With ATEC Spine. Thank you all for joining us in the audience. It's going to be a fireside chat format, which means it's meant to be interactive. Feel free to raise your hand to ask a question. More than happy to have anyone join in. Most pleased to have from ATEC Spine with us, Todd Koning, CFO, to my immediate left, and Robert Judd, VP of Finance, to my further left. We're going to try to power through a bunch of topics. There's always a lot to talk about, and hopefully we'll be able to capture most of this. But we'll start, we'll talk about the key revenue drivers. I think one of the outstanding questions is sustainability of really top-tier growth that ATEC has posted the last several years, and then how that sort of growth and profitability mesh, so profitable growth, we'll call it.
And obviously that's tied to the next question, which is about the ramp to free cash flow positive, which the company's making pretty clear progress on. And so thank you again, both. Good to see you.
Thanks for having us.
My pleasure, our pleasure. I thought I'd start sort of looking back in the past year, as I've said, and I think all the transcripts will say this in all of the sessions I've hosted, but this is sort of a time of year where I sort of reflect back on the year that was and also think about the year forward. So if you'd sort of reflect back, and I think in particular on the commercial organization at ATEC, and maybe sort of talk about the progress you've made over the last several years. You've expanded the sales force opportunistically post some pretty heavy consolidation in this space. So maybe where are we today with the sales force? And then we'll touch on some other topics.
Yeah. So when you look at the sales force, we continue to add people to the organization from that standpoint. I think the idea that disruption would provide a unique opportunity, I think certainly has played out. What we have done over the last 12-18 months is we've been able to attract competitive sales reps that really have been interested as we attract their surgeons. Our thesis has always been one of create clinical distinction, and you'll compel surgeons to adopt the technology. And when you compel a surgeon to adopt the technology, you're going to get the attention of their sales rep for obvious reasons.
And so the fact that we believe we've got a great portfolio that does attract surgeon adoption, then being able to attract the right sales reps in an environment where there's some disruption just makes it a little bit easier, if you will, on that standpoint. And so we've definitely seen the level of interest. We've talked about last year adding a number of competitive hires associated with disruption from disrupted companies. And we've also, I think, been clear about adding not just from disrupted companies, but a company our size growing the rate we're growing, you're ultimately going to attract really customers from all the different competitors. And so then therefore then sales reps will follow from those as well.
I'd tell you that from a competitive standpoint and from a disruption standpoint, I think we're kind of in the early to middle parts of that or stages of that, if you will. It's going to be a multi-year experience. I think based on previous disruption, I think we think of the K2M experience. That was a tailwind to recruitment for multiple years. And I think so far this is kind of playing out in the same way in terms of being able to attract the right kind of talent to support the level of surgeons that are interested in the product.
What about the tailwind? Obviously, there's a tailwind from recruitment, a lot of excitement about ATEC portfolio. When does that start to visibly show, though, in the sales trajectory? Is that something still in front of us? I guess some of the pushback maybe since you guys expanded opportunistically is that we haven't seen, at least not visible to us, a step function or even a step up in growth. Is that still a possibility? Where are these new reps or distributors and reps in that productivity curve?
I would point to the second, excuse me, the third quarter sequential growth, I think, was a nice proof point to that. A good chunk of that growth was contributed by competitive sales hires. And we sequentially grew $5 million Q2 to Q3 in what's typically a pretty flat to down seasonality for the overall market. So I think that's a good proof point. And I think as you look to when we talked about hiring sales reps about a year ago or so, we talked about there being non-competes lasting about a year and there's cross coverage to navigate that for the interim period. And we've really lapped that. So now people are kind of back in their home territories and we feel good about that.
Really as we look at where we are today, I think it gives us a level of confidence about certainly the fourth quarter, but into next year as well.
And so, do the reps now and distributors have everything they need, whether it's the instrument sets? I think one of the issues in the second quarter was you didn't have enough expandables in the bag. And these would be reps, I would think, disproportionately from where they came that they'd be expandable fans. Do they have everything now to be successful?
Absolutely. I mean, I think we had some of those transitory growth headwinds in the second quarter, which we've navigated through. And inventory levels are very healthy. We've clearly deployed a lot of inventory and instrumentation over the course of 2024 to put us in the position to support the significant growth that we've seen and we'll continue to expect to see. So we feel like we're very well positioned to continue to grow into the future.
And all these you still think are tracking on whatever internal productivity ramp you've sort of thought about, they're tracking along that path? Are they tracking better or worse?
I think in aggregate, they're tracking as we expect. I think there's always a distribution of performance, but in aggregate, we feel like it's delivering what we expected.
Okay. Maybe we'll sort of transition. We'll talk a little bit about the opportunity, and when I say the opportunity, we'll talk about the lateral procedure and where we are in the adoption curve. I think in the past, yourself and other competitors in this space have talked about something like 30% penetration for lateral. It's about a $1 billion market today. Maybe where are we today? Is it still 30%? I would think you guys have worked to drive that penetration higher, or is it in fact a zero-sum game if you're winning in lateral, somebody else is losing?
Yeah, I definitely think the lateral market in and of itself seems to be growing a bit faster than the overall market. I think some of that's just broader adoption applicability of the technique, and I think some of that is a function of being able to convert some traditional posterior approach, PLIF and TLIF people to lateral approaches, so our view is that the market's growing a bit faster than the overall market in lateral in particular. Lateral continues to be a lead driver for growth for us, and I think if you look at where we are, we're in kind of the low double digit penetration or market share, if you will, of that $1 billion market size.
And you touched on it. You've also talked about expanding the opportunity into that other $2 billion segment. Where are we in that process?
I think we're very early days in that process. I mean, when you look at some of the people who have come and really trained and gone through our process, we can definitely point to some of that business that has transitioned. But I think we're very early days in really being able to grow it.
Is there any common pushback for the folks that don't see that as an opportunity? Is there a common theme that, or is it just, I've been doing it this way my entire career and so you're trying to change?
I think when you look at lateral, what are some of the broader hurdles to adoption? And it's really what has kind of generated PTP and why we approached the lateral solution with PTP, which has really been one of position and being able to address L5/S1 along with L4-L5, and above through PTP. And so being able to do that in one single position, I think the most common complication with lateral surgery has been the residual thigh pain and foot drop, the utilization of automated SSEPs. So our neural monitoring technology allows you to avoid that most common complication. So that's been a way we're addressing it. And then I think the other way is lateral surgery does take a lot of fluoroscopy. So there's a lot of radiation that the surgeon himself or herself gets exposed to procedurally.
As we think about integrating our robotic platform, Valence, into a procedure, that's how we believe that we can ultimately mitigate a lot of the radiation exposure in a lateral procedure through navigation.
Just to maybe put some numbers on that, we're just getting started comment. If you look at where we're at, as Todd said, maybe 12%-13% market share in lateral. You think about, it's rather objective to look at our portfolio, the people that are presenting PTP on our behalf and that we're working with are the luminaries in that field and space and say, hey, we've got the latest technology. SafeOp is really the preeminent neurophysiology solution out there. We introduced the positioner, we introduced the technique, a new retractor. All those things have brought a new, we call it essentially lateral 2.0. So to be the thought leader there and be at only 13% of the market share when you know this previous team, when they pioneered lateral, they created the market and then held 50-plus% share of it for quite some time.
And so I think just numerically, there's quite a bit of opportunity for someone who's really leading the technology and thought leadership in the space.
And you sort of, you've mentioned it when you mentioned SafeOp, Todd, but you obviously do have a large competitor that's been distracted doing other things. I think when people look out several years and they think about that competitor and obviously they're now competent in lateral, is that a threat competitively or is it an opportunity to just have another big company out there banging the drum and the virtues of lateral? And I think if you're going to differentiate, you're going to differentiate on SafeOp. But to that point, why do you feel comfortable from a competitive standpoint that the largest competitor may not be distracted in the next several years as they have been?
Yeah, I would say that I think our advancement of the neuromonitoring platform is significant. And there is an incredible amount of know-how that has been required to do that. And if you think about the know-how that created the platform down the road, the majority of that know-how sits with us. And quite frankly, getting to what we've got in terms of automating the SSEP and now being able to automate MEPs, so monitoring the motor nerve as well, all of that is significant advancement in the technology, which is a reflection of know-how. And that's know-how nobody else has. And so I think our confidence in our platform being meaningfully differentiated and protected for a long period of time is quite high as a consequence.
