AtriCure Inc (ATRC) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to AtriCure's Second Quarter 2014 Earnings Conference Call. My name is Denise 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 send the conference over to Jamar. Please proceed.

Thank you, Denise. By now you should have received a copy of the earnings press release. If you have not received this 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 our website.

With that, I would like to turn the call over to Mike Carrel, our President and Chief Executive Officer. Mike?

Thank you, Jamar. Good afternoon and thank you for joining us. We are pleased to report strong second quarter results, which reflect our continued progress in building our commercial, clinical, and education-focused platform.

First, based on the strength of our year-to-date results, we are again raising our guidance for 2014 to a revenue range of $103 million to $105 million, reflecting approximately 26% to 28% year-over-year growth, up from our previous guidance, which we had raised at the end of last quarter to 23% to 27% growth.

Now, turning to the quarter. It was all about execution this quarter. Our second quarter revenue reached $26.5 million, or an increase of 30% compared to the second quarter last year. Growth was balanced across both the US and international.

In the US, open heart sales were up 19%; MIS, 25%; and AtriClip sales were up 42% in the quarter. OUS open heart sales were up 20%; OUS MIS was up 57%; and OUS clip sales up 18%.

Our robust international sales were driven by key contributors in Italy, Germany, Benelux, China, Turkey, and Russia.

The integration of Estech has gone according to plan and our experience to date validates our belief that we have added the right products, pipeline, and people to further cement us as the leader in the development of technologies to treat Afib and related conditions.

We fully integrated the two sales forces last quarter, and the teams in the field have now been cross-trained. Our sales team has a complete set of products, including Estech generators, and we are beginning to see the benefits of cross-selling. As discussed, when we acquired Estech we took steps to immediately make a positive impact on the expense structure of the Company, with a view of making sure the transaction would be accretive in 2015.

Estech had 52 people when we acquired them early in the first quarter, and by the end of the second quarter 21 remained, and we will likely be down to 12 by the end of the year. Most of those remaining are in sales, operations, and product development.

We also conducted our first major training on Estech products in late February, and we continue to train our sales team in Estech fusion procedures. We continue to expect contribution from Estech products to ramp throughout 2014 as our sales force gets up to speed on the technology.

We remain committed to building the market through training and education, and our efforts in the US are going well. We conducted seven advanced training courses in the US this year and expect to complete 15 by year end. The increased dialog between physicians is a highlight of the course, and the level of engagement continues to grow. The physicians consistently leave the course saying it is the best and most spot-on training they've had with a device company.

We're also continuing to gain traction with our international training initiatives. 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 have now conducted seven international Maze IV training courses. In 2014, we plan to conduct 15 total surgical cardiac ablation training programs outside of the US.

In addition to these courses, we will also 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 the space, including fellowship programs and in-person case observations.

Now turning to the business trends. In the second quarter, US open revenue was up 19% compared to the same period a year ago. We continue to build momentum on the early gains of our investments in education and training, which we are confident are resulting in sustainable growth opportunities.

AtriClip continued to be strong in the quarter as a contributor to our US growth rate in the quarter and it increased 42% over last year. AtriClip Pro increased 70%, while open clips were up 33%.

MIS sales in the US were up 25% in the second quarter, driven by the contribution from Estech products, and we expect Estech fusion sales to ramp throughout the year. The underlying US MIS market after four years of declines in our business stabilized and grew at a modest pace in 2013. We have seen the same in Q1 and Q2 of 2014 and continue to expect modest organic growth throughout the year with reported important driven largely by the Estech fusion product line. Our future growth in this area will be driven primarily by the clinical trials we are pursuing.

Internationally, revenues were $6.6 million for the quarter, an increase of 33%. Sales were up across Europe with strength in Italy, Germany, Benelux, Turkey, and Russia. Asia was also strong in the quarter, with particularly strong growth in China.

Operationally, our gross margin was 70.8% for the quarter and our net loss was $2.7 million, or $0.10 per share, both in line with our expectations. This included $900,000, or $0.03 per share, of expenses related to transitioning the Estech business to AtriCure. The remaining increase in operating expenses was driven primarily by an increase in selling, marketing, 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 second quarter of 2014 compared to 2013, they are in line with our expectations and the 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 325 patients in our ablate post-approval study, or PAS, which is up from 285 as of our first quarter. As a reminder, all 50 sites are on line as of last quarter. The FDA has also approved our protocol amendment to increase enrollment by up to 40 patients and we expect to add between 20 and 40 patients and continue to expect to complete enrollment by the end of the year.

On the stage deep AF trial, we submitted 30-day safety data on the feasibility trial patients in February, once all of the patients had completed follow-up. During the second quarter, we submitted our pivotal trial to the FDA and recently received conditional approval. We are in the process of responding back to the FDA, and continue to expect to move to a pivotal trial in 2015.

Moving on to our stroke trial, I'm pleased to report that all seven study sites have received IRB approval, which is up from five last quarter. As you may remember, this is a seven-site, 30-patient feasibility trial with primary safety evaluations at 30 days and six-month follow-up. We have enrolled four patients to date and continue to expect enrollment to be complete by the end of 2014. It's too early to provide more details, but we look forward to updating you on our progress in the upcoming quarters.

To summarize, 2014 is off to a great start. We will build on our momentum with continued focus on our investments in education, innovation, and clinical science, which we believe will fuel our long-term growth.

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

Thank you, Mike. For the second quarter of 2014, revenue increased 29.8% to $26.5 million. Revenue from product sales in the US was $19.9 million, an increase of 28.8% from the second quarter of 2013. Revenue from open-chest ablation-related product sales in the US increased by approximately $1.7 million, to $10.9 million.

And US sales of products used in minimally invasive procedures increased approximately $900,000 to $4.4 million. MIS growth was influenced heavily by the sales of products acquired in our December 2013 acquisition of Estech.

US sales of the AtriClip system during the second quarter of 2014 were $3.9 million, as compared to $2.8 million for the second quarter of 2013, an increase of 41.7%.

International revenue grew 32.9% on a GAAP basis and 29.1% on a constant currency basis, as compared to the second quarter of 2013, to $6.6 million.

Valve tool sales totaled $900,000 worldwide, approximately $700,000 in the US and $200,000 in the international markets.

Gross margin for the second quarter of 2014 was 70.8%, as compared with 74% for the second quarter of 2013. As expected, the sales of the products acquired in the Estech transaction put some pressure on the overall gross margin. The international sales mix was higher in 2014, which also has a negative impact on gross margin.

Additionally, the placement and servicing of the capital equipment needed to run our ablation disposables, including the Estech equipment, continues to be strong but does put some pressure on gross margin as we build the business to support these placements. Pricing remained relatively steady.

Operating expenses increased 29.1%, or approximately $4.9 million, from $16.8 million for the second quarter of 2013 to $21.6 million for the second quarter of 2014.

Research and development expenses, which include clinical activities, were $4.6 million for the second quarter of 2014, or 17% of sales, an increase of $1.5 million over the second quarter of 2013. The increase is driven by both clinical trial and product development efforts.

SG&A increased approximately $3.4 million from the second quarter of 2013, to a total of $17.1 million, or 64% of sales. The increase was due primarily to increases in selling, marketing, and training costs.

Our operating loss for the quarter was $2.9 million, as compared with approximately $1.6 million for the second quarter of 2013. This operating loss for the quarter, as well as our SG&A number, include a $2.7 million income item due to an adjustment to the earn-out liability recorded in conjunction with the Estech transaction.

As we have stated before, if we pay any of the earn-out, we would be above the guidance that we have given. However, from an accounting standpoint we must periodically review the liability on our balance sheet and have thus made this adjustment. We will review it again at year end.

Our adjusted EBITDA loss, which does not include the positive earn-out liability adjustment, was approximately $2.5 million, compared to a $323,000 adjusted EBITDA loss for the second quarter of 2013. Note that our EBITDA loss in Q2 includes approximately $900,000 of costs related to transitioning the Estech business into AtriCure.

Our net loss per share was $0.10 for the second quarter of 2014, compared to $0.09 for the second quarter of 2013. We ended the quarter with $75 million in cash, cash equivalents, and investments.

Lastly, we are positively adjusting our guidance for 2014. We anticipate top-line growth of approximately 26% to 28% year over year, or a range of $103 million to $105 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 71% for the year based on current trends. This represents a decrease from the 2013 reported gross margin due primarily to a slightly lower relative gross margin on acquired products, a stronger international mix, along with Estech transaction-related costs. We are still targeting long-term gross margins of 75% and believe this is achievable within the next five years due to increased volumes and efficiency.

We expect R&D to be 17% to 19% of sales and we expect SG&A to be roughly 71% to 73% of sales in 2014. These figures include approximately $3.5 million in transaction costs related to the Estech acquisition. Outside of the transaction-related expenses, we anticipate increased spending related to clinical science, R&D, selling, training and education, and international expansion.

We continue to expect adjusted EBITDA for 2014 to be a loss in the range of $9 million to $10 million, including transaction-related costs, which we estimate at approximately $3.5 million. As noted earlier, $2.6 million of this was realized in the first quarter, and $900,000 in the second quarter. Estech transaction-related costs for the rest of the year are expected to be immaterial.

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

Finally, we anticipate 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 summary, we are pleased with our results for the first half of 2014 and excited about the future. We delivered solid revenue growth while integrating Estech, which further positions us as a leader in the treatment of A-Fib.

We're also executing on our plan to conduct robust clinical trials and deliver data to prove the benefit of our innovative products to patients.

Our focus remains clear -- to continue to gain market share by driving training and education initiatives while simultaneously investing in our clinical trials and commercial efforts. We look forward to updating you on our progress in future calls, and will now turn it over for questions.

(Operator Instructions) Thom Gunderson, Piper Jaffray.

Hi; good afternoon, guys.

Hey, Thom.

Hey, Thom.

I'll do a two-part single question and it gets to sales in the US, Mike, and you can probably anticipate what I'm going to ask. But it's sort of -- the growth continues to impress and you continue to do more training, more products, etc. You went through that.

But can you give us an update as to how you feel it is mid-year here as far as how much is coming from increased procedures at existing facilities and docs, and how much is new or market share steal?

And then the second part of the question -- and that'll be it for me -- is -- AtriClip looks like it is, but I just want to hear it from you. AtriClip's still holding up as far as a percentage of Afib procedures that you do?

Sure. On the first one, in terms of the percentage and what's coming, most of the gains right now are not coming from competitive wins; they're coming from people that we may have converted last year in combination with the growing kind of push within those accounts. So the advanced training courses -- what we're seeing is these are people that bought product from us before and we're seeing a very large increase from those existing sites that were doing some Mazes and have really begun to expand and do it on a more regular basis.

As an example, we just did a training out in Hawaii and they bought from us every once in a while; they had historically last year been purchasing likely from Medtronic. We converted them then; we got some product from them in the first half of the year. And they went to the training course and in the first week after the training course, they scheduled five Mazes. And we were out there for that.

So it's really coming from existing customers that we're expanding within that customer base as a result of the training and the follow-up that we're doing relative to that.

To answer your second question, relative to clip sales, as you probably heard, it's the first time we're really broken out the open clip and the AtriClip Pro. We did that on purpose to kind of give you a sense for -- to show you that yes, we are continuing to increase our open clip at a greater rate than we're actually increasing the open sales. The attachment has gone up from being in the low or so 80%s from most of last year up to about 90% or so attach rate at this point in time. So we have definitely seen an attach rate increase on the clip.

Again, I think a lot of it has to do with it's part of the Maze procedure and we're very confident that that's happening. And we also wanted to show the continued growth on the AtriClip Pro side as well.

Got it. That takes care of me; thank you.

Jason Mills, Cannacord Genuity.

Hi, guys. Thanks for taking the questions; congratulations on another really great quarter. Mike, sticking here with the US business, just looking at the performance relative to our model, the one area that sticks out the most on sort of a differential between those two things, at least from my perspective, is the MIS business in the US. Which I know you're excited about the deep stage AF trial, but it's still off label.

So I'm just wondering what sort of color you can give us around the continued sort of strong growth there; it continues to be impressive.

The growth on the MIS side is 100% the Estech growth. Our core customers that had been using the MIS products before, the core MIS AtriCure products, are pretty flat, year over year, as we had expected. What you're seeing is the first quarter Estech -- our team was getting ready, they were starting to get used to it. And really most of the growth this quarter is really just the growth on the fusion sales that we've had in the US market. We saw a dramatic increase quarter over quarter on the Estech side for the MIS side. So almost all the growth that we see --

We anticipate going forward, for the back half of the year, that what you'll see is we'll continue to be flat on the AtriCure side and you'll see us as we're kind of getting back into the Estech accounts and our reps get more comfortable with it, we get generators on the field, that we'll see an increase on the Estech side of things, or the fusion products.

Okay. And then, second question is two-part -- sort of cheating here a little bit. For you, Andy, I may have missed -- I'm bouncing between calls. The gross margin for the balance of the year, the expectations. I think we all understand sort of what's going on, the dynamics of the business. And I did catch the part that you said you still think there's upside to 75% over the longer term. But I missed the part about sort of the nearer term.

And then, Mike, with respect to the pivotal trial for deep AF, what sort of questions or conditions must you meet, do you think, to get the unconditional approval? Thanks, guys, and congrats again.

I'll try to answer both of those. On the gross margin side, our guidance for the year is 70% to 71%. Now, that's our guidance; we did 70.8%. As Andy mentioned, most of that's just the pressure of bringing on new product line; it's a little bit more expensive over time. We know we'll get efficiencies out of it so we still target the 75%. And you could see -- we put it out there -- a five-year mark so that you can kind of incrementally grow it year by year to kind of get to that point. So that should give you some general guidance in terms of where you should be gross margin over that period of time.

In terms of the deep AF trial, the conditions are all things that we can get back to. Most of them are really relative to wording around HRS guidelines -- how do you track and measure the AF? Really clarifying some aspects of the lesion set and some conversations relative to that. So we anticipate that by the end of the year, we will be through that.

But there is a back-and-forth that we have to go through with the FDA. But there's nothing that is a game-changer or would change our direction relative to the deep AF. We still feel very confident that we will be complete and have full ID by the end of the year.

Super; thanks.

Rick Wise, Stifel.

Good afternoon, everybody. International, Mike -- OUS was up 33%. I'm not suggesting it means anything, but it was flattish sequentially. Just help us think through that and maybe just talk in a little more detail, if you could, about the kind of growth we can expect from international. You're clearly stepping up OUS training -- does that accelerate this kind of 30% kind of growth rate? Does it accelerate over time? How do we think about it, broadly?

I do think that the international growth rate will remain in the range that we're talking about or that you've seen so far. We had an exceptional Q1 on the international side; it really far exceeded our expectations by several hundred thousand dollars. So I think that some of that you saw was just the excitement. It was easier to integrate the Estech team, quite frankly, and we saw a little downward pressure in the second quarter on some of the Estech product OUS.

In addition to that, we did see a little pressure in particular in the UK market as we've transitioned from a full distributor model into an agency model. And as a result of that, there was a little bit of downward pressure in the second quarter relative to the UK.

You're clearly signaling the second quarter is all about execution. I imagine that's the plan going forward. When I look at Estech, it certainly seems the integration is on; maybe it's ahead of plan. Are you largely completed except for those headcount reductions ahead? And maybe you could talk a little bit about -- where are you with this whole process?

You're never completely complete, but we're basically complete with the integration at this point. The biggest item now isn't even the headcount. Most of the headcount is really about purchasing and things like that, and some of those are just kind of operating components. So I would call them minor adjustments and changes that have to occur over the next six months.

But the integration is complete. The biggest thing right now is just making sure we're training and getting cases. Seeing these cases be successful, getting stories out there about where they've been successful, etc. Those are going to be the big ones kind of to build the momentum as we go forward.

Just a last quick one. You said you're starting to see the cross-selling benefits just now and you expect it to ramp. Maybe talk us through a little bit of how -- the kind of contribution we could see in the second half. And is it signing contracts? Is it just procedure by procedure? Help us understand the process of driving that Estech sales.

We see it growing through the second half. A lot of that's just -- it's procedure by procedure. Because what's going to happen is as we get more comfortable, or people start to try the product out, use it in conjunction with our products on our clamps, they begin to like it, they begin to see, the people get to [sign us] with them right there on the table and feel very good about it and about the results they're getting and working with their EPs.

And so it's kind of one by one that you start to see the traction being built. You're not going to see a hockey stick per se; we just think that everybody that uses it feels very confident in the result's that they're getting and we think it's going to continue to build off of that. And then we'll obviously see even stronger growth in 2015 relative to that.

Thank you.

Danielle Antalffy, Leerink Partners.

Hi. Good afternoon, guys, and congrats on another great quarter. Mike, I just wanted to ask you about the long-term growth projections here. I mean, you've said historically you wanted to get to a 15% top-line growth rate sort of by 2015. You're obviously tracking well above that. I appreciate that some of that is coming from Estech, but it does seem like the core business is actually growing faster than that.

Can you talk about how your view on that 15% number may have changed or how much upside there could be for that number based on what you're seeing in the core business year to date in 2014?

I like to keep this year -- I think when we started the year, we said that organic rate would be about 13% to 15%. I think you're articulating properly in terms of we're clearly obviously at the high end of that at this point in time, and over 15%. Last year we did 17%. So we've kind of met that 15%-plus number that I've talked about.

I don't want to get too far ahead of ourselves, though. I like to be cautious about it and I think that's kind of wise for all of us in terms of 15%-plus -- if we can consistently do that is really kind of what we're sitting on. I know you're looking for what's the plus. At this point in time, I feel comfortable that 15%'s a good growth rate for us.

But going much beyond that, I think you're putting pressure on the business that we don't necessarily need to have. And so from my standpoint -- there obviously is upside and there are things that could create upside -- clip sales continue to go, we get the trials up and running. So there's always upside. As many of you have heard, I call that the icing on the cake to our core business that's growing so I don't want to kind of set things too far in advance. The 15% is still what we kind of feel good about.

Okay, that's fair. And then, what about as we move through the back half of 2014 -- how do we think about seasonality from a top-line growth perspective? Given the fact that you do have Estech, it could make the seasonality look a little bit different. Or do you see it sort of repeating how it has historically?

I think it should repeat as it has historically over all. I think that as you look at the back half of the year, you'll see the seasonality -- obviously summer months are always tough. But they were for Estech, too, just in general. They're slower and then fourth quarter's typically an up quarter from that standpoint.

We feel good about the guidance that we gave -- the $103 million to $105 million -- the increase that we put out there. We feel like we can definitely hit that.

Okay, great. And one more question for me, if I could. When you look at your open heart growth, very strong growth you're seeing there. I know part of it's coming from the training efforts that you're doing. What are you seeing -- I appreciate that there's three basic procedures -- mitral, CABG, and aortic valve procedures. And the growth opportunity is across all three, but really sort of greenfield opportunity in CABG and aortic.

Are you seeing adoption increase in those sort of greenfield opportunities or are you still pretty much just focused on the mitral side of things?

We're definitely seeing greenfield opportunities in those areas. I wouldn't say that it's taking off by any stretch of the imagination, but you're starting to see some growth come off of those areas for sure.

I talked about these in-person cases that we've just started, and a lot of those are really about seeing people do CABG and AVR procedures, common procedures, with those. So from our standpoint, we do think that's still a big ripe opportunity.

It's interesting, Danielle. I just got this yesterday from the STS database and you can find it on line; we just Googled it. The 2012 to 2013 increase in what they call atrial fibrillation correction surgery has gone from about 21,000 in 2012 to almost 24,000 in 2014. Over 24,000. So I believe a lot of that has to do with the training and education that we're doing, that we're creating awareness.

And the number of overall procedures has basically stayed relatively flat, at about 275,000.

Okay, got it. All right; that's helpful. Thanks, guys, and congrats again.

Thanks.

(Operator Instructions) We have no further questions. I would now send the call back over to management for closing remarks. Please proceed.

Great. Thank you, everyone, for participating on the call today and your interest in AtriCure. Have a wonderful evening.

This concludes today's conference. You may now disconnect; have a great day.