Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to the webcast of ATEC's second 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 the ATEX chairman and CEO, Pat Miles, and CFO, Todd Koning. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. Now I will turn the call over to Pat Miles.

Thanks much, Danica, and welcome everybody to the Q2 2023 financial results call. I would ask you to review the forward-looking statements at your leisure. I got to tell you, this has been a very good quarter. So our growth has been fueled by our spine focus. So if you look, we had $117 million in Q223 revenue, which was a 39% growth, 41% surgical revenue growth. That would exclude EOS. and a positive $1.5 million adjusted EBITDA. The highlights are that we extended the lateral momentum, really the strongest contributor to our Q2 growth, launched ALIF access to proceduralize LTP and midline ALIF approach for L3 to S1. We acquired navigation-enabled robotics platform, which we'll talk a little bit about. We drove $15 million in EOS revenue, which was a 24% growth. We achieved 32% volume growth and 7% growth in revenue per procedure and expanded adjusted EBITDA margin by 1,100 basis points. Our commitments really since ATEC recreation have not changed, but kind of under the auspices of spine focus, we've been able to continue to create authentic clinical distinction. The commitment of clinical distinction continues. There's nothing better than being aligned with your customer. And, you know, spine surgeons commit their career, their vocation to spine surgery. So being aligned with them in terms of being spine focus is big. And so we continue to compel surgeon adoption. And I would say same with regard to being elevated by the whole spine focus thing is just being aligned with the sales force and being sophisticated with regard to the subject matter in spine becomes very, very important. So one of the great misnomers in spine is that it's commoditized. Spine is not commoditized. If something is commoditized, oftentimes there's great predictability associated with it. When you see a 10 to 15 percent revision rate in one to three years in degenerative surgery, I would say that that's not a predictable environment. At least it's not a durable environment. And when it's 25% to 30% in two to five years, I would say the same. And so as we look at the opportunity in front of us, we think we could drive predictability, reproducibility, and durability by mitigating variables. And so when you start to think about how do you mitigate variables and how do you elevate procedural sophistication, And spine is a very challenging environment in doing so. And so our view is what you do is you take an informatics view and you create an ecosystem and you control variables from end to end. And you start off preoperatively and you start to look at the measures of a patient. You start to plan against a patient early on, so diagnostically and preoperatively. And then what you do is you do everything you can interoperatively to mitigate variables. And I think we continue to demonstrate the things necessary. I think the acquisition of the navigation-enabled robotic platform would suggest, gosh, we continue to make progress on that front. With the continued evolution of our safe op platform, the neural navigation and nerve health tool, we continue to get better on that front as well. So not only pre-op and inter-op, but also we're trying to inform future surgery with regard to the post-op experience. And so I think that there's a there's a great opportunity to create greater predictability in a field that candidly currently lacks it. But I think, you know, what is important is to talk about why is ATEC continuing to grow significantly outpacing the marketplace? And I would tell you the driver is lateral. If you look at all of the clinical data out there, it's tough not to think that in certain indications for surgery that lateral is just not better. And so as it relates to blood loss, less blood loss, as it relates to hospital stay, less hospital stay, and days back to normal activity in terms of just ambulating, it's been demonstrated to be better. And that's in 500 peer-reviewed publications. So I would say make no mistake, the lateral market is the most coveted market. It is the growth market. And the great part is, as other companies are out celebrating anniversaries, and it's often the wrong date, what ATEC is doing is setting a new standard in lateral. It's the thing that we do best because we have great experience in the space. We're the very people who created the first generation led by Dr. Luis Pimenta, who was the original lateral pioneer and is our CMO. And so there's nothing better than having the most versed, most sophisticated in it. So we're applying decades of lateral experience to address really what we did in the first generation. So what we're doing is we're saying, what are the goals of surgery? And the goals of surgery are decompression, stabilization, and alignment. So how does PTP, in essence, continue to evolve what we did initially? Well, the great part is with the SafeHop platform, we're addressing the neural retraction complications. The patient that we're doing the PTP in is a much more familiar position to surgeons, and it mitigates inefficiencies. If a surgeon does a decompression, which is, again, part of the goals of surgery, they're in a prone position, so it's a better position. Your ability to stabilize, meaning put posterior fixation or pedicle screws in, is in the prone position is the most favorable place to place pedicle screws. Our ability to use patient positioners to