Michael H. Carrel – President and Chief Executive Officer M. Andrew Wade – Vice President and Chief Financial Officer Jamar Ismail – Investor Relations - Westwicke Partners.

Thomas Gunderson – Piper Jaffray Jason Mills – Canaccord Genuity Rick Wise – Stifel Nicolaus Danielle Antalffy – Leerink Partners.

Good afternoon and welcome to AtriCure’s Second Quarter 2014 Earnings Conference Call. My name is Denise, and I’ll be your coordinator for the call today. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes.

I will now turn the conference over to Jamar. Please proceed..

Thank you, Denise. 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 on today’s call.

AtriCure undertakes no obligation to publicly update any forward-looking statements. Additionally, we may refer to non-GAAP financial metrics. A reconciliation of these non-GAAP measures with the most directly comparable GAAP measures is included in our press release, which is available on the company’s website.

With that, I’d like to turn the call over to Mike Carrel, our President and Chief Executive Officer of AtriCure.

Mike?.

Thank you, Jamar. Good afternoon and thank you for joining us. We are pleased to report strong second quarter results, which reflect our continued progress in building our commercial, clinical and education focused platform.

First, based on the strength of our year-to-date results, we are again raising our guidance for 2014 to a revenue range of 4103 million to $105 million, reflecting approximately 26% to 28% year-over-year growth, up from our previous guidance which we had raised at the end of last quarter to 23% to 27% growth. Now turning to the quarter.

It was all about execution this quarter. Our second quarter revenue reached $26.5 million or an increase of 30% compared to the second quarter last year. Growth was balanced across both the U.S and international. In the U.S, open heart sales were up 19%, MIS 25% and AtriClip sales were up 42% in the quarter. OUS open heart sales were up 20%.

OUS MIS was up 57% and OUS clip sales up 18%. Our robust international sales were driven by key contributors in Italy, Germany, Benelux, China, Turkey and Russia.

The integration of Estech has gone according to plan and our experience to date validates our belief that we have added the right products, pipeline and people to further cement us as the leader in the development of technologies to treat Afib and related conditions.

We fully integrated the two sales forces last quarter and the teams in the field have now been cross trained. Our sales team has a complete set of products including Estech generators and we are beginning to see the benefits of cross selling.

As discussed, when we acquired Estech we took steps to immediately make a positive impact on the expense structure of the company with a view of making sure the transaction will be accretive in 2015.

Estech had 52 people when we acquired them early in the first quarter and by the end of the second quarter 21 remained and we will likely be down to 12 by the end of the year. Most of those remaining are in sales, operations and product development.

We also conducted our first major training in Estech products in late February and we continue to train our sales team in Estech fusion procedures. We continue to expect contribution from Estech products to ramp throughout 2014 as our sales force gets up to speed on the technology.

We remain committed to building the market through training and education and our efforts in the US are going well. We conducted seven advance training course in the U.S this year and expect to complete 15 by yearend. The increased dialogue between physicians is a highlight of the course and the level of engagement continues to grow.

The physicians consistently view the course saying it is the best and most spot on training they’ve had with a device company. We are also continuing to gain traction with our international training initiative.

We’ve partnered with leading Afib centers in the European Union to provide best in class training on surgical cardiac oblation and formed a Maze IV European Educational Steering Committee that includes many of Europe’s most innovative, experienced and highly regarded physicians involved in the treatment of Afib.

We have now conducted seven international Maze IV training courses. In 2014 we plan to conduct 15 total surgical cardiac ablation training programs outside of the US.

In addition to these courses, we will also continue to offer courses and scientific programs in conjunction with medical society meeting and congresses around the world as well as explore other methods of meeting the growing demand for training and education in this space, including fellowship programs and in person case observations.

Now turning to the business fronts. In the second quarter U.S open revenue was up 19% compared to the same period a year ago. We continued to build momentum on the early gains of our investments and education training which we are confident are resulting in sustainable growth opportunities.

AtriClip continued to be strong in the quarter as a contributor to our U.S growth rate in the quarter and increased 42% over last year. AtriClip Pro increased 70% while open clips were up 33%.

MIS sales in the US were up 25% in the second quarter driven by the contribution from Estech products and we expect Estech fusion sales to ramp throughout the year. The underlying U.S MIS market after four years of declines in our business stabilized and grew at a modest pace in 2013.

We have seen the same in Q1 and Q2 of 2014 and continue to expect modest organic growth throughout the year with reported improvement driven largely by the Estech fusion product line. Our future growth in this area will be driven primarily by the clinical trials we are pursuing.

Internationally, revenues were $6.6 million for the quarter, an increase of 33%. Sales were up across Europe with strength in Italy, Germany, Benelux, Turkey and Russia. Asia was also strong in the quarter, with particularly strong growth in China. Operationally, our gross margin was 70.8% for the quarter.

And our net loss was $2.7 million or $0.10 per share, both in line with our expectations. This included $900, 000 or $0.03 per share of expenses related to transitioning the Estech business to AtriCure. The remaining increase in operating expenses was driven primarily by an increase in selling, marketing, product development and training expenses.

The integration of our acquisition of Estech has been successful to date and while overall operating expenses were higher in the second quarter of 2014 compared to 2013, they are in line with our expectations and the investments in our operating structure and we are maintaining our adjusted EBITDA guidance for the year.

Moving to an update on our clinical programs. W5e have enrolled 325 patients in our ABLATE post approval study or PAS which is up from 285 as of our first quarter. As a reminder, all 50 sites are online as of last quarter.

The FDA has also approved our protocol amendment to increase enrollment by up to 40 patients and we expect to add between 20 and 40 patients and continue to expect to complete enrollment by the end of the year.

On the Staged DEEP AF trial we submitted three day safety data on the feasibility trial patients in February once all the patients had completed follow-up. During the second quarter, we submitted our pivotal trial to the FDA and recently received conditional approval.

We are in the process of responding back to the FDA and continue to expect to move to a pivotal trial in 2015. Moving on to our stroke trial. I’m pleased to report that all seven study sites have received IRB approval, which is up from five last quarters.

As you may remember this is a seven site, 30 patient feasibility trial with primary safety evaluations at 30 days and six month follow-up. We have enrolled four patients to date and continue to expect enrollment to be complete by the end of 2014.

It’s too early to provide more details, but we look forward to updating on our progress in the upcoming quarters. To summarize 2014 is off to a great start. We’ll build on our momentum with continued focus on our investments in education, innovation and clinical science which we believe will fuel our long-term growth.

I’ll now turn the call over to Andy Wade, our Chief Financial Officer. .

Thank you, Mike. For the second quarter of 2014, revenue increased 29.8% to $26.5 million. Revenue from product sales in the U.S was $19.9 million, an increase of 28.8% from the second quarter of 2013. Revenue from open chest ablation-related product sales in the U.S increased by approximately $1.7 million to $10.9 million. And U.S.

sales of products used in minimally invasive procedures increased approximately $900,000 to $4.4 million. MIS growth was influenced heavily by the sales of products acquired in our December 2013 acquisition of Estech. U.S.

sales of the AtriClip system during the second quarter of 2014 were $3.9 as compared to $2.8 million for the second quarter of 2013, an increase of 41.7%. International revenue grew %32.9 on a GAAP basis and 29.1% on a constant currency basis as compared to the second quarter of 2013, to $6.6 million.

Valve tool sales total $900,000 worldwide, approximately $700,000 in the U.S. and $200,000 in the international markets. Gross margin for the second quarter of 2014 was 70.8% as compared with 74% for the second quarter of 2013. As expected, the sales of the products acquired in the Estech transaction put some pressure on the overall gross margin.

The international sales mix was higher in 2014, which also has a negative impact on gross margin.

Additionally the placement and servicing of the capital equipment needed to run our ablation disposables, including the Estech equipment, continues to be strong, but does put some pressure on gross margin as we build the business to support these placements. Pricing remained relatively steady.

Operating expenses increased 29.1% or approximately $4.9 million from $16.8 million for the second quarter of 2013, to $21.6 million for the second quarter of 2014.

Research and development expenses, which include chronicle activities, were $4.6 million for the second quarter of 2014, or 17% of sales, an increase of $1.5 million over the second quarter of 2013. The increase is driven by both clinical trial and product development efforts.

SG&A increased approximately $3.4 million, from the second quarter of 2013 to a total of $17.1 million or 64% of sales. The increase was due primarily to increases in selling, marketing and training costs. Our operating loss for the quarter was $2.9 million as compared with approximately $1.6 million for the second quarter of 2013.

This operating loss for the quarter as well as our SG&A number, include a $2.7 million dollar income item due to an adjustment to the earn-out liability recorded in conjunction with the Estech transaction. As we have stated before, if we pay any of the earn-out, we would be above the guidance that we have given.

