Alphatec Holdings Inc (ATEC) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Alphatec Spine, Inc. Third Quarter Fiscal Year 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I'd like to turn the call over to Carol Ruth at The Ruth Group. Ma'am, you may begin.

Thank you. Good afternoon, and welcome to Alphatec Holdings Third Quarter 2017 Conference Call. We'd 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 reported amounts which are in accordance with U.S. GAAP as well as non-GAAP or pro forma measures. Reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.

Joining us on the call today will be Alphatec's Executive Chairman, Pat Miles; CEO, Terry Rich; and CFO, Jeff Black.

With that, I'll turn the call over to Terry Rich. Terry?

Thank you, Carol. And thank you all for joining us today. Welcome to Alphatec's Third Quarter 2017 Earnings Call. I'd like to start off today by officially introducing Pat Miles, the new Executive Chairman of Alphatec. We've greatly advanced our vision of becoming the most respected, fastest-growing U.S. spine company with the addition of Pat's 25 years of industry relationships and know-how. It's rare to have the opportunity to recruit and hire your own boss. And I could not be more thrilled to be working with Pat once again.

There is truly no one better qualified or better suited for this leadership role. Pat cares deeply about our mission to improve lives by providing innovative spine surgery solutions through a relentless pursuit of superior outcomes. In fact, he has built a carrier and reputation in spine by partnering with surgeons to make surgery better. In his first month with Alphatec, Pat has already fully immersed himself in the operational aspects of this organization, greatly accelerating both the quantity and quality of our team building and surgeon engagement efforts. Pat's addition allows me to focus on the critical areas I can best influence, namely, I will drive the sales and commercial functions, while continuing to serve as the external face of the organization for our corporate partners and the investment community. Alphatec has now assembled one of the most talented, spine-experienced leadership teams in the industry. And I'm incredibly confident that under Pat's leadership, we are well positioned to drive growth by taking market share.

With that, I'm very excited to turn the call over to our new Executive Chairman, Pat Miles.

Thank you, Terry. I'm so pleased to be a member of this team, align behind the outcome-focused strategy that is foundational to the new Alphatec. We have assembled a team with unsurpassed industry experience, a team that has worked together before to build a spine powerhouse. We appreciate the value of being nimble and take our responsibility to deliver results both seriously and personal. We believe that our business is to drive innovation that improves results in the operating room. These are the core principles to the new Alphatec value system and the core principles that's really driven my entire career. I joined this team to unite with a company that shares my beliefs, and I'm impassioned to lead the charge.

In my first month on the job, I have placed my initial focus really in 2 key areas: first, externally, engaging with the surgeon community and reintroducing Alphatec to several key influential players in U.S. spine; secondly, internally, building on the momentum that this team has already clearly established and focusing our resources to accelerate innovation.

Moving forward, I will focus on reemerging the role of Alphatec -- reimagining the role of Alphatec. I know that great companies are those that serve both known and unknown requirements of a marketplace. And whether it realized it or not, the spine market needs the new Alphatec. I intend to manifest that realization by applying my expertise toward continued innovation, expedient decision making and engagement of the most innovative surgeons. It's the intention of this entire leadership team to rebuild Alphatec into an innovation machine.

I also want to impart that we are determined to earn the trust and respect of external stakeholders by doing what we say we are going to do. Transformations of this magnitude are not without challenges. And this one has been and will continue to be no different. But what we will be -- but what will be different is our collective impassioned resolve to work through this process in a disciplined, methodical and transparent way, building predictability in everything we do. We will continue to assemble a team of profoundly curious spine experts committed to driving great results. Today, we are reporting financial results that can't possibly do justice to what is happening behind the scenes at Alphatec. The excitement both internally and in the field about our new direction is absolutely palpable. We're completely focused on creating long-term shareholder value by delivering solutions to unmet needs in the marketplace. I look forward to sharing our progress in the future conversations, but now I'll turn it back over to Terry.

Thank you, Pat. This afternoon, I'll begin with financial highlights, then provide a brief progress report on the 3 initiatives we are prioritizing to revitalize Alphatec. Then I'll turn the call over to Jeff for additional comments on our financial results.

Let's begin with the financial highlights. Total U.S. commercial revenue in the third quarter 2017 was $20.4 million, down slightly from the $21.9 million that we reported last quarter. Third quarter revenue results were down sequentially due to the impacts of weather and the loss of 2 selling days in the quarter. Nevertheless, very encouraged by the continued momentum we're experiencing in the sales channel.

On the cash management front. Cash burn in the third quarter of $3.7 million improved substantially, down from $6.4 million last quarter. This improvement is an excellent demonstration of our continued commitment to deploy capital responsibly. Operating expenses improved in the third quarter to $15.8 million compared to $16.5 million last quarter. This is the fourth consecutive quarter that we have driven an improvement in operating expenses. Our team continues to successfully drive ongoing initiatives to more thoughtfully align expenditures with our business needs.

