Good afternoon, and welcome to AtriCure's Q4 2022 Earnings Conference Call. My name is Amy, and I will be your coordinator for the call today. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Marissa Bych from the Gilmartin Group for a few introductory comments.

Great. 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) 644-4484 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. These statements include, but are not limited to, financial expectations and guidance, expectations regarding the potential market opportunity for AtriCure's franchises and growth initiatives, including the adoption of Hybrid AF therapy and future product approvals, clearances, reimbursement, and clinical trial outcomes. 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. 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. And with that, I would like to turn the call over to Mike Carrel, President and Chief Executive Officer. Mike?

Great. Thanks and good afternoon, and thank you for joining us today. 2022 was an outstanding year for AtriCure. We executed our plan to accelerate revenue, delivering over 20% growth as we increased adoption across our portfolio of solutions for the treatment of atrial fibrillation, appendage management, and postoperative pain management. We also drove leverage as a result of our strong topline performance and the expanding scale of our platform, while making strategic investments to drive future growth. I am incredibly proud of our team whose hard work underscores our performance and whose commitment to our mission of improving patient lives led to an impact of over 100,000 patients around the globe in 2022 alone. We ended the year with another strong quarter, achieving $88 million in revenue, reflecting 20% year-over-year and 6% sequential growth. Our fourth quarter performance once again demonstrated the depth of many recent catalysts across our markets, led by remarkable adoption of the EnCompass Clamp, continued expansion of our pain management franchise, and enduring strength across the AtriClip platform. As we progress into 2023, we are reaffirming our commitment to revenue growth above historic rates as shown through our guidance of $380 million to $387 million in full year revenue. We are also reaffirming our expectation to achieve breakeven adjusted EBITDA in 2023 with improvements annually thereafter as we build sustained profitability of our business. I will now turn to a more detailed review of our business in the fourth quarter and full year 2022. Beginning with our open ablation franchise. Our 2022 performance highlighted the power of innovation at AtriCure with the commercial launch of the EnCompass Clamp in the U.S. driving an acceleration in revenue. The EnCompass Clamp leverages the proven technology of our Synergy Ablation System to provide a simpler and faster approach to ablation in open heart procedures. Momentum from the launch built throughout the year as we rapidly expanded to new and existing physicians. Overall, EnCompass contributed approximately 20% of open ablation revenue in the U.S. during 2022, reflecting tailwinds from new adoption and additional revenue per procedure upon conversion to the EnCompass Clamp. Feedback from our customers has been exceptional, and we are excited for the continued impact of this technology in 2023 and beyond. Globally, our open ablation franchise saw 18% growth in 2022 as procedure volumes around the world stabilized and we advanced patient treatment. While this part of our business has been a steady driver of growth for more than a decade, the market remains vastly underpenetrated and our opportunity is significant. We are confident in our ability to further penetrate the cardiac surgery market for many years to come. Innovation is also central to our success in appendage management. We first entered the LAA market with clearance of the AtriClip system in 2010. Today, with multiple enhancements to our technology and unrivaled patient outcomes, AtriClip system products are the most widely used LAA management devices worldwide with more than 400,000 sold to date. We are pleased with the consistent strength of our AtriClip franchise, realizing 20% growth worldwide in 2022 and continued to advance our technology focusing on less invasive and easier-to-use devices. In 2022, we initiated new activities to expand the benefit of appendage management with AtriClip through our LeAAPS clinical trial. We received FDA approval last April to begin this landmark clinical trial, one of the largest cardiac device trials in history with over 6,500 patients. The LeAAPS trial will study the prophylactic use of AtriClip devices in cardiac surgery patients who do not have Afib preoperatively, which represents over two-thirds of the 1 million cardiac surgery patients worldwide. The primary endpoint is a demonstrated reduction in ischemic stroke and systemic arterial embolism, laying the groundwork for a new frontier in stroke prevention. We recently announced the enrollment of the first patient in the trial and are now focused on a major expansion of both trial sites and patient enrollment in 2023. The LeAAPS trial will take many years to complete. However, we expect awareness for appendage management in all cardiac procedures to increase in the interim. Further, we believe this