{ "docId": "019dd923-622c-750b-8b98-08d95731b035", "docSlug": "4dea9707af58", "documentTitle": "AtriCure, Inc. (ATRC)", "authorId": "53_Kerrisdale_Capital", "authorName": "Kerrisdale Capital", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2020-09-01 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 8, "pageCount": 34, "prevPage": 7, "nextPage": 9, "slideType": "villain_critique", "function": "name_villain", "density": "overcrowded", "nDataPoints": 8, "notes": "The slide uses a short-seller thesis structure to argue that revenue growth has failed to translate into profitability or operating leverage.", "elementsJson": [ "paragraph", "bullet_list" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b98-08d95731b035/8", "deckHref": "/decks/019dd923-622c-750b-8b98-08d95731b035", "deckJsonHref": "/decks/019dd923-622c-750b-8b98-08d95731b035.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b98-08d95731b035#slide-8", "components": [ { "bbox": null, "kind": "callout", "text": "AtriCure is structurally unprofitable, even after having grown at a double digit rate for a decade.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0396-73da-b904-ee82ad72994a", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.11, "y": 0.34 }, "kind": "list", "text": "Gross margins are not meaningfully different: 73.8% in 2019 vs 71.2% in 2012\nThe rate of R&D spend has remained constant at 17.9% vs 17.3% over that time\nThe rate of SG&A spend as a percentage of revenue has in fact increased from 64.3% in 2012 to 70.3% in 2019.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b4d9bf82-ce34-495a-ac57-1216586abcde", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "operating leverage", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-0396-73da-b904-f1c31fd2dd0b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.11, "y": 0.44 }, "kind": "paragraph", "text": "It's difficult to understand how a company that has achieved close to maximum penetration of its core products has so poorly managed to translate that into profit, or even positive EBITDA, or even exhibit some degree of leverage. The number of AtriCure domestic sales reps has grown 15% annually since 2012, compared to a 20% CAGR for domestic revenues, so even from the narrow vantage point of sales expenses the company hasn't generated almost any operating leverage once adjusting for moderate increases in compensation and ASPs. Research and development expenses have also remained elevated as a percentage of revenue, given the degree of competition and technological advance that have characterized cardiac ablation.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6d829d4e-ee75-4ec5-b924-2585bd9e79ed", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.11, "y": 0.61 }, "kind": "paragraph", "text": "AtriCure is a relatively small player operating a structurally unprofitable business that's positioned to be overwhelmed by the near-term changes in ablation practice. Even if it could grow in the future like it did in the past, it's unlikely that shareholders would benefit – its overall 18.5% annual revenue growth rate since 2012 looks pedestrian in the context of the 15.7% growth in the share count over that time. But AtriCure can't continue to grow at that pace – we expect that its core business will imminently hit the proverbial wall, and that its hope for growth is sure to fail. At 7.5x 2019 revenues, investors are paying way too high a price for a company with growth prospects this poor.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a5c2abef-1c45-4162-9e1e-d6f1ec8a54df", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.8, "x": 0.11, "y": 0.21 }, "kind": "paragraph", "text": "Since 2012, AtriCure's total revenue has more than tripled, with its domestic open-heart ablation business growing at a 13.5% CAGR, and its domestic AtriClip business having grown by a factor of 10. The growth has been a reflection of the swift adoption of concomitant surgical ablation on the part of cardiac surgeons, and the even swifter adoption of the AtriClip as the almost-automatic choice for surgeons to clip the left atrial appendage in patients undergoing a concomitant ablation. Strangely though, almost every metric on the company's income statement has shown nothing in the way of operating leverage:", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a7351485-a503-4534-a8b3-1cfecd3f8f9f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.8, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "incredibly disappointing for investors, whatever modicum of success that AtriCure might achieve initially with its minimally invasive devices will be completely extinguished by the rapid improvements in efficacy, safety, and speed being achieved in the electrophysiology lab.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f705e9bf-5158-4ef9-b7f0-a3100da935f1", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.8, "x": 0.11, "y": 0.16 }, "kind": "title", "text": "AtriCure is structurally unprofitable, even after having grown at a double digit rate for a decade.", "attrs": null, "subkind": "action-title", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b45deef0-5e34-40d5-8cbf-c4c95201547b", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 20, "from": 6, "beatId": "4e62a9ca-4c36-4797-a49e-21bad253e137", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Struggle", "beatSlug": "overcoming-monster-the-struggle", "evidence": "The document presents various critiques of AtriCure's business model and market prospects", "position": 1, "confidence": 0.8, "parentBeatName": "Development", "parentBeatSlug": "development" } ], "loops": [ { "to": 20, "from": 5, "name": "Pattern Hunter", "slug": "02-pattern-hunter", "bestFor": "Time-pressed audiences, building consensus, when data is strong", "matchId": "ddc2fc5b-a109-4c3d-a59c-6071803a7a20", "evidence": "The document presents various critiques of AtriCure's business model and market prospects", "position": 0, "objective": "To identify patterns in AtriCure's business model and market prospects that indicate a flawed strategy", "structure": "Evidence A -> Evidence B -> Evidence C -> Pattern/Conclusion", "confidence": 0.7, "description": "Group multiple pieces of evidence that together point to a pattern or conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }