ATEC - NASDAQ

Good afternoon, everyone. And welcome to the webcast of ATEC’s Second Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP, pro forma or adjusted measures. Reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in today’s press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. Leading today’s call will be ATEC’s Chairman and CEO, Pat Miles; and CFO, Todd Koning. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. Thank you. Now I will turn the call over to Pat Miles.

Thanks so much Danica and welcome everybody to Q2 2023 financial results call. I would ask you to review the forward-looking statements at your leisure. I got to tell you, this has been a very good quarter. So our growth has been fueled by our spine focus. So if you look, we had $117 million in Q2 ‘23 revenues, which was a 39% growth, 41% surgical revenue growth that would exclude EOS and a positive $1.5 million adjusted EBITDA. The highlights are that we extended the lateral momentum, really the strongest contributor to our Q2 growth, launched ALIF access to proceduralise LTP and midline ALIF approach for L3 to S1. We acquired navigation enabled robotics platform, which we'll talk a little bit about. We drove $50 million in EOS revenue, which was a 24% growth, we achieve 32% volume growth and 7% growth in revenue per procedure, and expanded adjusted EBITDA margin by 1100 basis points. Our commitments, really, since ATEC recreation have not changed, but kind of under the auspices of spine focus, we've been able to continue to create authentic clinical distinction. And so the commitment of clinical distinction continues. There's nothing better than being aligned with your customer. And, spine surgeons commit their career, their vocation to spine surgery. So being aligned with them in terms of being spine focus is big. And so we continue to compel surgeon adoption. And I would say same with regard to being elevated by the whole spine focus thing is just being aligned with the sales force and being sophisticated with regard to the subject matter in spine becomes very, very important. So one of the great misnomers in spine is that it's commoditized. Spine is not commoditized. If something is commoditized, oftentimes, there's great predictability associated with it. When you see a 10% to 15% revision rate in one to three years in degenerative surgery, I would say that that's not a predictable environment, at least it's not a durable environment. And when it's 25% to 30%, in two to five years, I would see the same. And so as we look at, at the opportunity in front of us, we think we can drive predictability, reproducibility and durability by mitigating variables. And so when you start to think about how do you mitigate variables, and how do you elevate procedural sophistication, and spine is a very challenging environment in doing so and so our view is what you do is you take an informatics view, and you create an ecosystem and you control variables from end to end. And you start off preoperatively. And you start to look at the measures of a patient, you start to plan against a patient early on so diagnostically and preoperatively. And then what you do is you do everything it can interpretively to mitigate variables and I think we continue to demonstrate the things necessary. I think the acquisition of the navigation enabled robotic platform would suggest gosh, we can continue to make progress on that front. With the continued evolution of our SafeOp platform, the neural navigation and nerve health tool, we continue to get better on that front as well. So not only pre op and interrupt, but also we're trying to inform future surgery with regard to the post op experience. And so I think that there's a, there's a great opportunity to create greater predictability in a field that candidly currently lacks it. But I think you know, what is important is to talk about why is ATEC continues to grow, significantly outpacing the marketplace. And I would tell you, the driver is lateral. And it's, if you look at all of the clinical data out there, it's tough not to think that in certain indications for surgery that lateral is just not better. And so as it relates to blood loss, less blood loss as it relates to hospital stay, less hospital stay, and days back to normal activity in terms of just ambulating. It's been demonstrated to be better. And that's in 500, peer reviewed publications. So I would say make no mistake, the lateral market is the most coveted market, it is the growth market. And the great part is, as other companies are out celebrating anniversaries, and it's often the wrong date, what ATEC is doing is setting a new standard and lateral. And that's, it's the thing that we do best because we have great experience in the space where the very people who created the first generation, led by Dr. Luis Pimento, who was the original lateral pioneer, and is our CMO. And so there's nothing better than having the most versed, most sophisticated in it. So we're applying decades of lateral experience to address really what we did in the first generation. So what we're doing is we're saying what are the goals of surgery and the goals of surgery are decompression stabilization and alignment. So how does PTP, in essence, continue to evolve what we did initially? Well, the great part is, is with the SafeOp platform, we're addressing the neural retraction complications, the patient that we're doing that PTP and is a much more familiar position to surgeons, and it mitigates in efficiencies. If a surgeon does a decompression, which is again part of the goals of surgery, they're in a prone position, so it's a better position, your ability to stabilize, meaning put posterior fixation or pedicle screws in is in the prone position is the most favorable place to place pedicle screws. Our ability is patient positioners, to control the patient positioning, again, is something that we've learned and applied to PTP. You don't have to turn the room over. And clearly the sagittal alignment is better. Our view and it really is not even our view, it's an undeniable truth is you're not serious about market participation in lateral surgery, unless you have automated neuro monitoring. It's a foundational requirement. It's not a nice to have. So ours is designed to directly address the most common documented risk, which is femoral nerve complications in lateral surgery. And so it is one of the things that we really celebrate, which is having unmatched organizational neural monitoring expertise, we have the best of the best. We have great experience in this space and we just continue to get better. And so when -- when we see people knocking off a retractor, meaning copying our patient positioners, we know they can't copy the neuro monitoring. Taking -- capturing a small signal in a very noisy environment and then interpreting that and providing actionable feedback is the magic. And without doing that you're not ever going to be a serious participant in lateral surgery. So, we covet the SafeOp platform and what's going on. And also think about it as what we're doing is, is we're taking an informatics and driving greater predictability with this tool. And I think there's going to be a consistency with regard to help people look at ATEC in terms of what the competencies are. But I think part of being the most committed to an environment, meaning lateral, you have to do research, and you have to do education. And