Alphatec Holdings, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights: - ATEC is 100% spine focused, making decisions purely on spine and leading through proceduralization. - Q3 saw 30% growth, adjusted EBITDA of $26 million (13% of revenue), free cash flow of $5 million. - Surgical revenue growth was 31%, same-store sales (revenue growth in established territories) was 30%, new surgeon users were 26%. - Strong balance sheet with $216 million in cash. - Focus on clinical distinction to compel surgeon adoption, with progress in lateral, cervical, and deformity. - Deformity progress through EOS integration, including AI-driven alignment for pre-op assessment and patient-specific implants. - Valence system for procedural integration in spine surgery, expected to drive future growth.

Segment Performance: Total revenue for Q3 was $197 million, up 30% year-over-year. Surgical revenue was $177 million, growing 31% year-over-year and accounting for 89.8% of total revenue. EOS revenue was $20 million, up 29% year-over-year and 10.2% of total revenue. Adjusted EBITDA was $26 million, 13% of revenue. Free cash flow was $5 million. Trailing 12-month adjusted EBITDA is $81 million, 11% of revenue.

Guidance: - Raised full-year 2025 revenue guidance by $18 million to $760 million, with surgical revenue ~$684 million and EOS revenue ~$76 million. - Expect full-year 2025 adjusted EBITDA of $91 million (12% margin), an $8 million increase from prior guidance. - Self-funding investment in instruments and inventory to support future revenue growth. - Well-positioned to meet 2027 targets of $1 billion revenue, 18% adjusted EBITDA, and $65 million free cash flow.

Risks: - Uncertainties related to market disruptions and competitive dynamics. - Impact of tariffs on cost of goods sold, estimated in low single-digit millions for the full year. - Execution risks in integrating technology and expanding the sales force.

Q: Congrats on a nice quarter. Maybe just first starting off on the cash flow. Just talk about how you see next year playing out from a cash flow perspective given the strength over the last 2 quarters?

A: Yes. Thanks for your question, Vik. No, I think as we look at our long-range plan commitments, I think our cash flow expectations for next year are probably in that $20 million range on free cash flow. So on our path to $65 million of free cash flow next year. I think when you look at the amount of revenue growth that you might generate from a guidance standpoint and the drop-through on EBITDA, I think that gets you in that $20 million range. We're not at the point here where we're giving guidance, but I think as a construct, that's a good spot to be thinking about.

Q: Your comments around LRP, Todd, or maybe even for Pat here. I mean, just given kind of how you performed this year, can we expect an update to your LRP next year given that you're tracking well ahead of your plan?

A: Yes, Vik, I think as we're thinking about it, we're trying to contemplate when the right time to do that is. And we do think towards the end of next year would be a good time to do that as we enter 2027 and get 2026 mostly under our belt. And so we're thinking towards the end of next year, we'd come forward with an update to the long-range plan.

Q: Congrats on a really strong quarter. Wanted to get your thoughts on maybe the competitive landscape. And obviously, the changes -- the recent changes, and there's been a bunch have sort of, I'd say, consolidated. It looks like consolidated the major scale players in spine down to, I guess, 3, I want to say. So how do you expect that to potentially play in your favor? And perhaps like what other opportunities do you see for consolidation -- implications of consolidation, that sort of thing?

A: Yes. I'll jump on the first part. One of the things that is fascinating is that, first of all, we love market disruption. So if there's anything that you know that we could do to further that, let me know. And I'm kidding. The -- but the reality is these are multiyear dynamics. And it's like they never happen overnight. And so I even think J&J, the announcement was it's going to happen over a 2-year period. And so it's one of those things where it's like our focus is on just being us. We have so many catalysts that we need to focus on. We'll be opportunistic with regard to sales hires and the like, but it's just more disruption that candidly, we welcome.

Q: Congrats on a very strong quarter. So it looks like you had the biggest beat versus consensus in 3 years. It's also a seasonally slow quarter. Can you maybe just talk a little bit about what you're seeing in the market, the health of the spine market as well as some of the competitive dynamics? If you can comment on who you're taking excess share from during the quarter?

A: I'll start and provide Todd the ability to clean up what I mess up. The -- I think what's going on is a reflection of the foundation that we've built over the last several years. And I think you're starting to see some of the market disruption come through. I think the spine market is what it is. There's not a ton of change to that is my presumption. We're not seeing anything unique per se. I think the volume of surgeon users just continues to increase, and it's a proxy for a future business. And so when you start to see the volume of new surgeons added, you start to see the same-store sales, we so value the people who have been at this for a long time and watching them continue to be successful in their marketplace is a very big deal. And so I think more than anything, it's like, I think we're taking share from a lot of different companies. But I think what you're seeing is just kind of the -- we always say that there's an 18- to 24-month lag in this business. And so you're seeing kind of decisions that we made 18 to 24 months ago being reflected today. And I think in 18 to 24 months, you'll see decisions we made today reflect in the marketplace. And so I'll defer to Todd.

