Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of APEC'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 adjusted measures. Reconciliations of these measures to US 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 APEX Chairman and CEO, Pat Miles, and CFO, Todd Coney. Now, I will turn the call over to Pat Miles. Please go ahead.

Thanks very much, Desiree. Welcome to the Q4 2023 financial results call. Clearly, there will be some forward-looking statements, but I would characterize 2023 as a very good year, and a few of the highlights much of which has been communicated, but revenue of $482 million, which was a 37% total revenue growth, 890 basis points of adjusted EBITDA expansion, 40% surgical revenue growth was a broad contribution, 31% surgical volume growth versus 25 in 2022, which suggests acceleration. greater than 500 surgeons trained, and a lot of work really in three key areas, which is beginning with lateral. We launched LTP with the ALIF midline element. We launched expandables in lateral. From an informatic perspective, EOS has really expanded from a developmental perspective and look forward to talking a little bit about that. We also acquired a Navigate enabled robotic system from an informatic perspective, and from a capital raise, raised $150 million. So I would say a very productive year. To put it in context, we've gone from about 1% market share to probably a little north of five, depending on how you calculate it. Again, I think the interesting elements are the growth rate of 40% over that period, from an annual growth rate perspective, a compound annual growth rate perspective, 17% new surgeon CAGR, a 24% procedural volume CAGR. So people are doing work with us. And then a revenue per case CAGR of 12%. And I'll get into that as well, because I think it's such a buy-in to our surgical thesis. Our priorities have not changed. really what we're committed to is earning share through clinical distinction. And it's interesting. We've been talking about this since 2018, but surgeons adopt technology when there's a reason to and when there's clinical distinction. We attract salespeople when there's clinical distinction. And so our enthusiasm for that continues. Our opportunity to really kind of initiate the company's resurrection, if you will, was around how do you create clinical distinction? And there's such an expertise within lateral here. That's what we did. And so we've gone from about 1% to about 12% share in lateral. And the ability for us to continue to improve the utility and expand its application is very apparent. And so we're doing that through really fulfilling the surgical requirements and addressing hurdles within the procedure itself, We're integrating SafeOp to avoid the complications most associated with lateral surgery, which really speaks to the whole automated SSEP element, which you don't only determine where the nerve is, but also its health. And then one of the other elements was when we created PTP, really what we were able to do was obviate the need to approach from posteriorly with PLIF and TLIF. And so what the essence of that becomes is a lateral franchise that addresses really a $3 billion market opportunity versus what was previously a $1 billion market opportunity. So we love that because one of the things that it does is it furthers confidence. So if we do lateral surgery extremely well, what we find is that we have access to a greater part of a surgeon's practice. We call that the halo effect. And so if one of our salespeople executes with a surgeon a lateral approach in either the prone or the lateral position, what happens is we often earn trust. And that trust ultimately expands the footprint of what type of surgery we do with that respective surgeon. We've continued to commit to approximately 8 to 10 products per year. This was a big year for us at 15. And, you know, we always look for product launches to ultimately expand the influence of our procedures. And if you look kind of across each of the areas, from a lateral standpoint, the expandables was a big one. The other thing that I love that we do is really we establish a foundation for what's next. We launched some products in lateral for thoracic. We will prepare for thoracic clopectomy. As well as we launched an LTP position, we applied our learnings from what we knew in PTP and applied it to LTP, which is lateral trans service. From an anterior perspective, access is hugely important to surgeons. We developed an access system for ALIF, and ultimately that's going to integrate with regard to the procedural vision of L4 to S1 with regard to So super excited about that from a posterior perspective. Expandables was a big part of our launch profile this year, as well as some tools for stabilization in osteoporotic bone. That's important as it starts to lay the foundation for where we're going on the EOS front with regard to bone quality measure. From a cervical standpoint, there's been significant demand of our cervical portfolio. I would say that's reflective of the halo dynamic that we speak of. as well as SafeOp2 in our biologics portfolio. It's fun to see not only continue to launch a demineralized bone fiber product, but also start to see the integration of our biologics within the context of our expandables. And so when you have an expandable device and you expand it, what you want to do is backfill it with biologic and integrate these steps into a workflow that's elegant is part of