Alphatec - Q2 2023

Transcript

Operator (participant)

Good afternoon, everyone, and welcome to the webcast of ATEC's second 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, pro forma, or adjusted measures. Reconciliations of non-GAAP 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 the ATEC Chairman and CEO, Pat Miles, and CFO, Todd Koning. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. Now I will turn the call over to Pat Miles.

Pat Miles (CEO)

Thanks so much, Danica. Welcome everybody to the Q2 2023 financial results call. I would ask you to review the forward-looking statements at your leisure. I gotta tell you, this has been a very good quarter. Our growth has been fueled by our spine focus. If you look, we had $117 million in Q2 2023 revenue, which is a 39% growth, 41% surgical revenue growth that would exclude EOS, and a +$1.5 million adjusted EBITDA. The highlights are that we extended the lateral momentum, really the strongest contributor to our Q2 growth, launched ALIF access to proceduralize LTP and midline ALIF approach for L3-S1. We acquired navigation-enabled robotics platform, which we'll talk a little bit about.

We drove $15 million in EOS revenue, which was a 24% growth. We achieved 32% volume growth and 7% growth in revenue per procedure, and expanded adjusted EBITDA margin by 1,100 basis points. Our commitments really since the ATEC recreation have not changed, but kind of under the auspices of spine focus, we've been able to continue to create authentic clinical distinction. The commitment of clinical distinction continues. There's nothing better than being aligned with your customer. You know, spine surgeons commit their career, their vocation to spine surgery, so being aligned with them in terms of being spine focused is big, we continue to compel surgeon adoption.

I would say, same with regard to being elevated by the whole spine focus thing, is just being aligned with the sales force and, and, and being sophisticated with regard to the subject matter in spine becomes very, very important. One of the great misnomers in spine is that it's commoditized. Spine is not commoditized. If something is commoditized, oftentimes there's great predictability associated with it. When you see a 10%-15% revision rate in 1-3 years in degenerative surgery, I would say that that's not a predictable environment. At least it's not a billable environment. When it's 25%-30% in 2-5 years, I would say the same.

As we look at, at the opportunity in front of us, we think we can drive predictability, reproducibility, and durability by mitigating variables. When you start to think about how do you mitigate variables and how do you elevate procedural sophistication, and spine is a very challenging environment in doing so. Our view is what you do is you take an informatics view, and you create an ecosystem, and you control variables from end to end, and you start off pre-operatively, and you start to look at the measures of a patient. You start to plan against a patient early on, so diagnostically and pre-operatively. Then what you do is you do everything you can intraoperatively to mitigate variables. I think we continue to demonstrate the things necessary.

I think the, the acquisition of the navigation-enabled robotics platform would suggest, gosh, we, we continue to make progress on that front. With the continued evolution of our SafeOp platform, the neural navigation and nerve health tool, we continue to get better on that front as well. Not only pre-op and intra-op, but also we're trying to inform future surgery with regard to the post-op experience. I think that there's a, there's a, a great opportunity to create greater predictability in a field that, that generally currently lacks it. I think, you know, what is, what is important is to talk about why is ATEC continuing to grow, significantly outpacing the marketplace? I would tell you the driver is lateral.

You know, it's, it's, if you look at all of the, the, the clinical data out there, it's tough not to think that in certain indications for surgery, that lateral is just not better. As it relates to blood loss, less blood loss, as it relates to hospital stay, a less hospital stay, and days back to normal activity in terms of just ambulating, it's, it's been demonstrated to be better, and that's in 500 peer-reviewed publications. I would say, make no mistake, the lateral market is the most coveted market. It is the growth market. The great part is, is as other companies are out celebrating anniversaries, and it's often the wrong date, what ATEC is doing is setting a new standard in lateral.

It's the thing that we do best because we have great experience in the space. We're the very people who created the first generation, led by Dr. Luiz Pimenta, who was the original lateral pioneer and is our CMO. There's nothing better than having the most versed, most sophisticated in it. We're applying decades of lateral experience to address really what we did in the first generation. What we're doing is we're saying: What are the goals of surgery? The goals of surgery are decompression, stabilization, and alignment. How does PTP, in essence, continue to evolve what we did initially? Well, the great part is, is with the SafeOp platform, we're addressing the neural retraction complications. The patient that we're doing the PTP is a much more familiar position to surgeons, and it mitigates inefficiencies.

If a surgeon does a decompression, which is, again, part of the goals of surgery, they're in a prone position, so it's a better position. Your ability to stabilize, meaning put posterior fixation or pedicle screws in, is in the prone position, is the most favorable place to place pedicle screws. Our ability to use patient positioners to control the patient position, again, is something that we've learned and applied to PTP. You don't have to turn a room over. Clearly, the sagittal alignment is better. Our view, and it really is not even our view, it's an undeniable truth, is you're not serious about market participation in lateral surgery unless you have automated neuromonitoring. It's a foundational requirement. It's not a nice-to-have.

Ours is designed to directly address the most common documented risk, which is femoral nerve complications, you know, in lateral surgery. It is one of the things that we really celebrate, which is having unmatched organizational neuromonitoring expertise. We have the best of the best. We have great experience in this space, and we just continue to get better. When, you know, when we see people knocking off our retractor, meaning, meaning copying our retractor or copying our patient positions, we know they can't copy the neuromonitoring. Taking capturing a small signal in a very noisy environment and then interpreting that and providing, and, and providing actionable feedback is the magic. Without doing that, you're not ever gonna be a serious participant in lateral surgery. We covet the SafeOp platform and what's going on.

