Earnings Call Transcript - ATEC Q1 2021

Operator, Operator

Good afternoon, everyone, and welcome to the webcast of ATEC's First Quarter 2021 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 the call, you may hear the company refer to reported amounts which are in accordance with U.S. GAAP as well as non-GAAP or pro forma measures. Reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the 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 very much, and welcome to the Q1 2021 ATEC conference call. We will clearly be making some forward-looking statements. So please review the forward-looking statement at your leisure. Let me start by saying I'm super proud of the ATEC family. One of the things we talk about around here is that revenue chases value creation. Over the last eight quarters, we grew at an average of 33%. I would say that we're well positioned for continued industry-leading growth. We'll talk more about these items, but we are revolutionizing spine surgery through the launch of PTP, a lot of excitement there. We are increasing clinical prowess and progressing toward sales exclusivity. Our new state-of-the-art facility is elevating surgeon and sales education, and we are hosting many visitors, with palpable traction. We're going to improve information from diagnosis through follow-up with a set standard, which is what EOS is going to provide. Historically, we've provided a scorecard of leading indicators, and we'll continue to do the same but expect some evolution in how we view the demographics of our business. For Q1, we saw strong momentum, achieving 50% year-over-year growth, marking the 10th consecutive quarter of double-digit year-over-year growth, and a 77% new product revenue contribution, which is clearly up over the previous couple of years. We also witnessed 17% year-over-year growth in revenue per surgeon and a 13% year-over-year growth in average revenue per case. We're seeing an uptick in the average products sold per category. Our commitments will remain unchanged, and we will accelerate growth by prioritizing key initiatives. We will continue to create clinical distinction and build an organic product development machine while advancing our information-based core competence. Through clinical distinction, we will compel surgeon adoption, which we measure objectively through increased revenue and products sold per surgery, while also revitalizing the sales force, ensuring coordination between the inside and the outside of the company. We are jumping into the scorecard under each of the commitments. The organic innovation machine will continue to create clinical distinction through a sophisticated understanding of what approach-based technology compels surgeon adoption. We're clearly witnessing more adoption of products that survey procedure. We've gone from virtually nothing in 2022 to a significant market presence today. We've launched InVictus OCT, standing for occipital cervical thoracic, incorporating a posterior cervical system elegantly functioning with a thoracolumbar system. As we market the InVictus system, it's completely comprehensive from the head to the ilium. The consistent design and function enhance comfort and confidence, alluding to the development speed. Additionally, we've launched InVictus medialized MOD, adding a cortical screw option for medialized trajectory necessities. We're revolutionizing spine surgery through products designed for specific procedure requirements. The lateral surgery prowess outcome is evident, leading to quick adoption and proven results in procedures such as prone lateral.

Todd Koning, CFO

Thank you, Pat, and good afternoon, everybody. Before I go through the first quarter financial results, I want to express how delighted I am to be here at ATEC. Having previously worked closely with many on this team, I am well acquainted with the profound caliber of committed spine expertise assembled here. I've observed ATEC's phenomenal growth from the sidelines, achieving 30% growth last year amidst challenges for others. I recognize the significant opportunity for value creation ahead and am eager to contribute to that success. As ATEC grows into a larger spine company, I intend to build a world-class finance organization, scalable through rapid domestic growth and eventual international expansion. This inaugural earnings release certainly marks a solid start to an exciting year for ATEC. I will begin with revenue: we had a fantastic start with first-quarter U.S. revenue of $43.7 million, reflecting 50% growth compared to last year. Total revenue, including our international supply agreements, was $44.1 million, up 47% year-over-year. The increased search and adoption of new products and procedures, alongside revitalization of ATEC's strategic distribution channel, offset the pressure on surgical volumes early in the quarter. Clearly, our ability to deliver clinically distinctive procedural solutions is driving surgeon adoption.

Pat Miles, CEO

Todd, thanks so much. As I consider Q1 and the number of growth catalysts ahead, I'm truly excited. We will maintain a sustainable approach to long-term execution based on our commitments to perpetuating clinical distinction. I am pleased with our PTP and lateral momentum and think the sophistication of the EOS transaction is fantastic. We have yet to disclose our cervical and biologics products, which will come in large ways. We will remain aggressive in designing and developing solutions and revitalizing our sales force to drive surgeon adoption further. I believe we have mitigated many headwinds we previously faced and genuinely love the business we're in, intending to advance spine surgery and make a significant difference in operating rooms.

Brooks O'Neil, Analyst

Good afternoon, guys. I'm excited about the future of ATEC. I see the progress made over the last couple of years; congratulations on that. I'd like to discuss marketplace insights regarding reopening activity. Do you think there is latent backlog or procedures you can capture soon?

Pat Miles, CEO

Thanks, Brooks. Historically, we saw softness in January and February, but March emerged as a breakout month. I believe there is likely some backlog, but assessing it is challenging as we're such a small player amidst so many hospitals. It feels like things are starting to normalize, which offers us greater opportunity.

Brooks O'Neil, Analyst

Great. I'm also curious about your excitement regarding PTP. Is there anything left in Luis Pimentel's repertoire, or should we expect future proceduralization efforts to originate from elsewhere?

Pat Miles, CEO

Luis has been a pioneer for years, developing the lateral space since 2003 and contributing significantly to our company's success. When he engages in developing ideas he believes in, he consistently proves right. PTP is just another example of his vision. While Luis excels in lateral and anterior column surgery, we still have vast runway to explore within that expertise and leverage the contributions of our talented team.

Joshua Jennings, Analyst

Hi, thanks for taking the question. Regarding PTP, could you clarify where you think you are in the launch? Are you seeing conversions mostly in standard surgeries, or also non-invasive surgeries?

Pat Miles, CEO

We are in the very early phases of the launch. Typically, our business runs with an 18-month delay. The success we're experiencing now reflects the groundwork laid a year and a half ago. As we advance, adoption is happening at more complex levels after initial successful straightforward applications.

Matthew O'Brien, Analyst

Good afternoon. Can you elaborate on the distribution channel and exclusivity and the $4 million per distributor metric? How many more distributors are needed to cover the U.S., and are there direct market opportunities?

Pat Miles, CEO

Yes, these aspects are challenging to balance as we ensure clinical acumen and commitment from distributors. We've cleared many past headwinds and identified numerous regions within key markets that still lack representation. As we recruit qualified distributors, we aim for approximately 50, granting us vast potential for success in underrepresented areas.

Mathew Blackman, Analyst

Good afternoon. Can you share any commentary on your same-surgeon sales growth, which is up 17%, and how that relates to account openings? Are there new accounts you can quantify?

Todd Koning, CFO

Yes, that 50% growth includes a significant volume increase, but we haven't publicly quantified our expansion to new customers. However, we have many surgeons and sales representatives visiting our training facility, indicating our expanding account base.

Jason Wittes, Analyst

How do you see the current value proposition for EOS for surgeons? Can it be sold on current indications or is it more on the promise of future data analytics?

Pat Miles, CEO

That's the right framing for EOS. There's immediate, medium, and long-term value. The new EOSedge model provides excellent imaging and significant opportunity for practical and actionable insights in both pediatric and adult markets. Our focus on properly integrating EOS into our implant strategies enhances competitive advantages.

Todd Koning, CFO

We saw about $34 million in cash use during Q1. Looking forward, if we consider average burn, we may reach around $85 million for the full year. Factors that contributed to Q1's cash usage include inventory investments and some one-time compensation effects. Overall, we have ample cash available for upcoming needs.

Pat Miles, CEO

Thank you very much for your interest in ATEC. We are at the very early stage of building what we intend to be one of the great companies. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.