AtriCure Inc (ATRC) 2014 Q1 法說會逐字稿

Good afternoon and welcome to AtriCure's first-quarter 2014 earnings conference call.

My name is Sue and I'll be your coordinator for the call today.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Lynn Pieper, AtriCure's Investor Relations consultant from Westwicke Partners for a few introductory comments.

Thank you.

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

If you have not received a copy, please call 513-755-4136 to have one emailed to you.

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

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including 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.

AtriCure undertakes no obligation to publicly update any forward-looking statements.

Additionally, we may refer to non-GAAP financial metrics.

A reconciliation of these non-GAAP measures with the most directly comparable GAAP measures is included in our press release which is available on the Company's website.

With that, I'd like to turn the call over to Mike Carrel, President and Chief Executive Officer of AtriCure.

Mike?

Thank you, Lynn.

Good afternoon and thank you for joining us today.

We are off to a promising start to 2014 and we are pleased to report strong first-quarter results.

I will start today's call with a quick overview of our results for the quarter, followed by an update on the business, new product developments, and our clinical trial progress.

Then I will turn the call over to our CFO Andy Wade who will provide an overview of our financial results.

After that, I will come back to make some concluding remarks and open it up for questions.

First, based on the strength of our quarter, we are updating our guidance for 2014 to a revenue range of $101 million to $104 million, reflecting growth of approximately 23% to 27% year over year on a GAAP basis.

This includes contribution from products acquired in the recent Estech acquisition.

Andy will get into more detail about our financial performance and outlook in his section.

Turning to the quarter, our first-quarter revenue reached $24.8 million or an increase of 28% compared to the first quarter of last year.

Growth was balanced across both US and international with great strength on international side.

Highlights of our US performance were open-heart sales, which were up 14% and AtriClip sales which were up 52% in the quarter.

Our solid international sales were driven by key Contributions from the UK, Germany, Italy, and China.

We are now reporting OUS sales by product category.

And in the quarter OUS open was up 22%, OUS MIS up 50%, and OUS clip sales up 122%.

Moving to the integration of Estech.

We are pleased with the progress that we have made integrating our teams, products, and development activities.

Our early experience confirms that we have added the right products, pipeline, and people to further cement us as the leaders in the development of technologies to treat Afib and related conditions.

More specifically and more importantly, at this point we have fully integrated two sales forces, started cross training the teams in the field and at our global training meeting in February, ordered the Estech generators for our customers and our field, and will soon be consolidating the sales order process.

Additionally, Estech had 52 people when we acquired them early in the quarter.

By the end of the quarter, 27 remained, and we will likely be down to 20 by the end of Q2 and 16 by the end of the year.

Most of those remaining are in sales, sales support, customer service, and product development.

As expected and discussed on the last call, in the US Estech ablation product sales started slow as we started the integration and training and sales started to ramp nicely as the quarter came to an end.

Our US sales force did not receive their major training in Estech products until late February at our global training meeting and as such we saw a slow January and February and the uptick in March.

We continue to expect contribution from Estech products to ramp throughout 2014 as we get our sales force fully trained.

Given Estech's presence internationally, we experienced strong contribution from Estech product revenue in the quarter which we expect to continue.

As for our training and education initiatives in the US, we are gaining momentum around our efforts.

We are now moving towards more advanced courses.

We hosted to such two such advanced training courses this quarter and both were filled to capacity.

To provide a bit more color, these are smaller courses designed to be very impactful, and they are.

The attendees tend to fall into two different categories.

One, those who have previously been to didactic training and were at the advanced course to improve their skills with our solutions.

And, two, physicians that have recently completed the basic Maze IV training course, then opted to stay afterwards for a more advanced teaching and to apply what they have learned in a hands-on setting.

Overall, we continue to see strong and increasing interest in training on the safe and effective use of AtriCure products.

At the same time, physicians, providers, and payers are actively seeking better ways to treat and manage Afib.

Increasingly, providers are looking at developing integrated Afib treatment centers that bring multiple disciplines together to deliver the most effective and efficient care including the surgical treatment with AtriCure products.

Internationally, our education and training initiatives are also gaining traction.

We have partnered with leading Afib centers in the European Union to provide best-in-class training on surgical cardiac ablation and formed a Maze IV European educational steering committee that includes many of Europe's most innovative, experienced, and highly regarded physicians involved in the treatment of Afib.

We've accelerated our training programs and have now conducted four Maze IV training courses in Italy, the UK, China, and Australia.

In 2014 we plan to conduct 10 surgical cardiac ablation training programs outside of the US.

These courses are just one tool of many we are using to trained physicians.

