AtriCure Inc (ATRC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2007 Earnings Conference Call for AtriCure.

My name is Annie and I'll be your Coordinator for today.

(OPERATOR INSTRUCTIONS)

And I would now like to turn the call over to Mr.

David Drachman, President and Chief Executive Officer of AtriCure.

Mr.

Drachman, please proceed.

Thank you, Annie.

Good morning and welcome to AtriCure's Fourth Quarter and Full Year 2007 Earnings Conference Call.

Joining me on the call today is Julie Piton, Vice President of Finance and Administration and Chief Financial Officer.

At this time, I would like to turn the call over to Julie for a few introductory comments.

Thank you, Dave, and good morning, everyone.

By now, you should have received a copy of the earnings press release.

If you have not received a copy, please call Sarah Wichman at (513)-755-4136 and she'll be happy to fax or email you a copy.

Before we begin today, let me remind you that the Company's remarks may include forward-looking statements.

These statements include, but are not limited to, those that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as revenue and earnings estimates, other predictions of financial performance, launches of new products and market acceptance of new products.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including but not limited to the rate and degree of market acceptance of AtriCure's products and other risks and uncertainties described from time to time in AtriCure's SEC filings.

AtriCure's results may differ materially from those projected on today's call and AtriCure undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

I would like to remind everyone on the call today that the FDA has not cleared or approved the Company's Isolator Bipolar Ablation System, or pen, for the treatment of AF.

They have been cleared for the ablation of cardiac tissue.

The Company and others acting on its behalf may not promote any of its products for the surgical treatment of AF or train doctors to use the products for the surgical treatment of AF.

These restrictions however, do not prevent doctors from choosing to use the products for the treatment of AF or prevent AtriCure from engaging in sales and marketing efforts that focus only on the general attributes of the products for the current cleared uses and not for the treatment of AF.

AtriCure educates and trains its doctors in the proper use of its products and related technologies and does not educate or train doctors to use any of its products for the surgical treatment of AF.

Additionally, AtriCure's left atrial appendage clip system is not commercially available and is pending FDA 510(k) clearance in the United States.

It is, however, currently being used in clinical evaluations in Europe.

AtriCure has provided research grants to institutions for the purposes of conducting certain studies that may be referred to on this call.

The primary authors of the papers referred to on this call also may be consultants to AtriCure.

With that, I would like to turn the call back to Dave.

Thank you, Julie, and thank you, everyone, for joining our fourth quarter and full year 2007 conference call.

2007 was another high performance and momentum building year for AtriCure.

During the year, we continued to advance our leadership position and made significant progress on several key fronts.

As a result, we believe strongly that no other atrial fibrillation company is better prepared or positioned than AtriCure to deliver results for patients, physicians and shareholders.

While 2007 was a high-growth year for AtriCure, we are just beginning to scratch the surface.

We believe that AtriCure will become one of the elite, high-growth cardiac companies of our time.

In fact, AtriCure was recently ranked 80th in North America in the prestigious Technology Fast 500.

The Fast 500 is the five-year ranking of the 500 fastest growing technology, media, telecommunications and life sciences companies, sponsored by Deloitte & Touche.

Moreover, AtriCure ranked third in the medical equipment space and first in Ohio.

The passion of our people has fueled our growth and our significant contributions toward preserving and improving human life.

I want to commend our management team and the employees for their high-performance during 2007.

The strength of our company is our people and their talent, drive, passion and extraordinary will toward building on our leadership position in the large and growing market opportunity for our cardiac ablation and left atrial appendage products.

Since AtriCure was founded in November of 2000, we have spent less than $65 million to achieve a year-end 2007 revenue run rate of approximately $53 million, facilitated by high gross margins of 79%.

Behind our strong revenue and high gross margin performance, AtriCure is a company of highly motivated people that practice disciplined management, particularly as it relates to expense and financial controls.

We plan to manage the pressures of short-term expectations while focusing on deploying resources in areas that we believe will accelerate our historical growth trends and lead our company to profitability.

Now I will briefly summarize our full year 2007 financial results.

Later in the call, Julie will provide more detail on our full year and fourth quarter performance.

Full year 2007 consolidated revenues were $48.3 million, which represents a 26% year-over-year increase.

U.S.

revenues from open heart products of $27.3 million represents an 18% year-over-year increase.

U.S.

revenues from minimally invasive products were $14.4 million, which represents a 31% year-over-year increase.

Additionally, minimally invasive procedures were performed in 83 U.S.

medical centers during the fourth quarter.

International revenues were a record breaking performance of $6.6 million, which represents a 58% year-over-year increase.

Additionally, during 2007, we demonstrated strong operating leverage trends.

For the full year 2007, gross profit dollars increased by 24.7% while operating expenses increased by only 11.8%.

Our fourth quarter 2007 net loss of $1.3 million was our smallest to date.

