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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. My name is Nicole, and I'll be your conference operator today. At this time, I would like to welcome, everyone, to the Globus Medical Quarterly Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
It is now my pleasure to hand the conference over to Mr. Brian Kearns. The floor is yours, sir.
Thank you, Nicole. And thank you, everyone, for being with us today. Joining today's call from Globus Medical will be Dave Demski, CEO; Dan Scavilla, Executive Vice President, Chief Commercial Officer and CFO; Anthony Williams, President; and David Paul, Executive Chairman. This review is being made available via webcast accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com.
Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-Q for the 2018 third quarter and subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings including the 10-Q are available on our website. We do not undertake to update any forward-looking statements as a result of new information or future events or developments.
Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available on the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website.
With that, I'll now turn the call over to Dave Demski, our CEO.
Thank you, Brian, and good afternoon, everyone. Revenue for the third quarter was $169 million, an increase of 11.5% over Q3 2017 and our fourth consecutive quarter of double-digit organic growth. Non-GAAP EPS was $0.39 per share, an increase of 29% over last year. Year-to-date revenue stand at $517 million and non-GAAP EPS at $1.24 per share, up 12% and 33%, respectively.
Our U.S. Spine business accelerated significantly in the quarter, growing by 7.5% over last year, the highest growth we've achieved since 2015, reflecting both implant pull-through from ExcelsiusGPS placements and strong recruiting, which is on pace for back-to-back record years. These two factors combined with a robust product release schedule for the first half of next year point to continued strong growth through 2019.
Our international spine business grew by 6.9% in Q3 or 8.6% on a constant currency basis. The Japan business grew significantly in Q3 as we began increasing the flow of Globus technology into the country. We have seen impressive growth in several key markets this year, including Australia, Germany and Italy, while the UK continues to lag. We are encouraged by the future prospects in that market as we are taking steps to address operational issues and the NHS' elective surgery backlog has begun to turn around.
Our spinal implant launched in the first half of this year slowed from historical norms as much of the company's energy and resources were focused on growing the Excelsius platform, getting the Trauma business off the ground, and producing products to fully integrate the distribution channel acquired from Alphatec. That began to change in the third quarter as we saw solid sales contributions from COALITION MIS titanium and the launch of the CREO side loading system. COALITION MIS titanium is an integrated cervical interbody fusion device that combines central surface treatment technology with an advanced anchoring mechanism and a streamlined insertion technique. SintrOS is a proprietary surface treatment that provides a bone-friendly interface between the implant and the vertebral body.
CREO side loading is the latest addition to our comprehensive CREO stabilization system. The CREO side loading technology is ideal for segmental correction techniques and is easier to use than competing systems in the treatment of severe spinal deformities and complex patient anatomies.
Emerging Technology revenue for the third quarter was $6.3 million, driven primarily by our sales of ExcelsiusGPS system, including our first ever international system placement in Greece. The third quarter is traditionally a slow quarter for capital sales and this year, it may have been somewhat exacerbated by the timing of NASS as several competitors have targeted the event to unveil their future product plans.
Feedback from the meeting indicated that these offerings were not particularly compelling. This was confirmed by our strong booth traffic and a noticeable uptick in our business post-NASS as we closed more deals in October in the U.S. than in the entire third quarter. Consequently, we are raising revenue and EPS guidance for the third consecutive quarter.
Given the potential of this transformative technology, we expect all major spinal implant manufacturers to launch robotic systems in the coming years. We continue to be highly encouraged by our early lead in the technology as we are winning the battle in the vast majority of head-to-head evaluations. Our pipeline of potential deals is robust and we are seeing growing interest among spine surgeons. More importantly, we are seeing ExcelsiusGPS adopted enthusiastically with great clinical results and customer feedback. As we have alluded to in prior calls, the early success of ExcelsiusGPS has led us to make a number of investments in this strategically important area.
To that end, during the third quarter, we completed the acquisition of Surgimap, the leading surgical planning software for spine. Surgimap's intuitive, patient-specific surgical planning and cloud-based infrastructure with predictive algorithms and visual guides enable surgeons to plan and simulate potential surgical outcomes in the course of treating complex deformities.
The addition of Surgimap will further strengthen the ExcelsiusGPS platform by streamlining workflow and enabling superior data analytics. These existing platform features, in addition to the deep software expertise of the Surgimap team, are also expected to accelerate the launch of new products in Imaging, Navigation and Robotics.
