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NuVasive Inc (NUVA) Q1 2019 Earnings Call Transcript

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NuVasive Inc  (NASDAQ: NUVA)
Q1 2019 Earnings Call
May. 01, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the NuVasive First Quarter 2019 Earnings 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 Internal and External Affairs. Thank you. You may now begin.

Suzanne Hatcher -- Vice President of Internal and External Affairs

Thank you, Rob. Welcome to NuVasive First 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 have also posted supplemental financial information on the IR website to accompany our discussion.

Before we begin, I'd like to remind you 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 margins, 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 now like to turn the call over to Chris.

Chris Barry -- Chief Executive Officer

Thank you Suzanne. Earlier this afternoon, we reported first quarter 2019 revenue results of $274.8 million representing 5.5% reported growth or 6.4% constant currency growth over prior year. These results were attributable to a solid performance from U.S. Spinal Hardware, improved billings and collections within NuVasive Clinical Services or NCS business and our double-digit year-over-year growth in the international business. Overall, I'm pleased with the start of the year.

Now, let me elaborate on first quarter revenue results. U. S. Spinal Hardware revenue increased 4.5% year-over-year. In particular we saw a healthy uptick in our XLIF and ALIF franchises from the momentum gained in a lateral single-position Surgery solution now branded as the X360 System. With this growing demand the clinical and professional development team has increased the velocity of training to meet surgeon demand and accelerate the adoption of this procedure to continue driving minimally invasive surgery. New product introductions from late last year also contributed nicely to the top and bottom line in Q1. In particular, the Advanced Materials Science portfolio with the COHERE, Cervical and TLIF Porous PEEK antibodies are up nearly 70% year-over-year. Along with a high interest for COHERE XLIF cage that is currently in alpha (ph) testing. The expendable interbody cages and Reline fixation system continue to perform well.

I am pleased with the growth globally of PRECISE product line from NuVasive especially orthopedics or NSO business. With strong revenue growth from NSO in Q1 the business is looking forward to expanding the PRECISE technology line through two commercial launches. The STRYDE nail launching this month and the bone transport system which will be introduced into the market later this year. In the U.S. Cervical Support businesses revenue grew approximately 4% over prior year primarily driven by 15% improvement in our core service business with improved billings and collections. Over the past three to six months the service business strategy has been focused on three primary objectives; number one, complete the integration of SafePassage which we wrapped up at the end of the first quarter; number two, refine business development processes with additional rigor around account profitability; and number three, continue enhancement of the billings and collections functions through high-performance work teams and a more focused collection strategy.

Turning to Biologics revenue was in line with the current expectations at approximately negative 6% for the quarter. Investment through a pilot and a couple of biologic-only sales force team members in key geographic areas at the beginning of the year has demonstrated good progress. Revenue from the international business increased approximately 11% on a reported basis and approximately 16% on a constant-currency basis. This reflects a few region-specific trends that played out in the quarter. In the EMEA region the UK demonstrated accelerated growth from strong sales force execution as well as several tenders in the region that were awarded last year producing revenue in the quarter. LatAm was in line with expectations offset by lower growth rates in the Asia-Pacific region. We'll continue to hone in our globalization efforts and I remain confident in our ability to take share across key international markets and achieve full year guidance of 14% to 16% growth excluding the impact of foreign currency.

Turning to profitability non-GAAP operating margin came in at 14.9% for the first quarter of 2019 an improvement of 240 basis points year-over-year. The entire management team is operating the business with rigor and discipline to drive profitability, while strategically investing in key areas of future growth. West Carrollton in source manufacturing is stable and performed as expected with majority of the out performance in the operating margin tied to timing of investments spend. For example, investment in the European medical device regulation and sterile packaging initiative didn't ramp as fast as expected in the first quarter and drove favorability in our spend. Raj will give you a bit more color on how we should think about the margin outlook for the rest of the year in his remarks.

Let's turn to innovation. At NuVasive we are committed to leading the industry by delivering new technologies to enable better clinical and economic outcomes that are more predictable and reproducible. Our focus remains on technologies that drive a complete procedure enhancing the entire surgical experience and expanding current offerings in key market segments. 2018 saw the launch of more than two dozen new products spanning from solutions in core implant and fixation product lines to support the further adoption of minimally invasive surgery the fastest growing subsegment in spine. The strong utilization of these new products reflected in our U.S. Spinal Hardware growth rates and represent a shift to a more sophisticated implants through expendables and different surface structures.

At the American Association of Neurological Surgeons scientific meeting held a few weeks ago here in San Diego the company launched the X360 System. The evolution of our lateral single-position surgery procedure. NuVasive's flagship XLIF procedure is supported by hundreds of clinical studies validating clinical efficacy and patient outcomes. The X360 System builds upon the XLIF procedure and widens the addressable market by enabling surgeons to access L5 to S1 in addition to providing posterior instrumentation to support this minimally invasive technique.

As mentioned earlier we're seeing great adoption of this procedure not only among traditional invasive lateral surgeons but also with converted surgeons who may have less experience with lateral procedures. We have validated certain clinical and an economic value propositions associated with this innovative procedure. First and foremost the X360 System is beneficial to the patient because there is no repositioning which equates to less time under anesthesia. This procedure is also beneficial to the surgeon and hospital as it drives gained efficiencies and productivity through reduced OR time and associated hospital stay costs.