Importantly, gross profit dollars increased by 28% and fourth quarter operating expenses decreased by 4.2%.

Now turning to review of our market development, minimally invasive thesis.

Our minimally invasive thesis is based on several basic market development principles.

First, minimally invasive penetration into a small number of high profile catheter ablation centers will have a large impact on the adoption curves of our minimally invasive platform in the mainstream medical community.

Second, in order to penetrate the high-profile catheter ablation centers, we need to further segment the disease as well as the treatment alternatives.

For example, paroxysmal patients may be treated with catheter ablation and persistent and permanent patients may be better treated with minimally invasive procedures.

Importantly, we believe our next generation minimally invasive product, the Coolrail Linear ablation pen, along with our integrated OR mapping system will provide a product and technology platform that will allow surgeons to mimic the maze lesion set in order to safely and effectively ablate the more persistent and permanent patients.

Third, atrial fibrillation often develops into a chronic disease.

Patients with chronic diseases will often choose a single minimally invasive procedure that is potentially safer and has superior long term outcomes as opposed to a somewhat less invasive catheter approach, which often requires multiple procedures, each of which carries additional risk.

Fourth, an evolution of incremental, well executed market development activities, such as publications, national presentations and new product releases will lead to a tipping point.

Fifth, because of our high revenue and high gross profit dollars per procedure, limited penetration into the relative patient pool can result in the tipping point.

Sixth, adoption curves in newly accepted treatment paradigms in the large disease states are non-linear, but contagious and growth can be vertical.

Lastly, we believe that for the foreseeable future, the more minimally invasive ablation procedures, the more ablation procedures, catheter ablation procedures will be performed.

We apply the high tide floats all boats theory to these products and markets.

Now turning to our favorable marketplace trends supporting our minimally invasive business.

We believe that there are macro market indicators that strongly suggest that our minimally invasive platform is evolving as a standard of care for a large group of patients and that this will result in accelerated growth and profitability.

As we projected, there have been several recent peer review manuscripts highlighting the use of our minimally invasive platform published in the electrophysiology, cardiology and surgical journals.

We believe that these initial manuscripts further underscore the superior clinical outcomes achieved with the use of our minimally invasive platform.

We anticipate that there will be a series of additional manuscripts reporting on larger patient populations with longer-term patient follow-up and that these manuscripts will result in a pivotal change in the treatment algorithms and guidelines for thousands of physicians managing millions of patients.

As a result of the growing body of peer review publications, we foresee rapid and broad adoption for our minimally invasive platform.

Now in terms of presentations at the major meetings, there has recently been several key presentations at high profile international meetings highlighting the use of our minimally invasive products.

The Boston Atrial Fibrillation Meeting is the largest atrial fibrillation meeting in the world.

On January 17th, during the main accredited sessions, in front of approximately 1,000 potential referring electrophysiologists, there were three presentations highlighting the use of our minimally invasive products, including a live transmission from the Medical College of Virginia.

This minimally invasive procedure was performed by Dr.

Kasirajan, a well-known cardiac surgeon.

Importantly the patient was referred by a pioneer in electrophysiology, Dr.

Kenneth Ellenbogen.

Dr.

Ellenbogen, was in the operating room to perform the EP testing and led the narration of the procedure.

Following the procedure, the panelists surveyed the physician audience.

30% of the audience responded that they had had initial experience referring patients for minimally invasive procedures.

Now in terms of the patient that was ablated during the live demonstration, 13% of the physician audience responded that they would refer that same specific patient for a minimally invasive procedure.

We believe that this is a highly favorable trend and strong indicator of our momentum in the marketplace.

We believe that this landmark event further validates our significant progress and indicates that our minimally invasive platform is in the early stages of being adopted as a standard of care by an increasing number of physicians.

Furthermore, on January 27th, the Company sponsored a symposium preceding the Society of Thoracic Surgeons Meeting.

During the meeting, Dr.

James Edgerton presented his minimally invasive results and the ablation strategy to expand our current ablation procedure using our new Coolrail Linear ablation pen.

Now following Dr.

Edgerton's presentation, Dr.

Warren Jackman, an electrophysiologist, world renowned for his contributions towards advancing arrhythmia treatments through the development of catheter ablation procedures said, I'm going to stick my neck out here, but I believe that this minimally invasive procedure will become the standard alternative for patients with permanent atrial fibrillation.

In addition, Dr.

Douglas Packer, Professor of Medicine and Director of Research for Clinical Electrophysiology at the Mayo Clinic will be moderating a Heart Rhythm Society live broadcast where Dr.

James Edgerton entitled Reality EP, Epicardial Ablation for Atrial Fibrillation.

We anticipate that our minimally invasive products will be highlighted during this key broadcast.

We believe that the Heart Rhythm Society live broadcast with Doctors Packer and Dr.

Edgerton, insights from pioneering key opinion leaders such as Dr.

Warren Jackman along with the recently published manuscripts, our exposure at the Boston Atrial Fibrillation Meeting and importantly, the 2007 consensus statements, which were published by the Heart Rhythm Society, which characterizes minimally invasive ablation as a standard treatment alternative, are all key macro indicators of our substantial progress and increasing market acceptance.

As we reflect on the evolution of our minimally invasive business, it is important to note that our first endoscopic system for minimally invasive ablation was only just released in 2006, with a clearance for soft tissue ablation.

At that time, there was only one peer review publication describing the results of just 23 patients followed for only three months.

We believe our market development, regulatory progress during this small window of time demonstrates a powerful trend.

These favorable market indicators, along with our high revenue and high gross profit dollars per procedure, position AtriCure for accelerated growth and profitability.

Now I would like to summarize and confirm the status of our key initiatives and comment on physician reimbursement trends.

Our Coolrail Linear ablation pen and integrated mapping system, which is designed to expand our cardiac ablation procedure is on schedule for FDA clearance in limited U.S.

release later in the first quarter of 2008.

Our disposable cryoprobe, which we believe will expand our open heart business, is on schedule for U.S.

release during the third quarter of 2008.

In terms of our left atrial appendage exclusion system, we submitted our responses to FDA and we anticipate hearing back from the agency in March or April of 2008.

In the meantime, we are continuing with international clinical programs, which we plan to expand during the second quarter of 2008.

We have successfully implanted 14 clips in Europe and to date the clip has met all of our requirements and expectations.

Subject to FDA responses, we continue to anticipate a fourth quarter release in the U.S.

Turning to our FDA regulated ABLATE clinical trial.

As of January 31, 2008, three centers had approval to begin enrolling patients.

We anticipate that the majority of sites will be initiated in screening patients for enrollment by March 31, 2008.

To date, we have treated one patient and we are currently enrolling additional patients.

In terms of 2008 physician reimbursement changes, in January of 2007, there were changes to physician reimbursement, which required surgeons to use a miscellaneous code when performing ablation procedures concominantly during open heart surgery.

In January of 2008, CMS published three new physician CPT codes, which are configured to be used for concominant procedures.

We anticipate that this will favorably impact adoption of ablation during open heart procedures.

In addition, in January of 2008, CMS made changes to physician coding, which we believe will negatively impact reimbursement for catheter ablation procedures.

We believe that this will provide more motivation for physicians to refer patients for minimally invasive procedures.

In summary, at AtriCure, we are rapidly becoming a broad-based technology company.

The isolator synergy, open heart and minimally invasive systems, multifunctional bipolar pen, Coolrail Linear ablation pen, cryogenic probes, left atrial appendage exclusion systems and our OR lab mapping systems are all significant platform technologies, which we believe will stimulate growth well into the future.

Additionally, we believe that there are macro market indicators and new product releases, which suggest that our minimally invasive business is closer to the tipping point.

We strongly believe that our prospects for building a large, enduring company have never been greater.

At this point in the call, I would like to turn the call over to Julie for a detailed review of our financial performance.

Thank you Dave.

Starting first with 2007 full year financial results.

Total revenues were $48.3 million, representing a 26.3% increase over 2006.

Each business sector set new revenue records.

Revenues from domestic open heart products were $27.3 million, representing growth of 18.5% over 2006.

Revenues from domestic minimally invasive products were $14.4 million, a 30.6% increase over 2006.

International revenues were $6.6 million, a 58.5% increase over 2006, benefiting modestly as a result of the strengthening of the euro to the dollar.

As a reminder, revenues from our multifunctional pen, which is utilized in both open and minimally invasive procedures, are allocated between open and minimally invasive product revenues based on our best estimate of the pen's actually usage.

Now turning to gross profit and gross margin.

Gross profit for 2007 was $38.2 million, reflecting a gross margin of 79% as compared with a gross profit and gross margin of $30.6 million and 80.1% respectively for 2006.

The decline in gross margin was primarily attributable to an increased mix of international revenues, which generally carry lower gross margin as we market and sell to most international markets through distributors.

Next, an update on operating expenses and our net loss per share.

Operating expenses for 2007 were $50.7 million, representing an 11.8% increase over 2006.

The year-over-year increase in operating expenses was primarily driven by an increase in selling and marketing expenses, attributable mostly to an increase in headcount, an increase in variable selling expenses and increased marketing expenses associated primarily with an increased presence at key industry events.

As a reminder, late in the second quarter of 2007, the activities of certain clinical education specialists, which had previously been reported as a component of product development, were refocused to professional education and selling activities, which are a component of SG&A.

This redeployment of resources was the primary driver of the decrease in research and development expenses on a year-over-year basis.

The net loss for 2007 was $11.3 million, representing an 18% improvement over 2006's net loss of $13.7 million.

Net loss per share for 2007 was $0.84 on 13.4 million average shares outstanding as compared with a net loss per share of $1.13 for 2006.

