Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of VATEC'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 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 Koning. Now I will turn the call over to Pat Miles. Please go ahead.

Thanks much, Audra, and welcome to the Q4 Q&A. 2024 financial results call. You will enjoy some forward-looking statements. Read them at your leisure. First, let me address Q4 2024 financial highlights. What you're seeing is perpetuating growth leadership. So we grew at 28% total revenue growth in Q4, which is 4X the market. So we're perpetuating that leadership. It's also nice to see the profitability come in very strong. So we're expanding profitability. So we finished Q4 at $21 million, which was up 1,050 basis points year over year, which means we're cash flowing. And so we cash flowed $9 million for the first quarter really since the transformation. What we're enjoying is revenue growth, profitable leadership. And so just love where we are and also love the growth profile forward. As we've talked about since the transformation, we're in this for the long haul. And I think the growth reflection from the clinical distinction has been robust. And we love to say around here that we're 8% market share holders with 92% to go. But when you start to wonder, uh, is the, are the numbers reflective of that commitment? You have to say yes. And total revenue CAGR over a five-year period has been 40%. Somebody likes what we're doing and it's created demand. So we, we believe that that, uh, robustness, uh, continues forward. Um, 19% surgeon adoption, uh, on a five-year CAGR, 25% procedural volume on a five-year CAGR and 10% revenue per surgery. uh, on a five-year kegger. And so, um, I think the foundational growth machine and the growth, uh, thesis is intact. Um, the beauty about the growth thesis being intact is that the investment thesis is starting to provide powerful leverage and that was by design. And so, um, we love seeing the type of leverage that's coming forth and that's becoming a self-sustaining company. That's been that plan for, for some time. And, and clearly it's coming to fruition and, and, and, uh, And it will continue to be robust, and it's a commitment that we are absolutely forthright about it and excited about. And so as we look at the full year of 2024, we're back to the whole profitable growth commentary. We finished a year at $612 million, which is 27% revenue growth. Of the 612, the surgical revenue growth was 29%. 25% growth in established territories is all that means is same store sales. And when you start to see the expansion of same store sales, you have to say, gosh, there's some acceptance of the clinical thesis that we're putting forth. 18% surge in user growth, a $31 million adjusted EBITDA. Love to see the profitability coming in. First quarter of cash flowing since the transformation said that, but it's worth repeating. We launched the EOS Insight software as well as there's a record EOS order book in dollars. So there's a lot of enthusiasm with regard to what we're doing with EOS. It makes total sense clinically. Love to be participating in the second largest market in the world, which is Japan. And so we did our first cases there and we hosted a deformity summit, which would be requisite of our commitment to the deformity space. I would tell you I'm totally bullish on the route forward, thrilled about the year, and I'll turn it over to Todd to provide some additional color.

Well, thank you, Pat, and good afternoon, everyone. I'll begin today with fourth quarter 2024 P&L highlights. Total revenue was $177 million, up 28% compared to the prior year, and up 17% sequentially. The $177 million in revenue was comprised of $157 million in surgical revenue and $20 million of EOS revenue. Fourth quarter surgical revenue of $157 million grew 28% compared to the prior year period. That represents $34 million of year-over-year growth, our largest dollar growth in a quarter ever. The improvement was fueled by procedural volume growth of 19% and average revenue per procedure growth of 7%. Our lateral franchise continues to be the primary driver of this growth. Seasonality contributed to fourth quarter EOS revenue of $20 million, up 32% compared to last year. Demand for EOS is robust with record order volume in the quarter. That, along with the positive reception of EOS Insight, positions us well for strong system installations and the accompanied implant pull-through in the coming years. Now turning to the remainder of the P&L, fourth quarter non-GAAP gross margin was 70%, flat compared to the previous year. Non-GAAP R&D was $13 million and approximately 8% of sales. Top-line growth drove 200 basis points of leverage, while we continued to invest in innovation at a level slightly higher than the 2023 on an absolute dollar basis. Non-GAAP SG&A was $105 million and approximately 60% of sales. Over half of the 800 basis points of year-over-year improvement came from infrastructure leverage with a balance from variable expense rates. improvements. Included in this period's SG&A is a step up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 50 basis points year over year. Excluding that impact, SG&A improved 850 basis points. We reported total non-GAAP operating expense of $119 million, which was approximately 67% of sales. In the fourth quarter, we took measures to improve our operational discipline. strategically realigning and reducing the organization, and rigorously evaluating discretionary spend and investment dollar allocation. The increased operating discipline is beginning to add to what was already a powerful operating leverage opportunity and contributed to Q4 marking our first non-GAAP operating profit since the remake of the organization began. I'll turn next to adjusted EBITDA, which was positive for the third consecutive quarter. Fourth quarter adjusted EBITDA was $21 million, equating to a 12% margin and over 1,000 basis points of improvement compared to the prior year period. The improvement in adjusted EBITDA margin was driven by 850 basis points of SG&A leverage and 200 basis points of R&D leverage and represents a very meaningful drop-through of the year-over-year growth in revenue dollars to adjusted EBITDA. You can see in the chart on this slide that the profit margin expansion that we are executing has been significant and consistent. Top line momentum coupled with operational discipline has resulted in a deliberate profitability improvement. That execution in conjunction with the cost optimization measures that we completed in the fourth quarter gives us confidence in our ability to deliver on our financial commitments and translate revenue growth into profit and cash flow. Turning to the balance sheet, we ended the fourth quarter with $139 million in cash, including approximately $50 million in proceeds related to the term loan expansion announced last quarter. Debt at face value was $590 million. We continue to evaluate alternatives for the $316 million convertible notes due August 2026 and expect continued financial execution to increase our options and the attractiveness of those options. We achieved a pivotal milestone in the fourth quarter. We generated free cash flow of $9 million. The primary contributors were strong adjusted EBITDA and our transition beyond the period of heavy investment in instruments and inventory that enabled us to onboard multiple sizable US geographies over the last 18 months and positions us well to continue to invest in the sales channel. I'll turn next to full year 2024 results. Total revenue was $612 million, up 27% compared to the prior year. The $612 million in revenue was comprised of $545 million in surgical revenue and $67 million of EOS revenue. Surgical revenue grew 29% compared to 2023, driven by procedural volume growth of 19% and average revenue per procedure growth of 8%. EOS revenue was $67 million, up 13% year over year. Non-GAAP gross margin was 70%, up 40 basis points compared to the prior year. Non-GAAP R&D for the full year was 54 million and approximately 9% of sales, an improvement of 190 basis points compared to the prior year. Non-GAAP SG&A was 407 million and approximately 67% of sales, an improvement of 290 basis points compared to the prior year. Half of that improvement was driven by infrastructure leverage and the other half by variable expense rate improvement. 2024 adjusted EBITDA was $31 million and approximately 5% of sales, a year-over-year improvement of $40 million and 690 basis points compared to the 2023 results. Drop through of incremental revenue dollars to adjusted EBITDA was 31% for the full year, up significantly from the 22% in 2023. We are demonstrating growth leadership and profit margin expansion while investing in the future growth of the business. Cash use in 2024 was $128 million in line with our expectations and an improvement of $31 million compared to 2023. Next, I'll provide detail on full year 2025 outlook. We expect adoption of our unique procedural approach to drive revenue growth 20% to approximately $732 million, consistent with the outlook shared in our January pre-announcement. That includes surgical revenue growth of 21% to approximately $657 million, which will be fueled by mid-teens surgical volume growth and mid-single-digit revenue per surgery growth. We expect EOS revenue of approximately $75 million. The next slide provides context for the contributors of our surgical revenue growth. I'll begin with the procedural volume growth, which is driven by the impact of ATEC clinical distinction on surgeon adoption and utilization. You can see in the chart on the top left that surgeon adoption has been steady and strong, growing another 18% in 2024. Another consistent and recurring contributor to volume growth is surgeon utilization. The top middle chart depicts the steady ramp in utilization that each of our new surgeon cohorts has demonstrated over time. Our procedural solutions earn surgeon confidence. That creates loyalty and encourages surgeons to partner with us in more cases, including increasingly complex cases. Each new surgeon relationship that we develop typically unlocks a multi-year utilization growth opportunity as our penetration of their business grows. Average revenue per surgery increases as our mix shifts towards procedures that require more products per surgery like PTP and LDP and towards surgeries with greater complexity, all of which feature higher revenue per procedure than overall average. Innovation is providing another tailwind. Our portfolio now features expandable implants and corpectomy implants. which, along with an improving biologics attach rate, are contributing to higher revenue per case. Turning to the outlook for full year 2025 adjusted EBITDA, we expect sales growth to continue to lever the infrastructure we have built, contributing to an adjusted EBITDA of $75 million. That implies a 37% drop through of the incremental growth in revenue dollars, roughly in line with the drop through that we delivered in the second half of 2024. The chart on the right depicts the deliberate nature and consistency of the profitability progress we are driving. Execution has been strong, and the improved operating discipline of our organization as we exited 2024 positions us well to deliver on 2025 expectations and our long-range plan commitments, which include a 2027 adjusted debit down margin of 18% at $1 billion in revenue. So to recap our financial outlook for this year, we expect continued strong revenue growth to drive incremental profit margin expansion. That, along with the benefits of our 2024 investments in instruments and inventory, will fuel positive cash flow for the full year in 2025. That's a subtle but important change relative to the previous outlook, which contemplated cash flow break even. The intent of the nuance is to be clear that we view zero as the floor to our expectations of cash flow. With respect to cadence, keep in mind that due to seasonality, Q1 has historically been the largest cash use period during the year. We expect cash use of $15 to $20 million in the first quarter of 2025 with positive cash flow in quarters two through four. In conclusion, through our investments in the team and infrastructure, we have built a fast-growing spine-focused company. We are delivering a return on those investments through durable revenue growth and strong operating leverage, which resulted in an inflection to adjusted EBITDA profitability in 2024. There's a lot more to come. 2025 will see continued profitability improvement and mark another fiscal milestone, free cash flow generation and the capacity to self-fund future growth. With that, I'll turn the call back over to Pat.