NuVasive Inc (NUVA) 2016 Q4 法說會逐字稿

Greetings, and welcome to the NuVasive, Inc fourth-quarter and full-year 2016 conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Carol Cox, Executive Vice President, External Affairs and Corporate Marketing. Thank you, you may begin.

Great, thank you, Matt. And welcome, everyone to NuVasive's fourth-quarter and full-year 2016 earnings call. Today, we have issued our earnings release, which we issued early this afternoon. It is posted on our website, in our Investor Relations section, along with a presentation, and -- as well as the Form 8-K with the SEC. We have also posted our supplemental financial information on the IRS site to accompany today's discussion. On the call, we will be covering information that is included in the Investor presentation, and I encourage you to access these materials so that you can follow along.

Before we begin today, I would like to remind you that the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors. Which, if they do not materialize or prove to be correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. Additional risks and uncertainties that may affect future results are also described in NuVasive's news release and periodic filings with the SEC. We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates.

This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these non-GAAP financial measures. These measures include our cost of goods sold; gross margin; sales, marketing, and administrative expenses; research and development expenses; operating margin; non-GAAP earnings per share; free cash flow; and EBITDA. Reconciliations to the most directly comparable GAAP financial measures can be found in the news release and the supplementary financial information, which are accessible from the Investor Relations section of the NuVasive website.

Joining me on today's call are Greg Lucier, our Chairman and Chief Executive Officer; Jason Hannon, our President and Chief Operating Officer; and Quentin Blackford, our Chief Financial Officer.

With that, I will turn the call over to Greg.

Thank you, Carol. Good afternoon, everyone. By all measurements, 2016 was another dynamic year for NuVasive. Our talented global team executed on our strategy to launch game-changing products and systems, stand in the new markets and geographies, drive operational efficiencies throughout the business and improve our capital structure to support long term growth. We are extremely pleased to report the fourth-quarter and full-year 2016 results that exceeded our expectations.

On today's call, I will provide an overview of our results for the full-year 2016 and share some color on Q4 revenue drivers. And then Quentin is going to review our fourth-quarter 2016 performance in more detail, and provide our 2017 guidance expectations. Our revenue performance for 2016 delivered growth at multiples of the markets and reflected strength across our Business and geographies, ending the year at $962.1 million. Representing year-over-year growth of approximately 18.6% on an [EDS] reported basis; on an organic basis, our revenue grew approximately 8%.

Throughout the year, we sold [traum excessives] of our integrated global alignment platform, or iGA, across core product areas, including our realigned posterior fixation system, XLIF, [ND] and integrated operative solutions. In particulars, the adoption of [real lives] was in the iGA, leading to greater penetration in this formative market. Results were also driven by the integration of MAGEC for early on-set scoliosis and precise technology for limb lengthening, both acquired with Ellipse Technologies in February 2016, and are now part of the NuVasive's specialized orthopedics or NSO. In the US, revenue growth in the fourth-quarter of 2016 continued to reflect strong procedural volume and another sequential increase in revenue, coming from new surgeon conversions. Where our strategy to focus on bringing new surgeons into the NuVasive family is really taking hold and contributing to results.

Additionally, we are very pleased with the pull-through we are seeing in our NuVasive clinical services business, or [NCS]. Not only has the inclusion of Biotronic at NCS expanded our footprint, it is also providing greater opportunities to grow our M5 the neuro-monitoring platform disposables as we continue to successfully integrate our M5 platform into NCS contracts. Resulting in an accelerating number of cases being performed utilizing this M5 technology.

Now, we exited the fourth-quarter of 2016 continuing to see an acceleration in our field sales hiring initiatives. Ending the year with our largest year-over-year increase in field headcount. Now, more than ever, we are attracting long tenured, competitive sales reps who have experience running large geographies at their previous companies. You know, they are interested in joining the races for a couple of reasons. They want access to the most innovative spine portfolios, and the continued commitments to bringing new products to the market.

As well as world-class training and support, and more than anything, they want to be winners. They see how much we are investing in the spine business, and the impact it is having in the market. We saw tremendous progress from our focus on these strategic hires, and are excited about the potential they bring to the future.

Our core international business returned to 20% year-over-year growth in Q4 on a constant currency basis, despite the temporary delay in selling XLIF in Japan during the quarter. Our results were fueled with strong growth in Europe, Southeast Asia, and Latin America. We continued to see strong revitalization in our Western European markets of Italy, Germany, and the UK. And importantly, we also saw Latin America return to strong growth, driven by the beginning recovery in our Brazilian operation as anticipated, and strength across much of the region.

As I mentioned, the international team delivered these strong results despite the temporary disruption of our XLIF business in Japan. As you are aware, in December, we received a Class III Approval for our dilator in Japan, and XLIF procedures commence again in January of this year. The Japan team focused on posterior fixation and [vendeni] resulted in a strong finish to 2016.

Now, as we been communicating over the last two years, margin expansion is a key element in our efforts to deliver value creation for you, our shareholders. We continue to execute against these well-defined efforts, and for the full-year 2016, delivered a non-GAAP operating profit margin of 16.1%, an increase of 70 basis points year over year. This included absorbing some of the temporary headwinds while integrating Ellipse Technologies and approximately 70 basis points of incremental investments into the R&D of the course of 2016. Most importantly, we are making this progress on profitability while simultaneously investing in the key areas that will sustain future growth like growing our sales force and investing in new innovation.

For the full-year, non-GAAP EPS performance came in at $1.66, an increase of 27% over 2015, and growing faster than our reported revenue growth. We expect that strong leverage to accelerate as we continue to benefit from increasing scale and simultaneously executing on our efforts to lower our tax rates. Beyond financial metrics, we achieved several notable milestones during the year including settling over eight years of patent litigation with Medtronic in a manner that removes the ongoing burning of litigation between the two companies and provides a clear protocol for resolution to potential patent disputes in the future. Second, purchasing and building out our new state-of-the-art all-digital manufacturing facility in West Carrollton, Ohio, creating over 200 new jobs and nearing 100% self-manufacturing over the next several years. Finally, in recognition of our significant growth from Smallcap to Midcap, and increased interest from our investors, NuVasive was named to the S&P Midcap 400.

