Earnings Call Transcript - ATEC Q4 2022

Operator, Operator

Good afternoon, everyone. And welcome to the webcast of ATEC's Fourth 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 or pro forma measures. Reconciliations of non-GAAP measures to US 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

Thank you, Angela. And welcome everybody to the Q4 2022 ATEC conference call. We will be providing some forward-looking statements, so please review that at your leisure. Our momentum by revolutionizing the approach to spine surgery continues. Our finish for 2022 was $351 million. We grew 44%. Over four years, we've grown at least 25% each year and had a 40% four-year CAGR. And that comes via a year where we launched 10 new products, including our first expandable implant. We expanded lateral procedural sophistication with PTP and LTP, which includes a Midline ALIF. We drove $40 million in EOS revenue, trained greater than 500 surgeons, achieved greater than 20% growth in surgeon users, and increased our access to cash and liquidity to approximately $275 million. I believe much of our value creation is unlocked by our culture. So it is worthwhile describing who we are and who we're not. And I will say who we are is a winning culture focused solely on spine surgery, committed to moving the field of spine forward through informatics and procedural innovation. So who are we not? I would say we're not a division of a division. We are not a conglomerate tour, acquiring growth and disinterested in furthering technology or an implant-only transaction uncommitted to the full clinical experience. Our commitments haven't changed. We focus exclusively on spine, fulfilling unmet clinical needs through integrating technology to create predictability, that we call creating clinical distinction. And when we create clinical distinction, we believe that we compel surgeon adoption. When we compel surgeon adoption, we believe we have access to a more effective sales force and an expanding sales force. So our clinical distinction view is different. Our 100% spine focus allows us to invest in procedural technology that furthers the predictability of spine surgery. Around here, we have the propensity to make up words like procedure realization. At the heart of our procedure realization is lateral. We like to say, the more distinctions you draw to a subject you're more sophisticated. Lateral is a place of great sophistication at ATEC. Why would it not be, the gang that pioneered it is here. What makes a procedure predictable is removing variables, that requires designing from the ground up and applying technology where it is most required. To be successful in lateral surgery, you must not only have automated EMGs but also automated SSEPs. It only makes sense when you start to think about lateral spine surgery would exist between the skin and the spine from lateral is soft tissue. A key part of that soft tissue is a lumbar plexus. The number one complication potential in lateral surgery is injury to the lumbar plexus. So it's a requirement to have automated EMGs to know where the nerve is and automated SSEPs. We are the only company with those two technologies combined in a workflow that makes the information actionable. So we believe that actual information drives improved clinical decision-making. Our view additionally is that experience should not stop with lateral. It is really the reason behind the informatic ecosystem that we're building. In that system is a standard no other company has a front, front to back standard from which to build, our opportunity to affect the operative experience through information starts with EOS. Bring that information from pre-op to plan into the operating room is really key. Judging the plan in real time in the operating room against the same image post-op is the foundation for predictive analytics. The work has begun on the vision to inform better spine surgery. The opportunity for EOS is far beyond capital sales. We literally covet the information that comes out of the system. We have already spent significant time on the building of the cloud; the surgeon patient portal is in process, the automated alignment report. So when you take an image, the ability to automate the measures at the same time in real time with the image will be apparent. Our automating the surgical planning would be based upon having the alignment reports immediately, and then patient-specific rod bending will also be available. Our ability to reconcile that from an interoperative perspective is technology that we are working on today. There will also be a rep portal and that won't slow our efforts with regard to continuing to refine our neurophysiology platform. So having an automated alignment report based upon the preoperative plan and understanding the intraoperative reconciliation is really the foundation for how the analytics will begin. Our analytics will only be patient-related, but they'll also be operational related. And so we feel like that and looking forward, the opportunity to provide these analytics is really in its inception. And so the opportunity to go ahead and understand what type of release will be required in the spine. I think so often people require or rely upon implants to do the job of alignment, but it would be valuable to ultimately have the understanding as to what needs to be achieved, not only from a surgical perspective but from a building of lordosis perspective. And so not only will we utilize the analytics to drive our engagement in specific alignment, but also the opportunity to continue to build procedural elements beyond the core elements of the procedure. So for instance, we will have corpectomy for both lateral as well as PTP, lateral transpsoas as well as PTP, as well as we will expand the offering in the cervical realm. So we believe that creating distinction compels surgeon adoption. As you can see, we have increased surgeon adoption by 22% growth over the previous year. There are more products per category at 2.3, and we trained more than 500 surgeons. There is clear interest in what we are building here at ATEC. Additionally, the procedural thesis is working. More products per procedure reflect more surgeon buying. You can see we've gone from 1.5 in 2018 to 2.2 in 2022. We will be rewarded for our spine only focus. Imagine if you are a surgeon or a salesperson who has committed their entire career to spine; would you not want to deal with a company that has done the same? Our effort with regard to distribution is all focused on expanding the footprint, strategically filling in gaps and compelling new surgeon users. We are a less than 5% shareholder at this point. Our opportunity is endless. So additionally, one of the things that you want to know is are we growing independent of adding people. And the great reflection here is that in those people who have been with us for a period of time their growth is in the 46% range of year-over-year revenue growth. And so that gives us great confidence in terms of we’re growing in the established territories as well as we are growing with regard to adding individuals. Our real focus here is increasing the contribution from the existing team and making sure that the clinical aptitude continues to increase in the operating room. So we have a lot of work to do as we're focused and committed to distinguishing ourselves by serving the requirements of spine surgery over the long haul. So I can’t be more excited about where we are right now, but we have a lot of big future ahead of us. And with that, I’ll turn it over to Todd.

