NuVasive - Earnings Call - Q2 2014

Transcript

Operator (participant)

Thank you, Shay. Welcome to NuVasive's Second Quarter Earnings Call for the quarter ended June 30, 2014. Joining me on today's call are Alex Lukianov, our Chairman and Chief Executive Officer, Keith Valentine, President and Chief Operating Officer, Michael Lambert, Executive Vice President and Chief Financial Officer, and Quentin Blackford, our Incoming Chief Financial Officer. During our comments and responses to your questions today, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements that are based on current expectations and involve risks and uncertainties, assumptions, and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

These and other risks and uncertainties are more completely described in today's press release and in our most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission. This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our gross margin, sales, marketing, and administrative expenses, research and development expenses, operating margin, and non-GAAP earnings per share. We believe this information is useful to investors because it provides important information regarding earnings generation at NuVasive and is helpful for measuring our progress. We use these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating our actual and forecasted operating performance, capital resources, and cash flow.

The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to our financial results prepared in accordance with GAAP are included in the press release and at the supplementary financial information file, both of which are accessible from the investor relations section of the NuVasive website. With that, I would like to turn the call over to Alex.

Alex Lukianov (Chairman and, CEO)

Thank you, Carol. Good afternoon, and thank you everyone for joining us on today's call. We are extremely pleased to report second quarter results that exceeded our expectations on both the top and bottom line and demonstrated strong increased operational efficiency within NuVasive. During the quarter, we continued to solidly execute our strategy to take market share, and according to reported results, we can now claim the number three spot in the global spine market. Having achieved such a remarkable long-standing goal, I am confident that our mission to improve spine surgery with market-leading innovation will support our drive beyond $1 billion in revenue and toward the number two position in the spine market. Now let's turn to results for the second quarter of 2014. We reported revenue of $191 million, which represents year-over-year growth of 15% and non-GAAP earnings per share of $0.28 or EPS growth of 40%.

Revenue growth was driven by stronger-than-expected performance in the US, especially in lumbar and biologics, and continued strong growth in our international geographies. Revenue growth outperformed our expectations even excluding the benefit of a couple of less sustainable impacts in the quarter, which Michael will cover in his remarks. In addition to better-than-expected revenue growth, we made solid progress in our efforts to improve operating profitability, resulting in a 200 basis point year-over-year expansion in our operating margin during the quarter. The expansion was driven primarily by ongoing efforts to bring manufacturing in-house, leverage of systems investments we have made over the last few years, and the operational initiatives that have been underway to drive efficiencies in all areas of the organization.

As a result of the outperformance in the second quarter and the sustainability of the momentum of our US lumbar products, we are updating and increasing full-year guidance for revenue to approximately $745 million, up from $725 million previously, operating margin of approximately 16.5%, up from 16% previously, and non-GAAP EPS to approximately $1.11, up from $1.06 previously. Before I turn the call over to Michael to go through the results and discuss guidance in more detail, I will provide an overview of our longer-term growth goals and how we intend to achieve them. The goals include growing revenue to $1 billion and beyond, expanding our operating margin to at least 20%, and improving shareholder returns with initiatives to leverage earnings. Let's begin with NuVasive's future revenue growth, which we believe will be driven by the continued execution of our share-taking strategy.

Today, we have roughly 8% share of the global spine market. We believe that can be grown significantly by executing across three opportunities. First, driving the shift in spine toward minimally invasive, or MIS, and less invasive surgery. Two, penetrating the traditional or open spine market with innovation that is converting that market toward less invasive surgery. Three, expanding our footprint globally and taking share of under-penetrated markets. I'll spend a moment on each of these opportunities to provide a sense of how NuVasive is currently positioned. First, the spine market is shifting increasingly toward less invasive solutions as better patient outcomes and a wealth of clinical and economic evidence are expanding surgeon adoption.

We estimate that MIS and less disruptive solutions will represent close to 30% of the global market in 2014, and we believe that within the next decade, less disruptive solutions will become the standard of care, approaching 80% of the global market. That shift will create over $5 billion of opportunity over the next decade. As an innovative leader in the US MIS market, we intend to continue to be a key beneficiary. NuVasive established a leadership position within MIS by pioneering the lateral approach to spine surgery, but it has not stopped there. The manifestation of our core philosophy, innovating to improve surgical outcomes in spine, has resulted in a constantly evolving, comprehensive portfolio of highly differentiated, less invasive solutions.

That is fostering our ability to not just sustain a leadership position within the fast-growing market for less invasive solutions, but, as demonstrated by our performance in recent quarters, to actually expand our market share within it. Our drive for continued leadership of the market for less invasive solutions will be a key tenet of revenue growth over the next several years. Secondly, our core patient outcome-driven philosophy is equally applicable to traditional techniques. Our ability to penetrate the traditional spine market and increasingly convert it to less invasive solutions will be another key driver of future revenue growth. Our new solutions, like Precept for posterior fixation, Armada and Bendini for deformity, ALIF for anterior column realignment, MAS PLIF, and MAS TLIF, are blurring the line between traditional and MIS techniques.

They leverage NuVasive's experience as a pioneer of MIS and as the leading innovator in spine to make traditional techniques less invasive and to improve surgical outcomes. Those solutions are opening new doors for NuVasive. For the first time in our history, we are establishing new surgeon relationships not just with XLIF, but also with recent product launches like Precept and MAS PLIF, which are suitable for traditional techniques. As we penetrate the traditional space, our ultimate intention is to convert traditional surgeon customers to MIS and less disruptive solutions and eventually toward MIS. Another key driver of our future revenue growth will be international expansion. We have dedicated years to establishing an infrastructure to replicate our US achievements internationally. An international growth of 45% year-to-date is a testament to the rewards those investments have begun to reap.

In the EMEA, we implemented a more experienced leadership team early last year. Those efforts are driving better-than-expected performance in key markets like the U.K. and Italy. In Asia-Pacific, our drive for shared leadership in Australia and New Zealand is paying dividends. Also, our momentum in Japan is strong with surgeon interest and the adoption rates of not just XLIF, but also solutions like Precept and Armada continuing to be exceptional. NuVasive's penetration of the $2.2 billion international spine market is still in its infancy. We estimate that we have only 3% share internationally, but our share-taking strategy is geared to drive that much higher, another key component of revenue growth going forward. While revenue growth is a key priority, improving operating profitability is critical as we strive to increasingly translate revenue growth to the bottom line.

We are committed to expanding our operating margin from the 15% level reported last year to at least 20% as we approach $1 billion in revenue. Our results this quarter and the corresponding ability to raise full-year operating margin guidance demonstrate excellent execution against that goal. We have multiple, well-identified drivers that we anticipate can get us to at least 20% operating margins over the next several years. The majority of the drivers are not reliant on revenue growth, such as our vertical integration efforts, the majority of our asset efficiency initiatives, and the expiration of certain patent royalty accruals.

Going forward, the continued growth of our profitability should be driven primarily by: increased international scale as we lever years of investments, increased vertical integration as we work to more than double the 20% of product that we currently manufacture internally, improved asset efficiency with initiatives underway to improve inventory turnover and distribution methods, rationalize real estate, and lever IT investments, improved sales force effectiveness with mobility platforms and refocused sales teams, and finally, the February 2015 expiration of the patent behind the majority of our royalty expense accruals. I am confident in our ability to achieve our stated operating margin goals, and I hope to exceed them as we continue to work to identify additional opportunities to drive profit growth.

In addition to the strategies we have in place to drive top-line growth and operating margin expansion over the next several years, we also have recently implemented new initiatives aimed at increasing earnings per share leverage. Our globalization initiative, for example, is designed to consolidate and standardize the management of our international business activities. Over the next several years, it will drive multiple benefits, including a gradual improvement toward a rate in the low to mid-30%. Additionally, the intended share usage burn rate under the equity incentive plan recently approved by our stockholders is designed to reduce the amount of dilution, or new shares issued, from the historical annual range of 3%-5% to about 2% of outstanding shares in future years. In sum, the outlook for future earnings growth at NuVasive is strong.

We have a proven strategy to drive revenue growth by expanding our market share beyond the 8% that it is today. In addition to revenue growth, we have numerous levers to improve shareholder value with both operating margin expansion and earnings leverage over the next several years. Before I turn the call over to Michael, I did want to make a quick comment on the OIG subpoena, which we are actively complying with. We have nothing new to report on that front, but we'll provide further updates if and when they are needed. With that, I will turn the call over to Michael Lambert.

Michael Lambert (CFO)

Thank you, Alex, and good afternoon, everyone. Before we get started with the financials, let me remind you that when we cover gross margin, SM&A expenses, R&D expenses, operating margin, and EPS numbers today, we will be speaking to non-GAAP results. Please refer to the supplementary financial information file on our website in the Investor Relations section for all of the detail that will be covered on today's call and to reconcile our non-GAAP items to their GAAP counterparts. As Alex mentioned, revenue for the second quarter 2014 exceeded our expectations, coming in at $190.7 million. As a result, we are increasing full-year revenue guidance to approximately $745 million, or 9% growth year-over-year, compared to the $725 million that we previously expected.

Let's walk through the composition of revenue growth in the quarter and our revised expectations for the full year 2014, which contemplate the more difficult growth comparisons that we face in the second half. Second quarter US lumbar growth of 10% exceeded our expectations on a continued trend of exceptional demand for our minimally invasive solutions, including Precept and MAS PLIF. This is momentum that we expect will continue through the second half of the year. To flow through the outperformance and slightly improved expectations for the second half, we now expect about 6% US lumbar growth for the full year, up from the 5% that we previously expected. US biologics growth of 18% greatly surpassed our expectations. Procedural pull-through from our US lumbar solutions was strong, and the recent launch of Osteocel Pro is generating solid surgeon interest and trialing.

We are encouraged by the positive impact of the trialing, but we need additional time to determine what portion, if any, is a more temporary type of impact. However, as a result of the Q2 outperformance, we now anticipate full-year 2014 US biologics growth of about 7%, up from the 2% growth that we previously expected. US cervical performance was below our expectations, decreasing by 1%. Softness was driven by a slower-than-expected ramp of the PCM device, which I will address in a moment when I cover the intangibles impairment charge taken this quarter. Set availability issues in posterior cervical and a later-than-anticipated plating product launch also contributed to the underperformance. With the plating product now set for launch late this year and an initiative underway to improve the availability of sets in the field, we are optimistic that we can reinvigorate the growth of the cervical category over time.

That said, we now expect cervical to grow about 4% for the full year, compared to the 10% growth that we previously expected. U.S. monitoring service growth exceeded our expectations, increasing almost 15% in the quarter. Similar to last year, we experienced an improvement in collections, which drove the majority of growth in the quarter. While we are encouraged by that dynamic, it is related to historical volumes, so we cannot rely on the sustainability of its impact going forward. Thus, our expectations for the second half of 2014 are unchanged and assume that strong volume growth will continue to be offset somewhat by pushback from insurers. As a result of the Q2 outperformance, we now expect U.S. monitoring service growth of 2% for the full year and improvement from our prior expectations for flat growth.

Our international business, which includes Puerto Rico, also exceeded our expectations, growing 56% in the second quarter on strong contributions from the Asia-Pacific and Latin American geographies. During Q2, we saw some progress in Latin America after a period of sluggish growth, and this benefited our international growth rate. However, given the continued economic turmoil in a couple of these countries, Q2's progress is not something we necessarily expect to see systematically repeat itself in Q3 or Q4. Still, in consideration of the strong organic results elsewhere, we now expect full-year 2014 international growth of approximately 30%, up from 20% previously. In sum, we were very pleased with Q2 revenue results. As you model the remainder of 2014, please note that our guidance does not assume continued benefits from the less predictable impacts I mentioned from Q2, both in our IOM monitoring services and in our Latin American market performance.

Given our view on these items and considering that Q3 sequential growth has historically been flat compared to Q2, we currently anticipate Q3 revenue will be down sequentially. Turning to the rest of the P&L, gross margin in the second quarter was 76.6%, up 120 basis points from the 75.4% reported in Q2 2013. The gross margin expansion demonstrates very strong operational gains driven by our move to insourced manufacturing and improved inventory efficiencies. These items more than offset roughly 50 basis points of margin pressure driven by revenue mix, which measures the impact from the outsized growth of our lower-margin biologics and international businesses. Price was not a material factor in the quarter. In spite of the greater-than-originally-anticipated revenue mix headwind that we expect will last through the end of 2014, we continue to expect a full-year gross margin of approximately 76%.

