Good afternoon. And welcome to AtriCure's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward 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've not received a copy, please call 513-755-4136 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'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 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 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. And thank you for joining us today. We are continuing the strong momentum from the start of 2019 with total revenue for the second quarter at $59 million, our 27th quarter in a row of double digit revenue growth. Our top-line performance was driven by strength in our appendage management and open ablation franchises worldwide and highlights the diverse nature of our business. We continue to execute and achieve on our operational initiatives for 2019, and believe this quarter reflects the depth of our global theme. As such, we are raising revenue outlook for 2019, which we now expect to be in the range of $224 million to $228 million. This range corresponds to growth of 11% to 13% for the year. Turning to the U.S. business for the second quarter. We'll begin with our appendage management franchise. Growth in this franchise continues to be robust with open and minimally invasive products both impacting our results. We had meaningful contributions from the minimally invasive PRO2 and PRO.V products, both launched in the last three years. The attach rate of minimally invasive AtriClip devices and conversion procedures also continues to rise. In addition to the strong contribution from our minimally invasive AtriClip platform, the highlight for the quarter is the open chest FLEX.V device. It has been more than a year since we launched the FLEX.V in the U.S., and we remain pleased with the adoption and the extension of this product in the market. Results in the appendage management franchise demonstrate the substantial impact that previous investments innovation are having on our business today. The PRO2, PRO.V and FLEX.V products were part of a constant initiative to drive expansion with new platform products. We are clearly demonstrating traction with these new products, realizing immediate and sustainable…

Thanks Mike. For the second quarter of 2019, worldwide revenue was $58.9 million, representing growth of 13.7% on a GAAP basis and 14.5% on a constant currency basis. Revenue from U.S. product sales was $47.2 million, an increase of 15.5% from the second quarter of 2018. Open ablation revenue in the U.S. increased 13.8% to $20.6 million, driven by the success of our cryoSPHERE probe, which launched in the first quarter of 2019 in addition, the continued steady volume increases for cardiac ablation devices. U.S. sales of products used in minimally invasive procedures was $9.1 million in the second quarter of 2019 and '18. Across minimally invasive ablation products, results were flat, showing improving from the first quarter but keeping with the trend of volatility on the low volume of this business. U.S. sales of appendage management products during the second quarter of 2019 were $16.5 million, an increase of 25.9%. We again realized very strong growth from the AtriClip FLEX.V device along with volume increases in minimally invasive LAA exclusion system devices. We remain confident in sustaining growth rates for our appendage management products. International revenue was $11.7 million, up 7% on a GAAP basis and 10.8% on a constant currency basis as compared to the second quarter of 2018. Open ablation and appendage management products are driving our international business, offsetting a decline in revenue from minimally invasive ablation products. Turning to specific markets. We continue to see growth throughout Asia, particularly in Australia and Japan. We are pleased to mark the anniversary of our distributor partnership in China this quarter. We also had solid growth in several key areas in Europe, notably the UK, France and Germany. Gross margin for the second quarter of 2019 was 74.5% as compared with 73.5% for the second quarter of 2018…

Thank you, Andy. At this point, I would like to thank the entire AtriCure team for their passionate dedication to our foundational values of helping patients. We were once again recognized this year at the top workplace of Cincinnati Enquirer. I am truly grateful to be part of this world class culture for showing our mission of working alongside each and every one of you every day. And in closing, we are confident in our strategy of expanding our reach to positively impact patient outcomes worldwide. The first half of 2019 builds from years of momentum with the second quarter marking the 27th straight quarter double digit revenue growth. The consistent success is driven from a focus on patients, our patient first culture guys, our commitment to innovation, our investments in education and clinical science and is led to an expanding range of treatment options. Coupled with vast under penetration of concomitant ablation in all types of major cardiac surgery, we are well positioned for continued growth. With that, we will now open up to questions. Operator?

[Operator instructions] Our first question or comment comes from the line of Jason Mills from Canaccord Genuity. Your line is open.

Hi, Mike and Andy. This is actually Cecilia on for Jason. I just wanted to ask about your comments on the attachment -- corporate attachment you're seeing in the converge procedures. Where's this been trending recently? And what are kind of the primary drivers of this, and where do you see this going longer term?

Sure. If you recall, when we brought in contact almost four years ago, we didn't really have -- we didn't anticipate much of an attachment right at that time. We thought that it'd be less than 5%. We've been trending up. We recently talked about over 35% of the patients that are actually undergoing the conversion are getting a clip for an appendage management at that time as well. And so that number continues to go up. And in terms of where we think it's going to go, I'd say that there's a lot of positivity out there towards managing the appendage. It's important to the EPs. They talk about it. And they're really driving their surgeons to management -- to manage that appendage concomitant with the conversion procedures. So, I'd say that it continues -- I don't have a specific number or range in terms of what that penetration could look like. But I do anticipate that we will get some continued growth in that area.

And I guess just continuing with clip, just as you look forward. What kind of areas or what areas are you targeting for further innovation? And could you just also talk about the strength you're seeing with FLEX.V and potential with CABG continue to drive that opportunity? Thank you.

On the innovation on the clip side, we've rolled out three net new products over the last three years, the PRO2, the PRO.V and the FLEX.V. I feel very good about those products and adoption. And I think we've got a long way to go to have them be absorbed into the market. There's an under penetration of use and management of the appendage in all cardiac procedures. And so right now, we're really focused on getting the most out of the products that we've got there since we've been innovating quite a bit over the last several years in that area. The next wave really on the clip is going to be more along the lines of something even less invasive. And that would be the next stage for us on that front, something that can -- probably a new generation on that front but its several years off from that standpoint. In terms of -- I think that was -- that answered the question.

Thank you. Our next question or comment comes from the line of Matthew O'Brien from Piper Jaffray. Your line is open.

Mike, it doesn't sound like pain is a big driver to the open ablation performance in the quarter. But that's, obviously, pretty eye-popping, both in the U.S. So could you just help, talk a little bit more about what's driving a lot of that growth, and then the sustainability of it? I mean, is it -- are we hitting that inflection point now where more and more clinicians and centers are saying, look why are we not doing this? And actually we should be doing this. And it should be mandated across a lot of hospitals?

I mean, the pain definitely drives some of the growth. So to say that -- I mean that was some of the growth, and is definitely being driven by that on that front. And we do anticipate that the pain will continue to drive growth as we look not only at the end of this year but as we look into next year where we see more -- even more meaningful contribution coming off of it at that time. In terms of the open side of things, I'd say it's kind of steady as she goes. I mean everyday we're influencing more and more people to treat better and to do a better job on that front. I was just at, of course, this weekend in Baltimore with some of the top surgeons in the world, having this exact conversation about how to continue to get the guidelines and leverage those guidelines. I don't think what you'll see is growing at like the inflection point, like you're talking about. It's going to be a consistent, nice driver of growth for many, many years to come. And so we're focused on that. And that we get the accelerated growth in some of the new things coming down the pipeline, like cryoSPHERE and beginning get traction on that next year as we've got a more mature team, like more on the clip side and the under penetration as we've seen and continue to see continued strength off of that. And then, obviously on converge, once we get that approval and our ability to accelerate growth. So we've got a lot of levers for growth going forward. And I think the open side of our business is just going to be a good steady grower as we continue to gain share of the market, not share against competition.

Just to ask a little bit more about that. So I think you talked about pain as more of a 2022 2021 driver. Are you kind of accelerating the outlook for that business here in '19, just because of what you're seeing from the early adopters, and that they're reordering faster than you expected, or something along those lines?

I mean, it's not a huge number on our top line number yet. We are seeing -- we're getting a lot of great feedback on the product. We are adding more reps than we may have anticipated at the beginning of the year, because of the demands that we're seeing. And quite frankly the biggest issue we've got now is just covering cases. And so we've got to add more and more clinical specialist to be able to cover a lot of those cases. And so -- I don't know -- it's a modest acceleration as we're building towards success in 2020 and '21.