trial will provide a meaningful extension of our addressable market over the long term. Turning now to our Hybrid AF therapy, where we made progress over the course of 2022, increasing our number of accounts by more than 50% since the initial approval. We are now ramping adoption in 14 of the 25 top cardiac centers in the United States, and interest in developing hybrid Afib therapy programs remains high. We are encouraged by the feedback from clinicians and the positive impact of this procedure for patients with longstanding persistent atrial fibrillation. Despite the progress we have made in market development, sticky and acceleration adoption is slower than we anticipated. Cultivating a therapy that requires significant coordination of resources has presented challenges, particularly in an environment where staffing constraints are impacting hospital systems around the world. But these challenges are not insurmountable, and we continue to believe that Hybrid AF therapy will deliver accelerated growth in the long term as a differentiated solution for millions of patients. We have spent substantial time working directly with surgeons and electrophysiologists to understand the nuances with logistics required for case growth and to scale those takeaways, fostering deeper partnership between care teams along with tactics to implement greater efficiencies across sites. We will continue to focus on providing comprehensive support for the many programs we have in the early stages of adoption and expect 2023 to build the foundation for future growth. Finally, our pain management franchise. Cryo Nerve Block continues to be an outstanding contributor to our business, delivering 77% growth worldwide in 2022. We dramatically enlarged our reach in the U.S. with nearly 600 sites purchasing in 2022 and saw early traction as we launched Cryo Nerve Block therapy in Europe and Australia. Most importantly, we have helped over 16,000 patients achieve temporary pain relief after thoracic surgery. Like our other markets, a significant opportunity remains in front of us. We continue to expand our pain management business with the addition of commercial resources, enhanced technology, economic studies, and clinical data and remain focused on developing Cryo Nerve Block as a part of the standard-of-care for the management of postoperative pain. As we have indicated in the past, Cryo Nerve Block also shows promise beyond thoracic surgery. We are actively investigating applications in sternotomy with our existing cryoSPHERE device, and we look forward to updating you on our future progress. In summary, I would like to reiterate that 2022 was an outstanding year for AtriCure. Our results show that our growth catalysts are diverse, and our products offer differentiated and proven solutions in markets with substantial unmet needs. As we look forward into 2023, we are cultivating both adjacent and new markets by building upon our technology and leveraging the unique physician relationships we have developed. My earlier comments touched on the ground-breaking clinical trial, LeAAPS, which is intended to inform and better define clinical practice and treatment guidelines for stroke prevention in patients undergoing planned cardiac surgery with an elevated risk for stroke. This trial, if successful, unlocks the entire cardiac surgery market to AtriCure, which is well over $2 billion globally. We see substantial opportunity to leverage the strength of our relationships in cardiac surgery and the AtriClip platform for better long-term patient outcomes. I also mentioned the expansion of our pain management business into sternotomy procedures, but we are elevating the use of our existing cryoSPHERE device to enhance current solutions and provide temporary pain relief. The natural synergy between our pain management and cardiac surgery business makes this an exciting opportunity along with the potential to more than double our existing market for pain management. Additionally, in 2022, we announced that the first patient was treated in the HEAL-IST clinical trial. HEAL-IST is studying the treatment of patients with inappropriate sinus tachycardia, or IST, using hybrid ablation procedures. IST is characterized by an elevated heart rate and distressing symptoms of heart palpitations contributing to the inability to sleep or exercise. It affects millions of people around the world and currently there are no effective or approved treatments for this debilitating condition. We are focused on driving additional sites and patient enrollment in 2023, along with the development of a dedicated device for the therapy in parallel to the clinical trial. We remain excited for the potential of this new therapy to unlock another significant market opportunity and provide a solution to the many patients with IST. Treating patients in unaddressed and underpenetrated markets is at the core of AtriCure, and we have proven our ability to realize meaningful growth from our diversified platform. We will continue to innovate and research solutions to solve these unmet needs and believe our persistence will yield long-term growth in addition to benefiting patients every day. I will now turn the call over to Angie Wirick, our Chief Financial Officer, for more details regarding our financial performance.

