iRhythm Technologies, Inc.
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the iRhythm Technologies, Inc. Q1 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Lynn Lewis with Investor Relations. Please go ahead.

[Lynn Lewis:]

Thanks, Sarah. Thank you all for participating in today’s call. Joining me are Kevin King, CEO; and Matt Garrett, CFO. Earlier today, iRhythm released financial results for the first quarter ended March 31, 2019. A copy of the press release is available on the Company’s website.

[Kevin King:]

Thanks, Lynn. Good afternoon, and thanks for joining us. 2019 is off to a very strong start. We achieve first quarter year-over-year revenue growth of 54% reaching $47.2 million. Q1 gross margins increased by 3.4 points to 75.2%. Our business continues to strengthen on many fronts driven by accelerated adoption of our highly differentiated Zio platform with an existing and new accounts particularly and targeted large hospital networks. Zio has proven clinical superiority. The completeness of our service combined with our increased organizational strength, give us the confidence to increase our 2019 revenue guidance to $206 million to $211 million up from $201 million to $206 million, which represents annual growth of 40% to 44%. The three primary components that remain key to our short and long-term growth strategy are, sales team expansion and continued productivity improvements, increase market penetration with our single Zio platform strategy and expanding our addressable market into new indications.

[Matt Garrett:]

Thanks, Kevin. Our focus in large integrated system engagement and penetration continues to pay dividends not only in top line revenue growth, but also in our ability to scale the organization with benchmark salesforce productivity levels. We’re also starting to show material improvement in our financial performance up and down the P&L. Highlights for the first quarter of 2019 are as follows

[Operator:]

Our first question comes from the line of David Lewis from Morgan Stanley. Please go ahead.

[David Lewis:]

Good afternoon. Thanks for taking the question. I think reimbursement has been sort of asked and answered. So I’ll move on Kevin to some of the commercial events here. I guess the thing Kevin I want to focus on here this quarter is, you’re getting a very nice balance with Mexican new accounts and existing accounts and you’re getting reps more effective earlier than expected. So I guess in light of your historical commentary, Kevin, why not expand the commercial organization more in the back half of the year, the existing 20 to 30 reps. And you would talk to historically about 150 reps being sort of the bogey for how to cover the U.S. I guess is that you’ve changed now in light of what you see your market penetration in the U.S. and some of the early success you’re having in this commercial expansion.

[Kevin King:]

Hi David, thanks. It’s Kevin. Thanks for the question. I appreciate it. I’ll answer the back half questions first and then we can talk about whether or not the company feels like it’s in a position to accelerate the hire even more. Back in 2016 when we cast this number out of about 130 to 150, the market from our perspective, the addressable market was smaller, right. We did not have Zio AT product. We did not have an asymptomatic high risk population targets in mind. The Kaiser KP-RHYTHM study for paroxysmal AF burden was not really on the horizon. And so now we see all that the market is expanding and the completeness of our service relative to the needs of our customers is increasing as well. I think these are the primary drivers for the people that were hiring. And I think this is the primary driver for the increased productivity that Matt was talking about. So it’s possible that the salesforce can get larger. I’m not going to commit to something here on this call, but I think directionally with a larger market and an increased productivity expectation it is right for us to consider looking at further expansion. I am – we’ll talk more about that, I think as we go forward. The first part of your question…

[David Lewis:]

Sorry about that. I was just on mute. I think you basically answered, I think most of the components, Kevin what your detailed response, maybe just a quick follow-up and one for Matt. The first question I guess would be Kevin for you, just expectations at the back half of the year for AT, we’re assuming are relatively modest, if you gave us some sense as AT and have your views on the perceptive business that could contribute in the out years at that 10% rate. Does that still make sense? And then I’ll ask my follow-up as well for Matt, in this particular quarter has been a lot of questions on relative, expansion in the middle of the income statement. This particular quarter, you sell some revenue upside, we saw some pretty decent job through. So the safe to assume from here we can expect that additional revenue upside. We could see similar levels of drop through. So we’ll guess is this the beginning of a trend from a margin perspective? And I’ll jump back in queue. Thank you.

