OrthoPediatrics Corp (KIDS) 2025 Q3 法說會逐字稿

Good afternoon, and welcome to OrthoPediatrics Corporation's third-quarter 2025 preliminary results conference call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Hannah Jeffrey from Gilmartin Group, Investor Relations, for a few introductory comments. Please go ahead.

Thank you for joining us for today's call. With me from the company are Dave Bailey, President and Chief Executive Officer; and Fred Hite, Chief Operating and Financial Officer.

Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company's actual results may differ materially.

For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K, which was filed with the SEC on March 5, 2025, and its subsequent quarterly reports on Form 10-Q.

During the call today, management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period.

For each non-GAAP financial measure referenced in this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools should not be considered in isolation or a substitute for OrthoPediatrics financial results prepared in accordance with GAAP.

In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, October 9, 2025. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call.

With that, I would like to turn the call over to Dave Bailey, President and Chief Executive Officer.

Thanks, Hannah. Good afternoon, everyone, and thank you for joining us today.

Earlier this afternoon, we announced preliminary results for the third quarter. Revenue totaled $61.2 million, and these results fell short of our expectations. There are two primary factors that impacted the quarter. First, the 7D capital sales that were expected in the quarter did not close prior to the quarter end. Second, the growth headwinds we have discussed this year regarding sales in Latin and South America have continued.

The combined effect caused a material impact on revenue in the quarter and has ultimately led us to reevaluate how we will factor both segments into our fourth quarter and future guidance. Although these two areas did not produce the results we wanted, the rest of the business remains strong and delivered significant high-margin growth in line with our expectations. These segments are expected to continue serving as the primary drivers of revenue growth and profitability.

Before diving deeper, I want to emphasize that our broad product portfolio and expansive commercial footprint continue to drive strong growth, take share, and will remain the cornerstone of our long-term strategy. These strengths uniquely position OrthoPediatrics to further cement our leadership position in pediatric orthopedics and advance our cause of helping more children each year.

As a reminder, our core business of trauma and deformity and scoliosis implants, specialty bracing, and our international agencies all generate higher margin and better free cash flow than the capital sales and LATSAM stocking distributors. These segments are positioned to remain the key engines of revenue growth and free cash flow as we advance toward expanding profitability and our goal of achieving free cash flow breakeven in 2026.

In the third quarter, we once again saw strength in all areas within our business, excluding 7D capital sales and LATSAM international revenue. In fact, we saw total third-quarter global revenue, excluding 7D capital sales growth of 17% and domestic revenue, excluding 7D capital sales growth of 19%, both T&D and scoliosis implant sales were strong as we saw a very normal summer selling season.

And OPSB continued -- growth continues to be extremely robust with growth in excess of 20%. Early returns on our recent launches of VerteGlide and 3P have been very strong, and we're ahead of where we expected to be at this time. And OPSB clinic expansion and same-store sales are strong and give us further confidence in the ongoing growth of our T&D and scoliosis implant and OPSB businesses as we head into 2026.

Now looking first at the 7D capital sales shortfall. Overall, sales and placements of 7D units in key US accounts have been relatively healthy. And historically, we've seen success with this segment. But during the quarter, there was more variability in the timing of unit placements.

In the third quarter, new 7D capital sales were delayed and the corresponding revenue from those placements had an impact on the quarterly sales and overall growth. It's important to reiterate that the demand for 7D has not changed. And at this stage, we have a large pipeline of 7D targets that we expect to be able to build from to drive future sales.

However, it's difficult to predict exactly when these placements will occur. Even if 7D capital sales are shifted just a few weeks, it can have a significant impact on results for certain periods. And while we continue to pursue the sales of 7D, we recognize that we need to account for larger timing cycles within our outlook.

Next, I'll talk in more detail about the continued challenges we are facing in Latin and South America. As we previously discussed, in an effort to focus on improved cash metrics, we have made a conscious decision to limit new stocking and set sales to South America. Unfortunately, this dynamic, which we initially believed would be temporary, continues to play out and negatively impacts our growth, particularly in Brazil.

We anticipate that at this point, our LATSAM business would be in a more stable position and that we would see the benefit of growth in Latin and South America again. However, we experienced continued disruption in sales, largely related to timing of large stocking and set orders. These international markets represent an opportunity for OrthoPediatrics to drive growth and capture market share, but we want to be smart about how we capture this growth while also driving profitably and improving cash flow performance.

As a result of these impacts, we have taken time to assess both our full year 2025 and long-term outlook and feel that it is prudent at this time to reset expectations. For the full year, we are decreasing our revenue guidance range to $233.5 million to $234.5 million from $237 million to $242 million.

Additionally, we anticipate the timing of 7D capital sales will continue to vary, and our LATSAM business could be unpredictable for the next several quarters. Given those factors, we believe it is reasonable to reduce the expectation for these revenues in our long-term outlook. These are still priorities for our business with strategic importance and the potential to be growth drivers in the future. However, growth from those segments will be more varied and less predictable.

To reflect the uncertainty and timing in these segments, we are adjusting our outlook for revenue growth to be 12% or greater annually for the next several years. We feel that this is the appropriate range for the company moving forward.

I want to reiterate that our new outlook still supports our improved profitability and cash flow goals, which include free cash flow breakeven by 2026, and delivering our first quarter of free cash flow positivity in the fourth quarter of 2025.

With that, I'll turn the call over to Fred to provide more detail on our preliminary financial results. Fred?

Thanks, Dave. Taking a closer look at some of the top line items on the P&L, our preliminary third quarter of 2025 worldwide revenue of approximately $61.2 million increased 12% compared to the third quarter of 2024. As Dave has already discussed, the timing of 7D capital sales and continued pressure in Latin and South America were the primary drivers of the revenue shortfall.

Preliminary US revenue was approximately $48.7 million, a 14% increase from the third quarter of 2024, representing roughly 80% of our total revenue. We generated preliminary international revenue of $12.5 million, representing growth of 6% compared to the third quarter of 2024, representing 20% of our total revenue.

We generated preliminary third-quarter 2025 revenue, excluding 7D capital sales of approximately $60.7 million, representing growth of 17% compared to $51.8 million in the third quarter of 2024.

Preliminary domestic third-quarter net revenue, excluding 7D capital sales is expected to be approximately $48.2 million, representing growth of 19% compared to $40.5 million in the prior year period.

For the third quarter of 2025, we significantly reduced free cash flow usage when compared to the same period of the prior year. This gives us tremendous confidence in delivering on our commitment to generate positive free cash flow in the fourth quarter of 2025.

Turning to guidance. As Dave mentioned, we are decreasing our expectation for full year 2025 revenue to $233.5 million to $234.5 million, representing year-over-year growth of 14% to 15%. We are reiterating the guidance that our full year gross margins will be in the range of 72% to 73%, and we also continue to expect to generate between $15 million and $17 million of adjusted EBITDA in 2025.

Additionally, we continue to expect approximately $15 million of new set deployed in 2025. This represents our continued focus on driving the business to free cash flow breakeven by 2026, and delivering our first quarter of free cash flow positivity in the fourth quarter of 2025.

I'll now turn the call back over to Dave for closing remarks.

Thanks, Fred. OP is a great company with a long track record of producing solid, predictable results due to successfully executing our strategy of dominating the pediatric orthopedic market and providing our customers all of the solutions they need to appropriately take care of kids.

While we are disappointed with the quarterly results, we believe that a significant opportunity lies ahead of us and that we have the correct strategy in place to drive growth, deliver profit, and generate free cash flow while helping more children than ever before.

We remain focused on strong execution across the business, which includes scaling OPSB, leveraging prior set deployments, and driving growth through innovative product launches. Our commitment to helping more children than ever is unwavering, and we are equally committed to significantly growing revenue, improving adjusted EBITDA, and meaningfully reducing cash burn in 2025 and beyond as we progress towards achieving cash flow breakeven in 2026.

Lastly, we look forward to providing our full third-quarter 2025 financial results and hosting a conference call to provide additional commentary on these results following the release after market close on October 28, 2025.

Operator, you can open the call for Q&A.

(Operator Instructions) Ryan Zimmerman.

So just to be clear, first on the guidance, guys. So the missed expectations was roughly $2 million. I appreciate most of that was international. The $5 million that you're reducing for the year, Fred, that incremental $3 million, is that all coming out of international? I just want to be clear in terms of modeling.

Yes. I would just correct a statement there. I guess the biggest impact from all of this is the lack of 7D sales, unit sales, which are capital sales that did not happen in the third quarter as compared to the third quarter of last year.

The secondary impact was on the international side. And it's about, in my mind, $2.5 million in the third quarter and $2.5 million in the fourth quarter. Again, as we reduce, I guess, the expectations, at least in our guidance for those 7D capital sales and large international stocking and set sales going forward, large demand for those, but they're not predictable as our replenishment business.

Yes. But Fred, sorry, I misinterpreted. So some of those 7D sales are domestic, implying that the guidance reduction, $2.5 million for fourth quarter, it's a mix of both US and international. That's the interpretation I'm hearing.

Yes, that is correct. It's both domestic, which is primarily a 7D discussion. And then it is also some, but to a lesser extent, on the international side from the large set sales.

Okay. Very clear. And then the second comment I want to just spend a minute on, Dave, which you made was around guidance for 12%-plus. And just to make sure I'm clear about that, you're expecting that your long-term target, your long-term growth rate is now expected to be 12%-plus for the next several years.

And I want to make sure everyone heard that, I heard that correctly, and how you think about the composition of what is driving that and maybe what you're removing from that?

Yes. So you heard that right. I mean, we're setting the guide long term at 12% growth. Certainly, I think what we're removing that is that the uncertainty here that we see from quarter to quarter on the headwinds from Latin America as well as 7D. It's not to say that some of those things aren't going to ultimately get better.

But at this stage, we don't want to count on large stocking sales or large set sales, particularly in Brazil that aren't particularly profitable for us and in some cases, have longer payment terms. We're not going to put those things aggressively in our guide on a go-forward basis. And I think given the uncertainty we have around the timing of 7D, we're essentially pulling back US 7D placements from the guide as well.

Matthew O'Brien, Piper Sandler.

I wish we weren't chatting about this topic this afternoon, though. Maybe, Dave, just for starters on 7D, what exactly was the slowdown in the quarter versus what you're expecting? And then for the full year, what's causing the slowdown? Because I'm not hearing a lot about capital slowdowns, generally speaking, across most of med tech.

So is it specific to you guys? Is it something broader? And then why can't you make it up in Q4?

Yes. I would just say the demand for 7D remains very high. And a few units that you don't get a PO in the close of a quarter have -- especially since we don't really have any other capital sale in our model, those things can have a pretty substantial impact on quarter-to-quarter revenue. So I think you could assume that's what happened that it wasn't as though we didn't have line of sight.

Obviously, we gave guide in August, and we were pretty confident in how things are going to go. I think we will continue to place and sell 7D units. It's just we've been bit by this. We don't know exactly when those come. It's lumpy from quarter to quarter, and that's why we've pulled the uncertainty, I suppose, from the 7D placements out of the guide.

Yes, I would just add that the demand, as Dave said, is higher than it's ever been on this. And that is not the problem. The problem is getting all of the legal documents worked through the administration of the hospitals. And that process is hard to predict, to say the least.

And as it has grown as a percentage of our overall sales, it becomes a bigger, bigger impact on the overall business. And when it doesn't happen by the end of September, but maybe it happens in the second week of October, the hospital doesn't care, but it has a dramatic impact on our quarterly reported revenue, obviously.

Okay. I'm just not sure why that's different than what you've been seeing, but we can follow up offline on that.

Maybe to follow up on Ryan's question on the guide going forward. I mean, you had an Investor Day somewhat recently. We were looking for higher numbers in terms of growth going forward. It's only about $10 million per year that you're basically taking out to get to this 12%. I don't know if you're just annualizing them this year in Q3 going forward or what. But at some point, you would start to lap these comps as far as softness here in Q3 and then Q4.

And then what you're seeing in the T&D business outside of LATSAM and then the scoliosis outside of what you're seeing with 7D, you start to lap that. So why wouldn't the growth reaccelerate back? I know you said 12% at least, but everybody is going to anchor to that 12% number. So why isn't it 14%, 15% as you kind of get through this soft period?

Yes. I think we want to just simply set a baseline that we feel very strongly that we can achieve and hopefully improve on. And with the headwinds that we see in Latin America as well as the -- as we've said, the unpredictable nature of when these 7D orders come through, we feel like 12% is a number that we can very credibly bank on going forward.

Richard Newitter, Truist.

This is Ravi on for Rich. So I just want to kind of go back to the 7D and the overall capital environment. It sounds like you're saying that the pipeline is strong, but we don't have really any commentary around when these sales are going to come in.

So just what -- the sales deferment in 3Q, why doesn't that come back in 4Q? Or why doesn't that come through in 4Q?

Yes. The problem is the hospital administration process is not something that is predictable. We had commitments that were supposed to be executed in the third quarter from hospitals, and it didn't happen. And is it going to happen in the fourth quarter? I wish I could tell you.

I thought sitting here three months ago that I knew what was going to happen in the third quarter. And for whatever reason, a whole multitude of these opportunities just did not happen. And so sitting here today, I can't tell you what's going to happen in the fourth quarter related to that, let alone the fourth quarter of 2026.

And so there will be times when these things will show up and the revenue will show up, but we cannot predict that quarter after quarter after quarter, they're going to be nice and smooth and generate consistent year-over-year growth for us, the way that we are seeing the growth of the underlying business.

Sure. And then maybe just one related to the underlying business. Does the capital pull-through of underlying business, like can you talk about maybe the lost synergies that you might not be getting from this kind of elongated capital cycle?

And it seems like you're reiterating a lot of the profit metrics, I would maybe have thought that would have been better without a kind of a capital piece taken out of there, higher-margin products kind of emerge more in the underlying RRP. So maybe you could talk about that a little bit?

Yes, you are absolutely correct. So the sale of capital equipment has a much, much lower gross margin and does pull down our overall gross margin of the business, which is what we've seen from time to time in the past. Without that, the gross margin, the reported gross margin will be higher than with it, obviously.

I do think that longer term, the placement of -- the placement of, meaning the consignment of these units into hospitals, which is different than what we're talking about here, which is actually the capital sale of the unit. Both of those scenarios, which are the two business models that we use, will continue to have a benefit on the response implant growth, which we're seeing today.

It's just the size of the capital unit sale and the timing of it that is very hard for us to predict.

Great. And then maybe just one last one for me. Just anything kind of competitive that may be affecting you like in terms of prioritization of capital? Or is this kind of specific to 7D?

We're not seeing anything different in the competitive landscape here. Implants, capital, OPSB. And in fact, I think the markets, particularly on the trauma deformity implant side continue to get more benign.

I would just add, specifically to 7D, the unit has gotten dramatically more advantageous to the hospital, surgeons and patients in the last six months because they've now added the ability to have zero radiation. So historically, you would have to have a CT scan that fed into the machine learning, the AI component of 7D. They now have eliminated that entirely.

And so you don't need an upfront CT scan. You have no radiation in the operating room itself. And so it's the only unit that can actually do what it does, navigate the spine with zero radiation. And so the competitive advantage of the unit itself has only increased in the last six months.

The surgeons want the unit. There's a backlog of surgeons who want the unit. That's not the problem. The problem is the delays in working through the administration process.

