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 or adjusted measures. Reconciliations of these measures to U.S. GAAP can be found in the supplemental financial table 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. Now I will turn the call over to Pat Miles.

Thanks much, Danica, and thanks everybody for your interest in engaging in the call. So, I will jump right into the Q2 2024 highlights. And I would say it's another deliberate step in fulfilling the commitment to profitable long-term sales growth. And so, finished the quarter at a total of $146 million in total revenue. The total revenue percent growth was 25%, 27% surgical revenue growth, which I expect to be best in class, 20% growth in new users, which I would say is, speaks to the expansion metrics, 15% surgical volume growth. I think that's a metric that reflects kind of the non-linear ramp as we continue to upgrade our sales force. One that I love is the 10% growth in average surgical revenue per case that speaks to the convoyed elements of our procedural strategy and the buy into that, which is really good. We inflected to profitability with an adjusted EBITDA of $5.6 million. We had 244 surgeon training engagements fueled by our footprint expansion. So, there's a lot going on there. I think the $50 million invested is a confidence proxy for our route forward and so expanding just the footprint to support growth. And then last but not least, and I think the thing that I'm going to spend a bunch of time on during this call really is the EOS Insight launch on time. And I will explain the relevance of that, but it reflects the work of really hundreds of people over a multiyear period. And so, it's, it was audacious, and I'm exceedingly proud of it. And when we acquired EOS, our vision was to translate, the most coveted image in spine, into an informatics. And I would tell you, we've done it. So, if you look back or think back, we came to ATEC to create a spine juggernaut. And, we wanted to do it creating value by advancing the field of spine. And we are committed to a deliberate spine-focused long walk. And I think that the revenue reflection of this strategy I think is undeniable. We have created clinical distinction. So, we are distinguishing ATEC technologically through really two really core means. We've architect architected, procedures, which is reflected in the assembly of products, and then concentrated on what informatics creates predictability in spine. And I think that it's highly relevant for this time of year in this call. The second thing that we've been able to do is compel adoption, and that just means increasing surgeon users by improving surgery. So, if the clinical distinction is what we know it to be, the likelihood for somebody to be inspired to use our stuff is high. And clearly, what else is required is an elevated expanded distribution network and so doing our best to attract talent with distinction-driven surgeon demand. And so, I would tell you that those are foundational to our success, and we love to revisit them because it's what's driving the company. So, when we talk about procedural architecture, I will tell you that we are steeped in a history of value creation via informatics integration. What that means is there information where we could mitigate clinical variables to improve surgery. And when you start to think about the ascension and the prowess that's been created in lateral, it is our growth driver. What's done that is a key piece of information that enables surgeons to really know things that they wouldn't have known otherwise. And so, when you think about lateral surgery and you go from skin to spine, the most relevant anatomy of concern is neurologic. And so, to have a tool to be able to say, hey. I know where the nerve is, and I know what the health of the nerve is, is really kind of foundational information that drives surgeon decision-making. I hope that what this does is really kind of serves as an example or a proxy for how informatics influences the predictability of spine surgery. Because from this, what we've done is -- I would say that we've learned. And what we've learned is that, really, what, precludes, predictability oftentimes is information, and so measurable information that mitigates variables. It is the why behind our investment thesis into the most comprehensive, integrated, end to end automated information ecosystem in spine. Most importantly, it'll drive improved spine care, spine's yearning for improvement. Spine is hugely complex, and when you think about it as compared to other orthopedic surgery, it is less durable. And the revision rates in both short and long-segment surgery are unacceptably high. And if our job as a spine provider is not to make that better, I don't know what our responsibility is. There's a bad joke in spine, and it talks about there's two kind of surgeons. There's the ones that create deformity and the ones that fix them. I got to tell you, we want to be in the latter category. And the last thing a prospective patient needs in contemplating spine surgical intervention is the double-digit likelihood that there's going to be future surgery. And so, our ability to delve into how we minimize that potential is a value creator. We have demonstrated how using information to mitigate variables furthers predictability. We have done this with EOS Insight through focus on pre, intra and the post-op experience. This is what we mean by end-to-end. It starts at the pre-op and ends at the post-op. EOS Insight is just the beginning of a fully integrated tool that improves spine care. Let's start with an explanation around really the preoperative experience. And so, the reason most surgeons do not plan surgery is that it is onerous. It often takes a very long time and it's imprecise. You're dealing with non-standard imaging modalities where magnification and other challenges undermine accuracy. In short, it is a lot of work for little precision and objective value. So, it's just not done often. The beauty of EOS insight is it provides AI automated alignment measures that inform the surgical plan. It is a computer-generated assessment that precisely measures a patient's spinal alignment parameters. If alignment is the greatest correlative to durability or a successful long-term outcome, we believe this to be a requirement of surgery. So, EOS Insight automates this task with precise computer-generated alignment measures that inform a 3D model and subsequently a surgical plan. The surgical plan illustrates the optimal contract that maximizes the highest likelihood for plan achievement. Then the 3D plan contemplates what implants are most applicable to achieve a normative age-related restoration of spine alignment. Once this is determined, as expected, EOS Insight provides for the option of a custom implant. And so, the preoperative sophistication is efficient, it's expedient, it's automated. And so, the work required is little to none. And so, I think that that's an exceedingly attractive part of the preoperative effort. So when you start to move it to the