Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

AtriCure, Inc. (NASDAQ:ATRC)

Q3 2010 Earnings Conference Call

November 2, 2010 10:00 AM ET

Executives

David Drachman – President and CEO

Julie Piton – VP, Finance & Administration and CFO

Analysts

Matt Dolan – Roth Capital Partners

Tim Lee – Piper Jaffray

Vivian Cervantes – Maxim Group

Jason Mills – Canaccord Genuity

Charley Jones – Barrington Research

Larry Haimovitch – HMTC

Operator

Good morning and welcome to AtriCure third quarter 2010 earnings conference call. My name is (Michelle) and I will be your coordinator for the call today. 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.

(Operator Instructions)

I would now like to turn the call over to Mr. David Drachman, President and Chief Executive Officer of AtriCure. Mr. Drachman, please proceed.

David Drachman

Thank you, (Michelle). Good morning and welcome to our third quarter earnings conference call. Joining me on the call today is Julie Piton, Vice President of Finance and Administration and Chief Financial Officer. At this time, I would like to turn the call over to Julie for a few introductory comments.

Julie Piton

Thank you Dave and good morning everyone. By now you should have received a copy of the earnings press release. If you have not received a copy, please call (Sarah Luken) at 513-755-4136 and she will be happy to fax or e-mail you a copy.

Before we begin today, let me remind you that the company’s remarks today may include forward-looking statements. These statements include but are not limited to those that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as revenue and earnings estimates, other predictions of financial performance, launches of new products and market acceptance of new products.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure’s control, including but not limited to the rate and degree of market acceptance of AtriCure’s products, governmental approvals and other risks and uncertainties described from time to time in our SEC filings.

Our results may differ materially from those projected on today’s call and we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Additionally, we will refer to non-GAAP financial metrics on the call today. A reconciliation of these non-GAAP measures is included in our press release, which is available on our website.

I would also like to remind everyone on the call today that the Food and Drug Administration, or FDA has not cleared our products for the treatment of atrial fibrillation or AF or for stroke reduction. The company and others acting on its behalf may not promote any of its products for the surgical treatment of AF or train doctors to use the products for the surgical treatment of AF.

These restrictions do not prevent doctors from choosing to use the products for the treatment of AF or stroke reduction or prevent AtriCure from engaging in sales and marketing efforts that focus only on the general attributes of the products for the current cleared uses. AtriCure educates and trains doctors in the proper use of its products and related technologies. With that, I would like to turn the call back to Dave.

David Drachman

Thank you (Julie). We are pleased to report revenue of $14.5 million for the third quarter representing constant currency revenue growth of 10%. Domestic revenue was $11.6 million, up 8% and international revenue was $2.9 million reflecting 19% year-over-year growth on a constant currency basis.

The AtriClip system in its first full quarter of commercial release contributed $1 million to US revenue. For the quarter, we achieved adjusted EBITDA of $400,000 or $1 million year-to-date, which reflects our focus on profitability while still investing in growth, innovation and regulatory approvals.

Turning to business trends and highlights during the quarter. Our open-heart business grew $1.4 million or 22% in the third quarter which includes $1 million in sales from the AtriClip system. We are highly encouraged by the initial adoption trends and physician feedback for the AtriClip system. In the third quarter, the AtriClip system was sold into and subsequently reordered by 80 U.S. Medical Centers and we are encouraged by the initial average selling prices which were approximately $1000.

Open-heart sales further supported by continued share gains in the cryoablation markets. We estimate that our domestic cryoablation market after only one full year of commercial release of our Cryo1 ablation probe, a first generation product is approximately 25%.

Minimally invasive revenue was $3.7 million as compared with $4.2 million for the prior year, which we believe was driven primarily by an overall slowdown in hospital admissions particularly for elective procedures as a result of the continued softness of the US economy.

Additionally, during the quarter our sales and marketing activities were primarily focused on the launch of the AtriClip system, which is in open-heart offering.