We will continue to offer courses and scientific programs in conjunction with medical society meetings and congresses around the world, as well as explore other methods of meeting the growing demand for training and education in this space.

Now turning to business trends.

In the first-quarter US open heart revenue was up 14% compared to the same period last year.

We continue to build momentum on the early gains of our investment in education training which we are confident our resulting in sustainable growth opportunities.

On that note, I'd like to share an exciting competitive win in the US.

We now have 100% of the surgical cardiac ablation business at a former competitor's account, Mission Memorial in Asheville, North Carolina.

Dr. Mark Groh and Mission Memorial share AtriCure's passion and vision for improving the lives of Afib patients.

Dr. Groh is internationally recognized as an innovator and leader in the surgical treatment of Afib, and AtriCure is proud to partner with him and Mission Memorial, going forward.

AtriClip again contributed meaningfully to our US growth rate in the quarter with growth of 52% over last year.

We are seeing increased evidence that management of the LAA in Afib patients continues to gain acceptance.

In mid-March the International Symposium on Left Atrial Appendage, or ISLAA, took place in Orlando.

This symposium was led by Dr. Lakkireddy of the University of Kansas and had in attendance over 140 physicians, including many leading EP's and interventional cardiologists.

Exiting the symposium we have increased confidence our technologies for the management of the LAA will be a sustained growth driver.

As we expand our education and training programs to this area, we expect to continue to see increased utilization, competitive share gains, and cross-selling opportunities.

MIS sales in the US were up 10% in the quarter.

Note that this includes contributions from the Estech products.

The integration is still in the early phases, so Estech fusion sales were modest but did contribute to the growth.

As I communicated last quarter, we will not be providing a breakout of the Estech product contribution by product category.

However, to provide some color Estech's Afib products are largely used in MIS procedures, and the majority of Estech's US sales are reported in the MIS category.

Encouragingly, we have already seen many AtriCure customers adding Estech products to their surgical ablation procedures to complement the AtriCure products that they were already using.

As for the underlying US MIS market, after four years of declines in our business in 2013 the MIS business stabilized and grew, but at a modest pace.

Q1 was no different and we expect the modest growth to continue throughout the year with some improvement driven largely by the Estech Fusion product line.

We expect that when results of our ongoing clinical trials are available, that data will drive significant growth in the MIS segment, long-term.

International revenues were $6.7 million for the quarter, an increase of 40%.

Sales were up significantly across the EU, especially in the UK, Germany, and Italy.

Asia was also strong in the quarter with particularly strong growth in China.

Operationally, our gross margin was 71% for the quarter and our net loss of $7.7 million or $0.31 per share, both in line with our expectations.

This included $2.6 million or $0.10 per share on expenses related to transitioning the Estech business into AtriCure.

The remaining increase in operating expenses was driven primarily by an increase in selling, marketing, and product development and training expenses.

The integration of our acquisition of Estech has been successful to date.

And while overall operating expenses were higher in the first quarter of 2014 compared to 2013, they are in line with our expectations and investments in our operating structure, and we are maintaining our adjusted EBITDA guidance for the year.

Moving to an update on our clinical programs.

We have enrolled 285 patients in our ABLATE post-approval study, up from 258 as of our year-end call.

All 50 sites are online, up from 48 sites at the end of last quarter.

We have also submitted a protocol amendment to the FDA to increase the enrollment by up to 40 patients with the expectation that we'll add between 20 and 40 patients.

We anticipate the amended protocol to be approved shortly and continue to expect to complete the enrollment by the end of this year.

On the staged DEEP AF trial, we are on track to submit our pivotal trial protocol to the FDA in the second quarter.

We recently had a meeting with the agency in which we received positive feedback, and we are in the final stages of working with our scientific advisory board in preparing our protocol for submission.

We submitted 30-day safety data on the feasibility trial patients in February, once all the patients had completed the follow-up.

Moving on to our stroke trial.

I'm pleased to report that five of the seven sites that received have received IRB approval.

We anticipate that the first study procedure will take place in the current quarter.

As you may remember, this is a seven-site, 30 patient feasibility trial with primary safety evaluations at 30-day and six-month follow-up.

We expect to have enrollment complete by the end of 2014.

We are simultaneously in discussions with the FDA on the protocol for the pivotal phase of this trial.

We are still in the early stages so stay tuned for more details in the upcoming quarters.

In summary, 2014 is off to a solid start.

We will continue to focus our investments in education, innovation, and clinical science, which we believe will fuel long-term growth.

I will now turn the call over to Andy Wade, our Chief Financial Officer.

Thank you, Mike.

For the first quarter of 2014, revenue increased 27.9% to $24.8 million.