interoperative phase and once the plan is complete and imported into the interoperative experience, then what you'd you start to do is you say, if the plan calls for lateral surgery, our ecosystem will have Valence, which is the navigation robotic system, assembled to SafeOp, which enables you to look, where the nerve is and the health of the nerve. So, it assembles those pieces of technology, and really, that's the start of kind of integrated tools that reflect innovation. So, the EOS, operative plan is automatically loaded into our EOS interoperative alignment system, IOA. And so, what that system does is it takes intraoperative images and measures them compared to the preoperative surgical plan. It enables information like reciprocal change. Do I understand how I've effectuated the spine? And it enables them to achieve the operative experience prior to leading the operating room. So, these informatics tools ultimately combine best-in-class informatics with best-in-class procedural-specific tools. And so, it is no coincidence that the most coveted understanding of the lateral requirements are here at ATEC. And I would tell you, they are integrated with a informatics system and a procedural specific set of tools that ultimately creates predictability. A driver of our growth has included an increase in average selling price. And when you look at average selling price, what you do is you say, did we assemble tools to also reflect in the requirements of surgery, so an assembled procedure? The other, reflection is in surgical complexity. And so, we believe that our ecosystem will be a key driver to continue to drive surgeon confidence, availing more and more complex surgery, which really can lead you to the realm of deformity. And so, the ecosystem that we've created will be highly relevant in deformity surgery, not only in the navigation robotics piece and what we've done is added what's called facilitated MEPs for spinal cord monitoring. If realignment is a key driver of deformity surgery, interoperative reconciliation to a surgical plan fulfillment is a must. Deformative surgery is intended to provide a restorative impact. Our influence in both adult and AIS surgery, in essence adolescence, is in the earliest of phase. Our work on patient specific implants, positioners, derotation tools, and the like is really just getting going. So, in my mind, a ton of tailwind in the work that we're doing. I would say that another extremely relevant reflection of just the automation, of EOS Insight is the data collection element. Collecting data from an automated source requires no special activity. So, again, the work requirement is very limited. The beauty is that it provides, insights that future that improves, future surgery. Some call that predictive analytics. But in simple speak, it is a way to ultimately improve future surgery. Mitigating variables through patient and practice insights driven from automated data collection at the very least makes for more informed surgery. We believe the data collection aspect of the EOS Insight tool to be a significant driver of future value. I think so often people are introduced to things and they're introduced to them, more theoretically than practically. And what we want to do is really kind of show you the plan in action and would love, a quick shout out to Dr. Craig McMain and Dr. Dave Schwartz at OrthoIndy. They ultimately completed the first -- initial case of EOS Insight, and the first patient was scanned in the EOS Edge. So, you see the automated alignment measures. So, as I said, scan in the EOS Edge, generated an AI automated alignment report, which is opened in the portal. The automated alignment then informed the 3D surgical plan. The plan provides for normative values, for the specific patient and generates a patient specific custom surgical plan. That plan then informs the patient specific rod. So, you could see down at the bottom is a patient specific pre-bent rod. All of this is done preoperatively in a highly automated efficient manner. So, the expedience of this is very strong. At that point, what we do is we take the plan and we, port it into the operating room. By importing it, we import it to the tool that enables an interoperative reconciliation against the preoperative planning measures. So, all of this is a very expedient, exercise that takes the pre-op, integrates into the interop, and enables the surgeon to understand exactly where they are in real-time in the operating room. And then the beauty is the post-operative phase, there's an opportunity to compare the objective data from the preoperative alignment to the plan to the result. This is the result of a company that is committed to moving spine surgery forward. The complexity of this effort and the on-time launch is something for which we are, extraordinarily proud. Creating clinical distinction or the fulfillment of our clinical vision is really coming to fruition right before our eyes. And so, now, the effort becomes in compelling more converts. And so that's happening. As you could see, it's happening. We are compelling surgeon adoption in Q2, we had a record-breaking surgeon training, that reflects adoption where we are investing in long-term momentum building. So, we had 244 surgeons and as stated, 20% growth in surgeon users. So, I think clearly that we're making progress as it relates to compelling surgeon adoption. I think-- that was my friend, Siri. I think the other element that I think is highly important is, are we putting the right people around the company from a field perspective? And so, recruitment continues and expands our ability to meet surgeon demand. Market disruption continues to be our friend and is industry wide. We will continue to capitalize on that market disruption. We have a strong funnel of experienced talent to expand and upgrade our sales footprint, and we believe again that the disruption is a multiyear tailwind. As you'd expect, however, it's a non-linear walk. I think another interesting thing is if you look at the demographics of the recruitment class of our year-to-date recruiting efforts in the class of 2024, there's a lot of activity going on. What provides people confidence, however, is the 23% growth in established territories. It's one of those things where it's like many of us who have been here for a long period of time have started from nothing and created again monstrosity of growth. And I think that it gives people a lot of confidence when they join the family that they're able to do the same. So, as you would expect, we are executing well, against our long-term commitments and are excited about how we will continue to walk toward our 2027 commitments of $1 billion in revenue, in 2027 and adjusted EBITDA of $180 million adjusted EBITDA margin of 18% and free cash flow of $65 million. And so I think that we have a heck of a lot of momentum. There are so many things going on clinically. That is the cornerstone of who we are as an organization. And, I'm thrilled with where we are, at this point in 2024. So, with that, I'll turn it over to Todd.

