NuVasive Inc

F:NK8

Earnings Call Transcript 2019-Q3

[Operator]

Greetings and welcome to the NuVasive, Inc.'s Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Suzanne Hatcher, Vice President of Internal and External Affairs. Thank you. You may begin.

[Suzanne Hatcher, Vice President, Internal and External Affairs]

Thank you, Michelle. Welcome to NuVasive’s third quarter 2019 earnings call. The company's earnings release, which we issued earlier this afternoon, is posted on our website and has been filed on Form 8-K with the Securities and Exchange Commission. We've also posted supplemental financial information on the IR website to accompany our discussion.

Before we begin, I'd like to remind you that the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions, and other factors which, if they do not materialize or prove to be correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

Additional risks and uncertainties that may affect future results are described in NuVasive's news releases and periodic filings with the Securities and Exchange Commission. NuVasive assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

This call will also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, free cash flow, and EBITDA.

Reconciliations to the most directly comparable GAAP financial measures may be found in today's news release and the supplementary financial information which are accessible from the Investor Relations section of NuVasive's website.

Joining me on today's call are Chris Barry, Chief Executive Officer; Raj Asarpota, Chief Financial Officer; and Matt Link, President.

With that, I'd like to turn the call over to Chris.

[Chris Barry, Chief Executive Officer]

Thank you, Suzanne. Early this afternoon we're reported third quarter 2019 revenue results of $290.8 million representing 7.2% reported growth or 7.5% constant currency growth over prior year. These results are primarily driven by a strong performance from U.S. spinal hardware with nearly double-digit organic growth year-over-year attributed to focused commercial execution and continued traction on new products as well as solid growth in the international and services businesses.

Overall, I'm very pleased with how the business has performed over the last three quarters balancing top line revenue growth with increased profitability. Based on results year-to-date and continued confidence in the business, we are raising full year 2019 financial guidance. Raj will share additional details on the updates to fourth quarter and full year 2019 expectations in a few minutes.

Now let me discuss third quarter revenue results. U.S. spinal hardware revenue increased approximately 9.5% over prior year with meaningful case volume growth of 10.6%. We attribute this strong performance to several different factors.

First, the U.S. spine market continues to be stable and by our internal estimates grew approximately 2% in the quarter compared to approximately flat to 1% growth over the last 12 months to 18 months.

In addition, both the XLIF and ALIF franchises performed exceptionally well, driven by increased adoption of NuVasive's X360 lateral single position procedure. We're also starting to see further pull-through of our posterior fixation technologies by capturing the full X360 procedure, particularly around ALIF.

Surgeon training and adoption on the X360 procedure and lateral as a whole remains in high demand with clinical professional development team training 20% more surgeons year-to-date than we did in 2018.

Our proprietary advanced material science portfolio also contributed to growth in the quarter with continued momentum for new product introductions. Most notably Modulus XLIF, TLIF-A and TLIF-O and Cohere XLIF.

We believe balancing innovation on our core technology as well as enabling technology and procedures is key to sustaining continue above market growth in U.S. hardware. U.S. Surgical support revenue is down approximately 1% over prior year. The momentum in the NuVasive clinical services businesses primarily driven by solid billings and collections and an uptick in overall procedure volumes continued in the quarter. This is offset by decline in IOM products and Biologics.

While Biologics revenue reflected about a 1% decline over prior year, we continue to remain confident that the business line will return to growth in the fourth quarter 2019. Capital equipment revenue for the quarter was nominal as anticipated. While we continue to sell less rate and complete Pulse based [ph] evaluations for the remainder of the year.

Revenue from international businesses grew approximately 12% as reported, with 13.4% growth on a constant currency basis over prior year. We saw similar market specific dynamics associated with set availability from the second quarter carryover into the third quarter within the international business.

Turning to profitability, non-GAAP operating margin came in at 15.7% for the third quarter of 2019, 10 basis points higher than prior year. We continue to balance profitability over strategically investing in key areas for future growth, while consistently improving operations.

We continue to make strides towards acting with the rigor and discipline required to successfully execute against our goals. As discussed during the Investor Day in August, NuVasive’s approach to innovation is focused on three key goals; driving increased adoption of less invasive spine surgery, developing enabling technology to accelerate this adoption, and investing further in favorable open markets, open segments like cervical and deformity.

NuVasive is an innovation leader and will continue to bring technologies to the market that meets the needs of our surgeon partners and supports better clinical and economic outcomes that enabled more predictable, and reproducible spine surgery.

Pulse is at the center of NuVasive’s enabling technology platform and is designed to help surgeons adopt a more efficient, less disruptive, surgical approach across spine procedures. We're working through postpaid evaluations to get feedback from surgeons, and hospitals on the gained efficiency from the platforms used in the operating room. This feedback allows us to further build out the body of clinical evidence supporting the thesis that Pulse can drive greater adoption of MIS procedures and enable better and safer surgery.

The information gathered throughout the evaluation period to-date has been incredibly valuable, and has led to further advancements and increased functionality of Pulse, and its following applications including robotics.

Since commercial availability began in July, we started to contract for Pulse and collected signed POs but are holding off delivery and installation until the beta phase is complete. There is a capital pipeline of interest, but there likely won't be revenue impact on the P&L until 2020.