Non-GAAP sales, marketing, and administrative, or SM&A expenses totaled $106.8 million in Q2 2014, compared to $94.5 million in Q2 2013. SM&A expense was 56.1% of revenue for Q2 2014, representing nearly 100 basis points of improvement compared to the 57% reported in Q2 2013. We achieved improved sales force productivity, which more than offset both forecasted and opportunistic investment into our international infrastructure and increased freight costs associated with managing greater-than-expected surgery demand. We expect the freight pressure to ease some in the second half with the recent arrival of new sets. For the full year, we continue to anticipate SM&A expense in the 54.5% range. Non-GAAP research and development, or R&D expenses, totaled $8.6 million in Q2 2014, compared to $7.3 million in Q2 2013. R&D expense was 4.5% of revenue for Q2 2014 versus 4.4% in Q2 2013.

This represents an increase in dollar spend of about 18% from prior year, driven by investments in talent and new product development projects. Even as we invest, we are committed to increasing our efficiencies in R&D, just as we are doing across the entire company. With increased revenue expectations for the year, we don't expect to increase full-year R&D spend on an absolute dollar basis, and as a result, we now anticipate a full-year R&D expense of approximately 5% compared to the 5.5% that we previously expected. Second quarter non-GAAP operating margin exceeded our expectations, coming in at 16%, which was up 200 basis points compared to the 14% we saw in Q2 2013.

As a result of the Q2 outperformance and the slightly improved outlook for R&D spend as a percent of sales this year, we are raising full-year 2014 non-GAAP operating margin guidance to 16.5%, up from the 16% that we previously expected. Implied in my earlier commentary about revenue being down sequentially between Q2 and Q3 is an expectation that non-GAAP operating margin will display a similar cadence. In addition, our updated guidance anticipates non-GAAP operating profit dollar growth of about 20% this year, or operating profit growth that is more than twice the expected rate of revenue growth. Interest and other expense net on a GAAP basis totaled $7 million in the quarter, compared to $6.9 million in Q2 2013. We continue to anticipate full-year 2014 interest and other expense to be approximately $27.5 million, including roughly $14.7 million in non-cash interest expense.

Second quarter earnings were impacted by a $10.7 million non-cash impairment charge related to a lower valuation for the asset we acquired in the May 2009 Servitech acquisition. This acquisition added the PCM device to our product pipeline. The impairment was driven by an updated view of the landscape for cervical motion preservation devices, a market which has been considerably more difficult to penetrate than we originally anticipated. From a tax perspective, the impairment charge drove our Q2 earnings before tax into a GAAP loss position. Our quarterly tax expense is essentially a true-up to bring our year-to-date GAAP tax position into line. Accordingly, even in spite of the $2.3 million pre-tax loss position, we recognized a Q2 GAAP tax expense of approximately $1.9 million, or an effective tax rate in the low 80%.

With half of the year complete, we now expect a full-year 2014 GAAP effective tax expense of about $6 million, down slightly from approximately $6.5 million previously. We continue to expect non-GAAP adjustments for the full year 2014 to be tax-affected at approximately 40%. Second quarter non-GAAP earnings were $13.6 million, or $0.28 per share, compared to $9.4 million, or $0.20 per share in Q2 2013. With increased expectations for both revenue and non-GAAP operating margin, we now anticipate full-year non-GAAP EPS of approximately $1.11, up from $1.06 previously. Please refer to the supplementary financial information file on our website in order to put the year-over-year EPS comparison in its proper context and to review all of the items that will be excluded for non-GAAP reporting purposes.

For the second quarter, cash flow from operating activities totaled just over $25 million, well ahead of the roughly $8 million we saw in Q2 2013, driven by top-line growth and operating margin performance in the quarter. Free cash flow of about $6 million was impacted by about $19 million in capital expenditures in the quarter, most of which was product-related. For the full year, we continue to expect free cash flow will be roughly flat with 2013's result, even in spite of our becoming a significant cash taxpayer this year. Our cash and investments balance at the end of the second quarter was just over $350 million, up about $10 million from last year and up $24 million year-to-date. The increase was driven by operating cash flow generation and proceeds from the exercise of stock options.

The company's execution engine continues to deliver tangible progress that is increasingly evidenced in our reported results and in our guidance. We are simultaneously executing a share-taking strategy and driving operational improvements to enable margin gains. As you all know, last quarter we announced my eventual retirement from NuVasive. It's truly been a privilege to work with the most outstanding team and company in spine, and I have no doubt about the company's ability to achieve its next milestone of $1 billion in revenue, concurrently with at least 20% operating margins. On July 31, I will be officially stepping down as NuVasive's CFO, and Quentin will step into this role. He and I will continue to work together on various projects through year-end close in order to ensure a smooth transition. My retirement marks the achievement of a long-standing personal objective for my family.

I understand how lucky I am to have had the opportunity to play a role here at NuVasive these last five years. Also, I am fortunate to be able to transition such an outstanding team to an exceptionally strong leader in Quentin. Finally, I am especially thankful to our family of Cheetahs for all of your incredible hard work, dedication, outstanding results, and for the wonderful friendships we have developed here over the years. My alter ego, Captain Prophet, will be handing off the Cheetah print cape and money belt to Quentin, who will be fielding your questions both on today's call and in the future. Now, I'll turn the call back over to Alex for closing comments.

Alex Lukianov (Chairman and, CEO)

In closing, I'd like to speak on behalf of the entire NuVasive family in expressing gratitude to Michael for all of his contributions to NuVasive over the last five years. During his tenure, Michael has made a palpable difference within our organization, and I wish him and his family the best as he transitions into retirement. I also look forward to working increasingly with Quentin. I have utmost confidence that Quentin, who has also been instrumental in implementing and driving the operating efficiency and earning leverage initiatives we have underway, can take the baton and advance our drive to increase shareholder value. The second quarter was a clear demonstration of our aspirations for NuVasive. Our market share-taking strategy delivered double-digit organic revenue growth, which we achieved in conjunction with operating margin expansion of 200 basis points and earnings per share that exceeded our expectations.