Well, Thank you, Pat, and good afternoon everyone. We appreciate you joining us on the call today. I'll begin with revenue. Second quarter total revenue was $145.6 million reflecting 25% growth compared to the prior year and up 5% sequentially. The $145.6 million in revenue was comprised of $130 million in surgical revenue and $115.5 million -- excuse me, and $15.5 million of EOS revenue. Second quarter surgical revenue of $130 million increased 27% year-over-year against a strong comparable of 41% growth in the prior year period. Surgical revenue growth was robust across the entire portfolio, particularly in lateral and expandable implants. We drove procedural volume per procedure growth of 10% compared to the prior year. Both metrics have shifted slightly relative to recent trends due to the meaningful sales force upgrades and additions that we are executing. We are upgrading some existing territories with new sales agencies to more strategically reflect the ATEC brand and align with the surgeons who are compelled by our procedural thesis. That generally increases average revenue per procedure in the territory. Yet, as new coverage ramps up, volumes related to the incumbent coverage wind down. As a result, there may be quarter-to-quarter lumpiness in the underlying dynamics of revenue growth as the upgraded tariff ramps. And specific to the second quarter, case volume growth was not as strong, while average revenue per procedure growth exceeded recent trends. Adjusting for this dynamic in the quarter, volume growth would have been about 300 basis points higher at 18%. Our long-term expectation is that the upgraded agencies will grow the territories contributing over time to sustainable improvements in territory revenue. The 20% growth in Q2 surgeon adoption corresponds well with this. Surgical revenue growth in the second quarter was also impacted by an additional more transient dynamic. We grew we outgrew supply of one of our biologic’s offerings and one of our expandable implants. We have addressed both constraints and not have full supply available. EOS revenue in the second quarter was $15.5 million up 6% compared to last year. Next, I'll turn to results for the remainder of the P&L. Second quarter non-GAAP gross margin was 71.2%, up 190 basis points compared to the prior year. The year-over-year increase continues to be driven by improved EOS gross margin and volume-driven leverage of our Memphis distribution facility. Second quarter non-GAAP R&D was $13.5 million and approximately 9% of sales compared to $13.1 million and 11% of sales in the prior year. We delivered 190 basis points of R&D leverage while continuing to invest in innovation and the future growth of the business. Non-GAAP R&D spending was roughly flat sequentially. Non-GAAP SG&A was $100 million and approximately 68.9% of sales in the second quarter, compared to $81 million and 69.1% of sales in the prior year period, an improvement of 20 basis points. Included in SG&A is expected step up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 250 basis points year-over-year. Excluding that impact, SG&A improved by 270 basis points. Two thirds of the improvement was driven by variable selling expense with the balance driven by infrastructure leverage. Total non-GAAP operating expenses amounted to $114 million and approximately 78% of sales in the second quarter compared to $94 million and 80% of sales in the prior year period, demonstrating 210 basis points of operating leverage year-over-year. Total non-GAAP operating expense was down $1 million sequentially. In the second quarter, we inflected a positive adjusted EBITDA of $5.6 million and 3.8% of sales. This is compared to a loss of $3.1 million and 3% of sales in the prior year, 650 basis points of improvement. Drop through of the year-over-year growth and revenue dollars to adjusted EBITDA was strong at 30%. That improvement was driven by 270 basis points of SG&A leverage followed by 190 basis points of R&D leverage and 190 basis points of gross margin leverage. The consistent adjusted EBITDA margin expansion that we are driving is aligning solidly with our expectations. This gives us confidence that profitability will continue to expand in future quarters and fuel self-funded growth as we execute to our long-range plan commitments. Turning to the balance sheet, we ended the second quarter with $100 million in cash. Debt at carrying value was $531 million. Free cash use totaled $45 million with over $50 million deployed into inventory and instrument that support the expansion of our distribution footprint and new product launches. Managing the efficiency of those assets being deployed is proving to be slightly less linear than anticipated. As a result, working capital needs have been higher than we initially forecasted. Adopting more conservative working capital assumptions for the balance of the year will result in expected full-year cash use ranging between $125 million $135 million. This is $25 million higher than the $100 million to $110 million previously expected. Approximately $10 million of the change relates to elevated day sales outstanding, while the remaining $15 million relates to inventory inefficiencies. We expect Q3 cash use of approximately $25 million to $30 million with Q4 inflecting cash generation of $5 million to $15 million. With a fully drawn revolver, we expect to end the year with approximately $100 million in cash on our balance sheet, which as we've communicated is sufficient for us to run the business. We continue to expect to achieve free cash flow breakeven in 2025. Turning to our updated outlook for the full year 2024. As Pat mentioned, the leading indicators of future revenue growth were exceptional in the second quarter with record surgeon training engagements and growth in new surgeon adoption of 20%. Both are testament to the surgeon demand that ATEC clinical distinction is earning in the field. We expect that to fuel total revenue growth of 25% to approximately $602 million. That includes 2024 surgical revenue growth of approximately 27% to $537 million and EOS revenue of approximately $65 million. Calibrating for the impact of territory upgrades that I mentioned earlier, we expect surgical volume growth to continue to be the greatest contributor to surgical revenue growth, increasing at a high-teens percent rate for the full year. Territory upgrades will also drive increased growth in revenue per surgery. So, we now expect a high single digit percent growth rate for the full year. Sales growth continues to fuel leverage across our business and with the second quarter outperformance we now expect full year adjusted EBITDA of approximately $25.5 million which equates to 610 basis points of margin expansion. That implies an approximately 29% drop through of the year-over-year growth in revenue dollars, a significant acceleration compared to the 22% drop through in 2023. I'll close my comments with this view. This chart depicts the deliberate and substantial profitability expansion that we have demonstrated over the last two and a half years. Over that time, adjusted EBITDA has increased substantially from a loss of $13 million and 18% of sales to a contribution of $6 million and 4% sales over 2,000 basis points of improvement. Importantly, we are not done. We recognize that profitability and cash generation are crucial to value creation. The progress that we have delivered along with the drivers of that progress contributing the way in which we intended give us confidence in our future commitments. There's a lot of work left to do and a lot to be excited about. As usual, we have an active IR calendar in the next few months and are looking forward to connecting with you. With that, I'll turn the call back to Pat.

