Earnings Call Transcript - ATEC Q3 2023

Operator, Operator

Good afternoon, everyone, and welcome to the webcast of ATEC’s Third Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP pro forma or adjusted measures. Reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in today’s press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. Leading today’s call will be ATEC’s Chairman and CEO, Pat Miles; and CFO, Todd Koning. Now, I will turn the call over to Pat Miles.

Pat Miles, CEO

Thanks, Regina and welcome everybody to the Q3 2023 financial results. There are going to be some forward-looking statements. So, if you would read that at your leisure, it would be greatly appreciated. Our spine-focused momentum continues. Revenue for the quarter was $118 million, a 32% revenue growth. The surgical revenue growth was also 32%, and we achieved a positive adjusted EBITDA of $2 million. Just a few highlights: we achieved 24% volume growth and 6% growth in revenue per procedure, drove $14 million in EOS revenue, a growth rate of 30%, launched Calibrate LTX, an expandable implant for lateral procedures, and it’s nice to be in the disposable game. We delivered our second consecutive quarter of positive adjusted EBITDA with 860 basis points of margin expansion. We raised $150 million to accelerate investment in revenue-generating assets while executing our profitability and cash flow commitments, and we enhanced our Board of Directors with deep spine prowess, adding Keith and Dave to the team from a BOD perspective. Our commitments haven’t changed; we are still applying our 100% spine focus, which we think is super important to create clinical distinctions. This means we are going to continue to do better work and compel surgeon adoptions. Clearly, there is a great opportunity from a market disruption perspective. We want to continue to elevate distribution and deliver better solutions. The C-spine market has commoditized, but spine with a revision rate in adult deformity of 25% and degenerative at 10% to 15% revision rates is far from predictable. Minimizing clinical variables in spine through proceduralization is critical for improvement. We design and integrate technology to address the goals of spine surgery, which include decompression, stabilization, and alignment specific to each approach. Everything we design is interrelated for efficiency’s sake. If money has tokenized time, PTP fulfills surgical goals in less time with a patient under less anesthesia, creating immediate value. By giving surgeons back time and predictability, we earn their confidence, expanding ATEC product utilization into more conventional procedures like PLIF, TLIF, ALIF, ACDF, and posterior cervical usage. We have really commenced our pursuit of increased predictability and reproducibility. Our commitments to advanced spine surgery are palpable. The concept of informatics is vital to what we are doing — standardizing imaging, quantifying global alignment, and battling misinformation is a chance for objectivity concerning long-term outcomes. We can better inform spine surgery with automated tools, starting full release in mid-2024. We are excited about Valence, our navigation robotic system integrated into all procedures to enhance surgical precision while reducing radiation. At NASS this year, we launched Calibrate LTX, enhancing the sophistication of our lateral approach with a lateral expandable implant that enables precise control of lordosis and disc height restoration. As we think of informatics and great influence, our efforts on EO will enable us to develop the most relevant system in spine. We’ve obtained several FDA clearances in automated surgical planning and patient-specific rods; kudos to our regulatory team who continue to excel. Understanding what will happen before surgery through automated alignment reports and automated 3D models will significantly change the way spine surgeons approach planning and integration. As we progress into late this year and early next, we are excited about our ecosystem developments. We offer a comprehensive solution: understanding preoperatively, providing automation to the surgeon, integrating that into the operating room experience, and informing about future preoperative plans. We feel these distinctions compel multi-faceted surgeon adoption. We trained over 130 surgeons in Q3 of ‘23, increasing surgeon utilization steadily. Our demographic perspective is bullish regarding our progress in this space; we are the fastest grower in this market. We believe our best is yet to come. Demographic trends enhancing clinical distinction have created a unique market opportunity. We recognize two primary goals: expanding our footprint to address third areas that are under-penetrated, where we hold less than a 5% market share, and increasing existing team's contributions. Same-store sales sit in the 30% range. We will further penetrate adjacent markets within existing territories, advance team clinical aptitude, and continue earning share. Major market disruptions present us unique expansion opportunities.

