NuVasive Inc (NUVA) 2013 Q3 法說會逐字稿

Greetings and welcome to the NuVasive Incorporated third quarter 2013 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer it 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, Quentin Blackford, Senior Vice President Finance and Investor Relations for NuVasive. Thank you, Mr. Blackford. You may begin.

Thanks, Operator. Welcome to NuVasive's third quarter 2013 earnings conference call. NuVasive's senior management on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Michael Lambert, Executive Vice President and Chief Financial Officer.

During our comments and responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements that based on current expectations and 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 those expressed or implied by such forward-looking statements. These and other risks and uncertainties are more completely described in today's press release and NuVasive's most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission.

This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles, we generally refer to these as non-GAAP financial measures. These measures include our gross margin, sales, marketing, administrative expenses, research and development expenses, operating margin and non-GAAP earnings per share. We believe this information is useful to investors because it provides important information regarding earnings generation at NuVasive and is helpful for measuring our progress. We use these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating our actual and forecasted operating performance, capital resources, and cash flow. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Non-GAAP financial measures may not be comparable to similarly titled amounts reported by other companies. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to our financial results prepared in accordance with GAAP are included in the press release and in the supplementary financial information file, both of which are accessible from the investor relations section of our website.

With that, I would like to turn the call over to Alex.

NUVA is solidly executing our strategy to take market share. Revenue in the third quarter of 2013 exceeded our expectations, growing about 14% over $169 million. Revenue performance was strong across each of our major product categories and, importantly, operating profit translation also exceeded our expectations. We generated a non-GAAP operating margin of approximately 15.4% and drove earnings per share of $0.39.

I mentioned earlier this year that we run our business based on a multi-year strategic plan while emphasizing one full year at a time. As a result, we have been laser focused on executing to the guidance we outlined at the start of 2013 and we intend to maintain our full-year guidance in future years. That said, however, with the majority of 2013 now behind us, we are providing an updated outlook for the year. We are increasing 2013 revenue guidance to approximately $670 million from $655 million previously.

We also are increasing full-year non-GAAP operating margin guidance to approximately 14.5% from 14% previously. That implies that we expect non-GAAP operating margin to be flat compared to 2012. However, we are making great progress levering key items in the P&L and demonstrating operational improvements. That progress entails absorbing over 150 basis points of cost headwinds that are incremental this year, including the negative impact of the med device tax, higher litigation-related royalty expensive, and cost to comply to the OIG request. We also are increasing 2013 non-GAAP EPS guidance to about $1.14, up from $1 previously.

Our investor morning is just two weeks away, so my comments today will be intentionally brief. We have exciting event planned and I hope that you will be able to join us at NUVA East or listen to the live webcast. This year, several senior members of our executive team will provide an in-depth progress report on the top drivers of our strategy for sustained growth with increasing profitability. This will be a great opportunity to meet more senior executives and learn more about all the innovation that we just showcased at EuroSpine and NASS and also we will have plenty of time for Q&A. For additional information about the event, you can refer to the event section of our IR website

This afternoon, I'm going to give our initial thoughts on 2014 and spend a moment on the US spine market. I'll also provide a quick review of EuroSpine and NASS as well as a legal update. Then, I will turn the call over to Michael to cover financial results and updated guidance in detail.

So, let's begin with an update on the US spine market. Last quarter's reported results suggest that the US spine market growth improved slightly from the flattish rate of growth experienced all of last year and into the first quarter of this year. We are encouraged by the improvement, but we still believe that the market is stabilizing. As a result, we are weary of calling a quarter or two of improvement in market growth a trend. We expect US market growth will be flattish this year and into 2014. And against that backdrop, we currently anticipate total Company revenue growth in the mid single digit range in 2014. As always, we plan to provide additional detail regarding 2014 guidance when we report fourth quarter 2013 results in Q1.

Let me expand on our view of the market backdrop. As 2013 has unfolded, progress has been made against some of the market dynamics that have been pressuring growth of the last several years. The publication of the systematic literature review on fusion for degenerative disc disease, or DDD, in the April issue of the journal Spine is being used to fight insurer pushback against lumbar spine fusion on a case-by-case basis. The establishment of a clinically supportive set of guidelines is now fully in the hands of the surgical societies who have commissioned a third party nonprofit research to manage the process. The final guidelines should dramatically strengthen the industry's voice in executing the last step of the process and that is encouraging insurers to adopt guidelines for lumbar fusion written by clinicians as policy. While progress is being made, insurer pushback is increasingly recognized as the new norm in spine and certainly isn't limited to DDD cases.

A recent commercial insurer policy update asserts that cervical cages be considered not medically necessary for cervical fusion. NASS has already engage the insurer, citing the wealth of evidence and clinical outcomes in support of cervical cages and maintaining that the updated policy does not accurately reflect current scientific literature. NASS is waiting on a response which they intend to publish on their website.

In sum, insurer pushback is still a challenge, but progress continues to be made as the spine industry unites to drive consistent surgical guidelines that provide both predictability and patient access to care. Surgeons are increasingly learning how to navigate this environment and how to collaborate to fight back with clinical evidence. That said though, until industry efforts actually impact insurance policy for spine procedures, we don't anticipate a material impact on market growth.

Another significant market development this year relates to the outcome of the OIG's investigation into position-owned distributorships or PODs. In March, the OIG issued a fraud alert regarding PODs. The alert does appear to be slowing the growth of PODs which we estimate comprised about 10%-15% of the US market at their (inaudible). In response to the alert, we have observed the development and implementation of anti-POD policies by several hospital systems. A few hospital systems have even requested certification that NuVasive is not a POD.

We are very encouraged by these anecdotes; however, we believe that PODs will likely need to be dismantled on a grand scale to materially impact market growth. And while the federal for that is real, PODs were not banned outright in the OIG's final report on PODs issued just last week. The report concluded that PODs may increase cost to Medicare. This may ultimately be used by Congress to legislate against PODs, but both that possibility and the timelines are unclear. In the meantime, we will continue to raise industry awareness of the ethical issues at stake.

So, US spine market growth is stabilizing and behind the scenes progress is being made against some of the issues that have plagued market growth for the last several years. We continue to be hopeful that market growth will improve longer term and regardless of what market growth looks like, we intend to continue to outgrow the industry by executing our strategy to take market share. Our confidence in NuVasive's continued ability to drive market share gains was reinforced by the product momentum and excitement that we built at the EuroSpine and NASS meetings early month in addition to featuring some of the new solutions like PRECEPT, MAS, PLIFF, and PCM which continue to wrap -- ramp. We also introduced several innovations designed to expand our market presence and penetration like the Bendini Spinal Rod Bending System. Bendini is a procedurally integrated solution that enables surgeons to manipulate and customize rods preoperatively with computer-assisted bending instructions. Compared to the intraoperative manual rod manipulation that is the current standard of care, Bendini is designed to improve surgical outcomes by reducing OR time, anesthesia time, and fluoroscopy. It is going to be a game changer for long construct fixation.

We also featured XLIF for anterior column realignment, or ACR. XLIF ACR is a minimally invasive way to address sagittal imbalance from the anterior column while adhering to standard deformity principles. It is designed to result in less blood loss, shorter OR time, and reduced hospital stay as well as fewer perioperative complications when compared with traditional fusion surgeries. The new XLIF Decade Plate was another highlight. Decade represents the pinnacle and single position lateral spinal stabilization infusion and was designed to reduce OR time and reduce the risk of complications associated with posterior hardware. Obviously, we have a great deal of innovation to talk to surgeons about and booth traffic at both meetings was a reflection of that. We will look forward to helping you learn more about our new solutions in a few weeks at our analyst morning.

Lastly, turning to the legal front, we are actively compliant with the OIG's document request. We have nothing new to report on that front, but we plan to provide further updates if and when they are needed. With regard to our ongoing patent litigation with Medtronic, the appellate process related to phase 1 of the litigation is moving forward and we continue to expect the process to take 18 to 24 months. With that, I'll turn the call over to Michael.

Good afternoon, everyone. Before we get started, let me mention that when I cover gross margin, SM&A expenses, R&D expenses, operating margin, and EPS numbers today, I will be speaking to non-GAAP results. Please refer to the supplementary financial information file on our website in the investor relations section for all of the detail I will cover on today's call and as well for detail on reconciling our non-GAAP items to their GAAP counterparts.

Revenue for the third quarter 2013 was $169.2 million, a 14% increase over third quarter 2012. As Alex mentioned, we are raising full-year revenue guidance to approximately $670 million which compares to the approximately $655 million previously mentioned. With three quarters behind us now, we feel comfortable with a higher full-year revenue expectation based on the strength of results to date and particularly in the third quarter. Our decision to raise guidance was motivated by higher full-year expectations for our US lumbar and US biologics offerings. Let me cover the performance of each of our product categories in the quarter and offer some color on the outlook for each.

Year over year revenue growth for the US lumbar was about 12% exceeding our expectations on solid contribution from posterior lumbar solutions like PRECEPT, MAS, PLIF, and [Armada] as well as from the continued penetration of XLIF. As a result of the out performance, we now expect full-year 2013 US lumbar growth of about 6%, roughly in line with our US lumbar growth rate year-to-date and up from the roughly 4% growth that we previously expected. US biologics growth was over 11% driven by the strong US lumbar procedural volume in the quarter. As a result of the out performance, we now expect US biologics growth will be about 3% for the full year 2013 compared to the flat growth that we previously expected.

US cervical revenue grew about 27% in the quarter. The investments we made an innovation are driving strong surgeon interest in our entire cervical portfolio and support continued cervical market penetration. We continue to anticipate full-year 2013 US cervical revenue growth of roughly 20%. The services revenue from our US monitoring business decreased about 4% in the third quarter due to continued reimbursement challenges. We continue to expect a full-year US monitoring service revenue growth will be down roughly 2%.

Finally, international revenue, which includes Puerto Rico and the biologics component of our international business, grew over 30% in the quarter. Growth was in line with our expectations in spite of continued economic turmoil in certain geographies in Latin America. We continue to expect full-year 2013 international revenue growth of about 25%. Non-GAAP gross margin was 74.4% in Q3 2013 compared to 74.6% in Q3 2012. Year over year, gross margin was down only 20 basis points as strong operational improvements nearly offset about 150 basis points of downward pressure that was related to both the med device tax and to incremental litigation related royalty expense. We continue to expect a full-year 2013 gross margin of approximately 75%.

Non-GAAP research and development or R&D expenses totaled $6.8 million in Q3 2013 compared to $7 million in Q3 2012. R&D expense was 4% of revenue for Q3 2013 compared to 4.7% in Q3 2012. We continue to prioritized R&D investments and remain thoughtful about project funding decisions. That discipline, coupled with a timing-related decrease in clinical spending this year, drives a slightly improved expectation for full-year R&D expense. We now expect R&D expense as a percent of revenue to be in the 4.5% range for the full year 2013 compared to the approximately 5% that we previously mentioned.

Non-GAAP sales, marketing, and administrative, or SM&A expense, totaled $93 million in Q3 2013 compared to $81.4 million in Q3 2012. Year over year, the increase in absolute dollar spending was driven by continued investment outside the US, various infrastructure-related investments, and costs to comply with the OIG request. SM&A expense as a percent of revenue was 55% in Q3 2013 versus 54.9% in Q3 2012. While year over year SM&A expense was roughly flat as a percent of revenue, we absorbed about 70 basis points of spend in the quarter related to the OIG request. That masked SM&A leverage that would otherwise have been clearly apparent. We continue to expect full-year 2013 SM&A expense as a percent of revenue to approximate 56%.

Third quarter non-GAAP operating margin exceeded our expectations coming in at 15.4% compared to 15% in Q3 2012. Headed into the quarter we anticipated revenue growth would be down sequentially and in conjunction with that we anticipated that operating margin would be down considerably from the 14% reported in Q2. Instead, we achieved 140 basis points of sequential improvement so we are pleased with the degree of translation demonstrated this quarter. Given our increased expectation for full-year revenue and a lower expectation for 2013 R&D expense, we now anticipate an operating margin of approximately 14.5% for the full year up from the approximately 14% that we previously expected.

In order to be able to raise guidance by 50 basis points, we've had to offset an unanticipated 100 basis points of 2013 cost headwinds associated with the OIG request and the higher litigation related royalty expense. We accomplished this offset through a combination of our efforts to reduce our med device tax liability and various operational improvements. We now expect a GAAP tax rate in the 37% range for the full year which implies about a $1.4 million tax expense for the year. We continue to expect a 40% tax rate for non-GAAP adjustments. For those of you build only a non-GAAP P&L or for those who need further assistance with tax expense modeling, please refer to the supplementary financial information file on our website.

Third quarter interest and other expense net was about $3 million compared to $6.4 million in Q3 2012. Third quarter interest and other expense reflects a positive impact from the favorable settlement of several legal disputes totaling roughly $3 million. Third quarter non-GAAP earnings were approximately $18.3 million or $0.39 per share. Third quarter earnings per share was favorably impacted by about $0.10 related to the settlement of several legal disputes and changes in the tax rate.

Given the P&L guidance updates I've mentioned today, we now expect full-year 2013 non-GAAP earnings per share of approximately $1.14 compared to the $1 that we expected previously. Year-to-date cash flow from operating activities totaled about $70 million, down from last year's adjusted number of approximately $88 million. Free cash flow year-to-date totaled nearly $32 million versus last year's adjusted total which was approximately $53 million. While both of these numbers are below last year's year-to-date totals, please keep in mind our comments from the beginning of the year when we said we did not expect to be able to repeat the magnitude of last year's working capital improvements and in addition the med device tax would negatively impact 2013's results.

Year-to-date cash flow performance has been strong and has met our expectations. Our cash and investments balance at the end of the third quarter was approximately $303 million, down about $43 million from $346 million at the end of 2012. The decrease was driven by the repayment of our March 2013 convertible debt which was partly offset by the generation of positive free cash flow. The $303 million includes just over $20 million that we will eventually be escrowed to secure accrued royalties from the June 2013 litigation-related rolling. This amount is expected to cover royalty expenses at the original royalty rates included in the jury verdict from the date of that verdict award in 2011 through 2013. The third quarter was a testament to the continued successful execution of our share-taking strategy and our commitment to driving operational improvement and delivering operating leverage. I look forward to seeing many of you at our investor event in a few weeks.

Now, I will turn the call back over to Alex for closing comments.

NuVasive is changing spine surgery. At NASS we celebrated a decade of experience with XLIF procedure and it has been an incredible decade, but we're just getting started in transforming spine surgery. Our focus on innovations, superior outcomes, and absolute responsiveness affords us a clear line of sight to revenue growth toward $1 billion and beyond and profitability growth toward a 20% non-GAAP operating margin and beyond. Our execution through the first three quarters of 2013 has been rock solid and we are building on the momentum established at EuroSpine and at NASS to close this year well and kick off 2014 in a big, big, really big way, so onward and upward and we will now take your questions.

We will now be conducting our question-and-answer session.

(Operator instructions)

Bill Plovanic with Canaccord.

Great, thanks, good evening. Just a couple of things, obviously it's an impressive quarter and I think for us sitting here we've seen a pretty nice rebound in orthopedics in general, but I'd like to get a flavor for what was the price impact for you in the quarter? Is this volumes coming back? Is it mix? What is really the underlying driver of what's going on?

Price for us, Bill, is consistent, same thing that it has been for us now for quite some time. It is a very basically minus low single digit, it's 1% or 2% effectively on average so that's really not it. I think it's just ongoing execution taking market share. You're seeing the success of our posterior fixation products and all the things that we've been adding to the portfolio taking hold and increasing revenue as a result.

And then international was up pretty significantly in the quarter. Any major new countries added or is there anything specific you can call out there?

No, nothing a particular.

And if I could one more in for Michael, just what was the dollar on the med tech tax?

In the quarter, just over $1 million, Bill, $1.2 million give or take.

Thank you. Great quarter.

Matt Miksic with Piper Jaffray.

So, I wanted to follow up on just maybe the strength in the quarter, the stabilizing market and you are thinking about next year, I understand next year is a long way away and there has been a volatile past couple of years, but you've got some very strong new products that are getting you into, for example, the posterior fixation part of the market where you have not really -- part of the market you haven't really played much in and PRECEPT is a big opportunity for you. Can you talk about why the deceleration or are you just being cautious at this point? And then I have one followup.

So, we're just trying to give some color and insight in terms of how we're seeing next year. We have seen next year, as we talked about, as mid single-digit growth. We will talk about it as we get into the fourth quarter discussion and we will provide some color relative to how we see the segments playing out, how we see international growing next year, but we certainly are buoyed in terms of our confidence of how the year is going and, as a result, we've adjusted guidance for the year and provided just some color on next year and that's about as far as we're going to go with that.

That's fair. The other question was on something that has come up a few times over the past year or so, it's just that the business, the competitiveness, sort of the market for distribution. How you see that, how you are managing it, if you are still growing at this point, how do you feel like the market is for good spine reps in this market? Maybe what has changed or what has not changed? Your color would be appreciated.

Sure. So, as we talked about at our analyst day in the fourth quarter of last year as we were addressing the turn from the third quarter of 2012, we instituted a whole series of different programs with regard to how we were going to further incent mix performance and things of that sort with our sales force. I think what you have seen in terms of US productivity this year is obviously considerable consistency and very little churn, so there's obviously industry churn and that's normal, but it's been quite consistent for us over the course of this year. Really, it is just continued execution and I think as you pointed out rightly earlier, Matt, posterior fixation is a very important part of that growth for us just like lumbar growth is really what makes or breaks the Company longer term and that is how we are able to ultimately accelerate our growth over the next several years.

Great. Well, I'll hop out of line but thanks for taking the questions.

Matthew O'Brien with William Blair.

Just to follow up a little bit on Matt's last question. You mentioned share taking. Can you give us just a sense of whether or not that share that you are grabbing is still one of the larger providers out there? And then there has been some consolidation of the smaller ones recently, just any kind of thought as far as how that will impact your business heading into next year?

Yes, we believe that it is. So, I think most of our market share taking activity is from the other -- well, it's among the top four, right, ourselves included. So, it's really the top three companies that are ahead of us on a global basis, the top three in the US. So, that is really where the activity is focused. There is some outside of that of obviously across the entire market, but that is the preponderance of it.

Okay. And then you mentioned the PODs as well and I know it's difficult to handicap when we may see something a little bit more impactful there, but just any sense as far as congressional pressure or profits that we may see, the earliest we could see something or just your best guess in terms of when they might start to more formally investigate? I don't know if that is the best word, but some of these entities.

As you know, that is pretty hard to read and hard to really talk about what might happen. I think what we can talk about is what I mentioned in the remarks which is the hospital networks are the ones that are really kind of taking this into their own hands and so they are now making a point of not working with PODs, making that a very clear policy. As I mentioned anecdotally, even we have been questioned whether or not we are a POD which is somewhat comical to us given our position of course, but that is what we're seeing. So I would say I think it is premature say that the market has turned as a result of all of this pressure, but I would say that the sentiment is changing.

Okay, just along those lines have you heard of any bigger change that may be thinking of removing these providers from their system over the next six months?

We have not.

Thank you.

Chris Pasquale with JPMorgan.

Thanks. Just want to turn back to the quarter again. It sounds from your comments like the top line strength caught you a bit by surprise too just relative to your spending assumptions going in. So, is there anything that you can point to that in particular drove such a broad sequential step up across your business segments?

It's just straight forward execution. We'll take credit for that.

Okay. Well, then I guess the next logical question is why does growth fall all the way back to 6% in the fourth quarter? What was it that was special about it this quarter? The year-over-year comps are similar, so why not sustain growth at that level?

Chris, the way to think about that is essentially the year-over-year comps for Q4 are very, very tough, particularly US lumbar and international. If you look at last year's Q4, the growth numbers were 6% and 65% for lumbar and international prospectively coming off of the weak Q3, and so we think it sort of settles in the way it does because of the comps.

Okay. Just a quick update then on the progress in Japan. How are things going there and is that piece of the business still tracking to about the $8 million you had expected for the year?

Yes, everything is on track in Japan. We are very pleased with that progress.

Bob Hopkins with BofA Merrill Lynch.

So, just two questions. One, first on the quarter and then on the guidance. Just on the quarter and the strong performance, just wondering if you could talk at all about quantifying any impact you saw from either J&J's disruptions or PODs that you mentioned. Is that kind of stuff quantifiable this quarter or does that all just sort of get lost in the shuffle of a good execution quarter?

I do not think you can really quantify it. There's nothing that has been so incredibly pronounced that you could put your finger on it. I think it's just overall strong execution.

Okay. And then on 2014 just to be sure, you've given your guidance and -- is that just a function of tough comps year-over-year and the fact that you think you will grow mid single digits and that you want to be conservative or are there things that we need to be aware of as far as next year that would affect comparability year-over-year?

So, really I think when it comes down to is there's still a significant insurance headwind, right, and I talked about even some of the noise surrounding cervical cages and so forth. So, that continues to be the ongoing issue for us. So, we're optimistic. We're seeing things in a much more positive light. I think as you talk to spine companies throughout industry everybody shares the similar view that things are absolutely better and, quote unquote, feel better, but as far as actually turning that into a data point, it's premature and we're not going to get ahead of ourselves either and we think that mid single digit growth is a very reasonable projection for us in terms of where we're sitting right now in the year.

Okay and then just last real quickly. J&J has been very public about their problems in the marketplace and the difficulties that they had with integration. Just as you look at that, do you think you are benefiting from that at all or is that still opportunity to come? I'm just kind of curious since they have been so open about their problems.

I think that there's been an ongoing abundance of qualified sales people and they've certainly been coming from the major players in our general direction. Needless to say, there is always some churn but there is definitely an abundance. I wouldn't say it's entirely J&J. I think the entire acquisition has obviously created a fair amount of disruption among the distribution networks. So, yes, I think you could certainly look at that and say does it have an impact? It does because it allows us to hire very strong people that can really hit the ground a little bit faster than you'd expect in prior years.

Thanks, Alex

Mike Matson with Needham & Company.

I just want to go back to the cervical cage reimbursement change that you discussed. I was wondering, I understand that societies are trying to lobby against that but if that became more widespread, do you think that is something that could affect your cervical business or is it just the fact that you're gaining so much share there you're going to be able to dampen the impact of that?

It's hard to say. We're certainly pleased with the performance we've seen in cervical, but it is very important for NASS to effectively push back on that. As you know, a lot of the insurance companies sometimes move in terms of group behavior and so when one does something, someone else tends to follow. It makes absolutely no sense whatsoever, so I think the silver lining to this is that it's nonsensical. There's plenty of evidence on the table. There's no need for studies. There's no need for reassembling studies. It's all out there and I'm not exactly sure why it came to be this way, but I do expect NASS to be effective with regard to pushing back on it.

Okay. And with the --

You needed something on the TDR, too, didn't you, Mike? You had some questions on the TDR as well and I think there is good data coming forward obviously, not only on one level but also two level that is only going to create a better profile for the insurance providers to understand the true benefits. So, I think we're going to be seeing just as we talked but last quarter some inroads as far as what insurance providers are going to be allowing and we're seeing some of that as far as what patient profiles they are allowing to have total disc replacement.

Okay. And given the growth that you had this quarter, clearly you are gaining share in the market and I know you sort of gotten this question in other ways, but I'm going to ask it again anyway. Do you think that the 14% growth that you put up, how much of that do you think is being driven by picking up new customers, new surgeons, and winning business with things like PRECEPT just picking up more revenue out of your existing base of surgeons?

I think it goes back to what we've already talked about. It's solid execution on the part of the team. I think it has been buoyed by additional posterior fixation offerings that allow us to get in front of surgeons that perhaps in the past we were only able to get in front of with XLIF and now we have an offering on the percutaneous and on the posterior fixation side that allows us to get more pull through business and I really would say that that is probably the biggest driver and that is why you see across all of our segments very positive performance and that's why you see it in cervical and biologics and so forth. It's across all the areas.

Okay. And then my final question is just around the sales force. I know you're probably not going to give any numbers but have you been adding to the sales force recently? Have you been expanding that and maybe if you could give us revenue, well I guess revenue per rep would give us the number, but just progress on getting to that $2 million threshold that you're targeting.

So, you're absolutely correct. We are not going to provide you with that information but we will simply say that on a net basis we are increasing the number of sales reps in the coverage in the US.

All right, thanks.

Glenn Novarro with RBC Capital Markets

This is actually Brandon on for Glenn. With another weak quarter in monitoring, can you kind of give us your updated thoughts on that business and on your previous plan to continue expanding into the IOM market?

So, the business is basically let's just call it flat, that's really where it's at, so it's flat to maybe even compressing and retreating a little bit. I think from a strategic standpoint it's important to us. We believe that it's an opportunity for us to continue to gain broad procedural adoption and so that's the way that we continue to position it and position it as part of several systems as we go after procedural business. So, it's working effectively for us in terms of helping us drive revenue even though as a line. As a segment it's not performing as well as we would like, but certainly when you look at total performance, that is part of what is helping us.

Okay. And then separate question. With the Stryker acquisition of Mako I think there's been an increased interest in robotics not only in hips and knees but also in spine. Can you kind of touch on your thoughts on the use of robots and spine surgery in the future and is NuVasive interested in pursuing that opportunity? Thanks.

So, I think there's probably eventually going to be some spot for robotics in spine surgery. The biggest challenge to it without getting into a long-winded explanation is that the requirements are different relative to the very fine dissection required versus more the course and robust dissection required, and so that's part of what I think has slowed down robotic applications in spine surgery, meaning you only need it for certain parts of the procedure or you'd have to come up with a solution to address the entire procedure. It's different than a total knee or a total hip where effectively what it does is serve as a guide for cutting bone. As you appreciate, there's a lot more involved here with regard to nerves and vessels and so forth. So, short answer is long term, yes, I think that there's a place for it. Short term not on the immediate horizon.

Okay, thank you.

Richard Newitter with Leerink Swann

Thanks for taking the questions and congrats on the strong performance this quarter. Michael, I just had a question on the expense side. You did mention that you raised your guidance 50 basis points which was despite 100 basis points of incremental headwinds. Can you just remind us what some of the key drivers are there of that positive leverage that's allowing you to absorb those incremental costs?

Yes, so the operational improvements we're talking about really are coming across a range of areas. We've talked a couple of times this year so far about the lost damage scrap and our ability to lever that, parts cost reduction coming out of our acquisition of ANC now, NuVasive manufacturing, Ltd, and then sales productivity gains, management of discretionary, but those prior three were the top three. Lost damage scrap, parts cost, and sales productivity on a range of fronts.

The idea just to keep in mind on all this is these are the things that are helping enable us to offset unexpected costs which is contributing to what this quarter has raised the op margin for the full year and so we're obviously pretty happy about that.

Okay, thank you, that's helpful. And I was just curious, did you -- you might have mentioned this on the first part of the call but was there anything, any extra selling days this quarter and are we selling day neutral on a year-over-year basis next quarter?

Yes, I know next quarter we are neutral, I think it is. Neutral this quarter.

Okay, so neutral both quarters?

Yes, plus one next quarter. Neutral this quarter.

Neutral third plus one-fourth.

Got it, thank you.

Jeff Johnson with Robert W. Baird.

Alex, just want to start with you. I'm try to reconcile as I think many of us are kind of your 2014 comments with the strength this quarter, but I think more importantly in my mind you kind of ended your prepared comments with talking about some big, big things in 2014. And I think a lot of us would agree mid-single digits probably would not qualify there, so I'm just trying to figure out trying to reconcile your big, big comments with your comments about maybe mid single-digit revenue growth next year?

Big, big discussion will come in the next call.

All right.

How is that?

I figured I would not getting very far with it, but I thought I would try. And on the OIG, I --

That was a big attempt on your part though, I will give you credit for that.

On the OIG, I know no real updates there, but anything you can qualify as far as the tone you are hearing from them, the focus they have? Is there any chance you think at this point this does not just go on to a full investigation at some point a year from now, something like that? Would just like to get an update there maybe.

We have no visibility with regard to that. It is really -- there is absolutely no update. We are still gathering documents and so forth and we will see what happens hopefully sometime in 2014 as far as where it goes next.

And then, Michael, last question I guess for you. I appreciate the good job you guys are doing on offsetting a lot of those costs on the margin front, but I don't think any of those costs that we're talking about are changed relative to where you thought they were going to be last quarter. You're raising operating margin guidance by 50 basis points for the year but also cutting the R&D guidance by 50 basis points. I'm just a little surprised maybe we're not seen a little better leverage off the faster top line growth that maybe the SM&A line, the gross margin line. Am I missing something they're trying to connect the dots?

Well, 70 basis points absorbed on OIG just this quarter on the SM&A line, right? And so with SM&A up 10 basis points, essentially it masked 60 bps of what you would have seen as improvement. If you think about the guidance change from 14% to 15%, really two drivers there. The revs upside and the flow through associated with that is making a contribution and then the R&D piece which we talked a little bit about -- it's prioritizing spend, timing of clinical trials and all those things. The thing to keep in mind on that though is coming out of NASS we are demonstrating the same product momentum if not better even as the R&D expense to revenue ratio has declined a little bit. Right? And essentially it means we are driving that more efficiently that we have in the past. Las thought I'll leave you with on that is that the 50 basis points you are talking about, it is a rough rounding. We say approximately -- it's really probably 30 basis points give or take on the R&D line in terms of the guidance change.

Yes, got it. Thanks. That's helpful.

Larry Biegelsen with Wells Fargo.

It's actually Craig on for Larry. Just a quick question. I think -- I'm not sure if I missed it or not, but did you provide either PCM sales during the quarter or what you expect for the full year? Has your expectation changed at all?

Yes. No change and then I think the last time that we talked about PCM we said $2 million to $3 million for the year.

And then I guess just a follow-up on that, just the bigger picture about the disc market, one of your competitors expects a pretty big ramp in the size of the market and I know you guys have made comments previously about the issues in the market. I just wanted to see if you had any updated thoughts there.

Yes, we view it that it's not going to be a rapid increase. I think there's obviously been a lot of excitement out there because of [LDR] efforts, very good efforts on the two-level front, but I think everyone needs to be reminded that the difference between a one level ACDF and a one level total disc replacement may only be $1,000 to $1,500. But when you go to two level as you expand that ACDF, it really isn't that much more to go from one level to two level but it is 2X the price to go from a cervical TDR. And so you're now looking at a price difference at two levels from strictly implant cost of exceeding sometimes $5,000, and so almost 2X of what a two level ACDF is in some cases depending on what product you're talking about. So, with that, we don't feel like you're going to get this rapid acceleration in the market for cervical TDR, especially for two level, until you really start seeing some pressure relieved on the insurance side and right now the insurance end of it still is very push off and stand-backish on a one level let alone a two level, so we do not necessarily agree with that kind of growth.

Great, thanks for the color. Congrats on the quarter, guys.

Jason Wittes with Brean Capital.

I appreciate taking the question. So, you had mentioned a lot of questions about market growth and I think it's -- you had mentioned in the beginning changing market dynamics, both PODs and push back on insurers which you say is happening now but not necessarily impacting the market. So I guess my question is there has been certain procedures that the insurance companies have been pushing back on. Are we at a point now where they're continuing to push back but in terms of comps we're hitting easy comps where there is much less compression on those procedures per se, notably degenerative disc disease without radial pain?

In some respects it sort of feels like that, but then you get a quarter like this where all of a sudden cervical cages show up on the list of investigational experimentals. So, we think the payers are being a wiley or whatever the right word is to describe that in order to invent new ways to declare things experimental investigational, and we continue to sort of -- the surgeons I think continue to sort of fight their way through it. I think if you look at it over the last 12-15 months they've done a great job learning to navigate through some of these difficult times on the payer side.

Okay, so a bit of a moving target. Second question is just on your sales force. I know last year third quarter there was a lot of turnover and it sounds like that was not an issue this quarter. Can you give us an indication of what turnover might have been this quarter and whether you added sales reps this quarter?

We talked about that earlier that there is a net increase and that churn has basically been very consistent and at a very low level throughout the year.

Okay great, thanks a lot.

I think we are out of questions. So, we're looking forward to seeing everybody in just a couple of weeks and so the date of that -- it's November 14, so we will take even many more questions at that time if you have some others, so thanks everybody and we will chat with you real soon. Bye Bye.

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