Alphatec Holdings, Inc.ATECNASDAQ
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Operator: Good afternoon, everyone, and welcome to the webcast of ATEC's Third 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 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. Now I will turn the call over to Pat Miles.
Patrick Miles: Thanks very much, Lacie. Appreciate it. Welcome to the Q3 ATEC financial results conference call. As usual, there will be some forward-looking statements, so please read that at your leisure. I want to take a moment and put into context what we are building here at ATEC. I will tell you, it's a very small number of public medtech companies, I believe, less than 10 that are over $500 million in revenue, meaningfully profitable and growing over 10%. Our results and guidance suggests that we are not only in that club, we are leading that club with top line growth of 30% while approaching a run rate of $800 million in revenue. My point is, is that we are becoming the company that we intended. And what I want to do is make sure that these things don't happen by happenstance, and they happen by a bunch of committed people. And so I wanted to thank those who supported and have been part of the mission and also remind everybody that we're just getting going. And so there is much to do. And so now I want to speak to why we are so uniquely positioned for a very long run. And I think the key is we're 100% spine focused. And we make decisions every day purely on spine. We are leading through proceduralization, which means that we're advancing lateral, which is reflected in convoyed sales, and we're applying that thesis across the board. From a deformity perspective, we're in the very infancy of our role or influence on that market space, really driven by EOS and EOS Insight. We have previously built an infrastructure that's going to last us a very long run. I look forward to describing more about that. And from this point forward, what you'll see is durable, profitable sales growth. And so just to share a couple of statistics from Q3, we grew at 30%. We had an adjusted EBITDA of $26 million, which is 13% of revenue. We improved by 840 basis points and turned in a free cash flow of $5 million. And so from a total perspective, that means that the total revenue was $197 million. The surgical revenue growth was 31%. Something that I'm totally excited about is the same-store sales, so revenue growth in established territories was 30%. It just tells you that there's demand in what we're doing. New surgeon users was 26% [Audio Gap] cash flow. We have plenty of access to cash and cash at $216 million. Our trailing 12 months adjusted EBITDA is $81 million, and we are flowing cash on a trailing 12-month basis, which feels great. And so what I'll do is I'll turn the detail over to Todd and be back with you after his comments.
J. Koning: Well, thank you, Pat, and good afternoon, everyone. I'll begin today with the third quarter 2025 P&L highlights. Total revenue was $197 million, up $46 million and 30% compared to the prior year period and up $11 million sequentially from the second quarter of this year. The $197 million in revenue was comprised of $177 million in surgical revenue and $20 million of EOS revenue. Third quarter surgical revenue of $177 million grew 31% compared to the prior year period and was up sequentially by 5%. That represents $41 million in year-over-year growth. Procedural volume growth of 28% was driven by strong surgeon adoption, where we increased our net new surgeon users in the third quarter by 26%. Procedural volume growth reflects both an increased number of surgeons as well as earning a greater share of an existing surgeon's business. We see this happening as our procedures are used across the broader set of pathologies and as surgeons adopt more of our portfolio offerings like cervical or corpectomy. Since we first began reporting on new surgeon users in 2022, we have consistently added at least 19% net new surgeon users each quarter over the past 3 years. This surgeon adoption reflects both the attractiveness of our portfolio and the coordinated investments we're making in sales talent to meet that demand. Average revenue per procedure grew 2%, which was consistent with our expectations. Procedurally, we saw strong revenue contributions from our lateral and cervical solutions, and we are beginning to see measurable influence from our deformity offering. Same-store sales in the U.S. or sales that come from sales agents that have been in territory for a year or more grew 30% year-over-year, which demonstrates that we continue to grow significantly in the markets where we are already established. Our strong surgeon adoption, increased utilization and same-store sales growth results are testament to the durability and consistency of our revenue growth algorithm. EOS revenue increased to $20 million in the third quarter, up 29% compared to the prior year period. Demand in the U.S. market where we have a strong presence with our implant sales force continues to be strong and the biggest driver of growth in both deliveries and new orders. This in conjunction with a growing number of surgeons using EOS Insight positions us to see the benefit of the accompanying implant pull-through in the coming years. Turning to the remainder of the P&L. Third quarter non-GAAP gross margin was 70%, flat sequentially and up 80 basis points compared to the previous year, primarily driven by product mix and volume leverage. Non-GAAP R&D was $15 million in the third quarter. R&D investment was up year-over-year by more than $2 million and was up sequentially by $1 million. Non-GAAP R&D expense was approximately 8% of sales in the quarter, with top line growth driving 90 basis points of leverage year-over-year. The R&D is an area where we continue to see opportunities to invest in innovation that will drive future growth. Given the scale of our business, we can make these increased investments and generate EBITDA leverage without sacrificing the growth opportunities. Non-GAAP SG&A of $112 million was approximately 57% of sales in the third quarter compared to 67% of sales in the prior year period. SG&A grew by 11% year-over-year compared to our 30% increase in revenue, which drove 980 basis points of improvement. We continue to leverage the company's foundational infrastructure investments, improve our variable selling expenses and be very deliberate in new headcount additions. The combination of these factors accounts for about 2/3 of the improvement. We reported total non-GAAP operating expense of $127 million, which was approximately 65% of sales. Our operating expense investment reflects continued prioritization of strategic growth initiatives supporting sales expansion and new product development. While our foundational infrastructure is in place, we continue to expand the sales force, build out procedural solutions and integrate technology, data and information into the operating room experience. We continue to improve as an organization and the disciplined prioritization of these investments, along with our durable top line growth drove over 1,100 basis points of expansion in our operating margin year-over-year. I'll turn next to adjusted EBITDA, which was a record quarter for us at $26 million or 13% of sales in the third quarter, delivering 840 basis points of improvement compared to the prior year period. This quarter also marks our fourth consecutive period with over 40% drop-through on a year-over-year revenue growth to adjusted EBITDA. The discipline in how we look at headcount additions, the other types of investments we make has served us well and will continue to be foundational in how we drive profitable sales growth. You can see from the chart on this slide that the profit margin expansion that we are executing has been both significant and consistent. Our trailing 12 months of adjusted EBITDA now sits at $81 million and 11% of revenue. We are driving meaningful margin expansion that aligns with the priorities outlined in our long-range plan and as a result of disciplined execution. These deliberate results give us confidence in our ability to continue to deliver on our financial commitments and translate revenue growth into profit and cash flow. We are committed to driving profitable sales growth. Now turning to the balance sheet. We ended the third quarter with $156 million in cash on hand. Additionally, we had access to $60 million of available borrowing on our revolving credit line, which was undrawn at the quarter end, making our total cash and available cash $216 million. Our positive free cash flow of $5 million was again at the favorable end of the $1 million to $5 million range that we previously communicated. We generated $14 million in cash from operating activities, while we continue to invest in surgical instruments. Going into 2025, we had forward invested in instruments and inventory, the revenue-generating assets of the company. This year, you've seen how our revenue has grown and how we've become more asset efficient. We are growing more in absolute dollars than we ever have in our history, and we are doing it more efficiently. This efficiency is the result of the relentless execution of the plans we put in place by multiple teams across our company. The evidence of the company's inflection to cash flow generation is undeniable with our trailing 12 months of free cash flow turning positive for the first time in company history. The third quarter also marks our second consecutive quarter with positive free cash flow. Looking back at the past 4 quarters, we've now delivered positive free cash flow in 3 of the 4. With our consistent profitable growth and cash generation and a strong balance sheet, our financial position has never been better, and we foresee opportunities to begin to delevering our balance sheet in 2026. Given the momentum in the U.S. surgical business in the third quarter and healthy underlying spine market, we are raising our full year revenue guidance by $18 million to $760 million. Our revenue outlook for the full year 2025 expects adoption of our unique procedural approach to drive surgical revenue of approximately $684 million, and we expect EOS revenue of approximately $76 million. Our surgical revenue guidance raise is a result of overperformance in case volume, which we now expect to grow in the low 20% range year-over-year. We expect -- we continue to expect case ASP to grow in the low single digits year-over-year. As it relates to free cash flow, our third quarter and trailing 12-month performance further reinforces our confidence in delivering positive free cash flow for the full year 2025. We expect fourth quarter free cash flow to range from positive $6 million to positive $8 million. Turning to the outlook for the full year 2025 adjusted EBITDA. We expect sales growth to continue to leverage the infrastructure we have built, contributing to an adjusted EBITDA of $91 million, an $8 million increase versus our prior guidance of $83 million. Notably, our trailing 12 months of adjusted EBITDA of $81 million as of the third quarter speaks to our ability to deliver on our full year commitment of $91 million. As a reminder, our adjusted EBITDA guidance includes us absorbing the impact of expected tariffs in the second half of the year, and we continue to estimate the impact of tariffs on our cost of goods sold to be in the low single-digit millions of dollars for the full year. The chart on the slide depicts the consistency of the profitability progress we are making and the tremendous power of our business model to drive future profitability. Our adjusted EBITDA guidance of $91 million will generate an adjusted EBITDA margin of 12% for the full year. Notably, our current guide implies a 200 basis point improvement compared to the 10% adjusted EBITDA margin we guided to at the beginning of this year. Given the profitable revenue growth we've generated this year, we can now self-fund the investment in instruments and inventory to support our future revenue growth. We are well positioned to meet or exceed our 2027 financial commitments of $1 billion in revenue, 18% adjusted EBITDA and $65 million of free cash flow. The third quarter financial results are another step towards delivering on our commitments. We are delivering durable revenue growth, strong profitability improvement and seeing all of that translate into free cash flow. This team has made meaningful improvements in how we operate the business. You can see that clearly from the financial results. Most importantly, we are helping surgeons perform better surgery, and that is where we will remain laser-focused because it is the foundation for creating lasting value. With that, I'll turn the call back over to Pat.