Todd Koning, CFO

Thanks, Pat, and good afternoon everybody. We appreciate you joining us on the call today. I’ll begin with revenue. The third quarter revenue was $118 million, up 32% over the prior year and up 1% compared to the previous quarter. The $118 million in revenue was comprised of $104 million in surgical revenue and $14 million in EOS revenue. Third-quarter surgical revenue of $104 million increased 32% compared to the prior year period. Procedural volume grew 24%, reflecting strong surgeon adoption. Average revenue per case expanded by 6% year-over-year due to continued mix benefits. EOS revenue in the third quarter was $14 million, up 30% compared to the prior year, with solid execution on deliveries. Beyond revenue, the third quarter non-GAAP gross margin was 72%, up 130 basis points driven primarily by EOS gross margin benefiting from strong execution. Non-GAAP R&D was $13 million and approximately 11% of sales compared to $10 million and 12% last year. Non-GAAP SG&A was $80 million, or 68% of sales, compared to $67 million, or 75% last year. Adjusted EBITDA was over $2 million, or approximately 2% of sales in Q3, representing 860 basis points of margin expansion from the prior year with total operating expenses around $94 million, or 79% of sales. We ended Q3 with $123 million in cash, with over $260 million on the balance sheet. Adjusted EBITDA improvements are benefiting operating cash use, and we expect this to continue as we inflected to positive adjusted EBITDA. Our outlook for full-year 2023 includes raising revenue guidance to expect total growth of 35% to about $472 million, surgical revenue of $414 million, and EOS revenue growth to $58 million. With these metrics, we anticipate adjusted EBITDA of $3 million, equating to over 860 basis points of margin expansion for the year. The increase is in line with expectations — about 10% of revenue growth will flow through to adjusted EBITDA while the balance will be reinvested. Our ongoing training of surgeons, which drives physician adoption and utilization, supports continued strong procedural volume growth. The momentum we see currently positions us for a significant acceleration in growth. With respect to free cash flow, we expect to achieve cash flow breakeven in 2025. Our long-range plan had initially anticipated $555 million in revenue for 2025, but with the momentum and senior expectations, we believe that the estimates could exceed those projections significantly. Our adjusted EBITDA projections imply strong performance and present further clarity on our path to profitability.

Pat Miles, CEO

Let me take the qualified question on the potential risks as we accelerate growth. The opportunities derived from the disruptions we see in the market are evident. We have been bold about leaning into these opportunities, especially with disruptions reflective of demographic trends that suit our development perspective. We expect increased boarding of professionals familiar with our products and markets that create a dynamic tailwind for us. While execution will remain paramount, I am optimistic about our broad opportunities enabling us to sustain a high correlation of execution supporting our historical performance.

Todd Koning, CFO

To reinforce Pat's remarks, our opportunity for sales acceleration is through the acquisition of seasoned sales reps who understand lateral surgery and know their customer base. The favorable setup positions us to quickly onboard seasoned sales professionals who will ramp up productivity significantly faster than typical new hires.

Pat Miles, CEO

I would reiterate that distinguishing ourselves in lateral surgery puts us in a position to succeed in the upcoming market opportunities. Although we manage on a solid operating basis, there are immense considerations at play regarding the landscape surrounding competitive dynamics. The potential from this disruption is something we will continue to leverage as we set about acquiring necessary talent and infrastructure to capture market share effectively.

Matt Blackman, Analyst

Hi, good evening, everybody. Thanks for taking my question. Todd, I appreciate you’re not prepared to fully address the LRP this evening, but it would be helpful for all, I think, if you could walk us through what, if anything, may have changed following the raise and with the plan for accelerated hiring and set investment. Can you just reflect a little bit more on how we should be thinking about your ability to drive new customer acquisitions and same-store sales growth with more sets and more reps. And then on profitability, I just want to confirm, you still see free cash positive in 2025. Can you just confirm that?

Todd Koning, CFO

Yes, Matt, let me try and figure out where to start here. Our long-range plan assumed $555 million in revenue in 2025, and with the current analyst consensus expecting revenue at about $550 million that aligns closely with our goals. Our expectations for adjusted EBITDA of $80 million remain in line with previously outlined guidance. If we factor in revenue growth of about $100 million from where we previously estimated, we could see a strain on our adjusted EBITDA projections, implying approximately $85 million.

Jason Wittes, Analyst

Hi, thanks for taking the questions. When you talk about a non-linear sales growth, what timeline are we talking about? Because normally, there is a gestation period. And there is also even non-compete to deal with before these guys are fully up and running.

Pat Miles, CEO

The way that we’re seeing this is as opposed to one individual sales rep coming onboard, we are expecting to see several joining simultaneously, which allows for a much higher velocity of onboarding efforts. The expectation is higher productivity as these reps are already familiar with our products and the market dynamics. My hope is that this will even yield results as soon as Q4 of this year.

Todd Koning, CFO

We believe we can certainly achieve those numbers moving into 2024 and 2025 by utilizing the accelerated hiring strategy alongside our improved product portfolio, which could manifest in revenue growth much beyond what was historically projected.

Pat Miles, CEO

Thanks to everyone for your support and interest in ATEC. We believe we are just getting started, and I look forward to sharing more details of our advancements and strategies in the future.

Operator, Operator

That will conclude today’s meeting. We thank you all for joining. You may now disconnect.