NuVasive Inc (NUVA) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NuVasive, Inc. fourth quarter 2007 and year-end earnings. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Nick Laudico of The Ruth Group. Thank you Mr. Laudico, you may begin.

Thank you operator.

Welcome to the NuVasive fourth quarter earnings conference call. NuVasive senior management joining us on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Kevin O'Boyle, Executive Vice President and Chief Financial Officer.

NuVasive cautions you that statements included in this conference call that are not a description of historical facts are forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from historical results or those expressed or implied by such forward-looking statements. Such risks and uncertainties that could cause actual growth and results to differ materially include, but are not limited to, the uncertain process of seeking regulatory approval or clearance for NuVasive's products or devices, including risks that such process could be significantly delayed. The uncertain process of administering a clinical trial, such as that underway for NeoDisc, including the risk that the trial is delayed or product produces data suggesting that the device is not sufficiently safe or effective.

The possible that the FDA may require significant changes, to NuVasive's products or clinical studies, the risk that products may not perform as intended, and may therefore not achieve commercial success; the risk that the company's financial projections may prove incorrect because of unexpected difficulty in generating sales or achieving anticipated profitability; the risk that competitors may develop superior products or may have a greater market position enabling more successful commercialization; the risk that additional clinical data may call into question the benefits of NuVasive's products to patients, hospitals, surgeons and other risks and uncertainties more fully described in NuVasive's press releases and period filings with the Securities and Exchange Commission. NuVasive's public filings with the SEC are available at www.sec.gov. NuVasive assumes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which it was made.. With that I would like to turn the call over to Alex Lukianov.

Thank, Nick. And thank you, everyone for joining us this afternoon for our fourth quarter and year-end 2007 call.

During 2007, we accomplished a number of strategic milestones that drove our financial and market penetration success. Our exclusive sales force made progress with product penetration while at the same time winning new accounts and new geographies. We introduced several new products that meaningfully expanded our product breadth in the lumbar, thoracic and cervical areas of the spine. We continue to train surgeons on our unique [inaudible] procedure, while expanding its clinical applications, and we made progress on our motion preservation strategy with further enrollment in our NeoDisc pivotal trial and obtaining CE mark for European distribution.

Before outlining our operational progress during the quarter, let me take a moment to briefly review our strong financial performance in the fourth quarter and full year 2007 Revenue in the quarter increased 54% year-over-year to $47 million. On a sequential basis, this represents a 22% quarterly increase. Full year 2007 revenue, increased 57%, to $154.3 million while delivering $0.11 of non-GAAP profitability. NuVasive has become a competitive force in the U.S. spine market. We have developed the sales force, product breadth, differentiation, pipeline, reputation for strong service and market awareness that we believe will propel us to approximately 5% market share in 2008.

Let me take a few moments to outline what we accomplished and add some perspective on how we plan to reach $500 million in revenue over the next several years while advancing our culture of absolute responsiveness, [inaudible]and being easy to do biz. In other words, being the easiest spine company to do business with. Our exclusive sales force ended the year at 230 people, which was in line with our yearly guidance of growing the group by 10% to 15%. This dedicated team has driven our market share gains in two important ways: developing NuVasive product penetration and developing a presence in new U.S. geographies while delivering strong service to our customers. To drive our penetration further, we have expanded the U.S. market from five regions to 11, each lead by a sales director, thus allowing a greater focus across the U.S. market and creating greater career growth opportunities for our sales force. This strategy allows us to drive deeper penetration per account and approve -- improve responsiveness to the development of new business in each area.

Because our proven approach to growing our markets is time consuming, we expect many of our real line territories to ramp-up over the next few quarters as we grow beyond the initial key account phase. As a result, we expect revenue growth in the first quarter of 2008 to be marginal as the sales directors acclimate to the new geographic breakouts, target accounts and work to backfill their own positions with new area business managers and spine specialists to support our expansion. We believe this transition positions us solidly on track to achieve revenue and profitability guidance in 2008. Our experienced sales professionals continue to educate surgeon customers on how to incorporate the entire suite of NuVasive products into their practices across the lumbar, cervical and thoracic regions of the spine, creating smaller geographic footprints in each division while growing our total sales force once again by approximately 15% annually will serve to seed and expand our coverage where we historically have under penetrated, or not even had a presence.

We are taking a balanced approach to establishing our presence in new markets in order to ensure the accounts we develop experience the same absolute responsiveness in customer service that NuVasive has become known for, the momentum of deeper product penetration and an expansion in to new markets will be a key driver of our revenue growth in 2008 and beyond. Our commitment to new product innovation and strategy of obsoleting our own products has resulted in a rapidly growing product offering. To ensure our sales force successfully sells across all of these product lines, we will have a renewed focus on sales training in 2008. We fully understand the importance of providing a full spectrum sales training program to provide them with the product knowledge necessary to drive deeper account penetration and capture new business. The proper training of our sales force requires focus on product knowledge, anatomy, operating room protocol, clinical benefits of our products and techniques, and special emphasis on our core MAS technology.

To facility this, we have expanded our sales training group, are adding multiple subject experts to the training team and developing new products and OR training modules to increase the proficiency of our sales representatives. Importantly, we have taken a step of extending our training programs outside of our corporate headquarters, and will be providing our sales force with a significant amount of training in the field to further our expertise. In 2007, we introduced several new products, further broadening our product platform and allowing us to stay ahead of the competition. Many of the new products we introduced in 2007, address the growing desire of surgeons to expand their clinical use of our MAS platform. Surgeons have broadened a lateral approach from the lumbar to the thoracic region of the spine, as well as into adult degenerative scoliosis procedures. Our ability to move up the spine and provide surgeons with product systems to increase operative levels is extremely important for surgeon retention in concert with rapidly expanding indications. I will now provide you with a summary of our product strategy for 2008, including details on several of our expanding product lines.. We will continue to maintain our commitment to our MAS platform of NeuroVision, MaXcess, and specialized implants including the X-lift procedure.