control the patient positioning, again, is something that we've learned and applied to PTP. You don't have to turn the room over, and clearly the sagittal alignment is is better. Our view, and really it's not even our view, it's an undeniable truth, is you're not serious about market participation in lateral surgery unless you have automated neural monitoring. It's a foundational requirement. It's not a nice to have. So ours is designed to directly address the most common documented risk, which is femoral nerve complications in lateral surgery. It is one of the things that we really celebrate, which is having unmatched organizational neuromonitoring expertise. We have the best of the best. We have great experience in this space, and we just continue to get better. And so when we see people knocking off our retractor, meaning copying our retractor or copying our patient positioners, we know they can't copy the neuromonitoring. Capturing a small signal in a very noisy environment And then interpreting that and providing actionable feedback is the magic. And without doing that, you're not ever going to be a serious participant in lateral surgery. So we covet the SafeOp platform and what's going on. And also think about it as what we're doing is we're taking an informatic and driving greater predictability with this tool. And I think there's going to be a consistency with regard to how people look at ATEC in terms of what the competencies are. But I think part of being the most committed to an environment, meaning lateral, you have to do research and you have to do education. And so I would tell you that we're the most committed to both the research and education within the field. And I think it's being demonstrated. Some of the most recent publications are PTP for adjacent level disease, PTP versus TLIF, PTP versus the standard first-generation lateral that we did. And so there's 27 peer-reviewed publications currently. We've trained over 500 surgeons in 2022, and we continue to host really important events. We have a PTP council that continues to provide feedback, and we apply the learnings as expediently as we possibly can, as well as had a Duke-Emory conference as well, which, again, I think just illustrates or demonstrates a commitment to lateral surgery. And so I would tell you that... We are quickly becoming the lateral standard bearer. And I think the bottom line is PTP is really more aligned with the goals of surgery and really enables us to expand the marketplace in a very meaningful way. And so really from just participating in the $1 billion segment to making it a $3 billion segment based upon the addition of addressing pathology that would historically been addressed by PLF and TLIF where you would need to do some type of a posterior decompression. So I would say that only ATEC is committed at the outset to improve lateral, challenging its pioneers to better meet surgical requirements and address hurdles. We have a solution designed to avoid the complications, which is the safe part, which I talked about a minute ago. I think, you know, the whole applying our learnings is, I would tell you, a cultural reflection of who we are here. And the other thing is obsoleting our last best effort. So when someone copies this, they're going to copy our last best effort because we're going to apply our learnings forward. And then I think transforming and expanding the market to surgeons who are accustomed to more conventional techniques. And so really our interest is to continue to advance the most coveted market, which is lateral surgery. I think the other way that we've been rewarded as I think when you create lateral confidence, it earns a surgeon's trust. And we, we deem that to be really a halo effect. And when we say halo effect, what that means is it expands a tech product utilization in more conventional procedures. And so that becomes very, very valuable in terms of reflecting the momentum. And so I, I previously talked about informatics mitigating variables and, and, and, And the experience in translating, say, SafeOp in terms of the information and how it drives safety or looking at how we're going to integrate the navigation-enabled robotics into lateral surgery. But EOS is really kind of staring at us as such a great opportunity to expand its influence in the reasonably near term. And the first things that you're going to see mid-24 is you're going to start to see automated alignment reports, automated 3D models, automated surgical planning. And the option, if you want to, is applying the surgical planning elements to a patient-specific rod. And so when we say automated alignment, what we mean is as the biplanar view is taking place, on the image, our ability to immediately add public parameters and the measurements to assure alignment are immediate. And so this opportunity to continue to add informatics to the planning element becomes very, very apparent. The other thing in 24 is going to be the assessment and follow-up. And so that will be a big part of what you're going to see in 2024. So we expect a lot of influence by EOS next year. And then subsequent to that is going to be things like bone quality. If you're going to stabilize a spine, which we said the goals are decompression stabilization and alignment, you're going to want to know what the underlying material is. And so we feel like having a bone quality measure is very valuable. We'll also integrate an interoperative rod bending element to continue to make refinements in the alignment effort. We believe that there's a configuration opportunity to lessen the number of assets required in the room. And