[Kevin King:]

Yes. First, Kevin if you want to take that…

[Matt Garrett:]

Yes. David, look, I think that obviously from our guidance for the remainder of the year on OpEx were not significantly changing that guidance. So I think it’s fair to assume that with a little bit of a raised revenue that we have incorporated some of those costs into OpEx. I’ll also remind everyone or the investors on the call that we did have a number of onetime expenditures and Q4, which is why you’re seeing the sequential drop. Nevertheless, I do want to caution that our to – basically to your first question, right, which is if we do see the potential for upside and we’re going to and want to go after that, we’re going to fund it. We’re going to fund it with headcount both in terms of reps as well as in terms of the support for those organizational teams. I think the most important message out of the quarter related to OpEx David is that once again we’re showing that within a very short period of time, probably short as a quarter, we can flip this thing to cash flow breakeven or EBITDA breakeven, and often breakeven within a quarter or quarter two. And I think running at that level with a lower burn is appropriate given our size. But we’re not going to put a specific timeframe on when that flips because of the reasons that Kevin mentioned on that. If you still see upside to continuing larger burn to support the topline growth, we’re going to do that.

[Kevin King:]

Thanks, Matt. David relative to AT, first on the revenue side, the expectations for the year are built into our guidance that we’ve just given here. So that’s factored in there already. Relative to the percent of our business, keep in mind that AT or MCT volume is one-tenth of the total market, right. It’s about 400,000 out of maybe 4 million to 5 million tests, so 9% to 10%. And we’re still continuing to think that that’s the volume percentage of our business 10% to 12%, 10% to 13% in the long run for us. In the real benefit here is to completeness of our offering. And we’ll talk a little bit about this as we go forward as well sort of our innovation stack that we have, but the main benefit here of AT is the pull through in the complete side from our account – from an account perspective, converting new and existing accounts.

[Operator:]

Your next question comes from the line of Robbie Marcus from J.P. Morgan. Please go ahead.

[Robbie Marcus:]

Great. Thanks a lot. First of all, congrats on a good quarter. And second, there’s been a lot of noise in some of your in a smaller or want to be competitors trying to break into space here. I was hoping you could give us your current lay of the landscape. Do you see any competitors taking any share, if they are aware and what type of accounts are they taking share? And just remind everyone if you can, the difference in what you offer versus the competitor is that – why that is such a roadblock everyone else entering the space here?

[Kevin King:]

Sure. Thanks for the question, Robbie. The short answer is no. We don’t see a whole lot of success in some of their earlier level startups that have wearable technology, packs like technologies. Most of them, if not all of them really lack that full range of offering, inclusive of the ability to curate massive amounts of data to the level that we do, very few have any, if it all clinical publications to substantiate the value that they have and hence why we talk a lot about Zio being proven as reference by this remap study that I just described on the prepared remarks, right. Zio was 12 times more likely to give a positive diagnosis of AF an event monitor, six times compared to a CAM monitor and two times compared to the CAM and six times compared to the also which are early stage companies. And then from a channel perspective as well, it takes a lot to build a sales channel or support channel, payer relations, customer experience and so forth. So net net, I think it’s too early to say that the competitors are raising to a level two replace the oven anyway shape or form. I think it’s quite the opposite that Zio continues to take share mostly from the status quo and don’t really see a whole lot of success from the early stage companies that that set of course, you’ve got a lot of respect for anybody who is out there, who is trying to make a go with the market, and from that standpoint.

