00:05 Good afternoon and welcome to AtriCure's Third Quarter twenty twenty one Earnings Conference Call. My name is Catherine and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and answer-session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. 00:25 I would now like to turn the call over to Marissa Bych with Gilmartin Group for a few introductory comments.

00:34 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. 00:47 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. These statements include, but are not limited to, financial guidance and expectations, expectations regarding the potential market opportunity for AtriCure's franchises and growth initiatives, including CONVERGE and the adoption of the CONVERGE procedure, and future reimbursement. AtriCure's results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward-looking statements. 01:29 Additionally, we refer to non-GAAP financial measures, specifically revenue reported on a constant currency basis, adjusted EBITDA, and adjusted loss per share. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is included in our press release, which is available on our website. 01:46 With that, I'd like to turn the call over to Mike Carrel, President and Chief Executive Officer. Mike?

01:53 Thanks, Marissa. Good afternoon, everyone, and thanks for joining us today. We hope that you're well. Against a difficult backdrop driven by the pandemic headwinds, we delivered solid performance in the third quarter year, reaching seventy point five million dollars in total revenue. This represents twenty nine percent growth compared to third quarter twenty twenty and a one percent sequential decline from our strong second quarter twenty twenty one results. 02:18 We saw year over year growth across key product lines in United States, including contribution from continue addition of new pain management and hybrid therapy accounts. We were also pleased with the robust performance of our open ablation in appendage management franchises across Europe and Asia. 02:35 As many of our peers have stated, the third quarter brought continuing challenges driven by the COVID-nineteen pandemic. We began the third quarter with a record sales month in July. In August and September, however, we began to see some impact from the surges in COVID cases and hospitalizations along with hospital staffing constraints, which affected the industry broadly. While many healthcare systems have become adopt at managing through COVID related beats, there are a few options to mitigate the shortages of healthcare workers and we are not immune to these developments. However, the fundamentals of our business, as well as our twenty twenty one financial outlook remain very much intact. 03:14 Taking a step back, I would like to highlight our key growth initiatives beginning with our Hybrid AF therapy. In the second quarter, we received PMA approval of the EPi-Sense system as a result of our pivotal CONVERGE clinical trial. This achievement marks the only FDA approval for the standalone treatment of patients with longstanding persistent Afib, which represents approximately forty five percent of all diagnosed Afib patients. 03:41…

07:58 Thanks, Mike. Our third quarter twenty twenty one worldwide revenue of seventy point five million dollars increased twenty eight point seven percent on a reported basis and twenty eight point six percent on a constant currency basis when compared to the third quarter of twenty twenty. 08:15 On a sequential basis, this quarter we experienced a decline of one point three percent in revenue from the second quarter. The sequential decrease is partially driven by normal seasonal variation in our business, but also impacted by the ongoing pandemic and staffing constraints that Mike noted. 08:32 In the third quarter twenty twenty one, U.S. revenue was fifty seven point five million dollars, a twenty eight point seven percent increase in the third quarter of twenty twenty, reflecting healthy activity across product lines and promising growth trends despite reducing case volumes as the quarter progressed. 08:50 U.S. sales of appendage management products were twenty three point four million dollars, up thirty four point three percent over the third quarter of twenty twenty on strong AtriClip Pro V and Flex V product sales. U.S. sales of open ablation products, which include our Cryo Nerve Block business were twenty three point eight million dollars, up nineteen point four percent over twenty twenty. 09:14 Sales of the cryoSPHERE probe alone accounted for six point two million dollars in revenue in the third quarter, up nearly ten percent sequentially. Finally, minimally invasive ablation sales in the U.S. reached ten million dollars, up forty three point one percent from twenty twenty showing the recovery in elective procedures from last year, as well as growth EPi-Sense device sales. 09:37 International revenue totaled twelve point nine million dollars up twenty eight point five percent on a reported basis and up twenty seven point nine percent on a constant…

14:06 Thank you, Angie. I would like to end the call by recognizing the team at AtriCure and -- for AtriCure continued success. I’m impressive of the dedication and adoptability of our people, the high level of collaboration across our company and the commitment and excitement for our mission and our future. I’m thankful for each and every one of our employees and now that together as a team we will have the greatest impact on patients globally. 14:30 With that, I will now open it up to questions. Operator?