However, from an accounting standpoint, we must periodically review the liability on our balance sheet and have best made this adjustment. We will review it again at yearend.

Our adjusted EBITDA loss, which does not include deposit earn-out liability adjustment, was approximately $2.5 million compared to a $323,000 adjusted EBITDA loss for the second quarter of 2013. Note that our EBITDA loss in Q2 includes approximately $900,000 of costs related to transitioning the Estech business into AtriCure.

Our net loss per share was $0.10 for the second quarter of 2014, compared to $0.09 for the second quarter of 2013. We ended the quarter with $75 million in cash, cash equivalents and investments. Lastly, we are positively adjusting our guidance for 2014.

We anticipate topline growth of approximately 26% to 28% year over year, or a range of $103 million to $105 million on a GAAP basis, including the contribution of the products acquired in the Estech acquisition.

For modeling purposes, we continue to expect sales from Estech products to ramp up throughout the year with a greater contribution in the second half. We anticipate gross margins to be approximately 70% to 71% for the year based on current trends.

This represents a decrease from the 2013 reported gross margin due primarily to a slightly lower relative gross margin on acquired products, a stronger international mix along with Estech transaction related cost.

We are still targeting long-term gross margins of 75% and believe this is achievable within the next five years due to increased volumes and efficiency. We expect R&D to be 17% to 19% of sales, and we expect SG&A to be roughly 71% to 73% of sales in 2014.

These figures include approximately $3.5 million in transaction costs related to the Estech acquisition. Outside of the transaction related expenses, we anticipate increased spending related to clinical science, R&D, selling, training and education, and international expansion.

We continue to expect adjusted EBITDA for 2014 to be a loss in the range of $9 million to $10 million, including transaction related costs, which we estimate at approximately $3.5 million. As noted earlier, $2.6 million of this was realized in the first quarter, and $900,000 in the second quarter.

Estech transaction related costs for the rest of the year are expected to be immaterial. As previously disclosed, we expect the Estech transaction to be dilutive to earnings in 2014 and accretive in 2015 and beyond.

Finally, we anticipate an increase in net cash burn for 2014 versus 2013 due to the expense items just described, along with working capital and capital expenditures needed to support our growth strategy. At this point, I would like to turn the call back to Mike for closing comments..

Thank you, Andy. In summary, we’re pleased with our results for the first half of 2014, and excited about the future. We delivered solid revenue growth for integrating Estech, which further positioned as a leader in the treatment of Afib.

We’re also executing on our plan to conduct robust clinical trials and deliver data to prove the benefit of our innovative products to patients. Our focus remains clear, to continue to gain market share by driving training and education initiatives, while simultaneously investing in our clinical trials and commercial efforts.

We look forward to updating you on our progress in future calls. And we will now turn it over for questions. .

(Operator Instructions). Our first question comes from Tom Gunderson, with Piper Jaffray. Please proceed..

Hi. Good afternoon guys. So I'll do a two-part single question and it gets to sales in the U.S, Mike, and you can probably anticipate what I'm going to ask but it's sort of the growth that continues to impress and you continue to do more training, more products et cetera. You went through that.

But can you give us an update as to how you feel it is mid-year here as far as how much is coming from increased procedures at existing facilities and docks and how much is new or market share still? And then the second part of the question and that will be up for me is AtriClip looks like it is -- I just want to hear it from you AtriClip is still holding up as far as a percentage of Afib procedures that you do.

.

Yeah, sure. On the first one in terms of the percentage and what’s coming, most of the gains right now are not coming from competitive wins. They are coming from people that we may have converted last year in combination with the growing kind of push within those accounts.

So the advance training courses what we are saying is these are people that bought product from us before and we are seeing a very large increase from those existing sites that were doing some Mazes and have really began to expand and doing on a more regular basis.

As an example, we just did a training out in Hawaii and they bought from us every once in a while. They had historically last year purchasing likely from Metronic. We converted them then.

We got some product from them in the first half of the year and they went to the training course and in the first week after the training course they scheduled five Mazes and we were out there for that.

It’s really coming from existing customers that we’re expanding within that customer base as a result of the training and the follow up that we are doing relative to that. To answer your second question relative to clip sales, this as you probably heard is the first time we’ve really broken out the open clip and the AtriClip Pro.

We did that on purpose to give you a sense for, to show you that yes we are continuing to increase our open clip at a greater rate than we are actually increasing the open sale. The attachment has gone up from being in the low or 80s for most of last year up to about 90% or so attach rate at this point in time.