Also think about it as what we're doing is we're taking an informatic and driving greater predictability with this tool, and I think there's gonna be a consistency with regard to how people look at ATEC in terms of what the competencies are. I think part of being the most committed to an environment, meaning lateral, you have to do research, and you have to do education. I would tell you that we're the most committed to both the research and education within the field, and I think it's being demonstrated. Some of the most recent publications are PTP for adjacent level disease, PTP versus TLIF, PTP versus the standard first-generation lateral that we did. There's 27 peer-reviewed publications currently.

We've trained over 500 surgeons in 2022, we continue to host really important events. We have a PTP council that continues to provide feedback, we apply the learnings as expediently as we possibly can, as well as had a Duke, Emory conference as well, which again, I think just illustrates or demonstrates a commitment to lateral surgery. I would tell you that we are quickly becoming the lateral standard bearer, I think the bottom line is PTP is really more aligned with the goals of surgery and really enables us to expand the marketplace in a very meaningful way.

Really, from just participating in the $1 billion segment to making it a $3 billion segment based upon the addition of addressing, pathology that would historically been addressed by PLIF and TLIF, where you would need to do a post, some type of a posterior decompression. I would say that only ATEC's committed to the out at the outset to improve lateral, challenging its pioneers to better meet surgical requirements and address hurdles. We have a solution designed to avoid the complications, which is the SafeOp part, which I talked about a minute ago. I think, you know, the whole applying our learnings is, is, is, I would tell you, a cultural reflection of who we are here, and the other thing is, is obsoleting our last best effort.

When someone copies this, they're gonna copy our last best effort because we're gonna apply our learnings forward. I think transforming and expanding the market to surgeons who are accustomed to more conventional techniques. Really our interest is to continue to advance the most coveted market, which is, which is lateral surgery. I think the other way that we've been rewarded, as I think when you create lateral confidence, it earns a surgeon's trust. We, we view that to be really a, a halo effect. When we say halo effect, what that means is it expands ATEC product utilization in more conventional procedures, and so that becomes very, very valuable in terms of reflecting the momentum.

I previously talked about informatics mitigating variables and, and, and the experience in translating, say, SafeOp, in terms of the information and how it drives safety or, or, or looking at how we're gonna integrate the navigation, navigation-enabled robotics into, into lateral surgery. But EOS is really kind of staring at us as such a great opportunity to expand its influence in the, in the reasonably near term. The first things that you're gonna see mid 2024 is you're gonna start to see automated alignment reports, automated 3D models, automated surgical planning, and the option, if you want to, is, is applying the surgical planning elements to a patient-specific rod.

When we say automated alignment, what we mean is as the bi-planar view is taking on the image, our ability to immediately add pelvic parameters and the measurements to assure alignment are immediate. This opportunity to continue to add informatics to the planning element becomes very, very apparent. The other thing in 2024 is going to be the assessment and follow-up, that will be a big part of what you're going to see in 2024. We expect a lot of influence by EOS next year. Subsequent to that is going to be things like bone quality. If you're going to stabilize a spine, which we said the goals are decompression, stabilization, and alignment, you're going to want to know what the underlying material is.

We feel like having a bone quality measure is very valuable. We'll also integrate an intraoperative rod bending element to continue to make refinements in the alignment effort. We believe that there's a configuration opportunity to lessen the number of assets required in the room. The great future is really a predictive analytics foundation, that enables us to provide the surgeon data on like patients that have had a technique, that have like pathology, and give them a foundational view with regard to a rich data set. We're building the foundation for that rich data set. We recently got attestation for SOC 2, which is a IT requirement to ultimately house data. We're on our way to HITRUST. We have numerous accounts currently adding patients today that have EOSedge to our data set.

We will have the most rich data set in spine. I think having been at this for a very long time, all of the data collection forever has been manual. When I make a big deal out of the automated element, what we're telling you is that we're collecting objective data in an automated way that's going to make for a more assured data collection source. We talked a little bit about the, the navigation-enabled robotics. The integration of it is, is right on track. Our learnings continue to affirm the investment thesis. We're thrilled about the team. They have deep expertise, and our ability to advance the integration and, and development is very, very apparent to us.

We expect the initial experience in, in late this year, following regulatory clearance for InVictus screw placement. We will continue to expect freehand navigation clearance in mid to late 2024, then full integration into lateral procedural workflow in 25. We remain totally bullish and profoundly enthusiastic about what's going on on that front. I think from a creating clinical distinction, a ton of momentum and a ton of excitement. In terms of compelling surgeon adoption, we went from about 1.8 products per procedure to now it's at 2.4. I think the convoyed element of the way that we view surgery is coming to fruition. If, if, if ever you're wondering about the demand, the demand for educational experiences is still exceedingly high.

We had 150 surgeons in in Q2, there remains a, a tremendous amount of, of interest in, in, in what we're doing. As it relates to, to elevating distribution, I, I can't be more excited on this front. I, I, I think that when you talk about spine focus and you talk about opportunities to, to grow, we're a less than 5% shareholder at this point, we're so well positioned from a spine focus perspective. We celebrate the, the uncertainties in a marketplace. We think that they improve the quality and quantity of the, of the funnel of, of salespeople interested in working with ATEC. We'll continue to strategically fill in large geographic gaps, we'll continue to compel surgeon adoption.

Again, I think that this speaks to the spine focus, which Kimberly others don't have. Another very, very affirming view is, if you're gonna come join us, the likelihood of you growing at 38% is very high. That's a percentage growth rate of our same store sales. Would love for you to join us. We will have a... Todd.

Todd Koning (CFO)

Well, thank you, Pat, and good afternoon, everyone. We appreciate you joining us on the call today. I'll begin with revenue. The second quarter total revenue was $117 million, growing 39% over the prior year and increasing 7% compared to the previous quarter. The $117 million in revenue is comprised of $102 million in surgical revenue and $15 million of EOS revenue. Second quarter surgical revenue of $102 million increased 41% compared to the prior year period. Procedural volume grew 32% in the second quarter, reflecting strong surgeon adoption, with growth in the number of surgeons utilizing our procedural solutions up over 25%.

Average revenue per case expanded 7% year-over-year, due to continued mix benefit from the momentum of our lateral franchise, the continued increase of our biologics attach rate, and an increase in case complexity. Strong performance in lateral drove increases in both procedural volume and revenue per case. The number of surgeons using PTP is growing, and utilization of PTP among those surgeons is expanding as the procedure is applied to a broadening set of pathologies. A robust reception to our posterior expandable cages also contributed to growth overall. Importantly, the areas where we have invested to create clinical distinction are the areas achieving the strongest growth. EOS revenue in the second quarter was $15 million, up 24% compared to last year, with solid execution on deliveries and installations.

Working through the remainder of the P&L, second quarter non-GAAP gross margin was 73%, up 340 basis points compared to the prior year. The year-over-year increase was primarily driven by royalty rate improvements and mix. The mix benefit came from both an increased contribution of surgical revenue and an improved EOS gross margin. EOS gross margin improvement is due to the success we've had in addressing the backlog of service needs over the last 12 months, as well as pricing initiatives we've implemented. Second quarter non-GAAP R&D was $13 million and approximately 11% of sales, compared to $9 million and 11% of sales in the prior year.

The increase on an absolute dollar basis was driven by continued investment in our organic innovation machine to advance procedural and information-based solutions, including approximately $1 million of investment associated with the robotic navigation platform we acquired in April. Non-GAAP SG&A was $81 million and approximately 69% of sales in the second quarter, compared to $65 million and 78% of sales in the prior year period. We delivered 850 basis points of improvement year-over-year. Approximately half of that was driven by improved variable selling expense and the other half by infrastructure leverage, including about 80 basis points of investment related to creating an international presence. As we grow the business, the contributors to the leverage that we are delivering continues to be in line with our expectations.

Total non-GAAP operating expenses amounted to $94 million and approximately 80% of sales in the second quarter, compared to $75 million and 89% of sales in the prior year period, demonstrating over 800 basis points of operating leverage year-over-year. Adjusted EBITDA was $1.5 million and approximately 1% of sales in the second quarter, compared to an $8 million loss and -10% of sales in the prior year period. This represents another quarter of over 1,000 basis points of margin expansion. We are pleased to have achieved positive adjusted EBITDA this quarter, slightly ahead of plan. Continued top line growth and disciplined execution is delivering results. This quarter's performance reinforces our confidence in achieving the long-term profitability goals we've committed to.

Turning to the balance sheet, we ended the second quarter with $101 million in cash. Operating cash use totaled $37 million, of which approximately 90% was related to investments in the sales-generating assets, inventory, and instruments that fuel our growing distribution footprint and new product launches. Given the strength of sales momentum in the first half, we pulled forward the required set and inventory investments. Offsetting that, adjusted EBITDA improvements in the first half benefited operating cash, and we expect that to continue into the second half of this year. Debt at carrying value was $470 million. We continue to have undrawn and available borrowings under both MidCap revolving credit facility and the Braidwell term loan.

Turning to our outlook for the full year 2023, we now expect full year 2023 total revenue to grow 32% to approximately $462 million. That includes surgical revenue growth of approximately 33% to $404 million, and EOS revenue growth of approximately 21% to $58 million. As sales growth drives leverage across our business, we expect to continue to achieve significant adjusted EBITDA progress this year. In conjunction with the increased top line guidance, we are raising full year adjusted EBITDA guidance to $2 million, representing 840 basis points of margin expansion. The increased guide is in line with the framework we've shared, specifically that we anticipate about 10% of revenue upside to flow through to adjusted EBITDA, while the balance is reinvested to drive top line growth.

The next few slides provide additional context for updated 2023 guidance. I'll start by sharing how our expectations in procedural volume and average revenue per surgery growth shape surgical revenue guidance. We continue to train surgeons at a robust rate, which drives both surgeon adoption and utilization. Training surgeons builds loyalty and enables surgeons to work up the procedural complexity curve, both of which increase utilization. The middle chart is a testament to the consistent ramp in utilization that our surgeon cohorts have demonstrated each year. Due to improvements in these dynamics, we now expect low 20s% procedure volume growth for the full year 2023, compared to high teens volume growth expected previously.

Average revenue per surgery growth is our mix shift towards procedures that require more products per surgery, like PTP and LTP, and towards surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The gradual addition of expandable implants to our portfolio and increasing biologic attach rates are also enabling us to capture more of each procedural revenue opportunity. We continue to expect these dynamics to drive growth and average revenue per surgery at a high single-digit % rate for the full year. In sum, increased surgical revenue guidance is related to increased procedural volume expectations. That volume growth is being powered by adoption, both the quantity of surgeon customers and per surgeon utilization. These dynamics validate our thesis that when you create clinical distinction, you do compel surgeon adoption.

With respect to the rest of the P&L, we have begun to demonstrate the operating leverage that sales growth enables, we expect that dynamic to continue. Guidance for the adjusted EBITDA of $2 million for this full year implies 840 basis points of improvement relative to last year. The components that are delivering leverage have been consistent with what we described in our long-range plan last May. At that time, we committed to 2,500 basis points of operating leverage over the 2021 to 2025 time horizon. That entailed about 300 basis points of contribution from R&D, about 1,000 basis points related to variable selling rate, and about 1,200 basis point contribution from SG&A infrastructure leverage.