Q: Congrats on another really strong quarter. I just had a quick follow-up on, Todd, your commentary to that prior question. So you were talking about $120 million worth of annual growth. It sounds like that could be conservative. But the question is that's kind of right around where consensus is. So it sounds like you guys are feeling pretty conservative. Is that the right takeaway?

A: I think you're saying consensus today versus our current guide. Consensus -- [ 2026 ] consensus versus our current [indiscernible]? That would be the math. That is correct. So I feel like that's -- I think of the 2 data points I laid out there, $120 million and $130 million like that feels like that would be on the low end of that range.

Q: Congrats on a great quarter. You noted some discipline with sales team additions. If you could maybe provide some color on how you are being disciplined in those hires? And then also, do you plan to add to the capital sales team for the upcoming Valence launch?

A: Yes. I'll go ahead and start, and I'll let, again, Todd to clean up what I mess up. The -- so the first part was the -- just the discipline around the sales hiring. I think we have a very good algorithm in place just in terms of minimizing the volume of time from hire to them being effectual. As you appreciate, as we talk about disruption taking time, these guys oftentimes have noncompetes and other issues that preclude the immediacy of our impact in a specific market. And we still have a number of marketplaces where we are an absolute nobody. And so it's nice that what we'll see is we'll see access granted first. We'll hire sales heads to initiate a utility. And then by the time the people are offered noncompete, their influence just becomes significantly greater. And so I would tell you that our access to hospitals is tremendous and are continuing to expand. And so I have several markets in mind that we are in our infancy and just kind of just getting going. And I would say a lot of them in the Northeast. And so that's kind of the thinking on the sales hires. Again, very -- trying to be as methodically and as thoughtful as we possibly can based upon, as Todd talked about, just a lag in terms of the influence. He talked about the surgeon engagement. And then 2025 is ultimately reflecting what we're doing or previous years are ultimately reflecting in what we're doing today. It's the same impact from a salesperson's perspective, clearly. From a Valence perspective, we're going to add some capital heads, not a ton of them. What we want to do is integrate the thing procedurally. It's -- this system is very simple, and it's simple enough to where our guys can run it who are on the ground. Making sure that we have proficient salespeople that ultimately can run the entire case is of significant importance to us. And so -- again, we'll have them where we do sell capital, we will have people in place to ultimately help facilitate that process, but our expectation from an execution perspective is the people in the room.

Q: I wanted to follow up on deformity. Todd, I believe you mentioned in the prepared remarks that being an early revenue driver. And Pat, I appreciate your comments on the portfolio kind of road map to an earlier question. But Pat or Todd, how should we be thinking about kind of the timing of when that opportunity really starts to take hold sort of as we think about, I guess, contributions to revenue growth?

A: Let me start on the subjective, and I'll let Todd provide any objective he'd like to comment on. When the foundation of your strategy is based upon EOS and EOS Insight, what we want to see is the expansion of units and the expansion of availability of EOS and EOS Insight. And so where we have EOS units, we have a marked increase in market share. And so that's because of deformity. And so what we're seeing is just the opportunity to continue to further that expansion and that market share in places where we have systems placed. And so a big part of our effort and interest is to continue to push that. And so I would tell you that as I think about it, a big proxy for significant influence becomes the information that drives improved care. And so that's the whole clinical distinction element that we love to communicate about. And so there are product additions over the next 24 to 36 months that will continue to elevate the sophistication of not only the preoperative elements, but the interoperative elements and then the ability to assess and the ability to automate -- collect automated data. And so we think that those things will drive an outsized footprint of our influence on the deformity field.

Q: Guys, congrats on the great quarter. I just want to touch up on the EOS a bit since I see the great revenues you guys had in third quarter, which is typically a slower quarter for hardware sales. I was wondering what are the primary drivers behind this? And do you think this will carry over into the next quarter or 2 as well? And maybe thinking a little bit on the longer-term outlook as well. I know that for the EOS, you guys were initially primarily focused on academic centers. Has that changed so far? Or are you moving on towards broadening the potential targets as well?

A: Yes. Those are good questions, Sean. It's fascinating, right? It's one of those things where I would tell you that the thing that has, I think, inspired EOS sales is what's going on from an EOS Insight perspective. I think we were at the Scoliosis Research Society meeting, and it was a standing room dynamic. And it's a who's who that ultimately, I think, pushes forward a full body biplanar low-dose scan, which we're the only guys who have that. And so for us to be able to create informatics around that is really the driving force behind people's interest in what we're doing. And I would tell you it's both -- it's both an academic and candidly, a private interest. I think it probably has -- the initial interest is mostly around deformity. And I think it's going to extend way past there because there's a joke in the spine business that all surgeons are deformity surgeons. They either create them or fix them. And so even in short segment surgery, the value of EOS is highly valuable. And so what we're seeing right now is probably a predominance of academics, which, again, we love because now we're getting into being more relevant within the academic sector. We're seeing some privates. And then we're seeing some upgrades from previous pediatric institutions that start to see the software value that we're creating with EOS Insight. And so it is -- I would still say in the very early phase of the whole EOS experience, and I expect it will just get more robust.