Thanks Mike. Our fourth quarter 2022 worldwide revenue of $88 million increased 20.2% on a reported basis and 21.5% on a constant currency basis compared to the fourth quarter of 2021. U.S. revenue was $73.9 million, a 20.7% increase from the fourth quarter of 2021, reflecting healthy activity across product lines, enhanced by the continued strength from our launch of the EnCompass Clamp, pain management, and appendage management products. International revenue totaled $14.1 million, up 17.8% on a reported basis and up 25.4% on a constant currency basis as compared to the fourth quarter of 2021. Activity in key international markets highlighted by robust growth in appendage management products drove a strong fourth quarter. Sequentially, worldwide sales grew $4.8 million or 5.7% over Q3 2022. Gross margin for the fourth quarter 2022 was 74%, down 110 basis points from the fourth quarter of 2021. The decline was driven primarily by sales of lower margin products and supply chain and inflationary pressures. Turning to the bottom line, we are very pleased with our fourth quarter results. We had positive adjusted EBITDA of $6 million for the fourth quarter of 2022 compared to negative adjusted EBITDA of $2.1 million for the fourth quarter 2021. The improvement in adjusted EBITDA is a result of strong topline growth and moderated operating costs with notable leverage in our selling and administrative spend, partially offset by pressure to gross margin. Our loss per share and adjusted loss per share was $0.09 for the fourth quarter 2022 compared to a loss per share and adjusted loss per share of $0.30 for the fourth quarter of 2021. Now to review full year 2022 results. Worldwide revenue was $330.4 million, an increase of 20.4% on a reported basis and 21.8% on a constant currency basis. U.S. sales increased 21% to $277.2 million, while international sales increased 17.7% or 25.7% on a constant currency basis to $53.2 million. The impact from COVID and other macroeconomic factors created headwinds early in 2022, but as the year progressed we saw stabilization in our markets globally. The commercial launch of the EnCompass Clamp drove U.S. open ablation sales to $86.1 million or 19% growth over 2021. As we have noted in previous calls, we estimate that the pricing benefit from EnCompass accounts for roughly half of the annual growth with the remaining from continued penetration of the cardiac surgery market. In 2022, our U.S. pain management franchise grew 75.4% to $40 million from increasing activity in existing accounts along with new account adoption. U.S. MIS revenue was $38.6 million, reflecting a decline in legacy procedures, offset by approximately 6% growth in EPi-Sense sales where we continued to lay the groundwork for accelerated adoption of Hybrid AF therapy. Finally, in 2022 we saw strong attachment rates as U.S. appendage management sales reached $112.6 million or a 19% increase over 2021, driven largely by our AtriClip Flex V device. Similar to U.S. trends and activity in 2022, our international revenue growth was propelled by open ablation, pain management, and appendage management products. Gross margin for the year ended at 74.4%, a decrease of 60 basis points from 2021. The decline was primarily the impact of inflationary costs and sales mix where we saw a shift to lower gross margin products. We continued to explore measures to reduce costs and improve gross margin. Moving forward to operating expenses, in 2021, we recorded an adjustment to the fair value of contingent consideration and the impairment of the IPR&D asset associated with the aMAZE PMA. After removing the impact of these special items for comparability, full year operating expenses were $288.6 million compared to $253.2 million, an increase of 14%. The increase in operating costs in 2022 resulted from investments to expand our headcount across the organization, strategic clinical and product development project spending, as well as impacts from inflationary costs. We are pleased with the leverage in our operating costs in 2022 and remain focused on driving efficiency and SG&A while maintaining investments in R&D. Full year 2022 adjusted EBITDA loss was $2.2 million compared to $8.8 million in 2021. Our loss per share was $1.02 in 2022 compared to earnings per share of $1.11 in 2021. Adjusted loss per share was $1.02 and $1.16, respectively. We ended 2022 with $173 million of cash and investments on hand, a strong working capital position and the flexibility to fund future opportunities and investments. Now finally turning to our outlook for 2023. Consistent with our announcement in early January, we expect to achieve between $380 million and $387 million in revenue for the year, reflecting growth of 15% to 17% over full year 2022 results. As Mike outlined earlier in the call, we have multiple growth drivers in our business globally and anticipate similar drivers leading our 2023 performance, exceptional contribution from pain management and continued strong activity in both open ablation and appendage management with very modest contribution from MIS ablation as we strengthen the foundation for long-term success. This last point is important to our outlook for 2023. While we focus on program development for Hybrid AF therapy, we believe it is prudent to reset short-term growth expectations for this area of our business. Our long-term expectations are unchanged, and ultimately, we are confident that our focus and efforts will lead to accelerated growth in MIS ablation in the years to come. We also believe general seasonality trends aligning with those we saw prior to the COVID pandemic will inform revenue cadence in 2023 with first quarter revenue likely to be flat to our fourth quarter of 2022. From a margin perspective, we anticipate 2023 gross margin to be in line with our recent results with variability caused by geographic and product mix. We continue to make meaningful investments to support further label and market expansion, enhanced reimbursement, and innovative product development within R&D expenses, maintaining our R&D spend as a percentage of 2023 revenue at approximately 18% to 19%. This level of investment contemplates heavy enrollment within our clinical trials as more sites activate in 2023 along with many technology advances across our platforms. We are moderating SG&A investments in 2023 as we continue to leverage spend and target efficiencies in scale as we grow. With strong revenue growth and key strategic investments in mind, we expect full year 2023 adjusted EBITDA to be breakeven. Our investment priorities in 2023 are clear. We are balancing the support of our many growth catalysts with overall preservation of capital. Our focus in 2023 is to advance clinical trials with robust site expansion and patient enrollment, enhance our platforms with new technology while focusing on improving leverage and profitability. We continue to maintain a solid balance sheet which enables these investments in our future growth. For quarterly cadence, consistent with our historical results, first quarter 2023 will be a heavier adjusted EBITDA loss that is expected to decrease each quarter as the year progresses, and we achieve our guidance of breakeven adjusted EBITDA for the year. Further, cash burn in the first quarter is normally heavier driven by the timing of variable compensation payments, share vesting, and other operational needs to start the year. Our adjusted EBITDA guide translates to an adjusted loss per share for 2023 of approximately $1.14 to $1.19. We enter 2023 with determination to expand our patient impact and are thoughtfully managing our business for long-term success.