Patrick Miles: Well said, Todd. So I would tell you that our execution has been absolutely consistent across the strategy, and our strategy hasn't changed. It remains steadfast. We are creating value through creating clinical distinction, which compels surgeon adoption, and we continue to just get better from a field perspective. And so hugely exciting. So we like to say around here that the spine market needs ATEC. And I've never been a bigger believer in that view since I've started. And you got to realize the spine field is highly complex. And the type of revision rates or extensions of previous surgery is unacceptably high, which creates nothing but opportunity. And so the volume of variables that need to be addressed to drive success in spine has significantly increased due to a deeper understanding of the field. Historically speaking, investment has been overtly focused on flawed implant only, which is the currency of the business versus focusing on the requirements that ultimately drive outcome improvement. And so our view is that the industry needs a focal leader obsessed with mitigating variables in spine, and we are it. And so we've started down that road clearly through lateral. A key to variable mitigation is the architecture of spine procedures. That's what we call proceduralization. I think lateral surgery is a great example of that demonstrated success. However, the one thing to realize is we are absolutely in our infancy in terms of our footprint with lateral. There are multiple catalysts ahead. And so the first thing to talk about is just -- and Todd hit on it is the expanding of indications, which oftentimes is synonymous with new products. And so we have multiple new products forthcoming, including a mechanized arm. We have IdentiTi II. We just launched corpectomy. So not only expanding indications, but also increasing complexity, which oftentimes means more levels. And so we are able to address more pathology, and we just continue to be getting better in lateral. Another place that is a catalyst is the integration of technology that ultimately makes for more users. So it democratizes the technique to a wider audience. If you start to think about our informatic platform, EOS gives you the objective alignment measure and bone quality, Valence provides you where you are in space. So that's our navigation and robotic piece. And then SafeOp tells you not only the nerve location, but the nerve health. Having been at this for a long time, I would tell you, there is no one close to the level of sophistication in the most coveted element of the spine market, which is lateral. And so our next foray is into more data-driven decisions, and I will look forward to the day that we are informing the field of the best procedure for the respective pathology. And so there's still a lot to do on this front. Historically, whenever we talked about proceduralization, it was related to lateral. We have recently applied that same effort to our surgical portfolio with significant success. We used to always talk about the halo effect, meaning that we would create confidence with our lateral portfolio and people would ultimately use the least differentiated part of our portfolio in cervical. That is no longer the case. I will tell you that our cervical portfolio now stands on its own merit. Through the proceduralization effort, there is little we can't do in the cervical spine from elegant segmental surgery with our best-in-class access in IdentiTi II product through the most complex things such as corpectomy and revision surgery from the back. And so lastly, I'd hate to not shout out SafeOp. The type of information that it avails from an automated SSEP and MEP perspective and cervical spine has expanded the application of that product in this space. So our momentum really has just begun, and it's a very big deal. I would tell you another place that we are in our absolute infancy is accelerating deformity, our deformity inserts through the EOS integration. Much like lateral and cervical, our progress in deformity is just starting. So thanks to the influence through our EOS integration, we've launched AI-driven alignment for pre-op assessment. We're simulating surgery through our planning platform and providing patient-specific implants to correct deformity. Then the opportunity to confirm the plan postoperatively, meaning did I achieve what I intended to achieve. You have to realize the literature is abundantly clear. Surgeons are more likely to reflect the intended goals if they preplan. Our preplanning software is best-in-class, and the reflection of that is also best-in-class. So the EOS deformity opportunity literally creates another PTP like run just ahead. So I wanted to share a couple of things. Here's a great example of how our integrated product effort is advancing deformity. If you start on the top left picture and you look at the imaging, literally, we have the most coveted imaging. It is a biplanar low-dose standing image. It is what the surgeons want. Then we automate all the alignment measures and then create a 3-dimensional model. For a surgeon to have a 3-dimensional model in an idiopathic scoliosis is highly valuable for them to understand the rotational elements, and you'll see the top right photo is the blue, which shows the exact rotational deformity that the surgeon has to deal with and then to utilize our patient positioning efforts and straightening the spine prior to cutting or prior to the intervention is highly valuable. You can see the curve correction measured interoperatively, and you'll see it going from [ 40 to 6 ] using our best-in-class fixation. And so this is just an example of the type of sophistication that's assembled together to ultimately advance the field, and that's what we're doing with deformity. Another key catalyst forthcoming is Valence, which we expect to unlock further adoption. This truly democratizes the techniques and what we like to say is in the hands of the many. Valence is simple and most importantly, it's accessible and integrated. We don't look at technology as something unto itself. We look at how it ultimately influences the requirements of a spine procedure. And so procedurally integrated is such a key part of this. And so it's purpose-built for spine and compatible with all the 3D imaging systems out in the market. The footprint is very small. We're not taking a ton of room up in the operating room. It's not something that you spend millions of dollars on and wheel in. It has a very small