Revenue from product sales in the US was $18.1 million, an increase of 23.9% from the first quarter of 2013.

Revenue from open chest ablation related product sales in the US increased by approximately $1.3 million to $10.4 million, and US sales of products used in minimally invasive procedures increased approximately $316,000, to $3.4 million.

US sales of the AtriClip system during the first quarter of 2014 were $3.6 million as compared to $2.4 million for the first quarter of 2013, an increase of 51.7%.

International revenue grew 39.9% on a GAAP basis and 36.4% on a constant currency basis as compared to the first quarter of 2013 to $6.7 million.

Valve tool sales totaled approximately $1 million worldwide, $698,000 in the US and $287,000 and the international markets.

Gross margin for the first quarter of 2014 was 71.1% as compared with 72.5% for the first quarter of 2013.

As expected, the sales of products acquired in the Estech transaction put some pressure on the overall gross margin.

Additionally, the international sales mix was higher in 2014, which also has a negative impact on gross margin.

Pricing remained relatively steady.

Operating expenses increased 61% or approximately $9.7 million from $15.9 million for the first quarter of 2013 to $25.6 million for the first quarter of 2014.

Research and development expenses, which includes clinical activities, were $4 million for the first quarter 2014 or 16.1% of sales, an increase of $495,000 over the first quarter of 2013.

SG&A increased approximately $9.2 million from the first quarter of 2013 to a total of $21.6 million, or 86.9% of sales.

The increase was due primarily to increases in selling, marketing, product development, and training costs.

Our operating loss for the quarter was $7.9 million as compared with approximately $1.8 million for the first quarter of 2013.

Our adjusted EBITDA loss was approximately $4.7 million compared to an $820,000 adjusted EBITDA loss for the first quarter of 2013.

Note that our EBITDA loss in Q1 includes approximately $2.6 million of costs related to transitioning the Estech business into AtriCure.

Our net loss per share was $0.31 for the first quarter of 2014 compared to $0.10 for the first quarter of 2013.

We ended the quarter with $79.4 million in cash, cash equivalents, and investments.

Additionally, we had approximately $9 million of borrowing capacity under the revolving portion of our credit facility.

Note that we paid off the $6.3 million remaining balance of our term loan during the quarter.

We also had heavy burn during the quarter due to the payment of transaction-related expenses for the Estech deal including transitional payroll, severance retention, and professional services fees.

Lastly, we are positively adjusting our guidance for 2014.

We anticipate top-line growth of approximately 23% to 27% year over year for a range of $101 million to $104 million on a GAAP basis, including the contribution of the products acquired in the Estech acquisition.

For modeling purposes we continue to expect sales from Estech products to ramp up throughout the year, with a greater contribution in the second half.

We anticipate gross margin to be approximately 70% to 72% for the year, based on current trends.

This does represent a decrease from the 2013 reported gross margin due primarily to a slightly lower relative gross margin on acquired products, a strong international mix, along with Estech transaction-related costs.

We are still targeting long-term gross margins of 75% and believe this is achievable.

We expect R&D to be 19% to 20% of sales, and we expect SG&A to be roughly 72% to 74% of sales in 2014.

These figures include approximately $3.5 million in transaction costs related to be Estech acquisition.

Outside of the transaction-related expenses we anticipate increased spending related to clinical science, R&D, selling, training, education, and international expansion.

We expect adjusted EBITDA for 2014 to be a loss in the range of $9 million to $10 million, including transaction related costs, which we estimated at $3.5 million.

As noted earlier, $2.6 million of this was realized in the first quarter.

As previously disclosed, we expect the Estech transaction to be dilutive to earnings in 2014 and accretive in 2015 and beyond.

Finally, we anticipated an increase in net cash burn for 2014 versus 2013 due to the expense items just described, along with working capital and capital expenditures needed to support our growth strategy.

At this point, I would like to turn the call back to Mike for closing comments.

Thank you, Andy.

In sum, we are off to a good start in 2014.

AtriCure is positioning itself as a leader in the treatment of Afib, and we will continue to set the foundation for the Company to achieve consistent future growth.

We support our physicians with solutions they need for their patients by delivering to the market a full suite of innovative and unique products and continuing our commitment to training and education.

We look forward to updating you on our progress during future calls, and we will now open the call to questions.

(Operator Instructions) Thom Gunderson, Piper Jaffray.

I have one question on US, one question on international.

The US question is, I'm curious about what we have called same-store sales in the US.

You've been on a huge ramp of training and getting new guys in and getting old guys back up to speed.

I'm curious if you've looked at some of those maybe late 2012 docs that came back into the fold or early 2013 docs.

What kind of experience you've seen with their programs?

Great question, Thom.

What we're saying seeing from experience -- we do look at -- actually we track people that come to training and their revenues six months before, six months out, nine months before the training, and then 12 months.

And it's actually very consistent in terms of the numbers that we're seeing.

Overall, we're seeing an increase in those that are actually coming through the training process that -- we're seeing about a 30% overall net increase.

What's interesting about that is that we've got about a 67% to 70% increase in those that are actually seeing increases and then there are some accounts that may be a doctor has moved on or they have moved to a different site, so we are seeing some decreases.

So, actually, in those accounts that are increasing we are seeing even a larger number there.

So, we do track that and look at that very closely, and we are seeing some good penetration.

I know on previous calls we have talked about the fact that some of our gains were based on share gains, and I think that it was about a 50/50 split I talked about before.

And now I think we're starting to see it more come from same-store sales, to use your terminology, where more of those sites are actually buying from us, and we're getting increased penetration there.

Just because we don't have as many competitive accounts to necessarily turn that quickly anymore.

And we said 50/50 is what it was.

Would you venture what it might be now?

It would be somewhat of a guess because I don't know for sure, but it's moving probably more towards that 65/35 or so range -- maybe 75.

But it's a guess.

We are still getting some competitive wins but it's not as large as what it was before.

Got it.

Thanks.

And the international question is you mentioned plans for 2014 of international expansion.

In Q1 was any of that larger than expected number adding new countries?

It was not.

We had a couple of cases in France, so we actually had our first shipments there.

But it was a de minimis amount of revenue from that.

A lot of our growth was just the investment that we made over the last 16 or 17 months in the international infrastructure is starting to gain traction in all of the areas.

The UK, Germany, and China are some of the key ones.

UK, Germany, and Italy were really driven a lot also by getting Estech sales.

The Estech had a great international presence.

I think I've mentioned on the call before, that's really where we saw a tremendous amount of growth was on the Estech side, and the integration was a lot smoother in Europe only because we weren't kind of playing and putting two forces together.

What we were doing there was it was more of a bolt on, so we could kind of split Germany up.

We could add presence in the different area, and they were selling different accounts, whereas in the US it was literally basically just rationalizing the sales forces and putting them into one.

Got it.

Thank you.

Jason Mills, Canaccord Genuity.

Thank you, operator.

Congrats on a great quarter, Mike and Andy.

So my first question is sort of corollary to Thom's question.

Specifically, organic growth.

I understand it is kind of a complicated answer, or at least I'm supposing it is.

You've got organic growth in the base AtriCure business and then you're adding Estech.

But based on our due diligence, obviously, the Estech is augmenting sales, at the same time you are melding your data.

I would suppose maybe in some cases where they would have used AtriCure products maybe now they are using Estech, so there's sort of a blurring of the lines there.

But I'm wondering if you could tell me just as best you can on a pro forma basis the trends that you saw exiting 2013, let's say, second half of 2013 in organic sales relative to the trends in organic sales in Q1 and what you expect going forward, taking into account sort of that phenomenon where you have to blurring of the lines.

I think you stated it well.

There is a little blurring of the lines so is difficult to give specific numbers on that.

But I'd say that thematically maybe as opposed to trends hopefully this helps out a little bit, Jason, is if you look on the international side of the market we saw faster growth for sure both on and organic and on adding up the Estech product line.

I think those are basically growing at a very nice pace and that we really saw some of the investment that we made in 2013 start to take hold.

If you recall last year, our growth rate in the US was faster than international.

And I had originally anticipated that the international would grow a little faster.

But these investments really had to take hold and we started to see that quite a bit.

We also saw because of those investments, it was really simple to integrate the Estech team and technology.

So that was on the international front.

When you think about on the US side of things, I'd say that -- let's take it down kind of by product or kind of product category area, if you look on the open side of our business, we continue to see nice growth on that front consistent with some of the numbers that we saw before.

There is a little blurring of the lines, primarily because on the Estech side they did have plants.

They did have some open business.

That actually is a shrinking portion of the portfolio.

There wasn't a lot of focus on with our team and kind of the movements on the sales force there.

But overall we believe that it's pretty consistent.

The clip sales continue at a nice, robust pace -- consistent.

I think that's pretty easy to kind of break out because they did not have a clip technology.

And then on the MIS side we really had kind of a flat, slightly down or so with Estech making up most of it, which is consistent with the messaging that we gave last year, which was, we thought we had seen the bottom of kind of where we were.

We did see more growth last year them the expected on MIS, and I think I've been trying to really guide everybody to understand that the MIS side of the business, we've got to get our trial up and running and going.

