AtriCure Inc (ATRC) 2009 Q1 法說會逐字稿

Good morning and welcome to AtriCure First Quarter 2009 Earnings Conference Call.

My name is Frances and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of today's call.

(Operator Instructions).

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

David Drachman, President and Chief Executive Officer of AtriCure.

Mr.

Drachman, please proceed.

Good morning.

Thank you, Frances.

And welcome to our First Quarter 2009 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 [Sara Wickman] at 513-7555-4136 and she will 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 also like to take the time to remind everyone on the call today that the Food and Drug Administration, or FDA, has not cleared our products for the treatment of atrial fibrillation, or AF.

A majority of our products 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 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 on the general attributes of the products for the current cleared uses and not for the treatment of AF.

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

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

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

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

Thank you, Julie, and welcome to members of the investment community who have joined us today.

AtriCure is a company on the move.

I will begin with opening remarks and a concise overview of the key elements of our strategic plan.

Then I will review our first quarter financial highlights, which demonstrate our business momentum and strides toward profitability.

Next, I will provide an update concerning the progress of our clinical trials and product development initiatives, followed by an update concerning the Department of Justice investigation.

At that time, Julie will present a detailed review of our financial performance.

We will then open the call for your questions.

The global demand for medical devices has never been stronger, as people are living longer.

This is rapidly expanding the need for effective cardiac ablation products.

The men and women of AtriCure are highly focused on strategic opportunities that provide strong growth potential and we are prioritizing our investments in order to achieve profitability.

As market leaders, we are confident that AtriCure is uniquely positioned in high growth markets with the right technologies, capabilities and people to meet our challenges and capitalize on the large and growing demand for our products.

Notably, we are making significant progress toward our key elements of our strategic plan.

Our plan priorities include achieving profitability, the expansion of our market share and leadership position through new product development, the 510k clearance and worldwide launch of our left atrial appendage system, and the achievement of FDA atrial fibrillation approvals.

Based on the strength of our markets, power of our strategic plan, and the progress we've made toward achieving our strategic priorities, we would expect the investment community will understand that AtriCure is uniquely positioned to deliver results for patients, physicians and shareholders.

Turning to our first quarter financial highlights, the decisive actions that we implemented during the fourth quarter of 2008 are fueling momentum and gaining traction.

These actions have prepared our business for 2009 and the long term.

Consolidated revenues of $13.7 million were up 1% year-over-year.

Notably, on a sequential basis, consolidated revenue was up 13%, open heart revenue was up 18%, minimally invasive revenue was up 7% and international revenue was up 12%.

Furthermore, gross margin improvement contributed to our strong bottom line performance.

Gross margin of 78.5% was up 240 basis points compared to the first quarter of 2008.

As we continue our march toward profitability, we achieved a significant reduction in operating expenses.

Operating expenses, excluding the impact of our goodwill impairment charge, decreased by $2.3 million, or a 16.5% year-over-year improvement.

Furthermore, excluding noncash compensation, operating expenses decreased 21%.

It should be noted that despite our significant operating expense improvement, our commitment to innovation and FDA approvals has never been stronger, which is evidenced by our incremental activities and expenditures in research and development and clinical science.

In terms of the bottom line, excluding the goodwill impairment charge, we achieved a net loss of $1.2 million, or 68% improvement compared to the same period a year ago.

In addition, adjusted EBITDA was $600,000 for the quarter.

Our adjusted net loss and EBITDA results are record performances since becoming a public company.

We believe that these results are strong indicators of our forward momentum and strides toward profitability.

In addition, we secured a credit facility which is comprised of a $6.5 million term loan and a $10 million revolving credit facility, with a maximum borrowing capacity of $10 million.

We believe that our financial performance and growth opportunities provided us with the ability to raise capital with attractive terms, despite challenging credit markets.

This credit facility strengthens our balance sheet and further supports our ability to execute our strategic priorities.

Now, a review of our investments and FDA approvals.

First, a review of our Ablate pivotal trial.

As a reminder, the Ablate clinical trial is designed to treat patients undergoing elective open heart surgical procedures that present with a documented history of atrial fibrillation.

The efficacy endpoint will be determined at the six-month patient follow-up based on the results from a 24-hour Holter monitor and the successful discontinuation of anti-arrhythmic drugs.

As a reminder, our PMA Shell, which includes a complete outline of all modules, has been accepted by the FDA and since our previous call, we recently submitted the second of four modules.

The acceptance of a modular PMA filing supports our commitment to obtain atrial fibrillation approvals as rapidly as possible.

The Ablate protocol design includes a Bayesian statistical plan, which requires enrollment between 50 and 100 patients.

If the clinical trends are favorable, our Bayesian statistical plan allows for an interim data analysis when a minimum of 50 patients has been enrolled in order to assess whether the results are predictive of a successful clinical trial, thereby reducing the potential number of patients required to demonstrate safety and efficacy.

During the first quarter of 2009 we initiated a temporary suspension of enrollment while an interim analysis was performed.

Based on our interim analysis of the data, we reinitiated the trial and now estimate 55 to 70 patients will be required to successfully complete final enrollment and meet the statistical endpoints of the Ablate trial.

To date, we have enrolled 52 patients and we expect to submit our final PMA module during the first half of 2010.

Now turning to a review of our FDA Exclude clinical trial in support of our left atrial appendage platform.

As a reminder, the pathway for US clearance is a 510k.

Our 510k clinical trial design requires that we submit data on 30 patients with three-month follow-up and 30 additional patients with six-month follow-up.

The FDA has granted us approval to enroll up to 70 patients.

To protect against patient dropout, we plan to enroll all 70 patients and submit our 510k during the fourth quarter of 2009.

To date, we have enrolled 65 patients in six sites since enrollment began in the fourth quarter of 2008.

We believe that rapid enrollment in this clinical trial is a strong indicator of the large and growing demand for our left atrial appendage system.

Now turning to a review of our key 2009 product releases.

AtriCure has a broader range of technology and science than our competitors.

And we have demonstrated our ability to innovate consistently, reliably and successfully.

This is evident in a number of new and distinctive platform technologies we have developed and successfully commercialized.

With that backdrop, our new, innovative disposable cryoablation system, Cryo1, received 510k clearance from FDA for the cryosurgical treatment of cardiac arrhythmias and an initial series of procedures has been successfully completed.

The Cryo1 system offers several important benefits, including a long, malleable yet rigid shaft, which results in enhanced tissue contact.

Superior ablation performance and an active defrost mode, which decreases procedure times and improves ease of use, are all features that we believe will be highly competitive in the marketplace.

In addition, the AtriCure Frigitronics console supports both our Cryo1 linear disposable probe and our established line of reusable cryoablation devices.

The Frigitronics brand has been a strong market presence and has a documented track record of safety and efficacy resulting from more than 30 years of successful use in the surgical treatment of cardiac arrhythmias.

The release of our Cryo1 system further positions AtriCure as the leader in the surgical market for cardiac ablation products.

AtriCure is now the only cardiac ablation company marketing a series of cryothermy and radiofrequency ablation systems combined with an innovative portfolio of enabling tools and mapping products.

We are excited to offer this new, innovative technology solution, which we believe will lead to market share gains and demonstrate our continued commitment to developing innovative technologies which improve and preserve human life.

We are planning full US commercial release of our Cryo1 system during mid June of 2009.

Looking ahead, we have a strong pipeline which we believe will expand our tradition of innovation and market leadership.

During the fourth quarter of 2009 we plan to launch a new generation premium clamping platform designed to be used in open heart procedures and to facilitate the increased adoption of our products to perform full arthroscopic minimally invasive procedures.

In addition, our new linear ablation platform will combine the minimally invasive capabilities of our Coolrail system and our multifunctional pen.

We plan to release our minimally invasive linear ablation platform during the fourth quarter of 2009.

With respect to the Department of Justice investigation, we understand that the investigation involves a number of companies in the device industry and relates primarily to issues of off label promotion and reimbursement.

AtriCure has not been served with any complaint or notice of suit and, to our knowledge, is not a defendant in any proceeding.

As to the investigation itself, AtriCure has submitted various documents to DOJ at DOJ's request and has discussed the issues of interest with the government on several occasions as part of a cooperative stance that the Company has pledged to take.

The Company, which does not bill or seek reimbursement from the government or participate in the billing done by hospitals or physicians, has made relevant submissions to the government and has asked the Department of Justice to handle its investigation expeditiously.

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.

Total revenues were $13.7 million, a 1.1% increase over first quarter 2008 revenues and a sequential increase of 13.3%.

Revenues from domestic open heart products were $7.1 million, a 2.5% increase over the first quarter of 2008 and a sequential increase of 18.4%.