footprint, which is highly valuable. And it's been demonstrated to be efficient. And so the first utility you will see with the Valence system will be in our proprietary PTP procedure and super excited for a Q4 for that to occur and expect its real influence in '26. And so I think what's so often kind of either underestimated or misunderstood about ATEC's ecosystem for which we previously invested is it is built for the long run. I genuinely believe there is currently a lack of will competitively to make such investments. That is why we love the prospects of the long run. It is the only end-to-end fully contemplated, fully integrated ecosystem. We fundamentally believe that spine surgery will be made better through data-driven decision-making, and that's what this avails to us. So as I look back over 8 years here, I would characterize our evolution into 3 distinct chapters. I would say the foundational investment years were 2018 to 2020. The infrastructure build was '21 to '23 and the profitable sales growth is '24 onward. And I just -- I remember back years ago when we assembled really the unbelievable team that exists here today and that we continue to grow. The portfolio was completely overhauled. We acquired SafeOp and evolved it, which is such a key to the type of informatic foundation that we are enjoying today, and we started to evolve our distribution. We got a bit of a hard time in the early days of our infrastructure build. So we acquired EOS and Valence, and those are key components of what we're doing today. We built a state-of-the-art headquarters to maximize the surgeon and sales training. We expanded our distribution footprint in Memphis. Something key that, again, I think that most people don't understand is we built scalable internal systems. We invested in valuable internal systems, and we made a focal international investment. What you're seeing today is a result of those efforts. And so we're levering the infrastructure investments. We're integrating data and informatic -- and our informatic platform into our surgical experience, expanding and elevating our procedural approach, and our international market is winning. And so what I thought I would do is end where we started, which is what makes us uniquely positioned is our 100% spine focus. Everything we think about every day is spine. And so we love it, and we're prospering in the space. We're leading in advancing proceduralization, which starts with lateral, but as I said, includes cervical and deformity. Our deformity leadership is in its infancy. EOS is huge. The people who are working on EOS are crushing it. We built an infrastructure for a very long run, and so can't be more excited about our capacity to scale off of that in a profitable way. So what you're going to see [ forth ] is durable, profitable sales growth, and that's what makes us the preferred destination. And so with that, I will turn it over for questions.
Operator: [Operator Instructions] The first question comes from Vik Chopra with WF.
Vikramjeet Chopra: Congrats on a nice quarter. A couple of questions for me. Maybe just first starting off on the cash flow. Just talk about how you see next year playing out from a cash flow perspective given the strength over the last 2 quarters? And then I had a follow-up, please.
J. Koning: Yes. Thanks for your question, Vik. No, I think as we look at our long-range plan commitments, I think our cash flow expectations for next year are probably in that $20 million range on free cash flow. So on our path to $65 million of free cash flow next year. I think when you look at the amount of revenue growth that you might generate from a guidance standpoint and the drop-through on EBITDA, I think that gets you in that $20 million range. We're not at the point here where we're giving guidance, but I think as a construct, that's a good spot to be thinking about.
Vikramjeet Chopra: Great. And then just on the -- your comments around LRP, Todd, or maybe even for Pat here. I mean, just given kind of how you performed this year, can we expect an update to your LRP next year given that you're tracking well ahead of your plan?
J. Koning: Yes, Vik, I think as we're thinking about it, we're trying to contemplate when the right time to do that is. And we do think towards the end of next year would be a good time to do that as we enter 2027 and get 2026 mostly under our belt. And so we're thinking towards the end of next year, we'd come forward with an update to the long-range plan.
Operator: Your next question comes from the line of Matt Miksic with Barclays.
Matthew Miksic: Congrats on a really strong quarter. Wanted to get your thoughts on maybe the competitive landscape. And obviously, the changes -- the recent changes, and there's been a bunch have sort of, I'd say, consolidated. It looks like consolidated the major scale players in spine down to, I guess, 3, I want to say. So how do you expect that to potentially play in your favor? And perhaps like what other opportunities do you see for consolidation -- implications of consolidation, that sort of thing? And I have one follow-up.
Patrick Miles: Yes. I'll jump on the first part. One of the things that is fascinating is that, first of all, we love market disruption. So if there's anything that you know that we could do to further that, let me know. And I'm kidding. The -- but the reality is these are multiyear dynamics. And it's like they never happen overnight. And so I even think J&J, the announcement was it's going to happen over a 2-year period. And so it's one of those things where it's like our focus is on just being us. We have so many catalysts that we need to focus on. We'll be opportunistic with regard to sales hires and the like, but it's just more disruption that candidly, we welcome.
Matthew Miksic: That's great, Pat. And then just one on the lateral space and the role of Valence. I think you mentioned you're in the early innings. It seems like there's an opportunity, if you have 2 players kind of chasing this new approach, one of the potential differentiators and benefits to clinicians is to make that approach smoother and easier. And I don't know I've been hopping between calls here, so you may have already touched on this. But if you could talk a little bit about what kinds of benefits Valence could bring to that in terms of efficiency for surgeons already good at this and doing it regularly and what folks might benefit from and how this would benefit the expansion and adoption of [ prone lateral ] over time?