Commercialization progress of the Pulse platform continues as we near the launch of the technology at the end of Q2. After completing focused alpha testing for the past six months clinical trials began in April with positive feedback from surgeons. In addition Pulse preorder selling is under way. In parallel work continues internally on the robotic application to be added to the Pulse system which will be unveiled at NASS in late September this year. All these critical milestones will enable the company's Surgical Intelligence vision of connecting technology and tools to align the right patient with the right surgery for the right outcome. It is a significant step in the evolution from a procedurally integrated company to a systems-based technology company focused on delivering end-to-end solutions that enable predictable clinical and economic outcomes.

Now, let me turn to discussing updates on how we're managing the business. I'm excited about the progress we've made since stepping into the CEO role about six months ago. Clear priorities have been set and communicated to my team to drive focused execution as we balance top line revenue growth while driving operational leverage. We have instituted key governance mechanisms to measure our progress and ensure accountability and alignment on our priorities. A disciplined product planning and stage gate process is now implemented to ensure we deliver a strong innovation pipeline to the market. The management team also continues to focus on operational excellence from in-sourcing manufacturing efforts to supply chain and logistics to overall improvements in our business systems. This focus has resulted in a good start to the year. We remain optimistic yet cautious especially at the U.S. and global spine markets have not changed much from the end of 2018.

With the mindset of continued share taking the organization is applying additional focus on increased rigor around the day-to-day execution by management and our commercial sales teams globally. Finally, as I announced in early April we'll be hosting an Investor Day in New York City on Thursday August 8. This will be a great opportunity to engage with analysts and investors face-to-face and to hear from our management about NuVasive short to long-term business and financial strategy. Along with an opportunity to better understand the product roadmap to support both the current and future state of spine and specialized orthopedics. I am extremely excited about this opportunity and look forward to seeing many of you in attendance.

With that, I'd like to turn over to Raj to further discuss our Q1 financial performance.

Raj Asarpota -- Chief Financial Officer

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 earning news release as well as the supplemental financial information on nuvasive.com for further information regarding non-GAAP reconciliations. For the first quarter 2019 we recorded revenue of $274.8 million which reflects 5.5% reported growth year-over-year and 6.4% growth on a constant-currency basis. As Chris described results were achieved across U.S. Spinal Hardware U. S. surgical support and international all performing above-market growth.

Now let me share some of the specific drivers that supported the business results. U.S. Spinal Hardware revenue was $147.8 million for the first quarter representing 4.5% growth over prior year. The solid performance span across several sales region and contributions from traction of new product introductions launched last year coupled with new surgeon conversions. We see continued adoption of NuVasive expandable cages such as TLX 20 degrees, our proprietary Porous PEEK implants and the X360 system. Performing lateral single-position surgery that NuVasive technologies has gained momentum over the last six months and is translating into benefits in our XLIF and a ALIF franchises.

Offsetting this top line growth was pricing pressure of negative 2.4% for U.S. Spinal Hardware. Although this is low competitors it is higher than usual for NuVasive's in the first quarter. We continue to drive innovation in the space to help offset the industry pricing trends balance with price volume trade-offs to gain and drive further market share capture. Revenue from U.S. surgical support was $72.2 million for the quarter, a 3.7% increased compared to prior year. This was driven by NuVasive Clinical Services revenue which is approximately 15% and driven primarily by continued strength in billing and collections as volumes were steady and in line with market growth.

Biologics revenue for the first quarter was down approximately 6% over prior year which was in line with internal expectations. This franchise continues to see increased volume offset by declining average selling price as a result of shift from Osteocel to lower cost osteobiologics. Selling traction outside of Osteocel with DDM's and AttraX products has been positive since the launch last year. With a well-rounded portfolio in place we continue to track toward achieving flat to modest growth for the full year 2019. International revenue was $54.8 million growing approximately 11% on a reported basis and 16% on a constant-currency basis. This business performed to our growth targets with some regional puts and takes. EMEA growth was driven by solid performances in the UK, Southern Europe and Benelux.

The execution in the UK was driven by wins across several new key accounts and tender secured last year in Germany and Benelux which produced revenue in the quarter. Additional dynamics that played out in the quarter related to the occurrence of two extra billing days and timing of a favorable distributor order. Overall the results provide validation for the turnaround in EMEA and the normalization of these dynamics for the balance of the year have been contemplated in our full year guidance. Asia-Pac experienced growth primarily from Japan and Australia and New Zealand through strong reliant sales with salesforce investments made last year and partially offset by one-time distributor transition in the region. Latin America performed in line with expectations with Puerto Rico, Brazil and other countries remaining stable.

Moving now to profitability. Non-GAAP gross margin for the first quarter was 72. 9% an increased of 110 basis points compared to 71.8% in first quarter of 2018. The improvement in gross margin was led by the achievement of stable and consistent production throughput and planned queue in sourcing at the West Carrollton manufacturing facility. In-source manufacturing efforts are progressing as expected with six plus months of stable operations further integration of additional processes has now been initiated. Our focus will remain on ensuring that investment in the factory will continue to deliver the supply chain benefits through the balance of the year. The realization of strong billing and collections from NCS was also a factor in driving gross margin improvement within the quarter. The positive margin expansion from both West Carrollton and NCS was partially offset by the impact of price erosion and business mix as international and NCS businesses grew at a faster pace than the core U.S. hardware.

Non-GAAP SM&A expenses as a percent of revenue decreased 210 basis points from the prior year of 51.7% in the quarter or $142 million. With the growth in international business there continues to be leverage of expanding scale with fixed overhead costs. Domestically the management of operating expenses in a disciplined manner has produced the benefit of productivity and efficient resource management. SM&A spend in total was below our internal expectations in the quarter. The execution organizational design changes early in the quarter provided savings that have freed up resources to redeploying through investments for the balance of the year. These investments include the boundary model, EU, MDR and sterile packaging that were slow to ramp in the first quarter but will accelerate through the remainder of the year in a disciplined manner.