Further guidance on capital equipment revenue will be shared at the end of Q4, along with full year 2020 guidance. With the focus on wrapping up betas in the U.S. deploying the platform international or internationally is also in the works. An important milestone was hit early in October with the Pulse receiving CE Mark approval. This allows the initial deployment of the platform across the EU and other CE Marked geographies beginning with several prestigious hospitals and academic institutions in Italy, Germany and the Netherlands ready to start their evaluations.

Now turning to a few other technology roadmap highlights for the remainder of the year, and into 2020. One of most exciting new developments in NuVasive’s implant technology portfolio is the offer release of a new Anterior Cervical plate. The system will offer a unique, multiple unique new features designed to treat – generation, trauma and deformity cases. It will have significantly improved features, compared to alternative devices on the market, making it a highly competitive offering.

The system will start limited, clinical use later in Q4, and we'll preview the technology at the upcoming Cervical Spine Research Society annual meeting in November. This directly ties to NuVasive’s innovation strategy of investing in favorable open markets, where we are currently under represented and have an opportunity to position a more competitive technology portfolio.

NuVasive’s specialized orthopedic businesses line continues to be a competitive advantage globally with innovative technologies that not only take share, but also shift the standard of care in limb lengthening and reconstruction to internal fixation solutions.

Earlier this year, we expanded the precise technology portfolio with the launch of the STRYDE system, an internal nail which uses magnetic technology to non-invasive lengthening a patient's limb with an external remote controller.

STRYDE offers a meaningfully, improved compared to previous systems, related to post-operative weight bearing capability. Since this launch, the product adoption rates have been better than expected with accelerated market expansion.

Looking ahead, NSO has several commercial product launches planned for 2020 focused on transforming current standards of orthopedic care. Finally, I'd like to give context to the new organizational structure announced in the press release issued earlier today in Form 8-K filed with the SEC.

As CEO of NuVasive for nearly a year now, I’ve spend a lot of time listening, learning, and assessing the different business functions and overall organizational structure. Coupled with the company's long term strategic plan, the management team and I shared recently at our Investor Day, a natural next step is to implement an organizational structure that is aligned with the strategic plan.

The updated organizational structure includes the implementation of a portfolio on commercial strategy function, bringing together the sales force and product and technology teams under one leader, our current President Matt Link.

Many of you know Matt well from his 13-year tenure with the Company. This includes five years of leading U.S. commercial team in addition to overseeing many key functions and delivering tremendous results, and tangible improvements to business operations. This new structure enables a more holistic portfolio approach towards the management of the global commercial function.

In addition, a new global operations function is being established to optimize our supply chain and manufacturing to better enable the portfolio and commercial planning capabilities. This further enhances the ability to globalize the business, while continuing to keep the organization focused on operational excellence and continuous improvement.

Key operational functions will be managed under one leader, and I'm pleased to announce Dale Wolf, current Head of NuVasive’s manufacturing will be promoted to Head of Global Operations.

Dale joined NuVasive in 2018 and under his leadership, there's been significant improvement in the company's insourcing manufacturing efforts, and he has evolved the West Carrollton facility by optimizing outputs and streamlining processes.

Prior to joining NuVasive Dale spent more than 15 years at General Electric with leadership roles in manufacturing, operations and supply chain. I've been impressed with his leadership from the start, and I'm confident Dale along with his teams will continue to execute on many of the profitability and operational strategy goals that we've set forth over the next several years.

This new organizational structure will be effective as of January 1, 2020. Now turning back to the quarter, I'd like to close out my formal comments by saying how pleased I am, with the strong performance of the organization today. We are doing what we said we would do at the beginning of the year. There are many growth levers I believe are sustainable for the next several quarters in the U.S. hardware business. This should help drive further confidence and our ability to grow at multiples and market, and execute on the financial commitments we communicated to.

I'd like to reiterate the three priorities outlined back in January that I knew we needed to accomplish to be an attractive investment in short and long term. Number one, create disruptive technology and continue to be the leader in spine innovation. Number two, focus on operational excellence and deliver world-class execution across all aspects of the business. And number three, drive profitable growth through a renewed rigor and discipline on operating leverage. With the over performance this quarter, and raise and full year 2019 guidance expectations, I think we're heading in the right direction.

We're just getting started with many opportunities to create a further shareholder value by outpacing others with differentiated technology, that enables more predictable and reproducible spine surgery focused on improving patient’s lives.

With that, I'd like to turn over to Raj to further discuss our Q3 financial performance.

[Rajesh Asarpota]

Thanks Chris, and good afternoon everyone. Before we get started with the financials, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings news release as also supplemental, financial information on NuVasive.com for further information regarding non-GAAP reconciliations.

For the third quarter 2019, we reported revenue of $290.8 million reflecting 7.2% reported growth year-over-year and 7.5% growth on a constant currency basis. U.S. spinal hardware revenue was $160 million for the quarter with strong growth of 9.5% over prior year.

Performance as in the first half of the year continues to be driven by solid commercial execution from a stable sales force, new product and procedure introductions, and robust case volume growth of more than 10%.

In particular, acceleration in the X360 procedure adoption, NuVasive’s lateral single position surgery driven by a 20% year-over-year increase in surgeon [ph] education instances reaffirms our continued focus on MIS surgery proceduralization.