our proceduralization view. And so When you start to think about how we garner more surgeons, the surgeon adoption effort is really multifaceted. And so we compel more surgeons because of the clinical distinction. And then we earn more of their cases based upon the confidence it created with their experience. And then the more products category sold in each case is really, in my mind, a buy-in to the procedural architecture or the thesis that we put forth. And so certain procedures are going to have less products per procedure. Other surgeries are going to have more products per procedure. But we think it's a good proxy for what we're doing with regard to the whole proceduralization effort. So distinction doesn't only compel adoption by the surgeon, but it also attracts salespeople. And so we think that it's continually important to further our distinctions. And so elevating our distribution network is going to be a constant priority. You will continue to see us do that. As we said earlier, we earned an approximate 5% market share. The inspiring thing for us is that in places where we've had distribution in a place that has a number of people within their distributor network, There's places that we have 25% market share. And that just speaks to the application of our portfolio into an expanded utility, as well as the competence of the people in that respective area. We've really never been more enthusiastic with regard to the status of the marketplace in general. We internally characterize it as 35% disrupted and 60% apathetic. And I don't know if there's a better place to be when you are sprinting at moving a field than a market that's disruptive and apathetic. And so one that would suggest that there are good things happening would be that we have a 36% same-store sales dynamic. And that means that there's a growth rate that clearly far exceeds anybody else from a same-store perspective. And so when people come here, their ability to build a big business is significant. The beauty is we are attracting people who want to play long, those committed to moving the field. Surely not the ones interested in a single-year experience or a single-year guarantee. We're in this for the long haul, and I think can't be more excited about what we're building. When you start to think about our place in the market and our portfolio as we speak, if we wanted to build a good company, we would have stopped right here and we would have built a lateral franchise and And candidly could have been done. It's really what we did at the last company. Our aspirations are much greater, and we genuinely want to revolutionize the approach to spine surgery, which we've committed to. So, you know, much like we built the first part of the company around the informatic element of safe op and performing better lateral surgery, we're doing the same here with regard to deformity. And so started off building it with the people. Clearly, it's always about the people. acquired SafeHop, built a lateral franchise, and I think you're seeing the same thing happen again with regard to EOS. And so you can't be more excited about that. And so the value of our informatics set is that it creates an ecosystem. What we've seen is we've seen silos of information. And I think they're less valuable than when you have the opportunity to combine elements. And it is the proceduralization not only mechanically, but informatically. It's really proceduralization on steroids, the ability to assemble these goods to ultimately improve not only the interoperative element, but the predictive nature of what we're trying to do from an improvement of spine care perspective. Several years ago, I said that the spine business needs ATEC, and I have never believed it more. And I think that you could look here and if you think the science is settled when you have a 10 to 15% revision rate within one to three years in short segment surgery and 25 to 30 in two to five years in deformity surgery, I think you're kidding yourself. And so while being in an area where clearly the spine science isn't settled and I think there's a very clear requirement for spine to have an objective informatic ecosystem. And I think an interesting place to look really is at what we're doing here with regard to EOS. And if you look at the box in the lower left-hand corner, that's what most surgeons see. They see a very focal view. And I think when you pull up and you start to see a more global view, you can see how a limited view really starts to mislead the surgeons. And so one of the beauties of the EOS Insight is that it's going to provide you automation where, at this point, it's alignment measured by hand calculation, which is hugely time-consuming. And it requires software that's, candidly, not very friendly from a workflow perspective. And so when you start to think about spine surgery as being decompression, stabilization, and alignment, And alignment is the greatest correlative to a long-term, successful, durable outcome. And you look back at what the revision rates are with regard to fine surgery, you start to say, gosh, there's a heck of an opportunity to bring objective information into an environment. And so if science needs to become more settled, then it needs to become more settled with data. And there's not a better source of data than the tool that informs pre-, intra-, and post-op that's completely aligned with surgical goals. Back to the surgical goals of decompression, stabilization, alignment. You'll