We have definitely seen an attach rate increase on the clip. Again I think a lot of that has to do with part of the Maze procedure and we are very confident that that’s happening. And we also want to show the continued growth on the AtriClip Pro side as well.

Our next question comes from Jason Mills with Canaccord Genuity. Please proceed..

Hi, guys, thanks for taking the question and congratulations on another really great quarter. Mike, sticking here with the U.S business, just looking at the performance relative to our model, the one area that sticks out the most on a differential between those two things, at least from my perspective, is the MIS business in the US.

But you are excited about the DEEP stage AF trial, but it’s still off label. So I’m just wondering what color you can give us around the continued strong growth there? It continues to be impressive..

The growth on MIS side is 100% the Estech growth. Our core customers that have been using the MIS products before the corps MIS AtriCure products are pretty flat year over year as we had expected. And what you are seeing is the first quarter Estech our team was getting ready.

They were starting to get used to it and really most of the growth this quarter is really just the growth on the fusion sales that we’ve had in the U.S market. We saw a dramatic increase quarter over quarter on the Estech side for the MIS side so almost all the growth that we see.

We anticipate going forward for the back half of the year that what you’ll see is we’ll continue to be flat on the AtriCure side and you’ll see us as we are getting back into the Estech accounts and our reps get more comfortable with it, we get generators on the field that will see an increase on the Estech side of things or the fusion products. .

Okay. And then second question is two part, cheating here a little bit. For you Andy, I may have missed it. I’m bouncing between calls. The gross margin for the balance of the year, the expectations, I think we all understand what’s going on, the dynamics of the business.

And I did catch the part that you said you still think there is upside to 75% over the longer term. But I missed the part about the near term. And then Mike, with respect to the pivotal trial for DEEP AF, what questions or conditions must you meet do you think to get the unconditional approval? Thank guys and congrats again. .

Yeah. I’ll try to answer both of those. Just on the gross margin side, our guidance for the year is 70% to 71%. Now that’s our guidance. We did 70.8% as Andy mentioned. Most of that is just the pressure of bringing on new product line. It’s a little bit more expensive over time. We know we’ll get efficiencies out of it.

So we still target the 75% and you could see we put it out there a five year marks so that you can incrementally grow it year by year to get to that point. That should give you some general guidance in terms of where you should be gross margin over that period of time.

In terms of the DEEP AF trial, the conditions are all things that we can get back to. Most of them are really relative to wording around HRS guidelines, how do you track and measure the AF, which really clarifying some aspects of the lesion set and some conversations relative to that.

We anticipate it that by the end of the year we will be through that. But there’s a back and forth that we have to go through with the FDA. But there’s nothing that is a game changer or would change our direction relative to DEEP AF. We still feel very confident that we will be complete and in full ID by the end of the year..

Your next question comes from Rick Wise with Stifel. Please proceed..

International, Mike, OUS was up 33%. It was -- I’m not suggesting it means anything, but it was flattish sequentially. Just help us think through that and maybe just talk in a little more detail if you could about the kind of growth we can expect from international. You’re clearly stepping up OUS training.

Does that accelerate this kind of 30% kind of growth rate? Does it accelerate it over time? How do we think about it broadly?.

I do think that the international growth rate will remain in the range that we’re talking about that you’ve seen so far. We had an exceptional Q1 on the international side. It really far exceeded our expectations by several hundred thousand dollars. So I think that some of that you saw was just the excitement.

It easier to integrate the Estech team quite frankly and we saw a little downward pressure in the second quarter in some of the Estech product OUS.

In addition to that, we did see a little pressure in particular in the UK market as we’ve transitioned from a full distributor model into an agency model and as a result of that there was a little bit of downward pressure in the second quarter relative to the UK..

Mike, you’re clearly signaling the second quarter is all about execution. I imagine that‘s the plan going forward. When I look at Estech, it certainly seems the integration is on. Maybe it’s ahead of plan.

Are you largely completed except for those headcount reductions ahead? Maybe you can talk little about where are you with this whole process?.

You’re never completely complete, but we’re basically complete with the integration at this point. The biggest item now isn’t even the headcount. Most of the headcount is really about purchasing and things like that and some of those are just operating components.

So those are I would call them minor adjustments and changes that have to occur over the next six months. But the integration is complete. The biggest thing right now is just making sure we’re training and getting cases.

Seeing these cases be successful, getting stories out there about where they’ve been successful et cetera, those are going to be the big ones kind of to build the momentum as we go forward..

