AtriCure, Inc. (NASDAQ:ATRC) Q1 2024 Earnings Call Transcript May 2, 2024
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 First Quarter 2024 Earnings Conference Call. This call is being recorded for replay purposes. And at this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session following prepared remarks from AtriCure’s management. I would now like to turn the call over to Marissa Bych from the Gilmartin Group for a few introductory comments.
Marissa Bych: 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-mailed 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 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.
Mike Carrel: Thank you, Marissa. Good afternoon, everyone and thank you for joining us today, I am pleased to report a strong start to 2024 as we expand our global impact on patients with atrial fibrillation and postoperative pain. In the first quarter, we achieved total revenue of $109 million, reflecting 16% growth from the first quarter of 2023, driven by steady demand and activity across our franchises and geographies. In addition, we improved gross margins and expanded profitability with a nearly 50% increase in adjusted EBITDA in the first quarter of 2024 compared to the first quarter of 2023. As we continue efforts to grow adoption across our portfolio, we are reiterating expectations to generate full year 2024 revenue of $459 million to $466 million, reflecting 15% to 17% year-over-year growth.
We are also reaffirming our plans to deliver a full year adjusted EBITDA of $26 million to $29 million with annual improvements thereafter. We remain confident in our strategy to invest in innovation and growth, while driving increasing profitability and cash flow generation. As I think about the future of AtriCure, our strong growth outlook is the result of many years of innovation, clinical investments and market development initiatives. As you all know, AtriCure is the leader in the treatment of advanced atrial fibrillation and we are number one in each of our multibillion dollar markets. As we uphold this position, we do not take competitions lightly. We have long anticipated that our success marked by consistent double-digit growth within vastly under-penetrated disease states would invite new entrants into the markets.
In fact, we have intentionally executed a strategy that involves market expansion and development activities for over a decade in anticipation of some competition, which we are beginning to see today. We believe competition validates the immense opportunity still ahead for our business. And of course, we expect new market entrants to be able to generate business by entering our markets. We know that physicians try new products. That said, we are confident in our long-term prospects, because we know that competition creates greater therapy awareness and stimulates strong long-term market growth. For example, look at TAVR and percutaneous dependence management markets over the past 15 years. New entrants have helped grow those markets and drive multibillion dollar franchises.
Our confidence is also founded in the exceptional quality and safety of our innovative products, which are further supported by compelling clinical outcomes. We will continue to differentiate your care from the field by investing in innovation, which you will see this year through our recent cryoSPHERE Plus launch and upcoming AtriClip FLEX Mini launch, both of which we expect to be game-changing technologies and we will keep investing in market expanding clinical evidence in support of our technology, such as the only stroke trial ever done for concomitant cardiac surgery in our LeAAPS trial. Lastly, one of our greatest long-term differentiators is the deep knowledge and strength of our commercial and education teams. We have over 400 field personnel globally, building and strengthening relationships with cardiac and thoracic surgeons and EPS.
We will continue to invest across these differentiators in our business, innovation, clinical science and field expertise to enable AtriCure to remain a market leader. Looking forward, we expect to stay several steps ahead of our peers in the market and market development and expansion. To-date, our investments have culminated in a robust cadence of innovation and the launch of multiple growth drivers of our business. More recently, in our open ablation franchise, we have had tremendous success with our EnCompass Clamp. The EnCompass Clamp leverages the proven technology of our synergy ablation system to provide simpler and faster ablations in open heart procedures. This increased procedure efficiency over legacy solutions continues to drive exceptional adoption of this device and opening up new opportunities for growth.