Top line growth was offset by pricing pressure of negative 2.1%. Revenue from U.S. surgical support was $71.9 million for the quarter down 1% compared to prior year. NuVasive clinical services or NCS grew 4.8% year-over-year as a result of increased case volumes, and solid billing and collections.

Partially offsetting the growth from NCS was a decline in IOM products, driven primarily by competitive pricing discussed in the second quarter. Turning to Biologics within the surgical support business line. Revenue for the third quarter was down approximately 1% over prior year. While Biologics volumes continue to grow, pricing and product mix is impacting revenues along with the timing of bulk orders within the year.

Pricing pressure on the Osteocel product lines remains a headwind. However, we are gaining momentum with DBMs and AttraX, our synthetic line of biologics aligning with other new competitive form factors, further mitigating the impact of Osteocel.

In light of these dynamics, the team is executing well with growth still expected in the fourth quarter. International revenue was $59 million, growing 12% as supported year-over-year and 13.4% on a constant currency basis.

This performance was a bit softer than anticipated, primarily driven by limited set availability in Asia Pac and Latin America that carried over from the last quarter. This was offset by the EMEA region continuing to perform well with solid year-over-year growth in the U.K., Spain and dock regions. We anticipate similar dynamics for the remainder of the year, which I'll discuss further in our updated full year 2019 guidance.

Moving to profitability, non-GAAP gross margin for the third quarter was 73.5%, an increase of 70 basis points compared to 72.8% in the third quarter of 2018. The improvement over prior year was driven by savings realized from manufacturing efficiencies, partially offset by price and inventory related charges.

The production coming out of the Ohio plant is on track for the year, and continues to drive benefit to the P&L. Non-GAAP SM&A expenses for the quarter were $150.2 million compared to $139.9 million in the prior-year period, representing a 7% and remaining flat at 51.6% of revenue.

We continue to realize efficiencies gained from organizational streamlining implemented at the beginning of the year to sell fund strategic investments. Within the quarter, operational and supply chain investments were made as planned for MDR, sterile packaging and other projects.

Non-GAAP research and development or R&D expenses grew 18% to $18 million in the quarter or 6.2% of revenue, an increase of 60 basis points compared to the prior year period. R&D spend remains in line with expectations with the focus on investing and enabling technologies through Pulse and Pulse robotics along with planned core hardware business innovation projects.

Non-GAAP operating profit margin was 15.7% up 10 basis points compared to the prior year. The year-over-year improvement was driven by the previously mentioned expansion within the gross margin line and partially offset by R&D investments. This is also about previous expectations and primarily driven by higher than expected U.S. hardware revenue.

Moving further down the P&L, interest and other expense net on a non-GAAP basis was $5.5 million in the quarter, down from $5.6 million in Q3 of 2018. Non-GAAP tax expense in the quarter was $9.2 million resulting in a non-GAAP effective tax rate of 23%, an increase of 340 basis points over prior year. This was primarily due to a reserve release that occurred in the prior year that did not re-occur.

Non-GAAP net income was $30.9 million or non-GAAP diluted earnings per share of $0.59 compared to non-GAAP net income of $29.5 million or non-GAAP diluted earnings per share of $0.56 in the same period last year, an increase of $0.03 or 5.4%.

Turning to GAAP results. GAAP net income for the third quarter of 2019 was $11 million or diluted earnings per share of $0.21 compared to $15.9 million or diluted earnings per share of $0.30 in the same period last year.

Adjusted EBITDA margin, which excludes the impact of non-cash stock based compensation and other non-GAAP adjustments was 25.3% for the quarter, compared to 26.7% in the same period last year. This decrease was primarily due to the investments made in supply chain, including MDR and sterile packaging.

Finally, free cash flow for the quarter was $38.1 million compared to $48.3 million in the same period last year. This decrease was driven by a reduction in GAAP net income as well as an increase in capital expenditures to support the growth of the business.

Moving now onto guidance. Based on the results for the first three quarters and the outlook for the remainder of the year, we are raising full year guidance for 2019. The outlook for full year revenue guidance is now projected at the high end of previous expectations at approximately $1.16 billion inclusive of currency head-wind expectations of approximately $6 million.

This reflects an adjusted full year reported revenue growth range in growth range of 5.1% to 5.8% compared to prior guidance of 3.4% to 5.4% or 5.6% to 6.3% on a constant currency basis compared to prior guidance of 3.8% to 5.8%

We are raising the full year non-GAAP operating margin guidance range to 15.5% to 15.9% compared to a prior range of 15.3% to 15.7%. The non-GAAP earnings per share guidance range is now expected at $2.35 to $2.40 compared to previous guidance of $2.25 to $2.35.

Overall, this updated guidance is primarily driven by the year-to-date performance. Fourth quarter expectations are not changing much just the road to get there looks a little different than expected, had strengthened the U.S. hardware business is offsetting the slightly lower than expected performance in the international business. However, let me give you some additional context around the increased guidance.

The U.S. spinal hardware business is now expected to grow between 6% to 7% for the year compared to prior guidance of 3% to 5%. This increase is driven by exceeding performance targets, year-to-date with the current quarter once again above market growth rate.

U.S. Surgical support full year guidance is now expected to be in the range of 0% to 2% growth compared to prior guidance of 1% to 3%. This adjustment is driven by performance in Biologics in IOM product lines along with current expectations that Pulse revenue will not be recognized in Q4.