Our third quarter revenue growth in the international markets which now accounts for approximately 20% of our total revenue was up 19% on a constant currency basis. We are very pleased with these results, which reflect our investments in direct sales and marketing infrastructure in the European markets during 2010, the benefits of transitioning the Benelux region to a direct selling effort during the third quarter, solid contributions from new products and geographic expansion. We believe that we are well positioned to continue market share gains and deliver strong growth in our international markets.

Now, turning to our strategy to capitalize on our near term growth opportunities and an update on our mid-to-long term growth initiatives. In the United States, we believe our near-term growth will be driven primarily by the open-heart ablation market in the AtriClip System.

In terms of the open-heart ablation markets, the market has consolidated to two market leaders, AtriCure and Medtronic. We believe this consolidation provides an opportunity to capitalize on our superior technologies and our experienced and highly focused sales and marketing organization.

We intend to capitalize on the transitioning competitive environment which has resulted from a recent merger activity in our marketplace. The AtriClip system represents our highest growth opportunity in the US open-heart market. We have a strong first-mover advantage and there is growing interest in devices for the exclusion of left atrial appendage. We believe that the US market opportunity for open-heart left atrial appendage exclusion devices exceeds $150 million.

Our strategy is to initially focus on our selling efforts towards existing AtriCure open-heart ablation accounts. To date, we have sold into approximately 80 AtriCure accounts. During 2011, we will also focus our selling efforts into competitive ablation accounts capitalizing on our first-mover advantage.

We believe that the AtriClip system will allow us to gain access to competitive ablation accounts creating cross selling opportunities resulting increased sales of ablation products and extending our overall market share. To support this strategy, we plan to launch a series of four new open-heart ablation products over the next 12 months. Additionally, we continue to anticipate an atrial fibrillation approval during 2012.

To best position AtriCure for these near-term growth opportunities in the open heart markets we intend to expand our US sales territories from 30 to just over 40 smaller territories over the next few months. Smaller more focused territories will expand our ability to drive growth through closer and more targeted customer interactions.

Territory expansion will also facilitate our strategy of targeting competitive ablation accounts via the AtriClip system. The realignment will also position us for our anticipated atrial fibrillation indication, which we expect will expand the overall number of open-heart procedures being performed and accelerate share gains and growth trends in the open-heart ablation market.

Territory expansion will be achieved through a reallocation of existing personnel and the addition of approximately five new sales representatives. As a result of this expansion, we anticipate our total domestic (inaudible) in early 2011 will be in the mid-60s. These changes combined with investments in expanding our sales force during 2010 are expected to result in an increase to 2011 selling expenses of approximately $2 million. We also remain highly focused on increasing our sales and expanding our market share in the international markets where our market share is less than in the US.

We anticipate continued growth to geographic expansion in Europe, growth in our direct markets as a result of our recent investments and growth in markets that we approach to our distribution partners resulting from increased market and product support as well as new product introductions. We believe that we are well positioned for continued growth in the international markets for the balance of 2010 and throughout 2011.

Turning to an update on our mid-to-long term growth initiatives. We remain highly encouraged by the growing interest in hybrid procedures and hospitals’ commitment to develop hybrid rooms. We believe that our deep AF hybrid approach represents a novel clinical solution for a growing patient population and a game changing platform that will drive mid-to-long term growth.

Hybrid continues to represent our largest ablation market opportunity and we believe we have the leading technologies, clinical approach, and regulatory programs to capitalize on this high growth opportunity.

While we are currently focused on the open-heart concomitant market opportunity for the AtriClip system we are actively developing minimally invasive thoracoscopic, robotic and standalone epicardial AtriClip systems each of which we believe represents large markets and mid-to-long term market opportunities for AtriCure.

Now, a review of our investments in clinical science and regulatory matters. With respect to our ABLATE clinical trial, which is a pivotal trial in support of an open-heart atrial fibrillation indication for patients with persistent forms of AF we are progressing in accordance with our timelines and we plan to submit our final clinical PMA module during the first quarter of 2011. We will request an expediter review process for this PMA and we continue to project an approval during 2012.

