Orthofix Medical - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered solid top-line and profitability momentum: reported revenue $205.6M and pro forma net sales $203.4M grew 4.6% and 6.3% YoY (5.7% constant currency), with seventh straight quarter of adjusted EBITDA margin expansion; free cash flow was +$2.5M.
• Results exceeded S&P Global consensus: revenue $205.6M vs $200.0M estimate (+$5.6M beat); Primary EPS $0.20 vs (-$0.41) estimate (meaningful beat). Note: S&P GAAP EBITDA actual (-$2.7M) vs $20.2M consensus reflects large non‑GAAP add-backs (e.g., litigation) that underpin company’s adjusted EBITDA of $25.1M.
• Guidance: FY25 pro forma net sales narrowed to $810–$814M (midpoint unchanged), pro forma adjusted EBITDA raised to $84–$86M (up from $82–$86M), and FCF guide maintained positive.
• Key drivers/catalysts: U.S. Spine Fixation +8% net sales and +10% procedures (7D FLASH navigation pull‑through, distributor transitions), U.S. Orthopedics +19% (TrueLok Elevate), BGT +6%. CFO indicated Q4 growth comp headwind vs a strong prior-year quarter, tempering sequential acceleration.

What Went Well and What Went Wrong

What Went Well

• U.S. Spine momentum: U.S. Spine Fixation net sales +8% YoY and procedures +10%; management credits 7D FLASH navigation pull‑through and distributor transitions.
• Orthopedics & BGT outperformance: U.S. Orthopedics +19% on TrueLok Elevate launch; Bone Growth Therapies +6% YoY, with fracture channel strength.
• Profitability/FCF traction: Pro forma adjusted EBITDA $24.6M (+28% YoY) with ~233 bps margin expansion; seventh straight quarter of adjusted EBITDA margin improvement; FCF +$2.5M.

What Went Wrong

• GAAP loss persisted: GAAP net loss of $(22.8)M (–$0.57/sh) despite adj. profitability, driven in part by $21.5M litigation/investigation costs.
• Mix/price headwinds: CFO cited a price decrease at a major account and unfavorable geography mix (higher international spine/biologics) as gross margin offsets.
• Sequential liquidity dip: Cash, cash equivalents and restricted cash ended at $65.9M (vs $68.7M at 6/30/25) as the company forward-placed some inventory to support 2026 start.

Transcript

Operator (participant)

Thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orthofix Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. We kindly ask that you please limit your questions to one and one related follow-up. I'd now like to turn the conference over to Julie Dewey. Please go ahead.

Julie Dewey (Chief Investor Relations and Communications Officer)

Thank you, Operator, and good morning, everyone. Welcome to Orthofix's Third Quarter 2025 Earnings Call. We appreciate you joining us. I'm Julie Dewey, Orthofix's Chief IR and Communications Officer. Joining me on the call today are President and Chief Executive Officer Massimo Calafiore and Chief Financial Officer Julie Andrews. Before we get started, please note that our earnings release and the supplemental presentation accompanying this call are available on the Events and Presentations page of the Investor section of our corporate website at orthofix.com. Also, this call is being broadcast live over the internet to all interested parties, and an archived copy of this webcast will be available in the Investor section of our corporate website shortly after the conclusion of this call. During this call, we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements.

We do not undertake any obligation to revise or update such forward-looking statements. Factors that could cause actual results to differ materially are discussed in our most recent filings with the SEC and may be included in our future filings with the SEC. In addition, on today's call, we will refer to various non-GAAP financial measures. Please refer to today's news release announcing our third quarter 2025 results for information regarding our non-GAAP results, including our reconciliations of these non-GAAP financial measures to our U.S. GAAP results. Additionally, and unless otherwise stated, all net sales percentage changes discussed will be on a pro forma, constant currency, year-over-year basis, excluding the impact from the discontinuation of the M6 artificial disc product lines, and all results of operations that we will refer to will be on a non-GAAP as-adjusted basis.

We have posted a pro forma P&L excluding M6 on our website to assist you with updating your models. We will update it on a quarterly basis for the remainder of 2025. Moving to today's agenda, Massimo will open with comments on our performance and business updates. Julie Andrews will then review the specifics of our third quarter results and our 2025 financial guidance before we open it up for questions. With that, I'll now turn the call over to Massimo.

