Afternoon, everybody. Thanks so much for joining us. My name is Matt O'Brien. I cover medical technology here at Piper Sandler. Really excited to have the ATEC team here with us. From the company, we have Pat, who's the CEO, and then Todd, who's the CFO of the company. I have a luminary in the audience too, one Alex Lukianov sitting there. He's going to ask all the good questions in a bit here. But maybe, Pat, for starters, just maybe talk about the state of ATEC. You've been growing multiples of the market. How do you keep doing that? Is that what we should be expecting out of ATEC going forward?
Yeah, it's nice to have Alex here. And one of the things that I think that we'd previously done together is Spine still has a tremendous ways to go in terms of predictability. And so I think just the opportunity to apply technology in a way that ultimately reflects in improvement is very, very apparent. And so I think us being a Spine-only company and applying the technology assembly that we have, I think we have a huge run ahead of us.
OK, and just talk a little bit about that opportunity. Now that you're bigger, you've got a massive portfolio now and more stuff coming. How does the outlook for the business look there? And how much harder is share-taking now? Is it more difficult now that you're bigger or not?
Yeah, it's interesting. I think some of the market dynamics are I think the market's growing more robustly than it has previously. So that clearly is a tailwind. I think a lot of the requirements to participate in the market have elevated based upon just the money it takes to have adjunctive-type technology, be it navigation, robotics, neurophysiology, or the like. And so I think that the smaller players are becoming lessened, if you will, just the volume of them. And so I think that there's still a ton of share to be taken. And there's still, I think, a ton of opportunity for us.
OK. So to that end, just maybe talk a little bit about I think you noted on the Q3 call that things were impacted by the hurricane, or they started slowly in Q4 because of the hurricanes and maybe the IV solutions, things like that. Is that still the case? Is that still a headwind that you're facing?
Yeah, I think that anybody who does business in Florida was impacted. I think people who do business in North Carolina were impacted, but it all came back. I think what's fascinating, and it's really been this way ever since I can remember, is I think just the insurance dynamics of Q4 ultimately stimulate a high-intensity back end of the year, and so I would just say that that's probably the greatest driver, but we were not impacted in a meaningful way by the saline or the hurricane, for that matter.
OK. All right, great to hear. And it's not like low back pain goes away. So they're coming. They're going to get on the books at some point. So Todd, maybe talk a little bit about the cash flow outlook for the business. Is there any kind of risk that any of these headwinds or any of these other challenges could impact the Q4 outlook for cash flow specifically because it's a metric that a lot of folks are really focused on?
Yeah, we've clearly made significant progress in the third quarter in our cash flow. The big, I'd say the big improvement we made in the third quarter, well, two things, really. One was our investment in the sets. PP&E was significantly lower, as well as some working capital on inventory and also a benefit from an improvement in DSOs, and so that was really kind of the improvement going from Q2 to Q3. Out of the third quarter, we reiterated our full-year forecast of using $125-$135 million. That implies a cash flow in the fourth quarter, so that'd be our first positive cash flow, at least in my tenure, of $1-$11 million in the fourth quarter from a free cash flow standpoint.
And so as we looked at that, clearly doing a bit better than our expectations in the third quarter, our view was, or my view was, I might be a little gun-shy from changing my forecast coming out of the third quarter. So let's keep that in mind. But two, we could. I think we had 47 days sales outstanding from a DSO standpoint. That could go to 50. And 50 would still be very good for us.
Really good, yeah.
So that's like three days times $2 million. So that could be $6 million. We also had some cash-related expense associated with the narrowing of the organization that we did. And so for those reasons, we felt it was just prudent to leave the full-year forecast as it was and just kind of recommit to the $125-$135. And I feel like that's the appropriate place to be.
Got it. What about from an inventory perspective? Is that an area for meaningful improvement even here in Q4?
I think what you'll see is the seasonally strong step up in the fourth quarter. You definitely see some improvement in the utilization, and so I do think from a DIOH standpoint, we'll see some improvement in inventory.
Got it. OK. And sorry, Pat, to keep asking all these final questions.
No, this is good.
Yeah, but just maybe, Todd, talk a little bit about the puts and takes of ATEC going from this $125-$135 million of burn this year versus break even next year. I mean, that's a big jump.
It is.
The revenues are going the right direction. But how do you get there?
