Alphatec - Q3 2024

Executive Summary

• ATEC delivered another high-growth quarter: total revenue $150.7M (+27% y/y; +4% q/q), surgical revenue $135M (+30% y/y), EOS revenue $15M (+7% y/y), and adjusted EBITDA $7.4M (5% margin), the second consecutive positive quarter.
• Management raised FY24 guidance: total revenue to ~$605M (from $602M), surgical to ~$540M, EOS ~$65M, and adjusted EBITDA to ~$27M (from ~$25.5M); Q4 implied adjusted EBITDA ~$17M (10% margin) as profitability accelerates; gross margin targeted ~70% exiting the year.
• Cash trajectory inflecting: Q3 free cash use cut >50% sequentially to ~$21M; ending cash $81M and term loan upsized by $50M (SOFR + 5.75%) to bolster liquidity; pro forma cash ~$128M at close; year-end liquidity expected ~$145M; 2025 free cash flow breakeven reiterated.
• Key execution drivers: 20% procedural volume growth, +9% revenue per procedure, +19% new surgeon users, >200 training engagements; EOS Insight momentum (record orders YTD) and continued lateral leadership support sustained share gains.

What Went Well and What Went Wrong

• What Went Well

  • Strong top-line and EBITDA: Revenue $150.7M (+27% y/y) and adjusted EBITDA $7.4M (5% margin), with sequential EBITDA improvement (Q2: $5.6M) as operating expenses remained flat for the third straight quarter.
  • Commercial execution: Procedural volume +20% y/y, revenue per procedure +9%, new surgeon users +19%, and >200 trainings underscore durable demand; sales coverage expansion contributed $5M sequential growth.
  • Liquidity enhancement and cash burn improvement: Free cash use reduced >50% q/q to ~$21M; term loan expanded by $50M (to $200M capacity) at SOFR + 5.75%, lifting pro forma cash to ~$128M at close and supporting 2025 cash breakeven plan.

• What Went Wrong

  • Gross margin softness: Non-GAAP gross margin 69% (down ~60 bps y/y) due to product/geographic mix (lower-margin EOS international and stronger biologics); Q4 gross margin guided ~69.5% with year-end ~70%.
  • Ongoing working capital intensity: Despite sequential improvement, inventory/set efficiency and DSOs remain focal; full-year cash use guidance held at $125–$135M given assumptions for working capital and restructuring cash costs in Q4.
  • GAAP losses persist: GAAP net loss $(39.6)M and GAAP EPS $(0.28), reflecting heavy investment and interest expense; sequential EPS improvement from $(0.29) but indicates continued reliance on non-GAAP operating leverage and mix to drive profitability.

Transcript

Todd Koning (CFO)

Good afternoon, everyone, and welcome to the webcast of Alphatec's Q3 financial results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC.

During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of 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 Alphatec's Chairman and CEO, Pat Miles, and CFO, Todd Koning. Now I will turn the call over to Pat Miles.

Patrick Miles (Chairman and CEO)

Thank you, Kathleen. Really a great Q3. Super excited about what's going on here. We've outgrown everyone in the spine business again by at least 2X. I'm expecting more. Our focus is on perpetuating profitable growth. Just a couple of stats from a Q3 highlight perspective: $151 million in total revenue, which is 27% growth. 30% surgical revenue growth. Excited about that. Means a lot of volume. 20%

surgical volume. 9% growth in revenue per procedure. 19% in new surgeon users. That's back up and good. Increase: We did over 200 surgeon training engagements. EOS Insight is launched, and we have a record number of orders year to date. The profitability is good at $7.4 million in adjusted EBITDA. Greater than 50% sequential reduction in cash burn. We're on track to generate cash in Q4 2024.

And we increased our term loan capacity by $50 million. So, that's helpful. Our value creation and cash generation is really the focus of what we're doing. So, as a spine-focused company, creating value clearly is our intention. And so, we're accomplishing this through multiple means. And the first one is, and I think that nobody questions our capacity to do this because we've done it for five straight years, which

is really lead in revenue generation. And so, by leading in revenue generation and increasing profitability, clearly it will reflect in cash flow. And so, what I want to do is provide you why we are so confident in this walk. And so, as it relates to revenue, as I said, it's been five years of growth at multiples of anybody in the spine industry. Three years of organic growth, greater than $100 million.

Our procedural strategy is absolutely the right one, and it's driving industry-high ASPs, 20% surgical volume, 19% new surgeon growth. So, that's being well accepted. Our sales force continues to expand rapidly. We have record EOS orders year to date. And what that does is lay the foundation for future growth. So, can't be more excited about that. 25% growth guidance in 2024, with 27% growth in Q3 and

26% year to date. So, I would tell you that no one feels better about the perpetuating revenue growth leadership that we have taken on over the last five years. I think the focus on increasing profitability is hugely important. Third consecutive quarter of flat operating expenses. Second consecutive quarter of adjusted EBITDA positive, greater than expectation. 10% adjusted EBITDA margin implied for Q4 2024.

When you start to think about what leverage you can pull to impact profitability, improving efficiency of asset and inventory is a big one. This is a people and assets and instruments business. And so, when you look at kind of the approach we're taking on the people side, we are taking a very focused effort in people investment. So, if you're a sales guy or you're a product development guy, we like your chances in

terms of joining the family. We're keeping a very focused effort with regard to hiring. As of late, we've strategically narrowed our organizational structure. We have to be lean and mean, and what we're doing is making sure that we streamline the organization. We are closer now to the end user as we have ever been, and we are aiming to keep it that way. All these things ultimately reflect in cash flow.