Thanks much, Todd. I would just conclude the call by saying prior to Q&A of saying we have a track record of execution. This has been a deliberate spine focused long game. And so, we're executing unique ecosystem in all of spine to, inform better spine surgery. And I think it's unquestionable that we are advancing the field. And so, with that, we will take questions.

Great. We will now open the floor for questions. [Operator Instructions]. The first question comes from Vik Chopra with Wells Fargo. Please go ahead.

Hey, good afternoon Danica and thanks for taking the questions. So just on the cash burn, obviously higher than we were expecting. So just wanted to confirm, you're now expecting $125 million to $135 million cash burn for 2024. Is that right?

That's correct.

Okay. And just I guess to follow-up to that, will we need to raise cash against the portfolio in cash flow breakeven in 2025? And then I had a follow-up.

Yeah, Vik. I think as we look at it and if you look at the growth next year, I think if you take where the Street is at, that's about $123 million of year-over-year revenue growth. Take about 35% of that, you get about $45 million of growth in adjusted EBITDA year-over-year. So, if you exit this year at $25.5 million, you add $45 million to that, you get about $70 million of adjusted EBITDA next year. That ultimately funds our working capital and our growth needs and our cash needs for next year. And so, I think going into next year, we feel very good about achieving our cash flow breakeven with our existing liquidity where we're at today. Because ultimately as we look at our current second half cash burn, thinking that we'll exit the year with a fully drawn revolver at about $100 million going into next year then with the dynamics that I just laid out in terms of increased adjusted EBITDA on the basis of drop through year-over-year revenue growth.

Okay. And then just a follow-up. Can you just talk about some of the expected hiring trends for 2024? And any color on the cadence of competitive rep recruitment? Thank you.

Yeah. Vik, thanks for the question. I would tell you that it's robust and kind of the approach that we've taken has been as geographic dependent as our needs are. And so, try to provide a little bit of color with the pie chart that just shows you clearly a fair amount from Globus, Nuva, but also Medtronic, J&J, and the rest. And so, it's been as we could take on as many people as I feel like we want to. The question becomes is what makes most sense in what geographies at what time? And so, as you appreciate, these things take significant investment. We got to make sure that all the instruments and implants are available to them so that they could start the process of turning on their business. And it's a lumpy exercise, but it's happening at the rate that we desire.

All right. I think we're going to go to the next caller. The next caller is Caitlin [Indiscernible] with Canaccord Genuity -- sorry about that. Please go ahead.

Hello, everyone. Thanks for taking the questions. Just starting with the territory upgrades, where are you in implementing these, and how many territories have you upgraded or expect to upgrade?

Yeah. It’s interesting question just from the standpoint of where we are as a company. And so, I look at us as having 94% of the market to go. It means we're about a 6% market shareholder. And I would say that, let's just say, we're, probably, well less than a third of the size of, say, a Medtronic sales force. We have opportunities for the next, I'd say, eight years. And so, again, I think what is mistaken is that the disruption in the marketplace is a several year tailwind. And the great part is that what sales reps want is they want surgeons who are compelled by new and exciting technology. And so, our opportunity to compel sales reps to come along with their surgeons who are inspired by our technology is available to us in space. What we're trying to do is march toward a operating company. And so, we're doing that in a very methodical way. And that means what we're doing is prioritizing those territories that are most opportune for significant expedient profitable growth.