(Operator Instructions) Joseph Conway, Needham & Company.

I really appreciate the call today and all the color. Just a quick one for me. So looking at 12% growth in the third quarter, fourth quarter looks like a pretty similar comp, maybe a little bit tougher. So just based off of your guys' long-term guide, I understand maybe it's more of a yearly projection, but just looking at fourth-quarter expectation that you don't see any signs that whether it's Latin America or delays in capital equipment sales, the 7D could get any worse?

Or does it sound like maybe stable moving into the fourth quarter? Or is there still a possibility that the delays could increase and whether on the capital equipment or the sales? Thanks. That's all for me.

Yes, I would say that as we talked about for the 12%, the fourth-quarter guidance assumes some but limited amount of both 7D sales and limited amount of these large set stocking orders to LATSAM. We're not counting on that segment of our business to deliver growth. We are counting on the core underlying business to continue to grow similar to how it did in the third quarter and honestly, in the first three quarters of this year.

If those third-quarter 7D units slip into the fourth quarter, then that would be great, but they may slip into the first quarter. We just can't predict that given this longer cycle and the unpredictability of the hospital administration that we're dealing with.

David Turkaly, Citizens.

I was wondering if you might be able to provide a little color about sort of the installed base side. I think it's still pretty small, but would love to sort of hear why you think this administration issue popped up now?

And then if you could also help us just think through sort of the ASP of these capital sales. It doesn't have to be like the specific dollar amount, but like what's sort of a good ballpark number to be thinking of here per unit?

Sure. So I think we're somewhere 15, 20 units right now installed. We probably have -- well, we have a funnel, you can imagine that's extremely large on this, and we've got a number of demos that are being done. I think it's just become part of, as Fred said earlier, a little bit bigger part of our revenue. And if it doesn't happen in a specific quarter, then yes, we're certainly going to feel it.

And that's what we have here in Q3. Units are somewhere between $0.5 million and $1 million. So again, I think you can see that if you have a couple of units that fall out, it has a pretty material impact on top line revenue.

Matthew O'Brien, Piper Sandler.

Actually, I have two of them. How big is LATSAM at this point? And why is this going to continue to be kind of a source of pressure for '26, '27? Or can you start to kind of move through it?

And then again, I do have a follow-up.

Yes. I mean our business in LATSAM and particularly in Brazil is a large business. There is a good business down there. There are a lot of procedures that take place, and we have a lot of partners that is servicing the market. We are the single pediatric supporter of the industry down there, and we have a tremendous team that's driving the business down there.

Size-wise, it's not huge, but it does have big variability in it when destocking/set sales either happen or don't happen. And as we've talked in the past, just as a reminder, the insurance environment down there, the government environment down there has changed a bit. And so we're often battling the delay of payments or the request for extended payment terms on some of these set sales because it takes a long time to get them in country, it takes a long time to get them placed.

And our customers are requesting sometimes up to 12-month payment terms on these things. And so when we refocus the business, not only on just driving top line revenue growth, but more importantly, driving profitable revenue growth and improving the cash flow, it makes us sometimes make different decisions today than we would have two years ago.

Okay. And then, Fred, we're doing everything on the fly here. You're talking about this 12% growth going forward, but you still said breakeven next year on the free cash flow side. Is that right?

Yes.

Okay. So when I do the math on that, it's like something like $15 million of lost revenue roughly. How do you make that up to get to that free cash flow profitability without cutting into other areas that are performing well?

Yes. That's a great question. And the answer is improved working capital utilization. So lower days outstanding on the receivable, improved inventory days outstanding is where the improvement is going to come from.

And that concludes today's Q&A session. I would like to turn the call over to Dave for closing remarks. Please go ahead.

Well, thank you for your time. Great questions. And obviously, we're always available for additional questions and look forward to talking to you soon. Thank you.

Thank you for joining today's conference call. This concludes today's meeting. You may now disconnect.