Massimo Calafiore (President and CEO)

Thank you, Julie. Good morning, everyone, and thank you for joining us today. Orthofix delivered another strong quarter, reinforcing our track record of consistent execution and financial discipline. We achieved solid year-over-year and sequential revenue growth, led by strong performance in our U.S. spine and orthopedics businesses. This marks our seventh consecutive quarter of adjusted EBITDA margin expansion and sustained positive free cash flow generation, clear evidence of our disciplined approach to operational efficiency and cost management. In our U.S. spine fixation segment, net sales increased 8%, with procedural volume up 10%, both ahead of Q2 and the prior year. This above-market growth was fueled by the continued adoption of our 7D FLASH Navigation System and strong momentum across our spine portfolios. Lateral grew 24%, while posterior cervical and anterior lumbar both grew 17%, and MIS lumbar grew 18%.

We are seeing encouraging momentum from recent distributor transitions, which are expanding our commercial reach. Our top 30 U.S. distributor partners grew net sales 25% year-over-year in Q3 and 33% on a trailing 12-month basis, a clear validation of our go-to-market strategy and its ability to unlock accelerated growth. As we continue to optimize our channel, we are confident this trajectory will drive further market share gains and long-term value creation. 7D unit placements in the U.S. are up year-to-date compared to prior year, and our Voyager Earn-Out Program continues to outperform, with customers surpassing their purchase commitments by over 50% on average. The 7D technology remains a key differentiator, enhancing surgical precision and workflow efficiency, and is central to our ability to win share in a competitive market.

Now, let's turn to one of the most exciting developments in our spine portfolio: the limited market release of our new Virata Spinal Fixation System. Every aspect of Virata, from our proprietary pedicle screw design to intuitive instrumentation that integrates seamlessly with 7D FLASH Navigation, is engineered to optimize surgical workflow, boost surgeon confidence, and accelerate procedural adoption. All key differentiators that we fully intend to capitalize on to capture market share. To put this into perspective, the U.S. pedicle screw market, valued at approximately $2 billion in 2025, is projected to grow at a steady 4%-5% compound annual CAGR through 2030, fueled by an aging population and increasing spinal disorders. Like our successful Northstar Procedural Cervical System, we believe Virata will set a new standard in pedicle screw fixation.

Driven by its integration with 7D, we expect Virata will become a meaningful growth driver following its full launch in the second half of next year. Beyond Virata, we are advancing our data-driven deformity strategy with access to pre-operative planning and patient-specific roads beginning in Q1 of next year, further strengthening our competitive edge. Our orthopedics business also had a standout quarter, with U.S. orthopedics growing 19%, marking the fifth consecutive quarter of double-digit growth. This performance was driven by the successful global launch of TrueLok Elevate and supported by new product introductions, including the Fitbone Bone Transport and the Fitbone Trochanteric Lengthening Nails. We are proud to be the only company in the U.S. offering a complete suite of internal and external limb reconstruction solutions, and our dedicated focus on this $2.6 billion market is yielding strong results.

Our Bone Growth Therapies (BGT) teams continue to excel, delivering a bone market growth of 6%. By leveraging cross-selling opportunities and multiple access points to reinforce our market leadership position. Looking ahead, we remain focused on three strategic priorities. Sharpening commercial execution to drive deeper market penetration and adoption of our 7D FLASH Navigation System. Improving gross margin through targeted operational initiatives, and maintaining disciplined capital allocation with a continued focus on adjusted EBITDA expansion and free cash flow generation. As we look towards 2026, I believe we are well-positioned for our next phase of profitable growth. With a streamlined, differentiated product portfolio, optimized spine commercial channel, and unique enabling technologies, we are ready to deliver transformative innovation that benefits both surgeons and patients.

With a healthy commercial pipeline, well-defined and transformative innovation roadmap, and strong execution, we believe we have a clear path to sustained growth that outperforms the market, driving margin expansion, free cash flow generation, and positive shareholders' returns. Thank you for your time and continued support. With that, I'll now turn the call over to Julie Andrews to review our third quarter financial results and our 2025 guidance.