Todd Koning, CFO

Thanks Pat, and good afternoon, everybody. We appreciate you joining us on the call today. I'll begin with revenue. Fourth quarter total revenue was $106 million, reflecting 43% growth over the prior year and an 18% increase compared to the third quarter. $106 million in revenue is comprised of $91 million in surgical revenue and $15 million of EOS revenue, which grew 14% over the prior year. Fourth quarter surgical revenue of $91 million increased 49% compared to the prior year. Procedural volume grew 26% in the fourth quarter with an average revenue per case expanding 18% year-over-year as revenue mix continues to shift towards procedures with more products per case and greater complexity. The average revenue per lateral procedure is about twice our overall average and lateral related revenue continues to grow meaningfully faster than surgical revenue overall. While lateral related revenue contributed the most to growth, revenue related to ALIF and biologics also continued to grow solidly in the quarter. Turning to the full year 2022. Total revenue was $351 million, reflecting 44% growth compared to 2021. That is comprised of $303 million in surgical revenue and $48 million of EOS revenue. Full year surgical revenue grew 43% compared to the prior year, driven by volume growth of 25% and average revenue per case growth of 14%. Hosting over 500 surgeon training events in 2022 fueled surgeon adoption and drove a 22% year-over-year increase in the number of surgeon users. As newly trained surgeons become increasingly familiar with ATEC clinical distinction, utilization is also growing. Walking through the remainder of the P&L. Fourth quarter non-GAAP gross margin was 69%, down 120 basis points compared to the prior year. The pressure was attributable to increased EOS service costs as we continue to address the backlog of service needs created during the pandemic and an increase in our biologics attach rate, which features a meaningfully lower gross margin than our overall business. As we begin to anniversary these impacts in 2023, we expect gross margin to improve on a full-year basis. Fourth quarter non-GAAP R&D was $11 million and approximately 10% of sales compared to $8 million and 10% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investments to organically expand our product portfolio and advance the EOS platform. Non-GAAP SG&A was $74 million and approximately 70% of sales in the fourth quarter compared to $59 million and 79% of sales in the prior year period. We delivered 940 basis points of improvement. Consistent with our long-range plan, leverage of our SG&A infrastructure delivered about 70% of that improvement with a reduction in variable selling costs attributable to the balance. Total non-GAAP operating expenses amounted to $85 million and approximately 80% of sales in the fourth quarter compared to $66 million and 90% of sales in the prior year period, demonstrating 970 basis points of operating leverage year-over-year. Adjusted EBITDA was a loss of $2.8 million and approximately 3% of sales in the fourth quarter compared to an $8 million loss and a negative 10% of sales in the prior year. The 750 basis point improvement as a percentage of sales was driven by operating expense leverage, which is partially offset by gross margin. Sequentially adjusted EBITDA improved $3 million on a revenue step-up of $16 million, resulting in 420 basis points of improvement sequentially and an indication of the leverage we can deliver as our business scales. Turning to full year 2022 results. Non-GAAP gross margin was 70%, down 250 basis points compared to the prior year. Non-GAAP R&D for the full year was $39 million and approximately 11% of sales compared to $28 million, an improvement of 40 basis points compared to prior year. 2022 non-GAAP SG&A was $267 million and approximately 76% of sales compared to $198 million, an improvement of 510 basis points compared to prior year. Non-GAAP operating expense for the full year amounted to $306 million and approximately 87% of sales compared to $226 million, an improvement of 550 basis points compared to the prior year period. 2022 adjusted EBITDA was a loss of $28 million and approximately negative 8% of sales, an improvement of 360 basis points compared to full year 2021. We ended the fourth quarter with $85 million in cash. Year-end debt and carrying value was $364 million, which included $316 million of the convertible debt and a drawdown of $35 million from the revolving credit facility. With the improvement in adjusted EBITDA, operating cash used improved relative to last quarter and totaled $22 million. We expect full year 2023 cash use to meaningfully improve relative to 2022 as adjusted EBITDA improves consistent with our long-term plan. In January, we entered into an agreement with Braidwell securing a non-dilutive debt facility. With the new debt facility in the revolver, we now have cash and access to capital of up to $275 million. This provides us flexibility to invest further in instrument sets and working capital to support top line growth above our long-range plan and permits us to maintain a higher minimum cash balance. Now turning to our outlook for the full year 2023. In line with our January pre-release of fourth quarter and full year financial results, we continue to expect full year 2023 total revenue to grow 25% and approximate $438 million. That includes 2023 surgical revenue growth of approximately 26% and $383 million and EOS revenue of approximately $55 million. As sales growth drives leverage across our business, we continue to expect to achieve adjusted EBITDA breakeven for the full year 2023 by delivering 800 basis points of expansion. Now keep in mind that Q1 revenue is typically seasonally lower than Q4. And even with the 800 basis points of margin expansion, adjusted EBITDA would also be lower than Q4 sequentially. We anticipate delivering positive adjusted EBITDA beginning in the third quarter of 2023, which positions us well to achieve the profitability and free cash flow goals in our long-range plan. Now the next few sides provide additional context for our 2023 guidance. I'll start by sharing how our expectations for procedural volume growth and the expansion of our average revenue per surgery shaped surgical revenue guidance. We will continue to train surgeons at a robust rate, which drives both surgeon adoption and utilization. Training surgeons builds loyalty and enables surgeons to work up the procedural complexity curve, both of which increase utilization. The middle chart is a testament to the consistent ramp in utilization that our surgeon cohorts have demonstrated each year. We expect these dynamics to fuel mid-teens percent procedure volume growth for the full year 2023. Average revenue per surgery growth is our mix shift towards procedures that require more products per surgery like PTP and LTP and towards surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The gradual addition of expandable implants to our portfolio and increasing biologics attach rate are also enabling us to capture more of each procedural revenue opportunity. We expect these dynamics to drive growth in average revenue per surgery at a high single-digit percent rate for the full year 2023. Turning to EOS. We anticipate approximately $55 million in EOS revenue for the full year 2023, an expectation supported by the existing pipeline that we expect to be delivered and installed this year. In addition, just over one third of EOS revenue is driven by a predictable recurring maintenance revenue stream that will contribute incrementally. As EOS deliveries increasingly shift toward domestic markets over time, we will also see a gradual benefit to ASP. Now with respect to the rest of the P&L. We began to demonstrate the operating leverage that sales growth can drive in the second half of 2022, and we expect that dynamic to continue in 2023. Our guidance for breakeven adjusted EBITDA this year implies 800 basis points of improvement relative to the negative 8% margin reported for the full year 2022. The 810 basis points of adjusted EBITDA leverage delivered in the second half of 2022 gives us confidence in the continued progress that guidance implies for 2023. The margin expansion we saw in the second half of 2022 was driven by SG&A infrastructure leverage as investments we made began to scale. That dynamic will continue to play out in coming years coupled with the benefits of an improving variable expense profile. Like we saw in the second half of 2022, 60% to 70% of operating expense leverage will come from SG&A infrastructure with the balance from variable selling expenses. We are looking forward to demonstrating meaningful P&L progress for the full year 2023, which will position us well to meet our adjusted EBITDA and free cash flow commitments that we outlined in our Investor Day last May. Now in closing, 2022 marked a pivotal year. The first series of the ATEC growth story were about demonstrating sustainable demand for the clinic instinct procedural solutions our team was developing. That question has been answered as we have delivered a 40% compounded annual growth rate over the past four years. Now we have entered the next phase of our company's growth where we are beginning to deliver a return on the investments we have made. As a result of this operating, we expect to achieve adjusted EBITDA breakeven in 2023, which will improve our cash use as we walk towards cash flow breakeven in 2025. Clearly, the wheels of the growth story are in motion and the momentum behind what we are doing is strong. Now it is up to our team to continue to seize the opportunities in front of us and execute. It's my hope that our financial performance thus far has earned your confidence. This is a team that is serious about delivering on our commitments.

Pat Miles, CEO

Thanks much, Todd. I think you will find our share earnings strategy will not change. We will continue to garner value out of the investments that we made in procedures like PTP and LTP. What you will see is an expanding complexity of the type of pathologies that we will address through these different procedures. The investments have been made, and now the opportunity to exploit those investments is before us. That effort will allow us the confidence that we have created in a way that will enable a halo effect that will increase other product adoption, so an expanding portfolio adoption. That confidence and that expansion will ultimately compel salespeople to come our way. Those salespeople telling our way will avail more opportunity. We are continuing our early experience in the international marketplace. As we stated, we will be direct and narrow in those spaces. As it relates to EOS, we have only just begun. We are literally laying the foundation for an opportunity that will avail itself in '24, '25, '26. We believe that the translation of EOS information is before us, and that will be the real value creation. While we love to sell EOS units, it is an investment that will pay off in the future that will ultimately avail the translation of the very information that comes from those systems. So our enthusiasm is exceedingly high. Our opportunity to apply our nimble focus to improve spine care is massive. Our best days are yet ahead. With that, we will take questions.

Operator, Operator

The first question comes from Matthew O'Brien with Piper Sandler.

Unidentified Analyst, Analyst

This is Phil on Matt. Just a multi-parter here on guidance more. So what are your puts and takes with the industry as we move into 2023, what really gets you to the top end of the range and likewise the bottom? And what are you seeing from the LTP standpoint there? I mean, we're really excited by it, but what do you see in there?

Pat Miles, CEO

So as always, I will let Todd quantify, and I’ll qualify. And it's just best. I guess the second one first. We're hugely bullish on LTP. And I do not want to go overly deep into each of the different reasons why, just because I think I may lose the interest of the audience. The ability to ultimately change the position to get access to 51 is game-changing. In inflations that we have historically been, they've tried to position a patient to perform a lateral ALIF at 51, and it becomes very hard. I think that surgeons agree that the best position to do an ALIF is supine. So if you can get media-wise access between the bifurcation at 51, it's a game changer. To be able to go four to one from an LTP perspective and have the patient controlled orthogonally with a patient positioner while protecting the neural elements with things like safe ups is a very valuable tool. And when we start to think through the elements that ultimately avail the top end of our guidance, we say, what are we confident in? As the folks who pioneered lateral from the inception, our confidence is in our ability to compel interest. You see signs of that through all of the surgeons who have come through the building. Our confidence is in the volume of people we’re compelling to come through the building and then the clinical aspects of the lateral technique that ultimately will expand the halo effect across the portfolio. So PTP is still in its early infancy of a big run. We'd love to get LTP out there in a much more wide way. You start to see the expandables come in, and it speaks to a company that's just enjoying the early part of this momentum.

Todd Koning, CFO

And so I think as you kind of think about the $438 million guide, growing 25%, you think about the surgical revenue component of that, and I laid that out in terms of procedural volume and procedural ASP. Our procedural ASP assumption is in the high single digits, and that's actually higher than what our long-range plan assumption was. If you look at our volume component, it’s really being in the mid-teens growth over 2022 and that's really very much in line with our long-range plan. The guidance philosophy reflects numbers that we believe we can achieve and have a reasonable opportunity to exceed. Your question was really about industry factors. I have to tell you, when we're guiding to 25%, our upside is really more about our ability to continue to compel surgeon adoption through all of the things that Pat just laid out. Ultimately, that will come through stronger volume relative to our guidance. That's kind of how I think about the range and where things can differ; it’s probably mostly on the volume component.

Operator, Operator

The next question comes from the line of Josh Jennings with Cowen.

Unidentified Analyst, Analyst

It’s Eric on for Josh. Just starting on PTP, it seems like adoption and utilization of the procedure has been really solid in recent months. How penetrated do you think PTP is right now, and is it still early innings for PTP adoption do you think?

Pat Miles, CEO

It's fascinating, isn't it? What we've found intriguing is analyzing our established businesses from both a distribution and sales force perspective. Those selling PTP are experiencing growth rates that significantly outstrip those who have not had as much success with it. This gives us great enthusiasm, especially when we see established distributors reporting a growth of 46%. I can assure you that we are still in the very early stages. The advantage of this technique is its potential application to various pathologic conditions. There is a real opportunity to use it in areas like deformity and our eagerness to apply it in corpectomy. PTP is still in its nascent phases, and its applicability is incredibly broad. We've laid the foundational investments necessary to tap into this opportunity. Once someone learns to apply the technique, their capacity to use it on more unique pathologies increases, leading to opportunities for developing those expanded applications. I would emphasize that PTP is in its early stages, and I'm extremely optimistic about where it is headed.

Todd Koning, CFO

And I think Eric, the only thing I'd add to that would be, when you look at PTP, its applicability from a relatively straightforward single-level degenerative case to complex procedures, as Pat described, gives us such an opportunity, beyond the existing billion-dollar lateral market as it is today. That’s one of the true opportunities that PTP has availed us, which is to expand that market well beyond the billion dollars as we've defined it. Frankly, well beyond just dealing with singular or two-level degenerative cases, but into complex cases as well. So as you think about our penetration in surgeon use, obviously, more surgeons is good. But I think the more complexity you can apply with the procedure that you can address through the procedure, you get more utilization out of the existing surgeon base.

Pat Miles, CEO

It's a great point. The reality is what we have seen is whenever a new technique is created, there becomes an adoption curve. There are people who run forward with more complexity and when those who demonstrate more complexity, you will get more people jumping on the bandwagon of an early adoption type of pathology.

Operator, Operator

The next question comes from the line of Drew Ranieri with Morgan Stanley.

Drew Ranieri, Analyst

Maybe just to start, and I apologize, this is a multi-part kind of question. But in thinking about your revenue guidance and what you were able to do last year. Just how should we think about any upside potential dropping through to the bottom line, just in the context of your commitment to EBITDA breakeven? Are you more willing to let that fall or are you still really in investment mode to drive volume and surgeon adoption? Just love your thoughts on that dynamic. I have a follow-up.

Todd Koning, CFO

The first thing I'd say is our guide implies about 30% drop-through on the year-over-year. That’s a pretty big drop-through, and that’s really where we are starting. For you to think about the extent that we overachieve our guidance, we think about it: after you go for the gross margin and the variable costs associated with the incremental revenue, what's left probably two-thirds of that gets invested back in the business and R&D to drive growth, and one-third of it drops to the bottom line. That's how we’re thinking about it. We believe there is such an opportunity to innovate, and make spine surgery better and grow this business. We want to ensure that we're fueling the machine.

Drew Ranieri, Analyst

And still on the profitability context. Pat, it sounded like you were calling out compelling and attracting a sales force or sales reps. Just given the environment that we're in and the industry, are you seeing more evidence of an acceleration in maybe sales force additions? Would you step back from the committed breakeven and EBITDA to greatly expand the sales force this year to drive a longer-term opportunity?

Pat Miles, CEO

At least the way I'm thinking about it is any way to make the team better since the inception of the company, we’ve committed. I always love the view that companies are people, assemblies of people committed to making something better. As opportunities present themselves, we will make decisions in the best interest of our efforts. I don't see us coming off our commitments. But we will be opportunistic with regard to people who are aligned with our thinking. Being a spine-only force and committing our vocation to spine; there are a lot of people out there that feel the same way we do. Our enthusiasm is to expand the team with people with great experience and the same joy for spine that we do.

Todd Koning, CFO

Drew, our plan, our guide, assumes that we will be investing in the sales force. That's an important component to understand about our guidance. We are going into the year knowing we’ll be adding.

Drew Ranieri, Analyst

With your comments, maybe specifically on the cadence of the year on the first quarter. Should we think about that as a mid-single-digit step down sequentially, or is there any reason why it could be better given some of the growth drivers tailing at your back heading into '23?