Patrick Miles: Yes. The -- it's fascinating. It's like the whole PTP thing, I think, is so ripe for being a driver of procedures at 4, 5 and above. So anything at 4, 5 and above, just the ability to approach the spine and enjoy the benefits. And so the challenge always is how do you democratize it. There's always a bell curve of skill sets. And so the question always becomes is it's great to get a few doing the types of surgery that ultimately benefit a number of patients. But until you can democratize it, it's just -- it almost doesn't matter. And I think that when you look at navigation over the years and you look at even robotics, these things have been unidimensional. And so they've not been properly integrated into the workflow of a spine procedure. And so what's frustrating to us is what we want to do is apply all of the type of information that's going to drive greater precision to an experience in a methodical way. And so what we see as the opportunity for Valence is to architect just that. And I would tell you, on the team in Colorado and in San Diego, the Valence team has integrated this thing in a way that ultimately reflects the workflow that's desirous. And so my view is that these technological elements contribute to the predictability associated with the procedure. I will also say that it already -- we are leading in a huge way. Like SafeOp compared to anything else on the market is the father-son game. Our neurophysiology piece, the ability to ultimately identify where the nerve is, understand if it's degrading from a health perspective and then discern it with a motor evoked potential that's facilitated is not done by anyone. And so our retractor, our mechanized arm, it's -- again, I deem it to be a real competency of the company in just an absurd way. And so what we will continue to do is apply our learnings to things like the Patient Positioner where people don't have the will to invest, and we will continue to make things better. And so I just -- I think that the Valence element, I love it. It's one piece of it. It's one piece of the workflow of what we're building. And so anyway, clearly, I adore these things and have been at it a long time, but it's a great addition to the puzzle.
J. Koning: And Matt, I think all the things that Pat said, I think, bring a level of efficiency to the experienced user, but also makes it more predictable and accessible to a broader set of users who might not be doing lateral but be doing something more traditional from a posterior approach. And so I think that's what gives us a level of excitement about what all this does in terms of expanding the lateral market.
Operator: Your next question comes from the line of Young Li with Jefferies.
Young Li: Congrats on a very strong quarter. So it looks like you had the biggest beat versus consensus in 3 years. It's also a seasonally slow quarter. Can you maybe just talk a little bit about what you're seeing in the market, the health of the spine market as well as some of the competitive dynamics? If you can comment on who you're taking excess share from during the quarter, that would be helpful.
Patrick Miles: I'll start and provide Todd the ability to clean up what I mess up. The -- I think what's going on is a reflection of the foundation that we've built over the last several years. And I think you're starting to see some of the market disruption come through. I think the spine market is what it is. There's not a ton of change to that is my presumption. We're not seeing anything unique per se. I think the volume of surgeon users just continues to increase, and it's a proxy for a future business. And so when you start to see the volume of new surgeons added, you start to see the same-store sales, we so value the people who have been at this for a long time and watching them continue to be successful in their marketplace is a very big deal. And so I think more than anything, it's like, I think we're taking share from a lot of different companies. But I think what you're seeing is just kind of the -- we always say that there's an 18- to 24-month lag in this business. And so you're seeing kind of decisions that we made 18 to 24 months ago being reflected today. And I think in 18 to 24 months, you'll see decisions we made today reflect in the marketplace. And so I'll defer to Todd.
J. Koning: Yes. I think the only thing I'd add there, Young, is from a market standpoint, I think the market has been healthy and has felt healthy. And so I think that's a good thing. I think that's a good thing for us. And we feel that when you look at our growth and you look at our size, clearly, I think you're taking share from all the major players. And I think when I look at the demographics of that and the locations and the surgeons, I think that holds true. And so you don't grow $40-plus million year-over-year without kind of touching all the competitors.
Young Li: Okay. Can I ask a follow-up just on the balancing profitability versus growth. There's a bunch of companies been disrupted in spine. So you can theoretically grow them faster if you want to, but probably might have some -- some margins. You did mention durable profitable growth going forward. So can you maybe expand on that point a little bit more? How do you balance growth versus profitability? And then on that point, your average rep per case is much higher than the competition. Can you maybe talk about how you're able to achieve that, sustain that going forward? And how can that impact profitability and efficiency for your reps and instrument sets?
Patrick Miles: That's far more than I could answer, so I'm going to turn it over to Todd. However, the one thing I did want to hit on is I'm not sure everybody appreciates the whole convoyed sales. When we talk about proceduralization, what happens is there's multiple products used. And candidly, they've been designed to work together to ultimately reflect in the predictability of a procedure. And so our enthusiasm is all about has the surgeon accepted our thesis surgically. And so if they do, then the likelihood for us to have a high ASP based upon the convoyed elements that ultimately get reflected within a spine procedure is high. And so that's why we're zealous to track products per surgery. We're zealots on the ASP front just because it's one of those things that's reflective of buying the thesis that we're putting forth.