As a reminder, the increase in average shares outstanding was primarily attributable to the issuance of 1.8 million shares of our common stock in a private placement transaction on May 30th of this past year.

In terms of the balance sheet and cash, we ended the year with cash, cash equivalents and investments of $20 million.

Our cash used in operations improved $4.4 million or over 35% from 2006.

2006's use of cash for operations was $12.5 million and 2007 was $8.1 million.

We ended the year with total debt outstanding of $1.1 million.

This includes a note payable to Cooper, related to our acquisition of them this past summer.

The note was paid in full in January of 2008, upon completion of the successful transfer of the manufacturing operations.

Now for a quick review of our fourth quarter 2007 financial results.

Total revenues were $13.2 million, a 24.1% increase over the prior year and a 9.1% sequential increase.

Revenues from domestic open heart products were a record $7.3 million, representing growth of 14.2% over the fourth quarter of 2006 and 8.4% sequential growth.

Revenues from domestic minimally invasive products were $3.9 million, a 17.9% increase over the fourth quarter of 2006 and a sequential increase of 10.1%.

International revenues hit a new record of $2 million, representing growth in excess of 100% as compared to prior year and sequential growth of 9.8%.

International revenues, as compared with prior year fourth quarter benefited modestly as a result of the strengthening of the euro to the U.S.

dollar.

Now moving to fourth quarter gross profit and gross margin, gross profit for the fourth quarter of 2007 was $10.5 million.

This reflects a gross margin of 80.1% as compared with 77.8% for the fourth quarter of 2006 and 77.1% as compared with the third quarter of 2007.

The increase in gross margin in the fourth quarter of 2007 as compared with the prior year fourth quarter was primarily attributable to the prior year fourth quarter, including a non-recurring inventory valuation adjustment.

The improvement in gross margin as compared with the third quarter was primarily due to reduced product costs associated with improved efficiency of the Company's new product lines.

Next, an update on operating expenses and our net loss per share.

Operating expenses for the fourth quarter of 2007 were $12.2 million.

This represents a 4.2% reduction over the prior year's fourth quarter and essentially flat on a sequential basis.

This is on a 24% increase in revenues over the prior year and a 9% sequential increase in revenues.

The year-over-year decline in operating expenses was primarily driven by a reduction in administrative costs.

The reduction in research and development expenses was primarily attributable to the classification change for the clinical education specialists we discussed earlier and a slight reduction in project-related costs.

The net loss for the quarter was $1.6 million, our smallest quarterly net loss since becoming a public company and a 63.3% improvement over the net loss of $4.3 million for the fourth quarter of 2006.

Sequentially, the net loss improved $1 million, or 39.8%.

Operating leverage has been demonstrated in each of our last three quarters, with three successive quarters of reporting a reduced net loss on higher revenues and a relatively consistent overall operating expense base.

Net loss per share for 2007's fourth quarter was a record low of $0.11 on 14.1 million average shares outstanding as compared with a net loss per share of $0.35 for the prior year's fourth quarter.

That was on 12.2 million average shares outstanding.

Our cash, cash equivalents and short-term investments at September 30, 2007 were $21.2 million and as we closed up the year, they were $20 million.

Now turning to 2008 guidance.

For 2008, we expect annual revenues to be in the range of $58 million to $60 million and net loss per share to be in the range of $0.55 to $0.70.

Thank you, and at this time, I'd like to turn the call back to Dave.

Thank you Julie and at this point in the call, we'd like to open the call up for questions.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Suraj Kalia with Piper Jaffray.

Please proceed.

Good morning, Dave, Julie.

Good morning, Suraj.

Congratulations on the quarter.

Thank you, Suraj.

Dave, first and foremost, congratulations on the live case at the Boston AF symposium.

It went really well.

In terms of the guidance for FY '08, can you shed some more color on what do you all see in the open heart and the minimally invasive segments, vis-a-vis the overall guidance of $58 million to $60 million?

Yes, we're basically calculating guidance on our current visibility.

We believe that all three segments, both open and minimally invasive and international, will demonstrate strong growth.

And the guidance that we are calculating, based on our current visibility, is in line with historical trends.

What's challenging for us to predict, we believe strongly that we are closer to the tipping point in minimally invasive, but when that tipping point will occur, how much momentum it will take to basically reach that tipping point is unclear.

So guidance, once again, is based on our current visibility and based on historical trends in our business over the last several years.

Okay.

And pardon the question, Dave, in terms of the ABLATE clinical trial, the patients are going to be free from all AF.

Is that the primary efficacy end-point?

At six months, the primary efficacy end-point is that no one patient -- or if a patient has more than five minutes of a single episode on a halter monitor or in totality has greater than one hour, they would be a failure.

So to put it the other way, if they have less -- no episode lasting more than five minutes and in totality the AF on a 24-hour halter is no longer than one hour, they would be declared a success.