Todd Koning, CFO

In terms of revenue from a surgical perspective, we did $91 million, and typically, you might expect a sequential decrease of a couple million dollars due to seasonality. If you examine the EOS seasonality from last year, there was about a $2 million drop from Q4 to Q1. With $106 million in the fourth quarter, you might anticipate around $102 million in the first quarter. One of our major investments is in personnel, as Pat mentioned, and some of those costs will increase sequentially from Q4 to Q1. Additionally, we always have a national sales meeting that represents an investment in the organization during Q1. Therefore, from an expense perspective, there is a bit of a sequential increase for these reasons. Considering how this affects adjusted EBITDA, an 800 basis points margin expansion for the full year suggests roughly a 900 basis point improvement in the first half and a 700 basis point improvement in the second half. You can expect a mid-single-digit negative adjusted EBITDA in the first quarter, which will obviously improve in the second quarter, and we anticipate seeing a positive figure in the third quarter.

Operator, Operator

The next question comes from the line of Mathew Blackman with Stifel.

Unidentified Analyst, Analyst

This is Emily on Matt. I just wanted to touch on EOS and the next wave of product features versus if there's anything in 2023 of note that we should be looking out for. Further out 2024, '25, I wonder if you could give us an example of how a surgeon might be using EOS today compared to how they might be using it then with all these new features in terms of procedures and product opportunity? And then what needs to be done on the product side to keep pace and optimize that product pull through for EOS?

Pat Miles, CEO

Emily, that’s a question that warms my heart, and I absolutely adore the opportunity that EOS provides. When you think about what the output is today, it is a standing rate-bearing image in a biplanar view, so both the front and the side. You can reconstruct the entire skeletal system in a single image. The near term will provide, and I'll give you some time frames: this year, we'll go through the verification process of each of the different feature sets so we know that they’re perfectly operating and accurately functioning. The effort this year will be a verification of the elements. Our IT team and the software team is building the cloud infrastructure with elements like high trust to ultimately house images in a HIPAA-friendly way. The things that are going on right now are automated measurements, preoperative planning elements, the ability to create patient-specific rods, and some interpretive reconciliation. Those will be the first things that you see in the marketplace in, let's call it, mid to late '24. We’ll go through the verification process much sooner than that. The excitement associated with a surgeon having the ability to pull down an image from the portal, understand the imaging, exactly what the plan is, what the interoperative experience was, and then reconcile it back to the plan is the foundation of a predictive environment. Spine surgery hasn’t been great in the hands of the masses; it’s the volume of variables. We feel like EOS provides an opportunity to really address the different variables in spine. There are other elements. I won’t provide timelines on things like bone quality measures. When you think about effectuating the objectivity of alignment, which is the greatest correlate to a durable long-term outcome, it becomes very important to surgeons to know what devices we’re putting in and the design of those devices we’re putting into foundational material, i.e. the bone, while knowing what that bone is. These types of things become profoundly important to surgeons. Effectuating surgery over a long period requires a foundational standard. Informatics is what will rule the day, not the pitch on a pedicle screw or a specific interbody device. Our foundation of informatics sources is outstanding, and that's why the longevity of our view and the opportunity we see to improve spine surgery is great.

Operator, Operator

The next question comes from Brooks O’Neil with Lake Street Capital Markets.

Brooks O’Neil, Analyst

I'm just hoping we can kind of dive into the ongoing consolidation in the spine space and whether you see that as a positive or negative for ATEC?

Pat Miles, CEO

It's a question that clearly has come our way a fair amount. My genuine view is we need to create clinical distinction, compel surgeon adoption, and expand the sales force. A lot of people are aligned with our thinking. We're going to be opportunistic. The one thing that we love is chaos; if there's chaos out there, we'll be opportunistic. Our interest is long-term, well beyond any consolidation. We're laughing today that we still have 95% of the market to address. As a less than 5% market share holder, we've got a long runway. Our enthusiasm has always been to be the standard bearer; we want to be the ones who make the rules in this business because we understand the requirements better than anybody. That’s how we view it. Candidly, we're indifferent to anybody else. Our focus is on what we're doing.

Operator, Operator

Your next question comes from the line of Kyle Rose with Canaccord.

Kyle Rose, Analyst

I understand the commentary about leverage when considering this year's 30% drop-through on incremental revenues. Could you provide a broader perspective on how we should approach this in the long term? Additionally, as you expand the sales force and invest further, whether this year or by utilizing the productivity from earlier cohorts, how should we view that drop-through on a consistent basis beyond 2023?