so I would say that we're the most committed to both the research and education within the field. And I think it's been demonstrated some of the most recent publications are PTP for adjacent level disease. PTP, versus TLIF, PTP verse, the standard first generation lateral that we did. And so there's 27 peer reviewed publications currently. We've trained over 500 surgeons in 2022. And we continue to host really important events. We have a PTP counsel that continues to provide feedback and we apply the learnings as expediently as we possibly can, as well as how to edit Duke Emory conferences is well. Which, again, I think just illustrates or demonstrates a commitment to lateral surgery. And so I would tell you that we are quickly becoming the lateral standard bearer. And I think the bottom line is PTP is really more aligned with the goals of surgery, and really enables us to expand the marketplace in a very meaningful way. And so, really from just participating in the $1 billion segment to making it a $3 billion segment based upon the addition of addressing pathology that would historically been addressed by PLIF and TLIF where you would need to do a post some type of a posterior decompression. So I would say that only ATEC is committed to the -- at the outset to improve lateral challenging it's pioneers to better meet surgical requirements and address hurdles. We have a solution designed to avoid the complications, which is the SafeOp part, which I talked about a minute ago. I think, the whole applying our learnings is, I will tell you a cultural reflection of who we are here. And the other thing is, is obsoleting our last best efforts. So when someone copies this, they're going to copy our last best effort because we're going to play our learnings forward. Now, the transforming expanding the market, the surgeons who are accustomed to more conventional techniques. And so really, our interest is to continue to advance the most coveted market, which is lateral surgery. I think the other way that we've been rewarded as I think when you create lateral competence, it earns a surgeon's trust, and we deem that to be really a halo effect. And when we say halo effect, what that means is it expands ATEC product utilization in more conventional procedures. And so that becomes very, very valuable in terms of reflecting their momentum. And so I previously talked about informatics mitigating variables and the experience in translating, say SafeOp in terms of the information and how it drives safety or looking at how we're going to integrate the navigation enabled robotics into lateral surgery. But EOS is really kind of staring at us is such a great opportunity to expand its influence in the reasonably near term. And the first things that you're going to see mid ‘24, is you're going to start to see automated alignment reports, automated 3d models, automated surgical planning. And the option if you want to is applying the surgical planning elements to a patient's specific rod. And so when we say automated alignment, what we mean is as you as the as the biplanar view is taking on the image, our ability to immediately add public parameters, and the measurements to assure alignment are immediate. And so this opportunity to continue to add informatics to the planning element becomes very, very apparent. The other thing in ‘24 is going to be the assessment and follow up. And so that will be a big part of what you're going to see in 2024. So we expect a lot of influence by EOS next year. And then subsequent to that is going to be things like bone quality, if you're going to stabilize the spine, which we said that goals or decompression stabilization and alignment, you're going to want to know what the underlying material is. And so we feel like having a bone quality measure is very valuable. We'll also integrate an interpretive rod bending element to continue to make refinements in the alignment efforts. We believe that there's a configuration opportunity to lessen the number of assets required in the room. And then the great future is really a predictive analytics foundation that enables us to provide the surgeon data, like patients that have had a technique that have like pathology, and give them a foundational view with regard to a rich data set. We're building the foundation for that rich data set, we recently got at a station for a SOC 2, which is an IT requirement ultimately housed data. We're on our way to high trust. We have numerous accounts currently adding patients today that have EOS edge to our data set. And so we will have the most rich data set in spine. And I think having been at this for a very long time, all of the data collection forever had been manual. And so when I make a big deal out of the automated elements, what we're telling you is that we're collecting objective data in an automated way and it's going to make for a more assured data collection source. And so we talked a little bit about the navigation abled robotics. The integration of it is right on track. Our learnings continue to affirm the investment thesis, we're thrilled about the team. They have deep expertise. And our ability to advance the integration and development is very, very apparent to us. We expect the initial experience in late this year, following regulatory clearance for Invictus Group placement, we will continue to expect free hand navigation clearance in mid to late 2024. And then full integration into lateral procedural workflow in ‘25. And so we remain totally bullish and profoundly enthusiastic about what's going on that front. So I think from a creating clinical distinction, a ton of momentum and a ton of excitement. In terms of compelling surgeon adoption, we went from about 1.8 products per procedure to now it's at 2.4. So I think that convoyed element of the way that we view surgery is coming to fruition. Also, if ever you're wondering about the demand, the demand for educational experiences is exceedingly high. And so we had 150 surgeons in Q2 and there remains a tremendous amount of interest in what we're doing. As it relates to elevating distribution. I can't be more excited on this front. I think that we talked about spine focus, and you talk about opportunities to grow. We're a less than 5% shareholder at this point. And we're so well positioned from a spine focus perspective, we celebrate the uncertainties in the marketplace, we think that they improve the quality and quantity of the funnel of salespeople interested in working with ATEC. We will continue to strategically fill in large geographic gaps and will continue to compel surgeon adoption. And again, I think that this speaks to the to the spine focus, which candidly, others don't have. Another very, very affirming view is, if you're going to come join us the likelihood of you growing at 38% is very high. That's the percentage growth rate of our same store sales. And so the thing that we love is the fact that the very places that we have today are growing very fast. We're not growing through just the addition of people. And so our interest is to advance the clinical aptitude of the team. Earn increased share of existing surgeon users and further penetrate adjacent geographies within existing territories. And so would love for you to join us. We will have an innovation update at NAS on October 18 in Los Angeles, and so consider this an invitation for you to join us. So with that, I will turn it over to Todd.