then The great future is really a predictive analytics foundation that enables us to provide the surgeon data on like patients that have had a technique that have like pathology and give them a foundational view with regard to a rich data set. We're building the foundation for that rich data set. We recently got attestation for SOC 2, which is a IT requirement to ultimately house data. We're on our way to high trust. We have numerous accounts currently adding patients today that have EOS Edge to our data set. And so we will have the most rich data set in Spine. And I think having been at this for a very long time, all of the data collection forever has been manual and so when i make a big deal out of the automated element what we're telling you is that we're collecting objective data in an automated way that's going to make for a more assured data collection source and so we talked a little bit about the the navigation-enabled robotics the integration of it is right on track our learnings continue to affirm the investment thesis we're thrilled about the team. They have deep expertise and our ability to advance the integration and development is very, very apparent to us. We expect the initial experience in late this year following regulatory clearance for Indictus screw placement. We will continue to expect freehand navigation clearance in mid to late 2024 and then full integration into lateral procedural workflow. in 25. And so we remain totally bullish and profoundly enthusiastic about what's going on on that front. So I think from a critical clinical distinction, a ton of momentum and a ton of excitement. In terms of compelling surgeon adoption, we went from about 1.8 products per procedure to now it's at 2.4. So I think the convoy element of the way that we view surgery is coming to fruition. Also, if ever you're wondering about the demand, the demand for educational experiences is still exceedingly high. And so we had 150 surgeons in in Q2, and there remains a tremendous amount of interest in what we're doing. As it relates to elevating distribution, I can't be more excited on this front. I think that when you talk about spine focus and you talk about opportunities to grow, we're a less than 5% shareholder at this point. And we're so well positioned from a spine focus perspective. We celebrate the uncertainties in the marketplace. We think that they improve the quality and quantity of the funnel of salespeople interested in working with ATEC. We'll continue to strategically fill in large geographic gaps, and we'll continue to compel surge in adoption. And again, I think that this speaks to the spine focus, which candidly others don't have. Another very, very affirming view is if you're going to come join us, the likelihood of you growing at 38% is very high. That's a percentage growth rate of our same-store sales. The thing that we love is the fact that the very places that we have today are growing very fast. We're not growing through just the addition of people. And so our interest is to advance the clinical aptitude of the team, earn increased share of existing surgeon users, and further penetrate adjacent geographies within existing territories. And so we'd love for you to join us. We will have an innovation update at NASS. on October 18th in Los Angeles, and so consider this an invitation for you to join us. So with that, I will turn it over to Todd.

Well, thank you, Pat, and good afternoon, everyone. We appreciate you joining us on the call today. So I'll begin with revenue. The second quarter total revenue was $117 million, growing 39% over the prior year and increasing 7% compared to the previous quarter. The $117 million in revenue is comprised of $102 million in surgical revenue and $15 million of EOS revenue. Second quarter surgical revenue of $102 million increased 41% compared to the prior year period. Procedural volume grew 32% in the second quarter, reflecting strong surgeon adoption with growth in the number of surgeons utilizing our procedural solutions up over 25%. Average revenue per case expanded 7% year over year, due to continued mixed benefit from the momentum of our lateral franchise, the continued increase of our biologics attach rate, and an increase in case complexity. Strong performance in lateral drove increases in both procedural volume and revenue per case. The number of surgeons using PTP is growing, and utilization of PTP among those surgeons is expanding as the procedure is applied to a broadening set of pathologies. A robust reception to our posterior expandable cages also contributed to growth overall. Importantly, the areas where we have invested to create clinical distinction are the areas achieving the strongest growth. EOS revenue in the second quarter was $15 million, up 24% compared to last year, with solid execution on deliveries and installations. Working through the remainder of the P&L, second quarter non-GAAP gross margin was 73%, up 340 basis points compared to the prior year. The year-over-year increase was primarily driven by royalty rate improvements and mix. The mixed benefit came from both an increased contribution of surgical revenue and an improved EOS gross margin. EOS gross margin improvement is due to the success we've had in addressing the backlog of service needs over the last 12 months, as well as pricing initiatives we've implemented. Second quarter non-GAAP R&D was $13 million and approximately 11% of sales compared to $9 million and 11% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investment in our organic innovation machine to advance procedural and information-based solutions, including approximately $1 million of investment associated with the robotic navigation platform we acquired in April. Non-GAAP SG&A was $81 million and approximately 69% of sales in the second quarter, compared to $65 million and 78% of sales in the prior year period. We delivered 850 basis points of improvement year over year. Approximately half of that was driven by improved variable selling expense and the other half by infrastructure leverage, including about 80 basis points of investment related to creating an international presence. As we grow the business, the contributors to the leverage that we are delivering continues to be in line with our expectations. Total non-GAAP operating expenses amounted to $94 million and approximately 80% of sales in the second quarter, compared to 75 million and 89% of sales in the prior year period, demonstrating over 800 basis points of operating leverage year over year. Adjusted EBITDA was $1.5 million and approximately 1% of sales in the second quarter compared to an $8 million loss and negative 10% of sales in the prior year period. This represents another quarter of over 1,000 basis points of margin expansion, and we are pleased to have achieved positive adjusted EBITDA this quarter, slightly ahead of plan. Continued top-line growth and disciplined execution is delivering results. And this quarter's performance reinforces our confidence in achieving the long-term profitability goals we've committed to. Turning to the balance sheet, we ended the second quarter with $101 million in cash. Operating cash use totaled $37 million, of which approximately 90% was related to investments in the sales generating assets, inventory, and instruments that fuel our growing distribution footprint and new product launches. Given the strength of sales momentum in the first half, we pulled forward the required set and inventory investments. Offsetting that, adjusted EBITDA improvements in the first half benefited operating cash, and we expect that to continue into the second half of this year. Debt at carrying value was $470 million. We continue to have undrawn and available borrowings under both mid-cap revolving credit facility and the Braidwell term loan. Turning to our outlook for the full year 2023, we now expect full year 2023 total revenue to grow 32% to approximately $462 million. That includes surgical revenue growth of approximately 33% to $404 million and EOS revenue growth of approximately 21% to $58 million. As sales growth drives leverage across our business, we expect to continue to achieve significant adjusted EBITDA progress this year. In conjunction with the increased top-line guidance, we are raising full-year adjusted EBITDA guidance to $2 million, representing 840 basis points of margin expansion. The increased guide is in line with the framework we've shared, specifically that we anticipate about 10% of revenue upside to flow through to adjusted EBITDA, while the balance is reinvested to drive top-line growth. The next few slides provide additional context for updated 2023 guidance. I'll start by sharing how our expectations and procedural volume and average revenue per surgery growth shape surgical revenue guidance. We 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. Due to improvements in these dynamics, we now expect low 20% procedure volume growth for the full year 2023 compared to high teens volume growth expected previously. 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 biologic detach rate are also enabling us to capture more of each procedural revenue opportunity. We continue to expect these dynamics to drive growth in average revenue per surgery at a high single digit rate percent rate for the full year. In sum, increased surgical revenue guidance is related to increased procedural volume expectations. That volume growth is being powered by adoption, both the quantity of surgeon customers and per surgeon utilization. These dynamics validate our thesis that when you create clinical distinction, you do compel surge in adoption. With respect to the rest of the P&L, we have begun to demonstrate the operating leverage that sales growth enables, and we expect that dynamic to continue. Guidance for the adjusted EBITDA of $2 million for this full year implies 840 basis points of improvement relative to last year. The components that are delivering leverage have been consistent with what we described in our long-range plan last May. At that time, we committed to 2,500 basis points of operating leverage over the 2021 to 2025, time horizon that entailed about 300 basis points of contribution from r d about a thousand basis points related to variable selling rate and about 1200 basis point contribution from sgna infrastructure leverage the improving variable selling rate and the infrastructure leverage that sales growth has enabled over the last several quarters gives us great confidence to continue investing in growth while achieving our financial commitments now in closing results this quarter are continue are a continued testament to our belief that good surgery is good business. Our investments to advance spine surgery and become the standard bearer have and will continue to deliver sector-leading growth. Financial results this quarter also mark a significant milestone for ATEC, a revenue growth-driven inflection to positive adjusted EBITDA. We have great momentum and great opportunity ahead. We have an active IR calendar over the next few months, including our Innovation Day, which Pat mentioned, in conjunction with NASS in October. And I hope to connect with many of you in person. With that, I'll turn the call back over to Pat.