Thank you, Angie. 2022 was a strong year across the company and in many ways, began the next phase of AtriCure as we continue executing against the significant market opportunities in front of us, while also thoughtfully investing to expand our markets and impact adjacent patient populations over time. We are building upon the foundation we have created together over the last decade by continuing to innovate with a long-term growth mindset. The totality of our business today and in the future will ensure success in 2023 and over the coming decades, and we will continue delivering on our commitment to revenue growth above historical rates. We are just as excited to showcase the benefits of our expanding scale and operational planning as we strive to calculate a balance between investing for the future and our profitability. And with that, I will turn it over to questions.

Our first question comes from Robbie Marcus with J.P. Morgan. Your line is open.

Hi. Thanks for taking the questions. Congrats on a nice quarter. Maybe to start, the MIS commentary was new and a little bit disappointing to hear in the short-term. I was wondering if you could spend a bit more time on it. Why has it fallen below your expectations for growth? And how long do you think it will take to start to resume back on track with where you thought it could be?

Yeah, really fair question. And we feel the same way overall about the kind of MIS business in terms of kind of where we are. Obviously, the data from the CONVERGE trial has been exceptional. More and more data continues to come out clinically to show that when you add epicardial ablation to the endocardial ablation, it actually benefits a lot more. And endocardial by itself just does not work on the longstanding persistent patients. So, in the face of this great data that's out there and continues, why is it taking us a little bit longer to get up and running? I think it's a very fair question for us. And really, it comes down to some of the comments that I made, Robbie on there, which is that the logistics have proven to be a little bit longer to kind of get that stickiness going. There isn't pushback on whether or not this is going to benefit patients and whether or not this is going to be something that long-term, we're going to have a lot of patients that are going to come through this funnel. It has more to do with really getting surgery and electrophysiology and their groups working very closely together and getting that patient flow in and having that confidence. And then that's just kind of, I'd say, a global kind of thing that we're kind of facing relative to that. On top of that, I think we underestimated the impact of coming out of COVID and the staffing effect of when you're trying to coordinate two different groups like that, getting people to kind of get their attention and get the staffing to work where you get their attention upfront because we had a lot of activity even during COVID to get sites up and running and training, but then to get them to do the hard work of actually working through the logistics and working through how we're going to move that patient through the process, that's the part that's taken us longer than expected. I do feel like we've got a really good handle on it now, but it's going to take us a little bit longer. And I think ramp-up on each individual site is taking us a little bit longer on that side, which is why we've set guidance this year above our historical numbers at that 15% to 17% and feel really good about that, and that includes a weak hybrid number. And so, obviously, we would love to see that come back faster. I can't give you an exact quarter date, but hopefully, it does and that we have some upside to those numbers at some point and additional upside that you might get relative to the other really fast growing parts of our business. But even with a weak hybrid aspect of it in 2023 from a revenue side, we're going to make a ton of progress in these sites, and I feel like it really is going to accelerate our growth long-term on that side.

Great. I appreciate that. And maybe to dovetail with that now with lower MIS expectations. Maybe you could speak to the different business line items and how we should be thinking about reallocating that revenue within the guidance range through the year? Appreciate it. Thanks.