Well. Thank you, Pat. And good afternoon, everyone. We appreciate you joining us on the call today. So I'll begin with revenue. The second quarter of total revenue was $117 million growing 39% over the prior year and increasing 7% compared to the previous quarter. The $117 million in revenues comprised of $102 million in surgical revenue and $50 million of EOS revenue. Second quarter surgical revenue of $102 million increased 41% compared to the prior year period. Procedural volume grew 32% in the second quarter, reflecting strong surgeon adoption with growth in the number of surgeons utilizing our procedural solutions up over 25%. Average revenue per case expanded 7% year over year, due to continued mixed benefit from the momentum of our Lateral franchise. The continued increase of our biologics attach rate and an increase in case complexity. Strong performance in Lateral drove increases in both procedural volume and revenue per case. The number of surgeons using PTP is growing and utilization of PTP among those surgeons is expanding, as the procedure is applied to a broadening set of pathologies. A robust reception to our posterior expandable cages also contributed to growth overall. Importantly, the areas where we have invested to create clinical distinction are the areas achieving the strongest growth. EOS revenue in the second quarter was $15 million, up 24% compared to last year with solid execution on deliveries and installations. Working through the remainder of the P&L second quarter non-GAAP gross margin was 73% up 340 basis points compared to the prior year. The year-over-year increase was primarily driven by royalty rate improvements and mix. The mix benefit came from both an increased contribution of surgical revenue and an improved EOS gross margin. EOS gross margin improvement is due to the success we've had in addressing the backlog of service needs over the last 12 months. As well as pricing initiatives we've implemented. Second quarter non-GAAP R&D was $13 million and approximately 11% of sales compared to $9 million and 11% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investment in our organic innovation machine to advanced procedural and information based solutions including approximately a $1 million of investment associated with the robotic navigation platform we acquired in April. Non-GAAP SG&A was $81 million and approximately 69% of sales in the second quarter, compared to $65 million and 78% of sales in the prior year period. We delivered 850 basis points of improvement year-over-year, approximately half of that was driven by improved variable selling expense and the other half by infrastructure leverage, including about 80 basis points of investment related to creating an international presence. As we grow the business the contributors to the leverage that we are delivering continues to be in line with our expectations. Total non-GAAP operating expenses amounted to $94 million and approximately 80% of sales in the second quarter, compared to $75 million and 89% of sales in the prior year period, demonstrating over 800 basis points of operating leverage year-over-year. Adjusted EBITDA was $1.5 million, and approximately 1% of sales in the second quarter compared to an $8 million loss and negative 10% of sales in the prior year period. This represents another quarter of over 1000 basis points of margin expansion. And we are pleased to have achieved positive adjusted EBITDA this quarter slightly ahead of plan. Continued top line growth and disciplined execution is delivering results. In this quarters performance reinforces our confidence in achieving the long term profitability goals we've committed to. Turning to the balance sheet. We ended the second quarter with $101 million in cash. Operating cash used totaled $37 million, of which approximately 90% was related to investments in the sales generating assets, inventory and instruments that fuel our growing distribution footprint and new product launches. Given the strength of sales momentum in the first half, we pulled forward the required set and inventory investments offsetting that, adjusted EBITDA improvements in the first half benefited operating cash and we expect that to continue into the second half of this year. That the carrying value was $470 million. We continue to have undrawn and available borrowings under both midcap revolving credit facility and the Braidwell term loan. Turning to our outlook for the full year 2023. We now expect full year 2023 total revenue to grow 32% to approximately $462 million. That includes surgical revenue growth of approximately 33% to $404 million and EOS revenue growth of approximately 21% to $58 million. As sales growth drives leverage across our business, we expect to continue to achieve significant adjusted EBITDA progress this year. In conjunction with the increased top line guidance, we are raising full year adjusted EBITDA guidance to $2 million, representing 840 basis points of margin expansion. The increased guide is in line with a framework we've shared specifically that we anticipate about 10% of revenue upside to flow through to adjusted EBITDA, while the balance is reinvested to drive top line growth. The next few slides provide additional context for updated 2023 guidance. I'll start by sharing how our expectations and procedural volume and average revenue per surgery growth shaped surgical revenue guidance. We continue to train surgeons at a robust rate, which drives both surgeon adoption and utilization, training surgeon’s builds loyalty and enables surgeons to work up the procedural complexity curve, both of which increase utilization. The middle chart is a testament to the consistent ramp and utilization that our surgeon cohorts have demonstrated each year. Due to improvements in these dynamics, we now expect low 20s percent procedure volume growth for the full year 2023 compared to high teens volume growth expected previously. Average revenue per surgery grows as our mix shift towards procedures that require more products for surgery like PTP and LTP. And towards surgeries with greater complexity all of which feature higher revenue per procedure than our overall average. The gradual addition of expandable implants to our portfolio and increasing biologics attach rate are also enabling us to capture more of each procedural revenue opportunity. We continue to expect these dynamics to drive growth and average revenue per surgery at a high single digit rate percent rate for the full year. In some, increased surgical revenue guidance is related to increased procedural volume expectations. That volume growth has been powered by adoption, both the quantity of surgeon customers and per surgeon utilization. These dynamics validate our thesis that when you create clinical distinction, you do compel surgeon adoption. With respect to the rest of the P&L, we have begun to demonstrate the operating leverage that sales growth enables and we expect that dynamic to continue. Guidance for the adjusted EBITDA of $2 million for this full year implies 840 basis points of improvement relative to last year. The components that are delivering leverage have been consistent with what we described in our long range plan last May. At that time, we committed to 2500 basis points of operating leverage over the 2021 to 2025-time horizon. That entailed about 300 basis points of contribution from R&D, about 1000 basis points related to variable selling rate and about 1200 basis point contribution from SG&A infrastructure leverage. The improving variable selling rate and the infrastructure leverage that sales growth has enabled over the last several quarters gives us great confidence to continue investing in growth while achieving our financial commitments. Now in closing results this quarter are a continued testament to our belief that good surgery is good business, our investments to advanced spine surgery and become the standard bearer have and will continue to deliver sector leading growth. Financial results this quarter are also mark a significant milestone for ATEC. The revenue growth driven inflection to positive adjusted EBITDA. We have great momentum and great opportunity ahead. We have an active IR calendar over the next few months, including our Innovation Day, which Pat mentioned in conjunction with NAS in October, and I hope to connect with many of you in person. With that, I'll turn the call back over to Pat.

