AtriCure, Inc. (NASDAQ:ATRC) Q4 2023 Earnings Call Transcript

AtriCure, Inc. (NASDAQ:ATRC) Q4 2023 Earnings Call Transcript February 15, 2024

AtriCure, Inc. beats earnings expectations. Reported EPS is $-0.21, expectations were $-0.22. AtriCure, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to AtriCure’s Fourth Quarter and Full Year 2023 Earnings Conference 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 Marissa Bych, the Gilmartin Group for a few introductory comments.

Marissa Bych: Great. Thank you, and good afternoon. 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 AtriCure'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.

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. And with that, I would like to turn the call over to Mike Carrel, President and CEO.

Michael Carrel: Good afternoon, and thank you for joining us today. 2023 was an exceptional year at AtriCure, and I am proud to report a strong finish with fourth quarter growth of 21%, showing robust momentum throughout our entire business. Our full year revenue of $399 million represents 21% over 2022, our third consecutive year of above 20% revenue growth, and globally, we saw increasing adoption of our broad portfolio of products for the treatment of atrial fibrillation, the left atrial appendage, and postoperative pain. Our patient impact extended further than before, resulting in the achievement of our one millionth patient treated with AtriCare technology. In addition, our top line performance and increasing leverage drove $19 million of positive adjusted EBITDA in 2023, making significant progress towards sustained profitability throughout our business.

Before sharing operational highlights of the fourth quarter of 2023, I would like to frame the opportunity in front of AtriCare now. We identify markets where patients are underserved and create standards-of-care to improve these patients' lives. We know that creating new standards-of-care requires sustained investment in innovation, clinical science, and comprehensive education and awareness. Investing across these areas has allowed us to unlock new opportunities over the last two decades, and we are now positioned to offer solutions for millions of patients worldwide. This translates to a more than $5 billion global market opportunity today, with significant potential to expand our market opportunity in the future. AtriCare is in a unique position as a leader in each of our markets, with every market still significantly underpenetrated.

Therefore, we remain focused on driving adoption, as well as identifying and cultivating new opportunities to drive strong growth for many years to come. As such, we are reiterating our expectations for full year 2024 revenue of $459 million to $466 million, reflecting 15% to 17% growth over 2023. We are also reaffirming our expectations to achieve adjusted EBITDA of $26 million to $29 million for the full year, with improvements annually thereafter as we progress towards positive cash flow. Now shifting to highlights of the quarter and 2023. Starting with the open ablation franchise, where our ablation solutions for the treatment of Afib are used concomitant to open heart surgery. In the fourth quarter, we surpassed 10,000 patients treated with our EnCompass clamp and achieved the best quarter yet for EnCompass clamp sales, which accounted for nearly half of our U.S. open ablation revenue for the quarter.

The uptake of this product has been extraordinary since the BoD commercial launch in early 2022. At the recent Society of Thoracic Surgeons Conference, I heard from many surgeons about the impact this device is having on patients, expanding our reach throughout cardiac surgery procedures. Globally, our open ablation franchise achieved 21% annual growth in 2023, showing a continued elevation over historical growth rates in this franchise. As we begin 2024, we are confident in the increasing adoption of the EnCompass clamp in the United States and look forward to the European launch later in the year and other markets in the future. Next, turning to appendage management. AtriClip products for left atrial appendage closure in both open heart and minimally invasive procedures remain a foundation of our business.

In many markets around the world, AtriClip devices are leading our growth as left atrial appendage management becomes the standard-of-care in cardiac surgery. We are excited to have seen the STS, AHA, and ACC all elevate surgical LA exclusion to Class 1A within their guidelines recently and we expect this evolution in guidelines to propel strong continued growth for our business. Overall, our appendage management business grew 21% in 2023 and we closed out the year with an acceleration in quarterly growth at 24% for the fourth quarter. Our growth was driven primarily by sales of AtriClip FlexV, Pro2, and ProV devices reflecting strong attachment to both open and minimally invasive procedures and is indicative of the immense opportunity that is still ahead.

