AtriCure Inc (ATRC) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the AtriCure second-quarter 2016 conference call. My name is Ranya and I will be your coordinator for today's call. 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. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Ms. Lynn Lewis from the Gilmartin Group for a few introductory comments. Lynn Lewis?

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. AtriCure undertakes no obligation to publicly update any forward-looking statement. Additionally, we may refer to non-GAAP financial metrics, specifically adjusted EBITDA. A reconciliation of any non-GAAP measure 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, President and Chief Executive Officer. Mike?

Thanks, Lynn. Good afternoon everyone and thank you for joining us.

Revenue in the second quarter reached $39.7 million, up 22% over last year. Sales in the US were up 20%, international revenues were up 29%, and gross margins continued to be strong at approximately 73%. Additionally during the second quarter, we launched two important products, made progress on our clinical trials and made significant strides in positioning the Company for long-term success.

We have also refined and expanded our commercial organization to continue to facilitate our growth but with these changes we also brought about some temporary disruption. As a result, we are updating our revenue guidance to growth in the range of 20% to 22% for full-year 2016. So while our revised expectations are quite strong, they are downward revisions from our prior thinking. Yet our underlying business remains strong.

Turning to the second-quarter results, put simply, the US business was not as strong as we had expected which limited our upside in the quarter and has impacted our outlook for the remainder of 2016.

Growth in MIS was solid while growth in open and clip was slower than expected. Momentum built throughout the quarter with lower than expected growth in April accelerating through June. While I am excited about our progress throughout the quarter, our expanded team is still gaining experience and consistency.

Driving our second-quarter results and our expectations for the second half of 2016 are two distinct but related factors. First, as I just briefly mentioned, we made some changes to fully optimize our commercial structure and team to position AtriCure for long-term growth and success. This culminated in some of our high performing reps moving into management roles. This is a positive in the long run and we are beginning to see an encouraging impact of the expanded leadership.

At a rep level however, these changes left some holes to fill. As of now we have added new reps to these areas and they are in the process of ramping up. Based on the accelerated momentum we are seeing, we are highly confident that we have made right moves and added the right people and we expect to work through this over the coming three to six months.

Secondly, we continue to expect the acquisition of nContact to be a game changer for our business over the next five years and there has been a groundswell of excitement from our customers. While sales of the nContact product, Epi-Sense, were up over 45% sequentially in the second quarter, this excitement also caused our team not to spend as much time on our open clip and cryo business. We have since refocused our efforts on what we do best which is building steady and sticky adoption but not as quickly enough to see the second quarter results exceed expectations and we expect some carryover in the second half of the year.

We have built our sales models that we can get significant leverage across all areas of our business but it will take just a little bit longer than we initially expected.

Meanwhile, our product and clinical pipeline are healthy. We remain confident in the market opportunity and our positioning and we expect growth will be strong for several reasons. One, first, I know and trust our team across the board. Our commercial team is second to none and we have made the right adjustments necessary to capitalize on all of the opportunities in front of us for the long-term.

Second, the new products that we just rolled out, the cyroFORM probe and the AtriClip PRO2 System are receiving great reviews and have already picked up traction in the second quarter and the beginning of the third quarter. AtriClip PRO2 expands our overall market and the cryoFORM probe helps us access more cases and gain market share. We expect these two products to ramp in contribution in the back half of the year with more meaningful revenue in 2017.

On top of this, our world-class engineering and R&D teams are continuing to innovate and we have additional new products slated to launch at the beginning of next year.

Third, we are increasingly confident that the strategic acquisition of nContact will enable AtriCure to grow our MIS business and change cardiac surgery and EP collaboration for the next 10 years. We have added over 25 new accounts since the acquisition closed and have completed over 40 new account trainings on the Epi-Sense product line. We expect Epi-Sense to more meaningfully contribute to the revenue as we enter these new sites, continue expansion on the West Coast and leverage our fully optimized sales force.

Finally, we believe the open or concomitant portion of our business still has many more years of double-digit growth. We are the only Company that is positioned to address the many patients who are still not treated at all or are undertreated in all categories MVRs, AVRs and CABGs. There is an increasing activity at the society level with AATS, STS and [EX] set to upgrade guidelines and generate more clinical data ensuring surgeons and cardiologists are aware of the benefits of treatment and the downside of leaving afib alone. The open market still remains vastly underpenetrated with meaningful opportunity.

I also want to take a minute to talk about our international performance which was up 29% for the quarter. Both Europe and Asia markets including Japan and China have seen a resurgence in growth over 20% in each. Additionally in Asia, we have hired a new vice president who has already made an impact in the short time he has been here. So while our confidence is intact, I know many of you are disappointed; so are we.

While growth in this quarter was less than we had anticipated in the US with some carryover into our expectations in the back half of 2016, we remain confident that the fundamentals and business outlook remain strong.

With our expanded relationship with EPs and strong performance in the CONVERGE trial, the nContact acquisition has proven to be strategic and we are confident that it we will drive accelerated growth for the long-term.

Turning to CONVERGE which is the first head-to-head study to evaluate the convergent procedure versus the catheter ablation in patients with persistent and long-standing persistent afib, we expect the trial results to support FDA approval of the Epi-Sense devices specifically for the treatment of persistent afib.

