Good afternoon and welcome to AtriCure's Fourth Quarter 2016 Earnings Conference Call. My name is Vicky, and I'll be your coordinator for the call today. 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 Lynn Lewis from the Gilmartin Group for a few introductory comments.

Thank you. By now, you should have received a copy of the earnings press release. If you have not received a copy, please call 513-755-4136 to have one emailed to you. Before we begin today, let me remind you that the Company’s remarks include forward-looking statements. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including risks and uncertainties described from time-to-time in AtriCure's SEC filings. AtriCure’s results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward-looking statements. Additionally, we refer to non-GAAP financial metrics, specifically adjusted EBITDA. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in our press release, which is available on our Web site. With that, I’d like to turn the call over to Mike Carrel, President and Chief Executive Officer. Mike?

Thanks Lynn. Good afternoon everyone and thank you for joining us. As we reflect on 2016, we're a little short on our revenue expectations, we grew the top line 20%, exceeded our bottomline expectations, and made significant progress in beginning our transformation into the minimally invasive Afib market, a large underpenetrated and underserved market, all while helping over 58,000 patients worldwide. Throughout the year, we hit several key strategic milestones. We completed the integration of nContact, while enhancing our sales structure with the addition of a dedicated team focused on MIS. Additionally, we have incorporated CONVERGE into our clinical trial program. And with the addition of six new sites enrolling and several more coming onboard by early April, we will have 20 sites and expecting meaningful acceleration in enrollment in Q2 and beyond. We also expanded our portfolio into the Japanese market and released two new minimally invasive products to the U.S. market, the AtriClip Pro2 and the CryoForm Cryo Ablation Pro, both of which address the opportunity in the minimally invasive market and have started to contribute meaningfully. So, we began 2017 with a platform in place to continue our transformation to expand our minimally invasive presence through our CONVERGE trial enrollment efforts and growth in the AtriClip franchise. We are simultaneously solidifying our base open market, where we are the only PMA approved product, and there is still significant under-penetration. Thus, our revenue guidance for 2017 is 13% to 15% growth taking into considerations our strength in the U.S. MIS and AtriCure franchise, U.S. open growth in the mid-single digit and steady international growth. We continue to have the clear line of sight to significant bottom line improvement this year and EBITDA profitability in 2018. Looking to the fourth quarter, revenues were $41.2 million, up 15% over last…

Thanks Mike. For the fourth quarter of 2016, revenue increased 15% on a GAAP basis to $41.2 million. On a constant currency basis, worldwide revenue also increased 15%. Revenue from product sales in the U.S. was $32.7 million, an increase of 13% from the fourth quarter of 2015. Revenue from open chest ablation related product in the U.S. increased to $14.6 million, representing growth of 1%. U.S. sales of products used in minimally invasive procedures increased approximately $1.8 million to $8.9 million, up 25% and influenced heavily by the contribution from EPi-Sense products. U.S. sales of the AtriClip system during the fourth quarter of 2016 were $8.4 million as compared to $6.7 million for the fourth quarter of 2015, an increase of 26%. Growth was again strong for the MIS Clip products, driven by the launch of the AtriClip Pro 2 late in the year. Open Clip performance was stronger than the open ablation growth. International revenue of $8.5 million was up 22% on a GAAP basis and 23% on a constant currency basis as compared to the fourth quarter of 2015. European markets performed well and sales in Asia were particularly strong during the quarter. Gross margin for the fourth quarter of 2016 was 70.2% as compared with 71.2% for the fourth quarter of 2015, the primary driver of the decrease were charges related to access scrap and obsolete inventory. We expect lower charges in future years as you will note with our guidance that I will discuss shortly. Positive trends on gross margin included pricing of the EPi-Sense product line, suspension of the medical device tax and the new AtriClip Pro 2 product. Pricing continues to remain relatively steady on other product lines. Operating expenses increased 1% or approximately $400,000 from $36.2 million for the fourth quarter of…

Thank you, Andy. In closing, we are confident that our fundamentals and business outlook remain strong. 2016 was a year of transition and transformation as we work towards greater predictability, embarks on building an EP salesforce and enhance our focus on minimally invasive approaches. We are confident, these efforts, along with a product releases the Pro 2 and cryoFORM, have set the Company up for strong growth, not only in 2017 but for the long-term and with some exciting clinical data and expanding indications coming at the end of the decade. Specifically, in 2017, we anticipate incremental volume growth for Pro 2 and cryoFORM as these new products settle into the market. Additionally, we expect EPi-Sense to be an increasing contributor in 2017 as we take advantage of our new sales structure and we are extremely focused on enrolling into CONVERGE trial. As Andy mentioned, we are confident in our guidance in 2017 of 13% to 15% top line growth for the year, and they pack to adjusted EBITDA profitability in 2018. With that, we'll open up to questions, Operator?