Todd Koning, CFO

When we laid out our long-range plan, we kind of said, going from 2021 to 2025, be in a $555 million revenue and $80 million adjusted EBITDA, which is about 12%-14% adjusted EBITDA margin in 2025. About two-thirds of that revenue growth is going to come from leveraging the infrastructure and the investments we have made, and the balance will come from improvement in our variable selling expenses. That’s really where we are headed. You can kind of do the math year-over-year on that, but that's the direction we are headed with the plan we’ve laid out relative to profitability profile.

Kyle Rose, Analyst

You mentioned that utilization is increasing on a per case basis for products and that new surgeon users are becoming more productive. I wanted to ask for more details. We saw the chart, but could you elaborate on how the procedural complexity has changed as you engage with a broader group of physicians? I'm trying to grasp how utilization rates have evolved in the latest cohorts as the market has stabilized after the pandemic.

Pat Miles, CEO

If I understand your question correctly, we have seen people compelled to come out here. They'll come out here for PTP, learn the procedure, have a successful experience with it and expand the utility into cervical or more commoditized degenerative procedures with different products. We will see a halo effect. The more experience they get with PTP, the more complex they begin to apply to different procedures. This will reflect, as dollars per procedure incrementally lift. We'll see greater dollars in the PTP realm that will ultimately skew the contributions from it across all procedures. I don't know if that answers your question.

Operator, Operator

The next question comes from the line of David Saxon with Needham & Company.

David Saxon, Analyst

I wanted to ask about LTP. I know it's early, but is there any overlap with docs doing PTP and those doing LTP? If not, how should we think about the LTP opportunity and what it could mean for ATEC's market share over the next 12 to 24 months? Looking at the chart showing the surgeon utilization ramp, is there any reason why you wouldn't be able to see that with a cohort of docs adopting LTP?

Pat Miles, CEO

We have a bunch of surgeons who do both PTP and LTP. The dynamic is often dependent upon pathology. If you have pathology in the posterior and want to do a decompression, if I want to do a single position surgery, I don't want to perform a decompression in the lateral position, so I will do it in a prone position. You're starting to see individual pathologies or types of surgeries being applied to individual patient physician. We don’t want to force it; we want surgeons to drive the reflected utility of the different procedures. There’s clearly a lot of excitement. One thing that has yet to be reflected and time will tell is the impact of LTP. The pendulum swinging back into the column at 51 is significant. When you hear people say that there's a lot of ALIF contribution to the number, realize that means surgeons are doing more ALIFs, and surgeons want to do ALIFs in the closest supine position, meaning lying on the back. There's a bifurcation at 51 that you operate through. The more we get that from a physician perspective, the better we are. We are optimistic about both PTP and LTP. The momentum is strong, and we have a lot to build on both fronts.

Operator, Operator

The next question comes from the line of Sean Lee with H.C. Wainwright.

Sean Lee, Analyst

Over the last couple of quarters, you have mentioned the potential to expand internationally as well as the avenues you're looking to grow. Are we seeing more of that this year? If so, would you still be leading with EOS or will you focus on lateral as the main focus there as well?

Pat Miles, CEO

We're excited about our international team. Chris Lyons has started to assemble an outstanding team in Australia and New Zealand, and we're in the process of figuring out what to do in Japan. The Australia team will lead with our lateral sophistication; they're steeped in lateral experience. I like our chances for building the foundation of a business. There are about 30 EOS units in Australia, so it has a nice base for building. The ability to translate that down there is exciting for us, and Japan is a place that we are hugely enthusiastic about. We will continue to be very narrow and deep in these markets. Our bullishness comes from the team we've assembled in our international business.

Todd Koning, CFO

When we kind of talked about narrow and deep, it reflects our commitment to bringing the lateral sophistication to the international markets. That is definitely how we plan to serve our patients and customers there.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to Pat Miles for closing remarks.

Pat Miles, CEO

Thanks very much, Angela. And thanks, everybody for your interest in ATEC. We are just beginning and so clearly a lot of growth this year. But our best days are yet ahead, and we appreciate everyone's interest in ATEC. Thanks a lot.

Operator, Operator

This concludes today's call. You may now disconnect.