The improving variable selling rate and the infrastructure leverage that sales growth has enabled over the last several quarters gives us great confidence to continue investing in growth while achieving our financial commitments. Now, in closing, results this quarter are a continued testament to our belief that good surgery is good business. Our investments to advance spine surgery and become the standard bearer have and will continue to deliver sector-leading growth. Financial results this quarter are also mark a significant milestone for ATEC, a revenue growth-driven inflection to positive adjusted EBITDA. We have great momentum and great opportunity ahead, and we have an active IR calendar over the next few months, including our Innovation Day, which Pat mentioned, in conjunction with NASS in October, and I hope to connect with many of you in person. With that, I'll turn the call back over to Pat.

Pat Miles (CEO)

Thanks much, Todd. I think oftentimes we say things like, "Our best is yet to come." I, I would say that, that, that, we've built a foundation, really assembled for a long-term, growth trajectory. If you look at what we've done from 2018 to 2022, and, and really have grown at a 40% revenue CAGR, I think, with clearly a big influence on, from lateral, I think our best days are yet ahead. If you think about us continuing to drive growth through distinguishing ourselves within the lateral franchise, we've, we've yet to, to reflect the, the value of EOS from an informatics perspective, and I think it provides us great opportunity to, have an expanded, presence in deformity.

I think the navigation-enabled robotics piece is, is apparent in terms of what the opportunity is there. We love the uncertainty of the marketplace. I think the spine focus will be rewarded, and, and so totally enthusiastic about the, about responding to, to those opportunities. We continue to see expanded hospital access. In places that we've had zero business, we now have access, and, and, and we have the opportunity to build sales forces in states where we've had zero sales. From an international perspective, we're in the very, very early phases, and we're gonna continue to be narrow and deep, but we're seeing success out of the places that we're participating. Lastly, just the continued momentum in terms of lateral is, is quite clear.

It's like, expandables will be launched at NASS, both from a lateral perspective and from a posterior. We're working on corpectomy. We have 3D printed implants. There's a lot going on within the cervical realm, and we continue to professionalize our sales force. Of, of, of interest and really a shout-out to our regulatory team, we have 9 regulatory submissions this quarter. That's, that's surpassed entire previous years. If you're wondering if, if there's a commitment to continuing to obsolete ourselves, there absolutely is. I would tell you that I believe that our, our 100% spine focus is powering our ability to be the standard bearer in the space, and when we say our best is yet to come, I think it's an objective truth.

Anyway, with that, I'll turn it back over to the operator.

Operator (participant)

Great. Thank you. We will now open the floor up for questions. At this time, I'd like to remind everyone, in order to ask a question, please press star and then one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question comes from Mat Blackman with Stifel. Please go ahead.

Mathew Blackman (Healthcare Equity Research Analyst)

Thank you for taking my questions, and good afternoon, everybody. Maybe just to, to start, Pat, you mentioned, and I was hoping you could repeat it, it went by too fast, the 2Q surgeon metric number you provided, and if possible, if you were to break that out, even in the roughest terms, between what's called lateral naive versus competitive surgeons. I'm curious if that mix has changed at all over the last 6 months, over the last 12 months. If I could add on top of that, just curious what sort of surgeon reception you're getting for LTP and, and who would be coming in to be trained on that. I've got 1 follow-up.

Pat Miles (CEO)

All right. I'll, I'll let, I'll let Todd answer the, the surgeon metric stuff, just 'cause if it has a numeric value, I'm gonna screw it up. The, the as it relates to the reception on the LTP front, it's, it's been very, very good. The, the reality is, is we, we haven't had the volume of sets out there to, to garner the, the level of, or response to the level of demand that's, that's apparent. So, I, on a daily basis, get texts and pictures of, of a, of a 5 1 ALIF with a 4 5 lateral with a patient positioner, and it's, it's a thing of beauty, and it, it's better than the work that we've done before.

The surgery is good, and when the surgery is good, the, the volume follows. I, I remain exceedingly bullish, and I would say that we're in the very early phase of that.

Todd Koning (CFO)

Mat, relative to the 2Q metric, you know, we did about 150 trainings this, this quarter. If you look over the past 4 quarters, I, I think it's 515 is, is the total. You know, we continue at a strong clip and feel good about the level of surgeon training. As you know, surgeon training is a great leading indicator for surgeon adoption.

As we look at the demographics of people coming through, you know, I, I'd say it's probably 25% are really lateral naive, I think, in your words, and kind of new to the technique, with the balance being, you know, people who are familiar with the technique and are looking to adopt PTP or LTP.

Mathew Blackman (Healthcare Equity Research Analyst)

Okay. Then just one quick follow-up. I'm curious, maybe just take a step back, talk quite a bit about the lateral market in general, but how fast do you think that market is, is growing today? You know, particularly when we think about sort of the underlying spine market being a, you know, maybe a low single digit grower. Can you just give us some context? You're obviously highly levered to the lateral opportunity, more so than maybe that sort of traditional low single digit spine market, but just curious what you think the underlying market is growing today in the U.S.

Pat Miles (CEO)

Yeah, Mat, right. It's a tough one to put a number on, but, you know, one of the things that was the nemesis of, you know, the previous experience was that there were certain indications for surgery that you couldn't address with the technique. So the great part is, you know, I don't know if the market's expanding as fast as we hope. Hope it is. I will tell you, the applicability of lateral into a much larger space is very apparent to us. So that's why, like, you know, I, I don't know if it resonates, but it's like, you know, the whole direct decompression in a prone position, the ability to stabilize in a prone position. Historically, those would have all been PLIF and TLIF-type patients.

For us to start to evolve the technique into a much broader market space suggests opportunity. That's where it's like I have a tough time discerning is it, is it market-- is it very fast market growth, or is it just one of those things where we're applying the technique into a much broader space from a pathologic perspective? Either way, you know, we're enjoying the trek. We're still such a small market share holder. There's a plethora of opportunity out there. You know, there's not a like. You know, outside of expandables in the last 10 years, there's really hasn't been very much from a PLIF or a TLIF perspective in terms of evolution.

