NuVasive, Inc. (NUVA)
Q3 2012 Earnings Conference Call
October 24, 2012, 08:00 a.m. ET
Patrick Williams - VP, Strategy and IR
Alexis Lukianov - Chairman and CEO
Michael Lambert - EVP and CFO
Keith Valentine - President and COO
Matt Miksic - Piper Jaffray
Robert Hopkins - Bank of America/Merrill Lynch
Matthew O’Brien - William Blair & Company
John Putnam - Capstone Investments
Bill Plovanic - Cannacord Genuity
Michael Matson - Mizuho Securities
Richard Newitter - Leerink Swan
Matthew Taylor - Barclays Capital
Larry Biegelsen - Wells Fargo Securities
David Roman - Goldman Sachs
Jason Wittes - Brean Capital
Jeff Johnson - Robert W. Baird
Dennis Keller - Cowen and Company
Previous Statements by NUVA
» NuVasive Management Discusses Q2 2012 Results - Earnings Call Transcript
» NuVasive Inc. Q3 2009 Earnings Call Transcript
» NuVasive, Inc., Q1 2009 Earnings Call Transcript
» NuVasive Inc. Q4 2008 Earnings Call Transcript
It is now my pleasure to introduce your host Patrick Williams, Vice President of Strategy and Investor Relations for NuVasive. Thank you, Mr. Williams you may begin.
Thanks operator. Welcome to NuVasive’s third quarter 2012 earnings conference call. NuVasive’s senior management on the call today will be Alexis Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Michael Lambert, Executive Vice President and Chief Financial Officer.
During our management comments and our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements that involve risks, uncertainties, assumptions, and other factors, which if they do not materialize or prove correct, could cause NuVasives results to differ materially from those expressed or implied by such forward-looking statements. These and other risks, and uncertainties are more completely described in today's press release and NuVasive's most recent 10-Q and 10-K Forms filed with the Securities and Exchange Commission.
Finally, please try to limit the number of questions from each person and keep the conference call to a manageable time that allow everyone an opportunity.
With that, I'd like to turn the call over to Alex.
Good morning from Dallas, Texas. We are hosting this call from Dallas, home of this year's NAS conference. We will be spending the remainder of the week meeting with certain customers to reinforce that there is absolutely no substitute for the years of experience with minimally invasive solutions that NuVasive has accumulated.
Competitive product portfolios do not come close to the safety and reproducibility that surgeons achieve with our comprehensive product portfolio. Our fully integrated innovative approach to spine surgery and our procedural sophistication will drive palpable excitement at the NuVasive booth. We encourage you to stop by to experience it for yourself.
On today’s call I will address our results for the third quarter, provide updated guidance for 2012 and offer general outlook for 2013.
Revenue in the third quarter grew 12% to $148.3 million. Non-GAAP operating margin was approximately 15% in the quarter. As I mentioned a few weeks ago, revenue fell short of our expectations due to a heightened level of account churn in the limited number of U.S. regions the impact of which accelerated late in the quarter. This was a result of both aggressive competitive tactics targeting our sales force and certain customers and continue surgeon adoption of the physician owned distributorships or POD model. These dynamics had a direct impact on our U.S. lumbar business which experienced flattish sales in the third quarter but are up 5% year-to-date.
The challenges also impacted the pull-through of our U.S. biologic solutions which were roughly flat in the quarter but are up 9% year-to-date. Our U.S. cervical and international business were both very strong growing about 15% and just over 40% respectively in the quarter.
Finally, our monitoring service revenue was approximately 9.6 million in the quarter which was shy of our expectations. So, first I want to talk about sales force and aggressive competitive tactics. So, let me provide some additional perspective around the current dynamics we are facing and offer a view of the outlook for each of them.
On the sales force front, we ended the third quarter 2012 with 310 quota carrying sales representatives globally, which was down on a net basis by 15 people from the previous quarter. The third quarter marked the first time that we have ever gone backwards in terms of the net number of reps. Some of these sales rep hold large accounts which will have a material impact on revenue in the short-term. Several reps went to various smaller competitors that are utilizing aggressive tactics to poach our industry leading sales team in three of our 12 geographies. In geographies where we did not experienced churn related to sales force departures, performance in the quarter was very strong. We believe that the strategy of offering huge and guaranteed compensation to poach our reps is unsustainable and we are taking steps to curtail this competitive threats as quickly as possible.
So, what are we doing about it? Well, first, the executive team is reengaging with our sales force at a much deeper level to best attract, retain and develop the face of NuVasive in the field. We have accelerated the pace of hiring with the intent of more than compensating for losses in the third quarter. We have already made progress adding six reps since the end of the quarter with the majority of the new hires in key regions. We are currently recruiting an additional 35 representatives and are making strong progress and obtaining top talent.
We continue to envision a team of 500 representatives globally as we approach $1 billion in revenue and despite the challenges of materialized in Q3, the efficiency of our sales reps continues to make excellent progress. In the third quarter, average annualized sales per representative was about $12 million up 13% compared to the same quarter of last year. Secondly, we are increasing our legal efforts to ensure that non-compete agreements are adhere to and we are pursuing those individuals (inaudible) companies that violate them. The market will clearly understand that we will aggressively protect the investments and agreements we have made to develop our industry leading sales force.
A couple of weeks ago we announced a decision of our President of Global Sales, Jeff Rydin to make the transition from his role at NuVasive. Jeff has been a very important member of the senior executive team and we are all supporting him in his decision. I thank him for his hard work and dedication throughout the years to build our global sales force. I’m excited that Jeff has agreed to a long-term consulting position and will continue to be a member of the NuVasive family working with members of the executive team. We have already begun the search and are also evaluating internal candidates for just replacement. In the interim I will assume U.S. sales responsibilities.
As you may know I have many years of experience executing sales strategies and leading sales forces in previous roles. We have made several changes already to better retain our top performers and I’m eagerly addressing the challenges we face head on.
Moving forward all international responsibilities will be led by our newly promoted Executive Vice President of International, Russell Powers who reports to me. Russell is very well verses in all international markets from his time at Medtronic. He has several years of experience leading international sales, marketing, development and global operations in spine and orthopedics. In just three weeks Russell has already set in motion high growth initiatives along with expense reductions. I’m really thrilled to be working alongside Russell to build our international business beyond a 10% of revenue that it is today.