Okay.

And have you indicated when you'll intend to finish enrollment in the trial?

We really haven't.

And part of the reason is this is a [basene] adaptive clinical trial.

So if the results are better, we'll need a smaller sample size.

If the results aren't quite as good, we may need up to 75 or 80 patients.

So we really haven't given any color, plus until your sites are really up and running and you have a few months of enrollment history, it's really hard to predict.

So we'd rather wait several months and toward the middle of the year give you more guidance on when we would anticipate completing enrollment.

The positive news is that the study end-points, we believe, are very achievable and the study end-point is only six months.

Fair enough guys.

Congratulations on the quarter again.

Thank you, Suraj.

Thank you, Suraj.

And your next question comes from the line of Charles Jones with Barrington Research.

Please proceed.

Hi.

Good morning.

Congratulations, guys, great quarter.

Thanks, Charlie.

Thanks.

Dave, I was wondering if you could go on a little bit with that.

I guess that means that you're going -- you're expecting an extremely high success rate if you're only expecting a maximum of 75 to 80 patients, right?

What would be the -- what kind of efficacy rates will they need to see to approve the device?

Approximately 70%.

Okay.

Now, if you look at the peer review literature, the results on the concominant procedure, in the permanent AF population have been better than that and our RESTORE-SR trial, which was very similar to the ABLATE trial, but had more challenging inclusion criteria, so we converted that trial over to the ABLATE trial and used that data to acquire a cardiac ablation indication for our clamp.

But if you look at those patients, 39 patients were treated and it was basically the same population of patients and the results were approximately 85%.

So we have that plus almost 45,000 patients treated with our open product and a series of peer-review literature in the open-heart area that will lead us to believe that these end-points are highly achievable.

All right.

Thank you.

And I was wondering if you could talk just a little bit about how long it'll take for Coolrails to get out to your installed base?

And --

A very good question.

Coolrail is the device that we have designed specifically to extend our ablation treatment and really mimic a maze-like procedure.

We're going to release the product, based on our best expectations of FDA clearance, this month.

We're going to limit the release in the U.S.

so that we can go to a few of our key centers and make sure that we get the training methodology down.

We'll want to make sure that the physicians understand how to mobilize key vessels to get to certain structures to perform the ablation, we'll want to make sure that the ablation technology is used properly and we'll also want to make sure that we confirm conduction block with each ablation line that we place.

So we'll use the first 30 to 45 days to complete a pilot where we'll gather ourselves in terms of creating our methods for training and advancing the product in the marketplace, but we're very confident, based on the pre-clinical studies, that this technology is spot on in terms of connecting -- making the connecting lesions that complete the maze-like procedure and will allow us to have more successful outcomes in the persistent and permanent patients.

And I was wondering if you have finalized your design in the second generation clip and whether or not you think that's going to be necessary?

Well the first generation clip is the one that we've implanted and the one that we, based on FDA responses, hope to launch in the fourth quarter of this year.

We have a series, actually two next generation designs for clips, that we're going to into pre-clinical studies with in the next 30 days, which are much more minimally invasive.

We view this as becoming the standard clip.

It has a lower cost of goods and we're developing some deployment tools, which will allow it to be more easily deployed through minimally invasive procedures but also potentially through subxiphoid procedures.

So we envision this next-generation clip and deployment tool potentially being used in the EP lab to exclude the left atrial appendage.

So how many patients have been treated with the clip in Europe at this point?

Sorry, if I missed that.

Fourteen patients have been treated with the clip in Europe and we've had a series of manuscripts in the preclinical studies, which have demonstrated the safety and efficacy of the clip in terms of its ability to exclude the left atrial appendage over a chronic period of time.

And will you continue to treat -- place clips in Europe throughout the year?

Or are you done with that now?

No.

We want to expand our European participation in clinical trials in part because right now, we're negotiating with the FDA.

It's most likely, like we've said in the past that even though this is a 510(k), the FDA will want human data.

Our current assumption is that the FDA will accept international data, so we're continuing to expand our clinical programs internationally plus, that will stimulate publications and allow us to get through some of the learning curves involved with not just this generation of technology but make sure that the designs that we develop for the next-generation technologies continue to improve.

Thank you, for the answers.

Congratulations.

I'll jump back in queue.

Thanks, Charlie.

Your next question comes from the line of Matt Dolan with Roth Capital.

Please proceed.

Good morning, Dave and Julie.

Hey, Matt.

Good morning, Matt.

With respect to the domestic open business, Dave, can you give us an idea of how much of an impact you thought the reimbursement change in '07 had, either quantitative or anecdotally?

And can you expand on your sense of the effect of the new codes for 2008?

Well, we certainly felt pressure from the change to a miscellaneous code in 2007.

We know this because we have a reimbursement specialist who is a consultant for the Company and answers calls about reimbursement.

So the calls about how to deal with open-heart reimbursement went up exponentially in the first half of 2007.

The new reimbursement code, we're early in the year but so far, our customers are -- seem to be very pleased with the level of reimbursement.

The level of reimbursement ranges from about $550 to $800.

If you remember, a [cabbage] pays about $800.

A valve pays about -- a valve procedure pays about $2,200 and the ablation procedure takes 15 to 20 minutes to perform.

So we did feel some pressure, particularly we think, in the western portion of the country in 2007 and we do anticipate some increased momentum from the new code in 2008.

But I will tell you that being the middle of February, it's a little early to tell what impact, how much impact that new code will have.

Sure, okay.

That helps.

And in terms of MIS, and I don't know if I missed this, but did you provide the number of treating centers during the quarter?

And going forward, are you sticking with your strategy of going deep into accounts in the U.S.?

Or should we expect that to expand in '08?

We did.

We did.

We mentioned 83 centers performing MIS procedures in the fourth quarter of 2007.

But what's impressive about that is if you look at the 2006 year-end, the number of centers.

And our strategy again has been to cement the number of centers for several reasons.

One is, we want to basically make sure that we train centers appropriately and limit the complications in the early stages of the rollout of a new treatment paradigm.

Secondly is that we want to focus centers on publishing papers, so we want our volumes and procedures to be focused on a smaller number of centers.

And third, we create efficiencies by focusing, and fourth, we create centers of excellence.

And one of the signs of the tipping points is that when centers that are regional centers around your centers of excellence begin to open programs to stay competitive, that's a sign of the tipping point.

And so, there are several good reasons why we wanted to stay focused.

But what's very impressive from our perspective is that we ended the year, the fourth quarter 2006 versus the fourth quarter 2007, weren't very different in terms of numbers of centers yet year-over-year, our minimally invasive business grew by 31%.

From our perspective, this is a natural progression in the marketplace.

Early on, you place product.

Now, the real challenge is to get product used.

And what we focused on is developing a market, getting into those 83 centers and making sure that we change referral patterns, appropriately address the training issues with surgeons and increase adoption within a critical number of centers.

And now, you're seeing publications, presentations.

I think a lot of that is due to the focus that we've had.

And we project in the not too distant future as we become more well known and more exposed at national meetings, in the publications and if the referrals begin to get greater in those centers that the neighboring centers will need to open up minimally invasive programs to be able to stay competitive.

And we are preparing our professional education systems to meet that demand.

Okay, great.

And then at Boston A-Fib, there was -- there's a fair amount of discussion regarding MIS moving to a totally thoracoscopic approach.

Can you give us an idea of your expectations and when this could be a reality for the procedure?

And thinking about your commentary on the variables that will drive MIS, what does that specifically mean for your ability to penetrate this whole therapy market?

Well, there are two major MIS initiatives.

One is to expand the ablation treatment, and two, is to go totally thoracoscopic.

Now, we're currently doing totally thoracoscopic procedures.

We have at least ten accounts that perform routine totally thoracoscopic procedures.

The issue for us though in terms of focusing our procedure development activities is to focus them on the expansion of the ablation treatments first and totally thoracoscopic second.

And the reason is that our minimally invasive thesis is largely based on market segmentation.

We believe that it's more important to stay within certain boundaries of minimally invasive but to actually be able to treat the patient with more ablation and be able to delineate catheter ablation more from surgical ablation.

So if catheter ablation is pulmonary vein isolation and minimally invasive ablation is pulmonary vein isolation, a connecting lesion across the roof, a line to the mitral valve annulus, the innovation of a left atrium and left atrial appendage exclusion, that procedure is different, more different and will allow us to segment the market, particularly in the high-profile centers where we have the key opinion leaders that perform catheter ablation.

And that market segmentation at those major centers, we believe will lead to exponential growth and contagious adoption in the mainstream.

Okay, very good.

I'll let somebody else jump on.

Congratulations on the progress.

Thank you, Matt.

Thanks.

And your next question comes from the line of Larry Haimovitch with HMTC.

Please proceed sir.

Good morning, nice year, nice quarter, Dave.

Hey, Larry.

I wanted to just check on a couple of things.

The international business was very strong during the year, wanted to get a little more color on that, which countries, what things you're doing over there and also the fact that the fourth quarter was much stronger than the rest of the year with how much of that was currency based versed just intrinsic growth.

Well, I'll answer the first one and let Julie talk more about the foreign exchange rates.

But in terms of international business, I think it's important to look back and say that AtriCure was a privately held company, a venture-backed company, until August of 2005.

And we had a very clear strategy to deploy resources in the U.S.

to create value for the Company.

After the IPO, using the net proceeds, we opened up a European BV and developed a European presence.

We also got more aggressive along the Pacific Rim, so we're really just beginning to scratch the surface of the international markets.

If you look at our markets share in the U.S, I think most people would concede that we have in the range of a 50% share in the U.S.

Our international markets are much less penetrated, so over the past several years, we've been bolstering up our distribution channels in Europe and along the Pacific Rim.

Specifically, we've had a significant focus on Germany, a lot because Germany obviously has 85 million people.

They now have good reimbursement for ablation, so we can be very efficient in Germany.

We have some direct people in Germany and we've also been very successful in the northern part of Europe as well and are becoming more successful in the South.

Japan has been a strong market for us.

China is becoming a stronger market for us and we believe that we have lots of opportunity all along the Pacific Rim.

But that's basically been more or less our strategy is to bolster our distribution channels a lot in Europe through the European BV, develop a European presence and also to be more calculated about distribution channels along the Pacific Rim.

And Dave, you have plans to increase the direct effort overseas as time goes on?

We do have an outstanding Vice President of European Sales.

We have two direct people in Germany.

We're going to go to two additional people in Germany.

We like the German market.

We think with 85 million people in the size of Montana it's a very efficient market.

It has good reimbursement and they tend to adopt new technologies.

So we like the German market, but we're having lots of success in UK.

We're certainly having success in The Netherlands and some smaller countries.

Overall, we think that Europe is a very hot market for us and we also have a very strong [effort], again, along the Pacific Rim.

We think it's a very much an under-penetrated opportunity for the Company.

In terms of foreign exchange, Julie?

Yes.

Larry, I would just indicate that a majority of our international revenues are still denominated in U.S.

dollars so certainly as the dollar weakened, then the balance obviously would be in the euro.

And as the dollar weakened in the latter half of the year, we did get a modest increase but virtually, all of the revenue growth is for all the reasons Dave just articulated.

And there's no stocking orders or anything, because the fourth quarter was especially strong compared to --.

It was strong but if you compare it to the third quarter, it was up roughly 9% or 10%.

So it wasn't dramatic growth --.

Yes.

Quarter over quarter, I think it's really the impacts of the business taking off.

Now on the minimally invasive side, you did very, very well this year as we thought you would and hoped you would, but I think the fourth quarter was not as strong as the rest of the year.

Is there anything that we should read into that, Dave?

Or is that just probably relatively small numbers still and not in that many cases?

Yes.

I think in the earlier-stage business, we're more subject to variability.

I also think there's a piece of the market development process that's important to think about.

And again, in 2006, we really start with a endoscopic product that's our first-generation endoscopic product with a soft tissue indication, and one peer review publication from Randy Wolfe with 23 patients followed for only three months.

So we go out to the market.

We open up accounts and you see some product being placed on the shelf.

What's encouraging to us is that the minimally invasive business grew 31% year-over-year in basically the same accounts, which tells us that we're getting traction and that we're changing referral patterns and that we're experiencing real adoption.

Additionally, if you just look at the growth trends, what's interesting is if you move away from year-over-year, the third quarter of 2007 was a very strong quarter for us despite seasonality.

In fact, it was only $300,000 off our all-time high and minimally invasive actually grew 10% sequentially.

International grew 10% sequentially.

Our open business grew 8.4% sequentially.

On a consolidated basis, the business grew 9% sequentially.

So we think that currently, all segments of our business are demonstrating strong performance.

And the average revenue per a -- per minimally invasive case for the year was approximately what?

There really hasn't been any changes of any significance.

There's some mild oscillations, Larry, but no real changes in ASPs per procedure.

Is it approximately about $8,000 as I recall?

Yes.

It's in the $8,000 to $9,000 range, depending on what series of products we use.

And then one more question for Julie and I'll jump back in queue.

The loss for the quarter was the smallest you've had.

I would have assumed that as you continued to build volume going into '08 that the loss would have diminished even more.

Can you explain why the loss is not going to be that much smaller?

And more importantly, what do you look for in terms of a break-even quarter either from a P&L standpoint, Julie, or a cash flow standpoint?

When could you be cash flow neutral?

Yes.

We look at cash flow neutral, Larry, more in terms of an annual revenue run rate.

So I think in the past, we've felt comfortable between a $65 million to $80 million range and that's still -- I'm sorry, $65 million to $80 million range and that's still the range we're comfortable in terms of cash flow and probably profitability neutral also.

And I definitely think that that's where we're still marching toward.

Great, thanks very much.

Thank you, Larry.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Steve Ogilvie with ThinkEquity.

Please proceed.

Hey, guys.

Good morning.

Good morning, Steve.

Do you pay out your bonuses at year-end?

And should that be in the fourth quarter [inside of] sales?

I'm sorry, what?

Say it again, Steve.

Do you pay out --.

Something about the sales reps, or --?

Yes.

For annual sales bonuses, are those paid in 4Q?

No.

Actually, our sales reps are actually paid on a monthly basis and then they have modest quarterly objectives.

Okay.

Then maybe you can help me understand because last year in the fourth quarter, there was a big uptick in SG&A.

I thought I remembered that some of that was bonus-related, but it was sequentially down this year.

Right.

So there was a change to the plans between 2006 and 2007.

You're exactly right.

So in 2006, there was a -- an annual component to the commission plan for the sales force and that plan was changed during 2007.

Okay.

Could you speak to whether or not they're hitting the objectives that would trigger bonuses?

I guess I'm curious about -- throughout the year, you've had steady sequential declines in SG&A.

Is that related to sales not hitting the targets they'd hoped to hit?

Actually, no.

I think the sales quotas and certainly guidance are fairly well correlated.

There's not a significant difference between the two.

It's not uncommon for you to have somewhat of a 20/80 percent roll in your sales organization.

We have some of that in our sales organization.

We have 20% or 30% of the sales people contributed more than the other 70% or 80% of the sales people but in general, we think that a high percentage of our people did make quota in that range that we're talking about and that the quotas are consistent with the numbers that we project for the street.

Okay.

And that just lastly again on the guidance on the bottom line, it just -- it seems like the $0.55 to $0.70 range, allows a lot of spending.

Is that -- are you thinking that that - the ABLATE trial is going to be expensive?

Or is it new headcount hires?

It just seems like this last quarter was pretty efficient in terms of spending, but it -- the projection for '08 doesn't mimic that.

Well, here's one of the issues to consider, Steve, is that -- if you remember last year, we had a $0.35 loss in the first quarter.

First quarter can be heavy because we have FTS.

We have Boston A-Fib.

We have a national sales meeting.

We have to pay for ATS and pay some of the fees for HRS, so fourth -- the first quarter of the year can be fairly heavy in terms of expense.

That's one thing.

The second thing is that we're into some other areas that have potentially very high opportunity for the Company such as this subxiphoid research project that we talked about that deals with potentially using clips from a subxiphoid position in the EP lab, potentially doing an endo-epi-ablation.

So imagine an electrophysiologist goes in to do a catheter ablation and then comes in from the subxiphoid position and mops up some of that ablation with a Coolrails technology from an epicardial perspective.

So one of the things that we did over the past 12 months that's worked very well for the Company and one of the reasons why you see so many new platform technologies in the Company is we've separated product development and research and development.

As a young company, those two functions were coupled.

We have one of our most talented, experienced people running product development and we have one of our most talented and experienced people running research and development.

And that's worked out very well and so, we have designs for products that are well out into 2009 and 2010.

And how much we invest in those products, it's not crystal-clear yet depending upon the progress in some of the feasibility phases of the development stage.

And I'd add to that Stevie, we talk a lot about being relatively comfortable with the number of domestic sales reps we have in the field.

But as Dave mentioned, we will be investing in some additional reps in the international market, so that's also something to think about as you think about '08.

Okay.

That's very helpful, thank you.

And then last question on the appendage clip, could you maybe characterize your conversations with the FDA in terms of they've given you an indication they may want to see human data.

Do you have any idea how much?

Does it have to be domestic?

It seems like there could be a huge swing factor there in terms of quarters, delay or earlier on the launch, depending on what they say.

All I can tell you is what we know today, Steve, and obviously this always such -- it could change in working with the agency.

But what we know today is that this project has been accepted as a 510(k), that even though there's a predicate device like a stapling system, which we've shown that our device raises no new issues of safety and efficacy, the FDA still seems to want human data.

That's not final but again, it's the prevailing conversations that we're having with FDA.

I think the agency is most likely to settle on a relatively small sample size of international data to support the 510(k).

So we're thinking that way.

The conversations that we recently had with the agency would lead us to believe that and we'll have our formal responses back in March and April and be able to give you more clear color on that.

Is there any precedence in terms of follow-up on one of the predicate devices on what the FDA likes to see?

Well, the interesting issue is that the FDA for these devices that have LAA claims like stapling systems didn't do any human data.

So there's two systems or three systems out there.

For example, one of the companies actually submitted -- they had general indications on their product and submitted for a specific LAA claim and showed that they were equal to the predicate devices, which were the U.S.

Surgical and Ethicon stapling systems and showed no human data.

The FDA here has been again leading us to believe that we will -- that they will want to see some small sample of human data and we've been talking to them about the least burdensome way for us to do that is to use our international studies.

So I don't want to characterize the sample size and the follow-up window yet, but based on our current conversations, we're optimistic that the sample size will be small.

The follow-up will be consistent with our preclinical studies, which was 90 days and we'll just have to wait and see come the March and April time when we get our formal responses back from the agency.

But that's been the tonality of our conversations.

Okay, great.

Thanks, guys

Thanks.

At this time, there are no further questions.

I would like to turn the call back over to Mr.

David Drachman for closing remarks.

Thank you everyone, for joining us today.

We look forward to revisiting with you in the very near future.

Thank you.

Thank you, for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.