Thank you [Operator Instructions]. And our first question comes from the line of Brooks West with Piper Jaffray, Your line is now open.

Let me start with just quick clinical trial update, and then I want to ask a question on Q4. Could you mention, Mike, where you are with ATLAS and DEEP trial? And then specifically I'm wondering when the DEEP trial is going to start enrolling again?

Yes, we didn't answer that specifically, but I'm happy to. So our focus really is, and our top priority, as I mentioned, is on CONVERGE and really getting these sites up and running. But we are making progress on DEEP. We've had great conversations with the FDA, and we anticipate to begin enrollment sometime in 2017, but our focus is really getting ourselves moving on CONVERGE right now with a fast follow on to DEEP after that. In terms of ATLAS, we've made great progress. We've enrolled over 150 patients so far. We're up to over 10 sites, and we've got 10 more sites in the pipeline ready to begin to enroll in that as well. So, we're making good progress on that, but I want to make the focus today on CONVERGE.

And then just main question just looking back in Q4, you said little bit internal, little bit external. Understand you had a lot of moving pieces with the nContact integration and the rebuilding the EP salesforce. So, was there anything in the market that changed that you’d want us to understand? Can you just go a little bit deeper on maybe what some of the external factors were? Then the second part of that is, remind us where you are with the salesforce. Do you have now dedicated MIS and dedicated open, is everybody doing everything? And just help us understand the strategy with salesforce at this time?

So I'll start with the strategy and I'll go into some of the impacts. But basically the overall structure of the team is we've got regional sales managers that sell the breadth of our product line. The surgeons are the ones that use it. They've got a lot of knowledge around Afib market in general. And then we've got a dedicated EP or minimally invasive sales team, that team is the one we built out over the last 15 or so months. We're now up to 10 people today. We've got 53 or so on the regional sales managers ranks, we'll grow that 53 to around 55 or so this year. And on the minimally invasive or EP space, we've got 10 growing to 14 plus. It could be more depending upon demand, and as we find the talent that is out there. But we'll be adding to that throughout the year, and so we're making good progress on that. Those teams actually work in concert with one another on account. As you can imagine, when you’re building on hard teams, you've got EPs and surgeons that are involved in the minimally invasive approaches it's really important to have a collaboration from that standpoint, so they both work very closely from that standpoint. In terms of your comments or question about the impact of the changes on the external/internal factors there is a lot of different items as I mentioned. Some of the external factors were, we had a lot of surgeons move this year, more surgeons than they had previously. And that was some of the external factor. We're not seeing a decrease in terms of the market per sequentially. I mean the number of cardiac procedures actually have not gone done. You've seen pressure on the AVRs, but on the overall cardiac procedures and miceholes, cabbages and the combination of all that, they've not gone down in fact they’ve gone up over the last several years. And so that is really not having the impact. It's really getting surgeons back on track and working it. And this external/internal component is actually interface because our minimally invasive -- our regional sales managers, as they were spending time without having the dedicated MIS team really in place yet, it was pointing them off of being in the row on a regular basis. We believe that we’ve corrected on that front. But again, we’re being cautious about our growth rate as we look at the year. We’re looking at the mid-single digit range of growth on the open side.

And our next question comes from the line of Jason Mills with Canaccord Genuity. Your line is now open.

This is actually Cecilia on for Jason. And I just wanted to ask briefly on EBITDA loss, and what's implied in your guidance for this year, and the potential to possibly hit EBITDA positive in the back half of the year. Just any commentary, from you, that might cause this to happen? Thank you.

