Alphatec Holdings, Inc. (ATEC) Earnings Call Transcript & Summary

Thanks so much for joining, everybody today. We've got Alphatec Holdings here again with us this year. We got both the CFO, Todd Koning and we have the VP of Finance with us as well.

So I wanted to jump into something that we don't usually lead with. I think a lot of small-cap med tech companies do convertible raises and everyone sort of looks at them and goes, well, I don't know about that. I'm not sure if I love it. I would much rather have another mode of financing or something like that. But in this case, you completed a financing recently that we thought was a great crossing an important thing off the list. I just wanted to give you an opportunity to sort of just run through what does it mean in terms of like the way you're looking at risks between last year, this year and the end of this year. And what does it mean to the P&L and your ability to continue to operate and execute on your plan that you laid out long term last year and then new guidance just recently.

Yes. Thanks, Matt, and thanks for having us here. A pleasure to be here with you. We just completed the refinancing. So I think the important note here is the transaction we did is a refinancing. And the point of the refinancing was we had some 2026 notes that were due in August, and so we wanted to refinance them before they got current. So that really meant we needed to do a refinancing before the summer of this year. And so coming into 2025, we thought it was important to look at the windows of opportunity that we had to do that refinancing. We did that and we looked at post our Q4 earnings, so kind of the March window and then we saw a potential window post Q1 earnings, which would be kind of the May, June window. We thought that to the extent that the equity is in the right spot, we thought sooner is better than later, just didn't really want to accept any incremental market risk to the extent that we waited. So we ultimately chose to do one in just, I guess, a week ago now. And to your point, I think really happy with the execution. So we raised $405 million to refinance $360 million worth of 2026 outstanding notes. The existing notes or the old notes had a 0.75% coupon attached to them. We also raised capital again here at a 0.75% coupon, which we thought was a great outcome. And so the way we used the proceeds was we bought back about 80% of the existing notes, which is kind of the creeping tender rules or essentially what the lawyers would allow us to buy back, leaving us about a $63 million stub. We used about $40 million to buy a capped call, so dilution protection all the way up to about $23.5. And then the remaining we paid some fees, of course, to the bankers as you do and then that leaves us just about $80 million on the balance sheet to address $63 million worth of remaining convertible notes and so we probably got a little bit of a positive carry here until we take care of the existing notes, but I feel good about where we're at and what the transaction allowed us to do, which was really take a near-term maturity and push it out to 2030. And so we think it clears the desk on the balance sheet from our perspective.

Sure. No, I agree. And it kind of like it allows you to sort of get right back to focusing on execution. And execution looks like continued strong growth and outperforming in Q4 in cash flows and lining up 10% EBITDA for 2025. Maybe talk a little bit about what some of the drivers are first on the growth side that kind of enable you to kind of maintain this high level of growth?

Yes. So as we looked at our $732 million of 2025 revenue, that is a 20% grower, as you said. That's comprised of both surgical revenue growing just a little bit north of 20% and our EOS contribution of about $75 million in 2025. And so our surgical revenue growth of 20-plus percent is underpinned by mid-teens procedural volume growth and kind of mid-single-digit revenue per procedure growth. And so I think as we exited last year, I think we saw procedural volume growth kind of north of 20% or about 20% in the fourth quarter and showing strong growth, obviously. And so we feel pretty good about where we are. In the fourth quarter, we grew about $34 million of year-over-year absolute dollars in surgical revenue, which was really a record for us in terms of absolute dollar growth exiting the year. So I think kind of coming into this year, feeling good about the setup and where we are relative to executing to the plan.

Okay. And I think one of the questions I get often is this is a company that does not yet have a robot in the market, but is delivering kind of best-in-class spine growth in a spine market that might be growing low to mid-single digits at best, probably closer to low. The question is how -- what kind of runway do you have to continue to grow at this kind of pace without this perception that at some point, you're going to need a robot. You have one that's kind of coming on a broader market release during this year, but maybe talk a little bit about understanding that you have mid-teens volume growth and sort of mid-single-digit revenue per procedure growth, but where is that coming from?