Just a last quick one. You said you’re starting to see the cross selling benefits just now and you expect it to ramp. Maybe talk us through a little bit the kind of contribution we could see in the second half and is it signing contracts? Is it just procedure by procedure? Help us understand the process of driving that aspect sale. ..

We see it growing through the second half. A lot of that is just it’s procedure by procedure because what‘s going to happen is as we get more comfortable or people start to try the product out, use it in conjunction with our products and our clamps, they begin to like it.

They begin to see the people getting signage for them right there on the table and feel very good about it and about the result they’re getting and working with their EPs. So it’s kind of one by one that you start to see the traction being built. You’re not going to see a hockey stick per se.

We just think that everybody who uses it feels very confident in the result that they’re getting and we think that it’s going to continue to build off of that and then we’ll obviously see even stronger growth in 2015 relative to that..

Our next question comes from Danielle Antalffy with Leerink Partners. Please proceed..

Hi good afternoon guys, and congrats on another great quarter. Mike, I just wanted to ask you about the long-term growth projection here. I mean you said historically you wanted to get to a 15% topline growth rate sort of by 2015. You’re obviously tracking well above that.

I appreciate that some of that is coming from Estech, but it does seem like the core business is actually growing faster than that.

Can you talk about how your view on that 15% number may have changed or how much upside there could be to that number based on what you’re seeing the core business year to date in 2014?.

I like to keep this year -- I think when started the year we said that organic rate would be about %13 to 15%. I think you’re articulating properly in terms of we’re clearly obviously at the high end of that at this point in time and over 15%. Last year we did 17%. So we’ve met that 15% plus number that I've talked about.

I don’t want to get too far ahead of ourselves though. I think I like to be cautious about it. And I think that’s wise for all of us in terms of 15% plus, if we can consistently do that is really kind of what we’re sitting on. I know you’re looking for what's the plus. At this point in time, I feel comfortable that 15% is a good growth rate for us.

But going much beyond that, I think you put pressure on the business that we don’t necessarily need to have. And so from my standpoint, their obviously is upside and there are things that could create upside. Clip sales continue to go. We get the trials up and running. So there is always upside.

As many of you have heard, I call that the icing on the cake to our core business it’s growing. So I don’t want to set things too far in advance. The 15% is still we feel good about. .

Okay, that’s fair. And then, what about as we move through the back half of 2014, how do we think about seasonality from a topline growth perspective, given the fact that you do have Estech. It could make the seasonality look a little bit different.

Or do you see it sort of repeating how it has historically?.

I think it should repeat as it has historically in overall. I think that as you look at the back half of the year, you’ll see the seasonality. Obviously summer months are always tough, but they were for Estech too just in general. They’re slower in the fourth quarters typically end up quarter from that standpoint.

We feel good about the guidance that we gave, the 103 to 105, the increase that we put out there. We feel like we can definitely hit that. .

Okay great. And one more question from me if I could. When you look at your open heart growth, very strong growth you’ve seen there. I know part of it is coming from the training efforts that you’re doing.

What are you seeing -- so I appreciate that there’s three basic procedures, mitral, cabbage and aortic valve procedures, and the growth opportunity is across all three, but really greenfield opportunity in cabbage and aortic.

Are you seeing adoption increase in those greenfield opportunities? Or are you still pretty much just focused on the mitral side of things?.

We’re definitely seeing greenfield opportunities in those areas. I wouldn’t say that it's taking off by any stretch of the imagination, but you’re starting to see growth come off of those areas for sure.

I talked about these in-person cases that we’ve just started and a lot of those are really about seeing people do cabbage and AVR procedures, common procedures with those. So from our standpoint we do think that’s still of big ripe opportunity. It's interesting, Danielle.

When we – I just got this yesterday from the STS database and you can find it online. We just Googled it. The 2012 to 2013 increase in what they call atrial fibrillation correction surgery has gone from about 21,000 in 2012 to almost 24,000 in 2013. So we’ve seen over 24,000.

So I believe a lot of that has to do with the training and education that we’re doing, that we’re creating awareness. And then number of all overall procedures has basically stayed relatively flat at about 275,000. .

(Operator instructions) We have no further questions. I will now turn the call back over to management for closing remarks. Please proceed. .

Great. Thank you everyone for participating on the call today and your interest in AtriCure. Have a wonderful evening. .

This concludes today’s conference. You may now disconnect. Have a great day..