love that you have a tool that ultimately informs through automated alignment reports, automated surgical planning, pre-bent rods, interoperative alignment reconciliation, and assessment and follow-up. So it is the data that will provide a pre-intra and post-informatic that will ultimately really just provide a richer ecosystem of information. It is very, very straightforward, I think, to be inspired by how it's going to influence deformity. And data and informatics informs better surgery. Clearly, our opportunity in deformity is apparent. And so in the image respective of an idiopathic deformity, you can see the value that understanding the rotational deformity has with the assembly of the procedure, with the assembly of an understanding of neurologically what's going on, where it's the assembly of the parts that ultimately plays a role. And so the opportunity within deformity is very clear, and I think it's reflective of the type of demand that ultimately was demonstrated here a few weeks ago at our first annual deformity summit. We had 30-plus participants. deformity thought leaders across the field join us in Carlsbad for the first one and could not be more excited about the understanding and appreciation of the tools that ultimately will reflect the sophistication within the field. And so when you start to think about really a unique dynamic that sits in a 5% market shareholder's bag is an ecosystem that informs not only the preoperative element in terms of who to operate on and and and why but also the intraoperative element which in which enables a procedural understanding of not only informatic needs but also the mechanical needs in a workflow that ultimately begets predictability and then inform that again with regards to the post-op information that that comes from the exact same image that was taken for the pre-op and the plan so um great year in in in 2023 Clearly, there's momentum. But the beauty is what's in front of us. And so we will continue to expand our lateral sophistication with regard to new products and broader and deeper sales footprint. We're literally just starting off an international, had a decent year in Australia and New Zealand, and about to get into Japan next. More hospitals are providing us access based upon our clinical distinction. We love, love, love the market dynamics of disruption and apathy. The integration of a more sophisticated, integrated navigation robotic element into what we're doing laterally, the whole navigation robotics plus neurophysiology in real time providing information, informational feedback. We love that. And we're just getting going on the EOS front with regard to the EOS Insight. So I would tell you that there's a lot of momentum, and there's more to come. And so with that, I'll turn it over to Tom.

Well, thank you, Pat, and good afternoon, everyone. We appreciate you joining us on the call today. I'll begin with revenue. Fourth quarter total revenue was $138 million. reflecting 30% growth compared to the prior year and 17% increase compared to the prior quarter. The $138 million in revenue is comprised of $123 million in surgical revenue and $15 million of EOS revenue. Fourth quarter surgical revenue at $123 million increased 34% against a tough 49% previous year comparison with strong contribution from our entire portfolio. Underlying that surgical revenue growth was robust procedural volume, which grew 29% this quarter. That is an acceleration compared to the third quarter procedural volume growth of 24%. Growth reflects both a solid increase in the number of surgeons adopting APEC procedures and an increase in surgeon utilization. Average revenue per case grew 4% year-over-year, driven by increased mix of lateral surgeries and expanding biologics attach rate and greater case complexity. Increasing mix of cervical surgeries is offsetting those tail limbs to some degree. And EOS revenue in the fourth quarter was $15 million, up 5% compared to last year. Turning to results for the full year 2023, total revenue was $482 million, reflecting 37% growth compared to 2022. That was comprised of $423 million in surgical revenue and $59 million of EOS revenue. Full year surgical revenue grew 40% compared to the prior year, absolute dollar growth of $120 million. Procedural volume grew 31% year over year, which accelerated compared to the 25% volume growth in 2022. Volume growth in 2023 was underpinned by a 27% increase in surgeon users. Average revenue per case grew 7% driven by increased mix of lateral surgeries, and expanding biologics attach rate and greater case complexity. The increasing mix of cervical surgeries is offsetting those tail ends to some degree. EOS of $59 million grew 24% over full year 2022 on continued strong interest in the technology. A geographical mix shift towards the U.S. is also benefiting EOS ASPs. Now before I work through the remainder of the P&L, I'll spend a moment on the updated definition of non-GAAP that we have adopted. For those of you that have followed the ATEC transformation since its inception, you know that the creation of clinical distinction was our number one commitment, a priority that catalyzed the complete overhaul of the product portfolio. That overhaul generated material but non-cash, excess, and obsolete inventory charges, or E&O, as legacy product portfolio were obviated and discontinued. To help investors assess the core performance of our business throughout that process, we determined