Yes, I mean, just given what we said about Q1, is definitely implies that as you get towards the back half of the year, you’re going to have to see some positivity, specifically as you get out to Q4. We’ll provide some color as we go through the year. But just given the expectation of approximately $5 million of a loss in the first quarter and still trying to hit the range then you're making a reasonable assumption.

And then if I could just ask really quickly on the Clip business, this recent trend in Pro 2, are you at all supply constrained at this point, and then just impact from the new clip coming on later in 2017 just timing impact in relative ASPs.

Right now, we don’t have any impact. No, no concerns about the inventory from a Pro2 standpoint. We’re locked and loaded. I know that was some things we were working through as we’re rolling out, and the demand was passed when thought in the back half of the fourth quarter. But we’re offset from an inventory standpoint. As it relates to Pro V, it won't have much impact on the revenue in 2017, but it will be rolled out at the end of this year or early part of next year. And as we roll that out, we anticipate that should help us sustain the strong growth that we anticipate going forward on the Clip franchise overall.

And our next question comes from a line of Rick Wise with Stifel. Your line is now open.

Let me start with again the outlook for 2017, Mike, I saw your confidence and I think you are laying out very clearly. Maybe talk about a couple of factors supporting that confidence; one, obviously the SCS guidelines seem to -- should support, I would think extended -- expanded conversations with surgeons. But help us to understand how that conversation is evolving, both in general? And maybe as it relates to your training courses, you mentioned the AATS events. But talk about your training events, my impression is you have significantly more people signed up for this year than last. If you could you just talk us through all those things? Thanks.

The overall guidance for the year is 13% to 15%, and we’re obviously confident overall on that number. And as Andy mentioned, it's really broken down into mid-single digits on the open side of the business, which is consistent with around where we were this year. And then on the other side, on Clip and the MIS side, we anticipate that being north of 20% on both of those. So, I’ll break down each one. So, on the open side of the business, we mentioned it, I think the number piece is that the SCS guideline changes, really provide, it's a landmark and that's why we spend so much time on the call on it that we really believe this is a great conversation piece. It's really a conversation to have with the surgeons about why they should treat. There's lots of data that's out there, and there's society and it's really kind of talking about it. So it's really enabled that. And you mentioned it, it's actually driven on the education front. We are already sold out on eight courses that we've had for the year that we had anticipated, which how many we did last year. We will likely add anywhere from two to four more courses this year. And if demand continues to be high, that's great. It's not just the surgeons that are interested in the course now. We have the PAs and the RMs that are very interested, because they've got holistic approach in the OR with it. So, it's really across that business and a lot of that I do equate to since the SCS guidelines came out that level of demand has gone up. We've also seen demand for our in-person courses and our non-Atri courses that we're doing. And so that's actually…

And maybe one last one, two part way from me, back to gross margins. Andy, you said and if I think I caught your words, you expect 75% gross margin in the next few years. I think previously you said more concretely perhaps by 2019. Am I getting caught up in language, or is there any change in your thinking? But maybe tie that into pipeline. And Mike you were talking about further products to be launched as the year unfolds. Just again if you can break down just the simplest kind of way, how big of role does the new products play in getting you to the 75% goal? Or is it volume or is it mix? How do we think about just in prioritizing those drivers? Thanks.

Honestly, Rick, it's all of the above. So, the new product launches that will happen will help from pricing perspective and the margin perspective. But a lot of it will be volume driven as we continue to grow and leverage the new facility that we moved into, all those kind of things. So, as far as the 75%, we haven’t given specifics but we have talked about the end of the decade type timeframe, and that's still where we are. So, thinking about it that part is up from here is the right way to do it.

And our next question comes from the line of Danielle Antalffy with Leerink Partners. Your line is open.

Just a follow-up question on Rick's question about the guidelines, it seems like very positive trends there when it comes to the physician training sessions, and a number of folks that have signed up so far this year. Mike, just wondering if you could comment on how quickly you start to see volumes ramp, how quickly you reap the benefits from a top line perspective in the open business, post physicians training in these advanced courses?

It's historically -- we’ve seen within like six to 12 month period after that you kind of where we would track and measure that. A lot of these people are repeat people that just going into more advanced courses now. So, I think it will be -- to be told in terms of what impact that’s going to have from that standpoint. Right now, we’re just comfortable we’re kind of stating and that we’re really consistent that we’re going to be in that mid single digit for the year, and seeing how the year comes off. Coming off of a slower Q4, we want to make sure that we’re cautious as we enter this year, and we’re going to continue to be at that pace right now.