While we are proud of our Q2 performance, we are laser-focused on executing to the full-year 2014 guidance communicated today. Importantly, we have a strategy in place and initiatives underway intended to drive increased shareholder value and earnings growth this year and in the years to come. NuVasive is now the number three player in spine globally. That is a huge accomplishment. In true NuVasive fashion, we are onward and upward to even bigger things. We will now take your questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone indicates your line is in question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, please limit your questions to one question and one follow-up question. One moment, please, while we pull for questions. Our first question comes from Matthew O'Brien from William Blair.

Matthew O'Brien (Medical Technologist)

Good afternoon. Thanks for taking the question, and Michael, best of luck to you going forward. I was hoping we could start off with the strength in the U.S. lumbar business. Alex, the results from some of your larger, well, not too many larger competitors, but larger companies this quarter have been pretty weak in their spine businesses, whereas your performance here was quite good. I am just hoping you can help us reconcile the performance via just the growth in the MIS market versus taking share with new reps or just going deeper with your existing customer base. How did you put up that type of performance in an environment where your competitors are talking about a pretty challenging environment?

Alex Lukianov (Chairman and, CEO)

Matt, I think it's been very clear that our strategy is working, and that is obviously that we're taking share. The strategy that's really working in the U.S. is being able to convert much more of posterior business in the lumbar space and doing that through a combination of driving MIS more deeply and, of course, converting open surgeries more into our direction. As I talked about in my comments, I think that's really where you're seeing the big growth coming from NuVasive, and that's what's driving the U.S. business. Of course, Biologics pulls through along with that into the lumbar as well as into the cervical space.

Matthew O'Brien (Medical Technologist)

Okay. For the follow-up question, just a commentary about PCM and the inability to penetrate the cervical opportunity. Is that more of a comment about the market not developing as fast as you guys had anticipated? Because that's something you've mentioned in the past, or is it just a fairly competitive space where you just haven't had the success that you anticipated? How should we think about that product for you guys going forward?

Alex Lukianov (Chairman and, CEO)

I think it's a combination of all of those things, but largely it's the market. I think all of us anticipated that the motion preservation segment would grow at a very fast clip. That has not happened. As you know, it's pretty well entrenched with the number of competitors. There's still a fair amount of insurance pushback with regard to that. We just have not seen the kind of uptake and conversion that we anticipated moving from the fusion business to the motion preservation market area. It's just the way that it's gone. Hopefully, someday that'll take off, but there's a number of things that are really restricting that growth.

Matthew O'Brien (Medical Technologist)

Got it. Thank you.

Alex Lukianov (Chairman and, CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from Matt Miksic from Piper Jaffray.

Matt Miksic (Managing Director)

Hey, thanks for taking our questions. First, I guess I should say the first question goes to Captain Prophet, whoever is donning the money belt at the moment. It had to do with some of the prepared remarks on international. Could you maybe walk us through how much of the strength there, understanding there were some delays and then there was some success? How much of that was instruments or stocking or some kind of push to get into some of these additional channels that you've been pursuing? How much was just, from what you can tell, sort of end-user market volumes that are just difficult to predict going forward?

Alex Lukianov (Chairman and, CEO)

Hey, for the record, Michael will not release his cape, but Quentin is Captain Prophet now. So Quentin, please go ahead.

Quentin Blackford (Incoming CFO)

Hey, Matt, this is Quentin here. When you look at international, very pleased with the result that we saw coming out of that space. I would not attribute any of it necessarily to large stocking orders. That was not the driver at all. I do think that when you look at the prepared remarks, and Michael spoke to it a bit, we did see an impact coming out of the Latin America markets and a couple of the different geographies there that historically have been a bit challenged from an economic perspective. We have talked about that in the past, but think of those as markets like Brazil, Argentina, Venezuela, those type of markets. We did see the benefit play through in the current quarter as a result of some strength in those local markets.

If you were going to quantify it, it was roughly $3 million in total. International growth still would have been sitting in the high 30s, pushing up on 40% for the quarter if you were to adjust for those items.

Matt Miksic (Managing Director)

Okay. And then the follow-up, I guess, maybe along the lines of Matt's question on the market and your success there, Alex, you talk about taking more business in the posterior MIS area. I guess that could be posterior fixation for XLIF, or that could be MAS TLIF. If you could maybe provide some color as to where you are in the cycle of those two product launches, maybe which one is out in front and making a bigger impact. And then if you have characterized it before, I don't know if you've given us a number, but kind of where you are in terms of capturing the share of the posterior fixation for your NuVasive cases. I know that's part of the goal with the new posterior fixation system.

Alex Lukianov (Chairman and, CEO)

Yeah. I do not think we have talked about the numbers with regard to that, Matt, but essentially what is happening is that I think if you look at this quarter and the first half of the year, we have had very strong performance from XLIF. We are extremely pleased with the success we have had in that area, but concurrently has been all of the pull-through business that we are getting, as well as the door-opening business with products like MAS PLIF, MAS TLIF, Precept, and so forth. The strength is very balanced in posterior fixation, and it includes both ALIF. It includes ALIF. It includes PLIF. It includes all of our LIFs. We are just extremely pleased with the way that has gone for us. As I already mentioned, that also pulled biologics in a very serious way, as you can see from the performance we had in that area.

Matt Miksic (Managing Director)

Super. Thanks.

Alex Lukianov (Chairman and, CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from Richard Newitter from Leerink.

Richard Newitter (Senior Equity Research Analyst)

Hi. Thanks for taking the questions. Michael, good luck in your retirement.

Michael Lambert (CFO)

Thank you, Richard.

Richard Newitter (Senior Equity Research Analyst)

I was just hoping it sounded like—correct me if I'm wrong—but I think this is now the second or third quarter in a row where you said that price was negligible. I would take that to mean that pricing was not negative nor positive, or was it just stable in a negative kind of way? Can you just elaborate on that?

Quentin Blackford (Incoming CFO)

Sure, Richard. What we mean by that, it's been relatively consistent in the low negative 1.5%-negative 2% range, which has been consistent for us over the last number of quarters now, spanning well over a couple of years. We haven't seen any dramatic change in pricing trends with regard to our own specific business and continue to see it in the low single digits.

Richard Newitter (Senior Equity Research Analyst)

Great. Thanks for that. I know that you guys have mentioned tax as a lever, and it's something where initiatives are likely going to kick in in a more meaningful way, particularly in 2015 and beyond. Maybe Quentin, can you just give us a sense, maybe some targets as to where we can see that tax rate moving from the 85% today? Where could it realistically get to over the next two years, so to speak?

Quentin Blackford (Incoming CFO)

Sure. I think if you look at our current guidance today that Michael walked through, you actually see that tax rate sitting down in the 45% range. A lot of that is being driven by these large items that we've had to record in the first half of the year, being the litigation liability in Q1 related to Neurovision and the PCM impairment charge in Q2. If you were to normalize for those items, though, you do get back into the 35% tax rate for the year that you're talking about. As we think about where that goes into the future, we've spoken to the fact that we expect that to get down into the low 30s. Most of that's going to be contingent upon our ability to really grow that international business to roughly 20% of our overall revenue contribution.

As we're able to do that, we're going to lever tax in a pretty significant way. To help frame it up a bit for 2015, we've talked about the fact that we expect it to fall down into the mid-40% range, and it'll migrate from there into the low 30% range pretty pro-ratably over the course of the next several years as revenue and the international business ramps up.

Richard Newitter (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from David Roman from Goldman Sachs.

David Roman (Managing Director)

Thank you. Good afternoon. I apologize for the background noise, but I'm on a cell phone. Hopefully, you can hear me okay.

Alex Lukianov (Chairman and, CEO)

Yeah. No problem.

David Roman (Managing Director)

I guess my first question would be, just Alex, on the sort of general trends within MIS surgery. In obviously all your analyst presentations and your prepared remarks, you talked about this sort of swap between MIS and conventional, but there's clearly been an acceleration the past several quarters. I think it took five years to get from like a 15% mix to 20%, and it just seems like the rate of penetration to MIS is picking up quite a bit. Could you maybe provide just some perspective on what's driving that acceleration and how we should think about that going forward?

Alex Lukianov (Chairman and, CEO)

I think the growth rate is still somewhere in the 10-15%. It's difficult for us because we just largely have our own data, and most folks don't really talk about it very much. I think what continues to drive MIS is just that there's many more things you can do with it from an application standpoint. That's, of course, what we've been evolving as pioneers in the space, from scoliosis to what have you. I think that more and more surgeons are finding themselves comfortable in moving towards MIS and starting off with at least minimally disruptive approaches.

That's really what's worked so well for us, is moving surgeons kind of down the pike where they begin using our products on an open basis, eventually start to move more and more into less disruptive applications, maybe not entirely MIS conversion, but moving closer and closer to that endpoint. I just think that there's a lot more open-mindedness on the part of surgeons. Of course, from a technological standpoint, I think we've helped to bridge that by making it easier for surgeons to move down that pathway. Could probably talk about it some more, but I think I've probably answered your question.

David Roman (Managing Director)

That's helpful. Maybe just a follow-up on the international side. Clearly, the business is going very well. Maybe you could provide a little bit more perspective on how much of the growth is coming from entering into new countries versus same-store growth in existing geographies. Maybe further to that, what type of infrastructure you need to make that a very big business and how we should think about that in terms of overall profitability?

Alex Lukianov (Chairman and, CEO)

Most of the growth that we're seeing is coming from the existing markets where we have subsidiaries. That would be countries like Japan, Australia, New Zealand, the U.K., Italy, Germany, and so forth. That's really where the bulk of our focus is. That's where the bulk of our resources have been expended over the last several years. We're now starting to see the fruit of that investment. The other areas that we're in are largely smaller. They're more distributor-based. We set up, as often as we can, exclusive distributor relationships, but those are really not the major areas of focus. The ones that I mentioned and really a couple of others are the main ones, which would include, let's say, China that we're especially interested in.

We're mostly interested in and have already invested in countries that have market opportunities of anywhere between $50 million and $100 million in revenue today. That's been our focal point.

David Roman (Managing Director)

Okay. That's a helpful perspective. Thank you.

Alex Lukianov (Chairman and, CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from Chris Pasquale from JPMorgan.

Chris Pasquale (Director and, Senior Emerging MedTech Analyst)

Thanks. Can you spend a minute on the causes of weakness in cervical and what drove the said availability issue there, which obviously did not have any problems on the lumbar side, but it seemed to have an impact with cervical?

Alex Lukianov (Chairman and, CEO)

Yeah. So the cervical weakness that we saw mostly had to do with PCM and the fact that PCM really hasn't moved forward, as I discussed, having to do with, in part, the market and the fact that the product has just not taken off for us. There was really less of a contribution to any kind of revenue shortfall with regard to posterior. Those are just some things that are running a little bit behind schedule. Those are launches and set builds that were planned, but they were behind. We have either caught up or are catching up on those things. That is why we have backed off our number from being around 10% growth originally for cervical down to about 4%. That is already baked in with some of the lateness in the launches and the set builds.

Chris Pasquale (Director and, Senior Emerging MedTech Analyst)

Did PCM sales decline year-over-year? I guess I'm just trying to reconcile. It wasn't contributing a huge amount previously, and you had been growing very nicely in cervical. Did you see a step down there? Or maybe you can just update kind of what you're assuming now for full-year PCM sales versus maybe where you were at the beginning of the year?

Quentin Blackford (Incoming CFO)

Hey, Chris. This is Quentin. I wouldn't say that we saw a step down necessarily in PCM, but it's been relatively flat. So we haven't seen incremental growth coming from it. And we kind of continue to view it as running out the rest of the year in line with that same trend.

Chris Pasquale (Director and, Senior Emerging MedTech Analyst)

Okay. And then just one other one. If you could quantify to any extent you can the contribution from Osteocel Pro and Biologics. I'm just trying to get at how much of the strength there we should think about as potentially being trialing-related versus real underlying strength in the pull-through from the lumbar business.

Quentin Blackford (Incoming CFO)

Yeah. So clearly, pleased with the results we saw in Biologics with nearly an 18% growth rate in the quarter. It gets a bit difficult to try to quantify exactly what is trialing as we have some of our existing surgeons both using the older product and the newer product to a greater extent than what they had in the past. You do have some new surgeons that are trying that as well. How much of that sticks into the future quarters is hard to predict. If you look at the overall growth of 18%, far outpacing the lumbar growth, the way we kind of look at it at this point is that incremental growth potentially could have been trialing in the quarter, and we're just not sure how to quantify that yet from a go-forward basis.