We have discussed our (inaudible) asset management model or the boundary model over the last few quarters. This initiative was piloted last year in certain high density regions of the U. S. to enable forward deployment of steps for surgery that are allocated to certain geography. As a result of this initiative we see significant decreases in courier cost and productivity for our sales teams with more freed up selling time. This year we are slated to add four additional geographies to the boundary model. EU MDR and sterile packaging are stable states to continue conducting business in certain markets and increase our competitiveness in other international geographies.

Non-GAAP research and development or R&D expenses totaled $17.2 million in the quarter or 6.3% of revenue which was an increase of 70 basis points compared to first quarter of 2018. The increased R&D spend reflects continued investments in Surgical Intelligence, robotics and the core business. We believe both recent and upcoming product launches related to these technologies will help drive further future revenue growth. First quarter 2019 non-GAAP operating profit margin was 14.9% up 240 basis points compared to 12.5% for the first quarter of 2018. The primary driver of improved profitability was related to the West Carrollton manufacturing facility. Year-over-year progress in reducing operating expenses as a percent of revenue drove down 140 basis points over the prior year. This management team is continuing to run the business with discipline and rigor and intends to invest in opportunities to drive top line growth with profitably to deliver on our commitments.

Moving further down P&L interest and other expense net on a non-GAAP basis was $5.2 million in the first quarter down from 5.9% in the same period last year. Now turning to tax, non-GAAP tax expense for the quarter was $8.2 million resulting in a non-GAAP effective tax rate of approximately 23% for both the current and prior year. First quarter non-GAAP net income was $27.6 million or diluted earnings per share of $0.53 compared to non-GAAP net income of $20.6 million or diluted earnings per share of $0.40 in the same period last year an increase of $0.13 or 33% over prior year. This performance stem from improved non-GAAP margins.

Turning to GAAP results, GAAP net income for the first quarter of 2019 was $9.4 million or diluted earnings per share of $0.18 compared to net loss of $27.1 million or a loss of $0.53 per share in the same period last year. Prior year results included a litigation accrual for the mapping case which was resolved in the second quarter of 2018. Adjusted EBITDA margin which excludes the impact of non-cash stock-based compensation and other non-GAAP adjustments was 24.3% for the quarter compared to 21.4% in the same period last year. This increase was primarily due to improved operating margins.

Finally free cash flow for the quarter was negative $9.5 million compared to a positive $7.3 million over last year as expected. The reduction was primarily driven by investment in inventory of surgical instrumentation as well as a difficult comparable due to strong non-NCF collections in the prior year period. Moving into guidance based on first quarter results and the outlook for the remainder of the year, we are reiterating full year guidance for 2019 including revenue in the range of $1.14 billion to $1.16 billion and non-GAAP operating margin guidance for the year at 15% to 15.5%. Some additional color on guidance starting with revenue.

While the year is off to a strong start across the board there are several items to note. First, I expect U.S. surgical support to be more in line with market growth for the remainder of the year as our billing and collections align with the volume growth we are seeing. Second, as we enter the second quarter we expect growth in EMEA to perform in line with overall international growth rates normalizing for the Q1 favorability as I pointed out earlier. Third, there is a harder comparable period in Q2 over prior year which should translate into total company year-over-year growth rate that have lowered than those observed in Q1. On margins we expect a large ramp in spend starting in the second quarter on key business priority investments including Surgical Intelligence and the integration of robotic capabilities into Pulse, MDR and sterile packaging. Offsetting the increased spend with the ongoing benefit from in-sourced manufacturing disciplined spending within our non-customer facing areas where we'll continue to identify opportunities to drive efficiencies. So as we look ahead to the balance of the year we remain optimistic and dedicated to delivering on our commitments.

Thank you. And with that we'll now open up the call for Q&A.

Questions and Answers:

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Josh Jennings with Cowen and Company. Please proceed with your question.

Josh Jennings -- Cowen and Company -- Analyst

Hi. Good afternoon. Thanks for taking the questions and congratulations to a strong start to the year. I was hoping just to start off. I think Raj commented about the 6.4% organic constant currency growth. I think if you add back on a constant billing day basis that's probably closer to high 7's. I think from a high level you said new products and usage of conversions or the drivers of that performance. You also caught a lot of you had a lot of commentary in Q4 and Q1 around interbody strength and I was just wondering if you could hone in there and help us understand if NuVasive is seeing kind of higher revenue per surgery growth in the last couple of quarters? And how you see that trending over the course of 2019 and then to the 2020?

Chris Barry -- Chief Executive Officer

Sure, Josh.

Matt Link -- President

Yeah. Hi, Josh. This is Matt. So as we have seen a strong uptake of interbody but historically we've seen very strong interobody performance by virtue of being seasonally based company. So what we're seeing is continued adopting of our interbody, continued strong growth in our (ph) patient (ph) business as well as referenced during the script with Reline and continue to see some benefit in price related to those new interbody offering again as referenced in the pricing spectrum from Raj. So I'd say in line with what we've seen in prior periods and continuing to support our surgery conversion rate through the balance of 2019 consistent with our expectations.

Josh Jennings -- Cowen and Company -- Analyst

Great. And just a quick follow if I could. I mean just on Reline, I know you had strong 4Q, strong 1Q we'll be calling it out as a driver one of the four technological focus area is complex spine. That's a -- it's a large market opportunity within the overall spine industry. And I was hoping you could just help us understand where you feel like your share position is in complex spine? And we tag it as a kind of $1.2 billion to $1.4 billion opportunity. And if you think you can make strides to kind of get to a share position in complex spine to where you are in the region? Maybe what the trajectory there is? And can you penetrate adolescents fully effectively? Thanks for taking the questions.

