GMED
#Thank you, <UNK>, and good evening, everyone.
Worldwide sales for the third quarter of 2017 were $152 million, an increase of 11.9% over the third quarter of 2016.
We also generated non-GAAP diluted earnings per share of $0.30 and 35.2% in adjusted EBITDA.
In the third quarter, we saw a further acceleration in our U.<UNK> business, continued growth in the Japan market, FDA clearance of our Excelsius GPS robotic and navigation system and industry-leading profitability and cash flow.
As we've discussed on the last several calls, growth in our U.<UNK> implant sales bottomed out in Q3 2016.
Since that time, we have taken steps to ramp up our recruiting efforts, correct certain issues that led to unwanted attrition and made invested ---+ investment into a long-term sales development program.
The year-over-year growth has increased in each quarter since that time, reaching 6.2% in Q3 2017 on a date-adjusted basis.
The pace and trajectory of this improvement has been very encouraging and positions us well for a strong finish to 2017 and positive momentum heading into 2018.
We remain highly focused on competitive recruiting and expect to begin seeing fruit from our development efforts in the back half of 2018.
International sales grew by 70.1% in Q3, including the acquisition of the Alphatec International business.
The business in Japan continues to grow and contribute meaningful profitability.
Since the acquisition, we have made significant investments in sales reps and sets in Japan.
We have launched our first 2 Globus systems in Japan, and the feedback from surgeons has been extremely positive.
We expect the impact of our investments and the introduction of new technology to produce strong growth into 2018.
As we discussed on prior calls, our core international business has struggled in several key markets.
While there was some improvement in the third quarter, we still experienced a 5.2% decline compared to the third quarter of 2016.
We have made several organizational changes to address these issues.
We have realigned executive management to increase our operational focus, we have made key hires in important markets, and we are finalizing plans to invest additional resources into inventory and education in larger markets.
While these are the right steps to drive growth in our international business, the impact will not be immediate.
We expect to see steady top line improvement as these changes are implemented in 2018.
In spine, we launched 2 new products in Q3, bringing our year-to-date total to 7.
Today, I'd like to highlight ELSA-ATP, a recent addition to our growing portfolio of expandable products.
Globus has pioneered the development of expandable interbody devices and is the unquestioned market leader in this category, having completed over 120,000 surgeries to date across 20 different implant systems.
ELSA-ATP is an expandable lateral lumbar interbody fusion device with integrated fixation that can be implanted through an anterior to psoas approach.
This first of its kind device is inserted at an oblique angle to reduce the need for trans-psoas resection and potentially decrease reliance on neuromonitoring.
The product allows for post-expansion introduction of bone graft and includes integrated screws for enhanced fixation in addition to supplemental fixation.
Like all of our expandable technologies, it enables a surgeon to safely place the device at a minimized height, reducing the impaction force and retraction needed for insertion.
This helps to preserve endplate integrity, which may result in less subsidence.
While ELSA-ATP is in its initial rollout period, we are very excited by the potential impact on our lateral business.
As previously announced, we received 510(k) clearance for the Excelsius GPS robotic and navigation system in mid-August.
While we did not book any revenue in Q3, we continue to see tremendous interest in this product from surgeons and expect to report meaningful revenue in Q4.
Excelsius GPS is the only product that combines robotics and navigation in a single platform.
It is designed to work with 3 different imaging modalities, and it has an optimized workflow that fully integrates with our implant technologies.
In trauma, we have received FDA clearance for 5 product lines, with several more filed with FDA.
We also previously announced that we had done our first cases using our distal radius technology several weeks ago.
This is a milestone event for Globus as our first foray outside the spine in our 15-year history.
We are building sets and aggressively hiring sales reps in anticipation of a full commercial launch in Q1 of 2018.
The sets and inventory needed for this launch are unprecedented in our history, involving literally hundreds of sets and thousands of distinct SKUs.
And I'd like to acknowledge the great work of our engineering and manufacturing teams to undertake this massive effort.
Turning to profitability.
We delivered 35.2% in adjusted EBITDA margins in Q3, which includes significant expenditures related to Emerging Technologies.
We believe we are at the apex of the investment stage of Emerging Technologies.
In Q3 2017, our investment in Emerging Tech reduced EPS by $0.05 and was a 4.7% drag to adjusted EBITDA margins.
In other words, the spinal implant portion of our business produced $0.35 in non-GAAP diluted EPS and 39.9% adjusted EBITDA margins.
As we begin to generate revenue in robotics, the negative impact should lessen, offset somewhat by incremental investments in robotics as well as a large ramp in the expenses associated with the trauma commercial launch.
As these businesses grow to scale, we expect them both to contribute materially to our bottom line as well.
This strategy was part of our commitment when we went public 5 years ago: to invest in new areas of growth while maintaining a mid-30s adjusted EBITDA, and I'm proud of our ability to execute on this commitment.
In summary, we had a very solid Q3 performance, exhibiting continued improvement in our U.<UNK> spine business while maintaining our focus on profitability.
As we enter into full commercialization of our Emerging Technologies, we are very excited about our prospects in Q4, in 2018 and beyond.
I will now turn the call over to Dan.
Thanks, Dave, and good evening, everyone.
We are pleased with the strong financial results in Q3, the continued improvements in the U.<UNK> business performance, driven by record recruiting, the significant international growth and the progress in commercializing our emerging technology opportunities in robotics and trauma, in line with our long-range strategic plan.
For Q3, sales were $151.7 million, growing 11.9% as reported, with GAAP net income of $25.6 million and non-GAAP net income of $29.3 million, delivering $0.30 fully diluted non-GAAP earnings per share and adjusted EBITDA of 35.2% and $22 million of cash flow.
Focusing on sales.
U.<UNK> sales for the quarter were $125.9 million, 4.5% higher than Q3 '16 or 6.2% higher when adjusted for 1 less day in Q3 '17.
We continue to see growth acceleration and sequential improvements in the U.<UNK> business, with year-over-year organic growth rates improving from negative 4.1% in Q3 '16 to positive 6.2% in Q3 '17 on a day-adjusted basis.
This is driven by stronger competitive rep recruiting and other structural improvements we have made to the business that we believe have and will drive continued momentum and quarterly improvements to revenue into 2018.
While sales were impacted by hurricanes in Q3, we saw increased procedures in the subsequent weeks that netted the overall exposure to less than $1 million for the quarter.
International sales for the quarter were $25.8 million, growing 70.1% as reported or 69.7% in constant currency, driven by continued market penetration in Japan, gains in key distributor markets and improved momentum in the core international business.
September marked the anniversary of the Alphatec acquisition, and we remain pleased with the top line and bottom line contribution of this successful acquisition and the long-term growth potential it offers in international markets.
Disruptive Technology sales for the quarter were $71.5 million or 6.5% growth, with continued strength in our expandable technologies, integrated spacers, biologics and CREO MI<UNK>
Innovative Fusion sales for Q3 were $80.2 million or 17.1% growth, driven by international business, cortex and CREO.
Turning to the rest of the P&<UNK>
Q3 gross profit was 75.7% compared to 76.8% in Q3 '16.
The change versus prior year is driven by negative mix, with growth in international markets in U.<UNK> biologics resulting in a planned margin decline, partially offset by continued gains from in-house manufacturing, which contributed $2.2 million in the quarter.
Research and development expenses for the third quarter were $10.9 million or 7.2% of sales compared to $10.3 million or 7.6% in Q3 '16, reflecting an increase in investments for robotics and trauma.
SG&A expenses for the third quarter were $63.4 million or 41.8% compared to 40% in Q3 '16.
The increase is driven by the inclusion of pre-revenue robotics and trauma commercial organization builds and increased investments in the U.<UNK> sales force.
Provision for litigation expense in Q3 was $2.5 million, impacting GAAP EPS by approximately $0.02.
The income tax rate for Q3 was 31.5% versus 32.5% in Q3 '16.
The change in the effective tax rate is driven by gains from foreign tax credits in Q3 and the ongoing benefit for the adoption of new stock compensation accounting regulations that began in Q1 '17.
GAAP third quarter net income was $25.6 million and GAAP diluted earnings per share were $0.26.
Non-GAAP net income was $29.3 million, and non-GAAP diluted earnings per share were $0.30.
Investments in Emerging Technologies negatively impacted Q3 '17 EPS by approximately $0.05.
Excluding the investment impact of Emerging Technologies in both years, the non-GAAP net income growth in the U.<UNK> and international businesses would be 14.5% in Q3.
We ended the quarter with $396.5 million of cash, cash equivalents and marketable securities.
Net cash provided by operating activities in Q3 was $35.3 million, and free cash flow was $22 million.
The company remains debt-free.
The company reaffirms guidance for full year 2017 sales of approximately $625 million and non-GAAP diluted earnings per share of $1.27.
We will now open the call for questions.
<UNK>, this is Dave.
I didn't hear the second part of your question.
Could you repeat it.
Sure.
So overall, I think the growth rate in our international business should be higher than our overall growth rate.
We're still underpenetrated in several markets, so I think the upside potential is much stronger there.
As I mentioned in my prepared remarks, we're doing really well in Japan.
Some of the offsets to that would be we are still working through the integration of overlapping distribution in certain markets, and we expect to see some drag next year for that.
But most of the major markets at least are on a good path towards ---+ we're not finalized, we're on a good path towards that.
Sure.
I'll answer the second part first, and then I'll ask Dan to address the sort of the guidance and revenue expectations.
But we consider the Excelsius to be a platform technology.
So today, it's assisting in navigating and placing pedicle screws, but we are actively working on projects to expand that, to work in cranial applications.
We also anticipate a rod-bending process that would be associated with the machine.
We have a navigation ---+ a stand-alone navigation project on the books.
And then we see further on down the line that beyond pedicle screws, we think there's opportunities to really expand the utility of the platform and go into sort of discectomies, decompression, rod placement, really encompassing the entire procedure.
Dan.
<UNK>, for the first part of your question with guidance, as we get to the $625 million, we feel pretty good about that in many respects.
Certainly, we see the anticipated seasonality lift that we're already experiencing as we had planned for Q4 in the spine.
Dave had mentioned we see a lot of activity with robotic quoting.
We think that we will have some meaningful revenues there.
In general, we feel strongly that we can achieve that $625 million.
I think I'll refrain from anything going forward.
Your question was more about the outer years of 2018.
And we'll provide some of that guidance in January, as we normally do, as how that looks.
Thanks, Matt.
So I'll go at that a couple of different ways.
The first thing is we're really pleased with the results on the-day adjusted basis.
It's exactly where we would have called it for Q3.
I'm not looking at a stacked comp because we're going from a negative inflection point in Q3 of '16 to a positive in this Q3.
So just in general, almost 10.5-point spread between those 2 factors, I think that shows momentum, which is more important.
I think that is driven by us doing competitive recruiting, surgeon conversions, going deeper into existing businesses in the U.<UNK> that are the main driver that way.
As we signaled, we thought that we would get through Q4 and the rest of this year exiting around that same rate and bring that forward.
That was always the plan of 2017 being the recovery year.
And we would hit the high points in Q3, Q4 and carry that into what we think would be 2018 based on what we know.
So 2 things.
We had always signaled that Q2 and Q3 would be the heavier investments as we carry both robotics and trauma pre-revenue.
I would never shy away from a 35% EBITDA.
I think I'm pretty proud of that being market-leading by anyone's standards.
Nothing else comes close, to be honest.
And as always, we would encourage The Street to look at that mid-30s EBITDA, between 33% and 37%, at any given time as we continue to invest and grow for the future.
Thanks, <UNK>.
In terms of the impact, I think it's a safety and a comfort factor.
So the other pure robotics systems out there, you're essentially driving the screw in or driving the k-wire in blindly.
And this ---+ the navigation, the integrated navigation enables you to visualize, at least digitally, where the instruments are and where the implants are throughout the procedure.
And we've gotten a great feedback from surgeons that, that's really essential to a lot of them adopting robotic technology so that the integration there ---+ and to your question about what the competition will do, I think it's highly informative that we are aware that they are planning to add that feature to their offering.
So we clearly think we're on the right path.
And as I mentioned in <UNK>'s question, we are working on ways to enhance the functionality of the platform moving forward.
So we're not going to stand still.
It's both.
It's certainly, the ones that use computer-assisted technology today are already believers that, that can improve their ability to treat patients.
But I think the functionality that we've built into Excelsius has attracted an entirely new group of potential users who are considering using technology to help them treat their patients as well.
Jon, yes, we'll fine-tune, obviously, guidance for 2018 in January, as we said before.
But the way I would look at this is, depending on what you see or read, you're looking at a spine market that's currently considered between 0 and 2%.
And I think what we're signaling is that we are 2 to 3x growth rate of that.
And as you always know, we strive to be a share taker.
So we think that we're still going to look at that mid-to upper single digits as a main driver for us to capture share in the market.
So, Rich, when I was using that number, to answer Jon's question, I was referring to core spine.
An addition to that would be, of course, the trauma business and the robotic business.
They would come as additional growth beyond that number.
Thanks, Rich.
I mean, we're not going to get into all of our intricacies of our selling strategy.
But I think the most obvious impact to our implant business is that the robot works much more efficiently if you use our implant.
It's fully integrated with about 10 of our implant systems right now.
So there's a natural inclination for surgeons to want to utilize our implants because their procedures are going to go better and faster.
Yes.
Sure, <UNK>.
Thanks.
So the first thing is, you're right, it was about 2 years ago that we had, had that Analyst Day and we had declared about $1 billion as we got to 2020.
I would tell you, everything we look at now, we still see that as a realistic approach and certainly feasible.
In that, the key signal was that we are a spine company and would remain a spine company even then.
So back to our point, 80% to 85% of sales in that $1 billion would remain as the core spine.
And we had, had about $150 million that would be Emerging Technologies.
During that meeting, we simply cut it in half, having had no real data, just to say this is what we think.
If you ask me today, I'm still guessing.
But I would tell you that I would be heavier on the robotics side than the trauma that way.
The number is truly a guess, but I would probably be more in the 100 to 125 for the robotics and the difference being trauma right now.
But it's really more of a gut feel than any data or science there.
<UNK>, we're really not prepared to discuss anything regarding the fourth quarter or any details of our sales on this call.
We're hiring right now.
We've got our field sales management team in place, and we're hiring reps as we speak.
They're coming through here every day.
Was that answering your question, <UNK>.
<UNK>, this is <UNK> <UNK>.
So we started ---+ as Dave mentioned, we've got a handful of systems cleared for sale in Japan.
Obviously, we started initially with the products that target the biggest segments there, so primarily pedicle screws at this point.
But we are in the process of looking at the entire portfolio and figuring out what makes sense to launch in Japan and are working with the regulatory team there to get products submitted and registered as quickly as we can.
<UNK>, it's Dan.
It's a great question.
And I would tell you that it probably is going to track in line so far.
There's a couple of reasons for that.
We have been investing in our in-house manufacturing capabilities in order to produce trauma as well as grow spine.
And so this year, you're carrying a lot of machine expenditures that would probably diminish somewhat into next year and be replaced with that build of trauma sets.
Keep in mind, we're sitting with $396 million of cash, so converting that into profit-generating sets is something we're equipped to do.
Thanks, <UNK>.
We have seen a modest impact.
It's more anecdotal at this point, where a few surgeons have utilized some of our competitors' products in 3D printing.
And we are actively developing products in that space at this point.
It's going quite well.
I think as we mentioned last quarter, we had already exceeded our previous record in terms of the number of competitive reps that we've hired.
And our pipeline is very full and very active at this point.
There's a lot of buzz about our ---+ the robotics opportunity and the impact that may have on the implant business.
And we continue to see people that are interested in carrying our portfolio.
So we've got an extensive pipeline, looking forward to continuing to build the sales force that way.
Thanks, Matt.
Well, the difference is our competitors ---+ you need to use a k-wire, which means you're agnostic to the implant that you're going to use.
As long as it's a cannulated screw, you can use anybody's implant.
Ours also offers that option.
You can use a k-wire and other folks' implants, but the system itself is ---+ functions much better if you integrate it with our technology.
So we think there'll be a natural pull-through as surgeons want to do the cases as efficiently and safely as possible if they use our implants.
Yes, we traditionally don't disclose actual numbers of hires and that sort of thing.
But just to clarify my comments, I was referring to the developmental program that we had instituted late last year, early this year.
We're bringing folks who don't have experience in the industry up to speed, getting them comfortable and confident in the spine world.
They will start becoming ready to take over territories towards the back half of next year.