Over the last decades, NuVasive has evolved from a company focused on bringing minimally invasive spine products to the market. A company focused on developing end-to-end procedurally integrated solutions, to drive clinical predictability, and moving towards the company focused on systematizing the spine, from pre-op to post-ops, creating an integrative OR, completely unique to spine. We aspire lead this industry by delivering these technologies and innovations that surgeons want and need. During 2016, we continued to strengthen that momentum as the fastest-growing full-line spine company as we undertook significant steps to expand our unique capabilities and our footprint in new markets through a combination of internal R&D and strategic acquisitions.

As a result of this strategy in 2016, we entered the early onset in pediatric supporting markets with the acquisition of Ellipse Technologies. Over the course of the year, we integrated the technologies into our realigned posterior fixation system to further those [advocate] abilities in the $2.5 billion complex conformity market. We also created NuVasive Clinical Services, the nation's leading inter-operative neuro-monitoring services company with over 450 neurophysiologists, covering more than 85,000 cases annually. We expanded our iGA platform to include cervical procedures, making NuVasive the first company to offer a solution for surgeons to address spinal alignment for all spine procedures. Finally, we took a big step forward in our efforts to reduce radiation exposure in the OR with the acquisition of LessRay software suite, which will be integrated into the future technology offerings.

In 2017, we have a number of planned introductions to enhance these offerings such as 3D printing capabilities and expandable cage offering. The commercial launch of LessRay and the integration of LessRay into our M5 platform and the introduction of the [united] system, which uses MAGEC technology to help heal complex fractures and fractures that fail to heal due to poor bone quality or poor fixation. At the core of these achievements is our commitment to transform spine surgery and beyond. With clear strategies to meet surgeons and hospital system customers' need for greater clinical predictability.

Over the course of 2016, we were very active on the corporate development fronts, utilizing approximate $490 million in capital to complete several acquisitions. These acquisitions, which included Ellipse Technologies, Mega Surgical, Biotronic NeuroNetwork and LessRay software suite, have expanded NuVasive's technology leadership in spine and entered new markets or broadened our participation along the spine care continuum. We remain disciplined and highly selective in our approach to M&A, seeking targets that are both a great strategic fit, meet our return on invested capital goals, and fit into the long-term margin expansion plans we have. I am pleased to report our integration efforts in these fields do remain on-track, and are delivering substantial growth.

Now, as we looked at 2017, we expect to maintain an active pipeline of potential targets. Please rest assured, we intend to maintain our disciplined approach to potential deals. Our top priorities will include opportunities that complement our existing technology platforms, target geographic expansion, and opportunities for imaging and navigation in the spine continuum.

The healthcare landscape continues to rapidly change with increasing focus on delivering measurable clinical outcomes, reducing overall costs, and delivering high-quality care in an environment of regulatory containment changes. The pace of change demands our relentless focus to understand our customers better than anyone else and adapt quickly. At NuVasive, our dedicated employees [sure are] strategise about these challenges every single day.

Given these dynamics, we are confident that NuVasive is uniquely positioned, and nimble enough to provide value and outperform in this landscape. With our procedurally integrated solutions and our service line partnership strategy in place, we are acting different than our competitors. Today, we are already changing the way we do business with our strategic partners, including academic centers, regionally integrated delivery networks, ambulatory surgery centers and spine specialty hospitals. The structure of this new business model contemplates risk sharing and is designed to transform how spine procedures are approached, measured, and valued from a clinical and economic perspective. With that, I will turn it over to Quentin. Quentin?

Thanks, Greg. Good afternoon, everyone. Before we get started with the financials, let me remind you that many of the financial measures covered in today's call are a non-GAAP basis unless noted otherwise. Please refer to today's news earnings news release, as well as the supplemental financial information on NuVasive.com for further information regarding our non-GAAP reconciliations.

As Greg noted, we are very pleased with the strength we continue to experience in the business. Our results for the fourth quarter of 2016 reflect strong procedural volumes and continued share taking resulting in year-over-year double-digit revenue growth, as well as continued expansion in our non-GAAP operating margin and more than 50% growth in our non-GAAP earnings per share. For the fourth quarter 2016, we delivered total revenue growth of the 25.9% on an average reported basis, and 12.8% on a pro forma basis. Excluding results from both our NuVasive specialized orthopedics, or NSO, and Biotronic businesses, both of which we acquired in 2016, our core business grew approximately 9% on a constant currency basis. For the quarter, we delivered revenue of $271.1 million driven by US revenue growth of 23%, and international growth of 42% on a constant currency basis.

Before I move into the details of our results, I wanted to provide you context for why our revenue for the fourth quarter came in about $6 million higher than the preliminary results we provided back in early January, in connection with our presentation at the JPMorgan conference. The difference is primarily due to a $4.8 million purchase order for MAGEC Rod that came late in the quarter from a charitable organization. The founders of the organization include certain former stockholders of Ellipse Technologies who made the purchase with the stated purpose of donating the rods for use in spinal deformity procedures for children in underprivileged communities.

Given the unique nature of this order, we did not include it in the preliminary revenue figure we provided in January, as we were working through the revenue recognition criteria alongside our auditors. We subsequently determined that it does meet the appropriate revenue recognition requirements. This order contributed to the achievement of the milestone payment under the merger agreement, which was contingent on meeting specific stretch revenue targets for 2016. This target was well above the revenue expectations we had when we completed the deal.

The milestone payments to the amount of $30 million will be paid pro-rata to the former stockholders of Ellipse Technologies in accordance with the merger agreement. We are extremely pleased with the progress to-date of our integration networks with Ellipse Technologies, and the impact this unique [outfit] is having on our business.

While the type of purchase order we saw in Q4 may not repeat in the future, the underlying revenue performance for NSO, excluding this transaction was in-line with our expectations. The business continues to grow in excess of 30%, and will continue to contribute to the accelerated growth profile of the overall company for years to come. In addition, we are exceeding our operating margin goals, and have been able to monetize some anticipated tax benefits, which have us performing well ahead of our ROIT expectations for the deal.