In regards to the international business, expect similar dynamics to continue into Q4, as we saw in Q3 particularly in Asia-Pacific and Latin America. With that backdrop, the full year international revenue guidance is now lowered to a range of 10% to 12% growth on a constant currency basis compared to prior guidance of 12% to 14%.

Although lower than previous expectations for this year, we are being diligent on international expansion efforts and balancing capital resources across the globe. This is impacting short term growth rates, but we remain committed to the long term growth expectations for the international business, as discussed at our Investor Day.

The impact of these revenue adjustments result in the non-GAAP operating margin and EPS guidance raises I previously mentioned. As you saw in the third quarter, we increased SM&A spend sequentially as investments ramped, which was included in previous guidance and remain unchanged as we expect this trend to continue into Q4, along with normal non-GAAP gross margin seasonality.

With three solid quarters behind us, we remain optimistic and delivering on our financial commitments for 2019. And with that, I'd like to open up the call for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question. Our next question comes from the line of Josh Jennings with Cowen. Please proceed with your question.

[Josh Jennings, Cowen]

Hi, good evening. Congratulations on the strong results. I was hoping to start on U.S. Spinal hardware, 9.5% growth. You guys called out 10% growth in case volumes and a nice uptick in training on X360. But my question is really, with this strong growth that you've experienced, can you give us some idea of how much the contribution came from new surgeon customers that have been added, perhaps partially through this increased training on the X360.

And then also, your sales force numbers. I mean, have you been adding feet on the street over the course this year, and -- the other those two contribute heavily to the still results that you printed?

[Matt Link, President]

Yes. This is Matt. Appreciate the question. Excuse me. Overall the growth was balanced with respect to a contribution increase procedure of volume from existing surgeons, as well as new customer conversion, heavily related to NPI that's been introduced through the course of 2019. As you think about expansion of existing customers as you know X360 has been a primary focus for us through the course of 2019 with the intent that the extended portfolio for lateral model single position surgery and X360 allows us to increase the addressable market with XLIF and lateral surgery. So that's been a healthy contributor to our existing customer base, and as I said we've seen a balanced growth through new customer attraction related to NPI across a range of the procedural offerings, including posterior interbody with TLIF largely, I think attributed to advancements in the AMS portfolio with Modulus and the Cohere Porous PEEK as well as continued growth in our in our fixation portfolio.

So with respect to Sales force additions, we have continued to see a net adds across the U.S. commercial organization in line with our expectations for growth this year, and continue to see those providing a contribution as expected. So it's really, really been a balanced approach to growth across both the portfolio and continued growth of the U.S. commercial organization.

[Josh Jennings, Cowen]

Great. And do you guys have room for a follow up or is it just limited to one.

[Chris Barry, Chief Executive Officer]

Go ahead, Josh.

[Josh Jennings, Cowen]

Oh, great. Thanks Chris. I just was just curious if -- you guys made some nice commentary the updates on the Pulse system. You guys had a big surgeon event out at NASS, bunch of surgeons getting their first look at the robotic module that will be added down the line. Just wonder if you could give us any color on the feedback you received specifically on robotics and then feel free to add any color that you're getting from the beta launch on the navigation capabilities as well. Thanks for taking the questions.

[Chris Barry, Chief Executive Officer]

Thanks Josh. You bet. We've -- we're obviously as we said, we would continue to perform beta for the Pulse system generally. I think that the feedback has been overwhelmingly positive. Clearly, we are -- we're making absolutely sure that the system is fully functional and ready for prime time. We've gotten tremendous interest from across our customer base in anticipation of the full launch, which we expect over the course of 2020.

In response to robotics, I think the -- you know the overwhelming response that we, that we heard at NAS was very positive. I think, we've taken a unique approach to bringing a technology to the market very quickly, and I think the uniqueness of what we've built within the integrated platform around Pulse is really starting to come to life in the eyes of our customers.

So I think the feedback has been positive. I don’t think Matt , if you've heard anything specifically, but I'll turn it over to Matt.

[Matt Link, President]

Yes, I think just to further Chris's commentary, the intent all along with Pulse has been to provide a platform with a wide range of applications to drive broad clinical utility. Certainly with the debut of Pulse last year in 2018 at NAS building through the early alpha and beta this year, we continue to see a positive reinforcement of that and with the debut, Josh as you mentioned of Pulse robotics at NAS, I think it really completed the picture of what the platform will be able to offer that the extensibility of the software architecture such that if it flows into the robotics and surgical automation application, and really will support the broad clinical utility we're looking for across all spine cases and spine pathology.

So very pleased with the work and contribution of our teams internally, as they bring what is a very comprehensive platform to marketplace as Chris said, continuing to validate and harden the platform to ensure that we can deliver against our commitments to our customers heading into 2020, has had led to some great experiences and we've got a healthy pipeline as a result of it. So things are things are on track.

[Operator]

Thank you. Our next question comes from the line of Shagun Singh with Wells Fargo. Please proceed with your question.

[Shagun Singh, Wells Fargo]

Thank you so much for taking the question, and congratulations on a great quarter. I guess the first question is, you know what the selling day impact was in Q3? And then, I wanted to get a better understanding of the implied Q4 outlook that you're providing here. It assumes you know a step down in growth versus your year-to-date performance, and it appears that you are assuming U.S. hardware and international to be weaker and U.S. surgical support to be stronger. So can you give us some you know the puts and takes for each of the segments in Q4 versus Q3? And then how should we be thinking about these buckets in 2020?

[Rajesh Asarpota]

Yes. Okay. So hey, this is Raj. Thanks for the question. The first part of your question Shagun the selling day impact is 1.4% in the quarter. So if you think about the U.S. business, the hardware business that grew at 9.5% it could normalize for that, the growth rate is more like 8.1%.

And then as we think about the fourth quarter in terms of the outlook, I think the hardware business. Let's take one at a time. But the U.S. hardware business will continue to be robust. But again, if you kind of normalize for the one extra selling day, your account a little bit for a little bit more of price degradation, the fourth quarter as is typical. And just being prudent in terms so far year-over-year comparable we think that they got some 4.5% to roughly 5.8% to 6% which is the midpoint of our guidance is very reasonable.

So I want to say that, I want to continue by saying that we will see positive growth in the hardware business, but we are being very prudent in terms of the guidance, and we think that it's fair compared to comparable.

As you look at the surgical support business that has not changed materially. But we did say that there will not be any revenue expectation from Pulse in the fourth quarter. So that business segment essentially will be around flat to 1% for the year, with biologics showing a little bit of growth, and biologics showing a little bit of growth in there, and the NCS business will continue to kind of track with market like we said.

And then on the international business, the dynamics that I pointed out in my written remarks in terms of continuing to see a little bit of a challenge in Asia Pacific and Latin America as we think about leveraging the goodness that we're seeing in the United States, constrained that's a little bit in terms of said availability on the international side. So that's going to step down a little bit. We'll still see a double-digit growth for the year in that geography. So that essentially is the balance for the fourth quarter, and the total year.

[Shagun Singh, Wells Fargo]

Any color on 2020, and how these buckets shake out?

[Rajesh Asarpota]

No, not at this point. We will report that on our fourth quarter earnings.

[Shagun Singh, Wells Fargo]

Got it. And if I could just squeeze in one question for Chris. You know the Pulse robot was showcased at NAS this year, and you know it is in collaboration with KUKA, which is the German manufacturer of industrial robots. I was just wondering you know why was this the right choice and what are some of the key differentiating features between your system and what's competitively available. Thank you.

[Chris Barry, Chief Executive Officer]

Well I'll take a bit of a shot. I think that the uniqueness of our system is truly the integrated application that really is all of Pulse. So not only having a robotic application, but having the navigation, the 2D imaging, 3D imaging, the inter operative monitoring system in integrated and I think it provides a very unique framework to Matt’s earlier point that provides full utilization across a much broader spine procedural base.

So I continue to think that we've got a very competitive robotic application, but I think the uniqueness of our system is truly the Pulse platform and what the integrated software opportunities and the modularity of the system actually represents to the broad utilization of this technology.

[Shagun Singh, Wells Fargo]

Thank you.

[Chris Barry, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

[Matt Miksic, Credit Suisse]

Hey, thanks sorry for that earlier, not sure what happened. I appreciate you letting me back in. So I had a couple of follow-ups. One, Raj and I think it was your comment on Pulse and the outlook for Pulse and the progression through beta and the feedback that you're getting. I think if you could maybe flush out, what the process looks like. It sounds like you're following one sort of gaining commitments, upgrading the system and then maybe upgrading these sites? And if we could maybe just walk us through that whose types of accounts that have committed or you know how they fit into the early parts of the rollout next year obviously without getting into expectations and to specifics, but the process would be very helpful to understand? I have one follow.

[Matt Link, President]

Yes this is Matt. I'll take that. So as we entered into the market with Pulse in early Q3, expectation was that we would deploy a first set of applications all of which had been validated through alphas and continue to gain experience around the integration of those applications interoperability. And so while all applications are validated and approved, as we’ve talked about the utility of the Pulse platform, it's really been around the integration of applications. So if you think about deployment of 3D navigation and the integration of both interoperable monitoring and the surgical planning capabilities. And so we've been able to through a number of pilot sites with our betas to gain a relevant body of clinical experience that allows us to continue to work through the software advancement, and in doing so, it have been able to garner commitments associated with the placement of the units moving forward.

And so, that has been the intent through the course of the back half of the year. While we provided the guidance we have, previously with some conservatism around the relative contribution, and we believe, we remain on track for 2020.

[Matt Miksic, Credit Suisse]

And just to understand the tail end of that process will involve upgrading those sites, I guess, and then recognize the revenue as you do throughout the -- I want to say early part of the year, but I don't want to turn you down on that, but it seems like those are the first batch of sites that you're likely to be kind of rolling the final system to, is that where we look at it?

[Matt Link, President]

It’s a -- I think it’s a directionally a fair way to look at it. But I want to also just sort of address the you know how we would articulate the final version of the system. As we've talked about policy, we’ve talked about a software architecture that's extensible. Our anticipation is that we will continue down a process over the course of the next several years of adding applications.

And so, when we think about the diversion in the application made available today on Pulse, we don't think of that as like a final and then a next gen. There's a roadmap of applications over the course of the next 24 to 36 months, inclusive of Pulse robotics, that would be part of a continual release associated with the system and those applications will be available to Pulse sites with installation and future installation.

So again, I think directionally you're looking at the right way. I just would like to characterize a final version quote unquote is not really the intended endpoint. It's an extensible system with a roadmap of applications that we intend to deploy over the course the next several years.

[Matt Miksic, Credit Suisse]

Sure that’s helpful. A lot of data, I think there’s one point I'll make is [Indiscernible]. And then and then the follow up I had for Raj, I think and again, I'm just kind of ask with respect to Raj here, but I hope this stuff is just on the international and the changes that you're making here, the investments that you're making there that might be impacting sort of the trajectory of growth, but you know you feel like the right investments to make. Just maybe a little bit more color if you could on what those are, where they are regionally and maybe the timing as to when you think they might start to show or shall return for you?

[Chris Barry, Chief Executive Officer]

Yes. Matt, this is Chris. I'm going to keep you from answering numerology. So listen. Some of the -- some of the growth in the U.S. business honestly has impacted our ability to fully equip the international markets with some of the assets. As you've heard me talk a lot about getting our supply chain up and running and make -- and really ensuring that we're operating the company with rigour and discipline.

And I've said this before our demand truly outstrips our supply, and we've got to make choices over the course of a year as to where we're deploying sets. And in some cases, we have either foregone delivering sets in the time that we had originally thought, because of demand that we're seeing in other parts of the world, primarily the U.S. and other markets Western Europe.

And when we've been late with some of those, we've seen and as a response less than expected growth in certain key markets that's not all on us. There has been certain customs related issues that we've continued to be challenged with in areas like Brazil. But over the course of this quarter, good news I believe that we're delivering the I think the majority of the sets that were guaranteed down to AsiaPac specifically Japan, and feel very very good that going into 2020 that the set delivery that was expected earlier over the last couple of quarters will be fulfilled and we'll be starting out the year with with very good inventory.

So that's really the lay of the land on some of the shifts that we've seen in the market U.S. versus international growth this year. I think to Raj’s point, I still believe that we're committed to delivery of the of the expectations we laid out in New York back in August for the long term growth. It's still one of the, the single biggest opportunities on our national expansion strategy. Just really moving to fulfill the opportunities in the short term has been a little bit challenging. Kind of a good news, bad news, good news is we're seeing very strong growth in the U.S. Bad news is, we need to make more sets. So we're working on that as we speak to try to remedy that situation.

[Matt Link, President]

Yes. And then if I can just add a little bit here. The outlook for the year has been evolving a little bit like Chris said. We're seeing super robust growth in the United States, and then we had some really aggressive expectations in certain geographies on the international side, but so you know we're just doing our best to kind of balance that, the opportunities haven't gone away. We were just you know just a little bit off a landscape shift here.

So again, as far as we said for the international business, we continue to see you know in the future good expansion like we talked about during the Investor Day. So…

[Operator]

Thank you. Our next question comes from the line of David Lewis with Morgan Stanley. Please proceed with your question.

[David Lewis, Morgan Stanley]

Good afternoon. Thanks for taking the question. Chris, just some falls for you and then one for Raj. Just on Pulse, the purchase sort of activity, I'm kind of curious how that's tracked relative to plan? And the other questions would be, in terms of Pulse deal structure, do you have any greater clarity kind of post the beta placements, whether we should be thinking cash sales or use just based agreements, and should we think about the first quarter of 2020 as sort of a full commercial quarter for the company, and then a quick one for Raj?

[Chris Barry, Chief Executive Officer]

Okay. Yes thanks, David. Thanks for the question. The -- I guess the velocity of the some of the PO activity has been consistent what we expected. Now again, we've because of our internal capacity we haven't necessarily put a full court press on trying to fully commercialize this. So we've been pretty selective on customers that we've taken the system to.

So to that end, I’d say it's consistent. The pipeline is actually grown substantially over the last several over the last several months, so that's actually exceeding my expectations on the pipeline development. I wouldn't say those are POS, they have to be transitioned through the process through the PO, but from a general the POS that we have very consistent, but I would say that that's been intentional. We've been concerned, we've approached certain customers and obviously haven't overcommitted.

As far as your next part of your question, as far as the ways in which we will sell or place these units. I think the key and I said this before, is to be as flexible as we can. We have POS for purchases. We're continuing to build out a portfolio of financial arrangements to ensure that we can meet our customers where they are. Obviously, I'm willing to take on one commitment. I'm willing to take on some creative ways to get our capital installed. So we're keeping a very open mind to how we place these and are keeping a keen eye on the proceduralization aspect of driving both POS but also ensuring that the broader portfolio is well represented in these procedures that we're covering with the Pulse system.

As far as your last question on the 2020, are the first quarter or 2020. I would just say that, that will I believe, we will be in commercialization. What I -- when I consider full commercialization is a bit is a bit tricky. Based upon the fact that we have to, we have an internal capacity that we have to keep an eye on installing these systems getting good at installing these systems and servicing the system is going to be a learning curve for us as organization.

So to that end, we're gating our our commercialization in a very deliberate way, really only taking on a certain number of systems that would go out over a certain period of time. So as we work through the final stages of beta, we will solidify the plans for 2020 and we'll look forward to talking more about that at the end of our fourth quarter.