14:49 Thank you. [Operator Instructions] First question comes from Robbie Marcus with JP Morgan. Your line is open.

14:56 Hi. This is Lily on for Robbie. Thanks for taking the question. Maybe just to start with a question on overall trends. Can you give us any color on how COVID trends played throughout the quarter and what you've seen so far in the first month of fourth quarter? And second, what's assumed in guidance in terms of the recovery? Thanks.

15:17 Sure. I mean the trends we saw were we had a record month of July as a business, and then we saw kind of a combination of COVID and summer vacations in the August timeframe, COVID had an impact on the September and October months. And so, we definitely saw that, but we did see some pickup a little bit in the October month, but it definitely had a lingering effect into of the fourth quarter, much like what we're hearing from a lot of other companies, the impact on COVID. 15:44 That's all baked into our guidance in terms of our thoughts. Everything that we know as of today is kind of in our guidance. We reiterated our guidance of two seventy and two seventy five for the full year and we're confident in that number.

15:59 Great. That's helpful. And then just a quick follow-up on CONVERGE. As you've been training doctors and onboarding centers, how long does it take for a doctors to get comfortable with the procedure and come up the learning curve? And when do you think you could really start seeing an infection in procedure volumes? Thanks.

16:17 I mean, for a doctor to get really comfortable, it typically takes about three to five cases where they feel comfortable and I'd say ten cases where they were getting really good at it. And then I'd say that's kind of in terms of just the surgeon getting comfortable with understanding the maths from that perspective. In terms of kind of the inflection point or impact, it's going to be kind of a continuous growth for the next many, many years to come. It will take a system, let's call it, six to twelve months to kind of really go through that process where they get trained, they start recruiting patients, they get their first patients in, they start to get comfortable with it and then they kind of get to some critical mass over time. And so you're starting to see some of those sites that started at the beginning of the year really start to get and open up a little bit more and get more patients. 17:02 Obviously, COVID had an impacts, so it's tough to kind of look through some of that as we look at it right now, but I'd say that you're going to start to see continued growth into next year. It's one of the main reasons why when Angie talk in her guidance, we talk about the fact that we're very comfortable that we will be able to grow above historical numbers. So, if you look before COVID, we were pretty consistent growing that fourteen percent to fifteen percent every year, our seven year CAGR was about that. We will grow faster than that for the foreseeable future at this time.

17:36 Great. Thank you.

17:39 Thank you. Our next question comes from Matthew O'brien with Piper Sandler. Your line is open.

17:45 Afternoon. Thanks for taking my questions. Just to follow-up a little bit on -- question there. Mike, you're in inpatient procedure for CONVERGE. It's a little bit more of an involved procedure versus other EP cases that are out there. So I'm just wondering if the staffing shortage overly affects AtriCure versus other in this space. And then what kind of slowdown that may cause as new centers are building here towards the end of this year into next year as a result of the labor side and the COVID side of things and things that you can do internally to kind of offset those headwinds that you may be seeing versus others in this space.

18:25 It's a really fair point Matt. I mean, I think you're correct in stating that, in general, obviously being in patient for a longer period of time, there are more staffing concerns for cardiac surgery and we'd be hitting ourselves if that wasn't the case. That being said, we've also got a new label that really shows a demonstrable benefit of doing this procedure and so you counter that with the fact that we're adding a lot of net new sites, those sites are now getting their programs up and running, they want to build momentum, they want to build what that looks like. And so they're really dedicated to getting these patients in and moving it. So I think it's going some impact and we've obviously baked that into our revenue or our guidance for the remaining portion of this year, but it does not take away any of my confidence long term in our ability to really grow this business as we look at twenty twenty two, twenty twenty three and twenty twenty four or go back to. We will be growing at a faster pace than we have historically grown and a lot of that's going to be driven by the strong growth that we expect coming off of the CONVERGE platform.

19:21 Okay. That's really helpful. And then question for Angie, just on the gross margin side, it looks like it's probably more a function of just geographic mix more than anything, as far as the slight pull back in gross margins here. I'm just curious as far as that metric as we head into twenty twenty two? And then you're still spending pretty aggressively on R&D and I think that's important for the company from a developmental standpoint and a clinical trial standpoint. But given now that LARIAT is pretty much out of the picture. Is that an area of leverage you should expect next year for the company and maybe even a little bit on the SG&A side as well? Thank you.

19:56 Yes. Starting with gross margin, the biggest impact this quarter was a charge on the LARIAT inventory reserve. We did have some unfavorable geographic mix, but offset by some favorable product mix, EPi-Sense and Flex V and Pro V clips, those are high -- high margin products for us. When you think about leveraging the P&L, we are not at a point where we are giving guidance long term. I'd say, if you look at this particular quarter, we saw a downturn in R&D expense as a percentage of revenue. It's a function of where projects are at in their life cycle. Longer term, we would expect that to return kind of at the historical levels that we've been and would expect some leverage off of SG&A. 20:35 I say that, but also want to remind investors that we're making investments to fuel our growth. We continue to build out our commercial teams and then training and education programs as we're attacking our launch for the Hybrid AF therapy, Cryo Nerve Block and expanding other products.

20:52 Great. Thank you.

20:57 Thank you. Our next question comes from Danielle Antalffy with SVB Leerink. Your line is open.

21:04 Hi, good afternoon, guys. Thanks so much for taking the question and congrats on a good quarter despite all the headwinds. If I could just ask a question on what you're seeing as it relates to the logistics around CONVERGE? And whether that is complicated, I think, maybe I'm following up on Matt’s question a little bit here. But how you think about that in the hospital labor shortage? Is that a procedure that's maybe more at risk from a hospital labor shortage perspective or am I thinking about that incorrectly? And I do have one follow-up.

21:38 As I kind mentioned a little bit, Danielle, sure there's an impact when you've got a labor shortage and you've got somebody in the hospital for longer. So there's no question that there's an impact on it. It's counter though by the positive of a brand new procedures engineering of the hospital that is treating patients that couldn't treat before that is enabling them to save time on some of their other procedures on the EP and the time they are spending in the cat labs. So it's freeing up resource on that side. And so while theoretically, yes, there is an impact of that, I'd say it's kind of overcome by the fact that they want to get these programs up and running and we're really at that beginning stage of getting them. We've seen continued growth in that franchise, and in that area we had our best EPi-Sense quarter this quarter and so we're in a really good place overall, and we'll continue to see volumes go up in that area, even despite what you're talking about relative to some of the labor shortage. 22:30 So yes, theoretically there is some impact, but I'd say that overall, we do see positive trends and we don't see it really impacting anything from a long term standpoint.

22:40 Okay. That's helpful. And then my follow-up question is really on the commentary around the above historical growth. I mean, that's helpful color. I was wondering if you could put a little bit more behind that as far as how to think about twenty twenty two and then beyond and thinking of it as sort of a step function or is it more gradual acceleration?

22:59 I mean -- I think it's a really fair question. We're not ready to give guidance for twenty twenty two. That is more specific at this time. We'll definitely do that at the beginning of next year, we'll give much more specific guidance. But we do anticipate – again, I don't want to give any more than what we've already said, which is that, we're going to grow for not just next year, but for many years to come above those growth rates. And I think that's something that you can expect from us. And again, we'll get into some more specifics in January. I know everybody wants it now, but I think it’ll be more prudent to kind of see how the year ends up and then kind of give everybody a broader view of that for twenty twenty two in January.

23:38 Thank you. Our next question comes from Rick Wise of Stifel. Your line is open.

23:44 Hi. This is actually John on for Rick. Thanks for taking my question. First, you mentioned earlier on the call the training of doctors for CONVERGE. And I'm just wondering if you could quantify kind of how that process is going, given COVID and if you can give any more color there?

24:03 Yes. So we've got multiple angles for training. So the first piece is the didactic training we've had, I think up to five different didactic trainings or typically like a Friday Saturday type training, they basically come to a city, get that training and then they go through. They've got several EPs and surgeons basically giving the course, lots of dialogue and discussion, generates interest and a much better knowledge of it. We usually end those courses with a wet lab or some sort of lab afterwards. 24:32 In addition to that, we have a mobile lab -- we've got two mobile labs moving to three that travel across the country. Those are basically busy every week, they're doing anywhere -- each one of them are doing two labs a week. And those labs basically they go into the hospital parking lot or to a local parking lot nearby. The surgeons and EPs come into that, we basically do some of the didactic and a shortened version and then they get their hands on the product and are able to use it. And those are basically were already fully booked through the beginning part of next year. And we're continuing to train people on a regular basis there. 25:06 And so that's going extremely well. We do use those labs mostly today for hybrid, but we're going to be adding within the EnCompass launch. And as we add more sites next year, we'll start to add quite a bit from that standpoint as well. So those are kind of two of the main thrust around some of the training that we're doing. We will do local courses and things like that as well. And we're doing a lot of those. Those are driven more by the local, we've given the local teams and we've given the materials to be able to drive kind of an initial kind of one hour to two hour kind of conversation about the procedure. That typically leads to them going to some sort of weekend course or to some mobile labs.

25:43 Thanks. That's helpful. So then just one more follow-up from me. AtriClip continues to be a big performer for you guys. We're curious what else you kind of have in the pipeline? How you're thinking about that in the future? Any developments, potential products that could grow at that rate?

26:01 Well, if you look at the franchise portfolio, we've got, I'd call, three really major drivers of accelerated growth. The first one is on the hybrid side, obviously, CONVERGE amd EPi-Sense is growing at great pace and doing very, very well and we anticipate that we're going to create -- hopefully create the standard of care within that over the next five or so years for longstanding persistent patients. There's a huge market opportunity and a lot of patients can benefit from that treatment. I've talked about the numbers before, but I mean, we're just so low in the penetration there and so many patients can benefit from that treatment. 26:35 Number two is on the Cryo Nerve Block side, that's also continued to grow quarter over quarter every quarter, we're opening up net new sites. We've more than doubled the size of our sales team over the last year, continuing to get access to that adding clinical support to that team as well. That has been a very fast grower for the business and also provides real growth. I mentioned in the call, we are at about thirty million dollars of kind of life to date sales, and Angie talked about six point two million dollars in this quarter. And so you can kind of see that it's continuing to be a very strong contributor to us and growing for our business. 27:09 Third is, we believe that the EnCompass Clamp combined with reimbursement changes that have happened that not necessarily will get into the same kind of accelerated growth mode, but will enable us to continue to grow at very strong rates within our open franchise and get more and more adoption. As I mentioned, only one third of patients are getting treated today, so -- that…

28:38 Thanks for taking my questions.

28:44 Thank you. And our next question comes from Mike Matson with Needham & Company. Your line is open.

28:50 Good afternoon. Thanks for taking my questions. I wanted to ask about the training you're doing for convergent, specifically getting interest, getting the EPs and surgeons together kind of on onboard with the idea of COVERGE, have you had any challenges there where you have a surgeon who wants to do it, but the EP is not cooperating or vice versa? And how do you kind of deal if that's happening?

29:18 Fortunately, we're not seeing a lot of that. I mean, we definitely -- I'd say that, the area we see mostly is, we've got EP interest everywhere. I mean, there's just a lot of EP interest. Finding a surgeon that we can make sure they find the time and dedicate themselves to it. It's not that there's not interest, but they've got to be ready to dedicate it as a specialty for themselves. And so finding that surgeon is going to be a good fit with the EP is a really good collaborator, is what we spend a lot of time on. It's as expected, and so we've got to targeted list of those that we think are going to be good fit for that that have the right skill set and have the right temperament to really work collaboratively with their EPs. We're not getting a lot of pushback, quite frankly, it's more just a process of kind of getting them up and running and walking through what a program looks like and getting administration on board and getting the workflow or patient flow to work is really kind of the biggest lift, not as much about getting people interested.

30:11 Okay, thanks. That's good to know. And then just the EnCompass Clamp. I know it's early days for the launch, but I was wondering if you could share any kind of feedback you've gotten from the surgeons that are using it?

30:24 Yes, the feedback has been fantastic. It's basically reduced the time they need to spend on the ablation, now the ablation lines have been really, really good. We’ve only been doing testing, It's getting complete blocked on it during it. So we've had really, really good results so far, we just want to make sure that we're taking and getting some learnings so that we can make sure that when we bring it out to the masses, that we can train appropriately and that everybody is going to be doing it incredibly safely. And it's a great product. So the feedback has been very good and we're going to move forward probably with a really full launch early part of next year. And the feedback we've gotten so far has been positive and put us informative about how to train better with it.

31:06 Okay, great. Thank you.

31:10 Thank you. And we have a question from Marie Thibault with BTIG. Your line is open.

31:17 Thank you so much for taking the question and congrats on a strong quarter. I'll ask one more here on CONVERGE. Sort of a bit forward looking. I wondered if you could tell us how many new sites you were able to add since the launch? And from these new sites, are you hearing anything about how they plan to market the procedure? We've heard feedback that this could become something that sets hospitals apart in their regions. So I was curious what you're hearing from some of your newer customers on that front?

31:47 Yes, It's a fair question. Everybody want to know the number of new sites. And I think it's a good question. We're not ready to give that number quite yet, because I don't want people to begin to think, oh, you're at this number of new sites yet. We're not ready to show a consistency on that because some of our areas of the country we're going deeper into there and we're not actually trying to add new sites. And so depending on the area of the country, what established based they might have, we might be going deeper within their EP base versus the adding sites. And so I don't want that to be a miss leading figure for you guys to put in your models quite yet. 32:15 Revenue is going to be the key driver. We continue to grow that. We are adding a lot of net new sites more than we had expected at this point. I can tell you that. And we're getting repeat customers from them too. So they're doing their first couple, then they're coming back and they want to do more and really figuring out that workflow. So that's all gone really, really well overall for the business. 32:35 And remind me, what was the second part of the question Marie?

32:37 Sure. What are you hearing in terms of marketing plans and how they plan to market there ability to offer the CONVERGE procedure?

32:45 Yes, we're definitely starting to see more and more together proactive marketing campaigns out to their referring cardiology community. We just saw one, I just saw one this week at the Cleveland Clinic where they're talking about their procedure and kind of their internal newsletter that's going out to all of -- everybody within the cardiology group, not just the surgeons and the EP, to really talk about the fact that they've got this new procedure at Cleveland Clinic, they've been using it and they're pushing it out kind of throughout their internal network. They're starting to do internal trainings and classes of that cardiology community as well, not just of the EP community. So they are really beginning to push it, I think they are at the beginning of what we're going to start to see at many sites around the country, but they're just starting to kind of get that. I'd say, a lot of the focus now for us has been on training, because we want to make sure they do the procedure right and really well and get great results. And then I think the marketing is going to start to come really probably six to twelve months from now, once they get really comfortable with it. 33:43 Cleveland Clinic is comfortable with it now, which is why they're willing to kind of go down, they're further down that pathway. And they're beginning to start to talk about the results they're having with the patients they've already had.

33:53 Okay. And well understood on the new site metric. I had to try. Let me ask my follow-up then to Angie. Angie, mentioned working on building up production volumes. Curious, if you can give us any more detail on supply chain, whether there's any specific products or components that we should sort of be circling or that you think there might need to be some caution on the supply chain side? And thanks again for the question.