Chris Pasquale (Director and, Senior Emerging MedTech Analyst)

Thanks.

Operator (participant)

Thank you. Our next question comes from Raj Denhoy from Jefferies.

Raj Denhoy (Equity Research Analyst)

Hi. Good afternoon.

Alex Lukianov (Chairman and, CEO)

Hello, Raj.

Raj Denhoy (Equity Research Analyst)

I wonder if I could ask a bit more about this strategy to move into less invasive as opposed to minimally invasive. You have made some comments about the number of surgeon customers that opens up to you. Is there anything you can offer in terms of how that is going, the number of new customers that are coming into being invasive customers at this point?

Alex Lukianov (Chairman and, CEO)

The strategy is to do both. It is something that we really embarked upon last year in earnest as we started to introduce products like Precept that could be applied both in an open and in a closed fashion. We really do not talk about what it has netted for us in terms of added customers and things of that sort. Clearly, it has been a real game changer for us.

Raj Denhoy (Equity Research Analyst)

Yeah. I guess what I'm trying to get at is it seems to have certainly been a big contributor to the acceleration in growth recently. I'm trying to understand how sustainable that could be in a sense. If you are targeting this much bigger part of the spine surgery market and you're just now getting into that, it suggests that you could probably run in that space for a long time.

Alex Lukianov (Chairman and, CEO)

That's certainly how we look at it. As we talk about it, in terms of the $5 billion that's out there, that's really what we're going after. As you well appreciate, we've really penetrated very deeply into the $2.2-$2.3 billion MIS space. Now we're going after the $5 billion number. I think we do have a lot of runway.

Raj Denhoy (Equity Research Analyst)

I guess the follow-up question on that is, as you do get a broader bag of products, not just minimally invasive, but now less invasive, at what point do you get enough that you can move to having more of a consigned inventory in hospitals and thus also reducing the cost it requires you to service your sets and the like?

Alex Lukianov (Chairman and, CEO)

We have a great deal of product that's already consigned. We're approaching 100 products this year. By the end of this year, we'll probably be north of 100 products. That's a big part of what we have. I think that also because we're very well known for service, we've also been very active on the loaner side. We move a lot of sets around, and we meet the demands of surgeries and pick off cases. In the more established accounts, you bet. Those are consigned sets. In those where we're still really going after the business and just getting some of the initial cases, that's where you see a lot of the loaner business being more prevalent.

Raj Denhoy (Equity Research Analyst)

Does that represent a significant opportunity for you, though, I guess, as you get more into that bigger part of the market? Does the move to consignment, I guess what I'm trying to get is how big of a margin opportunity could that represent in the next couple of years?

Alex Lukianov (Chairman and, CEO)

It's significant because it helps us a great deal with freight. It helps us with other things. That's one of the levers that we're absolutely pushing on.

Quentin Blackford (Incoming CFO)

Yeah. Raj, when you hear us talk about operating margin expansion opportunities and talk about the asset efficiencies, you're hitting on exactly those kinds of things that we're focused on. We've quantified that at roughly 150 basis points as we move to a 20% operating margin. You're right down the right path of what we're looking at.

Raj Denhoy (Equity Research Analyst)

Okay. Helpful. Thank you.

Alex Lukianov (Chairman and, CEO)

You bet.

Operator (participant)

Our next question comes from Matthew Taylor from Barclays.

Thanks, guys. It's actually Dan in from Matt. Just wanted to first ask, was there a selling day difference in the Q2?

Quentin Blackford (Incoming CFO)

Yes, there was. One less selling day in Q2.

Okay. Thanks. That's helpful. I just had a quick follow-up really related to the monitoring business. Historically, or I guess really most of last year, you've talked about how the softness was not so much procedural, it was more reimbursement. As we look year to date and going forward, obviously, the results are stronger. Is that really just the volume growth continuing and then the collections, I guess, that you talked about this quarter? Or have you actually seen any improvement in kind of the reimbursement environment over there?

Yeah. Not really seeing any improvement in the reimbursement environment necessarily. I think it's a bit more stable from a volume growth perspective that's playing through the number. We do still have some of the collection benefits that are impacting the number. That's part of the strength you saw in Q2. As we think about the future, next two quarters, we don't anticipate that's going to repeat itself.

All right. That's helpful. Then just one last one, if I could just sneak it in. I mean, obviously, good trends in the Biologics business. I just wanted to ask, I know you've de-emphasized Attract. Is that still something that's a driver, I guess, out into the future? Or is really the focus now Osteocel Pro and really the pull-through that you're seeing from lumbar?

Alex Lukianov (Chairman and, CEO)

Osteocel Pro is our primary focus.

Cool. Thank you.

Operator (participant)

Our next question comes from Jeff Johnson from Robert W. Baird.

Jeff Johnson (Senior Research Analyst Covering Medical Technology)

Thank you. Good afternoon, guys. Quentin, maybe just a couple of follow-up questions, clarifying questions on the international side. On the Latin American comments you made, is end market demand there, procedural demand, actually, did you see a pickup in the quarter? Or is that just maybe collecting on some of the past cases, some of the receivables that were due there? I did not hear a comment on Japan. Maybe any kind of growth rates there, the push towards break-even on profitability there. How do we think about that update?

Quentin Blackford (Incoming CFO)

Sure. So from a procedural perspective, in those markets, primarily Latin America, where we see the economic challenges, the end-user volumes remain solid. That's never been the issue. The primary issue has been the ability to get paid out of those markets and the ability to recognize revenue. We did see somewhat of a benefit related to that aspect in Q2. That's the aspect that's hard to predict in Q3 and Q4. Therefore, we're not baking that into our guidance. Over time, we'll continue to build those markets, and you would expect some benefit from that. It's just hard to predict exactly when. With regard to Japan, we couldn't be more excited about what we're seeing in that local market. I can tell you that it's been beyond expectations.

When Michael talked about making some opportunistic investments in international, that's really what he's speaking to there. Most of the infrastructure is in place to support that business. To the extent we can continue to train surgeons given the strong surge in demand, those are the kind of investments we're talking about making to continue to fuel the growth in those local markets. That's what we're seeing play out in the results right now.