J. Koning: Yes. And I think I'd add in terms of how we balance and think about growth and profitability, obviously, we've got our landmark of the long-range plan out there in terms of what we've committed to from a profitability and a growth perspective. And so we have a plan to get there, and I think we've been executing to that plan. When we talk about priorities, our priorities are to grow and to invest in the innovation that will perpetuate future growth. And so that investment in growth is a combination of our investment in sets and inventory, which are the revenue-generating assets of the company. And I think we've got a solid construct in terms of how to think about that in terms of investing $0.75 on the growth dollar. And I made some comments in my prepared remarks about the size of our adjusted EBITDA now being able to be big enough that we can self-fund that growth. And so we feel confident that we've got the right amount of profitability dropping through so that we can continue to invest in the sets and the inventory of the business to perpetuate the future growth. And in combination with that, as we think about the leverage of the business, we are leveraging the overhead. And so we're certainly getting some improvement in our [ real berets ] as we've expected and as we planned. But fundamentally, we're seeing a lot of interest from surgeons to adopt the procedures. And as we grow, we can continue to drop profitability based on the fact that we've invested in the infrastructure of the business.
Operator: Your next question comes from the line of Matthew O'Brien with Piper Sandler.
Anna Runci: This is Anna on for Matt. I guess I wanted to ask another one on Valence. I mean you're getting pretty close to the full launch that's supposed to come later this year. And just wondering if you have any sense of what the funnel of orders looks like currently? And maybe if you could also provide some more context around the size of the ASC opportunity?
Patrick Miles: Yes. The -- I was going to be a smart alec and give you a precise number. I'm kidding. What I would expect out of Valence is for us to end this year with a decent experience. As you know, the robotics side has been in Alpha for several months now. We're waiting on the navigation side to kick in. And so when that kicks in, we'll get an experience. We have a high degree of confidence in terms of what's going on there. But we don't expect any significant impact really until '26. And so clearly, there is demand for it out of the gate, which we're excited about. But my enthusiasm around the Valence system is the impact it will have on the democratization of surgery. And so we see these things as integrated tools for surgery. And so not as a big capital opportunity, capital sales opportunity, but our enthusiasm is clearly on the surgical side, which we think it will drive volume.
J. Koning: And Anna, the only thing I'd add to that is I think we're clearly going to be deliberate about how we roll this out over the course of 2026, ensure we're getting good experiences and setting ourselves up for success for '26 and beyond.
Anna Runci: Great. And then if I can just squeeze in one last one on international. I appreciate you're taking sort of a narrow and deep approach to your expansion there. And it looks like you're ahead of schedule against the LRP target. So I was just wondering what your outlook is on international, if that's changed, there's any upside there? Yes, just what are your thoughts?
J. Koning: Yes. Thanks, Anna. I think you may be looking at the international breakout in our Q, which would also include EOS. And so when we built our long-range plan, we really talked about a global EOS, a surgical international and a surgical U.S. breakout of revenue. And so what I would tell you is I think we're kind of on plan in terms of our progress towards the long-range plan commitments that we had. So if you remember, $1 billion in 2027 was about $100 million of EOS revenue, $870 million of U.S. surgical and $30 million of international surgical revenue. So that was how that broke out, and I feel like we're on track towards that.
Operator: Your next question comes from the line of Allen Gong with JPMorgan.
K. Gong: Team, congrats on the good quarter. I just wanted to touch on the guidance and kind of build off of a question that was asked earlier. You had a really strong third quarter, kind of grew right through the normal seasonality we expect to see in the summer months. And when I look at your implied guide for the year, you still have a step-up into fourth quarter, but it's definitely a touch smaller than what we've seen in the past and what we've kind of expect from orthopedics more broadly. So I guess, why was this the right range to basically establish for fourth quarter? And then just to slip in my follow-up as well, when I think about the outlook for 2026, is that kind of the right run rate that we should be using the fourth quarter number as a run rate for 2026 as well?
J. Koning: Yes. Fair question, Allen. And I think as we looked about it, we kind of thought that an $18 million lift off of the previous -- previous guidance was just a good place to be. I think it was a strong place. We clearly dropped the beat and raised and felt like that was appropriate. When you look, it implies a 20% year-over-year growth in our surgical revenue, about $30 million of year-over-year growth. To your point, it does imply a slower or less of a lift from Q3 to Q4. I think that's factually true. But ultimately, our guidance philosophy has kind of remained unchanged. We're going to put numbers out there that we believe we can achieve and have a reasonable opportunity to exceed. And so on the balance, we felt like it was just a prudent place to land. I think as you contemplate next year, and clearly, we're contemplating next year, that won't be a surprise to anybody. And your question is how should you think about it? And what I would tell you is we came into this year, we guided towards about $120 million of absolute growth. If you look at where we are today relative to $1 billion in 2027, that would be $120 million this year -- next year and $120 million of growth in 2027. Now then you'd also say in 2023 and in 2024, we grew $130 million each year in absolute revenue. And so I think as you contemplate it for us to kind of come out into 2026 and when we do give guidance, I think those are probably good data points to reference. The thing I'd point to in terms of what makes me optimistic about our future is you look at the growth that we've generated, especially in our surgical business. And you come to realize that when surgeons adopt our procedures, they use more in year 2 than they did in year 1, and they use more in year 3 than they did in year 2 and so on and so forth. And so the adoption continues. When you look at the dollar growth that we've generated here in 2025 in surgical revenue, the preponderance of that revenue growth has been driven by people who adopted the procedures before 2025. And so when you look at the amount of surgeon adoption we've seen thus far this year, it gives me optimism for the years to come. And so probably not giving you the exact answer you were looking for, but that time will come here in probably the next time we get on a phone call. So I appreciate the question.
