AtriCure, Inc. (NASDAQ:ATRC) Q3 2023 Earnings Call Transcript

AtriCure, Inc. (NASDAQ:ATRC) Q3 2023 Earnings Call Transcript November 1, 2023

AtriCure, Inc. beats earnings expectations. Reported EPS is $-0.2, expectations were $-0.3.

Operator: Good afternoon, and welcome to AtriCure’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in 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 Marissa Bych, the Gilmartin Group for a few introductory comments.

Marissa Bych: Great. Thank you. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call 513-644-4484 to have one e-mail to you. Before we begin, 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 the company’s SEC filings. These statements include, but are not limited to, financial expectations and guidance, expectations regarding the potential market opportunity for AtriCure’s franchises and growth initiatives, future product approvals, clearances, reimbursement and clinical trial outcomes.

A healthcare professional examining an X-ray of a patient with a serious cardiovascular disease.

AtriCure’s results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward-looking statements. Additionally, we refer to non-GAAP financial measures, specifically revenue reported on a constant currency basis, adjusted EBITDA and adjusted loss per share. A reconciliation of these non-GAAP financial 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, President and CEO.

Mike Carrel: Good afternoon, and thank you for joining us. I am delighted to announce another strong quarter for AtriCure, once again demonstrating the broad based activity in our business and global revenue drivers. In the third quarter, we achieved total revenue of $98 million, representing 18% year-over-year growth. Our team continues to promote awareness and adoption of our therapies for the treatment of atrial fibrillation, LAA management, and postoperative pain management. As we increase our patient impact in these markets, we are also driving sustainable profitability. In the third quarter, we achieved positive adjusted EBITDA of approximately $5 million, driven by our growth on the top line, strong gross margins, and disciplined approach to investing in the future.

In light of our quarterly results and our confidence in the remaining of the year, we now forecast full year 2023 revenues of $394 million to $396 million, reflecting a year-over-year increase of 19% to 20%. In addition, we now anticipate full year 2023 adjusted EBITDA to be approximately $18 million to $20 million. As we reflect on our progress this year, there is still significant untapped opportunity in the large populations that we serve. We remain confident in our ability to continue to accelerate growth over the rates achieved in the preceding decade, while expanding profitability. Now, turning to a more detailed review of the business, starting with our open ablation franchise. Growth from the EnCompass clamp remains incredibly strong.

Our EnCompass clamp leverages the proven technology of our synergy ablation system to provide simpler and faster ablations in open heart procedures. Physician feedback is exceptional, with many underscoring the efficiency and ease of use of the device. For the second quarter in a row, EnCompass sales exceeded $10 million and along with our legacy platforms drove 20% worldwide growth in our open ablation franchise. So much opportunity remains to treat AFib in combination with cardiac with open cardiac surgery and we are optimistic about the future of this franchise with our proven technology and the abundance of clinical data on our products. Shifting to appendage management, our products for both open heart and minimally invasive procedures continued to be critical growth catalysts for AtriCure, representing 40% of overall revenue in the quarter.

Worldwide revenue for the franchise grew 18% over the prior year, reflecting robust adoption across geographies. Our growth was driven primarily by sales of our AtriClip Flex-V device, which represents the latest innovation in our 20-year history of technology development expertise in LAA management. To complement our commercial progress, we are actively pursuing the expansion of our addressable markets with the LeAAPS clinical trial to elevate patient care in cardiac surgery. Two-thirds of the more than 1 million cardiac surgery patients worldwide do not have preoperative AFib diagnosis. Yet, it is well understood that these patients have an increased risk of stroke and AFib following surgery. The LeAAPS trial represents a meaningful opportunity to expand the benefits of AtriCure technology for these patients.

The primary endpoint of the study is a demonstrated reduction in ischemic stroke and systemic arterial embolism defining a new market in stroke prevention. Excitement for the trial is compounding, and we are continuing to expand site initiation worldwide. We’re also enrolling well ahead of plan. At the same time, we are developing even less innovative and easier to use technologies to ensure that our AtriClip product line remains at the forefront of this rapidly expanding market. Turning now to Hybrid AF Therapy, where we saw 8% growth in this franchise globally year-over-year and a slight decline on a sequential basis largely due to seasonality. Recently, we have hosted several standing room only hybrid courses all around the globe and continue to hear from physicians and seek clinical evidence that supports our belief that combining Epicardial and Endocardial ablation will unlock enormous benefits for millions of patients suffering from longstanding persistent atrial fibrillation.