We have made solid progress in enrollment with 49 patients enrolled to date. In order to accelerate enrollment, we just received approval from the FDA for up to 30 sites, almost double the number of original sites. We expect to continue adding new sites and accelerating enrollment throughout the rest of this year and into next.

Moving to DEEP, our trial for the stage dual epicardial and encocardial procedure for the treatment of afib, we are currently in a temporary pause in this trial. Specifically, after one adverse event, we voluntarily suspended enrollment to make some protocol changes. This is the first adverse event of its kind in the trial and we continue to expect the trial to conclude with safety rates well within the protocol limits. We are working collaboratively with the FDA to incorporate risk mitigation protocols for the trial and after a series of meetings with the agency in the past month pending FDA final approval, we expect to be back on track in the back half of the year.

When we suspended enrollment, we were up to 41 patients enrolled. As a reminder, the target enrollment is 220 patients for DEEP AF. We now expect to reach this milestone in 2018.

We are also making progress on our non-IDE trial in Europe, CEASE AF, which compares DEEP like procedure to standard catheter ablation. We are 25 patients enrolled. Additionally, our ATLAS trial we now have 47 patients enrolled which evaluates the prophylactic treatment of the left atrial appendage for patients at risk of perioperative afib.

Finally, we have begun enrollment in the FROST trial to evaluate the effectiveness of cryoanalgesia for pain management in cardiac procedures involving a thoracotomy.

We expect all this found clinical data to further differentiate us as a company and extend our leadership position in the treatment of afib for many years to come.

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

Thanks, Mike. For the second quarter of 2016, revenue increased 22% on a GAAP basis to $39.7 million. Revenue from product sales in the US was $30.9 million, an increase of 20% from the second quarter of 2015. Revenue from open chest ablation-related product sales in the US increased by approximately $1.1 million to $14.7 million representing growth of 8%. Open growth was slower than in prior quarters for the reasons Mike described. We expect the open growth rate to ramp up with more meaningful contribution in the second half of this year based on our recently announced 510(k) clearance for our cryoFORM probe and a more focused effort by our commercial team.

US sales of products used in minimally invasive procedures increased approximately $2.9 million to $8 million, up 58% and influenced significantly by the nContact acquisition. While we were pleased with the solid impact of the nContact acquisition in the first and second quarters, we continue to believe that this business will only see modest organic growth during 2016. Development of clinical data in support of MIS ablation for the treatment of afib through trials such as DEEP AF and CONVERGE is critical to growing this market and the business over the longer-term.

As Mike mentioned, efforts to move Epi-Sense and related products into our existing customers will continue to ramp through the year as the training of our combine commercial team takes hold. Conversations with physicians in both the EP and surgical communities continue to be extremely positive. US sales of the AtriClip system during the second quarter of 2016 were $7.3 million as compared to $6.3 million for the second quarter of 2015, an increase of 17%. International revenue grew 29% on a GAAP basis and 27% on a constant currency basis as compared to the second quarter of 2015 to $8.8 million.

Performance was solid across both Europe and Asia and we were very pleased to see such a strong quarter from our international business.

Valve tool sales were approximately $950,000 worldwide including approximately $800,000 in the US and $150,000 in international markets.

Gross margin for the second quarter of 2016 was 72.6% as compared with 70.9% for the second quarter of 2015. Positive impacts on gross margin included the suspended medical device tax and the impact of Epi-Sense products. Additionally, the prior year included some scrap and obsolescence charges related to non-core and Estech products.

Pressure on gross margin included moving into a larger and more modern facility to support our growth along with uptick in depreciation related to continued generator placement also to support growth.

Operating expenses increased 31% or approximately $8.6 million from $27.9 million for the second quarter of 2015 to $36.5 million for the second quarter of 2016. Research and development expenses which include clinical and regulatory activities were $9.1 million for the second quarter of 2016 or 23% of sales, an increase of $3.3 million over the second quarter of 2015. The increase was driven primarily by product development efforts and a ramp in spending for our MIS related trials including the CONVERGE trial absorbed as part of the nContact acquisition.

SG&A increased approximately $5.3 million from the second quarter of 2015 to a total of $27.4 million or 69% of sales. The increase was primarily due to the changes in our sales, marketing and training organizations to both support the nContact acquisition and our general level of growth and procedures. In addition, we have made some investments in administrative areas to support our business.

Our adjusted EBITDA loss was approximately $2.4 million this quarter compared to a $1.0 million adjusted EBITDA loss for the second quarter of 2015. Our net loss per share was $0.26 for the second quarter of 2016 compared to $0.18 for the second quarter of 2015. We ended the quarter with approximately $48 million in cash, cash equivalents and investments. We continue to believe that our balance sheet is strong and that we have more than enough cash to reach cash flow generation.

Lastly, we are updating our guidance for 2016. We anticipate constant currency topline growth of approximately 20% to 22%. At current exchange rate, this represents approximately $156 million to $158 million in annual worldwide revenue. We anticipate gross margin to be 71% to 72% for the year based on current trends and investments to support our progress and expansion. This represents a slight increase from the 2015 reported gross margin.

Items with a positive effect on gross margin include volume leverage and programs to increase efficiency, the positive impact of nContact products and the suspended medical device tax. Headwinds on gross margin include moving into a larger and more modern facility along with continued heavy capital placement particularly as we penetrate worldwide minimally invasive markets.

We still believe that gross margins of 75% are achievable within the next few years due to increased volumes and efficiency. We expect R&D to be 23% to 24% of sales with the largest driver of the increase over prior year due to the absorption of the CONVERGE trial from the nContact acquisition along with continued R&D pipeline development.

We expect SG&A to be roughly 70% to 71% of sales in 2016 which is slightly under the 2015 rate. The overall increase in SG&A expense is driven by continued investment in our worldwide sales team as well as training and education expenses.

We continue to expect adjusted EBITDA for 2016 to be a loss of approximately $14 million to $15 million. The heavier loss compared to 2015 is driven primarily by the acquisition of nContact in late 2015 including PMA clinical trial expenses and enhancements to the sales and education teams to support the MIS portion of our business.

In terms of EPS, this adjusted EBITDA range translates into a loss of between $1.12 and $1.22.

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

Thank you, Andy. In summary despite some growing pains in the second quarter that are modestly tempering our expectations for 2016, our foundation is strong and the excitement in our business continues. We expect 20% to 22% growth for 2016 while momentum builds and accelerates into 2017. With our commercial infrastructure gaining leverage, new products starting to contribute and nContact building momentum, we are well-positioned to execute on delivering and expanding our portfolio of products for afib.

I continue to be excited about our growth prospects and we remain confident in our path to adjusted EBITDA profitability in 2018.

With that I will open up to questions.

(Operator Instructions). Danielle Antalffy, Leerink Partners.

Good afternoon, guys. Thanks so much for taking the question. Mike, if I could ask on the sales performance and you explained it but I guess I am just wondering first of all what prompted the sales force moves? If I understand correctly, you took some people out of the field and put them in management positions. But were you expecting this disruption? Clearly not, it wasn't included in guidance.

So I guess I'm just trying to understand did you know you guys were doing this? Was there some catalyst that prompted you to make these moves and so the disruption in the quarter was unexpected? I'm just trying to understand what was known by you guys, what was not known?

It is a great and very fair question, Danielle. So I appreciate it, to kind of dive into more detail about it. So basically what happened was we actually started the process back in October of last year where we -- one in October and then two at the beginning of the year where we basically promoted some of our top reps so we went from eight regions or areas in the country to 11.

When we had done this historically, we had actually backfilled them. So we had actually done it a year and a half ago as well and we had seamlessly backfilled with people from internal promotions that had kind of gone into those territories and being able to perform day one and actually continue to see growth in those areas.

What wound up happening here that was a little bit of a surprise to us and we were tempering it and watching it obviously throughout Q1 and Q2 was that we promoted these fantastic people who were going to be great but it left when we were backfilling people weren't internally able to kind of go to different parts of the country, different regions and these were people that were $3 million to $4 million reps for us and so what happened as we split be territories into two which historically had worked really well and we think we did that right. But we want to bring on new people. And so what we saw was a softening because the person that was in the territory was now managing, hiring and bringing on and training some new people and so instead of actually seeing growth in those territories that we had seen historically, we actually saw a softness and in those territories, there was more pressure than we thought and in particular on the open business.

And actually all across the business and then people got excited about nContact was the second piece.

So when we did that management change, we didn't think it was going to be as big of a deal because it wasn't like -- we didn't restructure anything necessarily, we just basically expanded so that we could actually handle not only the acquisition but also long-term as we start to see things getting closer to 2017 and 2018 that we have got a really experienced team ready and getting ready for all of the approvals that are going to be coming down the pipeline for us longer-term to kind of help us achieve the longer-term growth rate as well.

So that is really what happened. Unfortunately it was a little disappointing for us because we just kind of miscalculated maybe doing three at once in that period of time and maybe we could have kind of staged out a little bit longer but right now we are actually pretty happy because these people are getting up and running fast now and we think that it will take a little bit longer to kind of get through this third and fourth quarter which is why we brought the guidance down a little bit but as we enter next year, we are going to be really incredibly strong.

Okay, so is it fair to say you feel like at this point you have right-sized the issue, you have corrected the issue and now you are at sort of what would be your underlying growth expectation previously really the guidance lowers like you said some bleed into Q3? But the underlying growth rate is still there, still unchanged, 18% long-term? Is that fair to say?

I didn't look at the specific growth rate for next year per se. We were really focused on making sure we had this right and that we are set up for being able to really grow in that mid-teen area for the foreseeable future and into the next decade.

Okay, great. Last question for you, Andy, I was hoping just on the cash situation if you would give some color on the cash burn and why you are confident that you are in a position to get to cash flow breakeven?

Sure. The cash burn was fairly heavy in the first quarter, some of which the EBITDA loss but you also had some working capital changes so for example, year-end payouts of variable comps, things like that, a little bit heavy on the CapEx as we finished moving into the building. But nothing out of the ordinary or nothing we didn't contemplate in our business plans and our discussions that we have had before on getting to EBITDA profitability and cash flow positive.

Danielle, when we raised the debt back in the April timeframe, we raised more than enough. We got a lot of feedback. Obviously we felt like we could make sure that we have more than enough cushion between the cash position and where we needed to be relative to where we are going to be on breakeven. We feel very comfortable as you saw, we were a little better than expected on the bottom line this quarter, we are continuing to manage our expenses very closely so that we are very confident that the EBITDA breakeven will happen in 2018 and we will do everything we can to accelerate some of those as well.

Rick Wise, Stifel.

Good afternoon. Let me start with some of the issues that happened and then look ahead, Mike. Again, you are explaining with the sales changes, management changes and the focus on Epi-Sense that open-clip and cryo got neglected and obviously you are refocusing on that.

Can you help us understand the refocusing process and what concrete steps you are taking? Is it incentives? Is it more focused on quotas? And why would take so long and I'm trying to separate that from the new reps starting in territory issue.

And they are a little bit combined, but again another good question to kind of dig down into a little bit more detail, Rick. So what happened with the Epi-Sense, people got really excited about it like I think you said it really well. We took our eye -- and I wouldn't say off the ball, they just got excited about all the activity that was going on, it was a lot of customer demand calling on our team and two things really happened.

One was they were getting pulled into learning the new product and as a result they were bringing people to training. As I mentioned we have done over 40 trainings and our team was flying around the country kind of getting those trainings set up and actually moving into those areas. And what we found out was we didn't have as much support coming in from the acquisition on that side and so that as we were expanding, the demand was picking up, our team really had to backfill and do a lot of that heavy lifting and work and more than we had expected which took them away from kind of being available and in the hospital, walking around making sure they were in front of their surgeons on a regular basis which is really what drives and has always driven kind of open and that concomitant growth for us is to make sure that we are there.

And so that was definitely the distraction quite frankly that occurred.

Some of the efforts that we have done to refocus -- and we may have caused some of that was that we did have some focus in terms of commission and some other areas relative to that. We have actually adjusted it so that it is on an overall basis and so we made some minor modifications to that as we kind of went through.

We also got the training done if you recall in early April where we got people focused on that. We got our whole education team really taking on the brunt of that load in terms of being able to take on the helping set up a site, the new sites as they are kind of coming online and we kind of expanded that education team internally so they could basically handle that and take that off of the rep's hands for being able to get on planes, etc.

There are many other activities that we have got going on within the business relative to that as well. We are also setting up sites on the West Coast because one of the issues was that on the West Coast you've got people flying to the East Coast and so that would take two or so days out of the field. And so we had to basically take care of that by getting sites that we can train people on closer to the West Coast. And some of that just took a little bit longer to get set up and ready to go than we had maybe expected.

As I said it is kind of like a three- to six-month piece there but overall we feel like everything is kind of coming together really well. And then in addition to that, some of the new reps that came on board as well that I talked about.

Just thinking about the numbers a little bit and maybe this is for Andy more but Andy, if I think about the 22% guidance let's say at the midpoint that might suggest something like $81 million in second half revenues. Maybe to both of you, there's always a seasonal pattern third-quarter a little slower understandably because of vacations, summer, etc. Is the seasonality -- if a number like $81 million second half revenues is right, do we see a little more pronounced sequential decline in the third quarter than usual because of all of these issues or no, the second-quarter a little slower and now this refocus it could be more sequentially flat? Just directionally how do we think about it?

I think directionally you will see in the second quarter -- I mean in either quarter, you will see the seasonality that you would typically see where you would kind of be a little bit lower in the third quarter and then picking back up in the fourth quarter like you have seen for the past four years. That has kind of been the traditional trend because of the seasonality that you talked about.

And thinking about your comments, Mike, about adding new accounts and obviously that augurs well as nContact gets integrated and the sales force is cross trained. You added 25 new accounts this quarter. Maybe just talk to us a little bit and help us understand -- I mean is that the kind of rate you had hoped to be adding new accounts in coming quarters? Just talk about the logistics and how quickly as you add these new accounts you can penetrate them and just as I think about building confidence in our minds particularly as we approach 2017.

Yes, so I think that when you think about bringing on these new accounts, bringing on 25 new accounts means they ordered something from us and that is typically kind of what they do. They do a trial. It takes about three or so months to get somebody to get through a training course, get themselves to do their first order and their first case. They have expressed interest, you've got to coordinate the schedules to kind of get that up and running and going. Then you typically will see anywhere from another one to three months to they will do their first case, they will see how it goes. They will do a second case maybe a month or so later. And then at that six-to nine-month period is when you start to see some acceleration into an account with really what I will call kind of sticky revenue where they start to really see the results about 12 months out.

So the 25 new accounts are beginning to drive some revenue for us but you will really start to see it kind of near the back half of this year and definitely into 2017.

You have already seen a little bit of that which is the sequential growth quarter over quarter. Some of that was because Q1 was incredibly light because there was some stuffing that had been done in the channels prior to kind of around the time of the acquisition and so we had to kind of bleed through some of that in the first part of the year. But I think we are pretty much through all of that now and so we saw some of that come to fruition in the second quarter but we will see I think more sequential growth from Q2 to Q3 in that area as well.

Got you. Thank you very much.

Jason Mills, Canaccord Genuity.

Thank you very much. So I have a multi-part question that sort of builds towards 2017 to be frank. You didn't break out nContact but in the United States correct me if I am way off but if we assume somewhere in the $2.5 million to $3 million contribution from the nContact acquisition, it sort of lands your organic growth in the US at least in the low teens which is where it was last quarter, down from where it was last year. And that has been one of the narratives in the stock, Mike, you and I talked about in the past.

What you are seemingly talking about is these disruptions have caused some of that degradation in growth to the low teens but from what I am hearing, correct me if I'm wrong, is you are expecting that organic growth to accelerate in the second half of the year?

So it builds towards 2017 because clearly what we hear from investors is some concern about you hitting 18% growth guidance which is what you put out there. I think it is important to communicate what you are thinking so there is not a surprise come end of year at the JPMorgan conference or whatever you decide this year to give guidance when it comes that we are sort of on the same page now as opposed to wondering for the rest of the year where you might land.

Our thoughts are obviously we have gone through for this year and we have brought down the guidance. We do believe that the core open and clip growth is going to come back because of these disruptions like I think you described that actually fairly well. We also think we will get organic growth coming into next year coming off of the nContact acquisition. We still feel really comfortable with the midteens growth. I know we gave the 18% for kind of a long-term. Do I believe that longer-term we are going to be able to hit really good growth? Sure, but I'm not committing to a specific guidance number for 2017 at this point in time.

I really want to make sure that we can execute towards the numbers we have got here, show you guys the accelerated growth that we are going to see here and then really kind of build up towards 2017. These are really big markets that we are going after, the nContact piece is going to play and contribute quite a bit. And we still do feel very good about the open portion of our business and the clip portions of our business that unfortunately didn't get the attention they deserved in the first half of this year.

That is on me and that is on execution on that side of our business because the market is there and we have just got to continue to execute on it.

Okay, that is helpful. So let me follow up on that. The second half of the year what I'm hearing we should see some acceleration in your organic growth. Correct me if I'm wrong but that is what I'm hearing. Would it be fair to characterize that 18% at this point in time is a growth rate that you think you can hit maybe characterized as a stretch goal? I'm hearing midteens so it sounds like you feel more comfortable with street models landing like somewhere in the 14% to 16% range if we are looking at putting some members into our models for 2017 and maybe 2018? Do you disagree with any of that?

I am not going to disagree with that. I feel good about the midteens number for us, for the business overall. Do I think we can hit 18%? I absolutely believe it is possible or even better but I'm not ready to sit here on the call today and say that we are talking about the next three years. I'm really focused on the next two quarters to make sure we are really set up to accelerate and be ready for the approvals. Because as I mentioned, we have got these -- CONVERGE is enrolling very fast, we really believe that we are going to be able to get that fully enrolled sometime next year and then move that forward. It is going incredibly, incredibly well. We are able to add more sites with the FDA right now and the excitement there in terms of just the demand coming from customers for that is palpable.

And so from my standpoint, we are really focused on making sure that we are ready and prepared that when that comes about that our team is prepared to be able to handle that.

Okay, that is very helpful. Just two follow ups and I will get back in queue. One for Andy on gross margins, really strong gross margins again. It looks like you have very good line of credit for to your 75% goal but your guidance for the year didn't change. So it implies that you are sort of toward the bottom end of your range for the back half of the year. Wondered if I'm reading that incorrectly and wondered what sort of drives that modest degradation to keep you in that 71% to, 72% range?

And then Mike, sorry if I missed it but I didn't hear an update on ATLAS. If I missed it I can check the transcript. Thanks.

I will just say ATLAS real quick and I will let Andy Kendall the gross margin. ATLAS we are up to 47 patients on ATLAS. We've got sites coming online, we are allowed to get up to 20 sites. We've got six sites now beginning to enroll and a very strong pipeline of sites quite frankly competing to get into that trial and so that trial is continuing to go incredibly well.

And then on the margin front, Jason, we kind of held the guidance, just part of it was due to the strengthening of the international business which as you know carries a lower gross margin than the US business. And again, some of it is just as we leverage our building and get better and better visibility. So nothing overly complicated or driving some systematic decrease in margin.

Brooks West, Piper Jaffray.

Thanks. So Mike, I apologize -- I've been juggling calls. I want to make sure I got the clinical trial updates. So you have been allowed to double the sites on CONVERGE and that should finish enrollment by next year. So kind of play out the rest of the timeline there. I mean can we basically extrapolate that the early enrollment finish in terms of a readout of the trial, just the timing of when that might happen?

Yes, if we are able to complete enrollment let's say December of next year, it is one year follow-up from that last patient which would be end of 2018 and then we would be obviously going and looking for some approval in the 2019 timeframe and that hasn't changed from that standpoint.

Okay. And then on the DEEP study, what was the issue again that caused the pause? Is it the device? Is it procedure?

No. It is definitely not the device. Unfortunately there was an esophageal fistula that happened which is an incredibly, incredibly rare adverse event that you may know, we have actually had three out of 12,000 and so it was definitely not device related in any way, shape or form. It is more common to happen on the catheter ablation side. It is basically less than 0.05% of an event type rate. Unfortunately what happened in the trial and so as a result of that, what we decided to do is put a pause because obviously surgeons and hospitals that kind of do that part aren't used to dealing with esophageal fistulas. From that standpoint, we wanted to make sure that we had all the patient education wrapped up and into the protocol and were able to tell patients when they start feeling a certain way what to do.

So we put it on pause, talked to the FDA about it, put together some material so that we can educate patients relative to that and get ourselves back up and running. But patient safety is the most important thing here, it is really the only event that we've had of significance in the trial. It is a really unfortunate event and so that is why we wanted to basically put the pause button on it and talk to our investigators and make sure that everybody understood what to do when something like this happens and basically how to walk through it.

Okay, okay. Just following up on the discussion of the open procedures, everything makes sense, what you have talked about in terms of sales force and coverage and everything. But for somebody who might want to say -- aha, this is the slowdown in open chest and with the penetration in the mitral and thoughts about CABG and aortic and type of TAVR, that whole kind of conversation I wonder if you could just address that? And maybe I don't if you can talk about [minics] or you can talk about what you are seeing in the field but I just wanted to have you address that thought process on the (multiple speakers).

It is a very fair question and in some ways I think it would have been easier for me just to come on and say that is what it was and you are going to start to see a slowdown. But that is actually not what happened. We have talked to our entire salesforce and we are not seeing any slowdown in AVRs, CABGs or on the mitral valves from that standpoint.

It was purely an execution game on our side. All you have to do is look at externally, don't even listen to what we have to say and the information I'm getting from our team and everything but look at what you are seeing on the Edwards calls and on the even Lenovo call where you are actually seeing that their surgical valve growth rates are actually going up. And what we hear from them in the field is they are seeing 5+% growth in that area.

So it is not the crazy growth but it is a very underpenetrated area and they are actually seeing growth in that area. And if you just listen to those other calls, they are kind of confirming the fact that is not happening right now or for the foreseeable future.

So while it might be easy to look to that as a reason, that is really not what happened and that is not anything.

I spent three days with our sales team after this quarter to make sure we had locked down and understood exactly what was going on in every category within our business and we went region by region and not once was procedure volume in that category brought up. It was all about the shifting of some of the resources and not being at the hospital and not getting the right coverage on that.

Then as I mentioned, the piece on the nContact just kind of having people pulled away for a little bit a period of time and getting themselves back up and running.

Again, I have obviously had my commentary on it, I feel strongly about it but at the same time I think there is external data that actually supports that as well.

Very helpful, Mike. Appreciate it.

Suraj Kalia, Northland Securities.

Good afternoon, folks. So, Mike, just juggling in between calls -- forgive me if you or Andy highlighted this in your prepared commentary but did you quantify the impact of this temporary shift or attention shift to nContact sales and the impact on the open and minimally invasive side?

No, it is impossible to say exactly which one it was. And what we did do is as I was briefly mentioning in the answer to Brooks was we went to each territory within the country so we've got 53 regions that we basically support covering hospitals. We went region by region and kind of looked where there were growth that was happening and then kind of what the back half of the year looked like in each one of those different categories.

But it is tough to say when you go into the territory how much of it is the nContact distraction versus the new rep. It is next to impossible to pinpoint a specific number on that. That is why we say it is a combination of the two.

Let me rephrase the question then, Mike. Is there a pricing difference and a commission difference to the rep between nContact and the open and minimally invasive? I guess I'm just more interested on the commission side of the equation?

There is not, no. The way our commission plan works is that we pay for over performance, people that actually get through their quotas and it is their annual quota. They have quarterly quotas and annual quotas and they basically get bonuses for getting through those quotas and then the commission rate goes up substantially on all the products that they sell once they get through their quota number in the quarter and for the year.

Fair enough. On the staged DEEP AF trial, Mike, I presume this was a [well] entry pause that you guys initiated for the esophageal fistula. So, Mike, when we have experienced in other companies, you have an event, a safety event, there is well entry stoppage or a temporary stoppage or new protocol is formed. Then there is a whole process that needs to be reinitiated the IVR process and all, it just kind of drags the whole thing out. Are we going to see something like that on the staged AF study here also or can you give us the next steps in terms of protocol and --?

A little bit of that which is why I pushed out the date to 2018. So it occurred in March. We started having conversations we learned about it really in the late March timeframe, had conversations with the FDA back in April and then we had an advisory board meeting back in May, put the pause on the trial at that time and notified all the IRB on the pause. And so we met with the FDA in the last month so it took us a couple of months to get back to the FDA and they have been very positive in terms of our next steps and going forward and the vertical changes that we have now submitted after having several meetings with them.

And so then our next step is like you said to get their final approval on that and then we will reinstitute or kind of go through that IRB process again. It should go reasonably quickly but that is why we pushed it out about six to 12 months overall in terms of where we had originally anticipated it.

And Mike, are you in a position to tell us what that protocol modification -- if it is not device related, is it technique related, is it patient selection related or something else?

It is actually mostly patient awareness related so it primarily focused on educating these surgeon in terms of how to just make sure that it is not getting hot or that they are avoiding and making sure they are not near obviously the esophagus which they shouldn't be. But just to kind of make sure that they are thinking about it so it is more awareness from that standpoint. And then it is also for the patient that when they leave the hospital that if they start feeling these several symptoms, then they should go directly to it, carry this package with them to say I had an ablation and therefore they can be corrected very quickly at that time. Get a CT scan and see that it is a fistula and actually try to correct it very quickly.

Unfortunately in this particular case, that is not exactly what happened and it took a little bit longer to diagnose the issue that it occurred. That is why we are so focused on the patient being aware of it. So it much more focused on that. That is why I think we can get through some of the IRBs at a reasonable pace.

Fair enough. Finally, Mike, if I heard you correctly for the CONVERGE trial, you will double the number of sites to 30. So I guess multipart question, how do you factor in the number of patients enrolled per center, per month for this trial or at least what is the thought process? And do all of these sites have the requisite expertise and logistics to handle these procedures in an efficient manner? Thank you for taking my questions.

If you remember what we said, we were originally allowed up to 15 sites and when we acquired nContact, what occurred was about half of those sites if not more were just not enrolling in the trial. So that was the biggest issue. We asked to get up to 30 sites, I'm not sure we will actually utilize or actually get up to 30 sites. As you can tell, we are hoping to conclude this by the end of next year in terms of the enrollment relative to what we have seen some good enrollment for the couple of new sites that we have added since we acquired them. And so now our focus is really on getting several new sites over the course of the back half of the year and early part of next year. But we need to make sure as you mentioned, that they've got the requisite skill sets.

We don't need to get up to 30 to hit the milestones that we are talking about, we just need to get several more over the course of the next six plus months to make sure that we are really enrolling at a brisk pace the beginning of next year.

John Gillings, JMP Securities.

Thanks for taking the question. First, I just want to kind of go back to guidance just relatively high level. Looking through the different numbers that you guys gave if I caught everything correctly, it seems like most of the P&L numbers, EPS, EBITDA all stayed roughly the same with sales being taken down.

Can you walk us through how that works given that it sounds like you have hired some additional people, sales are going to be a little bit lower but it seems like there hasn't been much of an impact in the P&L.

We didn't really hire that many additional people, more than what the plan was originally. We actually have been doing better than expected on the overall operating expense and a little better than expected on the gross margin. And so you saw in this quarter where we were close to 73% on the gross margin line and then you also saw us beating kind of the bottom line by over $1 million. And so that basically is what helps contribute towards it is that we are actually spending less and we are being more efficient with the dollars relative to that.

And we are not holding back on spending necessarily, just the way the cadence of our business is coming together and where we are putting the dollars and resources, that is what has happened.

Okay. That makes sense and then looking at some of the new people that you have hired, the new reps, are there any noncompete agreements or anything like that or is it just training and getting up to speed? And if so, how long does it take roughly for a new rep to really get up to speed and get productive?

It is just training. The people we have hired have been great and finding the right people, our team does a wonderful job of interviewing, bringing them on board. Typically it takes about -- so there's two types of people that are really coming on board primarily right now or that have come on board. There are the direct reps that are selling, we call them regional sales managers, they own the territory, they manage that territory. Those take typically takes about six months to get up to speed and kind of understand everything clinically and then it takes about a year to be really incredibly productive. So part of the issue we had this quarter was that we were doing the hiring so the people that were covering the territory or were doing backfill on it were hiring people, some of those managers that were in the territory before and now that team is actually able to kind of be out in the field with them a lot more than just doing some of the hiring.

And that is why we have got confidence we will start to see some of that come back in terms of being out there and helping train them.

The other team that we are bringing on board now are the MIM team, or the minimally invasive managers. This was the former team that we had from nContact when we acquired them. There was around 11. Then we kind of came down to about five and we are back up to about 10 right now through hiring and we are hiring aggressively there and we think we will be at about 14 by the end of the year.

They are really bringing a completely different skill set, they understand the cath lab, the EP space and so they are getting up to speed, they need to get up to speed on our products. Their impact on revenue right away is actually not right away, it is really more for the future as we look into 2017.

Okay, that makes sense and then going back to kind of the spending side and keeping things under control but trying to balance that with growth, you have mentioned in the past for some of your training events that you see as much as a 40% increase in procedure volumes following those trainings. Have those trends changed and if not, what are sort of the factors that you look at in terms of doing more of those or less of those going forward?

We do about 10 to 12 advanced courses every year. The trends you are talking about really haven't changed per se but we constantly have to look at that. That is only a portion of what we do from a training standpoint now because that is ongoing training, that is really kind of getting out there.

But the trends we are seeing now are from sites we would have trained last year. So you don't see the trend within a three-month period of time. We really look at it six months and 12 months out and then 18 months out what has happened to it because they've actually got to go back into their site, they've got to start using it. And that has been pretty typical in terms of how we have looked at it over that period of time.

We are doing a lot on trading relative to other types of courses that we are doing. We are supporting these fellowship programs with the AATS, we are working with various different groups on some of those and we think those will have an impact as well.

Okay. And then just last one for me on the CONVERGE trial. Last quarter you talked about the centers where you weren't enrolling as much as you wanted and you mentioned that that had to do with the fact that they were getting some good -- such good results you were having trouble getting them to randomize and enroll.

So with the additional centers., is that something that you would still consider to potentially be an issue as people start to see the results that they might maybe not want to randomize or enroll as quickly?

On the other side of that, given that people are seeing such good results, could you comment on the trial design, if there is any interim look and if there is any potential that that could be halted earlier for efficacy?

So I will try to answer your first question. The sites -- and you characterized it very well. When we acquired nContact they did have a bunch of sites that had been historically getting great results with it therefore they were having difficulty on the randomization side. We have done several things on that front. I don't anticipate that many of those sites will be contributing many patients toward the trial because they still feel that way. I have visited every one of those sites and it is difficult to make them move.

However, most of the new sites are sites that we are being very critical about making sure that when they go into the trial that they are not going to be one of those sites, that they're going to be a site that is going to be capable and willing to randomize after they get their 10 to 20 patients in in terms of their ramp up into the trial and show that they can do the procedure safely and effectively.

So from our standpoint, we are being very critical on that, making sure we are having those conversations early in advance. Most of those -- we inherited really a lot of the other ones that had come forward from that standpoint so we didn't have a lot of influence. They are great sites on they are great customers for us so it is really not a knock on them from that standpoint.

The second thing that we are doing is that we will be doing some patient recruitment specifically for the trial in those very specific areas that we have been working on and it will be very specific towards the trial and so if something comes through that, it actually has to go into the trial.

Okay, that is helpful. And then just the second part if there is going to be some kind of an interim look?

Thank you for reminding me of that question. At this point we don't have a plan to have an interim look into it. The safety profile looks like it is good. Obviously we know the data on that. But we have not had a chance to do an interim look at the efficacy data at this time.

I'm not going to say that we wouldn't try to do that at some point but right now the plan is that we are not, we are going to try to get through the full enrollment by the end of next year.

Okay, thanks a lot, guys.

Matt Miksic, UBS.

Thanks for taking the questions. So most of the subjects have been covered I think at this point but I did want to follow up on John's questions around Epi-Sense and the CONVERGE trial.

As we talked about at HRS, we have also as I think many folks have picked up fairly positive feedback about EPi-Sense in the field, folks seem to really believe in it and been getting good results as you have talked about.

To just make sure I understand the timing right, you are looking at the end of 2017 enrollment still as sort of the goal or the expectation which puts you on the market sometime with follow-up and filing in 2019 or early 2020? Is that approximately right?

Yes, shooting for 2019 sometime. I think that we will have one year follow-up by the end of 2018, early 2019 and depending how long it takes and what data looks like hopefully we can get through reasonably quickly with good data. At that point it will be in the hands of the FDA to work through it. But I think that is a fair timeline. We have got to get the enrollment done, do the follow-up and that will be at the end of 2018 and the follow-up.

Sure. I guess where I am thinking is, I mean it started at your comments early in the call almost started to sound like between the extra sites and potentially not that you are looking at it this way but the pause in the DEEP trial, those factors, you could make an argument that you might be able to get through this enrollment a little faster. But for the point you just made about the difficulty in getting folks to randomize once they start to see great results from the device, is that a possibility? Should we start thinking about things moving a little faster with the new sites or should we just say these sites keep you on track for the end of 2017?

Sites keep us on track for the end of 2017. I can promise you we are doing everything we can to pull that in. But I don't want to commit to anything before the end of 2017. Obviously our team is working diligently to get as many patients into this as we possibly can as quickly as possible. Obviously the earlier the better. We would love to surprise people but I don't want to set that expectation too early until we actually have some of these sites come up and running and actually see how they are actually able to enroll.

They say they can enroll. These are heavy enrollment sites that we believe we can get online here in the next couple of months a couple of them along with those that we are seeing and we are seeing good traction but I don't want to commit to it yet.

That is fair. Just a follow-up on one of the questions earlier someone had asked about -- Brooks I think had asked about penetration or where you are with mitral. You had given us some numbers about a year ago in an update I guess around the beginning of the year. Can you sort of run down a best guess as to where you are in terms of penetration -- this is just the core open business?

In terms of --?

Penetration of those segments, so I guess the way you look at it is mitral, aortic and other or something like that.

There hasn't been a material change per se. We think the procedures are growing actually in each one of those areas. I believe mitral, AVRs and CABG actually will all see a little bit of an uptick when the data comes out in 2017 not 2016, I think you will wind up seeing that those have all come up a little bit overall and the penetration I think has come up slightly.

We are making progress on AVRs and CABGs. One of the key things here as I mentioned in the script is we are really focused on working with the societies on funding different clinical trials and data that they are putting together for showing that people actually live longer, they do better when you actually treat the afib at the time of surgery. And they are looking at changing guidelines and so that is a hot topic at every one of the ones I talk about STS, AATS and EX have all looked at it. They have all got proposals to upgrade the level of guidance. That is going to have the biggest next step of impact on it in addition to us just making sure that we can cover the cases as the market grows.

And timing on something like that?

Usually they do them at their meetings. I know there is a presentation going on at EX this year relative to some of the upgrades that they are trying to propose. And then I anticipate you will probably see some things come out at STS in the beginning part of next year and AATS middle part of next year. Abstracts and things at their shows.

I'm sure that they would love to get in at AHA and ACC, I'm just not sure that is the case. But we are also spending time with ACC and AHA in other areas and working on guidelines there. We are obviously not driving it but we are working with them on various different things and registries, etc. to make sure they've got the data to show that yes, in fact you do live longer lives and better lives, you reduce the amount of readmits back into the hospital when you actually treat the afib.

I am sure it is big unmet need for sure. I'm sorry if I cut off. Andy, were you say something? Did I interrupt?

No.

Okay. Listen, thanks so much for taking the questions.

That does conclude our question-and-answer session. I would now like to turn the call back to Mr. Mike Carrel for any further remarks.

Just thank you everyone for joining us today and look forward to talking to you over the course of the next several months. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.