Operator: Your next question comes from the line of David Saxon with Needham.
David Saxon: Congrats on another really strong quarter. I just had a quick follow-up on, Todd, your commentary to that prior question. So you were talking about $120 million worth of annual growth. It sounds like that could be conservative. But the question is that's kind of right around where consensus is. So it sounds like you guys are feeling pretty conservative. Is that the right takeaway?
J. Koning: I think you're saying consensus today versus our current guide. Consensus -- [ 2026 ] consensus versus our current [indiscernible]?
David Saxon: Yes. Yes. Yes. Sorry.
J. Koning: That would be the math. That is correct. So I feel like that's -- I think of the 2 data points I laid out there, $120 million and $130 million like that feels like that would be on the low end of that range.
David Saxon: All right. And then the real question I wanted to ask was just around deformity and that part of the portfolio. Would love to hear some of the traction you're seeing there. I guess, is that part of the portfolio and that offering at critical mass at this point? Or do you still have some product launches to go through before it gets there?
Patrick Miles: Yes. I'll go ahead and take that one, David. We are in the absolute infancy of our influence of deformity. And I think that we've gone into it really with a -- trying to garner a better understanding through the EOS experience. And the volume of opportunity to create predictability in the deformity space is significant would be an understatement. And so from the different types of deformity being adult deformity, idiopathic and early onset, the focus is going to be idiopathic and adult for the most part. But we have several products that we're currently enjoying solid adoption on. We have multiple products in the design phase of that -- for that market space. And so I think we are as poised as we can be with regard to having influence based upon the foundation built around the EOS platform. And the EOS platform will be having an end-to-end solution that's been fully contemplated, it will be fully integrated in due time. Again, our opportunity to have a significant impact on that market space is very apparent. So anyway, I guess that's all I can comment on.
David Saxon: Congrats again on the quarter.
Operator: Your next question comes from the line of Caitlin Roberts with Canaccord Genuity.
Caitlin Roberts: Congrats on a great quarter. You noted some discipline with sales team additions. If you could maybe provide some color on how you are being disciplined in those hires? And then also, do you plan to add to the capital sales team for the upcoming Valence launch?
Patrick Miles: Yes. I'll go ahead and start, and I'll let, again, Todd to clean up what I mess up. The -- so the first part was the -- just the discipline around the sales hiring. I think we have a very good algorithm in place just in terms of minimizing the volume of time from hire to them being effectual. As you appreciate, as we talk about disruption taking time, these guys oftentimes have noncompetes and other issues that preclude the immediacy of our impact in a specific market. And we still have a number of marketplaces where we are an absolute nobody. And so it's nice that what we'll see is we'll see access granted first. We'll hire sales heads to initiate a utility. And then by the time the people are offered noncompete, their influence just becomes significantly greater. And so I would tell you that our access to hospitals is tremendous and are continuing to expand. And so I have several markets in mind that we are in our infancy and just kind of just getting going. And I would say a lot of them in the Northeast. And so that's kind of the thinking on the sales hires. Again, very -- trying to be as methodically and as thoughtful as we possibly can based upon, as Todd talked about, just a lag in terms of the influence. He talked about the surgeon engagement. And then 2025 is ultimately reflecting what we're doing or previous years are ultimately reflecting in what we're doing today. It's the same impact from a salesperson's perspective, clearly. From a Valence perspective, we're going to add some capital heads, not a ton of them. What we want to do is integrate the thing procedurally. It's -- this system is very simple, and it's simple enough to where our guys can run it who are on the ground. Making sure that we have proficient salespeople that ultimately can run the entire case is of significant importance to us. And so -- again, we'll have them where we do sell capital, we will have people in place to ultimately help facilitate that process, but our expectation from an execution perspective is the people in the room.
Operator: Your next question comes from the line of Tom Stephan with Stifel.
Thomas Stephan: I wanted to follow up on deformity. Todd, I believe you mentioned in the prepared remarks that being an early revenue driver. And Pat, I appreciate your comments on the portfolio kind of road map to an earlier question. But Pat or Todd, how should we be thinking about kind of the timing of when that opportunity really starts to take hold sort of as we think about, I guess, contributions to revenue growth?
Patrick Miles: Let me start on the subjective, and I'll let Todd provide any objective he'd like to comment on. When the foundation of your strategy is based upon EOS and EOS Insight, what we want to see is the expansion of units and the expansion of availability of EOS and EOS Insight. And so where we have EOS units, we have a marked increase in market share. And so that's because of deformity. And so what we're seeing is just the opportunity to continue to further that expansion and that market share in places where we have systems placed. And so a big part of our effort and interest is to continue to push that. And so I would tell you that as I think about it, a big proxy for significant influence becomes the information that drives improved care. And so that's the whole clinical distinction element that we love to communicate about. And so there are product additions over the next 24 to 36 months that will continue to elevate the sophistication of not only the preoperative elements, but the interoperative elements and then the ability to assess and the ability to automate -- collect automated data. And so we think that those things will drive an outsized footprint of our influence on the deformity field.