it was appropriate to exclude E&O charges from our calculation of non-GAAP cost of goods sold. Thankfully, that transition is largely behind us. Now, the E&O charges we are taking are a recurring aspect of our current business operations. As a result, the non-GAAP financial results and guidance for 2024 that we share today include the non-cash charge part of the calculation for cost of goods sold and adjusted EBITDA. You can see from this reconciliation that the inclusion of E&O and cost of goods sold impacts reported gross profit and thus adjusted EBITDA by about $4 million in the fourth quarter 2023. Fourth quarter adjusted EBITDA under the previous non-GAAP definition would have been $6 million, drop through on incremental revenue dollars of 28%. and strong performance compared to the $5 million expectation implied by previous guidance. With respect to the full year, the inclusion of E&O and cost of goods sold impacts gross profit and adjusted EBITDA by about $14 million. Full year, 2023 adjusted EBITDA under the previous non-GAAP definition would have been $4 million, reflecting drop through of 25% on incremental revenue dollars and ahead of the $3 million that we guided to last quarter. I'd like to first emphasize, one, this updated definition of non-GAAP does not have a material impact on either the degree of margin expansion reported in 2023 or on the degree of expansion that we expect going forward. Under both the prior definition and the updated definition, 2023 adjusted EBITDA expanded 890 basis points year over year. P&O inventory expense is a non-cash item and has zero impact on our commitment to achieve cash flow breakeven in 2025. We've shared a reconciliation of the updated definition on previously reported periods in the appendix of this deck and in a supplementary financial file. Both documents are accessible from our IR website. Now, I'll turn to the results for the remainder of the P&O, which incorporate the updated non-GAAP definition I just shared. Fourth quarter non-GAAP gross margin was 70%, up 310 basis points compared to the prior year. The year-over-year increase was primarily driven by improved EOS gross margin, which is benefiting from the execution as we improve service operations and for pricing initiatives. Additionally, surgical revenue mix and operations efficiencies drove margin improvement in the quarter. Fourth quarter non-GAAP R&D was $13 million and approximately 10% of sales, compared to $11 million in 10% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investment in organic innovation and investment related to Valence, the robotic navigation platform that we acquired in 2023. Non-GAAP SG&A was $93 million in approximately 68% of sales in the fourth quarter, compared to $74 million in 70% of sales in the prior year period. We delivered 230 basis points of net improvement even after investing in both the U.S. and international sales channels. In line with the last several quarters, leverage is being driven by the expected contributors, infrastructure leverage, and variable rate improvements. Total non-GAAP operating expenses amounted to $107 million and approximately 77% of sales in the fourth quarter compared to $85 million and 80% of sales in the prior year period, demonstrating 270 basis points of operating leverage year over year. Adjusted EBITDA was $2 million and approximately 1% of sales in the fourth quarter compared to a $6 million loss that represented 5% of sales in the prior year. A 650 basis point improvement as a percent of sales. The consistent adjusted EBITDA margin expansion that we are driving underscores our confidence in achieving the long-term profitability goals we've committed to. Turning to full year 2023 results, non-GAAP gross margin was 70% up 220 basis points compared to the prior year. Non-GAAP R&D for the full year was $51 million and approximately 11% of sales compared to $39 million and an improvement of 40 basis points compared to the prior year. 2023 non-GAAP SG&A was $335 million and approximately 70% of sales compared to $267 million and improvement of 660 basis points compared to the prior year. Total non-GAAP operating expenses for the full year amounted to $387 million and approximately of sales compared to $306 million and an improvement of 700 basis points compared to the prior year period. 2023 adjusted EBITDA was a loss of $9 million and approximately 2% of sales, an improvement of $29 million and 890 basis points compared to full year 2022. The magnitude of drop through or the contribution of incremental revenue dollars to adjusted EBITDA was 22% for the full year and 26% in the second half of 2022. We demonstrated an ability to grow the top line and significantly expand profitability margins while also investing in the future growth of the business. For example, investments in Valence and International combined comprised almost 110 basis points of adjusted EBITDA for the full year 2023. These investments will drive growth and profitability in the business beyond 2024. Turning to the balance sheet, we ended the fourth quarter with $221 million in cash, and year-end debt at carrying value was $527 million. Free cash use totaled $51 million, with $35 million of that invested in the inventory and instruments that support our growing distribution footprint and new product launches. As you can see on the chart at the bottom of this slide, adjusted EBITDA improvements are benefiting operating cash use. Cash use for revenue-generating