Sure, I'll go through each individual franchise. For the open ablation franchise, we expect to see strong performance at the beginning of this year as we mark one year since launching EnCompass. We have seen excellent traction in this area of our business, surpassing our internal expectations. Adoption is going well, saving time and making it easier for surgeons who previously did not perform cardiac surgery ablations. This is benefiting the patients as well, and we see significant potential for growth in 2023 and beyond in this segment. The second growth driver is Cryo Nerve Block, which remains a significant source of growth for us. We plan to add more personnel in this area to support case coverage as demand continues to expand. We are currently active in over 600 sites and are just starting to penetrate the market in terms of both site numbers and the variety of procedures performed by physicians. We anticipate another strong growth year, albeit perhaps not at the same percentage rate as before. In terms of sternotomy, while we are excited about its potential, we’re laying the groundwork this year for future revenue stability. We have established relationships with nearly all cardiac surgeons in the country, which will support our efforts. Our cardiac surgery team is collaborating closely to enhance this area. Additionally, Clip remains a solid growth driver for us and is expected to perform well. These represent some of the key growth drivers for us this year. On an international level, we are beginning to see significant contributions to our business, as noted in this quarter, and we expect this trend to continue into 2023. We established new leadership there a couple of years ago, right before COVID, and we are now seeing tangible benefits in both Europe and Asia.

Great. Thanks for taking the questions.

Thank you. One moment for the next question. And our next question comes from Matt O'Brien with Piper Sandler. Your line is open.

This is Sam on for Matt. Thanks for taking our question. I guess, starting off, could you give us a little bit more information on pain management? Obviously, it was a good growth driver last year, coming in about 75%. What could we expect moving forward? And how could this play out throughout the year?

We definitely expect to see continued growth in that market. We currently have around 60 people. Looking back four years, we started with just four people when we were beginning that therapy. We plan to expand our team further as case volumes increase each week with new account openings and deeper engagement in existing accounts. While we may not achieve the same percentage growth as before, we anticipate strong growth within each account as we scale the business. I'm not entirely sure if that answers your question, and if you need more specifics, I'm uncertain where to go from here.

That's good. I have one more question regarding MIS. A lot of it has been covered already, but could you provide more information on what CONVERGE accomplished this past quarter? Also, could you give an estimate of when we might see a significant change in the future?

Yeah. Sam, I'll start with what CONVERGE did in the fourth quarter. We were down slightly year-over-year, but if you recall, the fourth quarter of 2021 was one of our strongest on record. So, we're down sequentially and then down year-over-year in the fourth quarter. We saw good activity within the overall number of accounts, but I think the challenge that we're seeing within accounts of being able to do procedures repeatedly on a mass scale, meaning reaching a bigger number of patients throughout the quarter and the year has definitely been a challenge, and that's the logistics and the workflow within program development that Mike referred to earlier.

As we consider key moments for growth, I am not in a position to provide a specific date. However, based on the feedback from electrophysiologists, cardiologists, and surgeons, there is a strong desire to establish programs and invest the necessary time and effort. Unfortunately, this process is taking longer than we anticipated. While I can't forecast an exact timeline, I am confident that this will serve as a significant growth driver for us through the end of the decade. This year may be somewhat challenging as we work to get these sites operational, but there are millions of patients suffering from longstanding persistent atrial fibrillation. Numerous studies indicate that pairing epicardial ablation with endocardial ablation significantly improves outcomes and durability for these patients compared to endocardial ablation alone. The evidence supporting this combination continues to grow. Therefore, we believe this strategy will have lasting benefits, despite this year being focused on development.

Great. Thank you so much.

Thank you. One moment for our next question. And our next question comes from Bill Plovanic with Canaccord. Your line is open.

Great. Thanks. Good evening. Can you hear me okay?

Yeah. Perfect.

Great. Thanks. So, just to piggyback on the MIS question, the commentary of a foundational year, you're building it. I think expectations have been probably in the 20% or 30% to 40% year-over-year growth rate. If you're building it, does that mean it's a flat year? Does that mean it's up 10%, 20%? How do we think about the growth in the year you're building? And what specifically are you focused on with the accounts? Because I think one of the other words that keeps popping up is stickiness. So, it seems like you're getting accounts started and then they might trail off. So, just kind of curious what that expectation is and then how you get to it?

That's a really good question. When we establish our guidance for the year, the key point to consider is that the 15% to 17% growth rate is based on the assumption that our hybrid business will perform below that. Our expectation is that other segments will drive growth. We hope to see some upside eventually and that our new sites will become more permanent, which should help improve logistics and increase patient flow, leading to more consistent case volumes. However, until we achieve that consistency, I can't commit to aligning with the overall corporate growth rate at this time. Therefore, we expect to be significantly below that rate according to how we formulated our guidance. This suggests that areas like Cryo Nerve Block and the Clip will likely exceed that growth rate, while open ablation is also expected to perform well. Historically, we've indicated that open ablation growth is in the high single digits, and we’ve outperformed that this year. Overall, I expect our performance will exceed that, though perhaps not as robustly as the Cryo Nerve Block segment.

Okay. And then a follow-up on expenses. Your SG&A, I mean that's a pretty interesting to see it drop nominally from Q2 and Q3 in the highest revenue quarter. And I'm just curious if there's any one-time benefit that you received in the fourth quarter? Or is this more of the baseline we should be thinking of for the future? And those are my questions. Thank you.

Bill, there was a one-time benefit from collecting a receivable that had been reserved several years ago, amounting to approximately $1 million, which positively impacted the quarter. Additionally, we experienced improved leverage in certain areas of our expenses, particularly in travel, which was slightly favorable in the fourth quarter. Historically, SG&A spending has tended to start at a higher percentage at the beginning of the year and then taper off as the year progresses. We believe we are starting the year with strong global investments in our sales team, and while we will be selective about adding resources, Mike mentioned a few areas where we will continue to expand, such as our Cryo Nerve Block team, our international teams, and additional support for cardiac cases. We are confident that we have a solid team in place to drive robust growth this year.

Great. Thank you.

Thank you. One moment for our next question. And our next question comes from Marie Thibault with BTIG. Your line is open.

Hi, Mike and Angie. Thanks for taking the questions this evening. I wanted to ask one here on open ablation. I want to understand how far that growth can be sustained. I know in the past, you've given us some details like it making up 20% of revenue in 2022. And I know that price uplift as well as volume have both contributed to that growth. So, I wonder if you can help us understand where we are in terms of reach with that device. How many of your accounts, if you've gone into that with all of your accounts? And how much longer kind of some of this price uplift can continue?

I'll start, and then Angie can address some pricing questions. We believe this market is just beginning. In the cardiac surgery market, particularly for Afib treatment, only about 28% of patients are currently treated, and data suggests it may be even lower. Despite this, it remains a guideline across all societies. A key piece of feedback was the need to simplify the procedure for surgeons who typically don't operate near the heart. EnCompass, which we've developed over four years and is now available, targets this audience, enabling a robust ablation for patients and making it easier for surgeons by accessing through the oblique and transverse sinus. We aim to increase the treatment rate from 28% to over 80% for patients undergoing cardiac surgery with Afib. This presents a significant market opportunity. Regarding our growth guidance at 15% to 17%, we are cautious because we've only been aggressively marketing for six to nine months. We want to see how this year unfolds before making more long-term projections. However, we are optimistic about its performance. Surgeons not previously using any ablation products are now utilizing it, and others find it easier to use than previous options. We're expanding in various ways and learning as we go. Overall, we are very pleased with the product's reception and believe there are many years of strong growth ahead as we strive to help more patients.

Yeah. Marie, in terms of the reach, we're in just over one-third of accounts as we ended the year in a pretty high conviction rate when you think about the number of accounts that started early on in the launch that have continued to order throughout the year. And then we'll lap the launch benefit really in the second half of 2023 when EnCompass is a more meaningful percentage of the open ablation revenue.

Okay. That's really helpful, both of you. Thank you. I guess I'll ask my follow-up here on the cryo expansion. You mentioned you're doing some exploration in sternotomy. What does that look like? And when might we start to see more meaningful revenue from the sternotomy opportunity? And can you also remind us on the sizing of that market? Thanks a lot.

I've been examining the sternotomy market for several years, assessing the pain levels associated with sternotomy compared to thoracic pain. Many of our customers have provided feedback indicating significant benefits in incorporating this into their CABG and sternotomy procedures. In the U.S. alone, there are around 255,000 CABG procedures, whereas thoracic procedures range between 140,000 and 150,000. This clearly indicates that our market opportunity is extensive, given the more than double size compared to thoracic procedures. We have established relationships with surgeons across these accounts in the U.S. and globally, which positions us well for market penetration. Over the past year, we've meticulously studied our approach to ensure safety, effectiveness, and patient benefits before a broader rollout. Our team has conducted in-depth collaborations with key opinion leaders across the country to gather insights. Currently, we are in the phase of rolling it out to a limited number of sites to gain insights on optimal application. Since this procedure differs from thoracic in that it targets a different nerve section, we'll focus on understanding the duration of benefits for patients, including impacts on hospital discharge and pain scores. We will conduct this analysis over the next six months in these select accounts. Based on the findings, we plan to implement a more aggressive rollout in the latter half of the year, followed by a significant launch in early 2024.

All right. Very helpful. Thank you.

Thank you. One moment for our next question. Our next question comes from Mike Matson with Needham. Your line is open.

Yeah. Thanks for taking my questions. I wanted to ask one on the gross margin. So, Angie, I think you said you expect it to be flat in 2023, but things like there's maybe still potential for some inflation and some of the mix issues that you had in 2022 could carry into 2023.

That's right, Mike. As we exited 2022, I think the last two quarters were hit a bit more by cost increases kind of across our supply chain. And as EnCompass and cryoSPHERE became a bigger percentage of our overall revenue, we saw some really nice activity in our international markets that does come with a bit of a hit to the gross margin. So, our expectation, as we think about 2023, pretty close to where we've been kind of more recently in the 74%, 75% range, but with upside as the team continues to really evaluate ways to lean production. EnCompass, for example, will be in our first full year of production here coming up in the spring and have targeted areas really to reduce costs and lean out the cost within both that and then our cryoSPHERE probe.

Okay. Just to clarify, do you still believe it could remain flat despite some of those ongoing issues?

Yes. Correct.

Okay. And then, I want to ask one about the international business. Good to see the strength there. Maybe you could talk about, are there any more opportunities to enter new markets and just wanted to take a temperature on China and kind of what you're seeing there? And do you see any risk of the value-based purchasing effect in there?

Our international business, as I mentioned earlier, has benefited significantly from new leadership implemented several years ago, which has positively influenced our overall strategy and market approach in Europe and Asia. In Europe, we have established a presence in nearly every market, either directly or through distributors, and we are optimistic about our growth prospects. The primary growth opportunity lies in the early stages of our hybrid therapies and the Cryo Nerve Block that have just launched. We've also experienced solid growth in our Clip franchises. Given that the penetration rate in our open business is lower in Europe than in the United States, we believe there is substantial long-term potential. While we are not yet in the EnCompass market there and it may take several years to establish that, there is increasing awareness that these treatments are necessary, and with strong leadership now in place, we are optimistic about our progress. In Asia, we've seen impressive growth in Australia this year, which has become one of the fastest-growing segments of our market. Japan remains a strong contributor and is our second-largest market globally for many of our products. China, on the other hand, has shown steady performance; it hasn't declined but hasn't significantly grown either. Currently, we only offer our RF products there, and while we're working to expand our portfolio, we anticipate it may take several more years to see growth rebound in China. However, the market is in a much more stable condition today compared to three years ago, which was marked by volatility. We now have a strong market share and a solid presence with our distributor in the region.

Okay. Great. Thank you.

Thank you. One moment for our next question. And our next question comes from Suraj Kalia with Oppenheimer. Your line is open.

Mike, Angie, can you hear me all right?

Yeah. Hey, Suraj.

Perfect. Hey, Mike, following up on some earlier questions, the strong outlook for open and the lukewarm outlook for hybrid you mentioned seems somewhat counterintuitive. I’d like to hear your thoughts on any potential indication creep from PFA. Does your new outlook suggest that CAPLA also influences your view on open versus hybrid moving forward?

PFA and CAPLA will have no impact on our short-term business, and I believe they will be very beneficial to us in the long run. The data from CAPLA indicates that the endocardial catheter alone is not effective for long-term treatment of persistent patients, similar to what we observed in the CONVERGE trial. In the CONVERGE trial, we experienced a significant improvement in durability. Therefore, I see CAPLA as strong evidence that for these challenging long-term Afib patients, combining epicardial ablation with endocardial ablation yields better long-term results. The endocardial approach alone is ineffective, and we complement that. This knowledge makes me optimistic, particularly for the long term rather than this year. Currently, we are focusing on logistics and workflow rather than data, as the data indicates that we should be growing even faster. I expect that the positive impact of this data will be felt in 2024, 2025, and 2026 as we navigate the existing workflow challenges. Regarding PFA, I view it as complementary and an intriguing technology aimed at enhancing speed and safety while being nearly as effective as RF and cryo. Most initial devices are being evaluated mainly for PVI, and some are starting to explore the posterior wall. I anticipate they will achieve similar efficacy results to cryo and RF when applied to the posterior wall. A recent study from Europe, the MANIFEST study, shows that PFA performs well at one year for paroxysmal and early persistent patients, with results consistent with RF and cryo. Although this information doesn't directly relate to our business, it illustrates that PFA is reasonably effective, leading physicians to weigh speed and safety as more data emerges. Notably, the study indicates a significant decline in results for longstanding persistent patients who underwent posterior wall ablation, aligning with what we have seen in our studies, including CONVERGE. This reinforces my belief that our epicardial ablation complements PFA, cryo, and RF, which strengthens my confidence in our long-term growth prospects, even as we address logistical concerns in the short term.