Chris Barry -- Chief Executive Officer

Yeah, no problem. So I'll try to break this up into maybe two sections adult complex and then may be pediatric . So I think as you appreciate and sort of as your question reference we have participated more largely in the adult degenerative segment since we introduced Reline in 2015 as well as historically. A lot of that by virtue of being focused more in minimally disruptive procedural segments. Since the introduction of Reline, we've seen steady growth into the complex segment and we expect that to continue. It's an area where proportion that we have under-participated relative to our degenerative market share. As you shift gears into the pediatrics segment, I think you need to take into consideration two critical components. One was the Elipse Technology and MAGEC rod acquisition which has continued to support our market growth in that segment as well as the introduction last year of the Reline Small Stature system also geared toward that sort of acute pediatric patient population. So we are continuing to see strong growth from Reline largely supported through the complex and deformity segment although I'll acknowledge as the market would also acknowledge those conversions typically are a longer cycle than the degenerative segment based on the complexity of the pathologies and so we are comfortable with the rate of conversion to date and expect it to continue.

Operator

Thank you. The next question comes from the line of Matthew O'Brien from Piper Jaffray. Please proceed with your questions.

Kevin Farshchi -- Piper Jaffray -- Analyst

Hi, everyone. This is Kevin Farshchi on for Matt today. Thank you so much for the time and congratulations on the nice quarter.

Chris Barry -- Chief Executive Officer

Thank you.

Kevin Farshchi -- Piper Jaffray -- Analyst

I wanted to follow-up on the first question that was just asked. I think you mentioned in the past one to two points of growth in fact coming from one last billing day in the quarter. Can you confirm what that growth impact was? And then on the guidance, the strong growth in Q1. Can you break out why stick with that range? Why not at least bring the low end a bit higher? I understand the commentary on Surgical Support and the other two factors coming more in line but is this really keep things risk-adjusted? Or do you anticipate some market dynamics, price erosion or any other destruction you had not accounted for previously?

Raj Asarpota -- Chief Financial Officer

Yeah. So I think your first part of the question was what is the extra or sorry like one billing day in the U.S. entail? So in Q1, we did have one last billing day which equates to about 1.4% growth in the U.S. And the second part of your question I think you mentioned price. We did talk about price as being a little higher in the first quarter this year than we've seen historically at about 2.4% compared to our 2%. And normally the way we think about this and we've always said this in the past we are going to remain while our NPI (ph) enables us to command premium pricing to some degree we continue to make price volume trade-offs. And as long as it entails in driving growth momentum on top line we are OK to sacrifice a little bit of price.

Chris Barry -- Chief Executive Officer

And I'll speak to the last word which was the guidance question. It comes down to we're excited about how we started the year but there were some one timers that we experienced all in our favor this quarter. One of the things I committed to you guys last time was I want to make sure we deliver on our commitments. I don't think we're being risk-averse. I just think we need to see the trend continue in a couple of key areas of the business. So feel very good about where we, how we drove U.S. hardware, the NCS business as we discussed. I believe that was more of a one-time event.

We are going to make improvements in the way that we collect but the fact is we were able to catch up in some areas that really benefited us in that business in the first quarter. We also saw some strong bounce back in certain key markets that Raj discussed. I need to see that trend out over another two to three months to really ensure that we've got the underlying strength and we're not just dealing with volatility coming off of a very, in many cases subpar year in certain key countries to really rebounding into a very phenomenal quarter. So I think it's prudent for us to maintain the guidance that we've given at this particular moment. As we move to the second quarter and into the back half of the year, I'll readdress guidance at that time.

Raj Asarpota -- Chief Financial Officer

And just one additional point, I mean we talked a little bit about this being first half second half story. As you guys know on the international side we have favorable or easier comps going into the second half of the year and on the flipside, on the U. S. side on the hardware business we've got harder comps from 2018 given we had like a really strong Q3 last year and Q4 and the strength of what case volumes coming back after the hurricane impact in 2017. So it's a little bit of a first half second half story. And we've got a great start this quarter but we have to be like Chris said little bit cautiously optimistic as we go into the second quarter and the balance of the year.

Matthew O'Brien -- Piper Jaffray -- Analyst

Thanks, guys. That makes a ton of sense. Wanted ask a quick question on Pulse. As you're building the indications for the robotics add-on, I know you showed at NASS and you are beginning to recognize some revenue for Pulse without robot this year. Can you talk a little bit about how that launch may progress either from a revenue perspective or just from the customers that you've showed the product to? And then on the robotics side could you talk a little bit about what the prototype at NASS may look like? And will the same indications that you're going to be presenting to clinicians in September be present in the robotics add-on when you inevitably launch it if you can provide some color there?

Chris Barry -- Chief Executive Officer

Yeah, I'll give it a shot. Thanks for the question. We're super excited about the new entry into this new phase of our company. As I mentioned really moving from a procedurally integrated company to a really a technology in a broader systems company to support I think a much more predictable and reproducible surgery. The way we're thinking about our launch coming into the back half of this year to be very honest is we're going to be, we're going to run before we're going to walk before we can run. We're going to be deliberate in how we drive the first sales. Clearly, we have seen very good customer reaction to our alpha tests and into the trials that we're into now.

As I mentioned earlier, we're in the preselling process. And I think the demand is showing a very strong, showing very strong demand as we speak but I want to make sure that we don't, we need to as a company learn how to manage these types of products and that's something that we are going to, that we are doing as we speak we'll do into the third quarter and into the fourth quarter. To that end I don't look for a ton of material revenue this year. I do look for us to learn a lot as an organization and implement the technology. Moving over to robotics as we've talked about I'm not going to speak to any kind of features or benefits of robotics. What I will say is the system of Pulse integrating multiple modalities, multiple technologies I think is a very architectural or software rich environment to then build a robotic application into. We are focused on and to simplistically on broader utilization of our technology. We want our Pulse system and ultimately going into the future our Pulse system with robotics to be utilized in every spine case whether that'd be navigation, 2D, 3D imaging, reducing exposure to radiation through our LessRay technology or in future cases having a robotic application that supports the surgery.

So we think about it, I don't necessarily think about Pulse and then robotics I think about Pulse and then Pulse with robotics. So we are entering into the space of our growth launching the Pulse system. We're excited about the reaction and the support we're seeing from customers that have been exposed to this technology. As an organization we are going to resist the temptation to move faster than what we can support. We have to learn and build organization the capability and we're very excited to unveil our robotic application and an enhancement to our Pulse system at NASS in September. So hopefully that's right the level of inside you know people are anxious to see and hear about what we're going to say about robotics but I'm going to be disciplined and hold that until we see you guys in September.

Kevin Farshchi -- Piper Jaffray -- Analyst

Definitely, very exciting. Thank you so much and congrats again.

Chris Barry -- Chief Executive Officer

Thank you. Appreciate the question.

Operator

Thank you. (Operator Instructions) The next question will be coming from the line of Jonathan Nemecek with Morgan Stanley. Please proceed with your question.

Jonathan Demchick -- Morgan Stanley -- Analyst

Hello. Thanks for taking the question. So I wanted to follow-up on the Pulse conversation. I guess both without and with robotics into the future but what's the strategy for selling their? From customers you've talked with so far, are they looking for outright sales, leases, usage based models? Just trying to figure out any color of how you plan on selling this and recognize in the revenue? And then secondly also with Pulse just wanted to kind of think about guidance this year. Is any revenue from Pulse needed to hit guidance this year? Or is that more upside?

Chris Barry -- Chief Executive Officer

We've reflected what we believe is in our guidance. So I don't, we don't need any additional sales of the capital to deliver on our commitments. Kind of back to your first question. I think the thing that as I mentioned earlier we're focused on utilization. I'm not taking anything off the table and I think we're being open-minded to our customer needs on how we sell the system, how we place the system, how we recognize revenue in the system. And I will tell you being focused on utilization really directly would represent that I'm not necessarily focused on trying to sell capital as a means to an end. I want to become a systems-based company tying in our current hybrid technology with the system and the architecture that we see even Pulse with multiple knowledge that we have to offer in today's Pulse inclusive of where we take robotics.

And in order to do that I don't want to be limited by hurdles that we inherently would install. So I think we're being very open-minded. We're having I think very strategic conversations with our customers around the best way for them to acquire technology. And as I mentioned before we are learning how to support this technology and as we do that I think it will further define the different ways to place the technology, sell the technology or other innovative ways that we get this product with our customers, so that we can as we said drive the proper utilization in advanced spine surgery.

Operator

Thank you. The next question come from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question.

Larry Biegelsen -- Wells Fargo -- Analyst

Good afternoon. Thanks for taking the question and Chris congrats on a good start to the year and everyone at NuVasive.

Chris Barry -- Chief Executive Officer

Thank you, Larry.

Larry Biegelsen -- Wells Fargo -- Analyst

The first question is just on X360. Could you help us help us understand kind of the commercial opportunity there? Are you getting a price premium? And then Chris, I have one follow-up.

Chris Barry -- Chief Executive Officer

Okay. I'm going to let Matt. Matt is our expert here on 360 and he work on this for a long time. So I'll let Matt Matt take this one.

Matt Link -- President

Hey, Larry. Good afternoon. So look there's a relatively well defined interbody space and one of the things we've learned over the history of XLIF is that in certain procedural applications and for certain pathologies their becomes limitation to XLIF in particular the ability to address the L5 to S1 antibody segment. And whether there's requirement for posterior fixation that may require repositioning of the patient in both instances. And so we still believe in lateral surgery particularly lateral XLIF is being the premier minimally invasive interbody technique providing other technologies to expand the utility (ph) of it in an efficient manner has been our goal. And in doing so we see the opportunity to capture a broader segment of the interbody market that makes it and other interbody techniques today such as TLIF and PLIF in particular from a posterior approach. And so we see it as primarily share shifting with respect to interbody techniques based on the ability to offer a better solution to the patients and a single position approach that then also offers greater efficiency and cost savings in the healthcare setting. So that's really what we think about the market opportunity around X360 shifting other interbody opportunities to surgery where we remain the market leader.

Larry Biegelsen -- Wells Fargo -- Analyst

Thanks a lot. That's very helpful. And Chris just a big picture question. It seems with NuVasive has been focused on top line growth margins have suffered and vice versa. So my question for you Chris is what's your priority top line growth or margin expansion and is it possible to do both? Thanks for taking the questions.

Chris Barry -- Chief Executive Officer

Thanks, Larry. Simple answer is it is possible to do both. I clearly we're focused on top line growth first and foremost as a number one priority because I think that's a direct reflection of innovation and technology and how our customers actually value innovation and technology. And at the end of the day we want to continue to be a technology company that's truly innovative in the spine space. So that is my number one priority. Having said that, I do believe it is possible to drive some level of operational leverage which is to me a function of discipline. Clearly there are some trade-offs along the way but I believe at our company now is a little over $1 billion is $1.1 billion there as we've grown there is naturally I think a way for us to continue to drive efficiencies across the enterprise, take full advantage of a growing footprint in our international markets.

And as we, as earlier as we said move from procedurally -- procedural integration to a systems-based company become more with our customers that typically drive efficiencies across our channels. So I 100% believe that it is not only possible but is required. I believe the organization is galvanizing rally to accomplish this objective. The one thing I would say which I said to you back in San Francisco a few weeks ago the pace of how we drive operating margin expansion that's the question I have. What I don't want to do is trade innovative opportunities to drive arbitrary margin improvement. So I will strive and continue to drive margin improvement across the business but I will also be disciplined and diligent on ensuring that we continue to innovate and driver our technology forward. So long winded way, long-winded way of saying that we are going to do both. The rate of our margin expansion is something that we're assessing as we speak but we will continue to really lead the market from an innovation perspective and that is our number one priority.

Matt Link -- President

If I could add little bit more color to emphasizing on what Chris said. Look, we've been seeing over the last couple of years we talked about the path to 25% and the opportunities that exist for margin expansion. Those levers have not changed, so whether its salesforce efficiencies, it's our factory investment that's going to pay dividends in gross margin it's our international leverage which continues to move along quite nicely and other operational leverage that we have. Having said that again to Chris's point as this company continues to scale there are opportunities to drive top line and those will be kind of balanced as we think about how the profit margin rolls through the P&L.

Larry Biegelsen -- Wells Fargo -- Analyst

Thank you, guys.

Chris Barry -- Chief Executive Officer

Thank you for the question.

Operator

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

Richard Newitter -- Leerink Partners -- Analyst

Hi. Thanks for taking the questions. Raj, just wanted to get a better understanding of the kind of the margin out performance in the first quarter but you reiterated full year margin guide. And I appreciate that there are some, there are some items that may be were a little stronger on the top line and some investment that got pushed out but on the gross margins specifically you still came in above where the consensus was certainly what we were thinking by about 100 basis points and The Street I think had you modeled moving right up to about where you started off the year in 1Q in 2Q, 3Q and 4Q. So I guess the question is just as The Street maybe miss modeling kind of the cadence there? And we should be thinking if that came in line with where your internal plan was? Or was there out performance relative to the gross margin improvement that we saw? And that's the -- I'm trying to get what the explanation is for no carryforward through a guidance increase given this out performance?

Raj Asarpota -- Chief Financial Officer

Yeah, sure. So I think, yeah let me try to unpack that right? So gross margin performance was good. And if you think about if you do the walk from where we ended last year at 71.8% to 110 basis points of expansion that we saw. So West Carrollton had great performance. I think we said we have now seen six months of really stable growth there. The throughput there is turning out quite nicely. Our in-sourcing plants working. So we saw 130 basis points of expansion through West Carrollton. We saw a little bit of goodness from and I'd say about 50 basis points that came through expired royalty expense on a couple of products. The NCS margin so you saw we had good services performance in the quarter. And as you know that's a fixed cost business and as you get more top line, there's leverage that translates from that. And then to offset that we had mix in price. So price erosion was about 50 basis points and then the rest of it falls through and makes. So the international and the NCS growth was above U.S. core growth. So that's kind of what drive -- that's kind of what drove the gross margin performance. And then as you think about operating margin then, so outside of the GM, the gross margin fallout. We saw a lot from efficiencies that have continued from streamlining efforts that we've worked through starting in mid last year. So those efficiencies and back office have been working out. And then I think we also mentioned in the script that we have some investments that have kind of ramped up a little bit slower. So the MDR, the sterile packaging was a little bit slower in the first quarter and will start to catch up as we go through the rest of the year. So I guess and it's a long-winded way of saying that we are maintaining our operating margin guidance at this point and should that change we will continue to keep you updated.

Richard Newitter -- Leerink Partners -- Analyst

Okay. And may be just one other one. I hear you guys talking a little about this little about this transition from a procedural-focused company to a systems-focused company. I just want to make sure I'm understanding exactly what that means because I always thought NuVasive focused on the procedure that in and of itself was a holistic approach to making sure you kind of service your customers on their actual clinical needs. What do you mean when you talk about the systems kind of a systems focused versus a procedural or moving away from a procedural focus? Thanks.

Chris Barry -- Chief Executive Officer

Let me be clear. We're not moving away from procedural approach. We're actually enhancing our procedural approach by becoming more to the overall operating room infrastructure. So we've been procedurally integrated by providing the interbodies, the fixation systems, the hardware and the training and support associated the monitoring for the patient. We're now entering into a realm where we'll now start to integrate that procedural solution and enhance it by not offering what we're going to be offering in Pulse which will now start to incorporate the navigation aspect of our procedures 2D and 3D imaging. Having that hub that we talked about within Pulse integrating LessRay and our monitoring capabilities into the system and ultimately participating and fully equipping that system to have a robotic capabilities. So much more inclusive of other technologies that in our past have operated outside of what we've considered to be our focus on the procedure. Clearly still inherently a part or could be and should be in many cases a part of the procedural solution. We just haven't participated. It's by moving into this next evolution of a systems based company. We're not only focused on the procedure but what is technology surrounding the patient, engaging with the clinical staff not just the surgeon but the staff in many cases to ensure that we are inclusive of the entire operating room theater to ensure that we are participating in driving the best possible solutions for the safest possible procedure and the safest possible operating room environment providing ultimately the best possible outcomes for the patient.

Richard Newitter -- Leerink Partners -- Analyst

Thanks.

Chris Barry -- Chief Executive Officer

That make sense? Is that good?