Revenues from domestic minimally invasive products were $4.3 million, a 13.3% decrease over the first quarter of 2008 and a sequential increase of 6.6%.

International revenues were $2.3 million, a 37.9% increase over 2008's first quarter and an 11.6% sequential increase.

On an exchange rate neutral basis, international growth as compared to the first quarter of 2008 was 48.9% versus the reported 37.9%.

Consolidated revenue growth on an exchange rate neutral basis was 2.4% versus the reported 1.1%.

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

Now turning to gross profit and gross margin, gross profit for the first quarter of 2009 was $10.7 million, reflecting a gross margin of 78.5% as compared with a gross profit and gross margin of $10.3 million and 76.1% respectively.

The improvement in gross margin was primarily attributable to reduced mix of OR lab sales, which are considered capital equipment and carry a lower gross margin than our disposable products, and a reduction in product cost.

These contributors to gross margin improvement were partially offset by an increased mix of international revenues.

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

During the quarter we recorded a goodwill impairment of $6.8 million.

This represents a full impairment of all goodwill we had recorded.

The impairment was due to the reduction in our market capitalization, not in our cash projections.

The impact of the goodwill impairment was a reduction in our loss from operations, net loss before taxes and net income of $6.8 million.

The impact on earnings per share was to increase our loss per share by $0.48.

We have attached to our earnings release tables a schedule which provides a reconciliation of amounts I will discuss here today, along with a reconciliation of adjusted EBITDA, which are deemed non-GAAP measures.

Operating expenses for the first quarter of 2009 were $18.7 million.

Excluding the goodwill impairment, they were $11.8 million, a $2.3 million, or 16.5%, decrease over first quarter 2008 operating expenses.

The reduction in operating expenses was primarily due to reduced headcount related expenses, which were the result of our fourth quarter 2008 reduction in force, partially offset by an increase in share-based compensation and an increase in expenses in support of our product development and clinical activities.

Our first quarter 2009 loss from operations was $7.9 million.

Excluding the goodwill impairment charge, loss from operations was $1.1 million, representing our lowest adjusted loss from operations since becoming a public company and an improvement of 71% as compared with the first quarter of 2008's operating loss of $3.9 million.

Adjusted EBITDA for the first quarter of 2009 was approximately $600,000 as compared with a loss of $2.6 million for the first quarter of 2008.

This represents the first time we have achieved a positive adjusted EBITDA.

The net loss for the quarter of 2009 was $8 million.

Net loss, excluding the goodwill impairment, was a record $1.2 million, a 68% improvement over the first quarter of 2008's net loss of $3.6 million.

Net loss per share for the first quarter of 2009 was $0.56.

Excluding the goodwill impairment, net loss per share was a record $0.08 as compared with $0.25 for the first quarter of 2008.

In terms of the balance sheet and cash, we ended the quarter with $8.6 million in cash and cash equivalents and no debt was outstanding under our credit facility.

Our cash used in operations for the first quarter of 2009 was $2.4 million as compared with $3.8 million for the first quarter of 2008, an improvement of approximately 37%.

Our cash used for working capital needs, as a reminder, tends to fluctuate quarter to quarter.

And we believe the first quarter cash used to support working capital was heavier due only to timing and we anticipate this will normalize on a year-to-date basis during the year.

Now for an overview of our new credit facility.

On May 1st, 2009 we completed a $10 million credit facility with Silicon Valley Bank.

The facility provides for $6.5 million term loan, which bears interest at 10%.

The term loan was funded in full at closing.

Further, the facility includes a $10 million revolving credit facility.

Borrowings under the revolving credit facility are tied to eligible accounts receivable and eligibility may be reduced by amounts outstanding under the term loan, and it is also subject to other financial covenants.

In total, our borrowings under the term loan and the revolver cannot exceed $10 million.

We also issued a warrant to the bank to purchase 371,000 shares of our common stock at $1.22 per share.

The facility contains certain financial covenants, including minimum EBITDA and limits on our capital expenditures.

Our existing facility with National Citibank was terminated.

At this point, I would like to turn the call back to Dave.

Thank you, Julie.

In summary, AtriCure is a company on the move.

Our capacity to succeed and meet our challenges and opportunities with rapid, well executed solutions is enabled by the men and women of AtriCure, who are dedicated to our purpose.

Through their commitment and leadership, we plan to capitalize on the markets for our products and deliver results for patients, physicians and shareholders.

At this point in the call we would like to open up the call for questions.

Thank you.