We made steady progress in our Trauma business during the quarter, with our focus continuing to be the production of inventory to support the national rollout of all core systems. As discussed last quarter, the magnitude of the logistical effort to launch the number of systems and SKUs we have targeted has proven to be a short-term challenge, taxing our manufacturing and supply chain and resulting in some delays to our full launch schedule.
We have expanded internal and external capacity and expect to achieve full launches of all core systems by the end of the year. Our product line has been well received by the surgeon community. There was palpable enthusiasm and interest from many surgeons at the recent Orthopedic Trauma Association meeting in Orlando. We have recruited some of the top talent in the industry to our sales team, and we expect to see a growing contribution to both the top and bottom lines in 2019 from the Trauma business.
In summary, as we head into the last quarter of 2018, we are on track to produce more organic revenue growth and more earnings growth in any year since we have been a public company. The investments we have made across our business lines – INR, trauma, spine, and international distribution – are all poised to deliver exceptional growth in 2019 and beyond. Finally, we have achieved this while maintaining industry-leading operating margins, profitability, and cash flow.
I will now turn the call over to Dan.
Thanks, Dave, and good afternoon, everyone. We are pleased by the strong financials in Q3 with continued above-market gains in the U.S. business, improving growth in international markets, and the entry of the ExcelsiusGPS robot into the international market. Q3 sales were $169.2 million, growing 11.5% as reported or 11.8% in constant currency, with the same selling days in the quarter as prior year. GAAP net income was $35.2 million and non-GAAP net income was $39.4 million, delivering $0.39 fully diluted non-GAAP earnings per share, and adjusted EBITDA of 34.1% and $36.4 million of free cash flow.
Focusing on sales, U.S. sales for the quarter were $139.1 million, 10.5% higher than Q3 2017. The growth was derived from strong performance in implant sales driven by competitive rep on-boarding, increased implant pull-through from accounts with our robot and continued placements of the ExcelsiusGPS system. International sales for the quarter were $30.1 million, growing 16.8% as reported or 18.5% in constant currency, delivering continued sequential growth acceleration for the year. Gains are achieved through ExcelsiusGPS sales coupled with continued market penetration in Japan and other key markets.
Turning to the rest of the P&L, Q3 gross profit was 77.6% compared to 75.7% in Q3 2017. The gain is primarily due to the change in depreciable lives for cases and instruments implemented in Q4 2017. Full year gross profit is projected to remain in the mid-70s% reflecting full year effect of pricing pressure, biologic mix and increased investments in cases and instruments.
Research and development expenses for the third quarter were $15.5 million or 9.2% of sales compared to $10.9 million or 7.2% in Q3 2017, resulting from increased investments in robotic and spine. Included in this quarter of $2.5 million of onetime expenses, primarily related to technology and licensing fees.
SG&A expenses for the third quarter were $75.1 million or 44.4% compared to $63.4 million or 41.8% in Q3 2017, reflecting our planned reinvestment of the U.S. tax reform savings to drive future growth. Expanding the U.S. Spine sales force, building out the robotic and trauma commercial teams, growing the Japanese sales force, and increasing surgeon education are the primary investment areas.
The GAAP net income tax rate for Q3 was 17.3% compared to 31.5% in Q3 2017, driven by the U.S. tax reform and higher deductions for stock compensation due to increased option exercises in the quarter. The stock option favorable impact was 3.3% reduction in our base tax rate for the quarter. We project an effective full year tax rate for 2018 of approximately 17%.
GAAP third quarter net income was $35.2 million and GAAP diluted earnings per share were $0.35. Non-GAAP net income was $39.4 million, growing 34.5%. And non-GAAP diluted earnings per share were $0.39 growing 29.2%, including continued investments in Emerging Technologies that impacted Q3 2018 EPS by $0.07 compared to $0.05 in Q3 2017.
Adjusted EBITDA for Q3 2018 was 34.1%, which includes 1.9 percentage point drag from the increased investments in Emerging Technologies. The company continues to deliver best-in-class margins, while investing for the future as we focus on investing for growth while maintaining our profitability.
Our full year 2018 EBITDA margin is projected to be in the mid-30s. We ended the quarter with $541.6 million of cash, cash equivalents and marketable securities. Net cash provided by operating activities in Q3 was $51.8 million, and free cash flow was $36.4 million. The company remains debt-free.