Julie Andrews (CFO)

Thank you, Massimo, and good morning, everyone. Before we dive into the numbers, a quick reminder: all net sales growth rates I'll reference today are on a pro forma constant currency basis, excluding the impact of net sales related to the discontinuation of the M6 artificial cervical and lumbar discs. These are non-GAAP financial measures, as outlined earlier in the call. I encourage you to review the reconciliations in our press release and the supplemental materials posted on our website, which include pro forma results through Q3 to support your modeling. In Q3, we remained focused on distributor transitions in spine and biologics and surgeon-driven innovation. Through disciplined resource allocation, we're prioritizing high-return opportunities that support share capture in U.S. spine and orthopedics, margin improvement, and free cash flow generation, positioning us for sustainable, profitable growth.

Total global net sales reached $203.4 million, a 6% increase over the prior year, driven by strong performance in our U.S. spine and orthopedic segments. Our spine fixation business saw a meaningful step up from Q2, continuing to outperform the market. Orthopedics saw strong results from Fitbone Products and the TrueLok Elevate launch. I will now take you through the net sales results by product segment. Global spinal implants, biologics, and enabling technologies delivered $108.6 million in pro forma net sales, up 6% year-over-year. Growth was supported by targeted distributor transitions and key geographies, which is positively impacting both our U.S. spine and biologics businesses. U.S. spine fixation saw increased procedure volume of 10%, partially offset by a price decrease at a major account, as previously disclosed. Propelled by expansion into new markets and deeper penetration within established regions, international spine fixation net sales grew by 86% year-over-year.

Bone growth therapies achieved $61.2 million in net sales, reflecting 6% growth, outperforming the market. We expect BGT growth to remain above market rates of 2%-3%, driven by new surgeon additions and competitive conversions, especially in the fracture channel. Global orthopedics grew 6% to $33.6 million in the third quarter, led by 19% growth in the U.S. as a result of the market release of TrueLok Elevate and the Fitbone Bone Transport Nail. International orthopedics grew 1%, consistent with expectations, given variability in stocking distributor and tender order timing that can occur from quarter to quarter. Moving down the P&L, pro forma non-GAAP adjusted gross margin reached 72.1%, up 80 basis points from Q3 2024, driven by the discontinuation of M6 and productivity improvements, partially offset by unfavorable geography mix due to increased net sales in international spinal implants, biologics, and enabling technologies.

Pro forma non-GAAP adjusted EBITDA was $24.6 million, or 12.1% of net sales, with year-over-year margin expansion of 230 basis points, led by the discontinuation of M6. As Massimo noted, this marks our seventh consecutive quarter of EBITDA margin expansion, underscoring the scalability of our model and operational discipline. We generated positive free cash flow of $2.5 million, ending the quarter with $65.9 million in total cash, including restricted cash, supporting continued innovation and financial flexibility. Moving on to 2025 full-year guidance, we are narrowing our full-year pro forma net sales guidance range to $810 million-$814 million, with a midpoint of $812 million. Unchanged from prior guidance of $808 million-$816 million. This guidance range excludes revenue from the discontinued M6 product lines and implies fourth-quarter pro forma net sales will be approximately $219 million.

These projections are based on current foreign currency exchange rates and do not account for any further changes to exchange rates for the remainder of the year. We are raising the bottom end of our full-year 2025 pro forma non-GAAP adjusted EBITDA guidance range to $84 million, with an updated range of $84 million-$86 million and a midpoint of $85 million. Representing 200 basis points of adjusted EBITDA margin expansion at the midpoint versus 2024. We continue to expect to generate positive free cash flow for the full year, excluding the impact of restructuring charges related to the discontinuation of the M6 product lines. Now for some specifics on P&L line items for 2025. We expect gross margins to be approximately 72% for the second half of the year. We continue to expect operating expenses to improve by approximately 200 basis points this year versus 2024.

