Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATAC's first 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 ATEX Chairman and CEO Pat Miles and CFO Todd Koenig. Now I will turn the call over to Pat Miles.

Thanks very much, Audra, and welcome everybody to the Q1 2023 financial results for ATAC. I am going to be providing some forward-looking statements, so please read at your leisure. The momentum for the company is exceedingly strong and very pleased to report Q1 2023 revenue at $109 million, which is 54% growth. 40% surgical volume growth, and adjusted EBITDA margin improvement, 1,080 bps. And so some recent highlights, extended momentum of PTP was the strongest contributor to Q1 growth. Fully launched LTP, and we'll go more into that, which is very exciting. Introduced Invictus direct vertebral rotation, AIS system, which is, I'll go into that a little bit more as well, drove $15 million in EOS revenue, and we acquired the navigation-enabled robotics platform to enhance precision of our procedural strategy. And so a lot of good things going on and a lot of momentum. And I think if you look back at the momentum, you could look back to really kind of our established commitments all the way back to 2018. And that is to create clinical distinction. If we're not doing something better, we're not going to be able to compel surgeon adoption. If we are not compelling adoption, then it'd be very difficult to garner the type of distribution that we're looking for. And so when we talk about clinical distinction, I think that the momentum would suggest that we're compelling adoption. And when you start to build procedures from the ground up and you're furthering procedural momentum, you could really look at PTP and LTP and look at things like the patient positioners and the retractors and information. And now they're so excited to add the navigation-enabled robotics piece. And so this whole view of distinction being different and how we're creating it, I think, is starting to be reflected at least procedurally. We've got a ways to go in terms of reflecting the EOS piece but can't be more excited about the influence it's having both on idiopathic and adult deformity. Again, I'll speak a little bit more on that as we roll forward. An area of profound familiarity to the company is lateral. When you start to think about sophistication being demonstrated through multiple distinctions of the same subject, I would tell you that lateral is a profound competency. When we talk about designing procedures from the ground up, we can't be more excited about what we're doing with regard to the lateral LTP transois approach. And so, what you've seen in the marketplace is a big swing back to ALIF. And so, what surgeons want to do is they want to do a conventional midline ALIF. And the beauty of this procedure is that it provides the ability to do ALIF at 5-1 in a position of great familiarity. And so... The most common treated levels are L3 to S1. We want to be able to have a solution for lateral approach surgery. LTP is a reflection of all of our know-how internally and can't be more excited about it. It really does enhance economics when you don't have to turn the room over. You don't forego all the expense associated with all of the disposables in a surgery, as well as you start to think about a patient under anesthesia. So the beauty of the economics, the ergonomics, and the optionality is provided by this is exceedingly valuable. And then what we get to do is we get to integrate some of the experiences that we had on the patient positioners as well as what we've done exceedingly well on the safe out front. So just super excited about the momentum and all that's going on in that arena. Our momentum clearly on the procedural front is fantastic. Our run with EOS is yet ahead. Just because we have been very focused and candidly successful on the momentum creation portion with proceduralization in the lateral space, it doesn't mean that we can't commit the same type of prowess procedurally for things like AIS. And I thought it would be valuable to just provide a little bit of a vision on how we're leveraging EOS to increase our influence in deformity. and really beginning to extend procedural strategy really beyond lateral and advanced care in something like AIS, which is adolescent idiopathic scoliosis. And so I mentioned that we launched the Invictus DVR direct vertebral rotation instrumentation. And so the great part is we've launched that instrumentation, but now when you start to think, gosh, how are we going to have influence across something that's been somewhat of a mature market? When you think about what we're calling our alpha informatics platform, you think about EOS, and you think about how we're automating measures. And so if a patient goes in and gets automated measures, and they get a preoperative plan, and you realize through the automated measures that there is a rotational deformity, when a patient gets derotated or a surgeon derotates a spine via a system like DVR, What they're going to use ultimately is they're going to use SafeOp in a way that ultimately provides motor evoked potentials such that when they derotate the spine, it'll provide them a confidence that everything is okay neurologically. And so you start to see, gosh, how does SafeOp start to provide influence in that surgery? And it becomes relatively apparent. And then just the ability to say, how do we integrate the information that we got from the EOS interoperatively? And that will be with an interoperative assessment that will be available in 2024. And then the ability to ultimately take that information from EOS and apply bending coordinates preoperatively such that we can understand exactly what's going to go on with the surgery is, again, another opportunity to influence what's going on in AIS surgery. And then lastly, a position that ultimately effectuates the ability to more precisely and more amenably place implants based upon the patient's position. And so we feel like there's a ton of opportunities to proceduralize outside of lateral and really create momentum for the company outside of what's previously gone on. This is, I think, really kind of a key slide and a kind of a thesis that really hits home with us is we think it's entertaining that some think that spine is commoditized, and I think that they look at the inflation of spine surgeries as implants or screws. And when you start to look at outcomes, you start to say, how are spine outcomes versus orthopedics. And they're less predictable versus orthopedics. And so if you start to look at the graph and you say, gosh, what's the revision rate