Our hybrid feasibility trial DEEP AF which combines minimally invasive surgical ablation with catheter ablation and mapping technologies received unconditional approval during the quarter. We expect to begin an enrollment during the fourth quarter of this year and we will focus our efforts during 2011 on designing a pivotal trial to support an atrial fibrillation indication for our hybrid approach.

Now, moving to our recent product releases. At the end of July, we released a new AtriClip deployment system which is uniquely designed for open-heart procedures. In October, we released an updated cryo probe the ICE System. The ICE System incorporates enhanced handling and ergonomics. Additionally, it provides a feature that allows a surgeon to modify the length of the exposed ablation probe. We believe this enhanced product will further expand our competitive advantage in the cardiac cryoablation market, and positions us for continued (inaudible).

Also, during October we launched our second generation Coolrail system, or multifunctional linear ablation pen. The multifunctional linear pen facilitates enhanced tissue contact, resulting in more reliable lines of ablation during minimally invasive thoracoscopic procedures.

We continue to invest in innovation to ensure that AtriCure maintains its position as the market leader. I would now like to turn the call over to Julie for a review of our financial performance.

Julie Piton

Thank you Dave. I’ll begin by providing information related to revenue. For the third quarter of 2010, total revenue increased 9%, or 10.2% on a constant currency basis, to $14.5 million. Revenue from domestic sales grew 8.1% to $11.6 million.

Revenue from domestic open-heart products increased 22% to $7.9 million, driven primarily by a $1 million in sales from AtriClip system. Excluding sales of AtriClip system open-heart ablation revenue increased 6.5% driven by increased sales of our disposable cryo probe. Minimally invasive domestic revenue for the quarter was $3.7 million, as compared to $4.2 million for the third quarter of 2009 reflective of fewer procedures during the quarter.

International revenue grew 12.7% or 19.2% at a constant currency basis to $2.9. The increase in international revenue was driven primarily by growth in the European market resulting from increased market penetration, geographic expansion and the benefit of transitioning the Benelux to a direct selling market.

Now, turning to gross margin. Gross margin for the third quarter of 2010 was 77.2%, as compared with 75.3% for the third quarter of 2009. This 190 basis point improvement in gross margin was driven by an increase in average disposable product ASPs for international sales, which resulted from growth in the direct markets and a reduced mix of capital equipment sales.

These increases were partially offset by an increased mix of sales from new products such as our disposable cryo probe and AtriClip system, which carry a lower gross margin than our other disposable products. We continue to anticipate gross margins to be in the range of 74 to 77% with quarterly variations driven primarily by product mix and the mix of the revenue from international sales.

Next, an update on operating expenses. Operating expenses for the quarter were $12 million, an increase of 12.5% or $1.3 million as compared to third quarter 2010 adjusted operating expenses of $10.7 million, which excludes the DOJ settlement related costs in the prior year.

Research and development expenses which include clinical activities increased approximately $350,000 from $2.6 million for the third quarter of 2009 to $2.9 million for the third quarter of 2010. The increase in R&D expenses was primarily due to increased cost in support of regulatory and clinical initiative and activities. As we increased our activities related to ABLATE, DEEP AF and new product introductions, we anticipate an increase in R&D expenditures during the fourth quarter of 2010 and into 2011.

SG&A increased 12.1% or approximately $1 million due to increased headcount related expenses, driven by an expansion of our worldwide sales organization by approximately 10 headcounts, as compared to the average headcount during the third quarter of 2009. Adjusted EBITDA for the third quarter of 2010 was approximately $400,000. Adjusted operating loss was approximately $800,000 as compared with approximately $700,000 for the third quarter of 2009.

Now, turning to a few balance sheet items. In terms of cash, we generated approximately $300,000 in cash from operations during the quarter. We ended the quarter with $11.5 million in cash, cash equivalents and investments and we had $3.5 million in gross debt outstanding under our credit facility.

Additionally, we amended our credit facility during the quarter to provide for increased borrowing capacity. As of September 30, we had available new borrowing capacity of approximately $8 million. At this point, I would like to turn the call back to Dave.