Richard Newitter -- Leerink Partners -- Analyst

Thank you, thank you.

Chris Barry -- Chief Executive Officer

All right. Thank you.

Operator

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

Matt Miksic -- Credit Suisse -- Analyst

Thanks. So I wanted to make sure like a lot of folks I guess given some of the variability and Raj as as you talked earlier in the call just the timing of some of the these expenses you mentioned for Q1. And normally there is a pretty substantial historically step down from Q4 to Q1 in terms of operating margins. This time it was a little less substantial. And I wanted to get a sense of how much of that was timing of expenses? And should we maybe expect cadence going forward to be slightly different just on the operating margin sort of cadence? And then I had one quick follow-up just on the robotics.

Raj Asarpota -- Chief Financial Officer

Yeah. So the operating margin cadence you're right in that we did have a little bit of we are going to see a ramp up of SM&A as we go through the back half of the year. And Q4 operating margin will be typically higher than the rest of the year but I think what you'll see in the next couple of quarters is a slight ramp in operating expenses, so your operating margin will align accordingly.

Matt Miksic -- Credit Suisse -- Analyst

Okay. So whereas we might see like a substantial step Q1 to Q2 maybe less substantial and then kind of a similar pattern less significant step up in Q4 just based on the spending ramp that you're talking about?

Raj Asarpota -- Chief Financial Officer

That's about right.

Chris Barry -- Chief Executive Officer

Yeah, I mean save for some of the one timers in Q1 you would've seen much more sharp drop from Q4 to Q1. So, no.

Matt Miksic -- Credit Suisse -- Analyst

And I'm sorry if I missed it but did you quantify those at all in terms of basis points or anything like that that could help us understand that?

Raj Asarpota -- Chief Financial Officer

In terms of...

Matt Miksic -- Credit Suisse -- Analyst

Like in other words it would have been don't know 50 basis points or a 100 basis points of additional margins would have been 100 basis points to 150 basis point different say if without the one timers?

Raj Asarpota -- Chief Financial Officer

It's right if you think about it it's going to be around 100 basis points to 200 basis points basically. So again in Q1 some of the one timers that Chris alluded too, we had the billings and collections that continued to pick up from where last year left off. There was a top line beat on the Europe side. There were a couple of extra billing days there from the timing on how the Easter holiday fell. We also had a distributor order that came in sooner than we expected and then to offset that we also had some of the MDR and sterile packaging expenses that are being pushed out. So the ballpark is around 100 basis points to 200 basis points.

Matt Miksic -- Credit Suisse -- Analyst

Got it. That's helpful. And then just on the robot I know Matt and Chris and team don't really want to dip your hand too much at this point but maybe I would ask what have you learned? What from your observations and speaking with folks in the field interested in robotics that you may not sort of, we might not expect you to sort of chase down the path that the other two major players have gone down? Or given that you're a lateral company to what degree as you would be expecting is something that's, you're not allowed a lateral company that's not fair but you do also lot of lateral surgery something that has a bit more capability in that approach? Just any thing you could tell us that might be unique and different as perhaps the teaser you're ahead of NASS?

Matt Link -- President

We're getting laterals actually a great reference point. We take pride in that being a foundational component of who we are as a company in our portfolio of technology. I think Chris did an excellent job talking about the clinical utility and the application based environment of Pulse. And what we see with respect to technology in the OR is it needs to provide value. And largely that value is by integrating seamlessly to a workflow that supports ease of adoption and actually drives incremental improvement in surgery. And so I think that's really the best way to think about what we're trying to do in the robotics space. Its building up this application rich environment of Pulse providing a form of mechanical automation that will support broad clinical applications that we don't believe is represented as completely in the market today.

Matt Miksic -- Credit Suisse -- Analyst

Great. Thank you.

Operator

The next question is from the line of Joanne Wuensch with BMO Capital Markets. Please proceed with your question.

Unidentified Participant -- -- Analyst

Hi, this is Steve on for Joanne. You guys launched a number of new products in 2018 and you've maybe more coming online the share with Pulse. I guess the question is outside of robotics what areas in spine do you feel you have the biggest portfolio gaps? I mean If any what areas from the portfolio standpoint would you like to see improved?

Chris Barry -- Chief Executive Officer

Let me just use this to kind of restate the way we look at the market and where we are looking to grow. As we talk a lot about we lead and what we conservative in minimally invasive side or the minimally invasive approaches to spine surgery primarily focused on lateral surgery enhancing now a Lateral Single-Position Surgery and we need to continue to drive and keep our growth and leadership position strong there that drives a lot of our innovation, drives a lot of the way that we think about innovation across the enterprise. But another growth vector outside of continuing to lead in minimally invasive surgery is I think we're misrepresented in areas like cervical in areas like deformity and complex spine where I think just because of our focus in developing lateral surgery over the last decade or so we just haven't focused in this area. Its something that we've looked it over the last 12 to 18 months. We've got technologies coming out including a cervical plate this year. So I think it starts to reposition us as a broader more comprehensive spine player. One of the key drivers that we're talking about internally is how do we take full advantage of the breadth and depth of spine procedures where we should at least get our fair share. And obviously I'm not going to be settled for that but just getting our fair share provides a tremendous opportunity for us. And then obviously we think about globalization. We're just really starting down the pathway to really globalizing NuVasive's business and we're very excited about where we are, building strong businesses across the globe but just starting just really starting in our efforts there. And then lastly I don't want to underscore this but too much but moving into this realm we're going to start providing more in the surgical (ph) procedure to really become more in the eyes of our customers and ultimately better support to the patients. This is the way so we look at it. So most underrepresented I would say that we've got room to grow outside of really the minimally invasive approach. We've got room to grow and we're excited about the opportunity.