Yeah, it is a big jump. So I think really when I look at cash flow for next year and our commitment has been to be break even cash flow in 2025. And I really looked at two components to that, one being our improvement in Adjusted EBITDA. And so as I talked about the sequential step up Q3 to Q4 seasonally on the revenue, we got clear line of sight to 10% Adjusted EBITDA margins in the fourth quarter. And that's really what our guidance implies. And so as you look towards the next year, the construct I laid out in the third quarter call assumed a $75 million contribution of Adjusted EBITDA for 2025. That's just about 10% margin on the $730 million consensus revenue number. So I don't think it's a big stretch to say we exit at a 10% rate.
And I'm assuming a 10% rate on the full year next year from an EBITDA contribution. So you've seen the performance over the last couple of years in terms of EBITDA and profitability expansion. We got to profitability in the second quarter of this year. And then really next year, EBITDA becomes a major contributor towards cash flow positivity. And then you look at the set and inventory investment. And so we deployed $140 million of sets and inventory this year, or we will have when it's all said and done. And if you recall, our investment in sets and inventory has a relationship to revenue growth of $0.75 to the dollar. So for a dollar of revenue growth, it takes $0.75 to invest in sets and inventory. That should support $190 million of revenue, which is probably $65 million more than we'll ultimately deliver this year.
So we've pre-invested this year to support revenue growth for next year. Then we talked about in the construct on the third quarter call of deploying about $50 million of sets and inventory next year to get to cash flow break even. So that's a $90 million swing on the investment in set and inventory. And so I think this preceding of 2025 revenue in 2024 from the capital that we deployed is a big piece to that.
Got it. Makes total sense. So Todd, you started talking about this a little bit as far as next year's numbers go. I think you've guided the street to about $1 billion in sales by 2027. So that equates like 20%- 23%-ish. I mean, should we think about next year as more like 25%, then maybe tapering it down a little bit through the 2027 time frame?
So I think what we've said publicly, we have not guided to a 2025 number. I think what we've said is the $730, where the street's at, we feel comfortable with. And I think at this stage, I'd leave it there. I do know, and as we laid out in the long-range plan, if you look at the $1 billion of revenue, the increasing contribution of EOS and International are more of a contributor in kind of that 2026 and 2027 time frame than they are in the 2025 time frame. And so I think that benefits our growth in those out periods.
OK. And then the contribution from EOS, getting better and better, is that affecting the replacement cycle from Gen 2? Because EOS has been fairly stable in terms of the revenue you're generating there. Is there something else that can accelerate growth there?
Yeah, I would say both. It's like we're seeing the Gen 2 pick up in terms of the trade-offs. But I think the EOS Insight software package that we just launched has really kind of created a lot of buzz. We were at the Scoliosis Research Society in September, and it was a standing room-only type of environment, and so we've always said the short thesis is a surgical kind of a can we compel people with regard to kind of the clinical sophistication that we have from a surgical standpoint, the long thesis is really kind of playing off the EOS element, and the demand is being reflected in that way, and we're seeing it all kind of happen in front of our eyes. That's good.
But I think to your point on the replacement cycle in the long-range plan, it's very helpful for us. You don't have to assume a lot of new placements. The replacement cycle is beneficial. And so new placements or replacements could be upside if you want to think about it that way.
Is there an ASP lift with the next-gen system?
It's $750,000-$1 million.
OK. All right.
It's about the same.
OK.
The value is going to be in the reflected surgical impact, and so the tighter we can assemble the technology to our surgical business, the better off we're going to be.
OK. What about on the international side? I didn't realize that was a component of the billion dollars in sales. I know at your old shop, that was 20% of sales. Obviously, it's not going to be 20% of sales by then. But how big of a contributor does that need to be?
Yeah, yeah. I'm trying to remember.
It's about $30 million in 2022.
OK, so about 3%.
Yeah, yeah, so it's kind of $870 in U.S. surgical, $30 in international, and about $100 in EOS.
EOS, OK.
I think the importance, though, is just the lack of need for big infrastructure for an international business. We've been super focused. Australia, New Zealand, Japan is kind of the three markets we're jumping into, and our view is that that's as big an international footprint as we need for some time.
Got it. OK, makes sense. Pat, so we're about one year from the completion of the GMED-NUVA merger. Do you still, there was a lot of enthusiasm at the time of the deal, like you guys are going to be the massive beneficiary. Do you still feel that way? Or is it just going to take a little longer than maybe some of us had expected?
Yeah, I always think to myself that these things happen in three-year intervals. What's going to happen is a couple of years from now, you're going to look back and see that happened in a real hurry. The reality is that you look at kind of proxies in the Synthes J&J thing. You look at K2M and Stryker. It's not as though these things happen overnight. What we've seen is just a continued access to not only NuVasive Globus guys, but really market leaders across the board. We think it's a fertile environment. We will continue to elevate our sales force. If that means NuVasive Globus, great. I remain profoundly enthusiastic with regard to building a sales force.