In sum, we made solid financial progress in the third quarter. Given third quarter top line results, it's too early to tell whether second half revenue will exceed first half revenue. We, nevertheless, expect the strong momentum we are seeing to drive sequential top line growth in the fourth quarter.

Now a brief update on the 3 vital initiatives we've prioritized in order to deliver predictable results. First, strengthening the Alphatec distribution channel. Second, executing organizational and cultural changes to return Alphatec to a growth organization. Third, driving new product innovation that improves clinical outcomes. I am pleased to report that we continue to demonstrate progress with the transition of our distribution channel in the third quarter. U.S. commercial sales generated by dedicated agents and distributors expanded to 30% in the third quarter, up from 18% last quarter and up from less than 5% in 2016. We are working continuously to streamline our onboarding process for new distribution partners and ramp up the partners that we've already engaged. We remain on track with our goal to exit 2017 with over 40% of U.S. commercial revenue from dedicated agents, heading into 2018 with strong momentum.

As we increase our visibility into the distribution channel, we continue to see 2 common themes. First, the transition to dedicated distribution relationships takes time. As we reported last quarter, our engagement discussions with existing, established distributors and potential new distributors are being received even more positively than we anticipated. These transitions, however, take time to fully execute due to the contracting process.

Secondly, in line with what we communicated at the outset of this transition, we expect some unpredictability in the top line as we rebuild the sales channel. We believe we're well on our way to executing the strategy we laid out in our first quarter call. Once these transitions have been made, we expect our revenue stream to become more sustainable and predictable. We continue to believe that this will be a 24- to 36-month process, and 3 quarters into it, we are very encouraged by our progress.

The second key initiative that we are prioritizing as we reposition the Alphatec brand is the broad transformation of the company's structure and culture intended to return us to a growth organization. A fundamental part of that cultural transformation has involved investing our personal assets. At this point, a significant portion of Alphatec's common stock is owned by management. We've also created an ownership culture by granting equity to every employee in the organization. We are committing to building trust by creating shareholder value, and the entire organization is highly motivated to succeed. We have accomplished dramatic organizational changes, and we continue to make massive progress.

Before getting into more detail on that subject, I want to take a moment to thank and recognize Mike Plunkett, who recently resigned from his role as Alphatec's President and COO. For 5 years, Mike has been a key leader in the organization, and we greatly appreciate his steady hand during what were often turbulent times. Personally, I would like to publicly thank Mike for his support as I transitioned into the organization. We wish Mike the very best in the future.

Now returning to company leadership. The executive team at the new Alphatec is comprised of recognized professionals with over 140 years cumulative spine experience, a number that grows substantially as you dive deeper into the organization. Over the course of the past several months, we have made strategic clinical hires, adding game-changing talent throughout the organization. The transformation that's underway at Alphatec is motivating the industry's best and brightest to seek opportunities with us, and we are thoughtfully leveraging the excitement to enhance our team. We've become extremely well positioned to deliver innovation and differentiation in a market that is ripe for it.

And that brings me to our third vital initiative, product innovation. History has demonstrated that in this industry companies that grow the fastest are those with spine know-how. We've assembled a team of spine experts to form new Alphatec because we know how much spine experience counts. As we reposition our brand, we intend to exploit the expertise we have amassed to drive innovation that truly improves clinical outcomes. Surgeons and hospitals don't just want more new products. They want expertise and comprehensive procedurally driven solutions that improve the experience in the operating room.

As we look forward, that will be the focal point for our development program. I am incredibly excited to see the strategic strides that our portfolio will take with the massive spine know-how we've assembled and will continue to assemble under Pat's leadership.

We just returned from a very successful North American Spine Society Conference in late October. There, we met with prominent spine surgeons from around the world, enthusiastically driving home the message of the revolution and the spirit of innovation that is building at the new Alphatec. The reception we received was exceptional, with strong surgeon interest in our new spine-experienced team and in our portfolio. Surgeons were especially impressed with the official introduction of the Battalion Lateral System, our next-generation procedural solution for lateral spine surgery. And we continue to protect our investments and innovation. Today, we own more than 150 patents and have over 75 patents pending. We were granted 20 new patents in the first half of 2017 and made additional progress during the third quarter with 6 new patent awards, 3 that further protect our expanding lateral portfolio.

In conclusion, in only 3 quarters, we have made and continue to make excellent progress on the initiatives that we've prioritized as we reimagine Alphatec.

With that, I will turn the call over to Jeff to cover financial results in detail.

Thank you, Terry. And good afternoon, everybody. As Terry mentioned, our execution was solid in the third quarter. We improved cash burn substantially. We strengthened our operating expense profile, and we made progress against our key initiatives. We ended the third quarter with $20.7 million in U.S. revenue, which was affected by 2 fewer sequential selling days as well as weather-related impacts. Adjusted for these factors, our U.S. revenue in the third quarter was flat sequentially.