And then just two more follow-ups from me, I'll ask them both here. One for you Mike and one for Andy. But just to follow-up on last question on the clips, you don't necessarily need to talk about where the penetration rates can go. I know they're still fairly low. But you've gotten a lot of -- probably more of the low hanging fruits type of procedures. And that next tranche of cases is always tougher to get into. So can you just talk about the momentum that you're still seeing on an account basis that makes you feel comfortable that appendage management is going to be this big driver for the next couple of years? And then real quick for Andy, just the gross margin in the quarter was really good. You're sticking with 73% to 74%. Why wouldn't we be at the high-end or even a little bit higher than that?

On the clip piece, I mean, we're still remarkably under penetrated globally on penetration on that front. And yes, sure, we've got some of the low hanging fruit in various different applications but more and more people are adopting it every day. It's a conversation piece of every hospital, there's a lot of discussion around it, not just because of us but because of what's happening in EP world and the cardiology world. And we get some benefit from that as well. Plus people know that clip works. There's more and more data that continues to come out on the benefits of managing the appendage, independent data that is out there that is influencing behavior. And so I think the combination of all those things leads us to believe and feel good about the clip for foreseeable future. And I'll let Andy answer the gross margin question.

Matt, I think it was a really good gross margin quarter for sure. I think the ops team continues to do a really nice job on managing costs and producing the product in a good way, efficient way, as we continue to build to support sales. So back at the year, we'll still make some investments that we want to make in that organization. So that's really driving us to keep the range where it is at the 73 to 74. We've got a good first half, but we've got some things to do in the back half and just want to leave the range in a good spot.

Thank you. Our next question or comment comes from the line of Robbie Marcus from JP Morgan. Your line is open.

Thanks, and congrats on the good quarter. I thought you guys did an excellent job on the first quarter earnings call, discussing how there's a very limited impact from TAVR and conversion from open heart surgery to TAVR and minimally invasive heart surgery. We saw really strong quarter from TAVR. Here it clearly didn't impact your business and the financials here. Maybe you could just give us some of what you're hearing from physicians following the data that was presented ACC. And any other color that gets you either more or less excited based on the comments you made on the first quarter call?

Thank you for those comments. Consistent with what we said on our first quarter call, I think the biggest thing for us is that the patients aren't getting treated around the table today and that's really where we see a lot of the growth and a lot of the growth that we anticipate for the foreseeable future in the open side of our business. We just saw a paper published by Dr. McCarthy, who is at Northwestern and talking about the under-penetration. And he evaluated pretty much every patient that gone in over a three year period and CMS data to kind of see who is getting treated who is not getting treated and the numbers were low. In addition to that, they were low in terms of their under diagnosis of them as well. So the combination that just says this is an under penetrated market. Sure, they'll be pressure on that one very specific market around AVR as it goes in the lower risk place. But the true impact on our business is de minimis relative to all the other positive tailwinds that are going on in that space and in that area. And so we still feel bullish on the overall open business for us for remainder of the year and into next for sure, and for many years quite frankly.

It's a really fair question. I mean, we do believe with the pain management we wouldn't be investing if we didn't think that it was a sizable market over the long-term that we can actually -- it's not nearly as big as the Afib market from that standpoint, but it's a nice niche market where we've got a significant advantage in the sense that our product works exceptionally well there. We're really the only one that had a probe in the market dedicated specifically for this. And it is a reasonably large market. If you think about the number of patients every year they're going for thoracic surgery. Just in the United States, it's 110,000 to 150,000 people. That number is growing every year as more and more patients fill in for lung resections due to changes in how they're diagnosing lung cancer as an example. And just there's a lot of pressure on these hospitals to reduce pain. So you just do the math on that, if we're in every one of those cases that would be a huge market, and well over $100 million market. Now, we don't think we're going to be in every one of those cases, by any stretch of imagination. But if we can get a small percentage of it, we think that we've got a really, really good robust market for the next three to five years. And we've got a good leg on where that's going, the clinical data supports it.