David Drachman

Thank you, Julie. In terms of outlook, we are confident that AtriCure is well-positioned to capitalize on our current momentum in our near term and long-term growth prospects. The U.S. launch of our AtriClip system, further cryo and open-heart market share gains, new product introductions, the continued expansion of our international markets, combined with further investments in sales and marketing, are expected to fuel growth during the fourth quarter of 2010 and throughout 2011.

Further, we believe the increasing demand for effective alternative procedures for persistent and (Foley) catheter ablation patients will drive the demand for our minimally invasive and hybrid approaches. We believe that our commitment and strategic investments in clinical science, atrial fibrillation approvals and innovation will provide the foundation for long term sustained high growth. Finally, I would like to thank the men and women of AtriCure for your commitment to the patient first, pride and ownership, innovation and sustained high growth. With that we’ll open the call up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Matt Dolan of Roth Capital Partners. Please proceed.

Matt Dolan – Roth Capital Partners

Hi guys. Good morning. Thanks for taking the call.

David Drachman

Good morning Matt.

Julie Piton

Good morning Matt.

Matt Dolan – Roth Capital Partners

Dave, first question on the clip, it’s clearly exceeding our expectations. I think we’re actually looking for this type of run rate next year. Can you maybe recalibrate us on maybe what you saw during the quarter in terms of orders versus actual, the usage of the clip and then maybe, you know where this product could go for you next year, thanks.

David Drachman

Thank you Matt. In terms of what we saw with the clip, accounts would generally order one or two clips in the more frequently used sizes, remember there are four sizes of clips. So generally speaking accounts would order one or two clips and then try the clips and then see if they wanted to order additional clips, and then the system begins in the hospital to get the hospital to stock the product on a long-term basis. So we’re encouraged. We sold the clips into 80 US accounts, and those 80 US accounts also reordered products, and our first target is our AtriCure ablation where we think we can move the fastest and we’ve confirmed those assumptions and are very pleased with both the adoption of the clip as well as the average selling prices that we’ve been able to achieve based on the premium nature of the product.

Operator

And our next question comes from the line of Tim Lee of Piper Jaffray. Please proceed.

Tim Lee – Piper Jaffray

Hi, good morning and thanks for taking the question. Just following up on that previous question in terms of the clip rollout. So there was an – we shouldn’t think of the number here in the quarter as any type of meaningful stocking and this should be base lining growth from here rather than having a type of pullback in the fourth quarter?

David Drachman

I think that’s a good way to look at it Tim, the only thing that I would add to that is we went to our top AtriCure accounts first. So in terms of ease of access to customers and purchasing patterns and knowing the hospitals and administrative people in those accounts, we went to our top 100 AtriCure accounts first. So I think that’s something to consider in your modeling.

Tim Lee – Piper Jaffray

Got it.

Julie Piton

Based on the trending and the order cycling Tim, we did not see any large stocking type orders that are affecting the quarter.

Tim Lee – Piper Jaffray

Got it, thank you. And then just on the gross margin side, I think you had said the gross margin outlook was 74% to 77%, is that correct?

Julie Piton

That’s correct.

Tim Lee – Piper Jaffray

And so what would make a 74% quarter versus a 77% quarter, if you can just give us in terms of big buckets of what drags gross margins down and kind of the bucket of what drives gross margins up that kind of gives a sense for our modeling purposes?

Julie Piton

Sure, so to the extent revenue growth or the increased mix of revenue comes from the clip product offering or the cryo platform. Both of those products carry lower gross margins than our other disposable product offerings. So increased mix of those products will have a downward pressure on our overall gross margins. Additionally to the extent depending on the international mixture in the quarter that can also have an effect on gross margin. The outside for international however is to the extent the growth in international comes from direct market, that provides a positive influence. So those are really the primary moving parts that affects gross margin and fluctuations quarter-to-quarter.

Operator

And our next question comes from the line of Vivian Cervantes. Please proceed.

Vivian Cervantes – Maxim Group

Hi good morning. Thank you for taking my questions.

David Drachman

Good morning Vivian.

Vivian Cervantes – Maxim Group

Heading back to AtriClip again. It was nice number this quarter. And I guess as we move forward, thinking about maybe the breakdown between new accounts that are trying it out versus account that are now moving towards steady restocking orders because they’re using it. How should we think about this in terms of I guess or growth outlook and again how that breakdown falls into it?

David Drachman

Well we’re certainly very optimistic that the 80 accounts that purchased the product and then reorder the product will stock the product. Again these are AtriCure accounts that we have good customer relationships and understand the ins and outs of the accounts. So we would anticipate that these 80 accounts will continue to grow revenue throughout the foreseeable future.

Vivian Cervantes – Maxim Group

Okay, great. And then shifting gears to minimally invasive, do you think it was affected – the quarter was affected by the IDE and you’re moving towards an IDE, so maybe there is a slowdown there. And as the IDE rolls forward, we’ll see some incremental improvements or given the tough economy, is the current minimally invasive revenue number I guess be, what we’ll going to be seeing more in coming quarters?

David Drachman

I think in terms of your question, did the IDE slow the minimal invasive trends. I think the IDE to some degree has slowed the minimally invasive trends because these are six important accounts for the company who are attending to hold on to certain patients for the clinical trial. But I think the major issue is last quarter we were in the same number of accounts as this quarter. Last quarter revenue was $4.25 million in terms of revenue performance. This quarter our revenue was $3.7 million. So our revenue and our procedures are tracking pretty much inline in terms of percentages of trends.

And I think the fact that we perform procedures in the same number of accounts is a good sign that part of this is due to the just the nature of seasonality, part of it is due to slowdown in procedure volumes for elective discretionary procedures. Going forward, I would anticipate that our minimally invasive business will be fairly stable and that the real inflection point for growth is when the feasibility trail for hybrid moves into a pivotal trial.

So we would anticipate the pivotal trial to be about 40 US centers. Those centers will be purchasing products, and we believe that we’ll go tremendous amount of exposure by moving from the feasibility to 40 high profile US accounts performing our hybrid procedure. So we believe that will be the more of an inflection point for growth for minimally invasive.

Vivian Cervantes – Maxim Group

Okay, sorry if you could just refresh us the difference between the feasibility trial and how that would look even the pivotal and maybe the timeline between the shift from feasibility to pivotal?

David Drachman

Well the feasibility is basically six centers and 30 patients looking at feasibility and safety. We would anticipate submitting a 90-day interim analysis for review with our pivotal trial design and at that point we would hope that the FDA would give us to go-ahead with our pivotal trial. The pivotal trails are likely to be large, 40 center, 300 patient randomized clinical trial. So I think those are the major differences Vivian.

Vivian Cervantes – Maxim Group

Okay, great. Thank you.

David Drachman

Thank you.

Operator

And our next question comes from the line of Jason Mills of Canaccord. Please proceed.

Jason Mills – Canaccord Genuity

Hi Dave and Julie, thanks for taking the question. Congrats on a good quarter.

David Drachman

Thank you Jason.

Julie Piton

Thank Jason.

Jason Mills – Canaccord Genuity

I wanted to go back to AtriClip briefly, your NED [ph] accounts now as you look forward Dave and you expand in ‘011 to other centers with your first mover advantage. Talk to us about sort of the number of accounts you would expect to be in say six months from now, 12 months from now, whatever timeframe you want to be in. And Julie on the gross margin side, does it relate specifically to AtriClip at the $1 million quarterly run rate we’re at now, what sort of gross margin impact is that having on the business and how does that change as that business grows? Thanks guys.

David Drachman

Thank you Jason. We would anticipate to be in about 250 accounts in 12 to 18 months from now. So that’s our estimate in terms of penetration. And Julie in terms of gross margin?

Julie Piton

Yes, our current gross margin Jason on the clip is about 70% in the US and our other disposable products in the US average an excess of 80%. So that would be your spread and obviously it depends on the revenue ramp and the growth and in terms of the blended impact it will have on gross margins. But we expect probably for 2011 to stay around that 70% mark also.