We expect our lumbar market share to grow in 2008, primarily resulting from a full sales year of several key products that were launched in 2007, including X-lift procedures performed with our XLP Lateral Plate for single access surgery, X-lift procedures with our SpheRx DBR 2 for percutaneous pedicle screw fixation X-lift and thoracic X-lift with our SpheRx 2 pedicle screw system for multi-level constructs and X-lift thoracic to address the expanding indications of this procedure. The lumbar thoracic junction and the thoracic spine become an area of even greater differentiation for us as surgeons expand our lateral X-lift procedure through the MAS platform. Our lateral approach with applications in the lumbar and thoracic regions of the spine will provide opportunities in 2008 to expend revenue in two additional ways. Through the increased usage of our growing platform of implants, including CoRoent composites and by expanding our ability to address multi-level surgeries. Regarding CoRoent implants, we will continue to expand our offering including the introduction of [inaudible] implants, additional shapes and angulations, and ones specifically designed for revision procedures. These are in addition to the unique XLP plates, SpheRx 2 and SpheRx DBR 2 pedicle screw systems and CoRoent impacts that are already complement our X-lift procedure. We are also launching the halo anterior plate to compliment our anterior CoRoent system so that with our MAS T-lift approach, surgeons may approach the L5, S1 level from the front or from the back. The lateral approach applies to L45 up, into the thoracic spine, and we now offer more choices of implants beyond T-lift for the L5 S1 level including anterior.

Building on our strategy to expand our rudimentary position in the cervical spine, our cervical product offering will increase significantly. In 2008, driven by new product introductions such as the Helix anterior cervical plates and viewpoints, our posterior solution to the cervical spine. These new products, together with our gradient cervical plate will deliver flexible and elegant solutions for the various preferences amongst surgeons for cervical fusion and provide our sales force with the necessary product offerings to meet customer needs. With significant contributions from our new products, we expect our total cervical revenue to approximately double from 2007 levels. We continue to move forward with our motion preservation strategy for the cervical and lumbar spine.

Enrollment in the pivotal trial for our cervical motion preservation device, NeoDisc, continues to progress with expected enrollment completion in the first half of 2008. We also expect IDE approval for two of our other motion preservation devices later in 2008. These being CerPass. our mechanical ceramic cervical disc replacement device XLTDR, our lumbar total disc replacement device designed for insertion through our unique lateral approach. We are currently developing a less rigid rod fusion system as well as evaluating -- as well as evaluating alternative spinus process-type devices. We believe motion preservation based initiatives will form a larger part of our product offering in the future.

Finally, we'll be introducing our next generation nerve [inaudible] system, which will provide precise and reliable nerve safety feedback while enhancing decision making during minimally disruptive spine procedures like X-lift. The real time directional feedback provided by the system delivers critical intra-operative information which has been used successfully in over 70,000 spine surgeries since its release in October 2002. Our next generation product will leverage our existing proprietary technologies to provide expanded multi-modality covering the entire spine. This new platform will also offer enhanced features such as customizable surgeon profiles, visual cues within the surgical field and guidance technology that will further aid with implant placement. This new system fully embodies our philosophy of obsoleting our own products and will place us even further ahead of the competition in the area of surgeon driven nerve monitoring. The beginning of 2008 also marks our initial entrance into the international markets, beginning primarily with Europe. Our strategy for the international markets is a controlled rollout focused on infrastructure development and clinical education for select European surgeons. This initial establishment of a training presence will allow us to educate surgeons on our unique product offerings, thus building a foundation for the adoption of our lateral approach surgery and motion preservation products.

In 2008, our sales effort will be primarily focused on Germany, German-speaking countries and the United Kingdom with a fazed rollout to other European nations. We also expect to begin preliminary sales in these markets of our NeoDisc, CerPass and XLTDR devices, all of which have been CE marked. Sales of these devices will be limited initially as we build clinical experience. Overall, our expectation is for the international contribution to be small in 2008, and become more significant as we enter 2009 with greater revenue from more markets including Latin America, Australia and New Zealand. I would now like to turn the call over to Kevin for a detailed review of our financial results.

Thank you, Alex.

Our revenue for the fourth quarter 2007 was $46.9 million, a 53.9% increase over Q4, 2006 and a 21.8% increase over Q3 2007. Gross margin was 82.9%, compared to gross margin in the fourth quarter of '06 of 83.1%, and gross margin in the third quarter of '07 of 82%. Our Q4 2007 net loss was $1.1 million, or a loss per share of $0.03 on a GAAP basis.

On a non-GAAP basis, the company reported net income of $2.9 million, or $0.08 per share. The non-GAAP income per share is due to the realization of sales force efficiencies and the continuing strength of our revenue from innovative products. Our non-GAAP net income calculation in the fourth quarter of 2007 excludes stock-based compensation of $3.6 million, and amortization of intangible assets of $400,000. For the year. our non-GAAP earnings per share was $0.11 which compares favorably to our guidance range of $0.06 to $0.09.