Jeff Johnson (Senior Research Analyst Covering Medical Technology)

Okay. And then just on the follow-up question, maybe two longer-term or bigger-picture items. Any update on IGA and still expecting kind of a late 2015 launch there? Any change in how KOLs are thinking about that product line? Anything like that? And then also an update maybe on the coverage rep model that I think you guys have been trialing, just how that's going and any updates there?

Alex Lukianov (Chairman and, CEO)

With regard to let's just take one of those so we do not run out of time. With regard to IGA, we will address that really more fully as we move into next year, which I talked about when we first disclosed that that was our strategy to move into a different way of correcting the spine. I can just give you a brief update and say that things are going well. We are working our way through the alpha and beta clinical case experiences, and everything is on track. We have not fully vetted out exactly when we are going to launch things in 2015, but we will be launching in 2015. We will talk about that as we get closer to that date.

Jeff Johnson (Senior Research Analyst Covering Medical Technology)

Thank you.

Alex Lukianov (Chairman and, CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from William Plovanic from Canaccord Genuity.

William Plovanic (Managing Director and, Equity Research Medical Technology Analyst)

Great. Thanks. Good evening. Thanks for taking my questions. Just two of them. One, cervical obviously slowed down, beating a dead horse here. When do you expect that business to turn around? Was it a function of sales focus just with lumbar doing so well?

Alex Lukianov (Chairman and, CEO)

Yeah. It does have something to do with sales focus. I mean, overall, we're certainly pleased with the contribution. So it's around 10% of revenue. So we're pleased with where cervical is. And the overall opportunity is only 20% of the market, right? So we're in a pretty solid position when it comes to cervical. But we have been driving the sales force very hard when it comes to the lumbar opportunity. They've performed extremely well, as you can see in the numbers. So that's really mostly what we're talking about. It's not that we don't care about the growth in our cervical side. But I think if you have to prioritize things, it's really the lumbar business that makes or breaks the overall growth profile for the company.

William Plovanic (Managing Director and, Equity Research Medical Technology Analyst)

Okay. A nice segue into my other question, which is the lumbar has been driving everything. You talk about kind of moving in this less invasive market. As we look at Precept and the penetration into the existing XLIF cases, where are you on a percentage basis? If it was 10% or 20% a year or two ago, kind of where do we stand today with that? That is all I have. Thank you.

Quentin Blackford (Incoming CFO)

Yeah. I think we've historically said that we believe on most cases, 75% of the time or so, you're going to back up with posterior fixation. In terms of the pathway that we still have in front of us, I would still say that we have a majority of that pathway left to go. Still significant share to gain with respect to that opportunity. And Precept is not just about capturing that opportunity for us. When you look at the differentiation with it and when you look at some of the opportunity we're seeing in the data, we have new surgeons trying that product with the company, which is really differentiated for us from where we've been historically. Usually, that's through XLIF. Now we're seeing that come through things like Precept or MAS PLIF. You look at the bigger posterior fixation market that pushes up around $1.8 billion.

That's the opportunity we look at as having the opportunity to get into. That's how we quantify the potential with regard to Precept. It's much bigger than just our own cases.

William Plovanic (Managing Director and, Equity Research Medical Technology Analyst)

Great. That's very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from Bob Hopkins from Bank of America.

Travis Deaton (Analyst)

Hi. This is actually Travis Deaton for Bob. You're obviously taking share. As you looked at your business over the course of the quarter, do you feel like there's an underlying improvement going on in spine surgical volumes?

Alex Lukianov (Chairman and, CEO)

That's a hard one for us to really get our arms around because we all probably have the same information. Based upon how other companies are performing in the U.S., at least, it's looking like things are relatively flat in this particular quarter. How that plays out on the year, we're not real clear. I think that's why we've taken a pretty prudent approach when it comes to providing our guidance.

Travis Deaton (Analyst)

All right. Sounds good. One quick question on the 20% operating margin guidance over the long term. Is that a conservative hurdle? Or is there a structural investment that will kind of limit your upside?

Alex Lukianov (Chairman and, CEO)

It's a conservative hurdle.

Travis Deaton (Analyst)

Got it. Thanks.

Operator (participant)

Thank you. Our next question comes from Larry Robinson from Wells Fargo.

Craig Stuart (Head of Strategy and Planning, Treasury Management)

Hi, guys. It's actually Craig on for Larry. Just wanted to talk about the broader spine market in general, what kind of growth you're seeing there, what you expect for the second half compared to the first, and then maybe even preliminary thoughts moving into 2015.

Quentin Blackford (Incoming CFO)

Yeah. I think we still look at the market as being relatively flat to maybe up a percent or two, but not much changing from that dynamic. Certainly, some of the reported figures that we're seeing come out from our competitors would seem to indicate it's probably still in that range. With regard to how we think about the future, at this point, still kind of status quo, right along the same lines that we're seeing today. Certainly, a bit more optimism out there with regard to what the potential could bring back into the market if you ever saw it come back or some relief on the reimbursement side of things. We aren't going to try to predict when that comes back into the market. At this point, we view it as relatively flat.

Craig Stuart (Head of Strategy and Planning, Treasury Management)

Just to follow up on that, any changes in payer pushback that you've seen recently?

Quentin Blackford (Incoming CFO)

Yeah. I wouldn't say any changes that we're seeing here recently. The reality is it's still there, though. No changes.

Craig Stuart (Head of Strategy and Planning, Treasury Management)

Great. Thanks. Congrats on a good quarter.

Alex Lukianov (Chairman and, CEO)

Thank you.

Quentin Blackford (Incoming CFO)

Thanks.

Operator (participant)

Thank you. Our next question comes from Josh Jennings from Cowen and Company.

Josh Jennings (Managing Director)

Hi. Good evening. Thanks a lot. Just wanted to start off on your gross margin guidance for the year and with the uptick in your revenue guidance, maintaining gross margins flat from your previous guidance. Just wanted to check in on whether there's a level of conservativism baked in there and what are some of the puts and takes to keeping it at that 76% level?

Quentin Blackford (Incoming CFO)

Yeah. I wouldn't characterize it as conservative at this point, but certainly, it's something we believe we can deliver on. You look at where we were at in Q2 at 76.6%. We did see some benefits of the insourcing initiative, which was essentially our acquisition of our manufacturing capability back in May of last year, really starting to play through roughly a quarter earlier than what we had anticipated. Our guidance had already factored in some benefit from that in the back half of the year. Similarly, some of the inventory efficiencies that Michael touched on with regard to other system investments that we made that are driving, those are playing out also.