Is there any way to comment as we sort of talk about the different procedure buckets here? Obviously, you spend a lot of time on lateral, but what about, so that's more lumbar. What about the cervical business? We think about the other opportunities, cervical being one complex, I think, and deformity is one you and I have talked about for several years. Maybe where those stack up relative to PTP and LTP in terms of drivers of the business?
Well, I think clearly our growth in the business has been driven by lateral, and we've been very kind of upfront about that. I think some of the things historically that have been tailwinds to growth has been our cervical portfolio. We upgraded that over the course of really 2023 and saw significant growth there in 2023. You see our increasing biologics attach rate, and so these are just part of what we kind of talk about the halo effect of when you gain a surgeon's confidence in some of the more difficult procedures like lateral, you ultimately are able to attract more of their business in totality. I think you've got that. I think you can look at our continued strength and revenue per procedure, so our share of the dollar share of the procedure continues to grow.
We're growing at what, 9% in the third quarter on revenue per procedure. That is a huge amount of.
That's on an average basis of procedure being in the highest.
10,000.
10,000.
Yeah, in that neighborhood. And so that's a meaningful amount of value capture in a procedure. Some of that's mixed related because lateral is 2X our overall average. And so that's a benefit. But fundamentally, I think we're seeing a lot of, well, we're seeing the continued adoption of our products by surgeons. And you can see through our historical cohorts that people use more of our products year after year.
Another good segue sort of to sort of talk to the sustainability of this growth. You mentioned some of the key metrics that we make sure we track from you guys is obviously the revenue per surgery. You mentioned 9%. So how sustainable is that type of growth? It's been fairly sustainable the last couple of years. I'll just interject. We think about some of the opportunities you have down the road on the complex and deformity side. We'll hopefully get to talk about how EOS plays into that. It would seem like there's a long runway to keep driving that number higher.
Yeah, our long range plan really laid out a volume assumption of kind of mid to high teens. That's underpinned by about 10% surgeon adoption and kind of low to mid single digit productivity kind of utilization increases over time. If you look at history, 2021 to 2023, the utilization increase was like 3 or 4%. And so I think our long range plan assumptions are very much intact. In fact, we're kind of ahead of the game on surgeon adoption. We're maybe a little bit lower on utilization increase. But if you think about our confidence, the long range plan volume component of the story, it's really underpinned by surgeon adoption with the utilization kind of catching up over time.
And so that's a good segue. Thank you for teeing me up. And so you said baked into the LRP for surgeon adoption is mid teens?
10% for surgeon increases. Total volume kind of mid-teens, but revenue per procedure kind of mid-single-digit.
Maybe actually how do you define surgeon adoption?
If we had 100 surgeons last quarter, like Q3 of 2023, and let's say surgeons grew 19%, then it would be 119 surgeons in Q3 of 2024.
Okay. So these are actual surgeons that came in. You give us training numbers, but these are actually surgeons that came in, trained, and are going back and actually doing procedures.
Correct.
Okay, and I think that number has ranged, I think I've got written down here, 19%-32% over the last several years. So you're outpacing, that's the point I was trying to get out. You're still outpacing the LRP percentage.
Totally. Totally.
And again, the biggest pull for these physicians is still PTP and LTP. Is that?
I think that is clearly it. I think what we're starting to see now as well is really access to a group of people in the deformity space that we wouldn't have had access to before, largely because of our acquisition and subsequent investment in EOS and EOS Insight.
Okay. Another good segue to talk about EOS. Maybe it might be helpful for folks in the audience if you could give a two minute background on what EOS is and why it's differentiated.
Yeah. So I think EOS is an imaging platform. It is a standing biplanar. So you got front and back and side view of the spine. It's a low dose in terms of the amount of radiation. And so historically, it has been widely adopted in kind of pediatric institutions because of the value of low dose radiation and the alignment measures that you get. With the current version, so kind of the second evolution of the imaging platform, we call this the EOS Edge. It's a bigger stroke, if you will. So it's more available for adult utilization. And so what we know is that alignment is the greatest correlative to long-term durable spinal interventions. And so what we believe is when you've got a biplanar standing full body weight bearing image, you can understand global alignment correctly.