Thanks so much, Todd. I think oftentimes, we say things like our best is yet to come. But I would say that we've built a foundation really assembled for a long term growth trajectory. And if you look at what we've done from 2018 to 2022, and really have grown at a 40%. Revenue CAGR, I think was clearly a big influence on from Lateral. I think our best days are yet ahead. If you think about us continuing to drive growth through distinguishing ourselves within the lateral franchise, we've yet to reflect the value of EOS from an informatics perspective, and I think it provides us great opportunity to have an expanded presence in deformity. I think the navigation enabled robotics piece is apparent in terms of what the opportunity is there. We love the uncertainty of the marketplace, I think the spine focus will be rewarded, and so totally enthusiastic about responding to those opportunities. We continue to see expanded hospital access in places that we've had zero business, we now have access, and we have the opportunity to build sales forces in states where we've had zero sales. From an international perspective, we're in the very, very early phases and we're going to continue to be narrow and deep, but we're seeing success out of the places that were participating. And then lastly, just the continued momentum in terms of lateral is quite clear. It's like expandables will be launched at NAS both from a lateral perspective and from a posterior. We're working on corpectomy we have 3d printed implants. There's a lot going on within the cervical realm. And we continue to professionalize our sales force of interest in really a shout out to our regulatory team. We have nine regulatory submissions this quarter, that's surpassed entire previous years. And so if you're wondering if there's a commitment to continuing to obsolete ourselves, there absolutely is. And so I would tell you that I believe that our 100% spine focus is powering our ability to be the standard bearer in the space. And when we say our best is yet to come, I think it's an objective truth. So anyway, with that, I'll turn it back over the operator.

[Operator Instructions] The first question comes from Matt Blackman with Stifel, please go ahead.

Thank you for taking my questions. And good afternoon, everybody. I need just to start, Pat you mentioned and I was hoping you could repeat it because it went by too fast the 2Q surgeon metric number you provided. And if possible, you would a break that out even in the roughest terms between what's called lateral naive versus competitive surgeons. And I'm curious if that mix has changed at all over the last six months over the last 12 months? And then if I could add on top of that, just curious what sort of surgeon reception you're getting for LTP and who might be coming in to be trained on that? And then I've got one follow-up.

All right. I'll let Todd answer the surgeon metric stuff just because if it has a numeric value, I'm going to screw it up. The -- as it relates to the reception on LTP front, it's been very, very good. The reality is, we haven't had the volume of sets out there to garner the level of a responsive the level of demanded that's apparent. And so I -- on a daily basis, get texts and pictures of a 51 ALIF with a 45 lateral with the patient positioner. And it's a thing of beauty. And it's better than the work that we've done before. And so the surgery is good. And when the surgery is good, the volume follows. And so I remain exceedingly bullish. And I would say that we're in the very early phase of that.

And Matt, relative to the 2Q metric, we did about 150 trainings this quarter. If you look over the past four quarters, I think it's 515 is the total. So, we continue at a strong clip, and feel good about the level of upsurge in training and as you know surgeon trainings are great leading indicator for surgeon adoption. And so, as we look at the demographics of people coming through, I'd say it's probably 25% are really lateral naive, I think, in your words and kind of new to the technique, with the balance being, people who are familiar with the technique and are looking to adopt PTP and LTP.

Okay, and then just want quick follow up. Curious, major take a step back talk quite a bit about the Lateral market in general, but how fast do you think that market is growing today, in particularly when we think about sort of the underlying spy market being a, maybe a low single digit grower, because maybe give us some context, you're obviously highly levered to the lateral opportunity, more so than maybe that sort of traditional low single digits by market? But just curious what you think the underlying market is growing today in the U.S.?

Yes, Matt, it's a tough one to put a number on. But, one of the things that was the nemesis of the previous experience was that there were certain indications for surgery that you couldn't address with the technique. And so the great part is, I don't know if the markets expanding as fast as we hope, hope it is. But I will tell you the applicability of lateral into a much larger space is very apparent to us. And so that's why I like, and I don't know if it resonates, but it's like the whole direct decompression in a prone position, the ability to stabilize in a prone position, historically, those would have all been PLIF and TLIF type patients. And so for us to start to evolve the technique into a much broader market space suggests opportunity. And that's where it's like, I have a tough time discerning is it market? Is it very fast market growth? Or is it just one of the things we're applying the technique into a much broader space from a pathologic perspective. And so either way, we're enjoying the trek was still such a small market shareholder, this a plethora of opportunity out there. But, there's not like outside of expandables in the last 10 years, there's really hasn't been very much from uplift for a TLIP perspective in terms of evolution. So when you say, what's the most coveted market? Clearly, the advantages of Lateral had been demonstrated. And that's why we're so excited about what's going on from a SafeOp perspective, because it is very hard. And so anyway, you know, longer answer than you wanted, but it's just kind of a little bit of a context and how we think about it.

And Matt, I think the implication there is to the extent that the Lateral market is growing faster, which we do believe it is than the overall market. That incremental growth due to tapping the existing kind of PLIF and TLIF market really accrues to PTP. So, for us, it's actually growing quite quickly, because one we're taking share and existing kind of pathological applications, but also because we're able to expand the amount of utility to a broader set of pathologies that growth accrues only to us.

Understood, thank you, I'll get back in the queue.

Great, thank you. Our next question comes from Josh Jennings with TD Cowen. Please go ahead.

Hi, good afternoon. Congrats on another strong quarter. Was hoping to just learn a little bit more about the early trends with the LTP launch. And I guess the follow up on that, is just with this, TLIF access system that you're now watching as well. I mean, as we think about LTP gaining more and more traction, and that revenue per case metric. The LTP associated with more levels per case and therefore increase revenue per case, and should that drive that kind of lateral revenue per case metric even higher?

Yes, Josh, I would say the shortest contract is going to be -- most common would be L45 and L5-S1. So it's going to be at least two levels. And so what we're seeing is really a very favorable acceptance from lateral -- or excuse me, from approach surgeons. And as you know, the nemesis of lateral has been you can't address L5-S1from a lateral position. And so to get the type of reception that we're receiving from access surgeons is super important. And so what we're seeing in terms of the early experience is multilevel surgery, L5-S1 done by an approach surgeon with our access system with the patient position required to tilt the patient and then bringing the patient back to an orthogonal position from 4, 5 and above. And so again, I think it's better -- the work is better than what we've done before. And so the ability to apply that learning and make sure that we're including 5:1 is hugely important. And so as I look at the pictures, all of the orthogonality associated with what drives predictability is right there. And so again, all indications are that this will be a good one.

And Josh, to your point, more levels mean more complexity, which ultimately does translate into higher revenue per case.

Great. Thanks for that. And then just wanted to -- you guys are growing so strongly off of a sizable base, and one of the elements we're trying to think through is just on the cross-selling opportunity with EOS accounts that you inherited with that acquisition and that didn't have -- haven't adopted ATEC’s implant portfolio. But where are we in that process? And our assumption is it's still very early and there's still a lot of opportunity runway ahead. But just wanted to get an update there. Thanks for taking the questions.