What you're seeing in the back half of the year with the strength in Biologics, with the strength in our international businesses, both which bring a lower gross margin profile with them, it creates a bit of incremental pressure from a mixed perspective that we hadn't contemplated in the prior guidance. In the new guidance, we're trying to contemplate all those different moving pieces. That's why you don't see an improvement in gross margin for the year.

Josh Jennings (Managing Director)

Okay. Thanks. Just one follow-up on your previous outlook for the spine market. You mentioned the potential for some of the pod share coming back in. Can you talk about, maybe, Alex, can you talk about any updates in terms of your outlook for pods? Any catalysts in the fall or early next year in terms of any Senate finance hearing or OIG issuance of any formal guidance or recognition of pods? Then how you're seeing the impact of the OIG special fraud alert impacting so far, maybe in Q2 and outlook for the back half of the year. Thanks a lot.

Alex Lukianov (Chairman and, CEO)

Yeah. As you know, DOJ has been pretty aggressive with regard to pods. We have seen the formulation of policy by a lot of the networks that have been anti-pod. That has been going on now for several months. As far as what impact has it had, I would say it's not much different than the remarks I made in the last quarter, which is that we're not seeing the formation of new pods. We're hearing much less with regard to people trying to move towards pods. At the same time, I think there's kind of a process underway right now with a number of the pods that are out there in positions either kind of changing their relationship and moving away from the pod and trying to rekindle that better relationship with the hospital or redefining their pod.

It is in a little bit of a state of flux right now. I think, as Quentin mentioned, we are still hopeful about what that means in terms of the future. Perhaps in 2015 or into the latter part of 2015, we start to see some more of those surgeons moving away from some of those models. As best we can tell, it is still somewhere in the 10-15% range. My guess, and this is entirely a guess, is that it is less than 15%, but it is really impossible to quantify.

Quentin Blackford (Incoming CFO)

Another comment too on the pods. I think it's important to note that there's still a number of surgeons that are in pods doing traditional fusion surgeries with their pod contact or their pod investment. A lot of their less invasive, their lateral surgery, they're seeking different technology. There's still a relationship there. That relationship fosters a greater long-term success together as they transition away from the pod.

Josh Jennings (Managing Director)

Thanks again.

Michael Lambert (CFO)

Thank you. Our next question comes from Mike Matthew from Needham & Company.

Mike Matthew (Managing Director and, Senior Equity Research Analyst)

Thanks for fitting me in. I guess just given the degree of success in the lumbar area, I'm wondering how much of that is coming from Precept versus some of the other products there that you mentioned, the less invasive lift procedures.

Alex Lukianov (Chairman and, CEO)

As I mentioned, XLIF is really having record performance. We are seeing our base products perform exceptionally well. It is really across the board. It is interbody. It is all the new offerings. The whole posterior fixation, let us call it the XLIF area, meaning all of it is performing exceptionally well for us.

Quentin Blackford (Incoming CFO)

Yeah. Also keep in mind the aging population and the need for longer level constructs. It is not just Precept. There is good strength with our model and the ability to really address a complete deformity correction and doing that not only with inner body opportunities but also doing it with posterior fusion. It is deeper than that.

Mike Matthew (Managing Director and, Senior Equity Research Analyst)

Okay. In your Biologics business, the strength there driven by Osteocel Pro, was that from volume or price? I mean, is Osteocel Pro priced at a premium to the prior version of the product?

Quentin Blackford (Incoming CFO)

Yeah. Most of that strength there is being seen through volumes, although you do get a bit of a price premium on the Osteocel Pro product. What's interesting about it is, while you get a nice mixed benefit on the top line from a gross margin perspective, they're relatively consistent between Osteocel Pro and Osteocel Plus. So it doesn't necessarily flow all the way through the P&L with that same benefit.

Mike Matthew (Managing Director and, Senior Equity Research Analyst)

All right. That's all I have. Thanks a lot.

Quentin Blackford (Incoming CFO)

Great.

Operator (participant)

Thank you. Our next question comes from Jason Witz from BMO Capital.

Hi. Thanks for taking the question. You have gotten a lot of questions about sort of what is going on with lumbar. I think we are all impressed by basically the growth rate that you have been posting the last few quarters, this one in particular. I guess many of the questions are kind of trying to figure out, is this just expanding the basket within your surgeons, or is it really pulling from other surgeons? From the responses you have given, Alex, I get the sense that you have really started to aggressively go after surgeons outside of your core. Is that the right way to think about it? That is sort of what is happening here?

Alex Lukianov (Chairman and, CEO)

Yes. Absolutely. We're taking share. So it's deeper penetration with the existing base and absolutely taking share.

You also mentioned that in terms of what's driving it, XLIF is kind of sort of the biggest underlying driver, whereas the new products are obviously kicking in. But sort of XLIF is still kind of the underlying driver here. Is that the right way to think about it?

ExLift is still the bigger part of the base, right, because we've really just moved into the direction of applying more fixation options over the last couple of three years. And so those are the products. We've talked about Precept before being one of our most successful ever launches. It continues to perform at a very high pace. It's really across the board. It's, as Keith mentioned, in Armada and deformity. We're very pleased to see the kind of uptake we're getting, both from a trialing standpoint with new surgeons, checking out our products, not necessarily beginning with ExLift, beginning with various other offerings. The uptake is across the board.

Okay. Great. One last question. I guess now that you're basically number three in the market, are you kind of competing as a full-service player with everybody at this point, meaning that you're looking to basically supply pretty much everything for the surgeon, or are you still kind of focused on just being the MIS option for the surgeons?

I think that's what really got us here, right, is that we do have the complete offering. I think it's probably something that not everybody always appreciates and is clear on. It's absolutely what's gotten us here. That's what's put us into a very strong position with the networks and with our national account business as well.

Great. Thanks.

You're welcome.

Operator (participant)

Thank you. At this point, we have no further questions. I would like to turn the call back over to Alex for closing comments.

Alex Lukianov (Chairman and, CEO)

Great. Thank you very much, everybody. Thank you for joining us. We look forward to chatting with you in another three months. Again, all the best wishes to Michael and his family. Again, thanks for the many years of fantastic service. Thank you.

Operator (participant)

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.