And therefore, you can come up with an optimal surgical plan based on the spino pelvic parameters that are well studied and understood. And so that's kind of the platform in terms of its imaging capability. What we've done subsequent to that is launch EOS Insight, which EOS Insight allows for automated alignment measures. It allows for an automated 3D surgical plan with ATEC implants. We have an intraoperative reconciliation tool that says, hey, if you have this plan, now intraoperatively, while you're intervening in the patient, are you achieving that plan? Because what good is a plan if you don't know if you've achieved it intraoperatively? We have patient-specific implants vis-à-vis the image in the form of a pre-bent patient-specific rod. And then we can do postoperative assessment of that intervention and compare that to your plan.
And so it's really the first tool that can give you a standardized image. And when I mean standardized image, it means that you can actually, with a resolution, compare your preoperative image to your postoperative image and do measurements in a way that you can tell with confidence if you are achieving what you want to achieve. And so there is no magnification that a typical X-ray would have. And so those are some of the defining factors of EOS, the image, and what we've done with EOS Insight.
And what's the response been? And maybe rolled out middle of the year, really. So you're still in the earliest innings. What's the feedback been?
Yeah. Do you want to speak to some of the feedback?
Yeah, the feedback's been really positive. And you think about the users are really the launch. We started with our close family and friends, people that are using our product, people who we trust to give feedback so we can make sure that there's something as we more broadly roll it out is the right experience for people. But the surgeons that are using it, I think the thing that they, I mean, I think we expected the workflow and the utilization in the clinic to occur. And so I think you're seeing high utilization. It easily works into the workflow. The surgeons are actually using the measurements and the planning because it's super easy. It's done almost automatically.
I think the thing that's been probably a net positive beyond maybe the surgeon's expectations, if I could speak for them just based on what we hear, is the intraop reconciliation, the ability to then actually have a plan, but then measure against it. Because you could have a great plan, but there's really been historically no way to measure success. So it's like I have a plan, here's my plan, hopefully I got it. But I think what you're seeing now is I can measure it intraoperatively, confirm my plan, or adjust as needed. And I think that's the real net pickup. We are selling pre-bent rods now, kind of somewhat similar to the Medicare model. So these things can be ordered preoperatively, customized to the patient. And so that's an element that we've added as well. But it's the early innings, right?
I mean, we want to see people get experience. We want people to get up on the podium, talk about it, publish it, share it with their peers. And we would expect, I think the EOS and the EOS revenue as well as the implant revenue to be pulled through from that in a future state.
When do you think you'll go full bore, whole hog on your launch? Is that a 2025 event? Does it take longer than that?
I guess probably more 2025, and I think we're going to need to get the early experience, make sure that EOS Insight's everything we want, incorporate any early feedback into the software, and if you think about it, we've got maybe 230 EOS machines installed base in the U.S. A third of those are probably Edge, and so it's probably going to take us 12 plus months just to get the existing installed base in.
Let's talk about that, how you monetize it. There's obviously multiple angles here. I think the one we spend most of the time on is sort of the longer tailed opportunity that having an enabling technology platform that's fully entrenched in a doc's practice is very likely to see higher utilization of your portfolio as a whole. There's a nearer term opportunity upgrading the installed base, obviously selling de novo placements. How should we think about, you first mentioned the installed base, how does that work? If we can upgrade a third of them over the course of the next 12 months, what does that look like? What's the economic model there? We can talk about what happens after that.
Yeah, I would say that early on, our launch cadence here is with friends and family, and so really the capabilities of automated alignment and having a surgical plan, that's really going to come to them based on the purchase that they've already made. Really what we want to do is we want to encourage broad use of this, and so frankly, we want to give people access to the automated alignments because we think that's a huge value. And then if you're not a user of ATEC implants, getting the automated alignment and getting a surgical plan with ATEC implants is kind of like, oh, all right, well, maybe I want a pre-bent rod. I'm only going to get that pre-bent rod from ATEC, and so, well, maybe I should use their screws as well.
I think there's a path essentially to provide access to EOS Insight with our existing friends and family. That really is just. It's not going to be incremental revenue to us in the near term. In the long term, yeah, I think you pay for some of this broader access, intraoperative alignment, and the ability to reconcile things postoperatively.