Yes. Josh, I think when I outlined what I believe to be the growth drivers of significant manner, the EOS influence in any hugely meaningful way is not transpired as of yet in terms of the reflection from the data that you get out of the EOS unit to move people for better surgery into the operative experience. And that's where it's like all of the automation is going to inspire significant interest. It's just the ability to have an automated alignment measure as you take a full-body standing, biplanar low-dose image. So your ability to get the alignment measures to ultimately apply into your surgical plan and have an automated surgical plan. All those seem to be automated which will elevate the likelihood of their utility. And so as you utilize those and you start to say, gosh, in this patient, I would like a patient-specific rod, your ability to select patient-specific rod and have that delivered into the experience and then have an interoperative reconciliation, so I got what I achieved based upon what the plan was. And then to follow up on that postoperatively with the exact same film, I think is ultimately what's going to compel the kind of the deformity audience into the experience. And so I think we're very early on since we haven't launched the stuff. I don't think that you've seen the type of traction that we expect to have over the years. We realized that this was going to be a long run. I would tell you one of the things I'm most proud of about the company is whenever we acquire a technology, what we do is we improve it, and we integrate it into our thesis. And so I would say that the last little while has been committed to evolving EOS into the way that we think about the interoperative experience and those things are forthcoming clearly in mid-'24. And so our excitement is that we have a lot of momentum on the lateral front and on the surgical front, but our best days are yet ahead based on the translation of our ability to once again take information and drive more predictability.

Our next question comes from Matthew O'Brien with Piper Sandler. Please go ahead.

Hi, this is Samantha on for Matt. Congrats on a great quarter. And thank you for taking our question. To start, I guess a little bit on the adjusted EBITDA. You've already achieved adjusted EBITDA positive versus the breakeven expectation at the beginning of the year. Can you talk to us a little bit more about what allowed you to achieve that so early and maybe what we can expect for cadence moving forward?

Yes. Thanks, Matt. I think ultimately, when you look at our adjusted EBITDA going into the year, more or less, we kind of messaged 800 basis points of operating margin expansion or just EBITDA margin expansion on the full year with a little bit of that heavier in the first half and a little bit later in the second half. And I think that would have kind of led you to something like a minus 5, 0, 0, and plus 5% is kind of how I think the math would have shook out after you looked at that from that standpoint. And so then kind of coming into this quarter, knowing that 0 was kind of the expectation. Clearly, the revenue outperformance benefits there, and we definitely benefited from some incremental improvement in our variable selling expense. And so I think this quarter, about half of our operating expense leverage was due to variable selling expenses. So we saw that come through a little bit stronger in the quarter. And that's really just a little bit, I think, timing of our investments on that front. And so ultimately, ended up a little bit better than probably would have expected given the revenue outperformance, but I'd just keep in mind that we're talking about hundreds of thousands of dollars here as we kind of flip from negative to 0. And I think we spent just shy of $90 million in total. So being as close as we, I think, was a pretty good result, and we're very pleased with, I think, the broader comment, which is as we've kind of built the company and as we've architected the lock to profitability, the profitability is coming in the areas that we expected. And so that, to me, is what is really the takeaway here. In terms of cadence, I think our total top-line raise is another $12 million, so beat by 7 in the Q2 and raised by 5% in the back half. And if you apply really the 10% drop-through on that, think about another $0.5 million of drop-through in the second half, which probably puts you a couple of hundred thousand dollars positive in the Q3 and the balance there in Q4. So that's kind of how we're thinking about it.

And then just one more from us. I know we touched a little bit about the market growth. But also, could you touch on whether you're seeing any share taking as well? Thank you.

Yes. I think clearly when you just do the numbers, if the market is growing, call it, low to mid-single digits and I think our surgical revenue grew 41%. We're clearly taking a lot of shares. And I think that's been the story. Clearly, lateral in our clinical distinction and all of the innovation we've created and brought to the market is driving a ton of attention. And I think, again, the greatest indicator is the amount of training we're doing and the interest that we're getting from surgeons and from our ability to elevate the distribution footprint.

Our next question comes from Drew Ranieri from Morgan Stanley. Please go ahead.

Thanks for taking the questions. Maybe for Pat to start with. In your prepared remarks, you talked about just the uncertainty in the marketplace and your opportunity to fill in still large geographic gaps amongst your sales organization. Pat, can you go into a little bit more detail there? And just given some of the market disruptions, are you even pulling forward some investment in the sales organization? And maybe just help us think of anything that's kind of baked into the updated guide for building out some of the geographic gaps.

Yes. I'll go ahead and take the -- I guess, the qualitative I'll get to the harder one. I think we're being as opportunistic as we can possibly be. And the dynamic is that I think that the salespeople who have been in spine and have found success in spine want a partner that's aligned with them. And so when we talk about being spine-focused, much of it is really an outreach to the people who are committed to this thing over the next 10 to 15 years. If you want to move the field of spine sure, you will work with us. And that's where it's like our enthusiasm to continue to outreach to, candidly, companies that have not been very focused in the spine field and think that it's commoditized is an opportunity for us. And so where we see some uncertainty in the marketplace, we're a very certain place. And it's kind of a strange thing to say, five years ago, when we took over ATEC, I wouldn't call it hugely certain, but I will tell you today, as it relates to having the foundational technology and the asset base of the type of engineering know-how that we have from a mechanical perspective, the prowess on the neurophysiologic perspective, the understanding of the imaging, the understanding of navigation robotics, I will tell you that it just provides us an opportunity to go solicit and to retain top talent. Top talent in the room makes a difference. We rely upon the sales guys in the room to make a difference. And so we're aggressively seeking those guys who can make a difference in the operating room to partner with us. And so I think with the Globus NUVA thing and with the big companies being somewhat lethargic, we're being opportunistic.