Yes. So I think you take a step back and you realize we're an 8% player in the U.S. market. And I think that tells you alone, there's a ton of opportunity to grow, like we'd tell you 92% to go. So I think the opportunity to grow is clear. And where we have seen growth and where we have excelled is in our lateral franchise. And so if you look at the existing lateral market, we've sized that to be about $1 billion, and it's probably growing high single digits itself and so we're probably in that 15% to 16% market share of that $1 billion lateral business and there's about $2 billion of incremental traditional posterior approach surgery that we think can ultimately be addressed with better outcomes through a lateral adoption. And so we think that, that lateral market can grow significantly from $1 billion to $3 billion. And so we think that, that is like the crown jewel of the kind of the spine market where we excel and where our surgeon adoption is really being driven from. And when you look at 20% surgeon adoption year-over-year, I think that is a strong signal that what we're doing truly does help surgeons do better surgery, which is what ultimately drives them to adopt the procedural approaches that we've developed. And so when you see that, you get great adoption and I think really sticky adoption in our lateral franchise, you begin to see what we kind of call the halo effect, and they begin to use other procedures. And so I think on the back of our lateral sophistication has really been where we've grown and where I think we're going to continue to grow. And of course, we've got other opportunities as well. But that has been the history.

Got it. Just maybe on the three opportunities, I mean, it's not -- maybe not just three, but three big ones. If you think about what's not in the revenue number today, I mean, Todd is talking about the opportunity in the U.S., largely in the U.S. surgical business, which is obviously the biggest chunk of our business. But you think about Valence and the impact of the robot being launched later this year. From a revenue impact standpoint, that's in '26 and beyond. We think about the impact of EOS Insight, and that was just launched this last year. We're in the early innings of rolling that out. Maybe we'll talk more about that. But that -- from the pull-through perspective, that revenue is probably out in '26 and '27. And then you think about the ramp in our OUS business, our surgical OUS business, and we're just getting started there. We talked about in Q4 doing our first case in Japan. And so I think that will be a growth catalyst in the next couple of years as we turn that business on.

Okay. And just to put that sort of lateral market and lateral market expansion into perspective, I guess, lateral market has been around for a while now, NuVasive short cut its teeth more or less sort of really created that market. But what is interesting, I think, around Alphatec is that, is that there was a -- there's a segment of growth, I think you mentioned, docs who like to operate on patients from the posterior, not really wild about having to flip them around during the procedure from lateral to prone. That opportunity is really, is being led by Alphatec, and it's really only got one other competitor at the moment kind of following. And so one way to look at this would be like, well, the lateral market is growing high single digits. How can you be growing in the 20s? But the reality is the lateral expansion to include these posterior patients is growing quite a bit faster and you're kind of leading that. Is that a fair way to look at it?

Yes. I think the expansion into lateral is definitely favoring us. It's accruing to us more than anybody because of -- I think PTP is a big piece of that. And keep in mind, to do lateral surgery, you have to have a neuromonitoring device so that when you place a retractor, you don't run into a nerve. So we have that technology as does now Globus, formerly NuVasive has that technology. What they don't have is the ability to monitor the health of those nerves intraoperatively which allows you to avoid the most common complication associated with lateral surgery. And so I think our ability to monitor those nerves intraoperatively has been one of the reasons why our share take has been so sticky and why also the expansion of that market has really accrued to us more than anyone else.

Okay. So that's sort of top line. Maybe kind of understanding a little bit about the sort of middle of the P&L. Where are you seeing leverage? What's enabling you to kind of turn the corner here, double-digit EBITDA, positive cash flow in the fourth quarter? Like what are the levers in 2025 and '26 that enable you to keep driving towards positive cash flow?

Yes. So we really have two primary levers of margin expansion. And one is the improving variable expense cost, the variable selling expense cost, which is really a function of how we've built our sales agent commission plans, if you will. And so we've structured them with a component for what we kind of call base sales. So for whatever you sold last year, that's your base sales for this year. So you get an industry competitive kind of low 20s percent rate. And then we'll pay extra points for growth. And so that incents people to grow. But as the growth ratio as a percentage of total gets smaller as they get bigger, that averages down plus the base rate kind of walks down over time. And so that's kind of a contractually understood process that we've set up, which gives us confidence in our ability to deliver on the variable selling expense. And then the other thing we've done, and this may be a little bit less appreciated by folks as they look through our history, but we've built a significant infrastructure early in the build of the company so that we could ultimately get to a meaningful scale in the marketplace to be relevant. And we've clearly hit that point where we're relevant. And what we're seeing today and what we've been seeing for a while now is the benefit of leveraging the scale of the infrastructure of the business. So I kind of speak of our distribution footprint in Memphis. The facility we have in Carlsbad and really the support functions, whether it be finance and accounting or regulatory or our quality system. Those are functions, sales training and surgeon training. Those are functions that have been built out. And as we grow revenue, we don't have to grow those functions at the same rate of sales, much less lower, in fact. And so we're able to get a lot of leverage off of the infrastructure of the business we've built. And so you're seeing the margin expansion a function of revenue growth dropping to the bottom line and an improved selling expense ratio.

Okay. And maybe in terms of leverage, growing rapidly now, not to take too much from the history of NuVasive, but one of the challenges there was they were growing rapidly. Did not build out the portfolio or bag of products as widely and as quickly maybe as they should have or maybe just struggled because the focus was always on lateral. I'm not sure. But what kinds of opportunities are you creating to kind of pull through more? You mentioned like the halo effect and using other products. When did those become a more important part of your pipeline?

Yes. Do you want to talk a little bit about the portfolio and how we approach that?

Yes. So some of the history, and I think you're alluding to it, Matt, is you think back to the NuVasive experience and NuVasive launched lateral 2004, 2005, but it wasn't really until 2015 that they had a relevant really competitive posterior fixation system. And so one of the things that Pat did early on in the ATEC experience was we actually had a very competitive -- we top-of-the-line fixation system in InVictus that we launched in 2019. And so -- and we launched PTP in 2020. And so when we launched PTP, we had the system ready because you want to pull through the whole procedure. And that's one of the things that NUVA never did a great job doing -- we speak from living that. It didn't pull it through the way we could have. And so I think we've tried to address that with having a fixation system, having the TLIF and PLIF. As an example, doing a PTP, you may still want to do the L5-S1 fusion from a TLIF approach because you can't go over the iliac press in a PTP approach. And so having the right TLIF expandable cage to do that is important. And so having the right TLIF expandable cage to do that is important. And so I think having those products and the portfolio ready to do that is something we've been able to capitalize on and pull through in our lateral procedures. Okay. So for folks who are looking at this maybe without having spent as much time in spine, you have the interbody part of the procedure that opens up the vertebral physicians, the 2 bones to grow together and you have fixation from posterior and both of those kind of important parts really of the construct. And if we think of, I don't know, the average implant revenue per case or something in the low teens, a big chunk of that revenue per case opportunity comes in the form of the posterior screws and rods and things that always call fixation. So obviously, that half of the business was a bit of a weak spot in the original NuVasive strategy, which makes a lot of sense. You've had that from the beginning. In addition to that, I mean, what other opportunities do you have to sort of grow and I'm not thinking today or tomorrow because you've got a lot in front of you just in lateral and prone lateral. But where and when do we start to see, I don't know, cervical or other things becoming more of a priority just because once you have the relationship with the doc, and once they like this system, they're more willing to if you have a decent bad system, they're going to want to use that as well.