We will get boosted and bolstered by the MIS business coming from Estech.

And that's really where we are seeing most of the upside.

Hopefully that gives you some context.

So it was a little slower growth on the MIS, from a trending from last year, but that was -- a lot of it is just kind of bringing in this new product line.

And is some of the Estech stuff taking out over?

That's where you get a lot of blurring of the lines.

So I had a different question, but it actually leads into [the minimally invasive side].

I think I am going to supplement it with this one, which is as you get the staged DEEP AF trial up and running, obviously, I think prudently we should probably assume that it's going to be a while until you see that data and perhaps on the presentation of that data is when you really start to see the market work for you on MIS.

But what you expect in the interim during the course of a pivotal trial?

Are you expecting that to be somewhat of a tide that lifts the boat?

I'd be conservative on that.

I think typically you will likely see that in many companies when they do get their trials up and running, but as our plans and as we are building out our business, we're just assuming that it's going to be modest growth, other than what we are seeing from the Estech side of things.

Modest to very low growth on what was the AtriCure products and adding on the Estech products on top of that should see some top-line growth.

But I'd say my answer is pretty consistent on that.

This year, in 2014, there won't be much just because the trial we are going to submit here hopefully very soon, once we get that submitted we will have time to go back and forth with the FDA with the goal of getting that approved by the end of the year and really being in a trial sometime next year.

Could there be an uptick relative to that?

There absolutely could be, but I'm a little conservative to bank on it.

Okay.

And I'm going to cheat because I do think the question I wanted to ask is an important one.

There is another company here that whose CEO joined your board, whose long-term growth prospects, in our view, are quite good.

They had a sales force add that causes some destruction in one of his businesses.

I know you know what I'm talking about, but I just wanted to ask you specifically, as you look out over the next 12 months and you're adding sales marketing and doing a ton of training if you could foresee or should we be aware of any period of time where your reps -- maybe training your new reps or training sessions may be heavy that we should be aware of?

I'd say that the biggest disruption really was in the first quarter for us.

We put two different organizations together, did new training, and net new products, so this is a really heavy quarter for that type of training for us in the US market, which is why long-term we feel really good about it.

We're not adding as many as others are adding, from that standpoint.

We're growing -- I think we're at about 42 direct reps today, and we'll probably be, as we've talked about before, between 42 and 45 or so by the end of the year.

So we're not adding as many right now in terms of territories.

Thanks, Mike.

Danielle Antalffy.

Hi, good afternoon, guys.

Congrats on a great quarter.

I had a clinical question and then a sales question for the quarter.

So on the clinical side of things with the stroke trial, will you move on to a broader trial once you see safety data?

Or do we have to wait for the six-month follow-up so that we see some efficacy data, as well, before you pursue a more broad-based trial?

We are going to have to see some safety data but it depends on really the FDA.

If they are starting to see that we are -- we are in parallel conversations with them so we would love to accelerate it and show them the data from, quite frankly, the DEEP feasibility trial where we did put a clip on every one of the patients and the fact that we've got a lot of these out there already that have been deployed safely.

And so, we're trying to leverage that in our conversation.

But we are not going to bank on it at this point.

We're going to try to get this trial up and running, get these 30 patients, and hopefully they will feel comfortable with it earlier.

So we are doing a parallel path.

Okay.

Great.

And then a question on any potential sales synergies in the quarter.

Estech did have a few accounts I think that you guys were not in.

Have you guys been able to penetrate those accounts, and how much are you saying from a sales synergy perspective on both sides of the equation?

I'd say it's to be told on their accounts because as you might expect near the end of an acquisition at the end of last year their accounts had all sorts of different items that were kind of going in and out.

There was a confused sales force at the end because we announced it before the end of the year.

I'd say that we are starting to get some synergies in their accounts, starting to build relationships.

But I wouldn't say that there is a lot of synergy in bringing our net new products into their sites yet because we've got to build trust into a new site where didn't know those or have those relationships before.

So that's going to take a little bit of time.

I think the synergies on that front will really come near the end of the year and into next year.

We are seeing -- now where our guys have good relationships in our accounts, we are starting to bring in some of the Estech products.

And we are starting to see them being used and that we are definitely starting to see some synergy on that front in the US market.

On the OUS side, it's a little more synergy that we're definitely seeing in terms of the teams working really well together.

Again, because the bolt-on made it a little bit easier from that standpoint.

Okay.

Perfect.

Thanks, guys.

Thank you.

I would now like to turn the call over to Mike Carrel for closing remarks.

Well, everyone, thank you very much for joining us today and participating on the call and your interest in AtriCure.

Have a great evening.

Talk to you soon.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you.