[David Lewis, Morgan Stanley]

Hi Chris. Very very helpful and then just Raj, maybe a quick one for you. We left the analyst day from the margin perspective, kind of thinking the first two years of the LRP kind of 50 to 75 basis points and sort of more back half loaded for a margin perspective. But then again, I look at your performance this year, and you're obviously tracking towards the top end, a sort of 75 basis points on the year, and if I look at the fourth quarter frankly it looks conservatively model from an earnings cycling perspective versus historical trend.

So how should we be thinking about the margin trajectory that you gave at the annual stay? Should we still be thinking 50 to 75 basis points in the first half of the plan, and bigger in the second half of the plan, or has progress to date made you think differently about margins in 2020 or beyond? Thanks so much.

[Rajesh Asarpota]

Yes. No change in the thinking in that regard. We've said that we will be very opportunistic in terms of delivering growth and kind of balancing that the investments that are ahead of us. So obviously this year, that's been some only goodness in margin primarily from the US hardware growth for the year, which we’ve kind of let it flow through and taken our guidance up. In the fourth quarter, we expect to be right around the expectation. And for the year like I said, we've taken the guidance up appropriately for next year.

The investments that we've been talking about in terms of the ERP infrastructure supply chain, finishing out the sterile packaging and MDR, those are still some have -- that's still some heavy lifting that needs to be done. So you will see like we've said, we will not regress. We will deliver margin expansion. It's just going to be on a rhythm that is more back end loaded, than what you see over the next year or so.

But again, stay tuned for 2020 guidance, it would be a little bit more specific around that. But the general color hasn't changed.

[Operator]

Thank you. Our next question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

[Richard Newitter, SVB Leerink]

Hi. Thanks for taking my questions. Jumping between calls, so something's been asked. I apologize. Just a first on Pulse. I know we've been talking about the U.S. rollout, but what about EU launch plans there? I think you said you got approval back in October. Just curious what the plans are for the international rollout of that product? Then I have a follow up.

[Matt Link, President]

Yes, it's Matt. It's international rollout is much in line with the U.S. We had similarly targeted specific centers across Europe, a handful of the markets mentioned in the script earlier as well as in Australia, New Zealand. Similarly being judicious in the rollout there to ensure that we have the infrastructure and capacity to support those site trials, evaluation, installation and service.

So we have a team in place in Europe that mirrors all the scale appropriately, that team that we have in the United States. And we're prepared to move forward through the course of late Q4 into the first part of 2020. And I said, you should think about that deployment in a manner relatively similar to the U.S. but scaled appropriately.

[Richard Newitter, SVB Leerink]

Got it. And I know you're probably reluctant to give too much on 2020, but just because you know it it's been a little bit of a moving turnaround the biologics division that is. And just given that you call that some of the headwinds that are maybe taking a little -- a little longer to turn. As we think of 2020, should we be thinking of the biologics dynamics that you're kind of calling out right now, is just continuing into 2020, and maybe a recovery there is a little bit longer. Or is it you know 4Q is growth, and then it just continues to improve from there throughout 2020. How should we be thinking about that? I think that would be helpful from the modeling standpoint.

[Chris Barry, Chief Executive Officer]

Yes. So your commentary is right on, we expect continued recovery. I think as Raj mentioned in his script, we're seeing continued growth in volumes as well as an associated shift in mix from off CSL to other biologic products within our portfolio, including propelled BBM and AttraX. We expect to see growth, modest growth, modest growth in Q4. And I think you could think about that is being relatively stable heading into 2020, so we'll certainly get into greater detail when we address 2020 guidance for the year.

[Operator]

Thank you. Our next question comes from the line of Robbie Marcus with JPMorgan. Please proceed with your question.

[Robbie Marcus, JPMorgan]

Great. Thanks a lot. And congrats on a good quarter. Two questions for me. First, more of a P&L question here. I saw in the press release that there was a -- you've lowered adjusted EBITDA by 50 bps for the year, 40 bps of which was loss on strategic investment. I was just wondering if you could give a little more color on what that was?

[Rajesh Asarpota]

Yes. So the explanation on the EBITDA. I mean, look we're seeing some favorability in stock based comp, which is being offset by other investments in OpEx. So it's that there's no impact on operating margin, but a slight headwind compared to your expectations and adjusted EBITDA. That's, that's all it is.

[Robbie Marcus, JPMorgan]

Okay. And then this quarter, you had really good implant growth. I was wondering if you could spend a minute on market dynamics and talk about where you might be gaining some share? Who you think you're gaining it from? We saw Stryker stumble this quarter in the spine integration, did you get any pickup there? And how sustainable do you think this is? I appreciate it.

[Matt Link, President]

It’s Matt. So we commented a little bit earlier, I think we're pleased with the share that we see as a result of a focus on key procedural segments, including XLIF and X360. The adoption in particular of lateral ALIF as a subset of the X360 and single physician surgery solution has continued to progress. And those gains are directly correlated to the investment we see in certain training and education. And so again, very pleased both with the curriculum development program deployment and commercial execution. We've been focused on continuing to build out the portfolio and other key procedural segments, including posterior fixation, thoracolumbar fixation specifically and posterior interbody, posterior antibody growth being driven primarily by continued advancements in our AMS portfolio, both Modulus and Cohere Porous PEEK technology. So that's been that's been consistent with expectations.

And then a continued push really into the complex, and deformity segment both for adult complex and deformity surgery as well as pediatric inclusive of the EOS market. So there's been, there's been steady great gains across the portfolio. I'd say an opportunity looking forward as addressing the script from Chris is in the cervical portfolio. In Q4, we’ll be entering into alphas for both new anterior and posterior cervical solutions. In both instances, those solutions will be highlighted, at the upcoming Cervical Spine Research Society meeting. We'll be moving through Alpha's Q4 into the first half of 2020 and full commercial launch. And I say that's a segment for further growth that is important long term for NuVasive. We highlighted as part of our five year strategy in terms of investing in under penetrated segments.

With respect to market share gains. I'd say it's opportunity presented itself relatively equally across market segments and from the market in general, we see geographic variations in terms of where there's market opportunities and potentially market disruption. So wouldn't suggest that we necessarily see it disproportionately coming from any one geographic area or our competitor. Again, I've been pleased with the focus of our commercial teams in the U.S. and the consistent execution with their plans and we expect that to remain stable heading into 2020.

[Operator]

Thank you. Our next question comes from the line of Matt Taylor with UBS. Please proceed with your question.

[Unidentified Analyst]

Hey guys. This is [Indiscernible] in for Matt. Thanks for taking the question. Maybe just to follow up on the robotic question. Can you talk about if the robotic arm on [Indiscernible] and NASS made any impact on the post funnel, and interest level from customers and hospital administrators post the upgrade ability or the modularity of the system playing to customers?

[Chris Barry, Chief Executive Officer]

I mean, it's definitely having gaining interest from customers. I think it's too early for us to truly comment on how it performs. Obviously, we're not filling the market with Pulse yet, and we're yet to launch their robotic application. But, I think the -- we had several hospital administrators and obviously many surgeon partners come and view the system at NASS. We obviously had a lot of investors and the utilization I think is the critical, is the critical value driver in the eyes of hospital administrators trying to maximize their capital dollars, trying to maximize, minimize the capital burden upon a facility, so that they understand the integrated nature of the technology and I think it's a -- it's a selling point for us and that will that will fully leverage as we move into the market.

You know having a system that is more representative of the full need in spine, I think resonates with our customers and we're hearing that played back to us. So it's early days, but I feel very very, I’m encouraged by the response we’re getting from not only surgeons, but broader hospital administrators around the opportunity with the system.

[Operator]

Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

[Ryan Zimmerman, BTIG]

Thanks for squeeze him in. And congrats on the quarter. Just two for me, and one first a housekeeping question, and second one on X360. Just Raj, quick briefly is there any onetime expenses as a result of the org structure change? And then I'll ask the second question as well on X360 you know it sounds like it's driving a lot of adoption and Matt or Chris, maybe you could speak to this, but maybe not so much quantitatively, but kind of talk about kind of incremental revenue dollars per case that you're picking up on some of these cases. If you were getting $0.50 on every incremental dollar, you know is it somewhere closer to 90.

And again, not you know appreciate that you're not going to give a quantity of numbers, but just qualitatively what you can say about that. And then, you know where you add, and what's the durability of training or appreciating that training metric you gave on surgeons that are trained on X360, you know what's the durability of that cadence or how should we think about that cadence going into 2020 and beyond? Thanks for taking the question.

[Rajesh Asarpota]

Hey Ryan. So from my from my end, the simple answer is No. On the one timers, and then for the rest of it, I’ll turn it towards to Matt.

[Matt Link, President]

I think, I've got everything here. So with respect to upside, I think the. Without getting into the specifics of case values, what are the benefit of X360 is, you are able to address the spine in the lateral position comprehensively. So it does really a couple of things that are beneficial for us from a state capture perspective.

First, the potential ability to capture more overall levels of surgery if there is a constant indication for lateral, it's possible a customer could use a another solution as an alternative at that level that was contraindicated for a lateral solution or perhaps they do another procedure entirely. So that's one benefit. The other is by virtue of being able to address the spine circumferentially. So into your posterior and lateral all within a single position there's less likelihood that we see any type of leakage or loss of attachment from a fixation perspective.

And so those combined provide incremental value to the case, and so we are seeing that trend with X360 and we see that as a an intended benefit. Chris referenced earlier, really focusing on proceduralization and providing a comprehensive solution for the surgery and the underlying patient pathology. And I'll be very focused on integrating the enabling technologies associated with Pulse to that solution moving forward.

With respect to durability, in the overall market, lateral antibody represents a relatively small percentage of total antibody. And so while we see a very good traction in expanding utility of lateral surgery within our existing excellent customer base, and additionally we see other competitive laterally users being attracted to the comprehensive solution of X360. Those are positive conversions, when I think towards durability and the role of not just technology, but training and education increasing the total number of lateral users and therefore increasing the lateral antibody market relative to more traditional posterior antibodies is really the pathway we see for the durability of this type of growth.

And so as you can imagine, we're very focused on creating alignment through our commercial organization for their targeting activities, and ensuring that we're aligning technology as well as training and education solution to support that shift to a vital service model surgery X360 and just in general, less invasive surgical interventions which we believe provide significant and clinical and economic benefit.

[Operator]

Mr. Barry, we've reached the end of the question-and-answer session. I'd like to turn the call back over to you for closing remarks.

[Chris Barry, Chief Executive Officer]

Thanks. And thanks all for joining us today. As I said, I'm very pleased with how the quarter has gone. I look forward to seeing you all again or hear from you again at the end of Q4. Thanks for joining.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.