Hi Mike and Andy. It's Drew on for Rick tonight. Mike just to start through the first half of the year, Mike, your commentary is sounding increasingly confident on the business. But just looking at the updated guidance, looks like you're only taking up the full-year by second quarter beat, looks like maybe you're expecting the lower half to be at the bottom end of the range. So is there anything in the second half that maybe we should be better appreciating beyond more challenging 3Q comps?

Nothing in particular. I mean as you mentioned, we feel great about the business. We feel really good about where the business is going to go, not just through the balance of this year but for many years to come. We've got a great product. We've got a great pipeline, on both the product and the clinical side for the next three plus years. We've mentioned some of them in all the franchise and all the markets that we're in. So nothing per se, I think you hit on it pretty well.

And then just on the MIS business. I know that you've talked about the market opportunity more from a patient population perspective. But I was wondering if you might be able to size the U.S. MIS ablation opportunity by maybe the number of centers in the U.S.? I know that there's maybe like 1,000 cardiac surgery centers in the U.S. But should we expect like a similar number to that, or maybe a quarter? Just any help there would be helpful.

I mean, there's no reason that we shouldn't be in well over 50% of them, and we could easily be in 75% of those facilities once it's truly adopted. Probably getting to 1,000, you're not going to get to some of the smaller community hospitals in areas like that. But quite frankly, one of the benefits of CONVERGE is it is a procedure that pretty much every cardiac surgeon is capable of doing. And so the training for us is pretty straightforward. It's relatively easy to do. I mean to say that about, cardiac surgery is obviously, some that's not a surgeon. Interesting, but I mean quite frankly, for a cardiac surgeon this is something that they enjoy doing. And it can be adopted by pretty much just about anybody from that standpoint. So it can be highly penetrated on that side.

And then just one last one on clinical trials. You mentioned that you're up to a few sites now. And I believe you have approval for 40 patients. Have you started to actually enroll patients at this point? And then would you also update us on the FROST and CEASE-AF trials?

Sure. We have started to enroll patients. So we've had good robust -- we've got 11 sites now up and running and we've got -- we've enrolled patients and we've got a pipeline of patients that will be enrolled over the course of the rest of the year. And so we're in a very good spot. We won't hit 40, but we want to hit 40 additional by the end of the year. But I think we will be in a very solid spot overall, and we'll give a more detailed update on subsequent conference call. In terms of CEASE, we are going to continue to enroll in CEASE through the end of the year. We've actually -- we're very close to hitting a statistical endpoint relative to the number of patients that need to be enrolled in that. Once we get through the end of this year then they'll be one year or it's actually 15 month follow up in that particular case, and follow up data on that. So the trial actually enrolled really well last year. We've had decent enrollment this year, anticipate kind of being near the conclusion of enrollment by the end of this year based on current pacing and where we are in terms of number of patients needed. And again, that one's a randomized trial. And then on FROST, we did complete enrollment in that, data is being submitted to various different journals. And hopefully, sometime if one of the shows next year, the data will be presented at one of the shows in an abstract before it actually gets to publication.

Thank you. Our next question or comment comes from the line of Danielle Antalffy from SVB Leerink. Your line is open.

Good afternoon, guys. Thanks so much for taking the question and congrats another really good quarter. Mike, just to follow up on Robbie's question around cryo and just because it seems to be coming an increasingly important growth driver. Can you talk a little bit about, I know its early days. But how are you seeing physicians that are adopting it and doctor? Like is there some sort of patient selection process that physicians go to? And based on what you're seeing so far, so how to think about the total addressable market opportunity within that? I think you said 110,000 or so procedures getting done.

The way that it's being used today is its being used as a, what we call, multimodality approach. Meaning it's not taking away from the approaches that they're currently using but it's helping them actually significantly reduce pain. So they're adding it to kind of the profile. We initially went out to four cities in United States where most of the long procedures were being done, and you can name them the big metro areas around the country. We've since then expanded it to eight. We'll likely continue to expand and add more clinical support as I was mentioning before. I mean the types of patients that are being treated are pretty much anytime that somebody's going in for thoracic surgery, anytime you have any rib spreading, or any pressure that's going to be put on the intercostal nerve there, that's really where you're going to see the benefit from it. Cases such as any kind of rib-plating, car accidents, items like that. Or you might be looking at, as I mentioned earlier, about lung cancer, in particular is probably the fastest growing area where you see patients that are getting screened, they've caught the -- they've caught it early, they want to take out a nodule or some lung cancer. And so they may take out one of the lobes as a result of that. That is definitely worth being used probably primarily. Today, those are some of the big areas that are there. And I'd say that those markets are growing. And as we kind of expand into other cities and other areas, there's obviously good penetration. There's no reason you couldn't be using it in every one of those thoracic cases. But I think we all know that nothing is 100% adoptable. All of those thoracic cases do have pain associated with them. The STS at the meeting not this past year but the year before, one of the top papers was out of the University of Michigan where they showed that 14% of those patients had an unhealthy addition to opioids one year out. And so there's a lot of sensitivity to it. And so there are people that are looking for other different ways to manage pain and help with the pain. And this is a way to go along with that.

And then just a question on the open business here in the U.S., I mean it seems to have built sustainable momentum here. The growth doesn't seem to be slowing. I know, everyone's rightly so focused on the AVR piece of the business, but CABG is really the big growth driver there. Can you talk about what percentage you would guesstimate now of your sales are into CABG? Or do you have any way to frame sort of where we are in the CABG adoption curve and sort of highlight for us how much more runway there is there? Thanks so much.

I mean, the best way to articulate the penetration of CABG is it's abysmally and embarrassingly low for our healthcare system today. It's likely less than 10% of patients that have Afib that are on the cardiac surgery table that are getting treated. And our mission in life is to help those patients get treated appropriately at the time that they're there. You're right, that's the biggest market, that's the biggest opportunity. We can do it through a combination of leveraging the guidelines, doing more training and education that we've done. And we've got a Why Treat campaign that I think we talked about in the last conference call specifically. And that Why Treat campaign is to really go out and talk about this and talk about this to referring physicians and others to make sure that when they've got these patients that are telling the cardiac surgeon to treat them, because the guideline say you should treat. And again, it's less than 10% that are getting treated in CABGs.

Thank you. Our next question or comment comes from the line of Mike Matson from Needham and Company. Your line is open.

Good evening, Mike and Andy. It's David on for Mike, thanks for taking the questions. One on the sales organization. I guess cryo, the cryo team is about eight people. At this point, what's the right size for that team? And then also where -- what other teams are you focusing you're hiring?

I don't have a size that we're ready to come out and say this is the exact size of what the team is. We're kind of playing it as we learn more about the market, and not get too aggressive, too early. I think you've seen that, quite frankly just in our business in general and how we manage it. And so right now, the demand is that we have to add more clinical people to support more cases. And so we're going to expand on that front so we can cover some of these major geographies. That's really our current focus. We're definitely going to add to that number by the end of this year and then into next year. But again, I don't have a specific number to give you. In terms of our other adds, we continue to add clinical support as well in advance of our CONVERGE label next year. And so we're continuing to add people that really understand the EP landscape and EP space, understand how to be an EP lab and read maps, see what the effect of our ablations look like on that. And so we're adding much more of that right now heading into next year. And so that those are the two major areas that we're basically adding resources right now in addition to other just clinical support to support cases, because as you -- as some have mentioned on the open side, we've got to make sure we're continuing to provide exceptional support on that side. Again, we've got good coverage on our direct business, or our direct reps that build the relationships of hospitals. It's more on the clinical support side that we're really investing today.

Yes, majority of it -- we continue to see really strong volume on that part of our business. So a vast majority of the growth is based on volume but we do have some price components to it. And we anticipate that we'll continue to grow. You saw a little bit of pressure this quarter down to 26% growth, which was we've told people we couldn't grow it 30% forever. We do anticipate though that we'll continue good, strong, robust growth for the foreseeable future.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Carrel for any closing comments.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.