Operating expenses for Q4 2007 total $41.2 million, a 17.2% increase from the third quarter of 2007. The increase in operating expenses in the fourth quarter primarily reflects increased sales commissions, higher administrative expenses associated with infrastructure advancements, and international start-up costs. R&D costs were $6.1 million in the fourth quarter, excluding stock-based compensation. The increase in R&D spend from Q3 was related to the normal enrollment of subjects in the NeoDisc clinical trial and development efforts related to our product pipeline. Excluding stock-based compensation, research and develop as a percentage of revenues for Q4 2007 came in at 13% versus Q3 of 2007 at 14.7%.

Sales marketing and administrative expenses totalled $31.5 million, excluding stock-based compensation, versus $26.1 million in the third quarter. The increase in spend from Q3 was related to increased commissions associated with top sales representatives exceeding performance goals following the launch of new products late in the year. Excluding stock-based compensation, sales, marketing, and administration, as a percent of revenues for Q4, 2007 came in at 67.1% versus Q3 2007 at 67.9%. The interest and other income for the quarter was $1.2 million. The stock-based compensation charge for the quarter of $3.6 million was recorded in our operating expenses and allocated as $563,000 in R&D, with the balance of $3.1 million in sales marketing, and administrative expenses.

As of December 31, 2007, we had $87.9 million in cash, cash equivalents and short and long-term investments. Our operating cash burn was $9.6 million for Q4 which broadly reflects the development of our MAS product pipeline including motion preservation. The national launch of new products and the build out of inventory and instruments to support future growth. Included in our cash burn were cost related to lease hold improvements for our new corporate facility and implementation costs for our ERP system, totaling $5 million. Our operating cash burn is defined as cash used for operating activities plus additions to fixed assets. Our inventory position was $36 million at the end of Q4, and has increased each quarter in 2007, principally because of the rapid revenue growth, the10 new products we released throughout the year, and the need to place inventory in the European markets.

Orthopedics traditionally has a high working capital requirement. Specifically to NuVasive, our inventory to sales ratio should average about 25% and may spike in a quarter depending on how many and what type of products get launched. Additionally a corresponding increase has occurred in our property and equipment costs for the same reasons. Day sales outstanding, or DSOs, were 53 days in Q4 '07, compared to 56 days in Q3. I will now provide guidance for 2008.

For the full year 2008, we expect revenue to be in the range of $204 million, to $208 million. We expect international revenues to contribute between 2% and 3% of total 2008 revenues. This revenue guidance is an increase of 32% to 35% over prior year. As Alex mentioned, our sales force strategy for new geographical penetration in 2008 is to establish clinical education and market awareness, followed by building the territories outward. We anticipate these sales management enhancements to be fully implemented by the second half of 2008, which gives us confidence in our full-year financial guidance. We expect full-year 2008-gross margin to be in the range of 81% to 82%, compared to 82.3% in 2007. We feel that this is a sustainable gross margin range, which takes in to account our international operation.

From an operating expense perspective, before stock-based compensation, we expect research and development costs to average in the 12% to 13% range, and sales, marketing, and administrative expense to average 62% to 63% of total revenues. These percentages compare favorably to 2007 when R&D was 14.5%, and sales marketing, and administrative was 70.1%. We expect these efficiencies in our operating expense base over 2007 levels to translate to GAAP earnings in 2008. Non-operating income, principally consisting of interest income, should be approximately $3 million to $3.5 million in 2008. In accordance with our investment policy guidelines, our cash is invested in short-term investment grade instruments, and with recent market trends, our yields will be reduced from 2007 levels. We expect full-year 2008 stock-based compensation to be in the range of $19 million to $20 million and allocated on a percentage basis as follows: R&D 15%; sales, marketing and administrative, 85%. As Alex mentioned, to provide the infrastructure necessary to achieve $500 million in revenues and beyond, we'll be moving to a new leased campus-style headquarters and converting to a new ERP software system, both of which will carry additional costs.

Notwithstanding these costs, we reiterate our commitment to marginal GAAP profitability for the full year 2008 and expect GAAP earnings per share to be in the range of $0.02 to $0.05. On a non-GAAP basis, which excludes stock-based compensation and amortization of acquired intangible assets, we expect 2008 earnings per share to be in the range of $0.56 to $0.59. A reconciliation from GAAP to non-GAAP earnings per share is disclosed in the table in our press release. It is our policy to provide only annual guidance, however, in order to provide context for 2008 quarterly modeling purposes, we are providing the following. For the first quarter of 2008, we expect revenue to be in the range of $47 million to $48 million with gross margins in the range of 81% to 82%. For first quarter 2008, revenues should see only a marginal increase sequentially due to our considerably strong fourth quarter 2007 and to allow for the new sales geographic territories to assimilate. We expect first quarter 2008 stock-based compensation to be in the range of $5 million to $5.5 million and allocated on a percentage basis as follows: R&D 15%, and sales, marketing, and administrative expenses, 85%. We expect first quarter 2008 earnings per share in the range of $0.01 to $0.03. On a GAAP basis, we expect a loss per share in the range of $0.13 loss to $0.11.

I would now like to turn the call back over to Alex for closing commentary.

Thank you, Kevin. We see the spine market growing at a 12% to 15% pace. Bringing the size of the overall U.S. implant market to $4.2 billion in 2008. This growth rate is supported by an increase in the number of procedures particularly cervical, and the introduction of technology focused on the approximately 500,000 fusion procedures performed annually. Within the $4.2 billion market, MIS is still a small but rapidly growing segment. Our estimate for the number of procedures performed in a MIS fashion is less than 20%.