Unidentified Participant -- -- Analyst

Okay, great. And just a quick follow-up on Pulse. I mean I know it's just getting off the ground here in the U.S. but how should we think about Pulse may be rolling out in the international markets? Is that a 2019 event? Or you expect more of the fully automated system for global launch?

Matt Link -- President

Hi. This is Matt. So we're actually running concurrently our alpha and clinical testing as well as second half launches in select countries in Europe as well as Australia and New Zealand. But as we stated earlier when we think about timing of introduction typical capital sales cycle all that's really been accounted for full year 2019 but we do absolutely believe the ability to consistently commercialize our entire portfolio in a global manner is important and so that was certainly a consideration as we bring Pulse to market as well.

Unidentified Participant -- -- Analyst

Great. Thanks for taking the questions.

Matt Link -- President

Thank you.

Operator

The next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your questions.

Ryan Zimmerman -- BTIG -- Analyst

All right, great. Thanks for taking the question, letting me in. I want to ask first about the stability of your Biologics franchise. You called out a couple of sales specialists that you hired, they have been more effective recently. And I'm just wondering what the impact has been in the market? And whether you intend to accelerate that or slow that down? And really more broadly speaking where are we at in the end market? It sounds like the stem cell market is either going away or is going at this point as you downshift the lower-cost DBM. So help us understand kind of what the status is with the Biologics business? And then I have a follow-up just a quick one on the status of the Premier contract. And what impact you're factoring in the guidance? And how should we think about the benefit of that contract this year? Thank you.

Chris Barry -- Chief Executive Officer

I'll take the first one and let Matt take, that he's close to the NCS business. So on the Biologics just as you think about it we were high-end player with Osteocel since broadening the portfolio, driving a more favorable a broader portfolio we've gone to a cycle now where although we've seen increasing volumes we're being, also being offset by price or mix. For as an example we were negative 6% growth this quarter but compared to Q1 of 2018 that's about 350 basis point improvement which is in line with where we think we should go. We have first and foremost we put strong leadership over that franchise. We broadened the portfolio. We're now going through an exhaustive process to gain better attention from our primary sales force and then more recently have added sales specialists to accelerate our focus and our organizational capability around Biologics. So as we think about the rest of this year we'll continue to annualized some of the mix headwinds that we took on really over the course of last 12 to 18 months as we annualize those headwinds we get back to a more normalized growth which is in line with market of flat to slight growth. So we're on track. Second question was on the Premier contract. So let me turn it over to Matt.

Matt Link -- President

Just real quick so we entered into the Premier contract with our service organization NCS second half of last year has factored into our growth plan for this year. We're really focused on the continuing integration of the services businesses that we've acquired and really optimizing the growth and utilization of our NCS services organization in the field. So Premier is a part of that. It continues to be a part of a growth strategy and we have seen opportunities come online through our pipeline consistent with our expectations.

Ryan Zimmerman -- BTIG -- Analyst

Thanks, Matt. Thank you for taking the questions.

Matt Link -- President

Thank you.

Operator

Thank you. The next question is from line of Robbie Marcus with JPMorgan. Please proceed with your questions.

Robbie Marcus -- JPMorgan -- Analyst

Thank you for taking the question. Just two quick ones for you Raj. First, it sounded like there was one (ph) billing day in the U.S. but two extra billing days outside the U.S. How much those will work outside the U.S.? And what's the total impact to the company on billing days was? And then I just throw on my second question here on free cash flow. It was down year-over-year. You said there was some investment in instrumentation inventory. How do we think about what that's for? How much will be needed for the year? How we do think about cash flow over the following three quarters and then just throwing what you're planning to do with your cash flow this year? Thanks.

Raj Asarpota -- Chief Financial Officer

Yeah. So let me start with the second question first. So you're right in pointing out that we had a inventory build associated with new product introductions. But the bigger factor along with that was last year we had outside of our NCS business we had a huge collections quarter in 2018 which impacted the quarter the growth, sorry the comparable over prior year. Having said that as we go through the rest of the year, that will tend to normalize and we do intend on hitting our free cash flow targets for the balance of the year. So there was a bit of anomaly in the first quarter but I think we'll be jumping right back into it. And can you remind me your first question, the first part of the question? Was regarding the Europe billing days? So yeah, I mean the Europe it was about 2% to 2.5% growth impact for the international business when it came to the impact from the two extra billing days. So I mean these aren't huge numbers within the region's but nonetheless they did have an impact. So but overall at the company level it's not material.

Robbie Marcus -- JPMorgan -- Analyst

Thank you.

Operator

Mr. Barry there are no further questions at this time. I would like to turn the call back to you for closing comments.

Chris Barry -- Chief Executive Officer

Thank you. And with that thank you for those on the call today and we look forward to speaking with you in the next quarter. Thanks.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 65 minutes

Call participants:

Suzanne Hatcher -- Vice President of Internal and External Affairs

Chris Barry -- Chief Executive Officer

Raj Asarpota -- Chief Financial Officer

Josh Jennings -- Cowen and Company -- Analyst

Matt Link -- President

Kevin Farshchi -- Piper Jaffray -- Analyst

Matthew O'Brien -- Piper Jaffray -- Analyst

Jonathan Demchick -- Morgan Stanley -- Analyst

Larry Biegelsen -- Wells Fargo -- Analyst

Richard Newitter -- Leerink Partners -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Unidentified Participant -- -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

Robbie Marcus -- JPMorgan -- Analyst

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