We now expect stock-based compensation expense of approximately $28 million-$29 million, and adjusted depreciation and amortization of approximately $38 million for the full year, and interest and other expenses of approximately $5 million per quarter. In keeping with our standard practice, we anticipate providing formal 2026 guidance on our Q4 call in February. Delivering long-term shareholder value will continue to be paramount in 2026 and beyond, driven by our heightened focus on disciplined, profitable growth, positive free cash flow generation, and strategic capital deployment. Momentum in the spine, BGT, and orthopedics businesses is projected to continue, supported by a robust innovation pipeline, consistent commercial execution, and ongoing margin expansion efforts.

We remain confident in our ability to deliver strong operational and financial performance through the remainder of 2025 and believe our strategic positioning, disciplined execution, and resilient business model provide a solid foundation for sustained value creation in the years ahead. With that, I'll turn it back to Massimo for closing comments before we open the line for questions. Massimo?

Massimo Calafiore (President and CEO)

Thanks, Julie. I want to thank our Orthofix team and our committed commercial partners for their contribution in Q3. This was a strong and successful quarter. I am incredibly proud of our team's disciplined execution and the way we are strategically positioning Orthofix for continued success in 2025 and beyond. Our spine, bone growth therapies, and orthopedics businesses are demonstrating sustained momentum, reinforcing our confidence in a successful close to 2025. Positioning us well for 2026. With operational rigor, a solid financial foundation, and a clear path for innovation-led growth, Orthofix is well-positioned to deliver long-term value for our shareholders and advance our strategic priorities. Operator, let's now open the line for questions.

Operator (participant)

We will now begin the question-and-answer session. If you'd like to ask a question, simply press star, then the number one on your telephone keypad. We kindly ask that you limit your questions to one and one related follow-up. Our first question will come from the line of Tom Stephan with Stifel. Please go ahead.

Tom Stephan (VP)

Great. Hey, guys. Thanks for taking the questions. I want to start, I guess, two questions, one kind of near-term revenue, one long-term. Kicking things off with near-term, just on 2025 revenue guidance, B3Q on pro forma by about $3 million, but the midpoint of guidance was unchanged. I think 4Q revenue implies a slight decel to about 4% growth from 6% in 3Q. Julie or Massimo, maybe if you can talk about some of the moving parts with the implied 4Q 2025 revenue figure and maybe what held back sort of a flush through of the 3Q top-line beat.

Julie Andrews (CFO)

Yeah. Hi, Tom. Thanks for the question. We set our guidance where we feel it's appropriate for the year. I think we had a very strong Q4 last year, and we are up against a little bit of comparability. We feel like we've set it appropriately within the range of what we expect for the fourth quarter.

Tom Stephan (VP)

Got it. Makes perfect sense. One a bit more long-term, I guess. As we think about the 2027 financial targets on revenue, Julie, maybe to stick with you, can you just help us a bit with sort of the path to the 6.5-7.5% CAGR? Do we think about both 2026 and 2027 within that band to get there, or is growth maybe more weighted to either 2026 or 2027? If you can talk about kind of key puts and takes for 2026 on the top line, that would be great. Thanks for taking the questions.

Julie Andrews (CFO)

Sure. Thanks, Tom. We're not providing 2026 guidance today, but in speaking about our long-range plan, I think it will be a little bit more—it will be a little bit more weighted towards 2027. Primary drivers of that, we will have a full launch of Virata in 2027. We're launching that—we talked about launching that mid-year next year. That will be a full launch. In addition, we've talked a lot about the TrueLok Elevate launch, which we are now in full launch of, but that is a market development type of launch. We will see continued acceleration of that and deeper acceleration of that into 2027.

Massimo Calafiore (President and CEO)

Yeah, Tom, let me add some other—so more color. You see the momentum that we're getting with the addition of our new distributors. This is ongoing. It's very successful. We're going to still get benefit in 2026 and 2027. I think that the foundation of the company is much stronger since we started two years ago. The pipeline is very strong. I'm very optimistic about what we can achieve in the later year of our long-range business plan.

Tom Stephan (VP)

That's great. Thanks so much. Congrats on the progress.

Julie Andrews (CFO)

Thanks, Tom.

Operator (participant)

Our next question will come from the line of Mike Petusky with Barrington Research. Please go ahead.