Our US spinal hardware business had a very strong finish to the year, up approximately 22% compared to Q4 of 2015, primarily driven by NSO and strong adoption of the Reline Posterior Fixation System within our iGA platform. Excluding the benefit of NSO, growth in our core US spinal hardware revenue accelerated nicely in Q4 to approximately 9% year over year to $138.1 million against our toughest comp of the year. Our cervical business benefit from the launch of iGA Cervical during the quarter, which drove nice sequential revenue growth from Q3 to Q4, and led to nearly 10% growth year over year.

Revenues from US surgical support came in at $78.6 million for the quarter, up 26% primarily driven by the addition of Biotronic and growth in our NVM5 disposables business as we continue to integrate that platform into our service accounts. Excluding the benefit of Biotronic, our core surgical support revenue came in at approximately $64 million, growing 2.7% driven by the NVM5 disposable business.

Our international revenue grew approximately 45% on a reported basis, or 42% on a constant currency basis in the quarter. Primarily attributed to the addition of NSO, and strong year-over-year growth across many of our EMEA markets including Italy, Germany, and the UK. Asia-Pacific remains flat on the constant currency basis as a result of the temporary delay of [excellent] procedures in our Japanese business which was offset by nice growth in Southeast Asia.

Excluding the impact of NSO, our core NuVasive international business grew approximately 20% on a constant currency basis. And if XLIF procedures in Japan had been performed at the normal pace, our core NuVasive international revenue growth would have been approximately 46% on a reported basis and 42% on a constant currency basis.

With the dilator receiving Class III Approval in late December, our Japanese proctors have resumed XLIF procedures as of mid-January. And we are moving forward with the other additional training requirements needed as part of our approval terms. As we have discussed before, the ramp-up in procedures will occur throughout the first quarter of 2017, and we anticipate a return to normal XLIF volumes in Japan throughout the second quarter.

Latin America grew approximately 56% on a constant currency basis in the quarter, driven by strong performance across its markets. Puerto Rico, Mexico and Brazil contributed significantly to the year-over-year growth in the fourth quarter. While the slower start than expected going direct in Brazil for most of 2016, sales started to gain momentum in the fourth quarter. We continue to remain confident that our strategy could go much more broadly in Latin America and efforts to go direct in Brazil will pay off.

Turning to the rest of the P&L, non-GAAP gross margin for the fourth quarter was 75.3%, down 90 basis points from prior year primarily driven by the lower gross margin profile of the Biotronic business, which negatively impacted our overall gross margins by 210 basis points. Excluding the impact of Biotronic, our gross margins improved by approximately 120 basis points, which was driven by the temporary suspension of the medical device tax, favorable [NSO] product margins and further admin efficiencies related to inventory utilizations. Price compression remained consistent the past quarters, remaining in the very low single digits at negative 1% and had a negligible impact on gross margin.

Our new manufacturing facility in West Carrollton, Ohio came online in the third quarter, and by the end of 2016, we had machined our first 40,000 pieces out of that facility. We are excited about the future benefits we expect to realize from this insourcing initiative. Non-GAAP [SM&H] [set] to the percent of revenue decreased 270 basis points from the prior year to 52.5% in the quarter, about $142.4 million. The lower SM&H spend profile of Biotronic contributed 220 basis points, and excluding the benefit of the Biotronic business, SM&H expense as a percent of revenue improved by 50 basis points. Which was primarily driven by greater asset efficiencies related to NSO and US sales force efficiencies, which were partially offset by investments in our international business.

Non-GAAP research and development, or R&D expenses totaled $13 million in the fourth-quarter of 2016, compared to $8.5 million in the fourth-quarter of 2015. R&D expense was 4.8% of revenue for the fourth quarter versus 4% in the prior year. The increase R&D spend reflects our continued commitment to supporting internal R&D, and investing in strategic assets we acquired to drive further innovations. Over time, as Greg said, we expect R&D expense as a percent of revenue to increase with the long-term goal of investing approximately 7% of revenue on these efforts.

We continue to make investments in key areas including the NSO technologies, and efforts around imaging, navigation, and surgical automation, as well as continued improvement and evolution of the iGA platform, like our recently announced iGA for cervical.

We are pleased to report fourth-quarter non-GAAP operating profits margins increased to 18%, resulting in 90 basis points of operating margin expansion compared to 17.1% we reported last year. Adjusting for the impact of the different P&L profile of the Biotronic business, we saw meaningful improvements in our underlying cost of goods sold and estimated spend that delivered roughly 170 basis points of improvements, offset by the increased investments into R&D. Moving further down the P&L, interest and other expense net on a non-GAAP basis was $5.9 million in Q4, up from $3.3 million in the same period last year. This increase is primarily resolved with a new interest expense associated with the 2021 convertible notes issued in March of this year -- 2016.

Now turning to tax, our non-GAAP tax expense in the quarter was $15.7 million resulting in a non-GAAP effective tax rate of 36.7%. In addition, we finished the year with a non-GAAP effective tax rate of 36.6%, which was an improvement of more than 500 basis points from the prior year, as we continue to focus on our multi-year initiatives to reduce our annual effective tax rate. I will talk more specifically about our decreasing tax rate in 2017 and beyond in just a minute. Fourth-quarter non-GAAP net income was $27.6 million, or non-GAAP earnings per share of $0.53 compared to non-GAAP net income of $18 million or non-GAAP earnings per share of $0.35 in the same period of last year.

Turning to our GAAP results, GAAP measurements for the fourth-quarter of 2016 were $6.4 million or $0.11 per share compared to the $11.5 million or $0.22 per share in the same period of last year. Please refer to our earnings press release or the supplemental financial file posted on NuVasive.com for further information related to our GAAP versus non-GAAP adjustments for both our fourth-quarter and full-year performance. Adjusted EBITDA margin, which excludes the impact of non-cash share-based compensation, was 26.8% for Q4 compared to 25.9% in the same period last year. Finally, free cash flow is very strong for the fourth quarter at $45.9 million. In addition, we delivered a record amount of underlying free cash flow of nearly $113 million for the year before paying the one-time legal settlement with Medtronics of $45 million. We ended the year with a cash and investments balance of $153.6 million.