Jason Mills – Canaccord Genuity

Okay, great. And then my follow-up is in relation to the new products as well as the ABLATE trial. So could you update us, Dave you mentioned four new products, I believe you said in the US in your ablation product portfolio over the next 12 months, maybe give us some more color there as well as the ABLATE trial, I know you’re going to request expedited review. How confident are you that the FDA in its current form and what its dealing with will accept that request and what is the potential upside, we know the downside its early [ph] to the FDA but the upsides relates to that indication coming perhaps late 2011 versus 2012 and I’ll get back in queue. Thank you very much.

David Drachman

Thank you Jason. So, first.

Julie Piton

In terms of the four new products.

David Drachman

The four new product launches were currently in the process of launching what we call Ice Cryo, which is an improved Cryo1 product. This product has superior ergonomics and also allows the physician to adjust the length of the ablation pro. Additionally and that again is aimed at the open market. Additionally, during the first half of the year, we plan to launch what we call the Ice Box, we’re working now with Frigitronics generator that was designed in 1980s. The Ice Box generator is a completely automated generator that puts the controls in the surgeon’s hands. We think that this generator is a significant product advantage and will also lower the service burden for our accounts.

Going forward, we have a product called Synergy Access. This product has been launched in Europe. It hasn’t been launched yet in the US. We plan to launch this in the first half of 2011 as well. This is an articulating clamp and it’s specifically designed to compete with the Medtronic clamp. Certain people like the flexibility of their shaft and this is an articulating shaft. We think this product will be very competitive in terms of share gains in the open heart marketplace.

The next product that we have is one of my favorites, we can this internally now the Ace Probe. This is a cryo probe that is really designed for minimally invasive right level for economies with or without a robot. We think this may actually become our main product.

So those are four products that we have for the open heart market. We also are in the process of releasing a minimally invasive totally thoracoscopic product, the multifunctional linear pen. We think that the multifunctional linear pen will be an improvement to Corel, but again that’s aimed primarily at the minimally invasive and hybrid markets. So those are our four new products.

And in terms of the ABLATE trial, our current situation with the ABLATE trial is that we believe that we will get an expedited review. And the reason is that the product is already in the market, the conversations that we’ve had with FDA have been very interactive. We have been functioning like we’re in an expedited review process.

In an expedited review process, FDA basically pushes you up in the queue in terms of the review, and they also put more resources behind the review process. So currently the vetting process for our clinical module has been done on a very interactive basis.

Again, we’ve been functioning like we’re in an approved expedited review process. So we think getting the expedited review when we submit our clinical module is the most likely scenario.

In terms of upside, we said 2012. I don’t believe that there is an opportunity for this product indication to be approved in 2011. I think it’s a question of whether it’s a first half of 2012 or second half of 2012.

So we submit our clinical module, let’s say, in January, just to keep the map easy, the FDA has six months to review that, and then during the review process if we have the expedited review it should be highly interactive. Following that review process, we have to plan the panel meeting and prepare panel packs.

So now we’re beginning to run into the holidays. If we can get the panel meeting in before the end of the year, I think this has the ability to be a first half of the year approval process. If the panel meeting gets pushed into the first quarter, then it could be midyear or second half of 2012. I hope I answered your questions clearly.

Operator

And our next question comes from the line of Charley Jones of Barrington Research. Please proceed.

Charley Jones – Barrington Research

Good morning. Thanks for taking my questions. I wanted to continue on with the new products and I was hoping you could update us on when your minimally invasive delivery system will be ready? And then will you still have the clip ready to be used within [inaudible] daVinci machine even though there is still some work to be done on their end for engineering in 2011?

David Drachman

Well, first of all, we plan to implant our first robotic clip by yearend. In terms of the readiness of our thoracoscopic AtriClip System, we plan to have the product ready for use in the third quarter of 2011. And this will be a highly featured articulating product that we think will be ideal for thoracoscopic use. So those are our timelines Charlie.