And Drew, in terms of our opportunity that Pat talked about and our willingness to invest, clearly, we're willing to invest. I think we've demonstrated that. If you think about the growth that we're seeing in our investment, we're leaning into that growth to fuel it. As you think about the investment in our sales organization, there's certainly a level of investment that's baked into the underlying guide, and we feel very good about where that's at kind of order of magnitude. It's very similar to what we've seen in previous years. And so will, from quarter to quarter, that might change. We feel good about where we are relative to our ability to invest to drive growth.

Got it. Thank you. And maybe just one on robotics, but the initial experience is expected later this year, free hand in late '24, full integration '25 if I kind of heard that correctly earlier in the call. But as you are thinking about commercializing the robotics platform, I know we're still a bit of ways but how are you thinking about placement trajectory or utilization trends? Is there anything that makes you feel better or worse when you kind of benchmark that to what some of the other couple of competitors have been able to do in the robotics space? Thanks for taking the questions.

Yes. Thanks, Drew. I think it's a great question. And the dynamic becomes what we love is a small footprint. And so when you have a small footprint, oftentimes, there's a direct relation to the COGS, and when you have low COGS, high technology, it provides you flexibility. And so as I look to the future, and I look at what the capability of what the guys in Boulder are doing with regard to that rollout and that navigation piece, it's going to provide us great flexibility to integrate it into the procedural workflow in a very elegant way. But that also means we get flexibility with regard to acquiring. Can you lease it? Can we integrate it with regard to some type of volume utility in the implant? So I think it gives us ultra-flexibility where we don't have to back a bus up to bring the robot in. And so our enthusiasm is very high with regard to just kind of the foundational cost structure of the system.

I think the only thing I'd add to that, Pat, is just given the fact that the cost and hence our price point being about $0.5 million relative to the total price, our core point being about $0.5 million, which is significantly lower than other market prices of other robots, our ability to do earn outs and those types of things and not needing five surgeons to sign up to the deal is totally eminent. And so that really opens up so many more opportunities for us to essentially commercialize this thing in the long run in a way that works for everybody.

Great. Thank you. Our next question comes from David Saxon with Needham & Co. Please go ahead.

Thanks for taking my question. I've been hopping between calls, but I apologize if any of my questions have been answered. But maybe first on the portfolio, I wanted to see how you're thinking about the breadth of it. I think you've talked in the past about wanting to add some sort of motion-preservation product. Is that still a focus? And then are there any other gaps in the portfolio that might be priorities to address?

Yes. The great part is, I think the navigation robotic thing filled a big gap. And so we're totally enthusiastic with regard to where we sit from a portfolio breadth perspective today. If you look at the -- in the high 90s kind of prevalence of pathology and can we address it? The answer is yes. I would say a whole clearly is cervical motion. We'll fill that hole in the years to come. Who knows when or what presents itself? But I don't see that as much of a detriment. We're in the process -- we'll output some corpectomy things next year. I would say as we sit today, it's irritating me, but it's one of those that seems worse forthcoming, and we have a clear view. We have designs. We have one in the very early experience. So we're good there. But other than that, I love where we are. I think what you're going to see is you're going to see continued expansion within kind of the idiopathic deformity space for us not to translate rotational understanding in EOS to a system that ultimately addresses some of those things, to not utilize some of our learnings from patient positioning, to not utilize our motor potentials within our new physiology round. And so I think that we have a lot of opportunities to continue to expand our really kind of competencies across different pathologies and different patient types. But I feel great about where we are.

Yes. I mean I love it because, ultimately, it's really such a reflection of the organic innovation machine we've built here that can ultimately address so much of the gaps that we had in front of us. And that's ultimately why you see our commitment to invest the kind of R&D spend that we do.

Great. And if I could just have a follow-up for Todd. Just on EBITDA, I guess, just the path to $80 million and $25 million. I think at the Analyst Day, you kind of thought it would be more of a ramp, but I think you're kind of outperforming EBITDA. So could it look more linear with '24 being closer to 40%? Any thoughts there would be helpful. Thanks.

Yes. Thanks, David, for the question. I guess what I'd tell you is I feel very good about how the leverage is manifesting itself. And I think one of the great comforts I have sitting in my seat is the fact that Pat and I were totally aligned on where the company is going. And the way our leadership team has built the company reflects the leverage that we've communicated. And so the investments reflect the priorities of the business. And as we grow, ultimately, we see that leverage. And so what I'd tell you is we feel good about the quarter. Happy that we can raise full-year guidance and be a little bit ahead of the game there and our ability to continue to march toward our long-term goals and objectives, is totally intact, and we feel great about it. And so I'm probably going to be short of giving you a hard number or a hard answer there, but I like our chances.

Yes. Great. That's helpful. And congrats on the quarter. Thanks guys.

Our next question comes from Aaron Wukmir from Lake Street Capital Markets.

Hey good afternoon everyone. This is Aaron on the line for Brooks. Congrats on the strong quarter. You guys are doing a lot of good things, and we're really excited about the growth going forward. So how sustainable do you believe that these elevated procedure volumes can continue in all -- you mentioned this a little bit in the prepared remarks, but are you seeing other companies respond to the innovation with any moves to their own? How are they responding to innovations in lateral and with SafeOp and EOS?

Yes, Aaron. Thanks much for the question and our best of books. But the interesting thing is that these things are very tough to pivot, meaning if there's a competitive dynamic that is very well protected, it's not the IP that protects it. It becomes the know-how that does. And that's kind of why I gush about the neurophysiology piece. I think at this in terms of just within lateral, north of 20 years, 22 years. And so the reality is the one thing I know is that neurophysiology, automated neurophysiology is an absolute unequivocal requirement. And so when people show different things in lateral, but they don't show an automated neurophysiology system that ultimately includes SSCP to understand retraction injury, then they're not serious about participating. So when I look at a procedure, and I see people copy our patient position or a copier retractor, what they can't copy is the know-how that we have here with regard to neurophysiology. And so that's going to be a very difficult thing to do. And so that's going to take years to do and years of competency to create. And so that's why I love our momentum, and I love the type of progress we're making from a surgeon user perspective because these are unadulterated tools. And that's where it's like, I feel like we're very well protected in the very area where we have committed expertise because there's a very long level of experience and know-how. And so that my general view is we will continue to grow procedurally, and we will continue to really relish in the high ASP of the convoy sales, and that's why we ultimately say, "Gosh, we're creating a distinction that the sits driving adoption, the adoption is reflective of the convoy sales.

Great. Awesome. Very helpful. And then just a quick follow-up. I think you might have mentioned this as well in the remarks, but can you describe just a little bit what you're seeing now in the international markets and what your plans are sort of there? Would you consider that a meaningful priority for you guys? And then also on the flip side, are you seeing any disruption in the domestic markets at all?

Let me answer the international thing first. I would tell you that one of the things that we want to do is we want to be very deliberate. And so when we go into a marketplace, we want to be all in. And so our early experience in Australia has been awesome. So New

Awesome. Yes. That's very helpful. Thanks for taking the questions and congrats again on the strong quarter.

All right. Our final question is from Sean Lee with H.C. Wainwright. Please go ahead.

Congrats on the great quarter. And thanks for taking my question. Moving back to the prepared remarks where you mentioned the increase in surgeon training. So I was wondering what's the cell cycle, I guess, like for the PTP how long does it take for a certain 2 country training to start using the PTP in their practice and then move on to become a repeat customer? And what's the rate of these certain conversions?

Sean, if you could tell us that, we would be forever indebted. No, it's like each of the individual surgeons has different needs, and they come to us with different sets of experiences. And so one of the challenges is what are the list of requirements to ultimately prepare somebody for them to feel comfortable in applying the procedure into surgery. And believe you me, it's within our interest to make sure that they are profoundly confident and comfortable. And so one surgeon may need a single cadaveric experience and they come to a course and they start doing cases. Other surgeons may need a course, they may need to go watch a surgery. They may need to go -- they may need a proctoring surgeon into their surgery, and they may be very, very slow to uptake. And so it's profoundly different for each individual surgeon. And the one thing I know, and this should provide you great comfort, is the surgeons don't want to make it in a fix. And I think that they're profoundly careful. And so they're going to take their time. And sometimes they need to be competed into it. It depends upon the marketplace. But I got to tell you, there's numerous geographies out there where PTP is on such an upswing that the surgeons feel forced to do it because they're losing patients for not doing it. And so we are profoundly confident. I think the publications all suggest that this is an absolutely predictable reproducible experience, but we have to respond to the individual needs of the respective surgeons to make sure that it's predictable. So I know that's a long-winded answer, and I didn't give any specific numbers. Candidly, I can't and won't.

I understand. But it's very helpful for helping to understand this market. My next question is on the -- you mentioned during the prepared remarks that you've seen geographic expansion and moving into adjacent markets, especially. How much is that contributing to your overall growth? And where do you see that trend going over the next 6 to 12 months?

Yes. I think it's a great question. And I would say you are limited. And so often, what will happen is we may have candidly a stronghold in a specific city, but then the adjacent cities that have big spine spend, we do nothing in. And so the great part about -- I think our -- the makeup of our business is you're seeing 38% growth in those territories that have been established. And so if we're seeing that type of growth in same-store sales, that, in my mind, means gosh, I had accepted that as a tool that will -- or a business that will expand. And so the great thing is we have like -- if you're going at 38% in those areas and your overall growth is 41% surgically, I would say it's not like we're and a bunch of people that ultimately get to a place. And that's where it's like our enthusiasm is to add those adjacencies to what we could enjoy, not only the adjacencies but the same-store sales growth that we would enjoy in that geography. And so to me, that's the excitement.

Great. Thank you. I will now turn the call back over to Pat Miles for closing remarks.

Yes. Thanks very much for your interest in ATEC. And as we say, our best is yet to come. So excited about what's going on, and we love spine, and we are thrilled to be serving it. Thanks.