As this continues to grow, eventually representing the majority of total procedures, we believe that our differentiated and easy to use MAS products, which we believe provide benefits over complex and poorly reproduceable MIS techniques will deliver greater market penetration and a double-digit market share. During 2008, we have a number of initiatives in place that will serve to build the infrastructure necessary for our long-term growth, allowing NuVasive to become a dominant force in the spine market.

We will relocate to our new corporate headquarters. The new campus style environment will accommodate all of our departments in a single location and enable growth up to 300,000 square feet over the next several years. This will allow us to leverage our unique culture of absolute responsiveness across the entire organization and continue to provide the best clinical education with our state of the art operating theater. In addition to the relocation, we'll also complete the conversion to a multimillion dollar SAP enterprise software platform that will unify our operations and increase our operational efficiency in headquarters, our distribution center in Memphis and our new office in London, as well as Germany. Consistent with our infrastructure investments, we will significantly invest in our sales training program. This is a key initiative supporting our sales strategy, providing our entire sales organization with the resources and skills required to educate a greater number of spine surgeons on our unique products and technologies.

While these initiatives will bring additional costs in 2008, they are necessary components of our planned growth trajectory. We remain focused on delivering operating leverage during 2008 and reiterate our commitment to marginal GAAP profitability for the full year. In summary, we are pleased with our performance in 2007, making substantial strides toward $500 million in revenue over the next several years together with significant operating margins. Our sales force has gained the momentum necessary to drive deeper penetration and expand geographically. Our broad product sweep is one of the most innovative in the industry and allows us to address the complete needs of a spine surgeon. Our combination of industry-leading innovation, and the platform to distribute it will lead us towards approximately 5% U.S. market share in 2008, and on to double-digit penetration in the not-to-distant future.

Despite all of our accomplishments regarding technology, our unique and differentiated platform and financial performance, our focus remains squarely on our core cultural values. These include absolute responsiveness to our customers, the ability to rely on fellow share owners to provide support, and deliver outstanding performance standards, and a dedication to being the easiest spine company to do business with. These values are the driving force behind everything we do. Because of this focus, we are able to bring products to market faster, respond rapidly to customer needs, anticipate trends and have the courage to try new things. The growth in our business provides opportunities to grow our culture and bring our unique brand of responsiveness and service to more customers. The challenge of proliferating our cultural values in step with our revenues is one that our share owners readily accept.

In closing, we are extremely proud of the unique product offering we have built through our organic development efforts. This focus on internal development of advanced products and technologies is our foundation for our drive to $500 million. We plan to be opportunistic about acquiring other products or technologies that represent synergistic additions to our core MAS platform and fit our goal of becoming the most innovative provider of spine surgery products. Our market position and strong exclusive sales force provide the right foundation to successfully integrate new strategic technologies into our company. We would now be pleased to answer any of your questions.

Actually before we go to questions, in my prepared comments, our cash number was $89.7 million, not $87.9. Let's make sure we have that clarification. Now we can turn it over for questions please.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question today comes from the line of [Roj Behhoy] with Bear Stearns.

Hi, how are you, this is actually Jared in for Roj today. Good afternoon guys.

Hi, how are you?

Good. Just a question on guidance, given your long-term outlook of mid-30% top line growth year-over-year, it looks like '08 might be a bit conservative. Is that a decent way to look at it, or could the growth in the out years actually pick up as you gain more territorial expansion and then also get in to Europe.

I think as we talked about during the call, we've made a number of changes in terms of sales management that -- we want to be sure have the stickiness that we anticipate they'll have in the first quarter. So, that's why we're really proposing that our growth will be marginal with regard to sequential growth over the first quarter over the fourth.. So we feel very comfortable about our guidance, and as I think as we get further into the year, we'll see where that takes us, but we think it's the appropriate place to start.

Great. In terms of sales force leverage, at what point do you think that leverage is really going to start to flow through. You mentioned 11 regions now in the U.S. That's more than double from where you were not too long ago. Obviously, a number of new products here, so, when does that leverage start to kick in?

In terms of decreasing our expenses further, you mean? Is that what you mean?

Yes, exactly.

Well, I think we have certainly made some very strong strides in that area, as Kevin talked about. I think we'll see further leverage into 2009, and I think that that will put us into a very strong position at that point.

Okay, so '09. And then just one last one on cervical. Where do you think the cervical portion of your business can be in a couple of years, can it be, 10%, 20% of the business? Where do you see that becoming?

It's a below 10% now, and we anticipate it moving to well above 10% as we go into 2008. Our belief is, that over the next few years as total disc replacements come in to vogue, and we believe they will on the cervical side, and as NeoDisc makes its way into the marketplace, there is still going to be a very strong place for fusion. So building our position with fusion products first, and then following in with NeoDisc, we think, puts us into a terrific place over the next three or four years, with having really a strong foundation in the cervical arena and having a position of 20% or greater.

Thank you.

You're welcome.

Our next question comes from the line of Bob Hopkins with Lehman Brothers. Please proceed with your questions.

Thank you, good afternoon.

Hey, Bob.

Hey. Couple of quick questions. First, I think I know the answer to this, but should we anticipate that you will have any financing needs in 2008, or do you think you have got plenty of cash to give you the flexibility to run your business the way you want to run it and identify any opportunities?

Well, I'll let Kevin jump in here in a second too, but I think certainly we have plenty of cash with regard to being profitable, with regard to doing the things that we need to do. I think concurrently we're going to be looking at opportunities as we always do, and see what makes sense, and if something comes down the road that we really feel like we need to do and that requires additional funding, then we'll revisit that, but we certainly need -- we certainly have what we need for operations for the next several years.

And from a M&A perspective, should we read in to your comments that you have got a few things identified? Or are these just more just general comments on what we should be looking for the rest of the year?

Well, we have been looking at things for quite some time and as you know, we haven't acquired anything since the start of last year when we did the [inaudible] acquisition. We feel that there is a number of areas that we would like to do additional acquisitions in. Clearly, there are, I think, more things we could do in the whole non-fusion area, if you want to call it that. There's quite a few companies working in that arena, certainly more in biologics. We don't have a presence in tumor or trauma. e haven't done anything in the vertebroplasty area. So, there's quite a few areas that we have not focused our unique technology on, but I think we should continue to seriously consider it, and we're looking under every stone and seeing what is going to make sense for us in 2008 and 2009.

Okay, great. And then, the OUS contribution that's factored into your guidance, is that more in the $1 million to $2 million range, or is that in the sort of the $5 million to $10 million range?

No, Bob, that was 2% to 3% of the overall revenue number, so it's higher than it.

Okay, for Europe in '08, 2% to 3% of total -- total revenues?

Yes.

Got it. And then, talking about this expansion in the number of territories going from five to 11. When did this go into effect?

Jan 1.

So the six new territories, what percentage of those are brand new territories versus chopping up existing territories in to smaller pieces?

It's -- all of it is chopping up existing territories. It is taking the United States, which had five territories, and moving it in to 11. So what we did is, we took area business managers that had been very successful in growing our business, moved them in to sales director positions, given them some additional responsibilities, taken existing sales directors and of course, narrowed their scope, and so now what we're doing is, with the expanded responsibilities of our sales directors, we're backfilling for lack of a better term, but we're adding new area business managers, new sales representatives as the stars that have really done a great job for us are now expanding, and they have taken on an additional state or two. So it's allowing us to overall focus our efforts with our top talent and to begin adding more area business managers and representatives underneath those sales directors.

Have you had any turnover as a result of the changes, or --?

No.

Okay, and then final question, just on any pricing trends that you are seeing out in the marketplace, Alex, and any comments on -- now that you got a cervical artificial disk on the marketplace, how you see the acceptance of that product its impact on your business? Thank you very much.

Sure. We have seen the pricing environment being pretty stable. We have not seen really any changes or spikes in that. I think it has been consistent with the same environment that we saw last year going in to this year, the metropolitan areas, as usual looking for more discounting than the more rural areas, and I don't think that has really changed very much. On the total disc replacement side, as we move into Europe and position that, we'll see how that goes. We believe it can be competitively positioned from a pricing perspective. So we think we can command at least what market getting, if not a premium with NeoDisc. So we'll see how that goes.

I think in the U.S., what I'm happy to see is that the TDRs are being priced at a reasonable level compared to perhaps what was done on the lumbar side once upon a time. So, I think that makes the market much more reasonable and I think the market much more open to the acceptance of cervical devices, and I think paves the way for us in the next couple of years with NeoDisc.

Thanks so much.

You're welcome.

Our next question comes from the line of Matt [Mixic] with Morgan Stanley.

Hi, thanks for taking the questions.

Hi, Matt.

Couple of things -- I guess, one, drilling down on cervical a little and lumbar, any -- any of the -- anything going on in those markets in the X infuse and biologics? Different growth dynamics potentially that you are seeing? Or just -- or are they growing at different rates as you move more into cervical?

No, we have not seen that yet. I think we'll start to see that once they get past the reimbursement challenges with TDR. I think we'll see the market start to grow in terms of the number of procedures being done on the cervical side. We have not seen that as of yet. We see the same growth rates that we saw in 2007 heading into 2008 at this point in time.

And the growth -- additional growth around TDRs would be, what, just driven by more people coming in for procedures in general?

Yes, I think for -- certainly what the whole idea behind TDR is that it's earlier intervention. Otherwise TDR doesn't work very well if you don't come in for early intervention and come in before there's additional degeneration. So that means that there's people waiting on the sidelines that are otherwise going to be waiting in they are in the Nth stage of the disease to be treated. So, our guess has been that is going to increase the size of the market by at least 10%, and I think that's conservative.

Okay. And then similarly in thoracic, I guess, if we look at the spine market as growing somewhere in the 10% to 12% range. excluding biologics. If that is in fact what you see also -- any differences about thoracic? Any differences, maybe in the competitive landscape there versus cervical and lumbar?

No, thoracic and lumbar we see as being consistent. We don't see a difference there. Okay. On the -- some color around the sales force. You talked about this carving up some of the territories, drilling down a little maybe deeper penetration into some of the territories. I mean, part of the effort has been opening new accounts, right, over the past year and a half as you went to national footprint. But to what degree is sort of servicing versus opening, farming versus hunting, becoming an important role for the sales force. This does both. That's exactly why we did it.

So that, it gives us the opportunity to make sure that we're looking after the that accounts that we have, and it allows our very best people to expand out and obtain additional business scenarios where frankly, we have next to no business. I can give you an example of an area, for example, where we have done well, like Chicago. We have done really a nice job of gaining market share there over a two-year time period. But we have next to no business whatsoever in Michigan, and we have some limited business in Wisconsin. So our sales director that has responsibility for largely the Chicago area has had his responsibility expanded, and we believe that he'll be very effective in not only maintaining, but growing Chicago market as well as expanding in to the others that I mentioned.

That's the strategy throughout the United States, and I think it's just going to take a little time for the sales directors to readjust to new accounts, to reposition people, so there's a little bit of an inflection point. That's why we're very comfortable about hitting the total number on the year. But I think it's going to give us even more gas for 2009 with regard to our goal for hitting $500 million in the way of the right infrastructure.

That's sort of top line leverage. I mean, are there -- are there cost implications of going to this sort of multi-level sales force structure?

No, actually to a large degree it's less expensive for us.

Okay. Just question -- quick question on the cash trends and kind of where -- if you can give us an idea of where the low water mark here is for cash. I guess at some point this year, you're going to -- or maybe, I don't know if it is this year, but where does that trough out assuming no significant acquisitions?

We'll burn cash in the first couple of quarters, and then start producing cash in the second half of the year, so the cash number shouldn't change materially from beginning to end. So that's how we see the cash position moving throughout the year.

Okay. And then on shares, is that -- I don't know if you gave the specific number, but judging from your full-year weighted number, your guidance for '08, I'm assuming that kind of pops up to something north of 40 and -- towards the end of the year?

We have it in our reconciliation of the press release, Matt. It's between GAAP and non-GAAP. But it's about $38 million, right around there, for the weighted average shares outstanding for the year.

Right. I guess my question is, that requires do you to sort of be north of 40 and to come out of the year at over 40, [inaudible] fully diluted.

That goes to -- that's a fully diluted calculation. That's the denominator of the fully diluted number.

Understood. Then the last question just on NeoDisc, and what I guess you are seeing in the market as -- at least when you are doing the trial here in the U.S., anything you have learned that you can talk about in terms of patient selection on maybe the way NeoDisc lines up against patients, or appeals to patients relative to the other trials that are out there as well.

Well, I think generally speaking the trial is going exactly as we would have anticipated a TDR trial to move forward with with a different device. We're very pleased. Enrollment is moving along nicely. We expect the outcome to be as anticipated. I'm going to ask Keith to jump in with any additional color, as he's closer to it than I am.

I think that the main point is that, it is a completely compliant device, and with a compliant device it opens up some additional flexibility, but all of that needs to be proven out in the clinical trial itself. And we're excited that the clinical trial provides a device that a fully imaging, capable of CT, MRI, so there's a lot of modalities that are out there to evaluate the device and do better tracking of those patients as we get through the two year windows.

Anything about the patients that are -- I mean, you have the CerPass as well, but I mean, is this -- you just find -- is there younger patients going for NeoDisc? Older patients? What's -- any differences there?

It's too early to tell from a population perspective any major differences, but we -- we are assuming because this study is so similar to the number of other studies that have been run, and we have the same variances across the country, that we should have a pretty consistent population when compared with the other studies.

Okay. Great. Well, thanks for taking the questions.

You bet.

Our next question is from the line of Ben Andrew with William Blair.

Good afternoon, can you hear me?

Yes, Ben, hi, how are you?

Great, good afternoon. Just a few follow ups, I think most of the questions have been answered. But as you look at the international market, what is the opportunity, Alex as 2008 unfolds to basically use that as an accelerator beyond what you have got in there. By which I mean, how many, kind of ripe opportunities are there territory-wise, and what chunk of those are you sort of going after in '08?

I think our biggest opportunities right now are in Germany and in the UK. That's where we're investing most of our time and resources. So that's really -- that's really where the biggest tops are, if you will, for 2008.

And are there big differences in terms of the market dynamics there versus the U.S. that we should be paying attention to as the year unfolds relative to volumes and revenue per case, things like that?

Yeah, there's big differences, of course, in terms of the systems and the health care systems in general, and the fact that there's a lot more devices on the market, and TDR has been out there for years. What is not different is that lateral TDR has not been in those markets. So we're still able to lead with very unique technology just like we have in the U.S. And that puts us in a very strong position versus showing up with a pedicle screw system and another cage or what have you. So, I think we're in a terrific position with not only our TD -- sorry, our X-lift products but also with NeoDisc that we're planning to move forward with. So, those are the two major products that we're going to focus on in 2008. Primarily in those two countries. And as we gain some traction, then we will start working in other areas. But, we want to make sure that we stay focused and don't get ahead of ourselves with regard to spending too many of our resources.

Okay. And then maybe a question for Keith, but as you look at the competitive dynamic out there, one of your competitors today announced what looks like effectively zero implant growth in the spine space. And I'm curious if you are seeing any change in overall market dynamics with some of the smaller physician owned firms coming in, or what could really be driving some of the changes for the bigger players right now, other than obviously [inaudible] taking share in some of the others? But is there anything, kind of beyond that, that you can help us understand?

Yes, I think there is -- there is what you just mentioned, there is certainly some nice growth out of some of the surgeon owned, and some of the smaller spinal device companies. But I don't think you're seeing any kind of limits to procedural numbers because of the advent of of motion preservation. I think the market is expanding nicely, just as Alex described, for the cervical platform and will continue so as the reimbursement pathways unfold. So I think it's largely -- the smaller competitors are taking more and more share now, and that share is becoming a significant part to some of those larger players.

Okay. Thank you.

Our next question is from the line of Steve Lichtman with Banc of America Securities.

Hi, guys.

Hi, Steve.

On the international contribution for '08, the ramp here is a little stronger than we had expected. So, just to be clear, what are the main drivers that you are seeing driving that internationally? And it is X-lift, as well as lateral -- -- and we're planning to launch NeoDisc internationally, and doing it in a small number of countries, as I just outlined to Ben, largely German speaking and UK. And also, of course with NeuroVision being one of the key products, part of the MAS platform. So those are the key products that we'll be driving out into those two countries primarily, and then expanding from there. And when would NeoDisc launch overseas?

We've already -- we've actually had our first sale over there just recently, so we've just begun. But we're short on the size of our sales force, so we want to be very realistic about what we can produce, and that's why we're -- 2% to 3% is reasonable. We did get things started last year, we do have a few people, so we have some momentum that we've brought in to 2008, and we're pretty excited about doing 2% to 3% of revenue, and being able to grow that to ultimately 10% over the next few years, as I talked about before.

And, originally you had spoken about perhaps seeding the market more with discs, and then coming with -- with X-lift, perhaps just on concerns about training. But obviously, that's not the case. Can you talk a little bit about the training program?

Yes, what we talked about was, that before we can do a lateral disk, we have to make sure that we have centers that can do a X-lift procedure. So they have to learn the X-lift procedure. So we're going to certainly move down that path, and I think what you're talking about is the same. It hasn't changed. We're doing X-lift. We're going to be doing lateral TDR, but we don't plan to do a big launch in Europe. We're just going to really be doing a smaller number of centers in that area. So it's really NeoDisc and X-lift. And we will be doing some CerPass centers, doing a number of centers, utilizing CerPass in Europe, but we don't really look at those as being major generators of revenue, which is -- it's the primary question I was answering, or what are the primary generators for Europe.

Okay. You briefly touched on a dynamic rod. Can you flesh that out a little bit more perhaps in terms of potential timing and maybe a little bit of the characteristics of the product?

Well, we're talking about the second half of the year in terms of having -- and really, our position is different -- it's -- we're talking about a different approach to this, so -- we're not really talking about a dynamic rod as similar to what everybody else has. We're approaching fusion in a different way, I think as we are're ready to launch that, we'll talk about it a lot more.

On NeoDisc -- I know it's early, but is there any thought to being able to see some interim data over the two-year follow-up period? Have you given any thought to that?

Well, we certainly have some good data out of Europe, which we have presented on several times. And we're now approaching some pretty strong data in the U.S. I'll ask Keith to add any further comment.

There is a number of meetings coming up this year that submissions are in place, and we'll see how they play out with getting time on the podium, or getting at posters, but you'll absolutely start seeing some interesting data points from the study as it unfolds, and certainly we have to do that under the guidance of how you can present data from single site or certain pooling rules of sites. But you'll start to see that over the course of the year.

Okay, great. And then, you talked about sort of the restructure, a little bit of the sales force here in terms of territories. Can you talk to the number of sales reps or the growth you are anticipating in '08? If not ,could you give us a ballpark?

Yes, similar to last year, Steve. Approximately 15%.

And in terms of timing, is that earlier in the year, spread out during the year --?

Spread out.

Thanks, guys.

You bet, thank you.

Our next question is from the line of Michael Matson with Wachovia.

Hi. Thanks for taking my question. I guess I noticed that the gross margin that you are guiding to is a little bit below where you ended the year in '07 for the full year. I guess I can come up with a couple of reasons, but I just wanted to hear your thoughts on that.

Yes, we wanted to make sure as we start selling internationally, and as we all know we have lower ASPs and therefore a lower gross margin, that we take that into effect in our guidance.

All right. That's helpful. And then the guidance -- you are showing a fairly big -- I guess bigger than we had modeled, loss in the first quarter, but you are guiding to a slight -- on a GAAP basis -- but you guiding to slight profitability for the full year. So it looks like you are going to have -- you are going to be pretty profitable in the back half of the year. In other words, there is going to be a pretty significant ramp in your GAAP profitability during the course of the year. Does that seem right?

Yes, that's correct.

Okay. And then revenues from your international sales, can you tell us what that was in the fourth quarter?

Last year, it was -- I don't know what it was in the fourth quarter, but on the year, it was -- it was less than a percent.

Okay. All right. And then, for the -- the sales force growth that you talked about, how much of that is going to be outside of the U.S., versus in the U.S.?

I'm sorry, say that again.

The sales force growth -- I think one of Steven's questions was about how much you plan --

Yes, the answer to that was just about all U.S. Very little outside the U.S. We're going to be going with small core sales forces as we build up. As we talked about, we're seeing 2%to 3% of revenues, so -- that equates to what? $6 million -- $6 million dollars, approximately, something like that. So we want to make sure that we don't overbuild our sales force.

Okay. And then, just taking a longer-term view as you start to get to that -- toward that $500 million level in revenue, in terms of your margin potential -- I mean, is it fair to look at your operating margin potential being 20% to 25% and then net margin kind of in the 15% to 20% range over the long, long run?

We're looking at the operating margins at being 20% on a non-GAAP basis. When we come in at the $500 million mark. We're comfortable with that. We have seen others who have very strong gross margins achieve that, and with the potential of going higher. So we think that's very realistic.

Okay. That's all I have got. Thank.

Okay.

Our next question is from the line of Ed Shenken with Needham and Company.

Thanks, wanted to ask a little bit more on the market growth. An earlier caller talked about it some, and you mentioned $4.2 billion market growing towards -- what is the expectation for growth in calendar year '08, and what did the market grow, do you estimate, in the fourth quarter?

Well, it's -- well, we estimate it to be about 12% growth for the year. It was -- I think -- I don't have it for the fourth quarter in front of me. It was lower for the year. It was -- it was in -- right around 10%, 9%, 10% last year. So it really -- I think started to pick up again going in to this year, but I don't have those exact numbers in front of me.

Good, and then as far as -- as far as clinical data upcoming, in an earlier call you talked a little bit about you hoped to get some NeoDisc presentations. Is there any other clinical data for other products that we should be expecting throughout this year?

Well, we have quite a few presentations and papers that have already been written, and you can anticipate quite a few things coming out over the course of this year, additional papers being released on X-lift. There's actually a book dedicated to X-lift that should be published towards the end of this year, so we're very excited about that which will have -- be entirely dedicated to it. Talking about all of the techniques and experiences, so that is certainly going to be a monumental publication.

Is that going to help for some of the residency programs? Do you think, to increase adoption, or is that just happening on its own?

I think that really just happens through the fellowship programs, where the surgeons that are using are of course showing it to the fellows that coming through. But I think just in general, there's -- there's a very strong adoption process taking place in spine.

Thanks, Alex.

You bet.

Our next question is from Steve Ogilvie with ThinkEquity.

Hey, guys most everything has been asked. With your very quick growth, and obviously a lot of reps are excited to work for you guys, and the things are moving so fast and so well, I was wondering if you could maybe talk to, like, what checks and balances you have put in place so as not to either get ahead of yourself and make sure you have quality in place. I guess one way of asking this is, how do you avoid the proverbial curse of missing a quarter once you move into the new headquarters?

Well, how do you avoid it? I think you do everything you possibly can to preclude things like that from happens. That's why I talked, I think, at length about what we're doing with regard to sales training. We have completely worked to revamp the program that is just unfolding over the course of this year. So we're making sure that our expertise continues to rise with each individual. And that's allows us to go deeper, and as well as wider, and that's going to be important for our growth longer term. So that's -- that's key. Obviously, having our pipeline stay very strong,so we continue to launch strong products.

I think being able to roll out cervical in the first half of this year in a big way is certainly going to be a large advantage for our sales forces. We've not had a very strong cervical offering. So, now having both anterior and posterior systems to roll out is going to give our sales force, I think, some additional opportunities to really -- to get in front of surgeons and not just talk about X-lift and thoracic X-lift, but all the terrific things that are driving our penetration, but to also be able to retain a surgeon's business with cervical. So I think that's critical. We do everything we can to make sure that our performance stays at the highest level possible. There are no guarantees in life, and that's all we can really do.

Okay. Great. And then, final question. Do you see your growth in the next year coming more from the existing base of customers? Or do you think you need to reach a lot of new doctors to hit your objectives?

I don't think we need to reach a lot of new doctors. I think, in fact, what plays very well for us is our ability to capture more levels. So we'll certainly be doing both. We want to get new accounts, especially in the territories where I talked about before where we haven't been present. So we want to be sure we get our sales representation into those areas. But, our entire play over the course of 2007, which will hold true for the coming years, is to be able to move into the thoracic spine, capture more levels, do adult degenerative scoliosis, do all of the things that we have talked about, and, that's just getting underway. I mean, that's still very much in its infancy, and I believe that that's going to really drive our revenues for many years to come.

Okay. Thanks, and congrats on the year.

Thank you very much.

Our next question is from the line of Joanne Wuensch with BMO Capital.

Hi , thank you for taking my question. When you think about your $500 million goal, do you think of it in terms of the types of products you need in your bag to reach there, the salespeople and/or the number of sort of sales per sales rep to reach

Well, I think as we contemplate $500 million, we believe we can do it organically with what we have. We believe we can do it over the next several years, and that's why I've talked about being able to grow top line around the mid-30% range. I think our sales force will continue to grow at about the same rate that it is growing right now. I expect us to continue to launch products and line extensions at about the same rate of approximately10 product lines per year. So, I think all of those things taken together are what allow us to continue to move forward and get to $500 million if we're able to come up with some acquisitions that make sense for us, and are very additive to our technology, and to the things that we want to do synergistically. Then I think that that potentially allows us to do even more over the next several years beyond that.

Is there a particular sales force number you have in mind to get to $500 million?

Well, I think ultimately, what I want to do is have the sales force delivering in the range of $1.5 million, to $2 million in sales, but that takes a solid per -- per representative -- but that takes a solid 18 months to even two years to accomplish. So it takes quite a while as you go in to missionary territories before you get to that point. So, I think you start to really get in to a terrific position at the 400, 500 level, that's really about where you want to be, and that will get us to -- that will get us closer to being the number 2 spine company over time.

My final question is, when you first started hiring your new salespeople about a year and a half -- well, two years ago, plus now, are those people still with you? You are clearly growing it. But are you retaining the core personnel?

I think if you take a look -- our turnover on the sales side has been low. We really have -- we have -- in fact, we have our original sales people with us, the original core people from day one, are now they're sales directors, they are doing other things in the company, on the training side. So, I think that's one of the things that's been really solid is, the expertise within our company continues to grow on an ongoing basis, and that's what allows for very effective missionary selling of X-lift to surgeons, as well as being able to confidently show surgeons how to move up the spine to the thoracic region because of that expertise.

Thank you so much.

You're welcome.

Our final question is a follow-up from the line of Matt Mixic with Morgan Stanley.

Just one follow-up, and I apologize if you went over this earlier. But, just looking at the increase year-over-year on stock based comp. And it looks like -- like $6 million, $5 million or $6 million, or maybe like -- is that $0.15 a share is kind of what I'm getting? Is that the right way to look at this?

It is.

Okay. So that's a significant amount of the step up year-over-year in SG&A and R&D is just around that number. All right. That's all I got. Thanks again.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay. Well thanks, everybody, we'll talk to you in April. Bye-bye.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.