Alphatec Holdings, Inc. 2026 Q3 Earnings Call

Thanks. Appreciate it. Welcome to our Q3 2026 financial results call. There will be some forward-looking statements, so please review at your leisure. In the third quarter, we again delivered solid growth and profitability. Revenue reached $221 million, up 13%, with surgical revenue increasing 14% and surgical hardware increasing 17%. While revenue fell short of expectation, demand for our surgical solutions remained strong. Surgical volumes grew approximately 20%, while new surgeon growth increased approximately 25%. We attracted more new surgeons to ATEC this past quarter than ever before. These leading indicators reinforce our confidence to the foundation we have built in the future growth of our platform. Hardware revenue grew approximately $26 million, while biologics declined year-over-year, creating an overall drag on surgical revenue growth.

Biologic performance was a primary constraint on growth, and to a lesser extent, we saw slower thoracolumbar procedure volumes that we believe reflect broader market trends. Be assured, we are not satisfied with our biologics performance and are taking action through greater focus and disciplined execution. EOS came in at $20 million for the quarter. We continue to see EOS imaging as an entry point with real value following, as accounts using EOS Insight bring us deeper into the clinical workflow and use more of our procedures. The quarter also demonstrated the resilience and leverage of our operating model. Adjusted EBITDA reached $38 million, up $12 million year-over-year, marking a 17% Adjusted EBITDA margin, and once again drove positive free cash flow. Even with revenue below our expectation, the scale we have built allows growth to translate into strong margins and higher earnings.

Todd's going to take you through the numbers, and then I'll discuss the drivers of our business in greater detail.

Todd? Thank you, Pat. In the third quarter, we delivered solid revenue growth, expanded both our gross margin and Adjusted EBITDA margin year-over-year, and generated positive free cash flow.

Those results reflect how we are investing in growth, improving asset productivity, and controlling the cost structure as volume scales. That focus is what allows us to translate growth into higher margins, durable profitability, and free cash flow. Strong surgeon adoption and increased procedural volume remained the engine of our growth this quarter in our core surgical hardware business. Total revenue was $221 million, up 13% year-over-year, with surgical revenue of $202 million growing 14%, a $25 million increase over the prior year period. Behind that growth are two elements of our model that continue to deliver: approximately 25% growth in surgeon adoption and 20% growth in procedural volume.

That pace has held throughout the year, reflecting consistent, repeated surgeon choice for our procedural solutions. As Pat mentioned, we did see lower procedure volumes than expected, specifically in the thoracolumbar category, and we believe this reflects some overall market softness, which we are following closely as we go into the fourth quarter. The strength in our cervical procedure volumes partially offset this dynamic, resulting in 20% total procedure volume growth. Revenue per case declined 5% year-over-year, primarily due to lower biologics attachment rate. In Q3, total biologics revenue declined about $1 million year-over-year, meaning our surgical hardware business drove all of our surgical growth for the quarter. Surgical hardware growth has been consistent for years, and we saw that again this quarter. Turning to EOS, revenue was $20 million in the quarter, up from $17 million in Q2 and essentially flat year-over-year.

EOS Insight remains an important part of how EOS creates value for our surgeons and our business. We continue to see established ATEC surgeon customers generate higher implant revenues after EOS Insight goes live. This reinforces our belief that EOS Insight is a meaningful contributor to procedural adoption and long-term growth, and we will continue to focus on bringing more accounts live. Turning to the P&L, gross margin for the quarter was 72%, up nearly 200 basis points year-over-year as we continue to improve our inventory efficiency and reduce cost while also seeing some mixed benefits from lower biologics attachment rates. Operating expenses grew approximately 8% year-over-year while improving approximately 260 basis points as a percentage of revenue, reflecting the cost discipline in our model while we continue to fund targeted growth investments.

The combination of strong gross margin expansion and disciplined execution drove Adjusted EBITDA of $38 million, up approximately 46% year-over-year, and an Adjusted EBITDA margin of 17%, expanding more than 400 basis points year-over-year. Our execution on healthy margin and earnings growth has been resolute. Turning to the balance sheet, we ended the quarter with approximately $80 million in cash and $55 million of available borrowing capacity, providing roughly $135 million of total liquidity. We generated $34 million of operating cash flow during the quarter while investing $29 million in inventory and instrument sets to meet the needs of our growing surgeon base as we head into the fourth quarter. As a result, we generated approximately $6 million of positive free cash flow, delivering positive trailing 12-month free cash flow for the fifth consecutive quarter.

During the quarter, we repaid the remaining balance of our 2026 Notes with cash on hand. This further simplified our capital structure, strengthened our balance sheet, and provided flexibility as we continue to grow and scale the business. Turning to guidance, we are lowering our full year 2026 total company revenue expectations to approximately $862 million, representing growth of roughly 13% for the year. We now expect surgical revenue of approximately $789 million, representing growth of approximately 15%, and EOS revenue of approximately $73 million. This update reflects the lower biologics attachment rate, lower overall procedure volumes due to current market trends, and a temporary supply constraint in our international business, which we expect to impact international sales by about $3 million for the year and resolve as we enter 2027.

Our outlook implies high teen surgical case volume growth and a 3% decline in revenue per case for the full year 2026. This reflects $102 million of year-over-year surgical dollar growth, which implies 17% surgical hardware revenue growth and flat biologics revenue contribution year-over-year. Historically, biologics has contributed approximately $15 million-$25 million of annual growth, which we are not seeing this year, but are working to address through improving sales force discipline and expanding contract access. For the full year 2026, we now expect Adjusted EBITDA margins of 16%, or approximately $137 million, representing growth of approximately 47% year-over-year. We now expect free cash flow of $10 million for the full year, which implies approximately $15 million in the fourth quarter. The reduction in guidance for Adjusted EBITDA and free cash flow is a direct result of the revenue declines.

Even with this revised revenue outlook, we expect to deliver substantial EBITDA growth and margin expansion, underscoring the leverage in our business. The infrastructure we have built, the gains in our gross margin, and the discipline of this team continue to drive increasing profitability and demonstrate earnings power for the business. With that, I'll turn the call back to Pat.

Thanks, Todd. Before I turn to our strategy, I want to be clear. Our growth algorithm is built around a procedural thesis, and that procedural thesis requires disciplined, convoyed sales execution. Bringing the full value of ATEC to each surgeon and account through a coordinated and deliberate selling of the entire procedure, inclusive of biologics and other technology. This quarter, our biologic performance fell well short of that standard, impacting overall performance. We are well aware of this dynamic and are actively working to increase focus and discipline here. My frustration is that we are undoubtedly earning the procedures, with case volumes up 20%, but not pulling through the entire procedure. Additionally, we have never attracted more new customers than we did in Q3 of this year.