assets stepped up in the fourth quarter as we invested in instruments and inventory to enable recent sales recruitment wins to serve surgeries. As we communicated previously, Our recent raise will fund the revenue-generating assets required for the teams we have already onboarded and those that we will onboard in the future. And that investment has an attractive ROI of about three times over the course of five years. In 2024, we will continue to put that capital to work, expecting to use approximately $100 million of cash for the full year. We anticipate cash use to be front-end loaded with the magnitude of investment in Q1 stepping up relative to the Q4 2023 and Q2 stepping down relative to Q1 and the second half of the year progressing toward breakeven. Turning to our outlook for the full year 2024, consistent with our January pre-release, we expect continued portfolio-wide momentum to drive full year 2024 total revenue growth of 23% to approximate $595 million. That includes 2023 surgical revenue growth, excuse me, 2024 surgical revenue growth of approximately 25% to $530 million, and EOS revenue of approximately $65 million. Note that EOS revenue in 2023 benefited from purchases related to our decision to exit non-strategic geographies, creating a tougher growth comparison to 2024. As sales growth powers leverage across our business, we expect to achieve continued solid profitability progress. We expect full year 2024 adjusted EBITDA of approximately $22 million, inclusive of a $18 million E&O inventory provision. Using the prior definition of non-GAAP, 2024 adjusted EBITDA guidance would have approximated $40 million. We expect to deliver 560 basis points of adjusted EBITDA margin expansion progress on top of the 890 basis points of progress delivered in 2023. That positions us well to achieve our long-term profitability and free cash flow commitments. The next few slides provide additional context for 2024 guidance. I'll start with how our expectations for procedural volume and average revenue for surgery growth shape surgical revenue guidance. The clinical distinction we have created has driven a robust rate of surgeon adoption and utilization. Surgeon user growth has consistently been strong, growing 27% in 2023. Another possibly less appreciated, yet consistent and sustainable aspect of volume growth is surgeon utilization. The top middle chart is a testament to the consistent ramp in utilization that our surgeon cohorts demonstrate each year. Our procedures build surgeon confidence. which inspires loyalty and empowers surgeons to work up the procedural complexity curve, both of which increase utilization. Each new surgeon relationship that we establish typically unlocks a multi-year utilization growth opportunity. We expect these dynamics to fuel up 20% procedure volume growth for the full year 2024. Average revenue for surgery grows as our mix shift towards procedures that require more products for surgery, like PTP and LTP, and towards surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The increase in procedural complexity and increasing biologic test rate are also tailwinds. Revenue growth that recent cervical innovation is delivering is a slight headwind to average revenue per case, as cervical cases feature a lower than average ASP. We expect these dynamics to drive mid-single-digit percent growth in average revenue per case for the full year 2024. Now turning to our expectations for the adjusted EBITDA guidance for adjusted EBITDA of $22 million for the full year 2024 implies 560 basis points of improvement and approximately 28% drop through on the year-over-year growth in revenue dollars compared to 26% drop through in the second half of 23. The degree of progress that we have delivered and the drivers of expected leverage contributing as planned give us great confidence in continued operating profitability improvements. We expect the components delivering leverage to continue to be consistent with what we described in our long-range plan that we gave in May of 2022. 2023 was a remarkable year, a financial reflection of execution. It marked our inflection to profitability. It presented us with an unprecedented competitive opportunity, one that we seized, equipping our balance sheet with cash to invest in the high-return, revenue-generating assets that will fuel growth in the years to come. The profitability progress we have and will continue to make, along with a well-funded balance sheet, position us to progress toward cash flow break-even in 2025 and self-funded growth thereafter. The sector-leading growth that we are driving is dovetailing with the delivery of significant operating leverage is no accident. We committed to a financial plan, and we are executing to that plan, and in doing so, we have set the stage for continued value creation. This one scrappy David and Goliath-style spine story continues to shift into a very different kind of story, one of profitable, sustainable, long-term growth. Our best is truly yet to come. And that's a great segue to remind you of our long-range plan update on March 19 in New York City. The event will feature additional detail about our plans for profitable growth, adding two years onto the long-range plan that exists today. If you plan to join us in person, please RSVP through our IR website And for those that can't physically attend, the event will also be webcast. We hope to see you there. With that, I will turn the call back to Pat.