Okay. Great. Thanks. And then just a follow-up on the competitive hires. Thanks for noting the breakdown of the hires. But, what's the most up-to-date, number of the hires? I think the last that you mentioned was 50 reps.

Yeah. We're not going to share the quarter to quarter hiring practices. And our desire is to get a rep toward a $2 million a year type of a cadence. And so, you could probably do the math and get to a place to where you feel reasonably well about kind of where we're heading. And so just from a pure volumetric perspective. But again, I would tell you that the people that make up our sales training classes are reflective of the pie chart that we had delivered and the volume of reps will continue to grow as we run toward a $1 billion.

And Caitlin, I think the greatest indicator for future sales growth ultimately becomes the surge in adoption that grew at 20% again in the second quarter and then clearly the surgeon engagements at 244, which was just a very significant quarter's worth.

Yeah. I would say just to add to Todd's point, which is a great one, which is you don't get near 250 surgeons to engage in your surgeon training event if there's not interest in what you're doing clinically. And to me, it's such an apparent, dynamic and I feel like we're just trying to be as thoughtful and appropriate as we can with regard to who's coming through.

And I guess reflective of the territory upgrades and additions that we've been making.

Great. Thanks so much.

All right. Our next question comes from Josh Jennings with TD Cowen. Please go ahead.

Hi, guys. This is Eric on for Josh. Thanks for taking the question. I was hoping to just put a finer point on expectations for cash burn through the end of the year. I appreciate the color you gave around cash use through 3Q and 4Q. But if you could just talk through the drivers of that flip into positive cash use in 4Q that would be great. And then what risk do you see to that pathway?

Thank you, Eric. As we look at the cash use and maybe I'll just take a minute to talk about the incremental 25 that we're assuming for the second half relative to previous experience or previous communications. That is really due to about $10 million of that due to day sales outstanding. So, if you think about where we exited last year, which is kind of in the high 40s, Q2 was in the low 50s. We're about five days different than frankly I expected us to be at this point in time. So, five days times $2 million a day gets you about $10 million. The remaining 15 of that has to do with inventory inefficiencies and really the confluence of growing a business at 25% to 30% a year, bringing the size and the volume of new sales agencies on ensuring that they have what they need when they need it. All of that is a lot of variables in that experience. And so, when you're growing at a rate that we've been growing, there's definitely been some variability there. We've been less efficient in that than I expected. And so that's the drivers behind this. Ultimately, I think we get through that over time and we improve in those metrics. But I'm now assuming that we don't improve at the end of the year. And so that's really the dynamic that we're going through here. Ultimately, when you think about the inflection to cash, part of that is, we have invested significantly in the sets and the inventory in the first part of this year as you know. And so that obviously is a trend downwards through the second half of the year. And then as we inflect the profitability, that ultimately drives cash generation. And so, it's really the inflection of those two variables going in opposite directions that really inflect you from cash burn to cash generation. I mean, this is really all about sales growth and profitability growth flowing into cash flow here the rest of the year and into the future.

Okay. Appreciate that. And then on EOS, with the launch of Insight now in play, I was hoping to just get your thoughts on some of the inbound interest that you and the team have been fielding with that now up and out in the field. And just as a technical question on EOS, I believe it's a software-based platform. So, is upgrading existing EOS systems as simple as just pushing that software out to customers? Or is there something more involved required to get adapters up and running? Thanks for the questions.

Thanks, Eric. So just I guess the straightforward one first is at this point, we go out and it's a software upgrade on the machine. We don't push it yet. There will be there's work going on right now that will enable us to push all software upgrades out. This is kind of our first real significant type of software solution. It's -- the reason I spent so much time on it is the reflection of a the most coveted image in all of spine being integrated into a informatic tool. And, it is very significant and maybe much like the narrowness of the way we think of safe up to our lateral portfolio, the whole EOS into spine care, I think, is a is a monumental achievement. And so, it'll play out over time. We have great confidence it'll play out over time. Right now, it's a software solution that is really kind of just the beginning of a very long run. But if maybe next time I could show the faces of the surgeons who come through here for visits when they seek the tools that, are provided through EOS Insight. Probably the best reflection of enthusiasm around the platform.

That's great. Thank you, guys.

Our next question comes from Matt Blackman with Stifel. Please go ahead.

Good afternoon, everybody. Can you hear me okay?

Yes, we can, man.

Great. So, Todd, I wanted to go back to the 15% volume growth. So, if I'm hearing you correctly, it sounds like there was some dislocation as you sort of switch territories around. I guess, why is it manifesting now, versus maybe a couple of quarters ago? Maybe it has something to do with the timing of instrument set deployments. But how long does this persist? I mean, Salesforce dislocation can be tricky to work your way through. It does seem like as I think about your guide, your updated guide for volume growth that you sort of baked it in for the remainder of the year. Is that how we should be thinking about it? Does it potentially bleed into 2025? And then I have one actual follow-up question.