The company is increasing guidance for full year 2018 sales by $5 million to $705 million, and increasing non-GAAP diluted earnings per share by $0.07 to $1.62, reflecting our ability to deliver strong margins and financial results while continuing to invest in sustained growth for the long-term health of the business.
In closing, I want to provide you with an update on our CFO search. There's a great interest in the opportunity, and we continue to interact with numerous potential candidates. Given the significance of the role in helping shape the next chapters of Globus' growth, we're taking time and being selective in the screening process. We're pleased with the candidates we've interacted with to date, and we feel we should be finished the search by year's end.
We will now open the call for questions.
Your first question comes from the line of Richard Newitter with Leerink Partners.
Hey, guys. It's Jaime on for Rich. Thanks for taking my questions, and congrats on a nice quarter.
Thanks, Jaime.
First question I have I guess is on the international business, performed very well this quarter. So, if there's any sort of color you can share around the strength that you saw in the quarter, and kind of what's the new run rate there that we should be expecting for the full year and potentially heading into 2019? Or asked another way, was some of the things you saw, more onetime in nature? I know you said that you placed your first robot there. Kind of just expand upon that a little bit if you can. Thanks.
Thanks, Jaime. So, yeah, we're certainly pleased with the results for international. As you know, we have been investing and structuring that for some time. This year in particular was a focus investment year. And when you look at this again, you see a lift that is driven somewhat by the Excelsius placement, as Dave said, in Greece.
But more importantly, you look at the continued growth and expansion and penetration within Japan and several other markets as well that we see just sequential growth and lift. We still feel that we under-indexed there as a market share. We're going to remain investing and driving international growth. I would tell you that exiting this year at the high-single, low-double-digit is the goal, and then looking to accelerate that throughout 2019 until we start taking sizable share is really our intent.
Okay. Okay. Thanks. That's helpful. And then I guess just on the guidance, you guys obviously raised it by $5 million. Is it fair to assume that most of that raise is coming from the robot or kind of what are the puts and takes to the $5 million increase? Thanks.
I think it's across the board. So we don't tend to break out the actual moves within this, but we're pleased with that U.S. strength. As we just said, we feel very bullish about the robots again, so going there. So I would tell you without really pointing to one area, we just have a good feeling and some confidence that we can go beyond our existing guidance and that's really why we raised it in general.
Thanks for taking my questions.
Next question comes from the line of Kyle Rose with Canaccord.
Great. Can you hear me all right?
Yes.
Hey, Kyle.
Great, congrats on a strong quarter. I just wanted to see, you talked about the source of the U.S. strength in the quarter, I wondered if maybe you could give us just a little more color there. Maybe frame how much of the strength you saw was from some of those sales conversions? And then the RESCUE and particularly on the implant pull-through on Excelsius. I mean it's great to see that coming. I think in some of the previous calls, you talked like maybe it would take a little bit longer, you need more robots to really see that top line growth. But maybe what are you seeing in the Q3 that gives you more confidence that you're starting to see that pull-through?
Thanks, Kyle. I think in terms of the recruiting, as I alluded to in the comments, though, last year was a record recruiting year. We look like we're going to match that this year. We're doing a great job of on-boarding the new reps and seeing some conversions earlier in the process with some of the recruits this year.
In terms of the robot, I mean as the installed base expands, I think that you'll see a growing impact to our overall implant strength. So, while we've been selling a lot of robots, it's really building up the number that are in the field that's going to drive the implant pull-through.
And then on the OUS, Japan, great to see that as a source of strength, maybe just kind of remind us on where you are as far as getting products approved, Globus legacy products approved in Japan? And then I'll hop off. Thanks for taking the questions.
Hey, Kyle. This is Anthony. We've continued a pretty quick cadence of getting Globus products approved there. We have maybe 10 or 11 of our systems approved in Japan and are pretty actively converting surgeons off of the Alphatec product and on to ours. 2019 is going to be a big year for that as we get some of our additional (17:39) advanced technologies into the country.
Your next question comes from the line of Matthew O'Brien.
Hi, guys. This is Will on for Matt. Thanks for taking the questions. I guess starting off with U.S. Spine, the growth was a little bit stronger than we were expecting. I'm just wondering if you could tease apart maybe any impact from the hurricane and if there's any benefits from reps that came off non-competes from last year?