OK. I mean, more specifically, was there any kind of lockup or guarantees that were provided to some of those reps? And is that coming off and making it a little more fertile?
Always. There's equity that tied them up. So we'll continue to see bleed over of expansive headcount in terms of our sales force. I would tell you that we built this thing, as we've talked about, in a very dense way. It's like if you look at specific, especially across the U.S., the geographies of large populations, we've been reasonably good with regard to the density there. Where we haven't been good is kind of the adjacencies outside of there. And I think that what we get to do now is start to pick off some of the adjacencies.
What kind of share do you have in some of the more densely populated areas?
Yeah, like if you're in San Francisco, there's a 25% likelihood you're going to get an ATEC implant. If you're in Raleigh, Durham, there's a big chance you're going to get an implant. If you're in Houston, it's like there's big dense areas where we have significant market share.
OK.
It's what provides us great bullishness in terms of the route forward. I think the clinical thesis is what we've driven from the beginning, and our view has always been a long view, and so it's playing out where we have, I think, long-term high-level sales talent. It's been reflected as such, and so we feel like the run forward is a big one. We're a 6% market shareholder domestically. We've got a big run in front of us.
Got it. OK. What about on the sales force side? What kind of retention are you seeing of the folks that you brought in maybe the last couple of years?
Yeah, phenomenal.
Better than industry averages?
Oh, yeah. And again, you would hope that I'm the least objective human. But even as it works out, it's like at this point, we're the bell of the ball. And so I think that when people say, hey, I want to be in this for another 10 years, and they look at what the portfolio reflection of the different companies are, I think we're the most attractive one. And having been at this for a heck of a long time, I would tell you that the assembly of technology that we've put together and the ecosystem that we're building at ATEC is phenomenal. And I think it speaks of a long run.
Yeah. OK. I mean, to that point, Pat, you guys don't have a robot yet. Well, you sort of do, sorry. How are the first couple of cases with Valence gone? And what can that open up? I can't remember the last time a company inspired with an enabling tech didn't see an acceleration in the performance of the business.
Yeah, I've been somewhat bearish on robotics from the beginning. And I think those of us who are students of surgery appreciate that the goals of surgery are decompression, stabilization, and alignment. If a robot helps in placing a screw, then it helps partially in stabilization. And so I think that it's great. But I think that those people who really understand robotics, I think it's a misnomer to call it a robot. We have a robot. My enthusiasm is more on the navigation side and integrating the technology. One of the great benefits of the technology that we acquired is that the footprint is very, very small. And so when you start to think about the volume of surgery going outside the hospital in the surgeon-owned ASCs, very few surgeons I know are going to put out $1 million for a robot.
I think just the opportunity to take a low cost of goods navigation and robotic system to an ambulatory surgery center is very high. And it speaks to the whole proceduralization that we so like to talk about. Because what happens is it's just another element of the convoy of sales that we ultimately get the charge for. And I think just the opportunity to architect workflow is very valuable. And so I'm totally bullish on what we have bought and how we're furthering it and what the impact's going to be.
OK. What have you seen in the first few cases, though?
Very, very simple. The great part is some of the people who are evaluating are Globus users and are ex-Globus users. And their view is it's a much simpler setup and a much simpler effort than the Globus robot, which I love.
OK, so saving efficiency on the OR time in terms of setup and.
The setup is super simple. The interface with regard to the software is super simple. The great thing is if you look at the history of navigation, there's been a group of guys that I think you acquired it back in the 1990s from Alex did from Surgical Navigation Technologies. It's literally that development team that's working on our navigation robotic tool. And so there's a plethora of experience. And so much that we covet the know-how so that we're not making the same market mistakes that we'd previously made. And so I think that having that team be really the driving force behind the development and the software writing has been very beneficial.
Got it. OK. How big of a gating factor do you think it's been in terms of attracting reps? And now that once you can fully commercialize that thing, do you think you'll see an even bigger inflow?
I don't think that we've had an impediment in attracting reps. As you appreciate, there's a lot of complexity in terms of where our specific needs are geographically, what their impediments are from a lockup or a vesting perspective, and does that geography match up with our respective need? So I think that's harder than it is a headwind from a lack of a robot. So I would tell you that, again, I think that what we'll do is continue to elevate the clinical experience with our proceduralization. That will continue to attract those people who are clinically adept. We think clinical aptitudes are a very important part of a sales force servicing a surgeon. So I think that that will just further our plight.