AtriCure holds a unique position in the broader AFib market, with the only devices FDA approved for the treatment of longstanding persistent atrial fibrillation. We are frequently asked about the potential for pulsed field ablation or PFA to impact AFib therapies. We believe innovation is paramount importance in the medical device field, and we are encouraged by the activity and progress of PFA. The awareness it brings to the treatment of AFib encourages robust conversations on this topic and the focus on more efficient Endocardial ablation is a tailwind for everyone in the market. For AtriCure, these are all positives and our hybrid approach remains complementary, much like it is shown with other energy sources used in Endocardial procedures.

Therefore, as we work to support this massive market opportunity, we are partnering with early adopters of our Hybrid AF Therapy to monitor their program development efforts while strengthening referral channels with the ultimate goal of building efficient and scalable workflows for a broader base of customers. We are making headway and remain optimistic that our activities are establishing the foundation for strong and durable growth of Hybrid AF in the future. Finally, moving to our pain management franchise, where our cryoSPHERE probe is driving robust growth around the world. In the third quarter, worldwide revenue grew 24%, a record number of accounts adopting the therapy. We continue to see opportunities to drive penetration in thoracic procedures.

We also began a limited rollout of Cryo Nerve Block and sternotomy. While uptake in sternotomy procedures remains very modest, we are learning more about the points of differentiation in this new application and believe there is potential growth from here. We are also pleased to announce that our next generation cryoSPHERE probe, which includes meaningful enhancements to our platform was recently cleared by the FDA. We expect the track record of exceptional ease of use and outstanding patient outcomes from our first generation cryoSPHERE technology to showcase even more prominently in this new device and look forward to launching in the United States in 2024. Now, I would like to shift my comments to an area that is top of mind for many investors in the broader stock market, which is GLP-1s.

We are excited about the potential patient benefits, and yet there is more to learn about the long-term clinical and market impacts of this class of therapies. What we do know is that our core market of atrial fibrillation is a global epidemic today. In fact, there are over 37 million patients worldwide, and this population is growing rapidly. Anyone can develop AFib. It is a complex disease with many risk factors and triggers. AFib is also a progressive disease becoming harder to treat and a more serious health risk as the disease progresses. Because the likelihood of AFib increases with age and people are living longer today, many researchers predict the number of AFib cases will rise dramatically in the coming years, and we agree. Another reason we feel confident in the durability of our end user markets is our focus on the hardest to treat AFib patients.

These patients typically have multiple risk factors and comorbidities, making it more likely that their AFib will progress regardless of other interventions or advancements in medicines. We have unique solutions for treatment of concomitant to cardiac surgery procedures, as well as standalone therapies for longstanding persistent AFib. With millions of patients untreated, both markets remain substantially underpenetrated, and we envision a future where many hundreds of thousands of patients are treated each year. In addition to our specialization in AFib, there are many avenues of growth at AtriCure, including our Cryo Nerve Block solution for managing postoperative pain, which was virtually non-existent less than five years ago. We see a steady increase in underlying procedures in this market, with majority arising from cancer and trauma cases.

Penetration in thoracic and cardiothoracic procedure continues and remains low. Therefore, in each of our markets, we have a substantial potential for expansive growth. We are thoughtful about building a complementary portfolio with diversified drivers, which is evident through our clinical trial investments such as LeAAPS and HEAL-IST and emerging therapy, research and pain management outside of the thoracic applications. In closing, we maintain strong conviction in our business, in the sustainability of our end user markets and in our unwavering commitment to profitable growth. Additionally, we see several exciting opportunities ahead for AtriCure, as our research and development efforts set the foundation for meaningful long-term profitable growth for all of our shareholders.

I will now turn the call over to Angie Wirick, our CFO, for more details regarding our financial performance.

Angie Wirick: Thank you, Mike. Our third quarter 2023 worldwide revenue of $98.3 million, increased 18.1% on a reported basis and 17.3% on a constant currency basis when compared to the third quarter of 2022, reflecting continued strong performance of our business globally and contribution across our broad portfolio of products. On a sequential basis, we experienced a 2.6% decline in worldwide revenue from the second quarter, attributed to normal seasonal variation in underlying procedures during summer months. In the third quarter of 2023, U.S. revenue was $81.7 million, a 17.1% increase from the third quarter of 2022. Open ablation product sales were $25.8 million, up 19.8% over 2022 and propelled by steady adoption of the EnCompass clamp across an expanding customer base.

We continue to be pleased with the uplift in volume driven growth in this market and estimate open concomitant procedure growth was roughly 13% for the quarter. Procedures with the EnCompass clamp are at a higher per case ASP, a trend that will continue with increasing adoption. Pain management sales were $12.6 million, up 19.8% over the third quarter of 2022. We saw growth from the addition of new accounts as well as deepening penetration within existing accounts. U.S. minimally invasive ablation sales were $10.9 million, up 8.1% from 2022. And finally, sales of appendage management products in the U.S. were $32.4 million, up 17.2% over the third quarter of 2022. International revenue was $16.6 million, up 23.2% on a reported basis and 18.7% on a constant currency basis as compared to the third quarter of 2022.

European sales contributed $9.2 million in the quarter, while Asia Pacific and other international markets accounted for $7.4 million in revenue. International revenue growth was fueled by expanding adoption of our therapies in our major markets, as well as favorable currency exchange rates. Our gross margin this quarter was 75.2%, an increase of 110 basis points from the third quarter of 2022. We realized benefits from favorable production efficiencies partially offset by unfavorable geographic and product mix. Now, turning to operating expenses for the quarter, which totaled $82 million, an increase of $9.5 million or 13.1% from the third quarter of 2022. Similar to the second quarter this year, a significant driver of the change in operating expenses was the expansion of personnel across our teams to support our growth.

The increase in research and development expenses was 34% year-over-year, well outpacing the 8% increase in selling, general and administrative costs. Research and development expenses reflect expanding activity and faster than expected enrollment in our LeAAPS clinical trial, as well as progress in several new product development projects. Adjusted EBITDA for the quarter was positive $4.7 million, compared to a negative adjusted EBITDA of $700,000 for the third quarter of 2022. Our basic and diluted net loss per share, as well as the adjusted loss per share was $0.20 in the third quarter of 2023, as compared to $0.27 in the third quarter of 2022. Our balance sheet remains strong and we ended the third quarter with $133 million in cash and investments.

This quarter’s modest cash burn reflects capital investment associated with the expansion of our manufacturing operations, as well as an increase in inventories. Now closing with our outlook for 2023. Considering our third quarter results and the ongoing momentum across our business, we expect to achieve approximately $394 million to $396 million in annual revenue for 2023, reflecting full year growth of approximately 19% to 20% over 2022. Our guidance implies sequential growth over the third quarter, and we anticipate similar franchise drivers leading fourth quarter performance. We remain confident in the breadth of our global portfolio, delivering continuation of accelerated growth rates over AtriCure’s long history of mid teens achievement prior to COVID.

We now anticipate full year 2023 gross margin to be slightly above 75%, with the potential for varying impacts from increasing costs and geographic mix, as well as investments to support revenue growth. And finally, throughout 2023, we have shared our commitment to both achieving and expanding profitability, while leaning into investments that we expect to be growth drivers in the future. To that end, we are maintaining an elevated level of investment in research and development as we focus on progressing our innovation and clinical evidence agenda and get ready for the launch of many new products to drive future growth. Key areas of spending in the fourth quarter include site expansion and enrollment in the LeAAPS clinical trial and product development activities for the next generation of AtriClip devices, new product development for ISP therapy and research across our platforms.

Additionally, our plans include thoughtful growth in our global commercial teams and targeted market development initiatives across franchises. Therefore, we expect full year 2023 adjusted EBITDA to be approximately $18 million to $20 million, corresponding to an adjusted loss per share for the full year 2023 of approximately seventy four cents to seventy six cents. We are extremely proud of the progress we have made in advancing our mission while gaining meaningful leverage in our business. As we close out this year, we thank the entire AtriCure team for a truly exceptional collaboration and dedication. Your efforts have powered our success in 2023 and a continued belief in a strong outlook for our business in 2024 and beyond. Now, I will turn the call back to Mike.

Mike Carrel: Thank you, Angie. We are making a profound impact in the lives of patients as we work to transform the treatment of AFib, pain management and stroke prevention, and establish standards of care globally. We remain committed to delivering profitable growth and are confident in the vast potential of our existing markets and our ability to further expand addressable markets in the future across every one of our franchises. Thank you for being a part of our journey. We couldn’t be more excited about the future of AtriCure. With that, we’ll turn it over to questions.

Operator: Great, thanks so much. At this time, we will conduct the question-and-answer session. [Operator Instructions] First question comes from Robbie Marcus at J.P. Morgan. Your line is open. Oh, great.

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Q&A Session

Robbie Marcus: Great. Thanks for taking the question. Congrats on a good quarter. Two for me. Maybe to start, you’ve got really good momentum through the year guidance 19% to 20% profitability is coming in nicely. Any preliminary thoughts as we head into 2024 and the EnCompass clamp starts to annualize the launch here. Just any early thoughts on some high level trends? Thanks.

Mike Carrel: Yes. Thanks for the question, Robbie. And yes, we feel great about the quarter so far and the momentum we built. And we feel like we can continue really strong momentum into 2024 across pretty much every one of our franchises on the EnCompass clamp. Let’s hit on that first, because you kind of mentioned that that has been a great product launch. We’ve definitely seen volumes increase in that area. I think we’re already pretty much on that lapping end that you’re talking about on the price side of things, as we enter into next year, it’s pretty much a volume game and we just see more and more penetration into those markets and they’re big markets for us to go after. So we think it’s going to be a really strong and good solid year in 2024 without getting into too many specifics on it.

We also believe the same in the other areas of business. On the hybrid side, we’re really starting to see traction in terms of number of accounts quarter-over-quarter. When you look sequentially, obviously, the seasonality affected it to some degree, we had a strong Q3 last year, but we feel like we’re really getting some stickiness in those accounts building on that. And see, we believe we’ll build on that in Q4 and heading into next year as well, and the same thing on Cryo Nerve Block as well. So across the board, I think we feel like we’re going to be in a good place. As Angie mentioned in her comments, our commitment is that we’re going to grow at a faster pace than what we did kind of prior to COVID when we were growing in that 14% to 15%.

We believe that we’re going to grow at a faster pace than that in 2024. We’re not ready to give a specific number for what that looks like or guidance, but we do believe that we’ll grow at a faster pace in 2024 on an overall basis.

Robbie Marcus: Great. Very helpful. Second for me, I want to spend a minute on profitability, because it’s the second quarter, it’s beaten pretty nicely. Clearly on a positive trend, at first, it was can you generate positive adjusted EBITDA? Then when – now, I guess we’re moving to how much? So as we think about improving gross margin, SG&A leverage still elevated R&D spend. Is that the right way to think about it as we move forward? And any one time items in the quarter that would impact it moving forward? Thanks.

Angie Wirick: I think we like to hear each one of those questions, Robbie, and I think you’ve got the calculus correct. I think we continue to expect good strength in gross margins this year, coming in a little over 75%, and believe that we can continue kind of operating at that level if not enhancing over the future. We do prioritize R&D investments and would expect kind of an elevated level of spend and then the leverage that you’re seeing in the business in the SG&A category specifically would expect for that to continue to next year and the years beyond that. So I think you’ve got the calculus correct.

Robbie Marcus: Thanks a lot.

Operator: [Operator Instructions] The next question comes from Bill Plovanic with Canaccord Genuity. Your line is open.

Unidentified Analyst: Hey, it’s [indiscernible] on for Bill. Thank you for taking the question. Looking at the full year in Q4, are there any specific products or geographies that will be a larger, smaller grower than usual, any kind of seasonality that you might not be expecting in that regard?

Angie Wirick: No, Zach, as I said in the prepared comments, we kind of expect the same areas of the business that have been leading the growth for this year to be the contributors to kind of the growth rate in the fourth quarter. So nothing to call out or nothing unusual, I’d say, that we would expect in the fourth quarter from that regard.

Unidentified Analyst: Got it. Thank you for clarifying. And my second question is, can you, I guess, provide more color contextualize the EPiSense physician workflow improvement, how that might impact the P&L, anything like that? Thank you.

Mike Carrel: The workflow that we’re seeing with EPiSense, it’s not really the EPiSense workflow, but the workflow of at the hospital how to treat these patients that have long standing persistent, and kind of getting them from the EP, passing them over to the surgeon and then back to the EP. And we’ve worked really with every one of the facilities that we’re doing business with today to really kind of make sure those handoffs are really strong, that the clinical work that’s being done is consistent across every site, across the country. So that they’re getting consistent and good results as they move that forward and that they understand how to best kind of maneuver the logistics with it, obviously, each hospital is a little bit of a different piece to it.

That being said, what that enables us is obviously more efficiencies, which should drive long-term more revenue growth for us. It also provides efficiencies in the EP lab, because when they do this procedure, we’ve definitely seen a dramatic decrease in the time they need to spend on these patients. In the trial, we saw close to an hour savings. In reality, we’re seeing much more than that on these really difficult to treat patients, which gives them time to treat more patients. And so you’re seeing with a lot of these companies that they’re having an increased workflow. And you see it with the catheter companies how much more business they’re getting for a lot of these patients. And we’re going to help contribute to that by reducing some of the time by taking out the backlog and doing a lot of that work.

Angie Wirick: And maybe just to add, I think Mike addressed top line, Zach, when you think about the investments that are in the P&L today, they’re pretty modest in comparison, I’d say, to the number of accounts. And the focus that we’ve got in the field really is improving workflows and existing accounts and would expect for that investment to stay in the P&L as we start to think in the future years about opening up new centers and continuing to expand the customer base.

Unidentified Analyst: Great. Thank you so much.

Operator: [Operator Instructions] The next question comes from Matt O’Brien with Piper Sandler. Your line is open.

Unidentified Analyst: Hi, this is Samantha on for Matt. Thank you for taking our question. I guess, first off, I was wondering if we could get a few more details on your new cryoSPHERE product and maybe how you can expect that to continue the momentum as a pain management business is seen.