To that end, we celebrated a milestone in 2023 with more than a half a million AtriClip devices sold to date. This milestone stands on AtriClip's longstanding commitment and decades of innovation and research which we are continuing in 2024 and beyond. In late 2023, we submitted a 510(k) clearance notification to the FDA for our next-generation AtriClip device, the FLEX Mini, which builds off our proven technology to increase ease-of-use and significantly decrease the size of our AtriClip device, which already has the smallest profile on the market. We anticipate clearance in late 2024 with the U.S. launch following quickly thereafter. Additionally, to extend our potential patient impact, we're actively investigating the application of AtriClip devices in patients with preoperative Afib diagnosis through our LeAAPS clinical trial.

The LeAAPS trial seeks to demonstrate a clinically meaningful reduction in ischemic and systemic atrial or arterial embolism, differentiating our AtriClip product from all other appendage management options in cardiac surgery and expanding our addressable markets globally. Enrollment in LeAAPS began in late January, 2023 and accelerated throughout the year. We ended 2023 far ahead of our internal expectations. And as of today, we have enrolled over 1,700 patients in the study. We are expanding clinical trial sites in 2024 and expect first enrollment from centers in Europe in the coming weeks. While the trial will take several years to complete, the pace of enrollment both validates our decision to embark on this trial and underscores the excitement from clinicians and patients.

Moving now to our pain management franchise, where our cryoSPHERE probe provides temporary relief for postoperative pain. Since the launch in 2019, the cryoSPHERE device has exhibited remarkable growth with full year 2023 revenue exceeding $50 million worldwide reflecting growth of 26% year-over-year. The base of accounts we serve has expanded just as rapidly and we saw more than 750 accounts purchasing globally in 2023. That said, to capitalize on the full market potential, we have several parallel efforts underway to add growth drivers for this business. First, our next-generation technology, the cryoSPHERE Plus probe was cleared by the FDA in the fourth quarter. The cryoSPHERE Plus device will enable faster ablations, improving efficiency of procedures.

Recently, we completed the first procedures with this device with a 25% reduction in ablation time. We expect to move to full launch in the second quarter. We're also conducting economic studies in partnering with multiple centers to expand clinical data to better illustrate the value proposition of Cryo Nerve Block therapy. We will continue to invest in commercial resources worldwide to promote awareness for this important alternative to traditional pain management practices. Lastly, while we focus on driving adoption in thoracic and sternotomy procedures, we are carefully evaluating potential new applications and market opportunities for Cryo Nerve Block therapy and look forward to updating you on progress. Finally, rounding out our portfolio is Hybrid AF therapy focusing on standalone treatment of the millions of patients with longstanding persistent Afib.

We ended 2023 on a high note with 27% year-over-year franchise growth in the fourth quarter. As I've said on several calls over the past year, 2023 was a building year for Hybrid AF therapy to ensure a strong foundation for lasting success throughout our accounts and leading to accelerating growth in the future. We were thoughtful about partnering with our customers to address workflow challenges and comprehensively understand their needs for program expansion. Our fourth quarter results confirmed that our work throughout 2023 is having an impact and we will continue our efforts into 2024. We expect 2024 to be an exciting year for standalone treatment of Afib. As peers introduced PFA catheter technology in the U.S. market, the focus on more efficient endocardial ablation driven by PFA should provide a tailwind for everyone in the Afib market.

A medical technician holding a modern ablation device in a hospital operating theatre.

Our hybrid approach remains complimentary to PFA just as it is complimentary to other energy sources used in endocardial procedures. Further, Hybrid AF therapy remains the only proven solution for longstanding persistent Afib patients. In addition to our CONVERGE trial results, there is a rapidly growing body of clinical evidence from independent studies and registries showing catheter ablation alone is not an effective treatment for patients with advanced Afib. In 2023, data from our CEASE-AF study and DEEP-AF clinical trial provided even more support for a hybrid approach. Moreover, recent updates to clinical guidelines published by AHA and ACC demonstrate the importance of Hybrid AF therapy. As such, we will continue to build our program development efforts with the goal of cementing efficient, scalable workflows for a broader base of customers.