Mike Petusky (Managing Director)

Hey, good morning. I guess I do want to just try to drill down on the strength in U.S. spine. Can you sort of talk about what you think are the most key drivers in that strong result? I mean, is it 7D pull-through? Is it the distributor transition? Can you just talk about what's driving sort of above-average market growth in U.S. spine things?

Massimo Calafiore (President and CEO)

Thank you, Mike. Look, I think that there are three key points for us. One, we are seeing encouraging momentum from this recent distributor transition. If you think about, if you drill down, the top 30 of our U.S. distributor partners grew net sales 25% year-over-year in Q3 and 33% on a trailing 12-month basis. This is a clear validation that the tough decision that we took starting our tenure are starting to pay off. All of this is bringing more capital-efficient commercial partners that can help us to drive the profitable growth that we want to achieve. At the same point, we want to be a company that leads with innovation. Our pipeline from the product standpoint is very exciting. There is a lot of support for what we are doing with Virata, a very successful alpha launch so far.

Of course, our pinnacle of our strategy, 7D, which keeps driving positive momentum. Our placements are up year-over-year. Our Voyager and our program is still being a very great success. Just remember that, on average, our customers are surpassing 50%. Of our customers are passing their commitment on usage of our implants. A great foundation to build up our spine business.

Mike Petusky (Managing Director)

Okay. Great. And then just a quick one for Julie. I would certainly expect, I guess, Q4 free cash flow to be strong relative to each of the first three quarters. I'm just curious, though, you had a very strong free cash flow quarter last. Last year's Q4. Is there any chance that you could exceed that figure this Q4, or should we model more conservatively? Thanks.

Julie Andrews (CFO)

Yeah. I mean, I think what we've guided is that we'll be free cash flow positive for the second half of 2025. We haven't specifically given a number for the quarters or specifically said what that number is. What I would say is I think I wouldn't expect it to probably be at the same level as last year. I think we're forward-placing some inventory to get a good start to next year. I expect a little bit more in capital usage and inventory from a working capital standpoint. But I would expect, again, that we'll be free cash flow positive for the second half of the year.

Mike Petusky (Managing Director)

Okay. Great. Thanks. That's helpful. Thank you.

Operator (participant)

Again, to ask a question, press star one on your telephone keypad. Our next question will come from the line of Jeff Cohen with Ladenburg Thalmann. Please go ahead.

Jeff Cohen (Managing Director and Director of Equity Research)

Hey, good morning. Thanks for taking our questions. I have one and a follow-up. Firstly, could you talk about distributor increases and transition, particularly domestically? Have you transitioned from existing ones to current ones, or have the current ones expanded?

Massimo Calafiore (President and CEO)

I think it is a combination. We start to consolidate our distribution to distributor partner in some areas. Instead of having multiple agent distributors serving the same account, we start to consolidate to the one that we believe can scale in the future. Of course, we look geography by geography in areas where we want to win. We can add or add new distributors to start to attack specific regions of the country where we saw that we did not have a good presence. I could say t1hat it is a combination of the two. Expansion and consolidation.

Jeff Cohen (Managing Director and Director of Equity Research)

Got it. As a follow-up, could you talk about this TBT with TrueLok Elevate as far as the one study that was published on increased peripheral vascularization? Would you expect there to be more studies and publications that are currently being done or in the future? Thank you.

Massimo Calafiore (President and CEO)

Yeah. We believe in clinical validation of our product. It is in the pipeline for us to participate. At the same time, we see a lot of interest in the surgeon community around the procedure. I would not be surprised if other centers are going to start to study the specific surgical technique. Very excited about the opportunities. There is a specific focus of our organization on validating what we do with Elevate. We are ready to build a great story around that.

Jeff Cohen (Managing Director and Director of Equity Research)

Perfect. Thanks for taking our questions.

Operator (participant)

That will conclude our question-and-answer session. I'll turn the call back over to Julie for any closing comments.

Julie Andrews (CFO)

Thank you, everyone, for joining us today. We sincerely appreciate your time and interest in Orthofix. If you have any questions, as usual, please reach out. We look forward to continuing the conversation next quarter. This concludes today's call.

Operator (participant)

This concludes our call. Thanks for joining. You may now disconnect.