When you say, "What's the most coveted market?" Clearly, the advantages of lateral have been demonstrated, and that's why we're so excited about what's going on from a SafeOp perspective, because it is very hard. Anyway, it, you know, longer answer than you wanted, but it's just kind of a little bit of a context in how we think about it.

Todd Koning (CFO)

Mat, I think the, the, the implication there is to the extent that the lateral market is growing faster, which we do believe it is, than, than the overall market, that, that incremental growth due to tapping the, the existing kind of PLIF and TLIF market really accrues to PTP. For us, it's, it's actually growing quite quickly because, one, we're taking share in existing kind of pathological applications, but also because we're able to expand the amount of utility to a broader set of pathologies, that growth accrues only to us.

Mathew Blackman (Healthcare Equity Research Analyst)

Understood. Thank you. I'll get back in the queue.

Operator (participant)

Great. Thank you. Our next question comes from Joshua Jennings with TD Cowen. Please go ahead.

Joshua Jennings (Managing Director)

Hi, good afternoon. Congrats on another strong quarter. Was, was hoping to just learn a little bit more about the early trends with the LTP launch, and, and I guess the follow-up on, on that is, just with this ALIF access system that you're, you're now launching as well. I mean, as we, as we think about LTP gaining more and more traction and that revenue per case metric, is the LTP associated with more levels per case and, and therefore increased revenue per case? And should that drive that kind of lateral revenue per case metric even, even higher?

Pat Miles (CEO)

Yeah. Josh, I, like I, I would say, you know, the shortest construct is gonna be most common, would be, you know, L4-5 and L5-S1, so it's gonna be at least 2 levels. So what we're seeing is really a very favorable acceptance from lateral, or excuse me, from, from approach surgeons. As you know, the nemesis of lateral has been, you can't address L5-S1 from a lateral position. So to get the type of reception that we're receiving from access surgeons is super important.

What we're seeing in terms of the early experience is multi-level surgery, L5-S1 done by an approach surgeon with our access system, with the patient positioner required to tilt the patient, then bringing the patient back to an orthogonal position from 4, 5 and above. Again, I, I think it's better than... The work is better than what we've done before, so the ability to apply that learning and make sure that we're including 5-1 is hugely important. I, I, you know, as I look at the pictures, all of the orthogonality associated with what drives predictability is right there. Again, all indications are that this will be a good one.

Todd Koning (CFO)

Josh, to your point, you know, more levels, means more complexity, which ultimately does translate into higher revenue per case.

Joshua Jennings (Managing Director)

Great. Thanks for that. Then just wanted to, you guys are growing so strongly off of a sizable base, and one of the elements we're trying to think through is just on the cross-selling opportunity with EOS accounts that you inherited with that acquisition and that haven't adopted ATEC's implant portfolio. Where are we in that process? Our assumption is it's still very early, and there's still a lot of opportunity, runway ahead, but just wanted to get an update there. Thanks for taking the questions.

Pat Miles (CEO)

Yeah, Josh, I think, you know, when, when I outlined what I believe to be the growth drivers of significant manner, the EOS influence in any hugely meaningful way has not transpired as of yet, in terms of the reflection from the data that you get out of an EOS unit to move people for better surgery into the operative experience. That's where it's like, all of the automation is going to inspire significant interest, and just the ability to have an automated alignment measure as you take a full body standing biplanar, low dose image.

Your, your ability to get the, the alignment measures to ultimately apply into your surgical plan and have an automated surgical plan, all those things being automated will, will elevate the likelihood of their utility. As you utilize those, and you said, "Gosh, in this patient, I would like a patient-specific rod," your ability to select patient-specific rod and have that delivered into the experience, and then have an intraoperative reconciliation, say, "I got what I achieved based upon what the plan was," and then to follow up on, on that, postoperatively with the exact same film, I think is ultimately what's gonna compel the kind of the deformity audience into the experience.

I think we're very early on, since we haven't launched this stuff, I don't think that you've seen the type of, of, traction that we expect to have over the years. We realized that this was gonna be a long run. I would tell you, one of the things I'm most proud of about the company is whenever we acquire a technology, what we do is we, we improve it and we integrate it into our thesis. I would say that the last little while has been committed to, evolving EOS into the way that we think about the intraoperative experience, and those things are forthcoming clearly in mid 2024.

Our excitement is that we have a lot of momentum on the lateral front and on the surgical front, but our best days are yet ahead based upon the translation of our ability to once again, take information and drive more predictability.

Joshua Jennings (Managing Director)

Thanks so much for that.

Pat Miles (CEO)

Appreciate it.

Operator (participant)

Our next question comes from Matthew O'Brien with Piper Sandler. Please go ahead.

Speaker 9

Hi, this is Samantha on for Matt. Congrats on a great quarter, thank you for taking our question. To start, I guess, a little bit on the adjusted EBITDA. You know, you've already achieved adjusted EBITDA positive versus the breakeven expectation at the beginning of the year. Can you talk to us a little bit more about what allowed you to achieve that so early and maybe what we can expect for cadence moving forward?

Todd Koning (CFO)

Yeah. Thanks, Samantha. You know, I think ultimately, when, when you look at our adjusted EBITDA going into the year, more or less, we kind of messaged 800 basis points of operating margin expansion or adjusted EBITDA margin expansion on the full year, with a little bit of that heavier in the first half and, and a little bit later in the second half. I think that would have kind of led you to something like a -5, a 0, 0, and a +5, is kind of how I think the math would've shook out after you looked at that from that standpoint. Kind of coming into this, this quarter, knowing that 0 was kind of the expectation, clearly the, the revenue outperformance benefits there.

We definitely benefited from some incremental improvement in our variable selling expense. You know, I think this quarter, about half of it, half of our operating expense leverage was due to variable selling expense, and so we saw that come through a little bit stronger in the quarter. That's really just a little bit of, I think, timing of our investments on that front. Ultimately, ended up a little bit better than probably would've expected, given the revenue outperformance. I just keep in mind that, you know, we're talking about hundreds of thousands of dollars here, as we kind of flip from negative to zero.

You know, I think we spent, you know, just shy of $90 million in total. Being as close as we were, I think was a pretty good result, and we're very pleased with, I think, the broader comment, which is, as we've kind of built the company and as we've architected the walk to profitability, the profitability is coming in the areas that we expected. That to me, is what is really the takeaway here. In terms of cadence, you know, I think our total top line raise is another $12 million, so beat by 7 in the Q2 and raised by 5 in the back half.

If you apply, really the, the 10% drop through on that, think about another $500,000 of drop through in the second half, which probably puts you a $200,000+ in the Q3 and in the balance there in Q4. That's kind of, kind of how we're thinking about it.

Speaker 9

Thank you. Then, just, one more from us. you know, I know we've talked a little bit about the market growth, but also, could you touch on whether you're seeing any share taking as well? Thank you.

Todd Koning (CFO)

Yeah. I think clearly when you just do the numbers, if the market's growing, call it low to mid single digits, and, and I think our surgical revenue grew 41%, we're, we're clearly taking a lot of share, and I think that's been the story. Clearly lateral in our clinical distinction and, and all of the, all of the, the innovation we've created and brought to the market is, is driving a ton of attention. And I think, again, greatest indicator is, is the amount of training we're doing and the interest that we're getting from, from surgeons and, and from, our ability to elevate the distribution footprint.

Speaker 9

Thank you.

Operator (participant)

Our next question comes from Drew Ranieri, from Morgan Stanley. Please go ahead.

Drew Ranieri (VP of Medical Technology Equity Research)

Hi, thanks for taking the questions. Maybe for Pat to start, but in your prepared remarks, you talked about just the uncertainty in the marketplace and your opportunity to fill in still large geographic gaps amongst your sales organization. Pat, can you go into a little bit more detail there? Just given some of the market disruptions, are you even pulling forward some investment in the sales organization? Maybe just help us think if anything is kind of baked into the updated guide for building out some of the geographic gaps.

Pat Miles (CEO)

Yeah, I-I'll go ahead and take the, the, I guess, the qualitative. I'll give Todd the, the, the harder one. I, I think, you know, we're, we're, we're being as opportunistic as we can possibly be. You know, the dynamic is, is that I think that, the salespeople who have been in spine and have found success in spine want a partner that's aligned with them. So when we talk about being spine focused, much of it is, is really an outreach to the people who are committed to this thing over the next, you know, 10 to 15 years. If you wanna move the field of spine surgery, you will work with us.

That's where it's like our enthusiasm to, to continue to outreach to candidly, companies that have not been very focused in the spine field and think that it's commoditized, is an opportunity for us. So where we see some uncertainty in the marketplace, we're a very certain place. It's kind of a strange thing to say. You know, five years ago, when, when we took over ATEC, I wouldn't call it hugely certain. But I will tell you today, as it relates to having the foundational technology and the asset base of, of the type of engineering know-how that we have from a mechanical perspective, the prowess on the neurophysiologic perspective, the understanding of imaging, the understanding of, of navigation robotics, I will tell you that it just provides us an opportunity to go solicit and to retain top talent.

Top talent in the room makes a difference. We rely upon the sales guys in the room to make a difference, and so, we're aggressively seeking those guys who can make a difference in the operating room to partner with us. I think with the Globus NuVasive thing and, and with the big companies, being somewhat lethargic, we're being opportunistic.

Todd Koning (CFO)

Drew, in terms of, you know, our opportunity that Pat's talked about and, and our willingness to invest, you know, clearly, we're, we're willing to invest. I think we've demonstrated that. You know, as you think about the growth that we're seeing in our, our, our investment, we're leaning into that growth, to fuel it. As you think about the investment in our sales organization, there's certainly a level of investment that's baked into the underlying guide, and we feel very good about where that's at. You know, kind of order of magnitude, it's very similar to what we've seen in previous years. You know, while from quarter to quarter, that might change, we feel good about where we are relative to our ability to invest, to, to, to drive the growth.

Drew Ranieri (VP of Medical Technology Equity Research)

Got it. Thank you. Maybe just one on robotics, but the initial experience is expected later this year, freehand in late 2024, full integration in 2025, if I kind of heard that correctly earlier in the call. As you are thinking about commercializing the robotics platform, I know we're still a bit a ways, but how are you thinking about placement trajectory or utilization trends? Is there anything that makes you feel better or worse, when you kind of benchmark that to what some of the other couple competitors have been able to do in the robotic space? Thanks for taking the questions.

Pat Miles (CEO)

Yeah. Thanks, Drew. I, I think it's a great question, and, and, and the dynamic becomes is, you know, what we love is small footprints. So when you have a small footprint, oftentimes there's a direct relation to the COGS. When you have low COGS, high technology, it provides you flexibility. So as, as I look to the future and I look at what the capability of what the guys in, in Boulder are doing with regard to that robot and that navigation piece, it's gonna provide us great flexibility to integrate it into the procedural workflow in a very elegant way. That also means we get flexibility with regard to, do you have to acquire it? Can you lease it?

Can, can we integrate it with regard to some type of a volume utility in, in implant? I think it gives us, like, ultra flexibility, where we don't, we don't have to back a bus up to, to, you know, bring the robot in. Our enthusiasm is very high with regard to just kind of the foundational cost structure of the system.

Todd Koning (CFO)

I, I think the only thing I'd add to that, Pat, is just given the fact that the, the, the, the cost and hence our price point being about $500,000 relative to the total, Or our price point being about $500,000, which is significantly lower than other market prices of, of other robots, our ability to do earn-outs and those types of things, and not needing, you know, 5 surgeons to sign up for the deal is, is totally eminent. So that really opens up so many more opportunities for us to essentially commercialize this thing in the long run, in a way that works for everybody.

Drew Ranieri (VP of Medical Technology Equity Research)

Great. Thank you.

Operator (participant)

Our next question comes from David Saxon with Needham & Company. Please go ahead.

David Saxon (Senior Analyst)

Yeah. Hey, hey, guys. Thanks for taking my questions. I've been hopping between calls, so I apologize if any of my questions have been answered. But maybe first on, on the portfolio, wanted to see how you're thinking about the breadth of it. I think you've talked about, in the past about wanting to add some sort of motion preservation product. Is that still a focus? And then are there any other gaps in the portfolio that might be priorities to address?

Pat Miles (CEO)

Yeah, I, you know, you know what a great part is, is I think the navigation robotic thing filled a big gap. You know, we're totally enthusiastic with regard to where we sit from a portfolio breadth perspective today. If you look at the, you know, in the high nineties, kind of prevalence of pathology and can we address it? The answer is yes. I would say, you know, a hole clearly is, is cervical motion. We'll, we'll fill that hole in, in, in the years to come. Who knows, who knows when or what, what presents itself. I, I don't, I don't see that as, as, as, as much of a detriment. We're in the process, we'll output some corpectomy things next year.

I would say, you know, as we sit today, it's an irritant to me, but it's, it's one of those things where it's like, it's forthcoming and we have a clear view. We have designs, we have, you know, one of the very early experience. we're, we're, we're good there. Other than that, I, I love, I love where we are. I think what you're gonna see is you're gonna see continued expansion within kind of the idiopathic deformity space. For us not to translate rotational understanding in EOS to a, a system that ultimately addresses some of those things, to not utilize some of our learnings from patient positioning, to not utilize our motor evoked potentials within our neurophysiology realm.

I think that we have a lot of opportunities to continue to expand our, our really kind of competencies, across, different pathologies and different patient types. I, I feel great about where we are.

Todd Koning (CFO)

Yeah, I mean, I love it because ultimately it's really such a reflection of the organic innovation machine we've built here that can ultimately address so much of the gaps that we have in front of us. That's ultimately why you see our commitment to invest the kind of R&D spend that we do.

David Saxon (Senior Analyst)

Great. Thanks for that. And if I could just have the or ask a follow-up for Todd. Just on EBITDA, I guess just the path to $80 million in 2025. I think at the Analyst Day, you kind of thought it would be more, more of a ramp. But I, I think you're, you know, kind of outperforming EBITDA. So, you know, could it look more linear with, you know, 2024 being closer to $40 million? Any thoughts there would be helpful. Thanks.

Todd Koning (CFO)

Yeah, thanks, David, for the question. I guess what I'd tell you is I, I, I feel very good about how the, the leverage is manifesting itself, and I think one of the, the great, comforts I have sitting in my seat is, is, is the fact that, that Pat and I, we're totally aligned on, on where the company's going. The way, our leadership team has built the company, reflects the leverage that, we've communicated. So the investments reflect the priorities of the business. As we grow, ultimately, we, we see that leverage. So, you know, what I'd tell you is, is we feel good about the quarter.

Happy that we can raise full year guidance, be a little bit ahead of the game there, and our ability to continue to march toward our long-term goals and objectives, totally intact, and we feel great about it. I'm probably gonna be short of giving you a hard number or a hard answer there, but I like our chances.

David Saxon (Senior Analyst)

Yeah. Great. That's, that's helpful. Congrats on the quarter. Thanks, guys.

Todd Koning (CFO)

Thank you.

Pat Miles (CEO)

Thank you.

Operator (participant)

All right. Our next question comes from Aaron Wukmir, from Lake Street Capital Markets. Please go ahead.

Aaron Wukmir (Healthcare Equity Research Associate)

Hey, good afternoon, everyone. This is Aaron on the line for Brooks. Congrats on the strong quarter. You guys are doing a lot of good things, we're really excited about the growth going forward. You know, how sustainable do you believe that these elevated procedure volumes can continue? You know, you mentioned this a little bit in the prepared remarks, are, are you seeing other companies respond to the innovation with, with any moves of their own? You know, how are they responding to innovations in lateral, with, and with SafeOp and EOS?

Pat Miles (CEO)

Yeah, Aaron, thanks. Thanks so much for the question and our best to Brooks. You know, the, the, the, the interesting thing is that these things are very tough to pivot. Meaning if, if there's a competitive dynamic that, that is very well protected, it's not, it's not the IP that protects it, it becomes the know-how that does. That's kind of why I gush about the, the neurophysiology piece. I think, you know, I've been at this in, in terms of just within lateral, north of 20 years, you know, 22 years. The reality is, the one thing I know is that neurophysiology, automated neurophysiology is an absolute unequivocal requirement.

When people show different things in lateral, but they don't show an automated neurophysiology system that ultimately includes SSEPs to understand retraction injury, then they're not serious about participating. When I look at a procedure and I see people copy our, our patient position or copy our retractor, what they can't copy is the know-how that we have here with regard to neurophysiology. That's gonna be a very difficult thing to do. That's gonna take years to do and years of a, of a, of a competency to create. That's why I, I, I love our momentum, and I love the type of, of progress we're making from a, from a surgeon user perspective, because these are, these are unadulterated truths.

That's where it's like, I feel like we're very well protected in the very area where we have a committed expertise because there's a very long level of experience, and know-how. My general view is. We will continue to grow procedurally, and we will continue to really relish in the high ASP of the convoyed sales. That's why we ultimately say, "Gosh, we're creating distinction, that distinction is driving adoption. The adoption is reflective of the convoyed sales.