(Operator Instructions) Our first question is from the line of [Mimi Fon] with JMP Securities.

Please proceed.

Hi.

Good morning.

Regarding the Ablate pivotal trial, can you remind us where your competitors stand in terms of getting a similar AF label?

Good question, Mimi, and thanks for calling in.

The only competitor that we're aware of that has a similar trial is Medtronic.

And we haven't heard updates from Medtronic specifically in terms of where they stand with their surgical ablation trial.

Okay.

And I know you didn't provide full year guidance, but would you expect to see sequential -- continued sequential increases in revenue through '09, especially considering your cryo full launch in June?

We feel very good about our momentum.

We're going to execute our plan to fully release our cryo system and continue to monitor our progress in the marketplace.

Great.

And then just last question, I guess.

Are you already seeing competitors back off on using the DOJ activities as a competitive selling technique as you were -- as we discussed in your prior call?

Well, now that the investigation seems to involve other companies which compete in our industry, certainly the impact of the Department of Justice in terms of our ability to compete has softened.

Okay, great.

Thank you so much.

Thank you, Mimi.

Your next question is from the line of Mr.

Lee.

Please proceed.

Hi, guys.

Good morning.

It's Tim Lee with Piper Jaffray.

Just a couple of questions here.

David, in the past you talked about some of the potential patient deferrals.

Are we still seeing some of that or just any commentary on the underlying marketplace?

Well, in general, what we talked about earlier, Tim, was that during October we thought that there was a significant decline in procedures, especially in discretionary procedures such as our minimally invasive procedure.

We believe that through the fourth quarter, the procedure volumes increased.

And at this point we believe the procedure volumes are beginning to normalize as compared to historical trends.

Thanks.

And then just kind of switching gears on the headcount side, I know you guys did a fantastic job in reducing your expenses.

Where did things stand at headcount?

Do you have the right headcount now?

Do you start building from this base or can we still see further reductions?

No, we believe that the cost of our business and the revenues are well aligned.

We plan to leverage the existing sales and marketing organization, continue to invest in new product development, and execute our clinical plans, and we believe that that will drive success in the marketplace and increase value for shareholders.

And just a couple of quick ones here.

Just given your current cost structure now, what type of revenue level is needed to achieve breakeven?

Well, as we said in the past on the previous earnings call that we believe that revenues between $57 million and $60 million that the Company will achieve positive -- consistent positive adjusted EBITDA.

And, I'm sorry, was that on your previous cost structure or is that your current cost structure?

On our current cost structure.

Current cost structure, thank you.

And then just one last one.

Next week at HRS, should we expect to see some additional data on your products?

We have a series of smaller, more targeted meetings relative to our products and increasing penetration in specific accounts.

Based on our efforts toward efficiencies, we're not going to sponsor a large symposium but yet we're going to do much more aimed approach toward penetration in very specific accounts.

Okay.

Thank you.

Thank you, Tim.

Thank you, Tim.

Your next question is from the line of Charley Jones with Barrington Research.

Please proceed.

Good morning.

Thanks for taking my questions.

Morning, Charley.

I guess I'll stick on that, Dave.

If we look at minimally invasive, it's down, and I guess I figure we're having a little bit of an economic impact.

But are you -- did you lose some accounts and you're seeing increases in some others or are you kind of seeing flatter usage across the board?

Just could you describe where you think minimally invasive is at right now.

Well, we're very excited about the momentum in minimally invasive.

Along with the realignment of our sales organization, we're focusing on profitable market share.

So we're aiming our sales organization at accounts where we can increase procedure volumes sooner, knowing that other accounts will need more market data for an inflection point.

So in general, we're seeing a larger number of procedures in a smaller number of accounts.

And then, Julie, I guess could you talk a little bit more about how you expect working capital to shift and where your cash balance goes?

Are we going to see a nice boost in second quarter or do you think you still have a little bit of inventory to build in the second quarter and then we'll see it come back in the third and fourth quarter?

Yes, good question, Charley.

So I think we really look at our working capital needs on an annualized basis.

And historically our working capital needs have about -- been about 20% of every growth dollar we needed tied up in working capital.

So we closed up this quarter with payable down roughly $1.5 million versus last year at the same point.

So we do expect moderation and recovery back to normalized working capital levels during the year.

Although we're not getting specific to the second quarter, there are indicators such as that accounts payable balance scenario I just provided you with that would indicate nice recovery that could occur in the second quarter also.

Okay, great.

Thanks, Julie.

And then, Dave, what's the enrollment -- the pace of enrollment, sorry, for the clip?

Seems like you're enrolling that pretty quickly now.

Well, since our last earnings call in mid February we've enrolled 40 patients in six sites.

We have 65 patients enrolled today.

We have a maximum approval from the FDA to enroll 70.

We believe that we will complete enrollment in the trial within the next week to two.

So we're seeing rapid enrollment and we think that's a strong indicator of how the market demand will look like when we filly release the product.

So when do you plan to submit your data to the Europeans for CE Mark?

We plan to be in the CE Mark approval process within the next several weeks and we plan to release the product in Europe during the fourth quarter of this year.

Okay.

And then I guess have you frozen any designs on a different delivery approach for the clip?

Can you just give us kind of an update where you're at with next generation clips and with delivery systems minimally invasive?

Well, certainly the research and development activities have been heavily weighted over the last year on clip derivatives.

We see the current clip being a very competitive product and driving new growth and new markets for AtriCure.

But we're not stopping there.

We have new clip designs that we think will be less invasive and be more broadly adopted.

In fact, we've completed six month clinical preclinical studies on those new designs and we're just very enthusiastic about the overall deployment of derivative technologies that we think will continue to become less invasive over time.

So was there any impact from cryo in the quarter or are you just -- or was it pretty minimal?

Well, we did our first cryo case on March 27th, so I think it's safe to say that there was zero impact in terms of Cryo1 during the first quarter.

Great.

That's it for me.

Thanks a lot.

Thank you, Charley.

Thanks, Charley.

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

Please proceed.

Good morning, everyone.

This is [Matt Palmer] in for Matt Dolan.

Thanks for taking the question.

Sure.

Just a couple of quick ones here.

What are the implications of the favorable panel vote for Atritech Watchman device for your LAA clip and the clinical community's view of the left atrial appendage exclusion?

Matt, that's a really excellent question.

In fact, in year 2000, a pioneering cardiac surgeon by the name of Dudley Johnson authored a paper called The Left Atrial Appendage, the Most Lethal Human Attachment.

Unfortunately, since then there's only been association of the left atrial appendage in terms of cardioembolic and stroke related to atrial fibrillation.

There's never been direct evidence.

We believe that the Watchman device, and I think the panel agrees, the Watchman device is the first system that really correlates the impact of excluding the left atrial appendage on reducing AF related strokes.

So we think that the Watchman device and its positive view from a clinical data perspective is going to have a very significant demand in terms of increasing the demand for products that exclude the left atrial appendage safely.

Okay, great.

And secondly, with the approval of the cryo ablation system, what are the implications for your competitive position?

Very strong.

We believe that the cryo market is one that we have not been able to capitalize on.

It's been a relatively important market over the last several years.

We're very encouraged by the initial results by our Cryo1 device.

The device is malleable, it's rigid, it has superior thermodynamics, we have a defrost mechanism.

We think all of these features will help this device become a very competitive system soon.

And also we have a very targeted and aimed sales force which focuses strictly on cardiac ablation products.

Okay.

And lastly on procedure volume.

Now, with more hindsight since the beginning of the more significant downturn late last year, how have your procedure volumes changed over the past several months and what are the implications for growth and referral patterns in this new environment going forward?

Excellent question.

Well certainly, as we talked about on previous earnings calls, we believe strongly that there was a moderation in procedure volumes, again, that we experienced beginning in October that began to neutralize and began to normalize over the last several months.

To date we see procedure volumes in some of our better accounts returning to historical highs.

On a going forward basis I think we'll need to continue to monitor the macroeconomics relative to these types of discretionary procedures.

But we certainly feel like there's renewed momentum within our minimally invasive business.

Okay, thanks for taking the questions.

Thank you, Matt.

Your next question comes from the line of Jason Mills with Canaccord Adams.

Please proceed.

Hi.

This is [Jamar Asmyalfer] for Jason.

Morning, Jamar.

Good morning.

I have a couple of questions.

Most of them have been answered, but kind of drill down on gross margin.

Thinking about the effective OR lab, are you seeing equipment sales down as a result of the macroeconomic environment?

How do you see those going forward and what effect is that going to have on gross margin going forward and also the ramp-up in cryo?

Okay, so, with respect to OR lab, that actually provides a positive impact to our gross margins.

We have a targeted number of (inaudible) and as I think we mentioned on the last call, the OR lab system was adopted into a majority of those centers.

So we were projecting lighter OR lab sales during 2009 as a result of heavier adoption during 2008, combined with the capital market -- the capital spending situation you referenced.

So all of that is going to be contributory to gross margin, as it carries a lower gross margin than our disposable equipment sales.

With respect to cryo, we are going to retain our gross margin guidance for the year between 74% and 77% because when we do roll out new products, the initial product cost tends to be higher and comes down over time.

And so I think you should expect us to stay in that range of 74% to 77% for the balance of the year, with some fluctuations quarter to quarter, also driven by the percentage of our international sales mix into any quarter.

Okay.

Also, following up on the competitive position of you versus the other guys in (inaudible) space, thinking about your reduced sales force now, are you going to target new accounts with cryo or are you -- or just going to be trying to convert your existing users to cryo?

We're certainly not -- we're certainly not going to go out and cannibalize our own business.

We're going to target new business with our cryo platform.

Well, some of the -- some of the accounts now, don't they use two separate -- two separate modalities in terms of some of the procedures?

They do, and where they use a disposable cryo probe we will go after that business in a very pointed way.

But we're not going to cannibalize our radiofrequency products with our own cryo technology.

We believe that radiofrequency and bipolar radiofrequency technology is still the standard for creating cardiac ablation lesions.

However, there is a market for disposable cryo products and we are going to go after that market with our Cryo1 system.

Okay, thanks a lot.

Thank you.

Our next question is from the line of Joanne Wuensch with BMO Capital Markets.

Please proceed.

Hi, guys.

It's Matt for Joanne.

How are you doing today?

Hey, Matt.

Morning, Matt.

Morning.

Just had a question if you could give me the number of centers for US MI in the quarter?

Seventy-eight.

Seventy-eight?

Okay.

And how do you see that trending through the rest of the year?

We think that given the cryo launch in mid June of this year that our sales organization will be largely focused on launching cryo successfully.

At the same time, we're seeing nice trends in those 78 centers.

So I think for the next quarter or two we'll be focused on fully releasing the cryo and continuing the momentum from a procedure perspective and adoption perspective in those 78 centers.

I think, as we get closer to 2010, we'll see a broadening of our number of MI centers.

Okay, so that's when you'll shift gears.

Then second question, I guess was wondering about [AFP] trends, both for the open heart and minimally invasive procedures, both in the quarter and how you see them playing out, given that you're going to have some product introductions.

Yes, I think the AFP for our existing products, Matt, have been relatively consistent now for several quarters and we haven't seen much uptick in that or much pressure in it.

So those have been really consistent.

Our cryo probe will have an AFP somewhere between $2,000 and $2,500, which is slightly less than our other disposable devices.

So looking at in a broad-based basis, you would expect consolidated AFP to come down slightly as we introduce that product.

Okay, great.

And then last one, you talked a little bit about some US MI trends, but can you also talk about the international business, which saw pretty good growth this quarter, and how you see that as a percentage of revenue through 2009 and 2010?

Good question, Matt.

We are very excited about the international markets, largely because the biggest international market, Europe, is an underpenetrated market for AtriCure.

Our share, our pie share of the US is significantly higher than our pie share in Europe.

We have a new leader in Europe and maturing distribution channels.

We're launching more and more products.

We'll release the cryo and the clip this year in Europe.

So we're very enthusiastic about the growth opportunities.

Number one, because it's an underpenetrated market for the Company.

And number two, because we have more leadership and maturing distribution channels.

Okay.

Thanks a lot.

Thank you.

Your next question is a follow-up from the line of Tim Lee from Piper Jaffray.

Please proceed.

Yes, thanks for taking the follow-up here.

Just wanted to touch on the DOJ issue, I guess.

What's next?

I mean is there any more deliveries planned?

Is there any more meetings planned?

When can we see some more progress on this and when can we potentially see resolution to this?

Tim, as you know, it's not something that we can really predict in terms of the processes while it's something that we would internally control.

However, there have been a series of communications.

We have meetings planned with the Department of Justice, face-to-face meetings.

We've had face-to-face meetings in the past.

And we're going to continue to work at their pace in terms of delivering the information requests as expeditiously as we can and follow up with them as quickly as possible.

To date, again, we feel good about the overall level of communication that we've had with the Department of Justice.

And we think that things are moving along as planned.

And then just one more.

In terms of the outlook for the balance of this year, it's -- I know you pulled kind of the '09 sales outlook.

But given that the patient level demand appears to have stabilized, given that this DOJ impact seems to have stabilized as well to some extent, when do you think you will be in a position to give us some sense of what you think your internal goals for sales growth for '09 may be?

We'll continue to evaluate that quarter over quarter, Tim.

Okay.

Thank you very much.

Thank you.

Your next question is from the line of [Kevin Cotler].

Please proceed.

Hi.

Good morning, Kevin.

Morning, Kevin.

Just a couple of things.

Did anyone mention the new inpatient codes?

Were there any changes that were noteworthy for you?

Nothing noteworthy.

We did a fairly bottoms-up analysis trying to understand those new codes yesterday.

And it appears that there's no significant change in terms of reimbursement as a result of that that would impact AtriCure and our business.

Okay.

And as far as -- Julie, as far as the SG&A, did you say that there was some big conferences in the first quarter that won't repeat in the second, third, fourth?

Generally, historically, Kevin, our conferences have hit in the first quarter and our first quarter has been seasonally heavy.

We didn't comment on it during this call but I do not expect as dramatic of an impact of seasonality in our operating expense line.

So we have two major shows in the first quarter.

We actually have two shows here again in the second quarter.

And then I think the historical pattern of some modest drop-off in the third and fourth quarter should continue.

But probably not as big of a drop or high seasonality as we historically have had in the first quarter.

Could you just tell us what the number was in the first quarter in terms of shows?

Well --

We attended [FTS] --

No, I know.

The dollar amount, though.

Oh.

We actually do not disclose individual marketing category dollars spend.

Okay, but I'm saying, like, just looking historically.

And I know that you've already cut a lot of costs.

But I was just trying to get the magnitude of what -- could we see the low point being more like an $8.5 million fourth -- you know, $8.8 million to $9 million fourth quarter versus just staying more flattish.

No, I think more flattish is more likely.

And I wouldn't expect the $8 million -- what I was trying to really articulate was we don't expect as much of a drop-off here prospectively as what we've had historically, Kevin.

Okay.

Dave, the Ablate trial, did you say you have a six-month endpoint?

Yes, we do.

Okay.

I was just curious, is six months the -- don't want to say the right endpoint but just given -- and I know there's not as many people doing as rigorous studies as you are, but as opposed to a nine or twelve-month endpoint or will there be continued follow-up on those patients to get that longer -- so is six-month endpoint like to you the gold standard at which you need to show or it's the shortest one the FDA would give you for approval but you're going to really try to get to the 12-month or 18, whatever the further endpoint would be.

Can you just go over that?

We actually will, even though this is not dependent on the approval, but we'll follow patients for five years.

Okay, but just generally speaking, if you said I was launching a trial and doing a six-month endpoint, would you feel that was the gold standard at which the market would accept it or is that better than what anyone else has done?

I think the concomitant data, it's a little bit of a different situation.

Number one, because the threshold is lower for performing the procedure, the patients are already in the operating room.

The second thing is that we've been performing concomitant procedures as a company since 2002, so there's patients out there now for five years or more that have had concomitant procedures.

So I think there's much more of a track record in terms of patient follow-up with a concomitant approach than with, for example, a minimally invasive approach, which has been done in smaller numbers and the follow-up is not as long in general in the marketplace.

Okay.

And then finally, just on the surgeon side, I know you're focusing more -- trying to take a more focused approach in your centers.

But, Dave, your background is EP but it seems to me that these cardiac surgeons are gasping for new products, especially with the advent of minimally invasive valve procedures.

And I just -- how do you assess yourself and the ability to attract surgeons and even surgeons that don't have the core EP capability?

Is that something that you could see yourself co-marketing or trying to expand distribution?

And just kind of overall do you think you need to emphasize that more as you try to grow the market?

Well, I think we have certainly grown the market over the past years and I think from a going forward basis, surgical ablation is still a new and emerging area for cardiac surgeons, as you point out.

And in new and emerging markets, the name of the game is focus, focus and more focus.

So we have highly skilled field teams and a sales and marketing organization that's highly focused on educating and training physicians, not just on the attributes of our products but also how our products should be used in terms of cardiac ablation.

So at this point in the process, I think the best way for us to approach the market is in a very aimed, targeted way and develop this emerging area through training and education and product innovation.

Got you.

So you're not concerned about just going to those centers that aren't doing EP ablation, saying, hey, you're doing these valves.

How do we get them engaged into a concomitant surgical approach?

I mean I guess ATS Medical has kind of that valve ablation, I guess maybe an easier access point.

And I just want -- you don't think -- you think focus right now is more important than trying to broaden that out.

We do.

Certainly Medtronic and Edwards have large shares, as does St.

Jude and [Carbomedics] have large shares in the market space for valve procedures.

So we think that the majority of valve procedures that are being performed, they're still not being performed when patients have atrial fibrillation with a cardiac ablation product.

So these companies like Medtronic and Edwards and St.

Jude that are out there marketing valves, there's still a large opportunity for AtriCure to penetrate that market, that open market, which we believe is about 30% penetrated in the US.

And how many accounts are you in in open heart centers?

I guess there's, like, what, 800 of those in the country?

We have sold product over the last 12 months into more than 700 US accounts.

Okay, so you're in most of the accounts that you need to be in.

Correct.

Okay, thanks.

Thanks.

Our next question is a follow-up from the line of Charley Jones with Barrington Research.

Please proceed.

Thanks again.

On that point --

Hey, Charley.

-- how many -- remind us how many active cryo accounts you have from Frigitronics and tell us what your plans are for a new system and whether or not you really need a new system to get adoption going in those accounts that already have a Frigitronics system.

Well, life to date there's been about 400 Frigitronics systems placed in the US that we're aware of.

Our plan is to upgrade those systems so that they're compatible with our reusable probe.

That's plan number one.

That plan in the initial pilot has gone extremely well.

The advantage of that beyond the concept of Frigitronics is the gold standard for cryo therapy, based on a 30-year history of safety and efficacy, is that physicians can use both a long disposable probe and a reusable probe.

We think that that model bodes very well for us in the marketplace.

So if you look at our reusable products, our disposable cryo products, and then our radiofrequency systems for open and minimally invasive procedures, combined with things like the pen, our mapping system, and then the clip, we believe that we have a very broad platform for physicians to choose from in terms of expanding our adoption within existing accounts that we currently sell.

And -- thanks, Dave.

And do you have any feel for what your safety rates will look like compared to Watchman?

I know this is kind of a competitor and a friend, but I was hoping you could kind of give us an idea of where you think you're going to fit in here.

We view Watchman much more as a friend than a competitor, somewhat complementary but different markets.

As you know, the composite endpoint for the Watchman device, the number of adverse events was presented at 8.7%.

We believe that our clinical trial will show a significantly less number of adverse events compared to that 8.7%.

And there's not going to be that drastic difference between the types of events, in your opinion?

Or is that --

Well, they're just very different devices.

As you know, the Watchman requires a large introducer sheath across the septum.

It requires a device that patients are implanted with but also requires Coumadin for 45 days, a minimum of 45 days, and then Plavix for six months thereafter and a lifetime of aspirin.

So they're very different devices.

With the clipping system, since the device is not being implanted into the circulating blood pool, there is no need to specifically prescribe Coumadin or any other antiplatelet or anticoagulation drug in combination with the clip.

So we think that patients will really like the clip system because they won't be committed to any drug therapy, especially a lifetime of aspirin or 45 days or more of Coumadin.

Just a couple of quick ones here.

Do you expect your -- could you give us an update on where the new RF clamp is, when you expect that to be approved?

Well, we expect to release it in the US during the fourth quarter of 2009.

It's an articulating clamp.

We think the clamp platform will drive new opportunities in the open because of its additional features.

So it'll be a premium plan for the open markets.

But importantly, it also helps facilitate physicians that are not yet doing [fluoroscopic] procedures to become more fluoroscopic surgeons and makes the totally fluoroscopic procedure more achievable for more surgeons.

All right, great.

And then the last one here.

Julie, could you give us an idea of how much the clinical studies are adding to your R&D?

Seems like it ticked up a little bit.

Do you expect it to stay at these levels for the rest of the year and pretty much here on out or do we see some drop later in the year as clinical studies wind down?

Yes, we don't segregate out clinical studies, but I think if you look at the R&D line in aggregate, we would expect that to have a little bit of choppiness.

But on a run rate basis I think what you're looking at is a fairly good run rate.

All right, great.

Thank you.

Thanks, Charley.

And at this time there are no other questions in the queue.

And I'd like to turn the call over to Mr.

David Drachman for closing remarks.

Thank you very much for joining us today.

We look forward to the next earnings call and continued progress.

Thank you.

Thank you all for your participation in today's conference call.

This concludes the presentation and you may disconnect.

And have a great day.