[Robbie Marcus:]

Thanks, appreciate it. And then maybe just one follow-up, at the ACC meeting, we saw data from the Apple Heart Study. This is probably the first and largest, what could be helpful in addressing the asymptomatic population. I thought it would be helpful if you could give us your take on this trial and the efforts moving into symptomatic. And then as we think for ACC 2020 next year, what are the sorts of – what should we look for an mSToPS and maybe the pathway forward for expanding into this untapped market here and how big of an opportunity can it be versus atrial fibrillation today. Thanks.

[Kevin King:]

Thinking about the market first then the studies, we believe that the market here is upwards of 10 million at risk patients. That meet the profile of high risk factors inclusive of their age, right, I think, it’s men over 55 and women over 65. And then one of the risk factors or two of the risk factors associated with diabetes, hypertension, sleep apnea and things of that nature. So we think the market’s pretty large. We know that the health plans in the U.S. are highly interested and trying to manage this population, for the reasons that a stroke and stroke risk are both expensive and very life altering, if events do occur. Typically, the first stroke is not one that kill someone. Unfortunately, not unfortunate, it’s unfortunate stroke, but the first one is not the one that gets you what’s yours or the second one and then it’s costly and debilitating. So we’re very confident in the market size. As far as where will be with mSToPS in 2020, we’ll have our readouts on the health economics side and we’re fully expecting that not only the trends for utilization of services, but also the incidents of stroke as compared to the normal or unadjusted arm will be significantly reduced. And so that should help us in a big way. Related to the broad view of whether it’s the apple heart study or anyone else, there’s a lot of interest in this market, right. It is a very large market. It’s important and the disease is prevalent. So we would expect continued progress here. That said, I think the Apple Study was a good start. We had only confirmed about 150 atrial fibrillation cases out of the 419,000 patients that were surveyed. Some of that having to do with age, some of the folks who were younger in the population, but even of the ones that had notifications, so number of events were quite small. I happen to believe that what this is really going to take is longer term continuous monitoring on the order of 14 days, like Zio, not necessarily intermittent monitoring and not necessarily short-term biosensor monitoring. I believe the patch that was used in the Apple Study, their average wear time was about six days. So it’s like one half of Zio and we know that many, many arrhythmia events occur after day seven. And so there’s a reason to believe that as we get more involved in this market segment. We’ll see an increased uptake or detection of atrial fibrillation.

[Operator:]

Your next question comes from line of Joanne Wuensch from BMO Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi, this is Steve on for Joanne.

[Kevin King:]

Hey, Steve.

[Unidentified Analyst:]

Hey, you guys have consistently shifted from this 50-50 same-store new store mix to a 60-41. Where do you see this mixed trending over the next year with AT really contributing more in the back half of this year and then into 2020?

[Kevin King:]

I don’t believe that we’ve given any guidance on that at this point. I think our – I guess, our hope is that we continue to see 60-40, 50-50 split, when we first came out with 50-50 was a really good mix for us. The reason why we’ve been so excited about the 60-40, because it’s showing our ability to deeply penetrate accounts that we thought were pretty, pretty penetrated. So as you can imagine, we’ve been selling in some of these accounts for six, seven years. We thought we might be fully saturated, but we’re finding out is that there’s actually more room to grow, more room to grow downstream in neurology and your cryptogenic stroke, as well as upstream into the emergency room. So we’re delighted that this is happening. So it’s an actually a positive for us. So I think that the guidance we would provide right now is probably to stay within that – the stay with that 50-50 over time. But if we are weighted a little bit more towards a same-store, I think we’ll all find that an attractive place to be.

[Unidentified Analyst:]

Okay, great. That’s helpful. And then last quarter you used the term workflow enabler where the Zio platform was really increasing its presence upstream and the continuum of care to emergency departments and primary care physician. Can you maybe give us an update on this momentum? And is there anything that you can quantify there as a percentage Zio’s used in sort of this setting as an expansion.