Aaron Wukmir (Healthcare Equity Research Associate)

Great. Awesome. Yeah, very helpful. Just a quick follow-up, I think you might have mentioned this as well in the remarks, but, you know, can you describe just a little bit what you're seeing now in the international markets and what your plans are sort of there? Would you consider that a, a meaningful priority for you guys? Also on the flip, on the flip side, are you seeing any disruption in the, in the domestic markets at all?

Pat Miles (CEO)

You know, let me answer the, the international thing first. You know, I would tell you that, that, one of the things that we, wanna do is we wanna be very deliberate. When we go into a marketplace, we wanna be all in. Our early experience in Australia has been awesome. New Zealand and Australia are not huge markets, but I gotta tell you, we're doing great surgery in those markets with people who know how to deliver great surgery. That's where it's like we realize that the precursor to a great business is doing great work. Our enthusiasm, as it relates to the contribution in the years to come from Australia and New Zealand, is very, very high.

We've started to lay the foundation for Japan. We will do the same thing in Japan. Japan's a great market, and it's a big market. I think from a surgical perspective, they view surgery in a very similar vein as we do. As we think of the international contribution, we don't feel like we have to be worldwide. What we wanna do is, is we always talk about being narrow and deep, and so the interest there becomes, becomes just that. How do we continue to, to follow the very directive that we committed to in the early phase of, of the recreation of this company? As it relates to the, to the domestic market, I think that there's a lot of disruption.

You know, I, I, I, you know, I, I think that, that, you know, we're irritating people, which is the intent. I think that, that, you know, I think that the Globus NuVasive news creates uncertainty. I think that, that there's, there's also a, a lethargy in the, in the companies that aren't spine focused. To me, I think, we're sitting in a, in a very opportune space of, of great opportunity in the, in the international market, some uncertainty for us to exploit in the domestic market. I think we find ourselves in a very good place.

Aaron Wukmir (Healthcare Equity Research Associate)

Awesome. Yeah, that's very helpful. Thanks for taking the questions, and congrats again on the strong quarter.

Pat Miles (CEO)

Thanks, Aaron.

Todd Koning (CFO)

Thanks, Aaron.

Operator (participant)

All right. Our final question is from Sean Lee with H.C. Wainwright. Please go ahead.

Sean Lee (VP of Equity Research)

Good afternoon, guys, and congrats on a great quarter, and thanks for taking my questions. Moving back a bit to the prepared remarks, where you mentioned the increase in surgeon training. I was wondering, what's the sales cycle, I guess, like for the PTP, where how long does it take for a surgeon to complete training to start using the PTP in their practice and then move on to become a repeat customer? What's the rate of these, these surgeon conversions?

Pat Miles (CEO)

Sean, if you could tell us that, we would be forever indebted. No, it's Like, each of the individual surgeons have different needs, and they come to us with different sets of experiences. One of the challenges is what are the list of requirements to ultimately prepare somebody for them to feel comfortable in applying the procedure into surgery? Believe you me, it's within our interest to make sure that they are profoundly confident and comfortable. One surgeon may need a single cadaveric experience, and they come to a course, and they start doing cases. Other surgeons may need a course. They may need to go watch a surgery.

They may need to go, you know, they may need a proctor surgeon into their surgery, and they, they may be very, very slow to uptake. It's, it's, it's profoundly different for each individual surgeon. The one thing I know, and, and this should provide you great comfort, is the surgeons don't want to make any mistakes, and I think that they're, they're profoundly careful, they're gonna take their time, and sometimes they need to be competed into it. It depends upon the marketplace. I gotta tell you, there's, there's numerous geographies out there where PTP is on such an upswing that the surgeons feel forced to do it because they're losing patients for not doing it. You know, we are profoundly confident.

I think the publications all suggest that this is an absolutely predictable, reproducible experience. You know, we have to respond to the, the individual needs of the respective surgeon to make sure that it's predictable. I, I know that's a long-winded answer, and I didn't give you any specific numbers. Candidly, I can't and won't.

Sean Lee (VP of Equity Research)

I understand, it's, it's very helpful for help understanding this market. My next question is on the, you mentioned that during the prepared remarks that you've seen geographic expansion and moving into adjacent markets especially. How much is that contributing to your overall growth, and where do you see that trend going over the next 6 to 12 months?

Pat Miles (CEO)

Yeah, I, I think that's a, it's a great question, and I would say limited. You know, it, it, it's, it's, you know, so often what will happen is, is we may have a, a, a, candidly, a stronghold in a, in a, in a specific city, but then the adjacent cities that have big spine spends, we do nothing in. You know, the great part about, I think, our the makeup of our business is you're seeing 38% growth in those territories that have been established. If we're seeing that type of growth in same store sales, that, that, in my mind, means, gosh, I'd accepted that as a, as a, as a tool that, that, that will, or a business that will expand.

The great thing is, is we have, like, if, if you're growing at 38% in those areas and your overall growth is, is, is 41% surgically, you know, I would say it's not like we're adding a bunch of people that ultimately gets to a place. That's where it's like our enthusiasm is to add those adjacencies so we could enjoy not only the adjacencies, but the same store sales growth that we would enjoy in that, in that geography. To me, that's the excitement.

Sean Lee (VP of Equity Research)

Great. Thank you again for taking my questions.

Pat Miles (CEO)

Thanks, Sean.

Operator (participant)

Great. Thank you. I will now turn the call back over to Pat Miles for closing remarks.

Pat Miles (CEO)

Yeah. Thanks very much for your interest in ATEC, and as we say, our best is yet to come. Excited about what's going on, and we love spine, and we are thrilled to be serving you. Thanks.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.