Looking back, 2016 was a tremendous year for NuVasive. Despite the temporary delay of XLIF sales in Japan for nearly half the year, we saw the growth of our business accelerate in a pro forma basis of nearly 10% while continuing to drive meaningful improvements in our profitability profile with non-GAAP operating margins coming in at 16.1%, well ahead of our initial expectations at the beginning of the year. In addition, we made meaningful progress in reducing our non-GAAP effective tax rate by more than 500 basis points, and exceeded our initial expectations at the beginning of the year for non-GAAP earnings per share of $1.48 by $0.18, finishing the year at $1.66.

Now, I would like to spend some time discussing guidance for 2017. We expect full-year 2017 revenue to grow double digits at 10.7% or 11.7% on a constant currency basis to approximately $1.065 billion. Our revenue growth assumptions reflect an estimated impact of $10 million from currency headwinds during the year. On a pro forma basis, normalizing for a full year of NSO and Biotronic, we expect 2017 revenue growth of approximately 8% on a constant currency basis, or 7% on reported basis, which is consistent with our high single digit growth expectations as a combined company. US spinal hardware and other revenue is expected to grow approximately 8.4%. This growth will continue to be fueled by the adoption of iGA, including iGA for cervical and our Reline Posterior Fixation System.

In addition, we expect continued growth from the adoption of our NSO portfolio and the associated pull-through of our NuVasive products. On a pro forma basis, we expect growth of approximately 7.7%. US surgical support and other revenue is expected to grow approximately 13% for 2017. New growth in this category is primarily driven by the addition of the Biotronic business and incremental pull-through from our NVM5 disposables. On a pro forma basis, we expect US surgical support and other to grow by approximately 3%, which is driven by the growth in our services and disposables business.

For 2017, we expect our international business to grow by approximately 16%, which includes a negative $10 million currency headwind. On a constant currency basis, we expect international to grow approximately 22% on both a reported and pro forma basis, which will continue to be fueled by markets like Italy, Germany, the UK, and Australia, as well as our ramp back up in Japan by the second quarter. We also anticipate the momentum we started to build in Brazil in the fourth quarter will continue throughout 2017. Overall, we are very pleased with the performance of the international business, and are confident in our ability to nearly double our current market share outside the US of approximately 4.5% over the coming years.

We expect non-GAAP gross margins to be approximately 76.1% for 2017, or 50 basis points lower than the prior year. The lower gross margin profile of the Biotronic business will create a headwind of roughly 150 basis points, and will be partially offset by the progress at our new West Carrollton manufacturing facility, which will deliver roughly 100 basis points of benefit in 2017. Keep in mind, the benefit of our in-house manufacturing initiative will be more heavily weighted towards the back half of the year as the manufacturing benefits work through inventory and to the [B&Ls].

We expect non-GAAP SM&H spend as a percent of revenue to be approximately 54% for 2017, or 150 basis points better than the prior year. The lower SM&H spend profile of Biotronic will benefit the year-over-year comparison by 100 basis points, while the remaining 50 basis points of improvement will be driven by incremental asset efficiencies resulting from greater utilization of our instruments. Leveraging of our support functions are continuing to grow with the investments we have made in our international business partially offset by the investment and building out a pediatric sales channel to further increase our reach with MAGEC and its use in combination with Reline.

We anticipate full-year 2017 non-GAAP R&D expense to be approximately 5% of revenue, increasing more than $5 million from the previous year. As we have said, we will continue to invest in game-changing innovation of new and different chain of products and technologies each year. We expect the non-GAAP operating profit margin of approximately 17.1% for 2017, an improvement of 100 basis points versus 2016 performance driven by the improvements in efficiency efforts we have laid out.

We anticipate full-year 2017 non-GAAP interest and other expense to be approximately $21.6 million, roughly flat to the prior year. And for 2017, we expect our non-GAAP effective tax expense rate will continue to improve to approximately 35%. We continue to be on-track with our goal to achieve a tax rate of sub-30% and approaching the mid- to high 20%s by 2020.

It is important to note that our current tax rate expectations do not contemplate any potential on [tax-on] tax reform. However, we are uniquely positioned in that nearly 100% of our taxable profits reside in the US today, so we anticipate any potential tax reform as currently discussed would have a material benefit on our effective tax rate. In addition, the current focus of the administration on creating US manufacturing jobs and potential incentives bodes well for NuVasive as we look to add more than 200 jobs at our West Carrollton facility in Ohio.

We anticipate 2017 non-GAAP earnings per share of $2, or a 20% increase of our performance in 2016. From a GAAP perspective, we expect EPS of $1.16 for 2017, and you can find further details on of our GAAP expectations on NuVasive.com or in today's press release.

Lastly, a quick note on the first quarter of 2017. As a result of the acquisitions of Ellipse Technologies and Biotronic in 2016, as well as the relaunch of XLIF in Japan, we expect that seasonality in our business may be a bit different than historical NuVasive averages. Therefore, to provide greater clarity in terms of expectations and for your modeling purposes, we anticipate that revenue for the first quarter will be approximately $250 million.

In addition, from a profitability perspective for the first quarter, we anticipate the continued ramp-up for production in West Carrollton and the relaunch of XLIF in Japan will create a headwind on non-GAAP operating margins in the quarter. As a result, we expect non-GAAP operating margins will be roughly 14.1% in the first quarter, or in-line with the prior year, and non-GAAP earnings per share of $0.37.

In closing, we could not be more excited as we head into 2017. I am extremely pleased with the significant progress we made in 2016, as we accelerated the growth profile of the top line, while continuing to deliver against our profitability goals with operating margins coming in ahead of expectations. The acquisitions we made last year are on-track to deliver the financial expectations we established; we are taking market share from our competitors; we are investing in both our internal and external pipeline to generate and deliver new technology innovations.

And we continue to make progress on the 1000 basis points of improvement in our margin profile that we have outlined for the past two years. As I've always said, we will continue to manage the business efficiently and prudently, and continue to deliver high single-digit top line growth, continued expansion in our non-GAAP operating margins and significant growth in our non-GAAP earnings per share.

Thank you, and we will now open the call to Q&A.

Thank you.