Yeah. And I thank you for the question. I don't want to communicate that there is unexpected dislocation. This is a phenomenon where we added sales coverage, sales agents in a territory where we have new surgeon interest. That surgeon interest is in our most distinct portfolio, which is really the lateral portfolio. And ultimately, we are upgrading that territory sales agency, and ultimately the existing sales agents wind down. So that's the normal. They always wind down when the new guys wind up and come on. What was a little bit unexpected this time was the pace at which the existing guys wound their business down. Now the reality is the ASP of the business that has come on in that territories, is lateral. So, it's 2x our average. That's a $15 million to $20 million procedural price. What walked away was, $3,000 to $5,000 procedural price. And so, when we attract surgeons who are most interested in our most distinct portfolio, ultimately, you drive a higher level of revenue per procedure. And you always do expect the existing business to ramp down at some point in time. I would just tell you that it happened a little bit faster than we anticipated this quarter. And so that's the dynamic that went on. So, does that make sense?

Yeah. No, it doesn't. Does that persist? It does seem like you're baking it in for the remainder of the year with the updated guidance. Does that persist for a quarter or two quarters? Obviously, I would expect it improves, but when do you think you'd get back on to that sort of typical trajectory of whether it's surgeon, productivity or rep productivity in terms of volume growth as opposed to ASP growth?

Yeah. So, I think at the now we're assuming essentially kind of high-teens volume growth in the second half, which is really what we saw here. I guess we saw mid-teens in the second quarter. So, you're starting to see that tick up a little bit in the second half. So, we see a little bit of that recovery in the second half. So that's kind of how we see that playing out. And ultimately, the revenue per procedure that's implied in that Q3 the implication there is kind of high single digits, Q4 it gets back to mid-single digits. So, I think that's how that effectively gets modeled in the remainder of the year between price and revenue per -- and volume.

Got it. And I guess to counter that, would be obviously we’re thinking bigger picture here, particularly given the amount of investment in new distributors, new reps, instrument sets, sort of hoping to see potentially some uptick in growth. Is the point and maybe it comes, maybe it doesn't, but maybe the point would be if we just look at in particular, maybe we're not seeing it in the actual dollars yet here in the first and the second quarter of ‘24, but we should be comforted by the fact that, particularly here in the first half of the year, your surgeon training numbers are pretty substantial. And it then therefore, that's an indication that these reps are in fact bringing in new surgeons. And so, that is the real metric we should be sort of leaning on as we think about the outlook for growth from here. Is that fair?

Exactly the point, Matt. And as you look at that, the guide implies probably a $2 million sequential step up in our surgical revenue, I think. And so, when you look at that, I think that reflects the underlying confidence that we have in the growth of the business looking forward.

Yeah. It is a non-linear walk and I never thought that we'd be apologizing for 27% top line or surgical growth. But totally understand your questions, but it is a put and take at every turn.

And maybe I'm just going to sneak in one more question, apologies to everyone else here. But just on EOS, I guess the simple question is, is EOS now at a point where it is a workhorse imaging system with all the enhancements? Or is there something else perhaps that we're waiting for in the near-term pipeline that really sort of moves this to, again, a workhorse imaging system that a physician can use across 70% of their procedures?

Yeah. I would say it's a workhorse imaging system that has no competitor. The problematic dynamic of imaging is that it is profoundly inconsistent with different magnification. It's imprecise. And just the ability to have a standard image out of EOS provides for opportunity of grand scale. I cannot communicate my enthusiasm more with regard to how we translate that image into an informatic tool that improves surgical care. We're well down the way of identifying the diagnostic platform whereby we can do is pull in different tools again to drive more clarity with regard to what patients require what surgery informed by a set of data that's derived in an automated way. It's like, these are things that have evaded spine in the 30 years I've been part of it. And so, to be able to be part of this and to support the architecture of it through the many, luminary surgeons who have kind of advised us is phenomenal. So, again, the proof's in the pudding, and we're going to be around it to show the pudding. It's an exciting time.

All right. Thanks, Pat. And apologies for the more than one question.

No issue.

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

Hi. Thanks for taking the questions. Just maybe a couple from me that I'll ask together. So, Todd, I think you called out some supply constraints that you maybe now resolved in biologics and expandables. Just curious if you can quantify maybe how much that might have cost you in revenue upside potentially for the quarter? And I'll just ask my second here as well. But we've been getting more investor imbalance just kind of questioning the overall utilization environment specifically when it comes to orthopedic and spine names. So, I mean, you're with 5%, 6% market share in the U. S, Pat or Todd -- and or Todd. Just hoping to get your perspective on maybe what you're seeing in the market and maybe what you're seeing specifically for surgeons that you have longer established relationships with? Thanks for taking the questions.

I'll take the first one and then Pat can take the second one on the utilization. So, Drew, relative to supply constraints, I did call out two items where we really outgrew our supply. Ultimately, that's now resolved. We're not going to quantify all of that, but suffice it to say, as we think about our sequential Q2 to Q3 in surgical revenue, I think our expectation would be to go from $130 million to $132 million sequentially. So, I think that should give you a sense for our level of confidence going into the third quarter and kind of sizing up and quantifying the overall impact of the dynamics we saw in the second quarter.

And with regard to utilization, there's really been like it's always tough. Like we're a 6% market share holder. We're a proxy for nothing. I always like to say just because it's like we don't have as wide of a visibility on the market per se. But I would say it's been pretty typical. And so at least kind of what we've seen exiting Q1 and through Q2, it's been a relatively typical time.

Okay. We'll go to the next caller, Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Hey, guys. This is Aaron on the line for Brooks. Thanks for taking the questions. I was wondering if you could just give us an update on Japan and maybe how you're thinking about that market timing wise? I appreciate any existing penetration in Australia and New

Yeah. Super excited about Japan. A lot of the regulatory stuff is coming through. We hope to like at least say, hey, we've done a surgery in Japan in the fourth quarter. And so, if so much of I think who we are as an organization is making commitments on timetables. And that was a commitment that we made and we said, Q3 to Q4 of ‘24 for our first experience, and I like our chances. And so, that will be a market that we're going to expect a lot out of over a long period of time. We're going to give it the necessary tools and time to create the very market that we expect out of Japan. So anyway, super excited about Japan.

Great. Appreciate it, Pat. Thank you.

Yeah. Thanks.

All right. Our next caller is David Saxon with Needham. Please go ahead.

Great. Good afternoon Pat and Todd. Thanks for taking my questions. Todd, I just wanted to follow-up on the free cash flow guidance change. So, what specifically is causing the DSOs, to go up? How confident are you that the DSOs and inventory dynamics won't get worse? And I guess, do you still have confidence in the 2025 breakeven target? And I have just one quick follow-up.

Thanks David. On the DSO, I would say they have not improved to the extent that we expected them to. So, we were I think 40 -- like mid to high 40s exiting last year, stepped up significantly in Q1. And I think that also had to do with some customer dynamics out there. I think there were there were some cybersecurity items that had hit different customers that delayed payments. Ultimately, we saw a significant improvement from we saw an improvement from Q1 to Q2, and we just have not seen as much of it. And so, I think some of that may be also associated with just some of our general customer mix in terms of where we're growing. So, my expectation is that we're not going to improve to where we've been exiting last year. And so fundamentally, we saw a step up Q4 to Q1. We stepped down Q1 to Q2, just not as much as I expected to. And so, I'm expecting no further improvement on that front. On the DI or on the inventory, the DOH, rank we’re about little over 400 here in the second quarter. Ultimately, as we're growing, think this has been a dynamic of just how efficient, how much needs to go to each different sales agent as they ramp up. And so, I think as we've looked at it, we're assuming no further improvements. We're putting a lot of effort and energy in the organization to get better at that and to improve it. I'm just assuming that we don't see those improvements. And so, it's really, we did not see the improvements that we expected to see through our activities in the first half of the year. So, I'm assuming that we don't see them in the second half of the year. And then your follow-up to that 2022, right?

Yes.

So, as I think as we've said before, the belief in the cash flow and the cash breakeven is a function of the belief in the top line growth. The top line growth creates the opportunity then for us to expand profitability. The expansion of the profitability ultimately funds and feeds our cash flow. And so, if you think that we can look at consensus that's about $120 million $25 million of growth next year, 35% of that you get $45 million of adjusted EBITDA on the year-over-year drop through. So, if we enter this year at 25.5 and you add 45, you get $70 million. So that would be $7 million to essentially invest in sets of inventory and what you need next year. And so ultimately, we've got a lot of adjusted EBITDA that ultimately funds the working capital needs of the business in 2025. And so, my confidence in achieving cash flow was a function of my confidence in the top line growth, which is predicated on the surge in adoption that we're seeing and the strong competitive sales reps and hiring that we're seeing. My confidence in our ability to continue to expand profitability is founded in the fact that we've demonstrated it for the last eight quarters and it's happened in the way we expected it to. And I know the walk forward is consistent with what we've the way we've built the company. And so that's the confidence that I have. And then also knowing that we have invested significantly this year in sets of inventory, you also get a bit of a tailwind next year in the higher utilization of those assets next year, meaning you don't have to buy as much to meet your revenue target. So ultimately, that's how I sit here and feel comfortable with 2025.

Okay, great. So, if I could just quickly summarize. So even if these dynamics don't improve, maybe they do, but even if they don't, you guys have confidence in the top line growth and that'll drive profitability, which drives free cash flow to breakeven next year, still looks achievable. And then, maybe just confirm that that was a good summary. And then my follow-up, you kind of walked into, the $70 million you kind of talked through for 2025. I mean, should we kind of be thinking of that as late/early guidance or is that just an illustration? Thanks so much.

Yes. So, I can confirm your understanding. And the math I walked through, I think it's consistent with our long-range plan expectations. I think consensus is like $66 million based on those numbers. So, I feel like that's a reasonable place to be.

Okay, great. Thanks so much.

We're not giving guidance at this point, but I think the logic and we've laid out the framework in the long-range plan and you're applying that framework.

Okay, great. Thank you.

All right. Our next question comes from Jason Wittes with ROTH Capital. Please go ahead.

Hi. Thanks for taking the questions. So, congratulations on the launch of EOS Insight. I assume that's going to have a lot of relevance in deformity. And I'm curious kind of where are your deformity business is right now and what else should we expect from the launch? Or you think you're fully prepared to go after that segment as with the EOS Insight launch?

Yeah. It's kind of the strategic question. It's one of the things that's very apparent is that alignment and measures are relevant in short segment as well as long segment surgery. Clearly, when you think of deformity, you think of long segment surgery. Our relevance there has been muted. We've been just, I would say, somewhat, when you create a company that was broken from nothing to something, you go to the place that, in essence reflects the most immediate influence, and that was lateral surgery. And so, our ability to apply lateral in relatively short segment surgery was kind of the initial kickoff of the company. That's driven much of the growth. We've used that, that growth in essence to continue to expand the complexity of tools that ultimately accommodate the lateral approach, but also say, how do we become a relevant participant in deformity? And candidly, there hasn't been a ton of innovation in deformity. And the opportunity that we have in terms of bringing a relative innovation package to deformity is very apparent. And so, I think that EOS has an entree into our adult deformity and subsequently our idiopathic deformity and then early onset is such the right walk. And so right now, we have kind of the automated alignment measures. Next year, Q2 ‘25, we're sprinting at a bone quality measure through the same image acquisition as the automated alignment measures. And so, again, I think that these things give us a very relevant, informatic package that will drive a relevant in deformity surgery.

And in terms of just hardware in general, do you think you have a full offering, to put out in the field at this point or is it lacking in some places?

Yes. I would say in terms of adult and idiopathic, I would say we have a great offering. Really, we're in the very, very early phases some of the small stature stuff.

So, what milestones should we be looking for to see how you're progressing with deformity, because it's obviously a pretty it seems like what's going to double the revenue opportunity for the company?

Yeah. Really, what we've modeled is kind of the growth of the company requisite to the technological advancement of the field. And so, I think that the route to a $1 billion requires 20% or north growth and I think that it's contemplated in that number.

So, and, I mean, is this sort of you're just launching now. I assume this is a multiyear, process to really start to see I guess, real numbers being starting to be posted there. So, I know you've given you've kind of given 2 year or 3 year out at this point, I guess, it's about a two and a half year out your outlook. Does that have much deformity in it, or is that pretty much all prefaced on, the current state of business?

Yes. It has a growing reflection of deformity in it. But It's interesting, I think, that if anybody questions our long-term commitment to this field, I think EOS is a proxy for a long-term commitment. And I think that where spine surgery needs to go, it clearly needs to evolve. The revision rates are clearly way too high. And so, as we mitigate variables through informatic tools, it improves surgery and it will expand our footprint. And so, what we've done is we've contemplated that through the growth profile of the company. And so, this is a multiyear walk and an opportunity that is again unique to us because we've been willing to commit the effort, the resources and the work to innovating in this space.

Great. I'll jump back in queue. Thanks a lot.

All right. Our last question comes from Sean Lee with H. C. Wainwright. Please go ahead.

Hey, good afternoon, guys, and thanks for taking my questions. I just have two quick ones. One for EOS Insight and the move towards deformity. Do you feel the company's goal is more towards getting enrolled with existing deformity surgeons or converting surgeons who don't do deformity yet into doing deformity surgery? And if it's the latter, have you seen any examples so far?

Yes. I would say that we're early in the experience. Just in terms of the way that the spine community evolves, I think there's going to be a focal assembly of surgeons who do the most complex of deformity surgery. So, we’re focusing on the young surgeons that are very technically and technology savvy, that are coming out of deformity programs. And so, I would tell you that that's a big part of our efforts and focus as well as I think the kind of the historically famous, deformity surgeons have always been hugely pro EOS, and, candidly, they've been extraordinarily supportive of us acquiring it because they know that we're committed to evolving the information package. And so, I would say that my presumption is that what's going to happen is there's just going to be a narrowing of the volume of surgeons who ultimately take on the majority of the deformity, and those people will be extraordinarily relevant to our focus and efforts.

I see. That's very helpful. My second question is on -- I think Todd mentioned that there was a supply shortage with one-year Biologics. I was wondering whether that's such a one-off event or do you see a trend of Biologics becoming a more material contributors to your overall portfolio? Thanks. That's all my questions.

Thanks, Sean. I think as you know, biologics has been an area of growth for us really probably over the last certainly last 12 months, maybe last 18 months. And so, as we've continued to grow and drive a higher attach rate, we just outgrew our supply. And so, at the end of the day, it was a demand created situation for us, which we've now recognized. And so, I wouldn't say that that's a trend per se, but clearly biologics has been a big growth driver for us over the last certainly last 12 months to 18 months.

I see. Thanks for the clarification.

All right. I will now turn the call back over to Pat Miles for closing remarks.

Thanks, Danica. Greatly appreciate everybody's support, and I hope shared enthusiasm over the whole EOS Insight launch. It is a significant one and one that we'll look back on with great pride. So anyway, I appreciate everybody's interest. Look forward to catching up. Thanks.