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Small-Cap Confidential
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November 7, 2023

TransMedics (TMDX) and Alphatec (ATEC) Report

TransMedics (TMDX) and Alphatec (ATEC) Report

After a horrendous few months, shares of TransMedics (TMDX) are up around 50% today after a massive Q3 revenue beat and a bit of relief that the aviation business might not be such a bad idea after all (implication based on TMDX share performance, not my take). In Q3, revenue grew 159% to $66.4 million, a whopping 35% ($17.2 million) more than consensus expectations. EPS of -$0.78 versus -$0.16 expected was an outlier given acquisition costs.

Turning to the aviation business, a few tidbits from the conference call. High level, management isn’t willing to give any formal guidance on revenue, profit margins, etc. since it’s too early (their words) to say for sure. But they did say the focus is on growing revenue and margins in the business and that they’re expanding the fleet and staffing to achieve those goals. There are some moving parts in aviation since TransMedics is shutting down the charter flight part of it to focus on organ transportation. It appears short flights could generate $25-$30K whereas longer ones could be up to $100K.

Looking forward (with new estimates factored in), Q4 revenue expectations are now up 30% to 120% growth ($69.2 million) and Q4 EPS projection improved by $0.06 to -$0.11. That suggests full-year 2023 revenue will be +145% to around $229 million, which is a bigger jump than the Q3 beat. Looking out to 2024, revenue is now seen up 45% to $332.4 million (17% higher than before the Q3 report) while EPS is seen at -$0.33.

There are more moving pieces within the various organ segments (heart, lung, liver all did better than expected, especially liver) but the bottom line is this was a very good quarter that DRAMATICALLY increases confidence in the business outlook and the aviation component. That’s not to say there are no risks. But it seems management’s strategy to be very conservative then trounce expectations is intact. Maybe they need to try and close that gap a little? Analysts are tweaking price targets modestly higher, and we’ll stick with a hold rating for now. But I’ll be digging in deeper and watching TMDX closely to see if it’s worth ramping our exposure up again. HOLD

Alphatec (ATEC) pre-released revenue for Q3 weeks ago (before the secondary offering), but the official report just came out last evening. Revenue of $118.3 million was up 31.6% while EPS of -$0.14 was up $0.04 from last year. Management reaffirmed full-year guidance for revenue of $472 million (+34.4%), broken down into $414 million from surgical and $58 million from EOS. The big takeaways from the conference call are that the company is aggressively growing the sales group to take advantage of its niche focus on lateral surgery (this is where some of the secondary offering cash is going), average selling price per surgery is going up and the full launch of new tech in EOS is expected in Q2 2024.

One of the not-so-great things from the call is that longer term, management discussed 2025 revenue of $555 million whereas consensus has revenue next year (2024) at that level. Clearly, Alphatec has been beating expectations so the Street thinks that will continue, but it would be really nice for management to put out 2024 guidance that’s closer to expectations.

Lastly, it was very interesting to hear management talk about the equity raise and why they did it. The answer was that following the September 1 closing of Globus Medical’s (GMED) acquisition of NuVasive (both in the spine surgery market) management saw an opportunity to move aggressively to pick up salespeople and capitalize on the disruption in the market.

I’ll let CEO Patrick Miles speak for himself here. He said, “And so, for us to start to look forward and say, hey, are we going to capitalize on this this growth opportunity or not, we said, let’s lean in. Our history has been one of execution. And so, we felt great about that opportunity and thought to ourselves the time is now ... I think that as we look back historically, people are going to forget all about this, because what you’re going to see is us build a behemoth based upon the type of aggressive perspectives – aggressive kind of efforts that we previously made. And so, my sense was the time is now, again, not the perfect market by any stretch of the imagination, that’s not lost on us. But again, every time we’ve raised money, we’ve created value, and this is going to be no different. And so, we felt like, let’s lean in, this is an opportunity.”

We will see! Keeping ATEC at hold and looking for a bit of follow-through (shares up 5% today). HOLD

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.