We are pleased to see EnCompass highlighted at the recent AATS meeting in Toronto across many papers and presentations. We are committed to making concomitant treatment to standard of care for patients undergoing cardiac surgery and still see significant opportunity ahead in both pre-op AFib patients and eventually post-op AFib reduction. Building on this we anticipate EU MDR approval and the European launch of the EnCompass Clamp in the back half of 2024 further expanding the impact of this outstanding product. Our founding mission is to advance the treatment of atrial fibrillation, leading to the development of standalone minimally invasive treatments for patients. Our hybrid AF therapy is an important extension of our expertise in effective treatment and is the only approved standalone treatment for longstanding persistent AFib.
The evidence is clear that the most effective way to treat those patients is with a combined Epicardial and Endocardial approach, making our hybrid AF therapy complimentary to all catheter based technologies. I am pleased to see the strength of our fourth quarter 2023 results carried into the first quarter of this year resulting in increasing adoption across a growing base of accounts. As we expected, 2024 is shaping up to be a pivotal year for standalone treatment of AFib, with the availability of multiple PFA catheter technologies in the U.S. highlighting this attractive and vastly underserved market. We are finding that physician interest in PFA technology encourages robust conversations on approaches to treating AFib and the varying needs of patients across the spectrum of this progressive disease.
Our hybrid approach is complementary to PFA and we believe the focus on more efficient Endocardial ablation is a tailwind for everyone in the market long-term. In fact, we have several customers already using Endocardial PFA catheters in the second stage of their hybrid procedures, further validating our thoughts that PFA is part of a rising tide in this market. As we move through 2024, we remain focused on targeted efforts to support accounts as they develop hybrid AF therapy programs. In addition, we are in the early stages of the launch of our Steerable Epi-Sense device in Europe, providing another catalyst for this franchise in our international markets. Our emphasis on innovation also extends to our appendage management franchise. Over a dozen years ago, we set out to transform the standard of care for patients with atrial fibrillation by offering a safer and more reliable method to exclude the appendage.
Today, our AtriClip products are the most widely used appendage management devices in the world, with more than half a million devices sold. Given the strength and longstanding contribution of our AtriClip platform, we understand the competitive dynamics in this market are top of mind for investors. However, we are pleased to continue driving healthy adoption in this business marked by over 15% growth in our U.S. open appendage management business in the first quarter and record sales of our AtriClip Flex V device, even in the presence of competitive device trialing. We are all already seeing the availability of the competitive device yield in-depth discussions on treating the appendage allowing us to highlight the advantages of our AtriClip technology.
Over the long-term, we expect this to promote therapy awareness in ways that we could not do on our own. In the short-term, we are ready to compete and remain focused on delivering differentiated solutions. To that end, we are preparing for another significant innovation in this market with our AtriClip FLEX Mini device, which is on track for FDA clearance and commercial launch later this year. The AtriClip FLEX Mini builds on the solid foundation of our AtriClip technology known for ease-of-use, unparalleled safety, and outstanding closure results with a substantially smaller profile in this new device. We also view our market opportunity for appendage management as multiples of where we began dozens of years ago – a dozen years ago. The investment in our LeAAPS clinical trial has the potential to dramatically expand the use of the AtriClip devices as the standard of care for all patients undergoing cardiac surgery, which represents over 1.5 million patients per year globally.
The LeAAPS clinical trial is investigating the use of the AtriClip products in patients without preoperative AFib diagnosis, seeking to demonstrate a clinically meaningful reduction in ischemic and systemic arterial embolism. If successful, this massive clinical trial along with existing robust clinical evidence would further separate our products from all other surgical left atrial appendage management devices. Enrollment in the LeAAPS clinical trial has continued rapidly, with almost 2,300 enrollments today driven by strong demand for patient inclusion across 77 sites in the U.S. and Canada. We anticipate the first patient enrollment in our European sites in the coming weeks and we now expect to complete full enrollment of 6,500 patients by the middle of 2025.