(Operator Instructions)

Matthew O'Brien, Piper Jaffray.

A couple questions. I know we are supposed to stick to one, but I will ask both of these together, and then listen to that response. Quentin, as far as guidance goes, it sounds like organic constant currency is [16%, 8.7%], going to 8% for 2017, although it seems like there is a lot of tailwinds that you have to the business.

Is there something specific there, is it the $5 million Ellipse order, that is the delta there? As far as why there is -- why it is modestly decelerating? And then secondly, on the tax rate side, just given the international strength, I thought we might see a little bit more improvement in that metric, so if we are not going to see it for the full-year, should we expect it to be sliding uniquely lower as we exit 2017? Thank you.

Thanks, Matt. With regard to the first question, when you look at the full-year, certainly, that order that came in late in the quarter that relates to the MAGEC that I spent some time talking about. It was about 50 basis points to 60 basis points on the growth rate.

If you were to normalize that, our growth is sitting around 8.5%, a little bit north of that in terms of percentage growth year-over-year, which would be right in-line with where we ultimately grew on a pro forma basis in 2016. So when you normalize for that, you find a growth rate that is pretty comparable year-over-year.

To your point, there are a lot of tailwinds that we look at as we head into this year, but we are certainly not going to get ahead of ourselves with respect to seeing those play through until they actually start to play through. We can get into details of what those are, but we feel very good about those things.

With respect to the tax rate, the tax rate is coming down almost 200 basis points, which is a pretty good system with the way we have laid that out over the last year. When we started to talk about the longer-term planning effective that we had in place. The temporary delay of XLIF in Japan certainly pushed some of that out, and impacted it by about 1 point on the rate in 2017, just because of that delay.

But we will see that start to come back in the future years, and again, we are still on-track to get into high-[20%s] by 2020, absent any potential reform. I would just highlight, given our unique positions, any reform that you do see come through on the domestic side of things is going to benefit us to a significant degree, as 100% of our profits still stay in the US. Things remain on-track there, we are excited about what we are going to see on the tax side.

Thank you.

Richard Newitter, Leerink Partners.

Hi, thanks for taking the questions. Just following up to Matt's question, as we think of some of the tailwinds, and some of them are new product related, it also sounds like you are finally starting to see that momentum. In -- from the Brazil distributor acquisition you did last year.

You have got Japan coming online for a full-year of contribution in 2017. Can you maybe just go through those three that I just mentioned, and give us a sense for what the incremental year-over-year contribution could be there? It sounds like -- it is answer to the last question, you are trying to start off the year conservatively, but it is some of those incremental drivers kind of hit the way -- even in a base case, there should be upside.

So maybe just help us think through what does Brazil contribute incrementally? What is Japan for a full-year's worth incrementally do for you? And then maybe some of these new products, when can we see the contribution?

Yes, so around Japan, I think we were pretty clear in the fourth quarter, that was about a $6 million impact that we saw on that business. To the comments earlier, we started to launch that again here in Q1, we [proctored a few of cases] and we would expect to be back up to that full ramp-up you used to see in the second quarter. If that were to accelerate, obviously, there is upside to it, but you can kind of do the math in terms of how we framed it up with $6 million of impact back in the fourth quarter.

On Brazil, I think we all know, that did not start as quickly as we had hoped when we came out of the gate back in the second quarter of last year. We started to see that turn in the fourth quarter, and so we have not quantified exactly what that looks like in 2017. But the last time we talked about those impacts in Brazil, we were talking about them being a $3 million to $4 million impact on a quarterly basis on a direct sales model.

They used to be a distributor of ours, so it was about half of that, but that is what we are looking at getting back to, and to the extent we can ramp more quickly, there is upside to that. I think the other thing that you start to look at from a pull-through perspective is that we are just not going to get ahead of ourselves yet on. You look at MAGEC with Reline, you look at some of the new products that are coming out this year with a small stature product line that opens up the four and five Rod capabilities, that becomes exciting to us.

We have not seen those benefits yet, but we are going to wait to see it play through before we start to roll them into the results. I think the same could be said for the NVM5 disposable business on the Biotronic acquisition. We are just getting into the early stages of penetrating that pull-through opportunity, so as we see that play out, if we can replicate what we saw in the IMI business, which we are penetrating north of 20%, moving towards 30% and on to 40%.

We had not contemplated that kind of penetration yet in Biotronics, so to the degree that we can replicate that, there is where we have the outside opportunities. But again, from our perspective, we are going to wait to see those play through before we start to roll those into our numbers.

Okay, that is really helpful, Quentin. It sounds like you guys have a lot of leverage that are not really fully baked into your guidance. And then maybe just one follow-up.

I think you had mentioned a combination product of LessRay and MAGEC, somehow combining to address trauma fractures. Did I hear that correctly? Is that new? And when could we potentially hear more about that?

Yes, I think -- this is Greg. I think you might be referring to the Unite product, which is a new product coming out of NSO, and think of it as almost the opposite of Precise.

So where Precise lengthened the bones in the leg, this actually compresses them, and is an alternative to external fixation, which is the normal protocol for hard to heal fractures. We are very excited about the product, and we think it ultimately could obsolete the entire external fixation market.

Okay, and when is that going to launch?

That launches this year, in the next two months.

Okay, thank you.

Kaila Krum, William Blair.

Hello, guys, thanks for taking my questions. You talked a lot about an uptick in sales rep hires, and without giving us exact headcount numbers, can you just give us a little more granularity as to the percentage growth you saw in your sales force for the full year 2017? Just relative to what you have seen in 2016 or 2015 -- I am sorry, in 2016, relative to what you saw in 2015 or 2014?

And then it does not sound like your modeling a substantial contribution from pretty much anything outside the [core growth], but just to be clear, how you are incorporating that accelerate there.

In terms of percent, in terms of headcount additions domestically, let us call it 15%, and then, Jason, to your -- in terms of international headcount growth on the field sales force, would be about --

Pretty similar. A little bit, maybe closer to 20%, but pretty similar to US.

Yes, so you can see, we are scaling the front line organizations to support strong double-digit growth into the future.

And then I guess just relative to what you saw in 2015?

2015, I would say was probably 5%. We have really perfected our approaches, our framework for building out the front line through 2016.

Okay, that is helpful. I would love to talk just a little bit more about LessRay just to get an update on your thoughts there. I know you mentioned it would launch within the next couple months, but can you just talk a little bit more about the selling process there, how we should think about sizing that potential opportunity?

Sure, this is Jason. LessRay will launch in the next couple of months. It will launch -- think of it as two phases, generally.

Initially, it will launch on its own, and so the selling process is a small piece of capital equipment that is -- launched on its own, to reduce radiation in the OR. That will be a limited process for the course of 2017.

Ultimately, LessRay will be incorporated into our larger capital unit that is placed into the operating room. That is a longer-term strategy, and that is the real expansion opportunity for LessRay overtime.

Okay, that is helpful. Thank you.

Josh Jennings, Cowen and Company.

Hi, good evening. Thanks for taking the questions. I was hoping to just start off just on iGA, and just ask a question.

Historically, there has been the potential to reduce instrument sets per case and potentially enhance the margin profile of the hardware unit. Can you just talk about where we are in terms of that storyline for iGA?

Jason and I can [frick and frack] on that one. I would say we are still in the very beginning stages of driving iGA adoption as a tool to do pre-surgical planning.

And so therefore, the very idea you spoke about, to then have it tied to the production of more patient specific implants is still ahead of us. So it has no impact yet on our financials, and I would say it is more towards the 2019, 2020 timeframe to start impacting the financials.

Jason, anything you would add?

Just that we are actively building the operational capability to fulfill the reduction of inventory needed to put into the room. But ultimately, you have to drag the practice of surgical planning and electronic surgical planning, so that we can communicate that information back. That is a lengthy commercial process to get that done over the next couple of years.

Great, thanks for that. I just wanted to follow-up on the Ellipse, and just -- any updated thoughts on the market opportunity for the MAGEC Rod, specifically? And then just on 2017 guidance, with the historic accretion that you had put on the table at the time of the acquisition, is that baked into the 2017 guidance. And is Ellipse accretive or dilutive to margins in 2017? Thanks, thanks so much.

Yes, you bet. The MAGEC Rod will have another very strong year of growth in 2017. I think there are a number of growth drivers.

The first being that the full integration of our small stature relying system with MAGEC will be out in the course of 2017. And then second, we mentioned it in Quentin's script, we are building out a pediatric sales force focused on the unique needs of pediatric surgeons, that are different than adult degenerate or adult deformity surgeons. They kind of do it all; they do spine surgery, they do orthopedics.

We are building out a channel to sell to them, both Precise and the spine system I just referenced. We [have gotten] close to having a nice impact on growth. So Quentin, about accretion and dilution of Ellipse Technologies.

Yes, so Josh, over the course of the 2016, as we had indicated when we did the deal, it was about 60 basis points diluted. As you come into 2017, it will be neutral; you will see it start to be accretive in the back part of the year. For the full-year, it will be neutral and then accretive going forward.

Certainly, from an EPS perspective, it has been accretive from day one, but on the operating margin, that is a percentage of revenue. It was [not] dragging 2016 as we had believed it would be.

Thanks again.

Matt Miksic, UBS.

Thanks for taking our questions. I just wanted to follow up on LessRay, and I had one market industry tone question for you. But on LessRay, your comments about the sales model, it is obviously a system that offers a benefit similar to some of the robotic surgery platforms out there, in terms of reducing exposure to radiation.

I am just wondering you mentioned it is a capital sales opportunity initially, and then integrated into your M5 platform over time. Can you give us any sense of how your valuing this in the marketplace, or how you will commercialize it once it gets integrated? And then, as I mentioned, just one quick follow-up.

Yes, it is -- think of it as, initially, it is a small capital sale item, and it is primarily focused on radiation reduction, as you described. The difference is significant, though, when you start to compare it to other visualization robotic systems on the market. It does not just do radiation reduction.

Since it is built on imaging, and it is the capability of adding significant imaging capabilities to the system. When we add it into our capital platform over time over the next year to two, you start the [married it] directly to the imaging platform. The software that is being run to reduce radiation is the same software that is being used to generate the images, and married with the navigation images.

It works seamlessly with what will become our navigation, imaging and then ultimately, that becomes the brain for robotics platform. All with the ability to not just reduce radiations because you are taking [less shock], because you are using a robot or navigations, but because you can actually reduce the radiation of the shots you actually take in the room. So it is designed to work seamlessly with what becomes the entire navigation platform.

That is excellent. Kind of blending iGA, via -- the blinds between this and iGA are going to start to blur, I guess we should expect.

You may call it blurring, we call it coming into perfect focus.

Got it. The other was just on -- it is not something we often think about or had not thought about with the ACA over the past couple years. Most medical device manufacturers had the take that they had not benefited much, and so regardless of what might happen, they might not lose much if coverage is disruptive.

But you, of course, spine skews to a younger patient. I am wondering whether it is private pay, whether it is thoughts on ACA, just your general thoughts on coverage, what you are seeing. If there are any changes, and what you might expect if there were to be some changes in terms of ACA or core reform.

It is a topic we have been spending a fair amount of time on over the last month. Your conclusion that it probably is not going to have much impact on us as a Company is how we see it, as well. We think the bigger changes will happen in terms of changing the risk pool to allow this more ubiquitous coverage, insurance coverage of people, and that can only be good for us. But that is a problem that has to get solved.

And then obviously, the prescription drug dilemma, and its completely, very complicated approach with rebates will probably be the other area of focus of change. We do not see any big disruption to the ongoing progress of bundled payments, capitated payments, companies like ours potentially going at risk. We like that direction, and again, we do not see that changing because that is going to be -- as it continues to drive changes in the economics.

So all in, we will see what happens, but we think net-net we are going to be just fine.

Great, thanks for the color.

Andrew Hanover, JPMorgan.

Thanks for taking our question. I wanted to spend one second on Biotronic and its integration. First, I wanted to talk about the market overall.

How quickly is the market growing on a reported basis or organic basis; however you know it. Can you talk about sales rep productivity and improvements as a result of having this service-oriented business?

I think what we said, and has certainly born out to be true, it is about the -- it is in-line with the current growth rate of our hardware implant business. We think that is good, we think that we can get the operating margins more in-line with our implant business, so that is good. The big opportunity is, as you say, the opportunity to have a more complete, holistic coverage of the operating room, both in terms of solutions, but also productivity.

That we can figure out even new models of servicing the chase than other people can or other companies can. That work is still ahead of us, and so I would say 2017 is all about driving the integration, driving the economics on the platform itself. But we have more productivity to get and more opportunity to get in 2018, 2019 as we do even tighter integration with our commercial teams.

On the [Piece] deformity system that you are all are supposed to launch in May, I just wanted to get an idea of how the Street should be thinking about the launch of that. You had deformity seasoned in the second and third quarters, you typically have -- or had in the past, a weaker -- on a quarter-over-quarter basis, third quarter. Should we be expecting the same type of seasonality second quarter to third quarter, or how should we be thinking about that launch?

Yes, I think -- I would not expect that launch to change historic seasonality at this point. Let us get it out in the market and see how it performs, and then potentially, we are looking at it a little bit differently. But at this point, in terms of how you are thinking about modeling the year and setting it up, I would say let us look at historic seasonality and expect something comparable.

Matt Taylor, Barclays.

Hi, thanks for taking my question. Can you hear me okay?

We hear you fine.

Great, thanks. I wanted to follow-up on some of the stuff you were talking about with the NSO portfolio getting exciting there. I think the claim that you could displace a lot of external fixation is a really strong one.

Starting with that, I am really wondering if you think that is going to happen over a long period of time? How much invest that takes, does that need a lot of data like you have with the CORLISS portfolio, or do you think the results you are getting are just so much better that it might create a earlier inflection? Maybe you could help us frame that.

I think it is something that is going to play out over the medium-term. As we all know, doctor practices, medical practices do not change that rapidly, and so we are going to launch the product this year.

We are going to get a lot of good clinical data as we have done that. We think that we will have good penetration over the next several years. Just on a more empirical basis though, it has the potential to solve a lot of the problems that have plagued the external fixation for these hard to heal fractures.

In terms of, as you know, surface penetration, skin penetration that causes infections. Very clumsy in terms of the ability of the person to have a normal functioning life while they are having this fixation. A lot of those problems are alleviated with this Unite technology, and as you said, it is a great example of why we bought the company because it has a chance to completely rethink the orthopedics industry.

Great, and just a housekeeping follow-up question. Quentin, if you had the $4.8 million order and beat revenue on that, how come we did not see as much of a difference in EBIT? Was that lower margin because it was a charity, or is there something different there?

Yes, it was a very low margin. What, ultimately, went into that order, as well was the controllers or the ERC controllers, which is the hardware that can extend the magnet themselves. We typically would not include that if we loaned those out, so that was part of what weighed upon the economics.

Just to be clear, that order is not what allowed us to beat on the quarter. When we set up the quarter back at the end of Q3, we came in at $261 million was the guidance. The performance of the underlying business would have left us about $266 million on the quarter, and with that order, taken it to $271 million.

So without that order, the underlying performance of the business is really what drove the out-performance of the beat. So make sure people understand that.

Got it, okay. Thanks very much.

Kyle Rose, Canaccord.

Great, thank you very much for taking the question. Just wanted to go a little more big picture OUS. Obviously, you showed a very strong return to growth in Europe, Japan has been a great success story and it sounds like Brazil is on-track.

When you think about doubling OUS market share over the coming years, how do you think about that as more of a going deep within existing territories, or adding new territories, converting over distributors to direct territories? And just how should we think about that growth?

Secondly, it sounds like the sales reps hirings have obviously been strong this year; longer term, historically, how have you seen the productivity ramp of new sales rep hires? And how should we think about this new class of hires with the big growth over 2016? Thank you.

So start with the international business, overall. That is the largest markets, the markets where our technologies have the greatest impact and can change surgeries, are the markets where we are direct. There the Western European markets, it is Japan, it is Australia, it is now Brazil, those are going to continue to be the primary drivers for us. To get all of those markets to 10%, 15%, 20% market share, is the primary focus, and that is going to drive the majority of our growth.

When you get beyond those markets, then it is about finding the areas where we have been successful with our distributors. Maybe converting some of those distributors and getting closer to the market directly. That is how we bring our best pieces of technology to bear.

The closer we get to the market, because the investment profile is easier for us to deal with. And then selectively entering new markets, would -- really, is the third tier. We do not want to be in every market in the world, it will pull us and stretch us too thin.

We want to be deep in the markets we enter, so it is selective market entry as the third piece of the strategy.

And then with respect to your question on sales rep productivity and the ramp there. Historically, and just looking at our path, it would tell us a rep is usually going to take 12 months to 18 months to really ramp up and come into their own in our business. But I think you start to look at the profile of the reps that we are hiring, and Greg talked about this a little bit, much more seasoned, tenured guys, we are certainly hopeful we would see that play out even more quickly than what history would suggest.

But in terms with how we think about modeling it, we have stuck with what history has told us, so we will see how the year shapes up, but we are excited about what we are seeing there.

Great. Thank you for taking the questions.

Jeff Johnson, Robert W Baird.

Thank you. Good evening, guys. Let me ask two Ellipse questions, and then one bigger picture question. On Ellipse, Greg, any update on go-to-market strategy on the trauma side?

Just with the Unite and Precise now filling out that back a little bit. Are you going to still go it alone at this point, or any update there?

I just want to maybe cynically make sure that I understand the charitable deal. Low level of profit for you guys, they get a $4.8 million tax write-off, probably, from a charity standpoint and they also get a $30 million milestone on this. It just seems a little bit strange to me, but maybe I am missing something there?

First part of the question, I will grab, and then Quentin will take the second half. In terms of the Precise technology, as I said, for pediatrics, we are going to over time, have a pediatric channel be formed. It will take us some time to do that, but as we are hiring our own people and teaching them how to do precise MAGEC Relines, we think that is going to be a nice recipe for growth.

In terms of Precise for the adult market, we continue to go at that direct and with distributors. I would just say that we are contemplating a bigger play on how we can make adult Precise having deeper penetration. We are thinking about that one to a greater degree.

And certainly, with Unite products, which is certainly adult-oriented, that gives it even more -- you know, the tool is and the bag from which somebody can sell. We are creating a pretty good product line that others or ourselves could invest in and bring to market on the adult side.

And Jeff, good question on the MAGEC order, the $4.8 million. Without question, there is a need in the marketplace around the charitable aspect of children who do not have access to this kind of care, and this was an entity that was set up with the intention of fulfilling that need. Certainly, you hit on the point that it did trigger, at the end of the day, the $30 million contingent consideration.

I would just be clear, when the order came through, that was not the case; there was -- they were not at that milestone yet. There was incremental procedures and orders that were coming together to make that happen. At the end of the day, you look at the order and we had a requirement under the merger agreement to certainly act in good faith.

When you look at the details of the purchase order, what it is for and the fact that it is in an arm's length transaction, it was prepaid. If all of those [facts] line up to where it -- had we not accepted it for the simple case of not wanting to trigger the $30 million, we certainly would have been operating in bad faith. That is not something we wanted to do.

At the end of the day, look, it is a great cause that it has been set up for, we are hopeful to see that continue into the future, to see that supported. But also, those are the facts around the situation.

Understood. Greg, maybe could you give us a tangible example of how your risk sharing and outcomes focus might be helping at this point? You mentioned a couple different channels there. I would love to hear maybe a tangible example or two of where that is coming together and really starting to help the business.

Just a good example would be a Midwest focused fine hospital where we are doing procedural pricing, and so within a range of procedure -- of bill of goods, the customer gets, basically, a fixed-price. It is -- if more is required, we [eat] it, if less is required, we get a benefit. What the customer, the hospital gets in this case, is predictability.

Given our knowledge of the surgeries, and the variation that you see in patients, we feel very good on an actuarial basis to be able to provide that type of -- certain payment or procedural payment. So that is an example of it. We are going to see a lot more of those models in the future, and we like that.

We think that creates more separation between us, and for sure, a lot of the smaller spine companies. We have other ideas ahead of that, too, but we will save them for another day.

Larry Biegelsen, Wells Fargo.

Hello, guys. Thanks for fitting me in. Two questions, one on M&A for Greg, and one on the operating margin.

Greg, you took disciplined capital deployment for strategic M&A off the slide and reasons to invest in NuVasive in the fourth quarter deck. The question is, why, and does it mean you are going to take a pause from M&A in 2017? It does not sound that way based on your earlier comment.

I just have one follow-up.

Larry, I am not sure what you are referring to. Certainly in my script, I will reiterate it here, what I did say is that we are taking a very disciplined approach to M&A, as we have done so far. And so I am not sure what you are referring to on the slide, though, that is missing.

All right, fair enough. It is a related question for my follow-up. About a year ago, at December 2015 analyst meeting, you guided to an operating margin of 20% with $1 billion in sales.

But in 2017, you are guiding to over $1 billion in sale, but an operating margin of 17%. Obviously, I think what changed was the Biotronic acquisition, so it does seem like you are willing to sacrifice some of those margin goals, at least short-term, for M&A. The question really is when do we get to that 20% that you outlined about a year ago?

You have put out a number of 25% for the long-term operating margin goal. Any color on the progression to that? Thanks for taking my question.

This is Quinton here. You referring to the Analyst Day back late Q4 of 2015, I believe it was. Which is prior to the Ellipse deal, and prior to the Biotronic acquisitions that we have made, as well.

At that point in time, if you were to use the guidance or the growth expectations that we put out there as being a mid-single-digit grower, you would have modeled a $1 billion revenue stream and a 20% operating margin, out around 2018 or 2019. We would have gotten to that $1 billion mark far further into the future than where we are at today. We accelerated the overall growth profile of the Company while continuing to maintain our commitment to improving operating margins, which we did again this year.

I think if you go back and you look at your models, you would find pretty clearly that we are delivering more incremental operating profit dollars today in the path we are heading down than you ever would have modeled at that point in time. I think we are probably a year to two years ahead on the operating profit dollar side of things, but you right, from a margin perspective, at that time, we had guided to something that would have put you at 20% of $1 billion, but it would have been two years from now.

That was before the M&A was out there, and we remain committed on the M&A side. We are going to do deals that have potential to accelerate the top line, but also meet the long-term margin goals of the Company, which is to get to 25%. We are committed to 100 basis points per year, again, in 2017 that we put out for you.

No color on the 25%, Quentin?

Well, I think the way to think about it, and at least the way we framed it up is 100 basis points a year is the way to think about it. If you look at the last several years, we have consistently been ahead of that. So I am not going to put a timeframe on exactly when it will be, but our focus is to get there as quickly as we can.

Got it, thanks for taking the questions.

Joanne Wuensch, BMO Capital Markets.

Good evening, everybody, and thank you for taking the question. Two of them, specifically, one is a big picture question, every now and then, the larger competitors such as Medtronic and J&J do some sabre rattling that they are going to accelerate their growth rate and stop losing market share. Have you seen any of that in the market as you compete?

Well, we certainly did not see it in the fourth quarter (laughter). So -- we have heard that, as well. We remain humble about what we are doing and respectful of the competition.

But as I tried to emphasize in my prepared remarks, we think have the right formula here of being very focused on what we do, and very fast in our response to the market. I think it is just difficult for us -- other large organizations to have that nimbleness.

My second question has to do with what happened in the third quarter as it relates to capital sales. I know it is not a big number, but it was one of the reasons we all sort of took a pause in the third quarter. Have you changed anything internally so that you do not, quote, get surprised or do not have this little moment again in the future?

I will tell you there is just a rigor around vetting each one of those opportunities directly with the sales team. Understanding what the pipe line looks like and where we are at in closed process, with respect to each one of those deals is something that we are now reviewing on a weekly basis. That weekly rigor was not there before, so we do continue to look for ways to get better and improve upon what we do, and that is one of the practices we put in place.

Very nice, keep up the good work. Bye, bye.

Thank you, everybody. Thank you for participating today, and we look forward to speaking with you at the next quarter. This concludes the fourth quarter and full-year 2016 earnings call.