[Kevin King:]

No, it’s still too early and too anecdotal to be commenting on that sort of the physician. I guess, the one thing I would add that’s changed from the prior quarter as we are having examples, not just a moving upstream or downstream, but within the brick and mortar clinics that we have, that workflow is improving and that they’re actually able to bring through more patients, which obviously increases the large – increases the use in that core market. We’re seeing a little bit more examples of that and that’s all workflow driven. So we’re obviously excited about that as well, but I don’t think that we’ll be providing much more than anecdotal guidance on that for the foreseeable future. It’s very difficult to be able to break that out in a meaningful way.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Jason Mills from Canaccord Genuity. Please go ahead.

[Cecilia Furlong:]

Hi, Kevin and Matt, this is Cecilia on for Jason. I just wanted to ask about in your initial days, rolling out AT in a limited launch. What you’ve seen just regarding the ease of shifting centers from traditional MCAR to AT, what have been the main impediment. And then just moving forward, thinking about the full market launch coming up, how your takeaways have informed. How you plan to drive a full lunch. And then just adding on current trends that you’re seeing XT pull through in AT accounts. How you expect this to trend with the full market launch.

[Kevin King:]

So Cecilia – so the first – this is Kevin. So the first part was what did we experience during the limited launch, what new learnings did we have? That was your first part of your question. And then the second part is what do we expect for learnings going forward.

[Cecilia Furlong:]

As well as the impact from the…

[Kevin King:]

I think one of the early findings that we had with AT was just how misinformed so many clinicians are or were about what mobile cardiac telemetry is. Not surprising, many customers believed or have believed that this is in essence a real time telemetry system with nanosecond response time, similar to what you’d see in a hospital telemetry ward. And I think that gave customers a false level of security relative to what really happens in the MCT space. I think that was more of a surprise to us than what we had expected. That said, we are focused on timely notifications of information to physicians about life critical events and we do that extremely well and our customers have been extremely happy with the way in which we not only provide them with those timely notifications. But we also are and we also provide them with a full report at the end of the study period to show them not only what they saw during the wear period, but also anything that might have not met a criteria – notification criteria. And so we’re seeing tremendous value add from that. I think to Matt’s point also about workflow, our customers have enormous pain in terms of them being overworked, having too much information, too many patients, difficulty in managing inventories, et cetera. And by adopting Zio as a single platform, they greatly streamline many, many of those elements to a point where tangible results occur, right. They diagnose more patients in less time with fewer resources and fewer unnecessary repeat tests. And that just plays really well into being a single platform company. Now, not only with Zio XT but also Zio AT.

[Cecilia Furlong:]

Okay, thank you. And then just turning to gross margins, can you talk a little bit about drivers in the quarter expectations for the year and then just as you’re rolling out AT, its relative impact on margins of the long-term. Thank you.

[Matt Garrett:]

Yes. I don’t think I have anything other to say in terms of the guidance for the year, which remains at 75% to 76%, in terms of the improvement or continued expansion of gross margins, our guidance still remains at scale that we believe we can achieve as high as 80% over time. As it relates specifically to AT, I think you can imagine that as we launch a product in a more material way, there will be some initial absorption if you will improvement related to that. On the flip side, there is a significant amount of overhead relate, required to monitor a 24/7 monitoring center. So we’re going to have a little bit of drag there as we initially launch and it’ll be gradual. And again, as Kevin pointed out earlier, we’ve already incorporated that into our guidance.

[Operator:]

Your next question comes from line of Suraj Kalia from Northland Securities. Please go ahead. Suraj Kalia from Northland Securities, your line is open. You may have yourself on mute. I am currently showing no further questions at this time. I would like to turn the conference back over to Mr. Kevin King, CEO.

[Kevin King:]

Thank you, operator. This concludes our Q1 earnings call. I’d like to thank you for your continued interest in the company and look forward to providing you with future updates. If you happen to be in San Francisco this week, please stop by our exhibit at the HRS booth at the Moscone Center and get a look at some of our new innovations that will be on display there. Thanks very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.