I think one of the opportunities that we see is deformity. And you think about the EOS footprint when we bought that asset was in pediatric and academic institutions where they're doing deformity, everything from pediatric to adult deformity. And having the products that fit there, I think and we think we can take a procedural approach to that like we did with lateral. And so bringing the EOS Insight tool to preoperatively plan post or intra reconcile and then postoperatively monitor is a big part of that. But also, an AIS positioner and a small stature system and having all those things bring them together. Todd talked about SafeOp earlier and integrating SafeOp into deformity. There's a big need for monitoring motors during a scoliosis fix. And so like bringing those things together in a way we did with LTP or PTP into a procedure, it seems like a big opportunity for us and want to kind of try and run that play in that deformity space.

Okay. That's great. One of the things that caught a lot of attention last year was the deployment of cash and capital. I'm sure that was a big topic of conversations throughout most of the year. And I guess 2 things happened in the back half. You executed really well on the top line and also executed really well in terms of your commitment to cash deployment. Where are -- we now as you kind of turn the corner, we begin to annualize what was a big outlay in the first quarter of last year. Maybe talk a little bit about how Q1 this year should be different and kind of where we go from here in terms of cash and capital outlay deployment.

Yes, absolutely. So I mean, you're right. I think we finished the year in a real positive note, generated $9 million of free cash flow. That was fantastic. Great to see and I think a validation of what ultimately, we knew that we could do. So felt very good about that. I think that's a good signal for things to come. And I think as we set 2025 up, it's truly an inflection to positive cash flow experience on the full year. You look at or when we came out of the third quarter, we messaged breakeven cash flow for the year. And I think what we heard was people would do a little bit of a bell curve and say 0 is in the middle and equal weight, they're worse and equal weight, they're better. And so what we messaged really coming in or out of the fourth quarter here was cash flow breakeven or 0 is our floor. And so that's why we're saying cash flow positive is the commitment on 2025. And so clearly, the seasonality would tell you that Q1 will be a cash use quarter. So we expect anywhere from $15 million to $20 million of cash use in the first quarter, but then cash flowing thereafter. And so I think as we continue to refine our cash flow modeling and our forecasting, I think we feel increasingly confident in our ability to have visibility to that to, I think, create the kind of cadence and the experience that's necessary for success.

Okay. And a couple and just for context, that's down like over 50% from last year?

Yes. So I think on the full year, we're at $128 million last year. And so going from a negative $128 million to 0 or plus 1. I think that's a significant improvement. I think where that is seen in the cash flow statement is we deployed $140 million of instruments and inventory. So that shows in PP&E and inventory. This year, we're going to deploy about $50 million of instruments and inventory. And so a significant improvement in that because we're essentially utilizing the deployment of those assets this year and getting revenue off of that investment. And so I think I'd tell you finally there, the investment in sets and inventory that we had made over the last 2 years should set us up for a very strong ability to hit our revenue commitment. And in fact, it probably supports or it does support a revenue number that exceeds what we've guided to. So I think we can clearly grow into our asset base and would reflect a number that's better than the guidance from that standpoint.

Excellent. And then another thing that's happened, I guess, you've absorbed a certain number of reps last year. That sort of changed the nature and sort of like tone of case delivery and revenue per case delivery during the year. There's always, I guess, some ebbs and flows around a transition to new sales reps. So you're annualizing that. So at this point, you need new reps to grow. Obviously, if you're growing as high above the market as you are, just you have to have new reps to grow. Are we back to kind of a steady state adding of reps? Do you feel like you'll see some stabilization of the reps this year compared to what we went through last year?

Yes. I think the investments we made last year and kind of exiting 2023, the people that we brought on in geographies really being kind of greenfield spaces. Those investments and so they have an outsized impact in their territories and some of those guys are coming off their non-competes this year and so as we turn the year. So all of that, I think, should be to our top line growth benefit. I think to your point, though, we'll continue to add sales reps to support the surgeon adoption that we're experiencing. And I think we'll continue to add those in the areas that exist today as we kind of build upon the investments we've made in the past.

Okay. Well, with that, we're at time. So we should probably call it, but really appreciate you coming again this year.

Thanks for having us. Thank you.