of a total knee surgery in five years? And it's 3%. And they say, gosh, what's a total hip replacement revision in 10 years? And it's around 5%. But then you start to look at spine surgery and you look at degenerative surgery and it's 10% to 15% in one to three years. And adult deformity, it could be up to 25% to 30% in two to five years. And so it's fascinating to us that people think, gosh, this is a commoditized environment when we realize there's still a ton to do to make this stuff better. And our view is that really it's about how do you start to mitigate variables? And if your commitment is to mitigate variables, that doesn't mean more screws. What it means is more information. And that's how we ultimately expand the influence of EOS. And so developing and integrating SPINE's most powerful information-based variable mitigation system has really been a commitment that we've made with regard to EOS. And so just the ability to understand the preoperative phase and what you're going to start to see through the EOS system is automation. And so the days of surgeons measuring EOS all of the different parameters that they're trying to achieve through the intervention is going to be gone because ultimately we're going to do that in an automated way, which will ultimately help automate surgical planning and it'll help with the diagnostic process. The other thing that's going to be fun is to bring this stuff into the operating room and really understand what the type of changes that we are able to garner with regard to some of the patient-specific type of rods, understanding a patient's bone quality, utilizing... reconciliation interoperatively to make sure that you're getting what you are trying to achieve based upon what your original surgical plan was, and then assessment and follow-up. And then, again, if you keep doing that a bunch of times, there's a predictive analytic reflection that ultimately creates just much greater predictability. But our variable mitigation doesn't stop at EOS. It's like such a... exciting part of the platform becomes is how do we continue to even interoperatively become more sophisticated? How do we become more precise? And that's what's so exciting about the investment that we just made in the fusion robotics platform. And so our intention is to improve procedural predictability and efficiency while reducing radiation exposures. And so whenever we think of these things, we think of them as how we would integrate them procedurally. And if you look at the picture on the far left, you get really the option to intervene and place robotically navigated EMG verified pedicle screws. That means combining two technologies, both navigation and robotics, plus EMG so that you're affirmed in terms of the screw placements. But it doesn't stop there, and this is where we think that our opportunity is, is to integrate these things procedurally. And then what we'll be able to do is we'll be able to navigate the lateral incision, plan bony anatomy trajectory, facilitate precise dilator and retractor placement with integrated automated neural navigation that provides real-time information on location and health of nerves interoperatively. So just the ability to assemble these technologies to create one, more precision, two, make it a much safer surgery, So, we believe that that's going to, again, mitigate variables as it relates to the intervention. And then, navigation-enabled robotics platform enhances predictability. Monitoring retractor migration throughout the surgery while doing disc prep and interbody placement, again, adds an element of precision. And so, again, I think that all of these things ultimately drive a variable mitigation effort that, again, makes for a greater level of predictability. just can't be more excited about the distinction that that continues to provide, which ultimately compels adoption, which ultimately continues to enable us to build our field force. And so, as discussed on the most recent call, we cannot be more enthusiastic about the team that's around the Fusion Robotics platform. And we love to say, gosh, those guys aren't guessing with regard to what the requirements are to make this stuff seamlessly integrated. into what we do with regard to procedures. And so the founders who we've talked a little bit about, Brad Clayton and Kevin Foley, have been around this since the mid-90s, and they know this field exceedingly well. And we just believe that our capacity to integrate this technology into the procedures, as I just described, is the opportunity. And so we get to do so with a foundationally versatile platform that ultimately has a very small footprint, which we think is also a great advantage. And so we believe ourselves to be really uniquely well-positioned for the informatics arms race that's going to ensue. And so I think with regard to the preoperative capabilities and all that I described earlier, all of the interoperative elements that drive a procedural sophistication And then an understanding of what happens postoperatively and us feeding that back in such that surgeons will have an understanding of the type of experience that the patient had, we feel like is a recipe for forward success. And so I think that statistically, as we are to date, the whole compelling surgeon adoption is being reflected as we continue to increase the blended products per category. The other, I think, element of a reflection is the continued interest in our surgeon education, which was 100 this quarter, and the demand continues to be profoundly robust. I expect we'll do 400 to 500 again this year. And so, very excited about continuing to host surgeons here at our facility in Carlsbad. Lastly, I think that the distribution team is getting better and better. You know, we're still a small company. We're less than 5% market share. And so our focus really is how do we strategically fill in large geographic gaps? How do we continue to compel new surge in adopters? And so that really remains our focus. The one thing that's got to make you exceedingly bullish is that those people who have been around a long time are growing at 48%. And, you know, there's nothing that I think makes us more confident in the trajectory of what's going on is that the people who have been around this a long time understand that they have a clinical aptitude are growing in a great way. And so what we're trying to do is continue to advance that clinical aptitude, earn increased share of existing surgeon users, and further penetrate adjacent geographies within existing areas. That's the color commentary on the business, and I'll turn it over to Todd to talk about financials.

Thanks, Pat, and good afternoon, everyone. We appreciate you joining the call today. So I'll begin with revenue. First quarter total revenue was $109 million, reflecting 54% growth over the prior year and a 3% increase compared to the previous quarter. $109 million in revenue is comprised of $94 million in surgical revenue and $15 million in EOS revenue. First quarter surgical revenue of $94 million increased 55% compared to the prior year period. Procedural volume grew 40% in the first quarter with average revenue per case expanding 11% year over year as revenue mix continues to shift towards procedures with more products per case and greater complexity. And while laterally related revenue contribute the most to growth, revenue related to our recently launched posterior expandable cage and biologics also grew solidly in the quarter. EOS revenue in the first quarter was $15 million, up 46% compared to last year, with solid execution on deliveries and installations, in addition to an order that was delivered in a non-strategic international jargon. Working through the remainder of the P&L, first quarter non-GAAP gross margin was 72.4%, up 20 basis points compared to the prior year. First quarter non-GAAP R&D was $12 million, and approximately 11% of sales compared to $9 million, and 12% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investment to organically expand our product portfolio and advance the Alpha Informatics platform. Non-GAAP SG&A was $81 million and approximately 74% of sales in the first quarter, compared to $61 million and 85% of sales in the prior year period. We delivered over 1,100 basis points of improvement. Consistent with our long-range plan, approximately 40% of the leverage came from variable selling rate improvements. while the balance was driven by leveraging the infrastructure investments we've made. Total non-GAAP operating expense amounted to $93 million and approximately 85% of sales in the first quarter, compared to $69 million and 98% of sales in the prior year period, demonstrating 1,270 basis points of operating leverage year over year. Adjusted EBITDA was a loss of $5.2 million and approximately 5% of sales in the first quarter, compared to an $11 million adjusted EBITDA loss, and 16% of sales in the prior year. The 1,080 basis points improvement as a percent of sales was driven primarily by SG&A leverage. These results continue to demonstrate the leverage we can deliver as our business grows. We ended the first quarter with $117 million in cash. That includes $95 million in net proceeds from the Brave World Term Loan, offset by a $28 million pay down of a revolving credit facility. Operating cash use totaled $35 million, which was predominantly related to investments in inventory and instruments to support sales growth and new product launches. First quarter of each year is also seasonally burdened with some compensation-related payments. We continue to expect full-year 2023 cash use to meaningfully improve relative to 2022 as adjusted EBITDA improves, consistent with our long-term plan. Debt at carrying value was $449 million, We continue to have undrawn and available borrowings under both the mid-cap revolving credit facility and the Braidwell terminal. Now turning our look to the full year 2023, in line with the pre-release of first quarter financial results a few weeks ago, we continue to expect full year 2023 total revenue to grow 28% to approximately $450 million. That includes 2023 surgical revenue growth of approximately 30% to $393 million in EOS revenue of approximately $57 million. As sales growth drives leverage across our business, we continue to expect to achieve adjusted EBITDA breakeven for the full year 2023. The strength of our revenue results in 2023 enables us to absorb about $4 million of investment in the robotic navigation technology we acquired, while continuing to deliver on our commitment to achieve 800 basis points of adjusted EBITDA margin expansion. Clearly, the momentum of the business is strong, which positions us well to achieve the profitability and free cash flow goals in our long-range plan. The next few slides provide additional context for our 2023 guidance. And I'll start by sharing how our expectations for procedural volume growth and the expansion of average revenue per surgery shape 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 now expect these dynamics to fuel high teens percent procedure volume growth for the full year 2023, compared to the mid-teens volume growth we expected previously. Average revenue per surgery growth is our mixed shift towards procedures that require more products per surgery, like PTP and LTP, and for 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 rates are also enabling us to capture more of each procedural revenue opportunity. We expect these dynamics to drive growth in average revenue for surgery at a high single-digit percent rate for the full year 2023. Now, with respect to the rest of the P&L, we have begun to demonstrate how this business scales as we grow, and we expect that dynamic to continue through 2023. Guidance for break-even adjusted EBITDA this year implies 800 basis points of improvement relative to full year 2022. And our confidence in delivering that level of operating leverage for the full year 2023 is shaped by the 800 basis points of margin expansion we drove in the second half of 2022 and by the strong 1,080 basis points we drove in the first quarter of 2023. Additionally, the components driving this leverage as we grow are consistent with what we described in our long-range plan last May. So we are pleased to be able to continue investing in the priorities that support business growth while achieving our financial commitments. So in closing, 2023 has started out strong and we continue to see great momentum in the business. Surgeon interest is strong as demonstrated by the training metrics Pat shared earlier. This is a leading indicator of adoption, which ultimately drives the magnitude of procedure growth we are achieving. It is clear to us, when you enable surgeons to do better surgery, you earn their trust and a greater share of their overall procedural value. You can see our commitment to invest in innovation through our prioritization of research and development. Our organic innovation machine is completely focused on revolutionizing the approach to spine surgery. Through the recent acquisition of the Fusion Robotics assets, we added a tremendously knowledgeable team of people that will lead the integration of navigation-enabled robotics into our procedural offering. We are laser-focused on executing our strategy, and I can't think of a place I'd rather be than in the middle of what we're doing here at ATEC. And as you might expect, we have an active IR calendar over the next few months, and I hope to connect with many of you in person. With that, I'll turn the call back over to Pat.