Beyond our offerings in AFib, we have been successful in creating and expanding our pain management franchise, where our cryoSPHERE product line provides temporary relief from postoperative pain. Since launching in 2019, adoption of the cryoSPHERE probe has been remarkable with over 60,000 Cryo Nerve Block procedures performed to-date. The momentum behind commercial adoption of the cryoSPHERE probe speaks to the meaningful reduction in pain patients experience following thoracic surgery. As this therapy continues to grow, we are making investments in clinical data to support a comprehensive value proposition for both patients and physicians. At the same time, we are actively improving our current technology to advance therapy adoption. Recently, we announced the limited launch of our cryoSPHERE Plus device, which features new insulation technology to reduce freeze times by 25%.
The limited launch is progressing well. The feedback has been excellent and we remain on track for a full scale launch by the end of this quarter. As cryoSPHERE Plus makes its debut, we are completing studies to show the benefits of our new cryoSPHERE Max probe, which incorporates this new insulation technology and features a larger ball tip. We expect the cryoSPHERE Max probe to show even further reduction in ablation and procedure time and expect to launch the cryoSPHERE Max probe late in 2024. We are confident that the improvements we are making will strengthen the case for adoption and an expanded set of use cases, including the sternotomy market. As we innovate and execute against our current market opportunity, we are researching additional market expanding applications for Cryo Nerve Block therapy and look forward to updating you on our progress.
In closing, I would like to reiterate my earlier comments. We have made investments across multiple growth vectors that will enable AtriCure to remain a market leader and we expect to stay several steps ahead of peers in the market development and expansion. Over the past decade, our company has consistently delivered outstanding growth even in the context of pressure in different markets. Looking forward, we remain positioned to penetrate each of our markets meaningfully and sustainably driving durable growth and leverage throughout our organization. I believe the future of AtriCure is even more compelling now than ever before, with new market entrants validating this position. Therefore, as we look forward into 2024, we remain focused on expanding the reach of our solutions for patients with advanced forms of AFib, managing the left atrial appendage and patients undergoing cardiac surgery and reducing postoperative pain.
We are also eager to launch several new products across our markets and expand our clinical research initiatives, all while continuing our efforts to improve profitability in our business. And with that, I will turn the call over to Angie Wirick, our Chief Financial Officer. Angie?
Angie Wirick: Thank you, Mike. Our first quarter 2024 worldwide revenue of $108.9 million increased 16.4% on a reported basis and 16.3% on a constant currency basis when compared to the first quarter of 2023. We saw strong growth across franchises and geographies demonstrating the diversified growth drivers of our business in each of our markets globally. Sequentially, worldwide sales grew $2.3 million or 2.2% over the fourth quarter of 2023. First quarter 2024 U.S. revenue was $90.2 million, a 15.4% increase from the first quarter of 2023. Open ablation product sales were $29.3 million compared to $25.1 million, up 16.5% over the first quarter 2023 and propelled by ongoing adoption of our EnCompass Clamp across both new and existing accounts.
U.S. sales of appendage management products were $35.9 million, up 11% over the first quarter of 2023. We saw robust growth in our AtriClip Flex V device, driving our open appendage management products to an overall growth rate of approximately 15.4%. As Mike noted in his comments, our strong first quarter growth in open appendage management products is against the backdrop that included accounts choosing to trial the Medtronic device. However, our appendage management franchise revenue saw pressure from a decline in our minimally invasive appendage management products, primarily from a reduction in LARIAT system sales, where we have a very limited base of users and following an outstanding fourth quarter growth in our MIS AtriClip products.
Pain management sales were $12.7 million, up 15.1% over the first quarter of 2023 and with limited revenue contribution from our new cryoSPHERE Plus probe. Finally, minimally invasive ablation sales were $12.3 million, up 27.8% over the first quarter of 2023. Similar to the end of 2023, our results this quarter reflect an increasing demand for our hybrid AF therapy, with more accounts adopting this treatment for advanced AFib patients. International revenue totaled $18.6 million, up 21.5% on a reported basis and up 21.1% on a constant currency basis as compared to the first quarter of 2023. European sales accounted for $11.3 million up 20.7% and Asia-Pacific and other international markets accounted for $7.3 million in international sales, up 22.9%.
We are excited by the continued strength of our international business across franchises and geographies and see pathways for accelerated growth to extend throughout 2024. Gross margin for the first quarter 2024 was 74.7%, up 21 basis points from the first quarter of 2023. The increase was driven primarily by both product and geographic mix along with operational efficiencies. Now, moving on to operating expenses for the quarter for comparability of operating costs, my remarks will exclude the $4 million gain on legal settlement recorded as an offset to SG&A in the first quarter of 2023. Operating expenses increased $12.8 million or 16.1% from $79.4 million in the first quarter of 2023 to $92.2 million in the first quarter of 2024. Overall, the change was a result of our continued investments in research and development activities, which increased approximately 29% from the first quarter 2023 reflecting robust enrollment in our LeAAPS clinical trial and progress on several research and product development initiatives.
We saw leverage within SG&A as expenses increased by approximately 13% from the first quarter of 2023. And as we navigate the remainder of 2024, we will prioritize investments in research and development to ensure our future with an enhanced pipeline of products and clinical evidence balanced with our commitment to realize increasing economies of scale to expand profitability. Now turning to the bottom line, we drove adjusted EBITDA $2.8 million for the first quarter 2024 compared to adjusted EBITDA $1.9 million for the first quarter 2023 for an increase of approximately 46%. Our loss per share was $0.28 in the first quarter 2024 compared to a loss per share $0.14 in the first quarter 2023. While the adjusted loss per share each period was $0.25, and $0.23 respectively.
We ended the first quarter with $106 million in cash in investments reflecting our normal pattern of a heavy burn, heavy first quarter burn driven by share vesting, variable compensation payments and operational needs. We expect to generate positive cash flows for the remainder of 2024, resulting in a modest overall burn for the year, which is consistent with our guidance earlier this year. We remain in a very solid position with our balance sheet to fund the current and future operating needs of the business. And now closing with our outlook for 2024, as Mike mentioned, we are reiterating our expectations for full year revenue of $459 million to $466 million, reflecting growth of 15% to 17% over the full year 2023. Underlying procedure trends, and the operating environment remains stable in our key markets worldwide.
Therefore, we expect to see sequential revenue growth from the first to second quarter that is in-line with historical seasonality in our business. In other words, we expect to see mid-single digit to upper single digit growth on a sequential basis. From a margin perspective, we continue to expect 2024 gross margin to be in-line with 2023 gross margin, with the potential for varying impacts from cost savings initiatives, product and geographic mix. As I stated earlier in my comments and on previous calls, 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% in 2024. Our spending across SG&A will moderate in proportion to revenue as the year progresses, providing leverage and sustained improvement to profitability.
With this in mind, we are reiterating our expectations for full year 2024 adjusted EBITDA of $26 million to $29 million, translating to an adjusted loss per share of approximately $0.74 to $0.82. We expect the remaining improvement to full year 2024 adjusted EBITDA over a full year 2023 will occur in the third and fourth quarters of 2024 largely based on timing and expansion of R&D costs from the comparable quarters in 2023. Overall, the first quarter 2024 results demonstrate that the strength and depth of our product portfolio, we are extremely pleased with our performance and the advancements of many impactful initiatives across the globe, along with increasing profitability in 2024. Now, I will turn the call back to Mike.
Mike Carrel: Thank you, Angie. We began 2024 on a solid footing across our business with strong growth on both top and bottom line while delivering on many key product and clinical milestones, which will drive growth for years to come. I would like to thank the entire AtriCure for your commitment to our patient first mission. Continue to live our values every day, as we work together to build an even brighter future for our business. We have the unique opportunity to both advance and further expand our markets as we work to heal the lives of those affected by Afib and pain after surgery. And with that, I’ll turn it over the operator for questions.
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