ATRC - AtriCure: Operating Leverage Is Required As A Cure

2023-06-14 15:43:15 ET

Summary

• AtriCure, Inc. has seen continued momentum in Afib and related markets.
• The company sees solid revenue growth, which, amidst a retreat in the share price, has resulted in rapidly narrowing sales multiples.
• While this combination is attractive, I am still waiting for (more) operating leverage to hit the bottom line.

In the summer of 2021, I concluded that there was no cure for high prices in the case of AtriCure, Inc. ( ATRC ) . At the time, the company was seeing top line momentum, although accompanied by continued losses and ever-increasing expectations. Despite some recent product approvals, I was leaning cautious at the time.

A Recap

AtriCure, Inc. was founded in 2000 as a developer of innovative surgical devices, which create precision lesion in cardiac and soft tissues. The Isolator developed by the company is a so-called bipolar ablation clamp, an alternative to creating lesions which block electrical impulses, as these are responsible for atrial fibrillation, impacting over 30 million people in the U.S.

The Isolator was commercialized in 2003 for open-body and minimally invasive procedures as the business subsequently went public at $12 per share in 2005, when the business was granted a $100 million valuation. This valuation looked reasonable given a $38 million revenue base, albeit that it was accompanied by an operating loss of $15 million. These (continued) losses made that shares fell all the way to the $1 mark during the economic crisis.

With more product approvals rolling in, revenues surpassed the $100 million mark in 2014, triggering a rally to $20 per share. Revenues grew to more than $200 million in 2019, although still accompanied by a big operating loss. Sales momentum pushed up the share price to $45 per share, granting the business a $1.5 billion valuation.

During the pandemic year 2020, sales fell from $231 million in 2019 to $206 million, although that the company guided for 2021 sales to recover to $250 million.

The EBITDA loss guided for at $10 million looked modest, but note that GAAP losses were still very substantial. With the company posting strong sales growth in the first part of 2021, and more product approvals rolling in, shares rallied to the $80 mark in 2021. This granted the business a $3.4 billion operating asset valuation. The resulting 13 times sales multiples was very steep, on the back of growth and losses, making me really cautious on the shares going forward, and no investor at the time.

Fast Forward

Forwarding from spring 2021 to today we have seen shares come down from about the $80 mark to $47 at this moment of writing, as shares even traded in the mid-thirties last year. This came as shares fell from $80 to $40 in the first half of 2022, following a slide in the technology and general market, in part the result of high valuations being the result of the strong momentum in 2021.

Little has happened on the corporate front other than the release of the regulatory scheduled earnings reports. In the end, the company blew away the original outlook for 2021, as sales rose to $274 million, coming in ten percent ahead of the original guidance. A $55 million operating profit was a bit misleading as it was inflated by a netted $102 million benefit from a negative revaluation of a contingent consideration and intangible asset amortization charge.

Adjusted for this, adjusted losses increased from $42 million to $52 million, with losses ticking op from $1.01 per share to $1.16 per share. While the company guided for sales to rise further to $315-$330 million in 2022, adjusted losses were seen rather stable between $1.07 and $1.12 per share.

In February of this year, AtriCure reported a 20% increase in full year sales to $330 million, with revenues coming in at the higher end of the original guidance. GAAP operating profits narrowed to $42 million (if we back out the contingent consideration in 2021), with losses reported at $1.02 per share. While the company touts continued approvals and investments into the business, a $57 million R&D expense for the year is relatively modest, as most of the losses are really the result of selling, general and administrative expenses.

While sales are seen up to $380-$387 million in 2023, it is somewhat disappointing to see the company guiding for flattish EBITDA results, marking very modest progress on that front, with adjusted losses seen up to $1.14-$1.19 per share.

In May, AtriCure started 2023 on a solid note. First quarter sales grew by 25%, with revenues reported at $93 million and change being very strong. Amidst very strong leverage of the sales growth, operating losses were more than cut in half to $5.8 million, with losses only reported at $0.14 per share based on 46 million shares outstanding.

This grants the company a more than $2.1 billion equity valuation, or about $2 billion valuation if we factor in a net cash position of around $110 million. On the back of the strong start to the year, the company hiked the full year sales guidance by five million to $385-$392 million with EBITDA seen positive around $2 million. This looks conservative as first quarter adjusted EBITDA already came in at $1.9 million, suggesting break-even results in the remaining three quarters of the year.

What Now?

The truth is that I am much more attracted to AtriCure now than was the case in 2021. The 13 times sales multiple has compressed to 5 times amidst a combination of a retreat in the share price and continued top line sales growth, which is promising. While some progress is made on the bottom line, the degree of the improvement on the bottom line is relatively modest, providing little fundamental support from a valuation perspective.

That said, the sales multiple in relation to the growth is starting to look compelling, which means that AtriCure, Inc. deserves a place on my watch list, in anticipation of an improvement on the bottom line compared to the latest guidance here.

For further details see: