All right, we're going to get started with this next session. I'm Josh Jennings from the TD Cowen Medical Devices team, and we are excited to have the ATEC management team with us. We have Chairman and CEO Pat Miles and Chief Financial Officer Todd Koning joining us from the West Coast. Thank you, gentlemen.
Thanks for having me.
For participating again this year. We really, really appreciate it. Phenomenal 2023. Exceeded internal expectations and then external expectations on the revenue growth line and the path to profitability, the profitability metrics, and then issued some really strong guidance for 2024. Wanted to hopefully just start and just ask about just your assumptions within that guidance for the spine market itself. I mean, I think there's two elements we were hoping to just get a response to is just expectation for market growth overall. And then second, just are you seeing any competitive dynamics, any product launches that are on your radar that you feel could be a threat or not necessarily inhibit you from continuing to capture meaningful share in the U.S. spine market, but at least provide an incremental headwind in 2024 versus 2023?
We haven't seen any, but just wanted to check in on those two areas as we get started here.
I'll do the qualitative as always, and he'll do the quantitative and the need for detail. I think the fascinating part is the spine market is disrupted. We love the demographics of a disrupted market space. So during the conference call recently, we said about 35% of the market with the whole Globus NuVasive and SeaSpine and Orthofix and then ZimVie kind of peeling out is very disrupted. We love that. So we see that as an opportunity. Then we think that there's some apathy as well. I think the big companies aren't committing the type of resources required to ultimately make for something significant. I know that Stryker is doing some stuff with Mako, but we see our play as our opportunity. So we feel like there's nothing but a tailwind.
I think if you look at some of the demographics underneath, Josh Jennings, Q4 growing surgical revenue north of 30%. The volume component, the procedural volume, like 29% growth, that's an acceleration from where we were in the Q3. So I think kind of stepping on the gas here, exiting 2023 in a strong and in a good way. And that same, I think, sentiment kind of played out in 2023 on the full-year basis where we ultimately grew 40% in terms of surgical revenue, 31% procedural volume growth on the full-year. And that's compared to a 25% procedural volume growth in 2022. So again, on the full-year, accelerating our procedural adoption, which just I think reflects the strength of the business and where we're going. As we kind of look into 2024, I think, was your question.
Certainly, I think the market saw some strength exiting last year. We're such a small part of the overall market. We're not a great barometer, but it kind of feels like the market is certainly kind of in recovery mode, and that feels good. The reality is so much of our growth comes from the share-taking element. As we laid out our $595 million of total revenue for 2024, surgical revenue growth assumption in there is 25%. We really framed that up to be about kind of high- teens-low 20s% of volume, procedural volume growth, and kind of mid-single-digit revenue per procedure growth. We think we've got numbers out there that I think ultimately, as we execute, we believe that we believe we can have a reasonable opportunity to exceed and achieve a reasonable opportunity to exceed and a chance to exceed those numbers.
I think our guidance philosophy hasn't really changed in 2024 relative to our previous approach to that.
Excellent. And with some of that disruption, I know you called out late last year that there was some opportunity to add some veteran reps to the team, add some more experienced feet on the street. And you gave an update on the Q4 call. But just to think about the tailwind of reeling in some of these reps that could be available, and there could be a tail to that resource, I guess.
Yeah. I think as we exited 2023, there was a lot of momentum in the business. I wouldn't say that the rep additions were significant parts of that tailwind, which is great. The opportunity, I think, that we have is to continue to be methodical with how we grow. We took the big bolus last year of the group up in New Jersey and New York. There's about 18 of them. Those guys will start to get settled in and start to roll. We're trying to be very methodical about how we ultimately just continue. These things require significant capital to build instrument sets and inventory and whatnot. We love when we have a market space where there's an adjacency to growth, where we have a decent footprint and a reputational tailwind.
And so just to be able to add to those areas, I think, is really kind of the opportunity.
Great. And some of the metrics you shared, Todd Koning, for 2024 guidance and some of the success you've had over the past couple of years, but I mean, surgeon training and surgeon adoption, I guess, the ATEC surgeon base continues to grow. I mean, it's there. I mean, it seems as if the PTP was a big driver. You now have LTP of building out the entire product portfolio, adding, I think, 15 new products last year, eight to 10, I think, is the assumption this year. But any help? Just thinking about the trends of surgeon training and converting some surgeons over to ATEC surgeons. And I think what we're particularly interested is in those PLIF, TLIF surgeons that are being drawn into PTP. That's a big opportunity. And any kind of stats around that or just high-level color would be great to hear.
Yeah. Maybe if you think about the volume of surgeons that have kind of come through the facility for training, we had over 500 trainings this year. So that whole flywheel is working very well for us. If I kind of just reference that 31% volume growth, procedural volume growth in 2023, driven by a 27% increase in the number of surgeons who use our procedures. So there's a small single-digit, call it utilization increase in our overall surgeon base that really kind of gets weighted down by the new surgeons coming on.
What you see, and we shared this in our call, is when you look back at the annual cohorts of surgeons who have adopted our product, in the year that they adopted so we can measure this all the way back to 2018, every subsequent year, they use more procedures, ATEC procedures, than they did the previous year. So there's this great underlying parallel volume driver, which is new surgeon addition, which we grew by 27% this past year, as well as those surgeons who've been using us use more next year than they did the previous year. That's repeated itself consistently all the way back to 2018. So to understand, people who've been part of our story for five years continue to apply our technology in a broader set of pathologies.
The halo effect of adopting more of our procedural portfolio into their procedural offering, I think, is encouraging. Ultimately, I think, reflects the clinical distinction that the company's built over time. Do you want to speak to the TLIF?
Yeah. What's fun about for me, what's fun about the story is the fact that we've spent a lot of time, money, and effort in terms of building procedures. And so Patient Positioners, retractors, neurophysiology, tools that ultimately are foundational to creating a procedure. And so what you see is you see adoption of the procedure in the most rudimentary way. So a run-of-the-mill spine case would be a slippage of the vertebra, spondylolisthesis. And so you see it applied there, and you see it successful there. And then what happens is you see the surgeons continue to march up the complexity curve. And so we're literally in the early phase of kind of expanding the portfolio of revenue-generating tools that ultimately elevate the complexity of the application of surgery. And so from our standpoint, we've built a foundation.
One of the things that, having been through this before, it's like we built a foundation of a company through just our lateral portfolio that makes for a very good company. So we're thrilled about the momentum. The reflected momentum is in lateral. And clearly, the halo effect that we garner with the confidence that we build through the distinction. But then there's the monster run forward with regard to the whole EOS play. And so it's really a great place to be. We'll continue to execute. We'll continue to have momentum. We'll love the demographics of the disruption in the marketplace while we ultimately build out a much longer play.
Great. I wanted to ask about this average revenue per case metric. You were beating me to the punch there, Pat Miles, but just on that complexity, increased lateral. You guys have the LTP procedure in place, still in very early innings. I think you have an ALIF approach from that lateral position where you have a retractor and also the interbodies. It just seems like more levels per case, you're adding more cases, you're getting biologic attachment rates up. I mean, at 4%, just my question is, is the 4% seems relatively concerning. I think last year you did in that mid-single-digit range, average revenue per case increase. Our sense is that's mostly from new surgeons coming on and diluting maybe a little bit of the surgeon bases, I guess, revenue per case increases.
But anyway, long-winded question, but I guess the real to get to the root of it is just that can you talk a little bit more just about that average revenue per case increase and the drivers of that?
Yeah. From our perspective, the spine's been not that good. And so what happens is you say, "How do you make it better?" And our thesis is you make it better through the assembly of goods that ultimately are a requirement of surgery. And the problem with spine surgery is that everybody's looked to the currency, so the implants, as the only tool to ultimately evolve. I always tease the surgeons and say, "My problem is I got to sell you a screw. Your problem is you got to care for a patient." If we're not aligned with regard to the requirements of that experience, then it's a problem. And so all we think of when we talk about the products per procedure is we think about our clinical thesis. Do they buy our thesis or not?
If they buy our thesis, then there's a lot more products per procedure. And ultimately, you see the elevation of the what, in essence, we deem as an ASP. But from a long view, the question always becomes, are we building the things that are a requisite of greater predictability? And that's where it's like we built a Patient Positioner. We built things that ultimately, if you were to do the math on just a Patient Positioner, it's a horrific business. A Patient Positioner within the context of a lateral surgery is a great business. And so that's why the products per procedure is so important to us. That's why we see the continued elevating value of each procedure is because the goods required to ultimately fulfill the obligation is higher. And then you're seeing more of those procedures done. So what's leading our charge is lateral.
And so you'll see a lot of products per procedure, probably less so on the cervical side.
It's why you put so much work into creating that corridor for surgery through a lateral approach between the neuromonitoring, the retractor, the Patient Positioner, all of those things. As we continue to build sophistication into the procedure to address more complex pathologies, whether that be through expandable interbodies, more biologics, and corpectomy and those types of things, you ultimately get more revenue through that corridor that you've created. I just think some of the tailwinds we've got there would be, obviously, the more expandable interbodies. You've got higher biologics attach rate, corpectomy. Clearly, as lateral continues to lead the growth, you'll see a continued mix shift in terms of revenue per procedure. Really, the headwind to all of that would be cervical is now also growing at a strong rate for us.
To Pat Miles's point, that does have a lower revenue per procedure, so that works against you a little bit. But feel very good kind of about that mid-single-digit guide that we put out there.
Awesome. Thanks for breaking that down. I wanted to also just touch on just the profitability metrics and know the E&O inclusion on the reported gross margin EBITDA results just optically with difference. If you think about the core performance on those metrics in 2023, you beat expectations, exceeded your guidance, and you got it to a higher level for 2024. Maybe just talk about what's driving that outperformance and anything else just to add on the change in the accounting for the E&O inclusion.
Yeah. Totally. So we ultimately have updated our definition for non-GAAP Adjusted EBITDA to include our E&O charge. And really, what we did prior was we excluded E&O from our Adjusted EBITDA metric. We did that because the E&O charges reflected charges we were taking for the product portfolio that was really the pre-remake of the company and so ultimately felt it was appropriate to exclude it because it really didn't reflect the go-forward of where the company was being built. Now, when you kind of look underneath all of the expenses that we're taking for E&O and keep in mind non-cash accrual, essentially, for E&O, that reflects today's portfolio. And so it's really appropriate to now include it as part of our profitability metric. To your point, though, it is a non-cash expense. So to the extent that you're using a DCF, it's very much neutral in that way.
We always said it would be probably between 250 basis points-300 basis points of margin in the company while we're in the growth phase of the company. Because as you place more sets in inventory out in the field, you have outliers in those sets in inventories. Those outliers don't get used as frequently. And therefore, you ultimately take a reserve to address the outliers that you ultimately have to kind of put out there. And so that's what we've done. To unpack Q4, to your point, we beat revenue by $10 million execution-wise in the Q4 . We dropped, in the old definition, $6.1 million of adjusted EBITDA relative to an implied guide of about $4.6 million. So we overachieved our adjusted EBITDA performance in the Q4 by $1.5 million.
And then when you look under the old definition, prior definition, which is where the consensus would have been at for 2024, consensus was around $30 million, I think $31 million. Our implied guidance, updated definition, $22 million, inclusive of $18 million of E&O, a total of $40 million under the previous definition. That's $10 million higher than the 2023 or the 2024 consensus numbers. So to your point, I think a very strong performance in the Q4, a very strong guide, well, certainly a guide that was higher than consensus in 2024. And I recognize some of that was maybe a little bit lost in the updated definition. But I think trying to be clear about that, certainly try to be clear about it in the call and kind of reiterate as we have our discussions.
I think very clearly continuing to expand profitability margins, 890 basis points of profitability expansion in the fourth or excuse me, in 2023. Really, six consecutive quarters of profit expansion and then implying 560 basis points of profit margin expansion in our guide. I guess the final point I'd make is our guide implies about 28% drop-through on the revenue growth dollar, 2023- 2024, to A djusted EBITDA. We did 26% drop-through in the second half of last year and kind of, I think, low 20s% in the H1 . So you're seeing us continue to see that drop-through increase over time. One of the key components of that is our ability and how we've locked in our variable rate improvements over time, the contractual variable rates.
Because those rates get set every year, whatever we had last year as a base is now being comped at an average number that's lower. Therefore, you can take those dollars, drop them through to the profit in the following year. That's one of the fundamental ways the company has been built, which ultimately drives our confidence in being able to expand the profitability profile of the business into time.
Thanks for that. You last updated the LRP. You're well ahead of Pace on both the top line and on the EBITDA margin and EBITDA result line. You have an investor day coming up in a couple of weeks in New York. You're going to reissue some out-year LRP targets, which we're looking forward to. But also, I guess, give an update on some of the technology advancements on these enabling technologies that you're developing, EOS on the imaging side and then Valence on the robotics side. Anything to walk us through these technology development programs in the past, but how do you think the pace of the R&D is going? And do you feel like you're on track for to hit some of these milestones that you put out there?
Yeah. It's clearly my favorite thing to talk about. From an EOS perspective, we'll have a big launch this year, Q2 2024. As I've always kind of commented, spine surgery goals are decompression, stabilization, and alignment. And when you look at the demographics of spine surgery and you look at the revision rates, literally, it's 25% within three years-five years in multilevel surgery. And call it 10% in three years-five years in short-segment surgery. When you see those types of rates of revision, you have to say, "Gosh, there's some variables that we're not addressing within the context of current spine surgery." I'd say that's relatively apparent. And so the opportunity to start to control variables. And I think that EOS is such the optimal tool to ultimately control variables. It's not as though the revision rate is because people are misplacing screws. I love robotics.
We have one. We're going to integrate it into the whole experience, and it's going to create greater predictability. The revision rate is not because of misplaced screws, not that rate. And so the opportunity for us to ultimately take a tool in EOS, have a biplanar view, reconstruct that into a three-dimensional model, understand all of the alignment measures and what you can portend based upon a surgical plan, and then integrate that into the experience, integrate patient-specific implants into that experience, and then assess how you did, we feel like, is a way to ultimately elevate the objective reflection of a key goal of spine surgery, which is alignment. And so that whole kind of element is coming forth in Q2 of 2024. We've spent the last several years building infrastructure from an IT perspective and otherwise to collect data.
The type of institutions that are attached to us that want to collect data and want to assess data is awesome. And so again, I love a dynamic to where it's like there's a bunch of momentum in the business with regard to the lateral product portfolio and assembly of goods. We continue to grow in the complexity. But then out there sits this whole EOS strategy that I think has yet to even be reflected. And so that will be Q2 of 2024, as I said. And then this year is really kind of an alpha year for our navigation robotic element. We're doing cases now. We're really, I would say, in an evaluation phase. It'll be integrated into something like PTP next year.
And so the excitement to be able to say, "How do we add another product to the reflection of a lateral surgery so as to continue to elevate the precision and minimize the radiation that the surgeon's taking on?" And so again, I love kind of the setup of where we are, momentum plus new technology plus the access to a much broader market where, again, I think that we can flourish with regard to the whole procedural bent.
Awesome. Just thinking about the acquisition of EOS, the potential for cross-selling synergies into those EOS accounts and vice versa, how much have you guys captured? I mean, is it still early days for those synergies? Will EOS Insight kind of help spark more cross-selling, I guess, into the ATEC accounts that haven't adopted EOS but then also adding that new technology, maybe those EOS customers that haven't adopted ATEC implants being more the door would be opened again for you guys to take another swing?
Yeah, for sure. It's been fun. We have several accounts that have demonstrated the model. And so you love to see it. And they've demonstrated the model before the feature set is there. And our view is the feature set is the integration of the surgical elements. And so candidly, the ability to do patient-specific type of rods based upon a surgical plan has not been reflected as of yet. But we have numerous accounts that have, in essence, either acquired the EOS based upon an implant volume or a rebate or some other method by which you offset the capital with regard to implant utility. And so the excitement of the early phase of this is, again, what we intended. The beauty is this is a very long- run.
I think that our view always is that people, I always love the quote, "People overestimate what happens in two years and underestimate what happens in 10." The reality is we're playing the long game here. What we're doing is trying to lay a foundation where we can be a significant player in the years to come. We feel like the way to do that is to commit to technological tools that ultimately move the field forward. EOS will move the field forward.
Excellent. On EOS and just, I guess, thinking about some product development initiatives in combination with the advanced imaging platform, anything to highlight? And I think you talked about a screw that would be kind of featured for maybe osteoporotic patients, but just that feature of EOS to be able to assess bone quality and then match it up to your implant portfolio. I guess you were talking about that earlier in your patient-specific implant comment. Maybe build on that further and how the imaging system and some of the product portfolio enhancements are going to help get you to a place where ATEC is delivering even better outcomes.
Yeah. I think part of the problem with spine surgery is there's a lot of gestalt. And this is what if I saw you as a patient and I was a surgeon, I would believe some set of facts about you. I would oftentimes have a very focal view of your spine and your hips and whatnot. And I think the ability to automate objectivity into the alignment and ultimately make implants that are reflective of the requirements of you specifically is very valuable. And so that's just the alignment stuff. And that's what's coming out in Q2 2025 or Q2 2024, rather. In 2025, you'll have the same reflection from a bone quality perspective. And again, if spine surgery is decompression stabilization, you'd want to know the underlying material with regard to stabilization and understanding how you're engaging the bone.
And if most people, especially from an adult perspective, are later in years that they get intervened upon, likelihood their bone quality is somewhat suspect. And so to understand segmentally what the bone quality is is very valuable. From a DEXA scan, you don't get that. And so the opportunity for us to provide, again, further resolution with regard to the underlying material whereby we can do a better job on the stabilization front, we believe to be very valuable. And so what's evaded spine surgery is not the pitch of a screw or a specific implant feature. It's an informatic that ultimately enabled the surgeon to ultimately assemble the view. The other problem is surgeons have a very challenging time diagnostically. There becomes all of these disparate elements that they have to assemble.
We feel like with the imaging element, what we can do is start to pull other sources of diagnostics into a portal that avails them the opportunity to make better decisions and better decisions with greater information from their electronic medical records, be it an MRI or the like, as well as we've recently ventured into a relationship with a group called Aclarion. Those guys do diagnostic elements with regard to where the disc pain is coming from. So nothing would be better for us in terms of having a portal that ultimately avails itself to a surgeon to, in essence, improve decision-making to create greater predictability in the spine realm. Sorry for being so bold.
No, appreciate that. That's what we were looking for. Wanted to just spend the last two minutes. I know international expansion is not a full-on greenfield opportunity, but you guys are making some strides and I think had some initial success in 2023 in a couple of markets. But I guess the high-level question is just how do you see maybe we may address this at the investor day a couple of weeks. But yeah, international opportunity, it seems real. You've taken share in the United States, run the same playbook. It seems like you could take a significant amount of share in some of these international markets, but you can be strategic about it and go into those markets that will be profitable. But how are you thinking about the kind of five-year plan for international expansion for ATEC?
I'll touch up into this. But probably the first thing that we agreed upon is if we're going to go at international, let's go narrow and deep. I think the old company that we recreated and they sold the international business to Globus was all over the world. Our view is let's go to the markets that ultimately share the thesis. That's Australia, New Zealand, and Japan. So we're in Australia, New Zealand. We'll head to Japan later this year, but.
Yeah. It is an important thing because I think you can get easily sideways. You can get attracted by quick revenues, whether it's through distributors or the like. But ultimately, we sell a procedure, and you have to go to markets that buy a procedure. And so previous experience would tell me that a place like Germany, they don't want to buy a procedure. They want to buy screws, and then tomorrow, they want to buy an interbody, and then they want to buy a rod. And they don't care if it's from three different companies. And so that really doesn't make for a good market where you can ultimately sell your clinical value. And so our view has been go to these places that shares your clinical thesis, where the surgeon has a reasonable influence on who's chosen, and where the economics are good, the market's good.
And so that's where we focused on Australia, New Zealand, and Japan. And so then it says, "Well, okay, well, how are you going to commercialize if that's where it's ripe?" Well, we believe a direct market's important for many of those reasons in the terms of, "Hey, you want to control your market presence. You want to make sure that you're serving the interest of the spine market. And we think that having a direct presence there allows us to do that." So when you match great clinical distinction with a market presence that reflects the importance of the clinical distinction in the operating room, then I think you can get a very deep penetration of that market, a high market share, which ultimately allows you to grow that business into profitability, not just quickly, but certainly over time.
And I think my previous experience would tell me if you go into distributor markets, you get a bump in revenue. You're not getting great margins. And growing the penetration, you're totally dependent upon some third party who doesn't necessarily share your interest. And so we want to serve the interest of spine and have a direct presence in those markets for those reasons, believes that makes us believe we can serve the interest of the market, which ultimately leads to greater penetration and a greater profitability profile.
Outstanding. Well, thank you, gentlemen, so much for spending time with us here, participating in the conference. Great to see you.
Good to see you.