34:20 Yes, it's a good question, Marie. I think the caution is just broad based. We're hearing --you've heard from our peers, you've heard from others, we're hearing from suppliers some of the pressure if they're under, I wouldn't say anyone product gives us concern. It's more just the macro environment, which they're all working in. And that being said, as we continue to look forward for a strong future, we are expanding capacity here to be able to meet that demand, continue to keep up with that. And are mindful that we can't do that without strong relationships and partners on the supply chain side.

34:52 Thank you.

34:57 Thank you. And we have a question from Suraj Kalia with Oppenheimer &Company. Your line is open.

35:04 Sure. Good afternoon everyone. Mike, Angie, can you hear me all right?

35:07 We can.

35:09 Perfect. Hope everyone is safe and healthy. Hey, Mike. So two questions. One on COVERGE, is the discussion in the field all encompassing on persistent AF or are you seeing stratification on longstanding persistent AF. And, I’m especially curious how OUS is viewing what's going on with CONVERGE?

35:32 Yes. I mean most of the conversation we're having – all the conversation we are having in the field is around longstanding persistent. That's the focus. It's a differentiator piece of the data it's what we got the labor force. Our team is really trained to focus on longstanding persistent Afib. And that's really -- and quite frankly, that's what all the positive feedback is coming in from EPs. 35:52 They see such a big differential there they know that this works really well in these complex cases, they know that the catheter does not work. And so, it's a great way for us to have that conversations. And those are the conversations we're having, not around that persistent population. 36:08 From an OUSs standpoint, it's similar, because I think -- it's even though the label there is broader, I'd say that the data is so strong on longstanding persistent and there's such a need there that everybody starts there anyway. So they're going to start with their most complicated to treat patients and that's really kind of what they're basically going after. I mean, if you think about a lot like how Tavr started in that really kind of high risk patient population, you start there and then over time maybe we'll get more data on the persistent population. But right now, that's not needed to get these programs up and running and it's not necessary and we're really focused on longstanding participant.

36:46 Fair enough. And my second question and please forgive me I was juggling in between two calls. If I got this wrong on the Atlas IDE, I thought I heard this trial is going to be – this IDE is going to be structured as post-surgery AF stroke risk. And I'm curious why go down this route and not de novo, I should say, de novo standalone AF patients on Coumadin? And also the specifically the reason I ask is, you just look at most of the major studies and post-surgery have stroke, the cumulative incidents between the patients who have AF and not AF, they're pretty tightly -- close to each other. 37:32 I'm curious about the rationale for this trial, because it'll be a long follow-up, large sample size. Any additional color would be great. Thank you for taking my questions.

37:41 Sure. It's a great question Suraj. So I’ll give you some context to it. When looked at the data, I’ve been studying this for a long time, if you recall, we actually did a feasibility trial specifically for this. And what it’s for is, it's for patients that do not have atrial fibrillation that are undergoing cardiac surgery which represents about two thirds of all the patient cardiac surgery do not have Afib when they go win, but almost all of them are at a good chance of getting Afib within their lifetime. And this is really a very patient centric trial. Just to say, these patients -- you've got a shot, you're looking at the appendage. Can you take advantage of it while you got it open to really basically get complete closure of that appendage at the time of surgory. So if they ever developed Afib in their lifetime, whether it's three years, five years, ten years, they've already got protection. And so, we're looking for -- looking at that. 38:31 Now, what we've seen in the atlas feasibility trial is the trend is in that direction. It was not statistically significant. It was five sixty two patients. It's been published It's out there. It basically shows that you've got a significant reduction at one year and even a larger reduction when you look out over a three year period for those patients. We anticipated it is a long trial your point, but we think the patient population is so large. The impact on patient care and stroke reduction is so great that it is worthwhile to look at this and to basically make this standard to care within cardiac surgery. 39:04 And so that's why we're doing it. We think that it's going to have a…

40:24 Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mike Carrel for closing remarks.

40:31 Well, great, everyone, really appreciate you joining the call today and all the questions and look forward to speaking again in the early part of next year. Have a great rest of the year. Thank you.

40:43 This concludes today's conference call. Thank you for participating. You may now disconnect.