Thanks for the question. So, I would tell you we saw minimal, if any real negative impact for the hurricane. We thought that that had some delay but it was covered within the quarter, so not enough for us to call out any sizable number or look at that or more importantly for you to think of a roll through into Q4 related to that. I would say that's just not really material enough to consider.
What Dave was saying and what I was calling out as well is when we talked about the recruiting that is reps who are coming off the bench who are getting active and who are driving sales. And so, the list that we're seeing in the U.S. is primarily related to the strong recruiting that has occurred over 2017 and into early 2018, it's now bearing fruit.
Great. Thanks. And then as far as in the robotic competitive landscape, have you seen anything, any changes regarding your competitors' robotic acquisition? And then any changes with the sales cycle, it sounds like NASS was quite successful, but any updates there to be helpful. Thanks.
That in particular Will, the integration of the navigation in the robotics from our main competitor, they've been showing that – they actually showed it at NASS last year, so, it's not really news to the market. So, anybody who is going to make that decision I think is probably made that decision if they were going to go in another direction. So, there's been a lot of noise around what people are going to do, but I think what's really out there right now, I think we're clearly seen as the leader, when we go head to head in evaluations, we are winning the vast majority of time.
Great. Thank you.
Your next question comes from the line of Jonathan Demchick with Morgan Stanley.
Hello. Thanks for taking the questions. I wanted to (19:59), I guess, follow up a bit on that robotics question. Obviously, the Emerging Tech contribution seems a little lighter, and you explained it pretty well with NASS. But I was curious if it was, I guess, related to potentially capacity to close the deals. It's just that there was a lot going on with NASS coming up, or was it more, I guess, competitive positioning?
And then what's kind of the update that you gave on the fourth quarter? I was curious if you had any thoughts on – what's a reasonable expectation on a seasonably probably stronger fourth quarter relative to, obviously what will be a seasonally weaker 3Q in the robotics field?
Hey, Jon. Thanks for the question.
Go ahead, Dave. (20:40)
Sorry, Jon. We're going to both answer the question. I was going to address your first question – your first comment about NASS. I didn't mean to – hopefully I didn't misspeak. I think it's more of a third quarter phenomena than it was NASS. We think NASS may have had a little extra effect this year because of a lot of noise from the competition about what they were going to come out with.
But, traditionally, the third quarter is light in terms of capital, and we saw that as well. And I think the counter to that is the fourth quarter is strong which we started out strong, and every indication is this will be a good quarter for us. And then, Dan, did you want to...
Yeah. I'll build on that, too, Jon. So, same thing. As you know, we've said through the year, we need to go through a cycle, make sure we understand it. We recognize capital has seasonality. Coming into Q3 this way, it looks like it follows the seasonal trend. You had asked a question about Q4, and we've always said Q4 is a heavier capital year. My estimate, and some of our experience before with other capital products is somewhere around 30% of sales occur in the Q4. I don't know why we would be off track from that. Again, we still need to run through that lap, but it would be consistent with what's really what we've been saying all year.
Makes sense. So just two quick follow-ups. So, the first on just the U.S. business as a whole. Obviously, there was a pretty big uptick in sales. It sounded like a lot of that was on pull-through. Anything particularly on the spine market as a whole?
And then I'll just ask my second follow-up now, which is on gross margin guidance, looked like the guidance implied a pretty substantial step-down into the fourth quarter. I was just wondering if there was anything particularly going on there?
Yeah. Sure, I'll take the first part of that on the U.S. market, Jon. As a smaller player, it's hard for us to really see the entire market. I think if you look at the factors that we traditionally look at in terms of procedures and pricing, those really haven't changed materially. We are already starting to see kind of that seasonality that we've seen in recent years where there's a lot of the high deductible payments occurring. So we're starting to see a spike in our business. But other than that, I think it's a solid market. It's not spectacular but it's not shrinking in any way either.
Yeah. Jon, the second part of your question, I don't feel like we're coming off track from anything previously communicated. So you're sitting at year-to-date at a 7%, 7.5% (23:06) margin. We said that as we get into Q4 and especially activate sets (23:09) not only for the increased Spine growth but for Trauma, you're going to have a rise in depreciation. And so, you kind of look at a slight step-down that was anticipated, given the fact that you're going to become active and start depreciating instruments and sets. So I'm not concerned about it. It fits right into the plan from what we've said every other quarter.
Thank you, very helpful.
Your next question comes from the line of Ryan Zimmerman with ETIG (sic) [BTIG].
Hi, this is Sam (23:45) on for Ryan. Thanks for taking the question. Just wanted to quickly touch on the adjusted EBITDA margin. It's been a bit of a trend down for a few quarters here. And you said that Emerging Tech is being a bit of a drag there. When are you thinking about that turning around and where do you think that could be going over the longer term? Thank you.
Yeah. I think we'll always say we're a mid-30s EBITDA company. This falls within that mid-30s range that I've declared to folks between 33% and 37%. The reason it's trending down follows historical norms. But more importantly, it's really driven by the fact that we tend to ramp up our Trauma investment. So think about us carrying the commercial side of Trauma, pre-revenue.
And so as we add more folks to that bench, getting ready to launch, you're going to see a slight step-down. As that revenue comes in, that will neutralize over some period of time. So I would tell you again, no concerns. It's right about where we think it ought to be in the mid-30s range. It makes sense for us because we said that we would spend and redeploy, especially with the U.S. tax savings. We decided to really drive some of that in for this year and take advantage of that. And this fits in where we want to be.
Great. Thanks.
Your next question comes from the line of Mike Matson with Needham & Company.
Hi, good afternoon. This is David on for Mike. Just one on robotics, just wondering if you can integrate some sort of nerve monitoring capability into the robot? And then also can you just talk about the timing of new indications for Excelsius?
Yeah. Thanks, David. Currently, the technology does not integrate nerve monitoring into it. And then, in terms of the new indications that we're expecting, that it's going to be early next year before we'll have – we expect clearance on that.
Okay. Great. And then for the Trauma sales force, are you planning on additional hiring in the fourth quarter and then maybe when you're planning on the full launch? Any color on what portion of the sales force will have rolled off their non-competes?
Hiring in the fourth quarter is not going to be substantial. We still have a few candidates in the pipeline that we're going to pull in. And we're going to take a pause on hiring as we launch the – we launch all the systems. And then I do anticipate later next year to go through another hiring phase as we get some traction in the sales cycle.
And to the second half of your question in terms of non-competes, I haven't really looked at it exactly. But I would say on average, we're probably half way through their non-compete cycle. But as we hire competitive reps in both Spine and Trauma, we expect the remainder of our sales force to really address the market that they have left and left a vacuum in there, so that we're in there trying to get business even before they come off their non-compete.
Great. That's helpful. Thanks, guys.
Sure.
Your next question comes from the line of Larry Biegelsen with Wells Fargo.
Hey, guys, this is Shagun in for Larry. Can you hear me okay?
We can.
Great. So, it looks like adjusted for one extra selling day. Your guidance implies about 5% growth in the fourth quarter versus 12% year-to-date, and I do understand that there are some tough comps but Q4 is also a heavy capital placement quarter. You've previously indicated that 40% of the year's placements are in Q4, and I believe you did make some comments about closing more deals in October than the entire Q3. So, why the deceleration and how should we think about 2019? Are you comfortable with where consensus is currently looking for sales and EPS growth of 9% and 10% respectively?
So, a couple of things with this. We give guidance for the full year. We don't look quarter-by-quarter. You're doing the math and I respect that. What we're doing is putting a number out that we feel we can achieve. And based on several different variables, we will be anniversarying our robotic launch from last year in the quarter and that in itself will have a natural effect as you cross-over all the previous quarters, this year have not had that, so we factor that in.
And again, with the market in change, we just want to make sure that we've got the ability to achieve this number. So, that's probably the first answer. For 2019, we're not in a position to offer guidance. We tend to do that in the beginning of January, so we could have that conversation once we get out there and release those numbers.
Okay. That's helpful. And then I was just wondering if you'd expect to see disruption from competitors like Stryker, K2 (sic) [K2M], and NuVasive and how much you think you can benefit specially in 2019? And perhaps people already started seeing some of the benefit. If you can comment on that, that would be great. Thank you.
Sure. I would tell you, again, with the 7% or 8% share in the U.S., we're still share takers and regardless of the activity out there, we're going to look to drive and penetrate by doing competitive recruits and capturing that. If we look at acquisitions that may be disruptive for them, we'll look and see where that makes sense and take advantage of it. But other than that, we're monitoring this and we still go out with the fact that we've got a lot of ground to go through penetration and that's how we'll look to grow.
Great. Thanks.
And at this time, we are showing no further questions. We thank, everyone, for their participation and ask that you please disconnect your line.