Charley Jones – Barrington Research

Do you think you need to raise any cash to be able to realize the full opportunity of the clip or shifting resources and you plan a shifting resources?

David Drachman

Currently, we have no plans to do any fund raising. We think that the current cash and borrowing capacity is adequate to fund our strategic priorities.

Charley Jones – Barrington Research

And then finally, I think I’ll squeeze one in, I was hoping you could update us on how the clip was used. Do you think there are any cases in the quarter where they were using them on non AF open cardiac surgery patients or was initially used probably more likely for AtriCure?

David Drachman

I think initially – remember we did a 70-patient Exclude trial, I think initially most of our customers want to see more long-term data with their own patients and to the peer view publication process, before they’ll move to prophylactic implant.

But I want you to remember that the ACC/AHA/ESA guidelines basically recommended the left atrial appendage should be removed from the circulation when possible during cardiac surgery in patients at risk of developing post-operative atrial fibrillation.

So the concept that these patients have markers, structural heart disease, left atrial large [inaudible] and have other markers for developing AF we think is going to be a strong long-term indication in the open heart market for AtriClip System.

Charley Jones – Barrington Research

No, that’s helpful. I was actually referring to CHADS2 score patients that are going through a CABG or a valve procedure, but don’t have a – maybe aren’t even at risk for developing AF.

David Drachman

Yes, again the guidelines I think refers to post-operative atrial fibrillation, not so much in the post-operative setting. But following the open heart correction procedure, these patients didn’t have ever risk of developing AF. But – so I think we’re talking about the same thing, Charlie.

Charley Jones – Barrington Research

Okay.

David Drachman

Patients that have markers for developing long-term atrial fibrillation that’s a market that actually, the guidelines recommend taking the appendage and it’s also a market that we were very successful within our exclude clinical trial, 50% of the patients that received a clip did not have a previously history of atrial fibrillation.

In the commercial market, we think that most customers are going to want to see their own long-term results and some more published peer review literature on the long-term outcomes with the clip before they’ll move to a more aggressive prophylactic placement in those patients that you described that had markers for developing long-term ad.

Charley Jones – Barrington Research

Very impressive launch. Thanks a lot.

David Drachman

Thank you.

Julie Piton

Thanks Charlie.

Operator

And our next question comes from the line of Larry Haimovitch of HMTC. Please proceed.

Larry Haimovitch – HMTC

Good morning, Dave. Good morning, Julie.

Julie Piton

Good morning, Larry.

David Drachman

Good morning, Larry.

Larry Haimovitch – HMTC

Your international performance was very strong. I wonder if you might provide a little more color to it. I know of course you’ve gone direct in some countries. Just give us a little more on what you saw in the quarter and how you view the next several quarters.

David Drachman

Well, Larry, as you know, our market in the US is much higher than our market share in the European markets. Now we have a VP of the International Sales, who has been on board for several years now and has built a quite impressive team. We’re again seeing great execution in growth in our direct markets, the Dentalex [ph] markets was a strong market for us to convert to direct. We’re achieving our goals.

And in Germany, as you know is the largest European market. And in fact 50% of all open heart procedures are performed in Germany. We’ve expanded our direct resources in sales forces in Germany and we also one of our best quarters, lifetime quarters in German markets. So I think the direct markets are contributing a lot. I think the fact that we have a team that has been built and that is now more cohesive overtime is a major factor.

The other factor is that we’ve upgraded certain distributors. For example, Italy is becoming a very strong market for us. We changed distributors out about 12 months ago and we’re really starting to see some nice growth trends from Italy, and we’re getting into Eastern Europe. And it’s just expanding geographically as our team matures in – better controls over the overall European market. So I think that along with some of the new products with the main growth drivers.

Larry Haimovitch – HMTC

So just to follow-up, is that kind of good growth, sustainable, or maybe I’ll ask the question a little differently, was there anything unusual in the quarter, any stocking or anything that would have skewed the results to look better than they really were, or is that kind of good solid organic growth?

David Drachman

Good solid organic growth. I think the 20% operational or constant currency growth is a good way to view the business going forward.