But more importantly, revenue from direct and dedicated sales agents grew to over 30% in the third quarter. This is a key leading indicator for our progress in building sustainable growth and reducing our top line variability.

Our U.S. gross margin was 69.1% in the third quarter as compared to 70.9% in the second quarter. We expect our U.S. gross margin to be in this range for the remainder of 2017. Our operating expenses improved by more than $700,000 in the third quarter to $15.8 million from $16.5 million in the second quarter. And on a non-GAAP basis, excluding restructuring expenses and the gain on sale of assets in the second quarter, our operating expenses decreased sequentially by $1.2 million. This is the fourth consecutive quarter we've driven an improvement in our operating expenses, reflecting the impact of cost rationalization across all functions.

As we noted before, we expect sales and marketing expenses to increase as we continue to invest in our distribution channel to support revenue growth. These increases will be in conjunction with revenue growth. We also expect to make targeted investments in R&D to drive continued outcome-focused innovation. And as a result, we should see R&D expenses increase in both absolute dollars and as a percentage of revenue.

Overall, our cash use decreased by $2.7 million to $3.7 million in the third quarter, down from $6.4 million in the second quarter. This represents a sequential improvement of more than 40% in cash usage. We ended the quarter with $15.4 million in cash compared to $19.1 million at June 30. In addition, in connection with the appointment of Pat to our senior leadership team and Quentin Blackford to our Board of Directors, Pat and Quentin have both committed to invest an aggregate of $3.5 million to $4 million in our common shares on or before January 1. And we've also received $1.7 million in proceeds from warrant exercises over the past 30 days.

As you're probably aware, we've recently filed our shelf registration statement which, when effective, will afford us the flexibility to strategically and responsibly offer and sell securities on an expedited basis should market opportunities present themselves.

I will now turn the call back over to Terry for closing comments.

Thank you, Jeff. I'm extraordinarily proud of the spine-experience team and the culture that we have built at the new Alphatec over the course of this past year. We have made impressive progress in our short time together, working towards the creation of a dedicated distribution network, launching unique products and rightsizing the organization.

Looking ahead, I'm incredibly excited to be working with Pat once again to drive shared vision of becoming the most respected, fastest-growing U.S. spine company. As we move forward with his leadership, market expertise and dedication to better surgical outcomes, our evolution into the new Alphatec will accelerate. He is uniquely capable of directing teams to architect procedurally complete solutions that dramatically improve the experience in the operating room. And his contributions to our development program and our surgeon engagement efforts will enable us to drive growth by taking market share. The market needs us, and the new Alphatec is exceptionally well positioned to deliver.

I'll now turn the call back over to the operator, and we'll take your questions.

(Operator Instructions) Our first question comes from Brooks O'Neil with Lake Street Capital.

I am in a building where there might be some background noise, so I apologize for that in advance. Terry, I was hoping you could give us just a little color in terms of some of the new distributions that you brought into the organization. I'm impressed by the move from 18% to 30%. And if you could just tell us a little bit about the kinds of distributors you're having success with, that will be great.

Yes. Brooks, I don't know that there is a common theme amongst the types of distributors that we're bringing in. I think some of this is the result of distributors that we've brought in previously beginning to ramp up, whether those were current distributors that we've been able to contract with, the dedicated or new distributors or direct reps. So I think we're seeing success across all fronts.

Great. And then could you talk a little bit about Squadron? I noticed that in the press release you highlighted the success with Battalion at North American Spine. What does Squadron do for you?

Yes. So Battalion is really the name that outlines our current interbody portfolio, and Squadron is a retractor. So what we're talking about is the combination of the 2 as our lateral procedural solution. And the initial launch of this was at NASS, and it's been received very well. We're very excited about the surgeon feedback that we've gotten and look forward to continuing to build out on that platform.

Great. And then maybe just a little detail question. Can you talk at all about what impact the hurricanes might have had on the business? Was that a big deal or a small deal for you this quarter?

Yes. Brooks, this is Jeff. The combination of weather and the impact of 2 less selling days had roughly $900 to $1 million -- $900,000 to $1 million impact on our Q3 numbers.

Okay. And if I was hearing you guys correctly, you would expect perhaps some modest sequential growth in Q4? And then probably, with any luck at all, continued ramp into 2018? Is that sort of how you're thinking about the business now?

Yes. Brooks, obviously, we haven't provided any guidance, but we do expect sequential growth in Q4 and to achieve the 40% or greater number of our revenue coming through dedicated distributors. And as we indicated, we're looking forward to create a degree of sustainability and predictability. And it is certainly our goal to continue to grow quarter-over-quarter.

(Operator Instructions) And speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Terry Rich for any final remarks.

Thank you, everybody, for joining our third quarter conference call. We look forward to engaging again to deliver our fourth quarter results.

Ladies and gentlemen, this does conclude your program for today. And you may all disconnect. Everyone, have a great day.