We have a strong conviction in the accelerating adoption of our Hybrid AF therapy for the millions of patients suffering from longstanding, persistent atrial fibrillation. In summary, 2023 was another truly exceptional year for AtriCure, defined by major milestones in patient impact and accelerating top and bottom line growth. We are excited to carry this momentum into 2024 as we advance adoption of our therapies and invest in future growth prospects that will propel AtriCure forward for many years to come. And with that, I will turn the call over to Angie Wirick, our Chief Financial Officer. Angie?

Angela Wirick: Thank you, Mike. Our fourth quarter 2023 worldwide revenue of $106.5 million increased 21% on a reported basis and 20.5% on a constant currency basis when compared to the fourth quarter of 2022. U.S. revenue was $88.8 million, a 20.1% increase from the fourth quarter of 2022, reflecting robust activity across each franchise, highlighted by an uptick in adoption of our Hybrid AF therapy representing 30.6% growth for the quarter, along with continued strength from key appendage management, open ablation, and pain management products. International revenue totaled $17.8 million, up 25.8% on a reported basis, and up 22.1% on a constant currency basis as compared to the fourth quarter of 2022. We continue to see strong demand for our differentiated solutions in major international markets with significant growth in appendage management and pain management.

Sequentially, worldwide sales grew $8.3 million, or 8.4%, over Q3 2023. Gross margin for the fourth quarter 2023 was 74.9%, up 94 basis points from fourth quarter of 2022. The increase was driven primarily by favorable production efficiencies, partially offset by less favorable geographic and product mix. Fourth quarter 2023, research and development expenses increased $7 million, or 51%, and SG&A expenses increased $12.2 million, or 22%, over the fourth quarter 2022. Turning to the bottom line. We drove positive adjusted EBITDA of $4.8 million for the fourth quarter 2023 compared to positive adjusted EBITDA of $6 million for the fourth quarter 2022. While we are continuing to drive improvement to gross margin and realizing operating leverage in our commercial and administrative infrastructure, we experienced a significant increase in research and development costs in the fourth quarter of 2023 due to the rapid enrollment and expansion of our LeAAPS clinical trial and multiple product development initiatives underway.

Our loss per share and adjusted loss per share was $0.21 for the fourth quarter 2023 compared to a loss per share and adjusted loss per share of $0.09 for the fourth quarter 2022. Now to review full year 2023 results. Worldwide revenue was $399.2 million, an increase of 20.8% on a recorded basis and 20.6% on a constant currency basis. U.S. sales increased 20.3% to $333.5 million, and international sales increased 23.5%, or 22.1% on a constant currency basis, to $65.7 million. The continued expansion of the EnCompass clamp drove U.S. open ablation sales to $105.3 million, or 22.3% growth over 2022. In 2023, our U.S. pain management franchise grew 23.1% to $49.2 million from increasing activity in existing accounts, along with a new account adoption.

U.S. MIS revenue was $44.6 million, reflecting single-digit growth in our legacy device sales, bolstered by approximately 18% growth in EPi-Sense sales, where we are successfully laying the groundwork for long-term growth. 2023 U.S. appendage management sales reached $134.5 million, a 19.5% increase over 2022, driven largely by our AtriClip FlexV device. And much like U.S. trends and activity in 2023, our international revenue growth was propelled by appendage management, open ablation, and pain management products. Gross margin for the year ended at 75.2%, an increase of 79 basis points from 2022. Similar to our fourth quarter results, the increase of gross margin reflects production efficiencies realized throughout the year, partially offset by less favorable geographic and product mix.