So really is this more 2018 and beyond tailwind?

Yes, I think it also gives us -- I mean I think one of the big thing is that there was always this question of how -- what the kind that you are shrinking, what's happening with it, and this really gives us the tailwind to to be able to maintain that we’re going to be in that mid-single digit area without having a shrinkage like many questions have come up in the past.

And then, Andy, just following up on the profitability of question, can you give a little bit more color on the leverage that you guys can pull there that are incremental in 2018, that gives you the confidence that you’ll get to that EBIT profitability in 2018? Thanks so much.

Sure. It's generally leverage across the entirety of the business to be honest. Margin improvement is obviously part of it. But even just leveraging clinical trial and R&D spend along with everything in SG&A. So, it's not necessarily a particular thing, just that we’re able to leverage a cost structure that is somewhat fixed in nature that you grow beyond. So, honestly, it's really across the whole of the business.

And our next question comes from the line of Matt Miksic with UBS. Your line is now open.

This is Rick in for Matt, thanks for taking the questions. I am jumping on a couple of calls, so apologies if this has already been asked. Can you give us some idea as to if you’re seeing any change in the comparative landscape in your open business given the launch of new probe? And then can you also update us on how nContact grew in the fourth quarter, and was it up or down sequentially? Thank you.

Sure. The comparative landscape we continue to compete aggressively, but there has been no significant change on the open side of our business. So, there has really been no significant change on that front. In terms of the nContact, it was sequentially up quite a bit. We had a great fourth quarter up overall in the MIS part of our business, pretty much all of that or most of that was driven by the nContact EPi-Sense products.

And our next question comes from the line of Suraj Kalia with Northland. Your line is now open. Suraj, is your line on mute? And our next question comes from the line of Ethan Potasnick with Needham & Company. Your line is now open.

This is Ethan Potasnick on in for Mike Matson. Just one more on the SCS guidelines, could you maybe talk about like I guess what sort of customer feedback have you guys gotten I guess on the changes at the SCS annual meeting?

Feedback's been positive, I mean, everybody that we spoke to I think said it was kind of a good reminder for many people that they really do need to be treating these patients when they’re on the table, they're going to do better and the date is out there now. So, I think they're -- it's kind of a good shot in the arm for many of them, and as a reminder. And so it's been very positive feedback we've received so far.

And just to reiterate, have you guys done any surveys to attempt to quantify the impact of the SCS guideline changes?

I am not sure what you mean by survey to quantify the impact of it.

Well, I guess the overall quantifiable impact of the guideline changes.

In terms of like what it's going to do to revenue for us, and that, is that what you're…

Yes revenue and overall impact.

There is no specifics on that, I mean right now it's a general sense that you’ve got. It's an underpenetrated market where you're still at 20-25% of patients are getting treated, so 75% of the patients that are on the operating room table to have Afib are not getting treated. And so, what this does is it obviously puts the spotlight on it, creates awareness for us to be able to talk to the fact today that your own society is basically encouraging you to treat these patients because they do better, they live longer. And so those are the things that we're really focused on. It's tough to quantify exactly what that impact is going to be. You really got to go it's a penetration game at this point in time and really moving that market. So to quantify it, we’re seeing this year, we're going to be cautious about saying we're in the mid single digits and the growth on the open side of our business. And again, we're going to be 13% to 15% total and 20% on the minimally invasive and Clip business.

And maybe how many sales people do you guys plan to add during 2017?

Well, we’ve got three major components to our sales team. We've got regional sales managers that are geographically focused, and we anticipate adding just a couple on that front. On the minimally invasive managers are the ones are EP focused. We anticipate adding at least four this year possibly more. And then on the -- which is going from 10 to probably around 14 plus, and we'll add more as we see demand shifting. We won't be shy about that. And then on the clinical specialists, we've currently got about 45 and we'll likely add between five and 10 this year.

And I'm showing no further questions, at this time. I would now like to turn the call back over to Mr. Mike Carrel for closing remarks.

Great. Well, thank you everyone for joining us today. We appreciate your interest in AtriCare, and look forward to seeing you in the coming months. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.