We have an infrastructure in place with all of our facilities to ultimately scale this business. And that was the intention from the beginning. We are positioned with sets and inventory to fuel expansive growth. We have a lot of sets and inventory to grow into. Our adjusted EBITDA in Q4 2024 will continue to contribute. And our sustained inflection of positive cash flow beginning in Q2 2025 will continue. So, we

love it, and we love the flexibility that the $50 million expansion our existing term loan has provided us. And we have great partners in Braidwell and Pharmakon that we can't be more thrilled about. So, I would say that we are aligned and focused on achieving our long-term financial commitments. We said back in 2023 we'd do $1 billion in 2027 in revenue. We'd have an adjusted EBITDA of $180 million.

Our margin would be 18%, and we'd have free cash flow of $65 million. Nothing has changed with regard to our ability to fulfill our LRP. We're on our way. Let me turn it over to Todd to provide you some financial details.

Todd Koning (CFO)

Thank you, Pat. Good afternoon, everyone. We appreciate you joining us today. I'll begin with revenue. Q3 total revenue was $151 million, up 27% compared to the prior year, and up 4% sequentially. The $151 million in revenue is comprised of $135 million in surgical revenue and $15 million of EOS revenue. Q3 surgical revenue of $135 million increased $32 million, 30% growth over the prior year. Procedural volume growth was 20%, a reflection of strong surgeon adoption and utilization. We

saw strong contributions across the portfolio, particularly in our lateral and expandable implant technologies, which contributed to the 9% growth in average revenue per procedure. Q3 results grew $5 million sequentially as we benefited from the increase in product availability and new territory additions. EOS revenue in the Q3 was $15 million, up 7% compared to last year.

Notably, our year-to-date EOS order volume has been the strongest we've ever seen, which is encouraging for Q4 and 2025. Next, I'll turn to results for the remainder of the P&L. Q3 Non-GAAP gross margin was 69%, down 60 basis points compared to the prior year due to the impact of product mix. Q3 Non-GAAP R&D was $13 million and approximately 9% of sales, compared to

$13 million and 11% of sales in the prior year. We continue to invest in innovation and future growth of the business, while top-line growth drove 250 basis points of leverage. Non-GAAP SG&A was $100 million and approximately 67% of sales in the Q3, compared to $80 million and 68% of sales in the prior year period, an improvement of 150 basis points. Now, included in this period's SG&A is a step in depreciation related to the purchase of instrument sets.

As a percent of sales, depreciation increased about 180 basis points year over year. So, excluding that impact, SG&A improved 330 basis points, driven primarily by infrastructure leverage. Total Non-GAAP operating expense amounted to $114 million and approximately 75% of sales in the Q3, compared to $94 million and

79% of sales in the prior year period, demonstrating 390 basis points of operating leverage year over year. In the Q3, we achieved our second consecutive quarter of positive adjusted EBITDA, which was $7.4 million, a 5% margin. That compares to a loss of $400,000 and 0% of sales in the prior year, a 530 basis point improvement. Drop-through of the year-over-year growth in revenue dollars to adjusted EBITDA was 24%.

Adjusted EBITDA improvement was driven by 330 basis points of SG&A leverage and 250 basis points of R&D leverage, and slightly offset by 60 basis points of gross margin impact. The chart on the next slide depicts the deliberate, substantial profitability execution that we have demonstrated since the beginning of 2022. Adjusted EBITDA has increased from a loss of $13 million and 18% of sales to a contribution of $7 million and 5% of sales here in the Q3 of 2024, a 2,300 basis point

improvement. The drivers of that progress have contributed as we expected, with the improvement driven by variable selling rate, followed by SG&A infrastructure leverage and R&D leverage. In fact, our Non-GAAP operating expenses have been flat sequentially for the last three quarters, resulting in adjusted EBITDA growth and guidance that implies Q4 adjusted EBITDA of $17 million or 10% of sales.

The considerable margin expansion that the business has produced gives us great confidence in our ability to deliver on our financial commitments and translate revenue growth into cash generation. Turning to the balance sheet, we ended the Q3 with $81 million in cash. That carrying value was $538 million. As we begin to move past the phase of intense growth investment, we reduced free cash use in the Q3 by over 50% sequentially to $21 million. That was net of approximately $30

million in cash that was directed toward inventory and instruments to support distribution expansion and new product launches. The chart at the bottom of the slide depicts the linear progression towards cash generation as we exit 2024, with the improving cash use trend from Q1 leading to an inflection in cash generation in the Q4.

The improvement from the Q3 to the Q4 is primarily driven by reduced instrument and inventory spend and an increase in adjusted EBITDA, partially offset by working capital. We continue to expect cash use to range between $125 million and $135 million for the full year of 2024. In conjunction with the financial results released today, we announced an increase in our term loan of $50

million, bringing the total term loan to $200 million. Through this transaction, we have added another strong lending partner in Pharmakon. The key terms of the loan are the same as the original facility, bearing an interest rate of SOFR plus 5.75% and interest-only payments until its maturity in 2028. With this incremental capital, our pro forma cash at close is $128 million. Upon close of the transaction, we used proceeds to pay down our revolver balance.

Exiting the year, we expect to have access to cash and liquidity of $145 million, which we believe provides us with ample liquidity going into 2025, where we expect to be cash flow break-even. I'd also like to share our thoughts for the $316 million convertible notes that mature in August 2026. While we won't rule out doing a convert if the equity is at the right price, we expect the material improvement in EBITDA over the next few years to allow us to refinance without dilution. As we progress towards our 2027 long-range plan financial targets, when we expect $1 billion in revenue with 18% adjusted EBITDA margins and cash flowing, the company will have a different level of access to financing alternatives.

Turning to our increased outlook for the full year 2024, the strong surge in adoption and large volume of surgeon training are great indicators of durable revenue growth and are a testament to the ATEC clinical distinction. We expect that to fuel total revenue growth of 25% to approximately $605 million. That includes surgical revenue growth of 28% to approximately $540 million and EOS revenue of approximately $65 million. That implies surgical volume grows at a high teens rate and revenue per

surgery grows at a high single-digit rate for the full year. Sales growth is powering leverage. And with the Q3 Adjusted EBITDA outperformance, we are raising full-year Adjusted EBITDA guidance to approximately $27 million, which equates to 640 basis points of margin expansion. That implies a 30% drop-through of the year-over-year growth in revenue dollars, a material acceleration compared to 22% drop-through in 2023.

We continue to expect cash use to range between $125-$135 million for the full year 2024. Our expectations for cash flow break-even in 2025 remain unchanged. We expect the cadence next year to include seasonal cash use in the Q1, followed by positive free cash flow in quarters two through four. I'll close today with reinforcing how well we are positioned for growth in 2025 and why that

translates to cash flow break-even. When you look at this year, our adjusted EBITDA is expected to be $27 million. We will have invested $140 million in CapEx and inventory and $17 million in interest and other working capital. In 2025, our expectation is that we will have $75 million of adjusted EBITDA, consistent with our long-range plan assumption.

Because we come into the year with an asset base from the 2024 investment that will support 2025 revenue growth, the required investment in sets and inventory in 2025 is $50 million. We will also expect to see a step-up in interest and other working capital to $25 million. That all adds up to a cash flow break-even year. We recognize that execution on cash generation is crucial to rebuilding shareholder value. As such, we are focused on growing revenue and expanding profitability to generate cash, which

has informed how we are directing investments and the realignment of internal resources. Those efforts are complete and strengthen our position as we progress towards cash generation. Our organization has a lot of work to do and a lot to be excited about. As we seek to rebuild shareholder value, know that this leadership team is confidently aligned. We know what needs to be prioritized, and the work is underway. With that, I'll turn the call back over to Pat.

Patrick Miles (Chairman and CEO)

Thanks, Todd. Our best is yet to come. We are absolutely focused on value-creating long-term objectives, and our objectives are bettering this environment, so creating clinical distinction. That means distinguishing ATEC through procedures and informatics. I think we're well on our way on that front. Also, compelling surgeon adoption, earning surgeon users by improving surgery. There's a lot to do in the spine business, and we're thrilled about engaging to do it, and then expand and elevate our sales force,

strengthening sales teams and enhancing our operations, so clearly, we know something that others don't, so I love this picture. It's from the most recent North American Spine Society meeting. About exactly five years ago, Dr. Pimenta presented PTP, our prone transpsoas approach, to an empty room. This year, his PTP demonstration was standing room only.

So we are thousands of surgeries into the experience and continue to apply our learnings. We know we are still early in the early phase of our lateral reconstruction spine surgery journey with a heck of a lot of opportunity forward. So by looking at this picture and appreciating our historical performance, it would be a great mistake to not realize our following in lateral approach surgery. So as always, plenty of work to do, but I think that this is indicative of who we are and how we're further distancing ATEC in lateral. The

way we further distance ourselves is really investing in the approach. That means to continue to integrate informatics into improving precision, like the case in Valence. We will also further minimize the potential for neural complications with the expanded applications and feature set of SafeOp, as well as increasing predictability and alignment with EOS.

We're attracting new users with our informatics platform and expanding applications and utility across the board. That means more users and more reasons to utilize. I think you could see in the right-hand side the opportunity to increase complexity with things like corpectomy, multilevel deformity. There's a lot going on with regard to lateral, and I think there's every reason to be profoundly confident in our perpetuating growth profile. It is the growth segment, and it is the most coveted piece of thoracolumbar

spine in the business. So when you think about our growing business in lateral, much like NASS, SRS was also standing room only. SRS is the most influential society in the treatment of spine deformity. There was palpable enthusiasm for our prospective deformity influence with AI-informed EOS Insight. I would tell you it was the bell of the ball.

ATEC has the only AI-informed automated tool that is an adjunct to clinical decision-making. We talk about variable mitigation incessantly, and this tool is absolutely foundational to that. The decision-making is informed by EOS Insight, and also, it's reflected in our implants. And so it's not lost on us that these decision-making tools ultimately get driven through implant utility and can't be more excited about

that. So with the launch of EOS Insight, it literally turns the most coveted image in spine surgery into information. The early sites are very enthusiastic about the experience and screams of another unique technology that provides valuable information that drives improved surgery.

Everything from the pre-op auto alignment tool that happens virtually real time to the opportunity to create a 3D surgical planning effort to patient-specific implants to the intraoperative ability to reconcile what the plan is to the objective data reflected in the post-op sequence. And so we love this tool. We cannot be more excited about where we are today. It's the reflection of future growth. Like Dr. Locke

says, EOS Insight streamlines our workflow and enhances our ability to track outcomes. Everything is automated. The reason that outcomes have not been consistently captured in spine surgery is because it wasn't automated. All these things are automated. And as he says, it ultimately improves patient care. So totally excited about what's going on there. We continue to see compelling surgeon adoption reflected in a 19% growth in surgeon users with over 200 surgeons trained.

Clearly, people want to come into the company. One of the things that we're doing is we're improving on focusing on yield. So the more surgeons come in, the more users we can create, and the better yield that can have, the more business will impact by doing so. So we are committed to continuing to drive clinical predictability through improved training. So when you look at a proxy for continued growth, this is one of

them. And training and education has been a hallmark of what we believe in terms of preparing surgeons for application of our clinical distinction, which, again, will continue to power our growth leadership. Moving on to the sales force, it's another source of significant confidence. We're completely confident in the growth leadership based upon not only the people who are there today, but the people who are forthcoming.