Got it. OK, that's understandable, so you've got a couple of companies out there that are ripe for some share taking, and one is Stryker, and they've been a donor for a while now. Do you think with their they're trying to roll out their own Mako spine system, it's going to make it harder for you guys to get some share from those guys?
Yeah, I think Stryker is an unbelievably good company.
I agree.
I think they've struggled in spine for as long as I've known them. And I don't think that this is going to turn the tide. And so again, I think that there's this misnomer that robots do spine surgery. They don't. They assist in placing screws, which is an element of spine surgery. And so the dynamic, I think, is one that is it going to do enough to ultimately move someone away in terms of placing a screw? And I don't think so.
Yeah, OK. What about Medtronic? I think Mazor has helped them stabilize things a little bit, if you want to call it that. I mean, could they be more susceptible going forward from you guys?
I think people underestimate the benefit of being spine only. Our experience in terms of products to the marketplace is far faster than anyone. And I think that having a totally focused existential dynamic associated with spine, it's like as we ultimately reflect the spine business, it dictates how well we do. And I think that our ability to be hugely responsive and hugely focused, if you think about the spine surgeon, the spine surgeon has more in common with me than he does, say, a Medtronic guy that has where the Medtronic company has clearly cardiovascular, diabetes, spine, and a number of other things. And so again, I think that the benefit of being aligned with your customer can't be overstated in terms of the importance of it.
Yeah, it makes sense. OK, thanks, Pat. One area, Todd, that has been a significant tailwind for ATEC, it's been the improvement in revenue per case. How much is left to go there? Because you've been doing unbelievably well the last couple of years. Is there still a long way to go on revenue per case?
Our long-range plan really outlined surgical revenue growth in kind of the low-20s%, as we talked about, about mid-teens% on volume, procedural volume growth, and kind of mid-single-digits% on revenue per case. Now, clearly, this year, you've seen kind of high single-digits% in the second half anyways on revenue per case. And the things that are tailwinds to revenue per case are the fact that our lateral business's price or revenue per case there is probably twice our average. We're still at a very low attachment rate on biologics. So as we continue to improve that portfolio, you get higher attach rates. That adds to the revenue per case. And so you look at the adoption of expandable interbodies. We've talked about lateral being our bread and butter and our driver. I think we also have an opportunity to continue to grow or begin to grow in deformity.
Deformity has reasonably large case values. So I do think there are tailwinds on the revenue per case that supports our long-range plan assumption.
To that end, on the deformity side, I mean, you've got Medtronic, J&J, huge players there, lots of physician consulting arrangements. How do you break into deformity and be successful in a category that others have tried to be better at?
Yeah, I think the investment in EOS is really kind of the single answer to that. It's like one of the elements of deformity is the lack of durability and predictability. And if EOS is a conduit to better durability, then we feel like it's a hugely valued asset. And so as we continue to get systems out there, I think the ability to translate the surgical business through EOS is very, very apparent. And we've recently launched the EOS Insight software. And just having been at this a long time, the ability to do any type of analytics has been implausible based upon the lack of automation associated with data collection. And so as we start to look at the volume of imaging that we get back based upon the automated tool, the ability to start to do predictive assessment is very, very high.
And I don't know of a surgeon who does a long deformity that doesn't want to understand things like how's the spine going to change based upon the instrumentation that I put in. And so our ability to do patient-specific implants, our ability to start to understand reciprocal response to intervention is very, very. It's going on now. And so I love our chances in deformity. And we've thought about the company in terms of in a short term based upon kind of the sophistication of what we're doing lateral and then the long view of how can we buy as much time as we possibly can to lay the foundation of an EOS, the number of EOS systems out there to ultimately be relevant. And so that's kind of the view. So we feel like short term, more degenerative, long-term deformity.
OK, makes sense. Pat, and I think you've been touching on this a little bit here and there. But what do you think investors really misunderstand about the ATEC story?
Yeah, probably the thing that I think is kind of disparate is our view is a long view. We are doing this, and we are moving a field. And our intention is to move a field. I think that are there some lumps? Yeah, there are. I think we bet forward. We deployed capital aggressively. We've been aggressive since the stock was or since the revenue was $89 million and going south, we're $605 going north. It's like I would tell you that it's a group of people who understand the requirements of the field. And we're going to keep being aggressive. But I would tell you the misunderstanding is just our long view at this and the expectation of this quarter-by-quarter assessment.
Just how much opportunity is there and how you can capitalize on it?
Yeah, there's a ton of opportunity.
Got it. All right, I've taken us over. So we'll have to cap it there. Pat, Todd, thanks so much. Appreciate it.
Thanks, Matt. Yeah,
thanks, Matt. Appreciate it.