Moving to operating expenses. Full year 2023 operating expenses increased 13.3% to $327.1 million from $288.6 million in 2022. Research and development costs expanded by $16.6 million, or 28.9% on both clinical trial and product development project spend as we extend our pipeline with clinical evidence and innovation. SG&A expenses increased $21.9 million, or 9.5%, with leverage in our training and education programs, commercial team, and infrastructure driving down operating expenses as a portion of revenue, in addition to a one-time benefit in 2023 from legal settlements. We remain focused on continued efficiencies in SG&A while maintaining investments in R&D for future expansion. Full year 2023, adjusted EBITDA was positive $19.4 million compared to a negative $2.2 million in 2022, an improvement of $21.6 million.

Our loss per share was $0.66 in 2023 compared to a loss per share of $1.02 in 2022. Adjusted loss per share was $0.75 and $1.02, respectively. We ended 2023 with $137.3 million of cash and investments, a robust working capital position, and the flexibility to fund future opportunities and investments. Finally, turning to our outlook for 2024. Consistent with our guidance in early January, we expect to achieve between $459 million and $466 million in revenue for the year, reflecting growth of 15% to 17% over full year 2023 results. Embedded in our guidance is the assumption that product innovation and supporting clinical data will propel us to 15% growth and beyond. Also included in our guidance are market dynamics that include increasing competition.

As we look at our progress with market development and the opportunities of each franchise, we expect our franchise growth rates in the United States to align closely with our expectations of 15% to 17% annual growth. We continue to see growth in our pain management business through deepening use in thoracic procedures and the addition of clinical data to lead to even wider acceptance of this therapy. We believe the exceptional adoption of our EnCompass clamp will continue to drive performance in open ablation, while broader progress with Hybrid AF therapy using our EPi-Sense system to lift MIS ablation growth in 2024. Complementing these drivers is our AtriClip products, which we see continuing delivery of steady growth over the large base of revenue.

Additionally, we anticipate our international growth to remain on pace with the United States in 2024 and beyond. In terms of revenue cadence for the year, we expect typical seasonality to inform 2024 with first quarter revenue likely to be flat to our fourth quarter of 2023. From a margin perspective, we expect 2024 gross margin to be in line with our 2023 results with potential for modest improvement from cost savings initiatives later this year. We anticipate headwinds from product and geographic mix as well as increasing material costs to be offset by continued production efficiencies and leveraging scale within our operations as we grow. And as we have said before, our primary focus with capital allocation is to incubate the next set of growth drivers for AtriCure.

Therefore, we expect to maintain R&D as a percentage of revenue at roughly 19% to 20% percent in 2024. Our spending across SG&A will continue to moderate in proportion to revenue, providing leverage and sustained improvement to profitability. With these priorities in mind, we expect full year 2024 adjusted EBITDA to range from $26 million to $29 million, translating to an adjusted loss per share of approximately $0.74 to $0.82. We also anticipate a moderate cash burn in 2024 against our strong cash balance and capital position. And as a reminder, our first quarter expense profile is typically highest, variable compensation payouts, share vesting and other operational needs will drive a higher overall cash burn and modest bottom line results.

As I turn the call back to Mike for closing comments, I would like to reiterate, 2023 was a stellar year at AtriCure. From expanding patient impact and revenue growth to realizing positive adjusted EBITDA, our results stem from the powerful collaboration of my AtriCure teammates. We enter 2024 with an unrelenting dedication to the patients we serve and drive to continue our financial progress. Mike?

Michael Carrel: Thank you, Angie. I would like to close by congratulating our entire team on an incredible 2023. Patient outcomes are our guiding principle and we are most proud of that at AtriCure. Your teamwork led over 100,000 patients treated this year and over 1 million in our company's history. We are making a difference for patients with advanced forms of Afib, higher risk of stroke and pain after surgery. As we grow and evolve in the future, patient outcomes will continue to drive our efforts as we capitalize on our leadership in these markets. And with that, I will turn it over to the operator for questions.

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