Fair enough. One other question, Mike. I may be getting ahead of myself regarding LeAAPS, and I understand there may be details you're unable to share. One of the endpoints you mentioned was systemic embolism. Given the idiopathic nature of thrombus formation in these patients, how can you reliably estimate the event rates? Any additional insights would be appreciated. You can occlude the LAA, but I'm curious how you address or consider other systemic factors that may not be related to your interventions. Thank you for addressing my questions.

That's a very relevant question, and we have considered it extensively during the design of the trial. When an atrium becomes sick, whether due to atrial fibrillation or other conditions like heart failure, it does not function properly, leading to blood pooling, particularly in the appendage. Our hypothesis is supported by the ATLAS study, which involved 562 patients and provided insights over a one-year period, though it wasn't fully powered for every aspect we wanted. By correlating this with existing data on heart failure patients and their stroke rates following cardiac surgery, we've established a strong understanding of the patient population at high risk due to a compromised atrium, whether from atrial fibrillation or heart failure. We believe that this condition results in a higher stroke rate when the appendage is not addressed, as blood tends to pool there. The structure of the appendage, with its trabeculated form and positioning around the heart, supports this view. While we are optimistic about the outcome of the trial, we understand that such studies require long-term validation, and there are no guarantees. However, after four years of research and data analysis, we are confident that we will see positive results from this trial.

Thank you.

Thank you. One moment, please. And our final question is from Rick Wise with Stifel. Your line is open.

Good evening. Hi, Mike. Hi, Angie. Just two quick ones for me. One, just on the macro picture. The only aspect I think of your comments if I heard correctly, Mike, where you talked about some of the macro headwinds we're all familiar with, kind of really mentioned much was staffing constraints relative to CONVERGE. I just was curious, we've heard from a lot of companies so far at the start of the year. Do you feel like macro pressures like staffing are getting better or getting worse or stable? How are you thinking about? And the same thing, maybe it's more for Angie, on the sort of cost inflation side. You're getting after some of those as you said, Angie, but are things getting worse or slowing down? Just as we start the year, I wanted to frame that.

As for staffing, I would say it remains quite stable compared to the end of last year. We may have underestimated the impact of COVID on staffing constraints, particularly regarding the initiation of new programs and managing logistics for patient care. This was a misjudgment on our part in terms of our expectations as we adjusted post-COVID and during the Omicron surge. Overall, the situation hasn’t worsened; it’s fairly consistent. However, we need additional time to fully ramp up on the CONVERGE side and improve logistics. There are still staffing challenges that affect how we utilize time and resources.

Yeah. Rick, on the cost side, I would say, from the supply chain area, we feel like we've got good visibility at this point and can understand kind of where the costs are coming from with our key suppliers. I do think that we exited the year feeling a bit more relief in some areas such as travel where I think early in the year, I think that the pricing that we were seeing, the cost just overall relative to our teams' travel was getting a little bit out of hand. So, kind of a mix there, I'd say, feeling better from some of the areas where there's a little bit more discretionary spend and kind of have a handle on where the suppliers are coming in, on a longer-term basis.

Great. And just one small follow-up really. Mike, considering the substantial investment in clinical trials and LeAAPS, it seems like it's obviously a significant and important investment. How should we view R&D expenses moving forward? Given some of the spending, could we approach 20% of sales like we did in 2020? Will the dollar amount be higher than last year? How should we model R&D? Thanks a lot.

Before Angie addresses the modeling question, I want to emphasize our focus on expanding into new markets where patients are currently underserved and developing therapies for them. We've mentioned investments in areas like LeAAPS and IST, which represent new market opportunities and involve our existing products. Clinical trials will help shape our success in these markets. I believe these efforts position us to be a significant player in the industry over the next decade and potentially expand our market into multiple billions. Our investments are strategic, allowing us to be the first movers in these areas. We also think that scientific evidence is critical for adoption, as physicians base their decisions on it. Now, I'll hand it over to Angie for more detailed insights on the financial numbers.

For the year, we expect about 18% to 19% of our revenue to be spent on R&D. While there may be some variability from quarter to quarter based on the pace of enrollment, we believe that in the near term, over the next couple of years, as we expand our clinical trials and continue to advance our technology platform, the percentage of R&D spending will remain in the upper teens.

Thank you.

I would now like to turn the conference back to Mike Carrel for closing remarks.

Great. Again, thank you, everybody, for joining us after an outstanding 2022. We look forward to demonstrating the sustainability and growth engine that we have here at AtriCure. Thanks for joining us and for your interest in our company. Have a great one.

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