J. Koning: And Tom, the only thing I'd add to that is I think that feels like a reasonably linear experience over the next couple of years. Like as we continue to do the product innovations and deliver on the promise from an EOS Insight standpoint that Pat discussed, I think when you look at the hardware stuff, you think about adult deformity, much of what you -- what we have today is utilized very effectively there. The addition of EOS makes that all the much more available, sticky and higher demand. I think when you look at pediatric deformity, that's where we've really started to add like a hardware solution or a proceduralized solution is really the answer to that. And that's probably something that's really only, I'd say, started to be felt by us in the last, say, 6 months or so. And so I think we're at the very early stages of that. And I think there's more proceduralization there to come.
Patrick Miles: And again, take this for what it's worth. I think what thrills us is we have a foundation of lateral. We see cervical starting to take off based upon its own merits. And then there's a deformity long-run opportunity, as Todd said, that's going to be linear, but it's going to -- again, just -- it provides catalysts for continued future growth. And as we look at the business over a long period of time, we've made foundational investments that will continue to evolve that ultimately reflect in a unique element of our portfolio. So it looks like it's an exciting time.
Thomas Stephan: And then a quick follow-up just on surgeon adoption. New surgeon adoption growth really strong, has been for many years now. Can you just talk about, I guess, kind of the durability here moving forward, just as you look at where this growth has been coming from? And then maybe more importantly, kind of where the growth will come from moving forward?
Patrick Miles: Yes, I'll go subjective and objective again. The -- I would tell you that I love the whole new surgeon adoption. It's not the same contributor in the immediate term that same-store sales is. And so the great part is, is all that does is provide a proxy for future engagement. And that's where it's like the enthusiasm from us is seeing the same-store sales continue to grow so that we're not completely reliant upon adding sales heads for growth. And so what you're seeing is you're seeing a very robust business within the context of established areas and just the proxy for future bullishness based upon the new surgeons.
J. Koning: Yes. And maybe to add or to expand upon that, we've got many territories where we're established today. We can both get penetration of an existing surgeon's business in terms of more procedures and/or more case revenue within the procedure. And we are adding surgeons within that existing footprint. And we've seen that significantly here over the last probably 18 months. And -- but then to Pat's point as well, there are also areas where we have just entered, if you will, and we'll begin to see more surgeon adoption because we're -- just now essentially have proper representation. And so all that to be said, the opportunity is significant to continue to add surgeons because at the end of the day, we're a high single-digit market share player, which tells you that there's a lot of surgeons we don't do business with.
Operator: Your final question comes from the line of Sean Lee with H.C. Wainwright.
Xun Lee: Guys, congrats on the great quarter. I just want to touch up on the EOS a bit since I see the great revenues you guys had in third quarter, which is typically a slower quarter for hardware sales. I was wondering what are the primary drivers behind this? And do you think this will carry over into the next quarter or 2 as well? And maybe thinking a little bit on the longer-term outlook as well. I know that for the EOS, you guys were initially primarily focused on academic centers. Has that changed so far? Or are you moving on towards broadening the potential targets as well?
Patrick Miles: Yes. Those are good questions, Sean. It's fascinating, right? It's one of those things where I would tell you that the thing that has, I think, inspired EOS sales is what's going on from an EOS Insight perspective. I think we were at the Scoliosis Research Society meeting, and it was a standing room dynamic. And it's a who's who that ultimately, I think, pushes forward a full body biplanar low-dose scan, which we're the only guys who have that. And so for us to be able to create informatics around that is really the driving force behind people's interest in what we're doing. And I would tell you it's both -- it's both an academic and candidly, a private interest. I think it probably has -- the initial interest is mostly around deformity. And I think it's going to extend way past there because there's a joke in the spine business that all surgeons are deformity surgeons. They either create them or fix them. And so even in short segment surgery, the value of EOS is highly valuable. And so what we're seeing right now is probably a predominance of academics, which, again, we love because now we're getting into being more relevant within the academic sector. We're seeing some privates. And then we're seeing some upgrades from previous pediatric institutions that start to see the software value that we're creating with EOS Insight. And so it is -- I would still say in the very early phase of the whole EOS experience, and I expect it will just get more robust.
Operator: This concludes today's question-and-answer session. I would now like to turn the call back over to Pat for closing remarks.
Patrick Miles: Thanks, Lacie. Just more than anything, I want to thank the team for their work. It's -- what a great quarter. I appreciate everybody's support in what we're doing. We have a long run ahead of us, but the foundation has been laid for future prosperity. So anyway, I appreciate everybody's work, and thanks for your interest.
Operator: This concludes today's conference call. You may disconnect.