So again, the way we're thinking about it, and I want you to make sure we're thinking about it correctly, through 2025, PTP and LTP and all the other blocking and tackling still the primary drivers. Maybe as we get into 2026 and beyond, I don't want to say necessarily that the growth baton gets handed off, but then EOS maybe more visibly contributes, whether it's through pull-through, whether it's through monetization. Is that sort of the right way to think about when it visibly contributes?
I think so. I think the EOS Insight influence will probably be more 2027 and onwards. I just think about as we get through 2025, like having a number, call it 70 plus accounts with it, like you've got to get some volume of activity. Those surgeons need to then reflect on that, maybe study some of their patients, get on the podium and talk about it. And I think that'll be a multi-year experience for us.
Okay. In the last five minutes, let's talk about profitability. So as I'm reading here, you've obviously shown a nice progression, particularly here in the third quarter on your EBITDA. I think the fourth quarter implies that EBITDA margin goes from 5%, I think, in the third quarter to 10%. So I guess help us understand why you feel comfortable in that sort of walk just sequentially. But then as we think about 2025, you've got very specific goals out there, why everyone should have confidence that the cash flow part of the story is intact.
So I think a couple of things I'd point to. You can look at our sequential operating expenses over the last three quarters, and really they've been very flattish, kind of Q1 to Q2 to Q3. So I think that should reflect and be understood as us really being, I'd say, prudent in where we're spending our money and investing our dollars. I think you look at the step up in revenue, Q3 to Q4 sequentially, just about $20 million. You probably get close to $7 million out of that $20 to drop through to the bottom line. Plus you get, there's just some timing elements. We had NASS and some other expenses in the third quarter that don't repeat in the fourth quarter.
As we talked about on the fourth quarter or on the third quarter call, we have taken some cost actions and we've narrowed the organization a bit as well. I think all of those things give us a level of confidence that we can deliver a fourth quarter adjusted EBITDA of what effectively is about 10% of revenue. As you think about going into 2025, and in our prepared remarks on the call, we talked about a cash flow walk that assumes $75 million of adjusted EBITDA on a consensus number on the top line of what's about $730 million. Just north of 10%. You'd like to think if you can exit at a 10% EBITDA margin that you can deliver 10% on the full year. I think that's the numerical stuff.
The way we get there, I think, is very much the way we've laid it out in our long-range plan.
And so it's the way you've gotten there to this point.
Totally. And that's also what gives us a level of confidence is we've delivered on our historical commitments in the way we expected to.
And so do you have enough cash on the balance sheet now? You've got some financing that you announced as well. Is there enough cash to get you to that cash flow break-even?
Yeah, we feel very good about the level of liquidity that we have. As you said, we were able to get an increase in our term loan on the $50 million. We took that proceeds. We paid down our revolver. So really net debt neutral to the balance sheet, but gives you some capacity to flex up on your revolver if you had to. Our plan would suggest you don't need to. Our cash flow forecast for this year implies cash generating in the fourth quarter and cash flow break-even on the full year next year. The way we get that is really twofold. One is the increase margin expansion on adjusted EBITDA. So adjusted EBITDA becomes a contributor to cash flow next year.
And then when you look at the amount of capital we've deployed in sets and inventory in 2024, a substantial amount of that will contribute to 2025's growth. And so our need to invest in sets and inventory at the same rate is much smaller. And so you actually get like a $90 million swing on set and inventory investment 2024 versus 2025.
You've rolled into your investments.
Completely.
Okay. In the last minute, I wanted to leave you with this question about, obviously, stocks have been very volatile and a lot of debate. Maybe it's sort of the nicest way to talk about it over the last several years. What do you think people are missing about this story in your seat? What are people not appreciating? Obviously, we're all focused on growth and margins and cash flow, but what are we missing?
Yeah, you know, I think ultimately our company is in inflection as we sit here today. Much of the heavy investment in sets and inventory is really behind us in 2024, the deployment of the $140 million of sets and inventory that really supported this year's growth as well as growth in the next year. So going into next year, I think we're well positioned to continue to grow at significant rates, to expand our profit margins in a confident way, which ultimately leads to getting to cash flow break-even. And I think hopefully investors share our conviction in our ability to do that.
Okay. We've got no time left, so we did a good job.
We landed the plane.
All right, Tina's going to be happy. All right, thank you, everybody. Thank you, Todd, Robert. Always a pleasure.
Thanks, Pat Miles.
Thank you.