And so when you start to look at the demographics of our sales, you start to say lateral as a percentage of business for our top 10 agencies is 30%. I will tell you, you want that mix. It's a protectable mix based upon the suite of technologies that we have. That compares to 13% of our U.S. lateral share. So clearly, there is a head start with the people who are performing best. We have a 25% growth rate in established

territories. Again, that suggests a lot of momentum with people who have been with us for a little while. And then in certain markets where we call benchmark territories, we have a 25% market share. That compares to a 5% in most places. It does nothing but reek of a forward growth profile that, again, we have been completely consistent on for five years.

And so our confidence is perpetuated by robust growth in established territories and the whole leading with lateral, ramping in new major or in major new U.S. territories, bringing new people on. We're starting to contribute. Putting 2024 set and inventory investments to work. We've bought a ton of inventory in 2024. It's being put to work in the way that we intended. Improving efficiency of set and inventory utility.

We know this business, as I said, is people, and it's sets and inventory. You got to be efficient with your sets and inventory, and we're doing that. And aligning sales incentive with operational requirements. We recently had an analyst meeting. I don't think we've ever been more aligned with regard to our sprint forward. And so completely excited about our alignment. And then strong talent funnel to further U.S. footprint expansion and elevation.

So there's a lot of good people out there and a lot of people that we want to attract to this business, and we can't be more excited about the prospective growth profile and business profile of ATEC. So the undeniable truth is that spine n

eeds ATEC. When you start to look at the revision rates associated with our field, people that increment in this business don't make any difference in this business. We're going at this in an aggressive way, and it needs to be gone after an aggressive way because spine surgery needs to be improved, and we're doing that. We're going to go from a 5% market share to a low double digits in the coming years and just cannot be more bullish as it relates to what we're creating. And so with that, I will turn it over and take questions.

Operator (participant)

We will now open the floor up for questions. In consideration of others, please limit yourself to one question, and your first question comes from the line of Brooks O'Neil from Lake Street Capital Markets. Your line is now open.

Brooks O'Neil (Senior Research Analyst)

Thank you very much, and congratulations on a terrific quarter, guys. I have one question for you, and that is, I appreciate your enthusiasm, appreciate your track record, but investors still seem to believe you're going to outspend your resources. How can you convince us that that is not going to happen?

Patrick Miles (Chairman and CEO)

Yes. Let me start, and then I'll let Todd jump in. And so the one thing that I will tell you is we are committed to building a monstrosity. And to build a monstrosity, you have to be self-funding. And when we start to demonstrate consecutive quarters of flat operating expenses, when we start to talk about Adjusted EBITDA above expectations, when we start to talk about break-even next year, and I got to tell

you, we're taking kind of the internal, not kind of, we're taking the internal moves necessary to make sure that we're streamlining the organization. If people and sets and inventory are the spend profile of these companies, we're narrowing the spend profile associated with people. We've done that internally. We've made challenging moves. We're getting closer to the business.

But also, as it relates to the efficient utility of the assets, we've made a ton of progress in that realm. And so when I start to think about leverage, those are the areas that I think about, and I see this stuff happening in real time, and it provides me significant confidence.

Todd Koning (CFO)

Brooks, I would add to that. I think clearly, this is a business of growth. That growth is generating incremental profitability through Adjusted EBITDA. As we think about the actions we've recently taken to ultimately narrow the organization, we also have done a significant deep dive in the operation to really root out discretionary spending and to really ultimately reduce our overall spend in that area as well. So I

think we're being very thoughtful and very diligent about where we're placing our resources and overall reducing that resource consumption today. As you think about next year, and I think that gives you confidence in our ability to continue to expand our profit margins, I think that was one of the reasons I laid out the Adjusted EBITDA path that we've seen over the last probably two, two and a half years.

It's been a deliberate walk of expanding EBITDA margins over that time period. And that has happened as a result of the way that we've built the company. And that gives us confidence that we can ultimately continue to expand those profit margins into 2025 and beyond. Then the second component, so I think that's the profitability piece, the second component of where our investments go is in the sets and

inventory. And I think as we laid out on the call, we made a significant investment in sets and inventory in 2024. And there are a level of inventory and sets that exist today that will contribute to 2025's growth. And therefore, the required amount of investment in sets and inventory in 2025 is, as we've described it, in the order of magnitude of $50 million.

So when you think about cash flow, you think about $75 million of adjusted EBITDA, spending about $50 million on sets and inventory, and then a step up of about $25 million of investment in additional working capital and interest. That really gets you to break even. I think that ultimately is where our confidence comes from. Going into next year with a further enhanced balance sheet, that also just gives you more and more confidence that we can run the play that we've outlined.

Brooks O'Neil (Senior Research Analyst)

Perfect. Thank you very much, and again, congratulations on a terrific quarter.

Patrick Miles (Chairman and CEO)

Thanks, Brooks.

Operator (participant)

Your next question comes from the line of Mathew Blackman at Stifel. Please go ahead.

Mathew Blackman (Equity Research Analyst)

Good afternoon, everybody. Can you hear me okay?

Todd Koning (CFO)

We got you.

Mathew Blackman (Equity Research Analyst)

Okay. Maybe, Todd, if I could start with you, just a couple of housekeeping questions. And we're asking this to everybody this quarter, so not saving it specifically for you, but anything notable in terms of hurricane exposure? And we've also been hearing some anecdotes of institutions delaying elective procedures due to the IV solution shortages. So just I appreciate any impact from both would be transient, but are you or what are you hearing from the field, if anything? And is there anything baked into the implied 4Q guidance as a headwind? And then I've got one follow-up.

Todd Koning (CFO)

Yeah. As it relates to hurricanes, really no impact in the Q3. And while we did see a little bit in the first half of the month, we're seeing that recover now. So really, our guidance assumes that we're going to catch up all of that. And we feel very good about that as a base case. And so I think that's from a hurricane standpoint. And really no impact we're seeing on the IV side. And I think maybe, Pat, you can give your perspective on elective surgeries and spine surgery and how that's probably less elective than maybe people think.

Patrick Miles (Chairman and CEO)

Yeah. No impact. Yeah. People need spine surgery.

Mathew Blackman (Equity Research Analyst)

No, I appreciate that. Maybe, and then just my follow-up.

Todd Koning (CFO)

The deductible phenomenon also works in everybody's favor here.

Patrick Miles (Chairman and CEO)

Amazingly.

Mathew Blackman (Equity Research Analyst)

Yeah. Okay. Got it. And then my follow-up, maybe hoping you could put a little bit finer point on where sort of new rep, new distributor productivity is today. You gave us a lot of great stuff in the slides, but is there a way to frame it relative to what inning we're in in terms of how they're ramping? And I guess the other question is, it sounds like it, but I just want to make sure that the new folks are sort of at full fighting weight in terms of their ability to access sets, but also the broadest range of implants. Thank you. Appreciate it.

Patrick Miles (Chairman and CEO)

Yeah. Let me give it a little bit of the subjectivity, and Todd has objectivity. He can add. It's fascinating. We actually have the inventory available to them. These are always ramps, and what happens is you walk away from one group who has been there that wasn't very good, that wasn't going to scale the business as you intend, and you enter a new group. And then so you walk away from all that business, and then

you jump into new business, and it's not like it all comes on day one. And so what we're seeing is we're putting together the sales force that we intend. And I still believe it to be a very effective sales force, effective in pockets. And we have geographies that are mature that are reflective of the growth profile of the company, and then we have others that are just getting going.

And so what keeps me very, very bullish is the same store sales continue to ramp at the way that we intend. And it hasn't even taken into account the new areas that ultimately are starting to ramp. And the ramp is mushy, right? It's like you lose the revenue on the previous distributor or the previous little group if we had a group there. And then you start to grow the bill. You get access to the hospital. And one of

the things I've always said, and I know that people hate to hear this, but this is such a 12- to 18- to 24-month business, which is you make these investments in people, and the reality is they don't get reflected for 18 to 24 months. And so the reality is we're seeing continued perpetuation of same store, and we're starting to see the engagement of many of the new guys.

Todd Koning (CFO)

And Matt, I would add to that. We've been adding coverage continuously for the last six years. However long we've been doing this. And so we're seeing the investments we've made over the last 12-18 months begin to contribute. I think one good example of that is just the $5 million sequential step-up Q2-Q3. Clearly, some of that was product contribution, but also some of that was the reflection of those investments beginning to ramp in a major way. And so I think that's a good proof point for the effectiveness of the investment in those territories.

Patrick Miles (Chairman and CEO)

Yeah. Matt, just to add something too, I just think it is relevant is somebody will come on, and they will have a non-compete. Either they will sit out or will do something whereby they operate in a different territory. So it's everything from somebody coming on, having a non-compete, serving a non-compete, entering into a different geography that first 12 months, and then coming off a non-compete. And we always see a little bit of a boost after that. And so it's one of these things where there's so many puts and takes to these things. It's tough to provide you the exact because, again, there's a lot of different ins and outs as we continue to evolve the business.

Mathew Blackman (Equity Research Analyst)

No, I appreciate that. But I guess the point is that we're ramping up that productivity curve, and we still have a ways to go.

Patrick Miles (Chairman and CEO)

We still have a ways to go.

Todd Koning (CFO)

We're a ways.

Patrick Miles (Chairman and CEO)

Yeah. We're a nominal player in this business. There's 95% to go. We're a 5% market share, but clearly, we're growing aggressively. And I got to tell you, we're the bell of the ball. You look at what we're doing procedurally with regard to the lateral, what's going on with regard to EOS. And it's not a secret to the industry that there's a lot going on here with regard to evolving care, and people want to be associated with it.

Mathew Blackman (Equity Research Analyst)

Yeah. Thank you so much.

Operator (participant)

Your next question comes from the line of Matt Miksic from Barclays. Please go ahead.

Matt Miksic (Managing Director and Senior Equity Research Analyst)

Hey, thanks so much. And congrats on a really great quarter. Nice to see you kind of turning the corner here in terms of cash use and continued growth. One question that I wanted to ask, Pat, is one that I get sometimes. Often, I think it's sort of part of the Alphatec story is folks look at what's happening with robots, look at where your robot is in the pipeline, and ask the question, why isn't competing with a robot today more of a challenge? Maybe if you could talk about your growth drivers today and how the robot and imaging kind of dovetails with that as you get into the 12, 18, 24-month period. And then I have one follow-up.

Patrick Miles (Chairman and CEO)

Yeah. Thanks, Matt. I love this question just because our intention is to have a profound influence on spine care. And if you were to prioritize the challenges and the variables that influence spine care, placing screws would not be at the top. And at this point, the robot helps place screws, which again, I think is fantastic. And fantastic enough for us to spend $50 million on a tool that ultimately will do that

and help do that. And so what I think is hugely valuable is an information piece that says, "Hey, the highest likelihood for a patient to get better from this type of intervention is this pathology," and be able to create correlatives that drive decision-making and behavior by surgeons. And so I think that that's at the top of the list. And that was the rationale behind the EOS.

And what happens is it becomes the foundation of an ecosystem that ultimately drives better decision-making. Within the context of the intervention is the opportunity to improve the variables within the intervention. And that's where a robot comes in, and that's where navigation comes in. And so all of our work has been, how do we architect a procedure that's reflective of a step-by-step execution where we

can provide intraoperative information to drive predictable outcomes? That is our strategy. And so when you start to assemble those technologies and you create an ecosystem, I got to tell you, you better love the foundation of that ecosystem. And the foundation of that ecosystem is the most coveted image in all of spine care, which is EOS. And so translating that image throughout the experience, through the surgical plan, into the operative experience is the magic.

And so our enthusiasm is all about monumental evolution in spine care because it needs it in the hands of the masses. And that's where it's like, again, we love robotics. We love navigation. We're in the process of integrating it. We're doing cases today, literally, with our robotic tool. But the reality of it is it's the assembly of tools that ultimately is the answer to these. It's not just a single tool. So that would be my diatribe. And probably I didn't answer the question you intended.

Matt Miksic (Managing Director and Senior Equity Research Analyst)

Yep. No, that is helpful. And one follow-up, maybe on the way that you're guiding, the way you're thinking about the EBITDA and cash deployment comments that you've made in terms of titrating or the level of deployment and capital and some of the inefficiencies that you had earlier in the year, I guess how you feel about that and how you feel about where in the bell curve you're sort of guiding us and what maybe you're doing a little differently in the way you're communicating and planning for Q4, Q1, and going forward.

Todd Koning (CFO)

Yes, Matt. Thanks for the question. When you look at how we described our inventory challenges in the Q2 call, we really had a mixed challenge, more or less, and so the way that works its way out is, and if you remember, it was really one of timing where we had stuff we needed at that point, or we didn't have stuff we needed, and we had stuff we didn't necessarily need, and so ultimately, when you grow into a level of revenue, that ultimately is supported by the inventory that we have today.

So my point being is the inventory that we had in the Q2 and we have today that is less efficient than it needs to be, that ultimately supports a revenue growth number next year, meaning you don't have to buy a certain amount of sets in inventory to support some portion of next year's growth. And so I think you look at what our expected growth rate is internally for next year, you understand what asset base you have, what asset base, or what revenue base that that asset base will support, and you ultimately do the math, and you come to the conclusion that about $50 million of investment in sets and inventory is what you need.

I think our level of resolution and confidence in that is reasonably high given where we are in the planning cycle, knowing what investments we've made and consequently what assets we have today and where we expect the revenue to come over the next 18 months. That's, I think, the level of confidence that we go into next year with on the asset front. More specifically to Q4, maybe the question is, "Hey, you came in at $21 million of cash use, which was favorable to what you expected in the Q3. Your cash flow expectation is $125-$135 million." Ultimately, we saw some improvement in DSOs in the Q3, which helped us.

And as we think about landing the plane in Q4 as it relates to cash flow, ultimately, we're giving ourselves a little bit of room for DSOs to creep back up to maybe in that 50 range, which is still pretty good. And also, we have some incremental cash expense associated with some of the actions we've taken from an operating expense standpoint here in the Q3 or in the Q4. And so that will also play itself out in the Q4. So when you take all of those things into context, our view was, "Let's stick with the $125-$135 cash use on the full year." And all the things that we're doing should give us confidence that we can hit that in a good way.

Matt Miksic (Managing Director and Senior Equity Research Analyst)

That's great. Thanks so much.

Operator (participant)

Your next question comes from the line of Matthew O'Brien from Piper Sandler. Your line is now open.

Matt O'Brien (Senior Research Analyst and Managing Director)

Great. Thanks for taking the question. It's a long one, but it is one question I think we're supposed to be sticking with. So maybe this question's for Todd. Todd, as I look at your CapEx spending the last couple of years - and again, it's a long question, so bear with me - but you spent about $80 million in 2023 on CapEx. You're going to grow the top line this year about $120 million-ish. So call it a 1.6 by productivity of that capital. And I know it takes time to get up the curve and all that stuff.

But if you're adding $130 million this year and you're able to get some level of productivity that's similar to what you've seen here in 2024, why wouldn't your top line in 2025 be something that's greater than $130 million of incremental revenue just based on all the investments that you've made this year? Because as I look at the street, we're only modeling things up about $120 million year over year. And it seems like just based on all these investments, it should be much higher than that. Thanks.

Todd Koning (CFO)

So, Matt, if you look at where we've invested over the course of 2022 and 2023, and I think we shared this in our long-range plan, historically, that rate has been $0.75 on the dollar of growth. And so if you look at the investment in inventory and sets in inventory, or excuse me, inventory and sets combined, it takes about $0.75 to drive a dollar of growth. Clearly, here in 2024, our investment level is about $140

million. And so we ultimately bought ahead to support the potential for a higher revenue ramp. And so we wanted to be prepared for that. Clearly, we're growing at significant rates today. And so when you look at the investment over the course of 2024 and what we expect to invest in 2025, that 140 plus 50, that actually is ultimately, if you assume a 725, I think that's where the street's at.

If you look at that, that's about $0.80 on the growth dollar. So I think to your point, our asset base does support a level of revenue growth that is higher than what's implied. Ultimately, we'll look at where we are, and we'll talk about guidance in 2025. But I think to your observation that we have invested and we have the asset base to continue to grow at meaningful rates, and we've grown about a little over $100 million a year for the last three years or so, clearly, we've got the assets that will allow us to continue to grow at that significant rate.

Matt O'Brien (Senior Research Analyst and Managing Director)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Josh Jennings of TD Cowen. Please go ahead.

Eric Anderson (Analyst)

Hi. This is Eric Alm for Josh. Thanks for taking the question. Congrats on the strong quarter. Really strong momentum in the surgeon training front with 200 plus. Just curious about what the conversion rate is on those surgeon trainings. Should we be assuming that the vast majority of those surgeons are going to be added to the ATEC base once they're at your training center and have exposure to your technology? And then secondly, is there anything that you think can be done to possibly improve that conversion rate? Thank you.

Patrick Miles (Chairman and CEO)

Every one of them is going to be an ATEC customer. I'm kidding. It's a great question, and I got to tell you, it's one that we ask every day. I think that when you look at the greater than 200, it's reflective of the perpetuation of the interest in what we're doing. I think people are at different places in their kind of evolution of surgery and evolution, I think especially lateral. Lateral really is kind of the place that people

clearly find that, "Hey, how do I learn lateral? And can I learn it from the guy who created it, Luiz Pimenta?" What they want to do is they want to come in here, and we have such an unbelievable group of surgeons. The peer-to-peer experience here is unbelievable. We see a high level of engagement as surgeons come.

Everybody has a different algorithm in terms of what makes them comfortable to engage in the technique. And so some guys will come in here, they won't do anything. Then they'll do a peer-to-peer at a facility. They'll go to that facility. They'll either watch a surgeon or they'll watch it online. We have some online tools. But every surgeon has a different algorithm of things that they require to ultimately be

comfortable in applying the technique to a patient. And so oftentimes, it's different for each surgeon. So not to evade the question, but I'm not going to disclose the specific rate. But on the other side, it's one of those things where everyone is different. And what we're doing is tailoring each of the different experiences. Part of the effort there is aligning interests.

And I think it's making sure that are the right people being invited to come in, and are they people that are serious about engaging in the technique? Do we have the sales structure in place in that geography? Do we have access to the hospital? Do we have the things aligned such that we can ultimately count on someone applying the technique if the comfort level is there? And so those are the ways that you

ultimately continue to elevate the yield associated with people coming in. But it's something that I've dealt with over the last 20-some-odd years in this business, or 25 years in the business. And I wish that there was a predictable algorithm associated with exactly who's going to use and who's not. There just isn't.

Eric Anderson (Analyst)

Understood. Yeah. Appreciate that, color. Thank you.

Operator (participant)

Your next question comes from the line of Caitlin Cronin of Canaccord. Your line is now open.

Caitlin Cronin (Director and Equity Analyst)

Hey, guys. Congrats on a great quarter. I just want to turn to EOS. You noted some record orders. Are these new EOS users, or are they upgrades to the newer EOS system in order for those legacy users to use the Insight software specifically? And also, just why keep EOS guidance the same given the strength and order volumes? Is there a lead time for these volumes that isn't really translating to the Q4? Thanks.

Patrick Miles (Chairman and CEO)

Okay. Yeah. Todd was telling me he'll take two, and I'll take one. I may take both. I'm just kidding. Can I tell you, there's great enthusiasm with regard to EOS Insight. And I think that people understand the translation of the technology. And if you saw the order book for Q3, it's outstanding. And it's a who's who.

And the thing that makes me most excited is that here's this little ATEC five years ago that couldn't buy themselves into a meeting. And now it's like a who's who in spine surgery is buying EOS. And so all that speaks to is our getting access to those institutions, and our proliferating those institutions with our implants.

I can't wait for the day that we are a ubiquitous player in this field, as well as what we're doing is we're taking the data from these tools and ultimately improving care. And so the vision is just that. And so to me, it's highly comforting to see the volume of enthusiasm of engagement associated with a tool. And a little bit intimately, EOS is a much more significant influence to spine care than, say, SafeOp is. And I love

SafeOp. I think SafeOp is the gateway to lateral surgery. Without automated nerve physiology, especially automated SSEPs and now automated MEPs, that is a gateway to lateral surgery and beyond. But when you start to think about the influence that SafeOp has had on lateral surgery, I will tell you, the influence that EOS can have on deformity is profoundly bigger.

And so that, I think, is what creates all of the enthusiasm. But this is a step-by-step-by-step exercise. And so we're going to be perpetually conservative with regard to placing the units. And these are new places that we're placing units. They're not upgrades. And we continue to upgrade units, which is inspiring. But if you look at the recognition of revenue, I think Todd could go into exactly why it's such a step-by-step phenomenon.

Todd Koning (CFO)

Yeah, it is. And I think, Caitlin, the point is that we've been about $15 million of revenue in EOS for the last probably six or seven quarters or so. And so this Q4, actually, the implied Q4 EOS revenue in our guidance is an $18 million number. And so it is a step up going from Q3 to Q4. And so I think our comfort with that number is backed up by the level of interest we're seeing in the order book.

Caitlin Cronin (Director and Equity Analyst)

Great. Thanks so much.

Operator (participant)

Your next question comes from the line of David Saxon of Needham. Please go ahead.

David Saxon (Senior Analyst)

Great. Good afternoon, Pat and Todd. Thanks for taking my question. I'll just ask one quick one on Valence. I know that's in kind of a friends-and-family stage launch at this point. So maybe just talk about kind of early feedback you've been getting and how we should think about the cadence from going from a friends-and-family into a broader launch in 2025. Thanks so much.

Patrick Miles (Chairman and CEO)

Yeah. Thanks. This is one of my favorite ones. It's like I love when you don't have to back a bus up to an OR to bring in a tool that ultimately guides your screws. And we don't have to do that with Valence. It's a meaningfully small footprint in the operating room. And as I said, we're doing cases today. We want to continue to refine the thing in a way that there's real elegance to its integration into the operative

workflow. And I would tell you that that's where we're spending most of our time. And so if I look over kind of the timeframe, our excitement is let's continue to refine the thing through middle of next year, and then let's discern if we're ready to launch it then. That's our expectation, and that's our excitement.

I would tell you, from a footprint perspective, from a technological perspective, from a software capability perspective, having guys that have the type of experience who are putting this together, Brad Clayton, Kevin Friend, these guys are years into this business. There's a whole slew of software people in-house here and in-house in Colorado that have meaningful experience in this field. What gives me

confidence is I see the improvement that we're making every day on the thing, and I see the opportunity that it presents because it is not a huge cost of goods, comparatively speaking, not a big footprint, comparatively speaking. It just provides us flexibility in terms of how we get these things into the hospitals. I know not a specific response to your question, but kind of where we are today.

David Saxon (Senior Analyst)

Great. That's helpful. Thanks.

Operator (participant)

Your next question comes from the line of Sean Lee of H.C. Wainwright. Please go ahead.

Sean Lee (VP and Equity Research)

Good afternoon, guys. Thanks for taking my questions, and congrats on a strong quarter. My question is kind of a top-level one. Looking back from the beginning of last year, we can see that you have been able to consistently outperform your previous guidance. And now the latest revenues are more than 10% higher than what you expected you were able to achieve at the beginning of the year. So I was wondering whether this has been driven by a specific tailwind and whether this upward surprise is coming from a trend that we can expect to continue going into next year. Thanks.

Todd Koning (CFO)

Oh, sorry. I think when you look at the guidance we put out at the beginning of the year, and that was $595 million. Ultimately, that was where we're looking at today in terms of our guidance and the improvement and the increase in it. It's really all come from surgical revenue. So our EOS guide has been consistent throughout the year. So you ask yourself, why has the surgical revenue done better than what

we anticipated early on? And it's really come through our volume assumptions. And so ultimately, I think this is a reflection of the interest, the adoption of our technology and our procedures by surgeons and aided and advanced through the addition of sales coverage and sales reps.

And so it's not just one thing, and I hate to be super simple about it, but ultimately, this has been a greater volume experience than we guided to at the outset of the year. And so I think that gives you confidence that we're on to something.

Sean Lee (VP and Equity Research)

Thanks for the additional color. That's all I have.

Operator (participant)

Your next question comes from the line of Drew Ranieri from Morgan Stanley. Please go ahead.

Drew Ranieri (Analyst)

Hey, Pat and Todd. Thanks for taking the questions. Just I'll sneak in too. This should be pretty quick, but Pat, maybe on EOS, I think in your part of the slide deck, you were talking about it laying the foundation for future implant growth, and maybe just put a little bit more context there, especially against what that means for the record EOS orders that you're seeing with Insights. Are you embedding volume-based

commitments with kind of every new order from EOS, whether it's an upgrade or replacement, so maybe just talk to us a little bit about that, and then Todd, just on the gross margin for the quarter, it came in a little bit weaker than we were expecting. I know you highlighted product mix, but we saw lateral kind of continue to take more share. So just talk to us a little bit more about why it was a little bit softer versus maybe our expectations and what you're kind of thinking about for the Q4. Thanks for taking the questions.

Patrick Miles (Chairman and CEO)

I'll start, Drew, and thanks for the question, and I was worried about not doing a great job in terms of describing the integration of our implants into that experience, and so the beauty of automating these measures is that we get a ton of radiographs and a ton of opportunities to create plans, and those plans are informed by our implants, and the beauty of that is we see it all the way through the surgical

intervention, all the way through the post-op assessment. Our ability to start to see the reflection of that spine care on the adjacent level and start to understand what the change has been in the spine alignment is profoundly valuable because ultimately, it's the indicator of a future issue, and so the great part is the surgical planning element ultimately is informed with our implants.

Our implants to the tune of, "Hey, here's the type of patient-specific rod you need. We will bend that rod. That rod will go with our implants." And so when you have the early kind of engagement with the surgeon on what his findings are radiographically, and he sees the patient and identifies the intervention that he's going to apply, our ability to plan it and integrate our implants and understand how our implants ultimately fulfill the requisite obligation is really outstanding. And so it really ties the implants to the plan. And then we have an integrated tool interoperatively to reconcile against that plan. All that is proprietary.

And so when we start to think about selling these units and garnering access to hospitals, our opportunity to garner access based upon the utility of this preoperative plan that's fundamentally driven by the AI that drives the alignment measures is outstanding. And so tying our implants is a very presumptive exercise in this effort. And so I think just to give you a perspective of the type of volume, the

automation is so important to ultimately garnering information and creating a predictive measure. I think we're over 100,000 images in the 10 sites that we had in our alpha evaluation. And so when you start to think about the volume of information that we get through the integration of these tools that ultimately inform predictable spine surgery, it's awesome. And so anyway, that's what creates all the enthusiasm. I'm sure I'm droning, but it's like that's why you really kind of get a tool that is unlike anybody else has. So.

Todd Koning (CFO)

And Drew, just on the product mix, our EOS margins were a bit lower, driving a little bit of a headwind there. That's just really kind of geographic mix more than anything with the international markets being at a lower margin because many of those are distributor sales. So that just provides a little bit of a margin drag in the quarter. And also, as we kind of got healthy in our biologic portfolio, we saw a good strong

biologic revenue performance in the quarter that has a lower margin profile as well. So both of those things contributed to a little bit of a headwind that we saw in the quarter. And think about the second or excuse me, think about the Q4 non-GAAP gross margin in that 69.5% range. And we expect to end the year at about 70% gross margin.

Patrick Miles (Chairman and CEO)

EOS is the international.

Todd Koning (CFO)

Yeah. Yes. Sorry. I didn't make that clear.

Drew Ranieri (Analyst)

Thanks for taking the questions.

Patrick Miles (Chairman and CEO)

Thanks, Drew.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Pat Miles for closing remarks.

Patrick Miles (Chairman and CEO)

Yeah. I just want to thank everybody for their attention, and I hope you share your enthusiasm about what we're building, so thanks very much.

Operator (participant)

Thank you, everyone, for joining. You may now disconnect.