Larry Haimovitch – HMTC

Great. Thanks Dave.

David Drachman

Thank you.

Operator

(Operator Instructions). And our next question is a follow-up question from the line of Matt Dolan. Please proceed.

Matt Dolan – Roth Capital Partners

Hi guys, thanks. Just one quick one on the revenue line Dave, could you maybe help quantify the impact of cryo? I know you’ve mentioned now for a couple of calls the market share that you’ve gained with that product over the last years has been impressive. So how much of that was supportive of your growth this quarter?

David Drachman

One of things Matt – and thank you for the question – and one of the things that we’re very pleased with is that, yes, we did $1 million in AtriClip sales, but also on a year-over-year comparative basis, our open business is up 6.5%. Cryo is a significant part of that in large part, because some of the open heart trends are moving more towards Cryogenics, and we’re taking share as we move further into the market. So we’re excited about the fact that the AtriClip System has kind of opened new doors for us but also that we have a line of cryo products, which is the fastest growing ablation technology in the open market to continue to take share from our competition. So, we think that we’re well positioned in the open markets between the AtriClip system pulling through products, creating cross selling opportunities in competitive accounts and allowing us to use our four new products to really stimulate continued progress in the core open heart market; we think presents a very real opportunity for us to see nice strong growth in 2011.

Matt Dolan – Roth Capital Partners

Okay and then a follow-up on the international, I may have missed this, but are there any other territories expected to transition to direct and maybe to profess that you could give us what you do direct versus distributor there.

David Drachman

Well the Benelux is all direct. Germany, Switzerland and Zurich – Germany, Switzerland and Austria are direct markets for us. So we currently don’t have any plans for further transitioning in the European markets. We have an excellent distributor in Italy. That distributor also has resources to help us grow our markets in France. Our distributor in the UK is extremely solid and is high performance. So generally speaking our next step is to continue to grow our direct markets and take advantage of those direct markets and if you’re still under penetrated but also to support our distribution partners with more resources and we continue again to feel very bullish about the European markets and the overall international market for 2011.

Matt Dolan – Roth Capital Partners

Okay and then last one on the margin side of things. You have given us kind of the cost of this direct sales expansion in the US and you have shown a lot of control over the last year or two. As you return to growth – as entering 2011, what is your general desire to maintain or improve your current EBITDA margin levels or what should we see there, is there a potential to see a little bit of dilution as you invest in some of the infrastructure?

David Drachman

There’s always the potential to see some dilution but we think that we can moderate that dilution with growth. If you look at our open heart markets not to be redundant but 6.5% growth on our core products. We have four new products coming.

We have a competitive landscape; it’s narrow between AtriCure and Medtronic. We have labeling coming in 2012. So we are very bullish about our open-heart markets and then we just talked about the concept at the international markets are strong and potentially getting stronger going forward based on the maturity of our direct people as well as the maturity of our overall sales and marketing platform in Europe and there is also continued growth from areas in Asia. So, we are bullish on the open market, we are bullish on the international market and we know over the course of time that we will be rewarded in terms of the hybrid and minimal invasive approaches that we are developing and then we think that inflection point coincides with moving to a pivotal trial in DEEP AF.

Matt Dolan – Roth Capital Partners

So going forward, just to be clear, you expect your EBITDA margin to be flat to up from the level we saw in Q3?

David Drachman

I think I would look at the company as still focused on aligning cost with revenues. There could be some variance up or down but we’re very focused on lending cost and revenues and we’re very focused on preserving our capital structure in using the cash and the borrowing capacity that we have to fund our strategic priorities.

Matt Dolan – Roth Capital Partners

Great, thanks again.

David Drachman

Thank you.

Operator

Ladies and gentlemen, this does conclude the question-and-answer portion of today’s conference call. I’d like to turn the presentation back over to Mr. David Drachman for any closing remarks.

David Drachman

Thank you for your support and time today. We look forward to talking with you on the fourth quarter earnings call, thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. This does conclude your presentation and you may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AtriCure CEO Discusses Q3 2010 Results – Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts