Alphatec Holdings, Inc. (ATEC) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the webcast of ATEC's Third Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of these measures to U.S. GAAP can be found in the supplemental financial tables included in today's press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. [Operator Instructions] Leading today's call will be ATEC's Chairman and CEO, Pat Miles; and CFO, Todd Koning. Now I'll turn the call over to Pat Miles.

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 surgeons, more new surgeons to ATEC this past quarter than ever before. These leading indicators reinforce our confidence to the foundation we have built and 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 is 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 2 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 costs while also seeing some mix 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 convertible 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-teens 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 to $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. 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. These are the leading indicators that reinforce our confidence in the 3 commitments to continue to guide the business: create clinical distinction, grow our surgeon base and build a sales organization that scales. Our strategy begins with the procedure itself. We don't develop individual products in isolation. We build them into sophisticated integrated procedures that make surgery better. Surgeons adopt the procedure when it helps them deliver better outcomes for their patients, and that is what sits behind the pace of adoption we continue to see. Earning new surgeons is how we know the approach is working. Once an ATEC procedure earns a surgeon's trust, our sales organization helps turn that initial adoption into broader utilization. The team supports surgeons as they expand across indication and procedures, then it repeats that process across accounts. In that way, clinical distinction creates demand, surgeon confidence deepens the relationship and disciplined commercial execution scales the business. What sets our growth apart is how we approach spine surgery. As I've said many times, we sell a complete procedure, not individual products. Clinical variables can undermine the success of spine surgery and carefully designed procedures are how we mitigate those variables. We build each procedure from the ground up. As surgeons gain confidence in our procedural approach to surgery, they expand the indications they treat with us, take on greater complexity within their practice and that increase in complexity translates into increased utilization and subsequently increased revenue. Lateral continues to be a foundational entry point into ATEC. It's where we've built tremendous clinical know-how and where our distinction is most obvious. The benefits of lateral surgery for patients are well established. PTP has fundamentally improved the approach to lumbar spine surgery, creating more options for the surgeon while minimizing morbidity for the patient. Our integrated approach, SafeOp, patient positioners, retractors, implants, biologics and now Valence, is designed to mitigate variability and increase simplicity and precision. Within PTP, Valence guides retractor placement, disc preparation and implant placement with greater precision and increases confidence using less radiation under fluoro. We pair that integrated experience with training on a complete approach, helping surgeons build the confidence to treat more patients and increasingly complex pathologies through lateral. This inevitably leads to them broadening their use of our other procedures. That progression is why new surgeon growth is such an important leading indicator. Every new relationship creates a potential for deeper procedural adoption over time. Beyond lateral, we're also seeing new surgeons begin adoption, utilizing our cervical portfolio, gaining confidence in the clinical experience and then looking to ATEC for more of their practice. Additionally, we're also seeing our influence grow in complex adult and pediatric deformity. I'll share a little more on our progress in pediatrics shortly. But what I want to emphasize is that we continue to see deformity as a longer-term opportunity and realizing its full potential requires disciplined execution of the EOS capital sales model. This means placing systems in the right institution, bringing EOS Insight into the workflow and converting that strategic access into deeper procedural adoption. EOS remains a pivotal part of our strategy because it changes where and how we engage with surgeons. EOSedge gives ATEC a clinically relevant presence inside leading spine institutions, including accounts that were previously difficult or impossible for us to contractually access. Installation timing can vary by quarter, but once the system is operating, it creates a durable pathway to introduce EOS Insight. This deepens procedural engagement and builds relationship with institutions training the next generation of spine surgeons. EOSedge is now in more than 70% of academic institutions with fellowship programs, enabling us to influence a younger cohort of surgeons who are learning alignment-based data-driven surgery from the very start of their careers. As these surgeons graduate from fellowships and evaluate where to build their practice, they're increasingly asking prospective institutions to acquire EOS as part of their employment. These younger surgeons typically start with less complex procedures, which can create a headwind on revenue per procedure initially, but they are a foundational element of our long-term growth profile. From this academic exposure, EOS is shaping future adoption. The strategic value of EOS grows with every patient that gets scanned. Insight converts that imaging into alignment measurement, bone mineral density assessment, predictive surgical planning and patient-specific rods and follows the entire patient journey from diagnosis to follow-up. Each patient adds structured data to a data set that becomes more useful over time and increasingly difficult for another company to replicate. The opportunity is not simply to accumulate data, but to make intelligence more valuable in clinical decision-making and available to more surgeons. We recently brought together more than 70 leading KOLs for our inaugural EOS Insight Council and the discussion reinforced both the value Insight delivers today and the opportunity ahead. We are focused on ensuring that great surgery is performed on the right patients for the right indications with the right plan, ultimately with a very predictable result. Creating predictability and durability by mitigating the variables in spine care is a tremendous business opportunity and has the potential to create tangible economic value for institutions from more predictable OR workflows and fewer unnecessary trays to stronger evidence around patient outcomes. The continued engagement from these thought leaders gives us the ability to accelerate Insight's evolution into a continuously learning intelligence platform, proliferating both clinical and operational value. We also saw our vision resonate at SRS in Sydney, where we convened leading spine surgeons for a discussion on EOS Insight's current and future capabilities. Published research tells us it takes an average of 17 years for scientific discovery to reach routine clinical practice. We believe the smallest and most vulnerable patients shouldn't have to wait that long. As groundbreaking pediatric deformity classifications emerge through SRS, we are working directly with thought leaders from some of the world's most prestigious spine programs, including Columbia, UCSF and BNI to integrate that science into EOS Insight, helping translate discovery into clinical value today. It was standing-room-only for our session and afterward, we experienced unprecedented outreach from high-profile surgeons interested in our ecosystem. That is why a growing priority is expanding both what EOS Insight can do and who it can reach. Today, Insight is delivering clinical value for surgeons and sites that use it, and we see opportunity to bring that value to far more surgeons and patients at scale well beyond where we are today. As we expand its reach and utility, we believe Insight can and will become a standard part of how spine care is planned and delivered. Turning to surgical execution. For years, spine companies competed around implants. Our investment in EOS, SafeOp and Valence reflects our belief that the future of spine surgery belongs to those who can improve every dimension of a procedure, whether that is how a patient is diagnosed, how surgery is planned, how it is executed in the OR, or how outcomes are evaluated afterward. Returning to Valence, early surgeon feedback is confirming that the platform fits naturally into the procedure. The workflow is intuitive, integration is seamless and the experience continues to improve with use. The elegance and small physical footprint is an absolute thing of beauty in the OR. The infield camera is unlike anything else on the market, and the workflow takes up such little real estate compared to bulky capital-intensive competitive systems. I wish everyone could experience watching a live PTP utilizing Valence to truly understand the differentiation of what we have built. With a strong foundation in place, our focus is shifting from validating the experience to broadening the utility across more procedures. That expansion is already underway. We recently added navigated TLIF to our indications, extending Valence beyond lateral into a posterior procedure many of our surgeons are performing today. Each new indication strengthens the platform as being the operating system through which more of the procedural experience can be orchestrated. SafeOp complements the procedure by adding real-time information on neural location and health. Together, these capabilities create a continuous loop around the surgical intervention. EOS Insight informs the plan, Valence and SafeOp support informed interoperative execution and our procedural portfolio marries surgeon intent with action. The result is a more connected experience for the surgeon, one that is absolutely unmatched and provides a broader role for ATEC before, during and after the operation. As I've said in the past, our aim is to be indispensable in the OR. We are continuing to add capabilities and leadership to capture that opportunity. This includes a recent addition to our leadership team. I'm thrilled to announce that in September, Tommy Carls joined ATEC as Executive Vice President, Data Intelligence and Strategy. Tommy brings more than 3 decades of spine and medical technology experience with a strong track record of the ecosystem integration and will lead our efforts across EOSedge, EOS Insight, data and analytics as we continue to build out our informatics strategy. As Todd outlined, we now expect full year revenue to approximate $862 million, including approximately $789 million in surgical revenue and $73 million in EOS. We expect adjusted EBITDA of approximately $137 million or a 16% margin, free cash flow of about $10 million. What matters is that we are sustaining a strong earnings outlook even with lower revenue expectations. That reflects the leverage in the model, continued gross margin progress and the discipline of the organization. Our focus is now straightforward: execute with greater consistency, improve performance across the portfolio and convert healthy procedural demand into revenue, profitability and cash flow. Make no mistake, we are in this for the long haul. We are growing at a rate that no other spine company has at this size. Even though revenue didn't fully meet our expectation, we expanded earnings, generated cash and continued investing in the opportunities ahead. That resilience gives us the capacity to keep building for the long term. Here at ATEC, we are earning share in spine through clinical innovation, exceptional people and focused execution. That combination continues to attract the best surgeons and talent and gives us great confidence in the opportunity ahead. I am profoundly inspired by what we are building together. Thank you to everyone on the call, especially to the ATEC faithful. Our best days are yet ahead. With that, operator, we'll take questions.

[Operator Instructions] The first question comes from Young Li with Jefferies.

I guess to start, just on the biologics attachment rates. I was wondering if you can maybe dive into that a little bit more. I mean we heard about this issue early in the year. You guys did talk about some of the plans and initiatives you're implementing to try to resolve that. I guess I'm also kind of wondering, is this across the board for your surgeon customers? Or is it more of a -- something that impacts newer converted surgeons?

Yes. Young, let me try to take, I guess, the qualitative and I'll let Todd jump on. He'll give you more of a numeric view and likely a more well-versed view. The challenge is when we built the procedural strategy, what's required and what drives the ACV is the inclusion of as many products per procedure as we can possibly assemble to that. When you get leakage in a biologic, it starts to undermine the entire selling of the procedure. If you look at just the elements, other than BMP, which is Medtronic's, the least distinctive elements of a procedure is the biologics. And so when you look at us and you say, gosh, these guys are growing procedures at 20% and they continue to grow procedures, it puts a big target on our back for all of these companies that just sell biologics. And so I think ultimately, what you're seeing is a bit of a lack of discipline on a selling front that reflects that leakage. And candidly, it's a little tough when you're growing, again, 20% procedure volume, growing your hardware at 17% and then you see leakage in a biologic that ultimately kind of undermines the revenue growth rate. And so that foundationally is what you're seeing. What we're driving is a response in terms of, one, greater sales discipline with both carrot and stick, and then two, making sure that those early adopters of our procedures have access. And so those are kind of the 2 headwinds that we're addressing with regard to biologics. But suffice it to say, it's irritating, right? It's like you spend all this effort to put together sophisticated integrated procedures, you earn the procedure and then you get picked a bit on the biologic. And so that fundamentally is the dynamic.

And Young, I might just add a little bit to that. I think if you look at the history, we have typically seen $15 million to $25 million of our growth year-over-year attributed to biologics. And while we saw some growth in the first half, we went backwards year-over-year by $1 million here in Q3, now flat sequentially. And to your point, we have made some of the changes that Pat outlined in the course of our third quarter. And so we did see some improvement as we were exiting the quarter, but our guidance implies really flat biologics revenue, Q3 to Q4.

Our next question comes from the line of Allen Gong with JPMorgan.

Sorry if this was already answered, jumping around a bit. We've now been hearing about potential softness in orthopedic markets. You called out maybe some softness on the spine side. The other call that's ongoing right now is calling out maybe some challenges on the hip and knee side. Generally speaking, ortho procedures are thought of as fairly elective, but do have to be performed eventually. So I guess help us to think about that challenge. How much of that is reflected in your updated guidance? And how do we get confident in the trajectory of that market dynamic going into 2027?

Yes. Thank you, Allen. This is Todd. When we came into the year, our expectation was that market growth would be in the mid-single digits. I think that's how we felt the market was performing in 2025 and earlier. And clearly, I think we have seen less volume over the course of the year. And I think it really has demonstrated itself here in the third quarter, and it feels like it's a low single-digit growing market at this point in time. When we pull back the curtain, if you will, on our customers and we look at them and we look at our most established customers, we definitely see a bit of a broader-based softness in our thoracolumbar volumes. And so Pat had commented earlier that our overall procedural volume is growing 20% and that was actually a little bit higher than what our guidance implied in the third quarter. And really, what you saw was slower thoracolumbar volumes offset by very strong cervical volumes. And of course, it's always a little bit difficult for us because we are growing in thoracolumbar and cervical at multiples of the market to exactly put your finger on how much market growth there is. But as we've looked at it, we definitely see a slower market contribution associated with the surgical volumes this quarter. Relative to how we thought about it in the fourth quarter, we reflected that in our fourth quarter guide. I think if you look at our guide in totality, it's about $20 million year-over-year lower, about $4 million of that came here in the third quarter, leaving about $16 million in the fourth quarter. Of that $16 million, approximately -- of the $16 million in the fourth quarter, we've got about $12 million in total associated with surgical volume, $4 million in EOS. In the surgical volume, about -- the majority of that is really associated with lower biologics expectation and lower procedural volumes kind of evenly split.

Okay. So about 50-50, so $6 million and $6 million?

Yes, more or less.

Okay. And then I guess like on the EOS side, right, how should we think about the slowdown there, right? Because that's a little bit separate from both biologics and even maybe a little bit separate from procedures. Of course, the 2 are linked. But are we starting to see any challenges on the capital side of the equation as well? We've been hearing a lot that order books are healthy, but maybe there's like a bit of an extended period between the orders are placed and then the hospital actually commits to the installation. Help us understand the EOS slowdown.

Yes, I would say it's kind of all of the above. I can tell you it's not a lack of demand. We tried to outline a little bit in terms of what the market is telling us and what the market is showing us. In my mind, it's more of a lumpy capital dollar availability and a kind of an inconsistent installation dynamic. But as it relates to a fundamental demand on the thesis of information that's driving improved surgery and the EOSedge unit being the core tool that's driving that, there is a healthy demand dynamic. And so again, frustrating to not deliver continued growth on that front, but that's going to be a lumpy one, and we knew that one from the beginning.

And I think the other point I'd say, Allen, is clearly, 2026 hasn't gone the way we've expected it relative to our total revenue growth or relative to the expectations that we set out for performance with investors. And so we're trying to be thoughtful about how we reset our 2026 guidance going into 2027.

Our next question comes from the line of Mathew Blackman with TD Cowen.

Can you hear me okay?

Loud and clear.

Great. And look, I appreciate this is not a fair question to ask today, given all the moving parts here in 2026, but you do have a 2027 LRP target of $1 billion in revenue, $180 million in adjusted EBITDA. Just your level of comfort with those LRP targets here. Again, appreciating there are a lot of moving parts here. Just any commentary on that would be helpful.

Matt, as you can imagine, we're in the middle of our planning process for next year, and we're not going to get into specific guidance for 2027. But I can share a little bit with how we're thinking about it. First, we continue to see strong procedural growth, and I think that's encouraging. The underlying volume component of this business is strong. We're seeing strong surgeon adoption and really durable hardware growth. And so I think that is an encouraging thing. [ EOS Capital ] has had a challenging year, but we do like the positive signs in that business, which we're seeing, and I think that should put us in a better position next year. And we've been very pleased with the progress on Valence and EOS Insight and see potential for continued growth in our international business as well. And now of course, we have had challenges with our bio performance, which we believe we have addressed. But the timing and the effectiveness of those measures is difficult to predict. And so I'd err on the side of caution until we get a little bit more clarity on that front. So I think consistent with, I think, the comment I made earlier on 2026 and how we're trying to be thoughtful for it, I do think the second half of 2026 is a representation of how we believe the current business is performing and I think a pretty good jumping off point for how you should think about next year.

Okay. If I could just squeeze one more in here. Again, another strong surgeon adoption quarter. I'm just curious, and you sort of talked about this in the past, if you didn't add a single surgeon from here on out, if you think about 2027, just the natural progression of those surgeon cohorts growing, could you sustain -- I mean I think our math suggests you could still sustain sort of mid-teens procedure growth even if you didn't add another surgeon to the armamentarium, so to speak. Is that the right way to think about it or no?

I think conceptually, Matt, that's consistent with how we thought about it. I think to my earlier comment on the market dynamics, we're going to have to pay attention to those here in the fourth quarter and how we think those will shake out for next year. So I think that dynamic is a variable in your logic. But I think the logic that you laid out is consistent with how we think about it.

Our next question comes from the line of Vik Chopra with BMO Capital Markets.

Pat, I'm just trying to understand what own and address means in practice. Does that imply changes to the bag, pricing, training or sales leadership? And then I had a quick follow-up, please.

Yes. I think -- I want to make sure I understand exactly what you're asking. Just the type of changes that we're making on the biologics front to ultimately influence what's going on, right? That's what you're intending...

Yes, exactly. I think in the press release, you said we're going to own and address this. I'm just trying to understand what that means exactly.

Yes. Own it means I'm profoundly irritated by it, and it's a lack of discipline that we're going to respond to. And so as I said, we're going to manage this with a carrot and a stick across the sales force. And again, there's a few things more maddening than making the investments that we had in terms of the integrated procedural strategy that has been so widely accepted and so enthusiastically received. You feel like you're getting pick pocketed a little bit based upon the most limited piece of the pie and the most undifferentiated piece of the pie. And so when I said we're going to own it, we're going to respond to it in an aggressive way. As you know, we're sitting in this precipice where a few years from now or 2029, we're going to have this -- be the second company that likely will have a BMP, which is the only really kind of distinct biologic on the market. It's unsettling when a lack of discipline in the short term where companies are targeting you based upon your growth in procedures to insert themselves within the -- what would have been a procedural case value that's higher. And so you can imagine that we're making sure that there's discipline with regard to the exclusivity elements within our distributor agreements. We're holding sales management completely accountable and we're managing both financially with regard to the carrot and stick. And so I would say we own it. We know what it is. We know exactly how we're influencing it. We're gaining more access by the day contractually. And so these are things that we know how to respond to.

Okay. Great. And then my second question was what gives you confidence in the updated guidance for the year? I'm just trying to understand how much of that assumes that the revenue per case comp eases and how much of that assumes a biologics recovery?

Thanks, Vik. The point on biologics is the right one. And so what we saw in Q3 was essentially a sequentially flat biologics number. And as you can see from our reported revenue that our surgical revenue sequentially went up. And we're assuming that biologics contribution sequentially is flat Q3 into Q4. And so we think that's the right place to put it. Overall, our surgical hardware guide assumes about $12 million of sequential growth. Last year, I think we did about $13 million or $14 million. So I think just in context and just analytically, I think that gives you some comfort.

Our next question comes from the line of Tom Stephan with Stifel.

I wanted to go back to thoracolumbar. Pat, maybe for you, it would just be great if you can elaborate a bit more with what's happening there with ATEC. And I guess it sounds like more at a market level. Regarding your market views, I guess, is this a potentially, I'll say, somewhat more durable headwind? Does it feel like something that's maybe more isolated to this quarter and the fourth quarter? And then as a tack on, are there any competitive dynamics at play here? And then I have a follow-up.

Yes. Not to be flippant, but when we start to see a slower volume, these are with customers with whom we've had relationships for years. And so what we're seeing is volume impacts to their practice. And so as it relates to competitive dynamics, I will assure you that's not the case. One of the other dynamics is -- I don't know if you saw in the -- in our prepared remarks is there is a growing younger cohort to the people who are engaging ATEC. And oftentimes -- that cohort oftentimes has less complex type of surgeries that they're initiating their practice in. And so when you start to -- when you're growing at multiples of the market and you start to discern what are the headwinds, you start to look at things like, geez, what's our most tenured cohort doing? Is their volume slowing in some way? Yes. What type of ACV are we getting from the younger guys? The younger guys are growing at a much faster rate, and you start to see kind of goofy headwinds. It doesn't speak to a competitive dynamic. And when you're growing procedures at 20%, you're adding surgeons at 25%, it gives you, again, zero hubris, but it gives you a level of confidence that the thesis is intact. And what we're seeing is just leakage on the ACV, based upon the biologic thing. And that really is -- you see a little bit of bumpiness in terms of volumes. Todd?

Yes. I'd just add on your question on the durability of the market softness. Our assumption is that, that continues and perpetuates into the fourth quarter, and we're going to pay close attention to it. And I think, as I had said earlier, early at this point to be giving 2027 guidance. I've made some comments on how to think about that. But it is a variable we're going to have to pay attention going into next year.

Got it. That's great. Super helpful. And then just to pivot back to biologics. And Pat, maybe I'll stick with you. I guess what I'm curious on is, could this pressure be durable or even kind of structural at a market level that maybe extends beyond just a lapping dynamic? If you can talk about what's going on at the customer, at the hospital level. I guess I'm just curious if maybe this is more of a shift in biologics more broadly within spine that could be somewhat lasting.

Yes. It's really a good question. It's like -- one of the things that we're seeing is, clearly, hospitals are doing their best to save money. And oftentimes, they'll do a spine RFP and then they'll do a biologics RFP. And really, it provides a bit of a hunting license for some of the smaller companies who are willing to take lesser price and pay higher points to distributors. And so I would say that, from a pure market dynamic perspective, that's one of the things that creates a challenge. The reality is, based upon our current access to hospitals and based upon kind of our accessible market space, we're underperforming it. And that's the piece that is frustrating is independent of the dynamics of the marketplace, I would tell you that what I would call a lack of discipline is impacting the value. And so we can't have a BMP soon enough. But in the meantime, what we have to do is we have to block and tackle and do the things that we know how to do to assure that our ACV is unimpacted.

Our next question comes from Lawrence Biegelsen with Wells Fargo.

This is Ross Osborn on for Larry. So adjusted EBITDA came down by only $3 million, yet the free cash flow guide was cut by $10 million after a strong 3Q. So I guess the question is what accounts for the gap? And is the timing shift into '27 or a step down in the conversion rate we should carry forward?

So if you look at our adjusted EBITDA of $137 million, it's about 16% of revenue, which is consistent with how we came out in the previous guide. It's about $3 million lower than our previous guide. Obviously, we overperformed EBITDA performance in the third quarter. So really, it implies about a $5 million step down year-over-year -- excuse me, versus our previous guide implied in the fourth quarter, which is about 1/3 of the revenue change that we've guided to. So I think the EBITDA reduction in the fourth quarter is in line and consistent with the reduction that we're projecting in revenue. So I think that's in line. We end up with an 18% EBITDA ratio implied in our fourth quarter guide, which we feel is good and strong. Your comments and your question relative to free cash flow, part of that is clearly the lower revenue and the lower collections you get. And I would just tell you that the conversion of EBITDA to cash flow has probably had more timing dynamics than you might expect. And so what we are doing is we continue to buy and receive towards the projected level of instruments and inventory to support the increasing volume we have in surgeons and our expectation for revenue growth. And so I think that's really the dynamic that's impacting our cash flow on this guidance. And we don't really think that there's a fundamental change in the relationship between cash flow conversion and EBITDA, and we feel good about our ability to continue to grow profitability. I think we've demonstrated that significantly over the last number of quarters and our ability to translate that into cash flow as we projected has also, I think, been demonstrated. So feel like that's working as intended.

Okay. Got it. And then maybe one on Valence and just how your relationship with Medtronic is going in terms of coexisting within the same channel. I would be curious to hear how many Valence cases to date have used StealthStation versus your own robot?

Yes. I would say I have zero idea in terms of the Medtronic dynamic. What I do know is that what we're doing with Valence is hugely elegant. And someone who's been at this for 30 years would refrain from using that commentary unless it was an absolute. And so what we're doing with Valence is we're integrating it into the workflow of PTP. And so the utility of Valence in terms of the workflow of the front of the spine and the workflow in the back of the spine is something that Medtronic, Globus or nobody else can do. And so I'm thrilled with regard to the early experience of it as we talked about. This is a place where we distinguish ourselves is in the clinical application of technology to ultimately create predictability in surgery. It's unmatched. And so I'm hugely bullish on our ability to translate Valence in the coming years. I love how we walk disciplined in a disciplined way to ultimately make sure that it reflects the very intention of the clinical requirement. And so anyway, I'm not going to give you numbers. I don't care about Medtronic. But I will tell you that what we're doing is highly distinguished.

Our next question comes from the line of David Saxon with Needham & Company.

I'll keep it to the one. So just on the procedure mix that you're seeing, thoracolumbar softness, where is that showing up? Like, very curious to see how -- or hear how lateral is holding up across PTP and LTP or if that's kind of more in other approaches.

Yes. Thanks for the question. It's fascinating. It's like you look at the cohort of guys that we're attracting to as new users, and the most -- the clearest utility of a spine procedure and the clearest success is in cervical. And so you see cervical start to run a little bit. And so we're thrilled about that. And then you start to look at, gosh, how is the thoracolumbar thing doing? And what are we seeing from a lateral perspective? Lateral for us is a proxy for success. And so we continue to see outsized strong demand on the lateral front. I would tell you that the place that's going to be the longer run is just in the deformity strategy. And so we're seeing the volume of enthusiasm with regard to EOS is so abundantly clear, and it's maddening that you don't see the requisite EOS capital placement success at the time that we had hoped for it to reflect. But the types of things that we're doing in deformity is going to just take time to ultimately be reflected. Great situation with regard to where we are with PTP. PTP continues to distinguish itself. It has been so much fun to watch and experience that technique proliferate. It will continue to proliferate. Same with regard to just lateral in general, lateral position, lateral surgery. But I would tell you that getting into the pediatric institutions, getting into kind of some of the longer deformity, we're probably seeing more adult deformity than we are kid deformity. And so I would say that's the dynamic, and that's the headwind.

And David, maybe think about it this way, the 20% procedural volume growth was probably a tick higher than our guidance implied in the quarter, yet we're talking about lower market demand. That's really a function of we completely outperformed our cervical expectations. We've underperformed on TL. But to Pat's point, the historical strength of the business has always been in the anterior column. And so the relative contributions, I think, remain intact, but they're overall kind of all down a bit. And we attribute that fundamentally to market demand. And so I think that's kind of how you reconcile the dynamics numerically.

Yeah, you say down, but it's multiples of the market.

Yeah, we're still multiples of the market even in the thoracolumbar today. So I do say down relative to expectations, but still significant share taking in the moment.

Our next question comes from the line of Mason Carrico with Stephens Inc.

This is [ Ben ] on for Mason. On the updated EOS outlook, would you be willing to provide some color on the average time it takes for an EOS order to be delivered? And then I guess, just what share of the Q4 EOS placement number, I guess, did you already have in hand entering the quarter here?

Yes. From a placement timing perspective, candidly, it's all over the board, based upon the build-out of the room and all of the other elements that drive placement acceptance. And so I would hate to give you a number just because the number is not going to represent anything other than a mean when the -- some of them deliver virtually immediately if they've already had an EOS, the other ones take longer. And so I guess the key points that I think are important to appreciate is that the demand on the thing has never been greater. Our ability to place them in quarter is -- rarely do we place the majority in quarter that we get ordered. But it's lumpy based upon all of the things I've defined. So I guess, hopefully, that provides you a little bit of color.

Our next question comes from the line of Keith Hinton with Freedom Capital Markets.

So this is Nakul on for Keith. So I wanted to ask you, the EBITDA margin is already near the 18% target for next year. Can you please speak to the expectations for margin drop through next year? Any reason to think why there might be -- you won't be able to stay in the 40-ish percent range you have hit almost every quarter for the past 2 years?

Thanks for the question. And I'm going to refrain from giving specific guidance on 2027. I think it's -- as I said earlier, we're in the middle of that process. But here's a couple of things I think you can consider. One, I think we have consistently talked about a 35% -- mid-30% drop-through year-over-year on the dollar growth to EBITDA. And so to your point, we have outperformed that over the last couple of years. Certainly, this year, we've benefited from gross margin expansion. Now some of that gross margin expansion has been very much a reflection of the work and the discipline and the execution of the team here in terms of driving costs down and improving overall asset efficiencies. But some of that margin improvement has also been associated with the mix benefit from having more surgical hardware volume and frankly, less bio and less EOS contribution. So I wouldn't want to count on that necessarily going into the new year from a drop-through standpoint. So all that to say, I think kind of a mid-30s percent drop-through is a good way to think about it going into next year. I think the other thing I'd say is if you kind of look back at our history, the EBITDA ratio where we exit in the fourth quarter is a pretty good indicator of where we land in the next year. And so, on that basis, to your comment, our guidance implies about 18% EBITDA here in the fourth quarter. And so I think that kind of helps you understand how we might be thinking about next year.

Yes. Got it. And just a small quick question. So this is a bit of a longer-term one. So on OsteoAdapt, in the 4Q '25 deck, you put the TAM at around $2.5 billion, but noted that Medtronic is only doing around $700 million in sales. So can you speak as to why you think Medtronic's product has only around 30% of the market and whether you expect OsteoAdapt to increase that penetration rate meaningfully? And if so, why?

Yes, it's a great question. And I'm going to do my best to describe the total addressable market. I think when you look at the biologics in total, it's inclusive of a lot of different synthetics, cells, all kinds of different products. And so it's a monstrously large market. Clearly, the only BMP player is Medtronic and it's at $700 million or $800 million. I don't think they describe it exactly. But suffice it to say, when a surgeon has a patient with whom they're concerned about the prospective fusion, they use BMP. And so based upon the early understanding and the early kind of findings from the IDE and what we believe to be true, we think that there's some real clinical advantages associated with OsteoAdapt. And so our expectation and our desire and why it's important for us to build a foundation of a biologic role within the marketplace is so we can go into this market sprinting, not jogging or walking. And so it's a large market, the biggest player, BMP by far. We think that OsteoAdapt has some features that are improvements to BMP. And so we see it as a significant opportunity.

Our next question comes from the line of Caitlin Roberts of Canaccord Genuity.

Just wanted a little more color on the international supply challenge you called out earlier in your prepared remarks and what you guys are doing to remedy that.

Yes. First of all, I greatly appreciate the question. One of the things that we've done is we've spent a lot of time to, in essence, lay a foundation for future success. That means spending a lot of time, money and effort in terms of training surgeons and preparing them. We have gotten off to a great start with regard to both Australia and New Zealand and Japan. And as you appreciate, it's a step-by-step walk, especially in Japan, like the Japanese spine society in essence, has to say, "Hey, this is safe. Let's go ahead and do a small cohort of surgeries and make sure it's reflective of what we had communicated." They've done that. They've broadened it. And then we finally get like the real monetization tool in the marketplace, which they value the screws most. And then there's a sterilization issue with regard to the packaging. And so we provide screws, they're sterile or implant sterile and saw a packaging defect. If ever you want to be proud of a company, what happens is the company jumps all over it in like an obscene way. And so rarely does a CEO talk about the quality department in a company. But I can tell you, if you want to be proud of a company and say there's a culture that's robust and killing it, the quality team jumped all over it and got everything back. There was nothing in market that they didn't get. And so we had the whole company jump in and check every single package. The ones that we had to resterilize and redo, we did. It was all hands on deck. We replenished a lot of the implants that we had to take out of market. And so it affected us in terms of slowing down the adoption. So when Todd talks about the impact of Q4, it's real. But it's always one of the things where it's like if ever you want to feel proud of a company, those are the things that transpire. So -- gosh, there was one more thing I was going to tell you. Anyway, that's the dynamic. The irony is there's some competitors out there that had the same issue, and I would welcome a comparison to the speed by which they responded to this issue.

Our next question comes from the line of Matthew O'Brien with Piper Sandler.

This is Samantha on for Matt. I guess just briefly touching on the hardware performance was really strong this quarter. Can you tell us what you're seeing from a pricing perspective and changes there and how that could look as we move into 2027?

Sam, your question on pricing is a good one. And I would tell you that I think the pricing dynamic in the market has been relatively stable. And I don't necessarily see a change here in Q3 relative to what we saw in the first half of the year and not implying a change in the fourth quarter relative to our guidance. So I think the pricing environment is stable.

Okay. Perfect. And then if I could just sneak one more in on biologics. I know you said that it was flat here in Q3, same expected for Q4. I guess what would it -- how do you envision 2027 in terms of expecting sequentially flat performance in biologics and what it would take for a potential rebound?

Yes. I shared some comments on the call earlier about 2027 and how to think about that and how you might frame that up in totality. And I think my comment specific to the biologics is we have some challenges there. I think Pat has described those, and we have addressed them very directly and believe that, that will result in improvement over time. I believe the timing and the effectiveness of the measures we've taken are kind of difficult to predict. And so I would err on the side of caution until we just get a bit more clarity. So we'll be paying attention to that here in the fourth quarter. And obviously, when we do give formal guidance, we'll have some specificity around that.

Our next question comes from the line of Ben Haynor with Lake Street Capital Markets.

First off, I guess -- just I'll leave it at one and kind of step away from biologics and EOS here for a second. On Valence, just kind of curious on how you see that rollout. Do you feel like you're kind of nailing the experience? And then on the angle of Valence as kind of an ASC tool, is that thesis kind of bearing out as you expect?

Ben, this is Pat. The answer is yes. It's so comforting. Again, one of the things that I've historically described as a competency of the company is we acquired SafeOp years ago, and you look at what SafeOp is doing today in the neurophysiology device, and it's really unbelievable in terms of just the number of feature additions that we've made and the increased precision associated with delving into the evolution of it. I've always loved the whole -- the investment starts after the acquisition. And I would say it's been the same with regard to Valence. It's like some of the core elements that were so key was -- I don't love the duration it takes to sell capital equipment nor do I love the real estate that it takes up in the operating room. And one of the elements of every navigation system and every robotic system is a camera that sits outside the sterile field that looks down and tries to search for the elements that enable you to navigate the tool. And so the great part about Valence is it's totally surgeon controlled and it's in the field. And again, what the experience has shown us is that when you do both the front and the back of the spine, you need to move the camera. And if you're using something where the camera is outside the field, it takes a sales rep or a nurse or somebody else to move the camera to ultimately identify where the instrument is. And it's nonsense. You think about the level of precision required. So the long-winded answer is it's going great. It's built for utility. Like, the intention was, hey, let's do this for PTP. It's hugely elegant for PTP. We've already gone on to TLIF, and it's doing exactly what we intended. And so again, I think it just speaks to the disciplined approach to clinical distinction. And so hugely bullish on it. It will be a tailwind for next year. And I'm just excited that we know exactly what it's going to do and what it's going to be and why it's an improvement to what's out there today.

Our last question comes from the line of Sean Lee with H.C. Wainwright.

At NASS, we saw some of your competitors start to move into the prone procedure field. And we were wondering, do you see that as a positive in expanding the overall market? Or are you starting to see some pushback on accounts? Or do you expect some pressure on pricing on that?

Yes. Thanks, Sean. I think it's awesome. And the reason I think it's awesome is because it brings more attention to something that we do unbelievably well and unbelievably better. And so when you think to yourself -- gosh, a good proxy for me is years ago, when we launched lateral surgery at another place, the largest company in the business came up and did their best to copy it. And candidly, whenever you copy something, you oftentimes get the last best effort of the inventor. And that's ultimately what our competitors are doing is get our last best effort. And what we will do is continue to apply our learnings into evolving the technique. And so when you have a navigation system that is designed specifically for the utility within PTP, you have a neurophysiology system that's designed specifically for the utility within PTP. When you have a retractor system specific for the utility -- I hope what it tells you is that the person who oftentimes invents it and evolves it because they're better students of the requirements of the field oftentimes prosper. And so people who copy it don't understand it deeply enough to ultimately get it right. And so we love it that they're promoting a technique that we believe deeply in because we're the ones who invented it. And so I couldn't be more excited about more people communicating the virtues of prone transpsoas surgery. But what they'll ultimately do is go to PTP because it is the lead and the one that is created by the inventor.

I would now like to hand the call back over to CEO, Pat Miles for closing remarks.

Yes. Thanks very much. Clearly, a frustrating quarter. But one of the things we say, and we're not kidding when we say that our best days are yet ahead, and we're thrilled to be long players in this business and believe deeply in what we're doing. So thanks so much.

This concludes today's conference. Thank you for your participation. You may now disconnect.