iRhythm Technologies, Inc.
Q2 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Good afternoon, my name is Sylvia and I will be your conference operator today. At this time I’d like to welcome everyone to the iRhythm Technologies Second Quarter 2019 Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Ms. Lynn Lewis from Gilmartin Group, please go ahead.

[Lynn Lewis:]

Thank you. Thank you all for participating in today's call. Joining me are Kevin King, CEO and Matthew Garrett, CFO. Earlier today, iRhythm released financial results for the second quarter ended June 30, 2019. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that includes forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements.

[Kevin King:]

Thanks Lynn. Good afternoon and thanks for joining us. Our second quarter results demonstrated continued strong company-wide execution and increased market penetration. We achieved second quarter year-over-year revenue growth of 50% reaching $53.3 million and second quarter gross margins increased by 2.8 points to 76%. Our business continues to strengthen on many fronts driven by accelerated adoption of our highly differentiated Zio platform within existing and new accounts. The continued strength we see on our fundamentals combined with a growing market opportunity gives us the confidence to increase our 2019 revenue guidance to $212 million to $216 million up from $206 million to $211 million which represents annual revenue growth of 44% to 47%. The three primary components of our short and long term growth strategy remain unchanged. Sales team expansion and continued productivity improvements, increased penetration within our single Zio platform strategy and expanding our addressable market into new indications. I'll highlight our progress on each of these objectives as well as our priorities for the remainder of the year and then turn the call over to Matt for a detailed financial review of the quarter and additional annual guidance. Before doing so, I want to provide a status update on our CPT code renewal process. On July 26, the AMA published the agenda for its upcoming CPT Editorial Panel Meeting which will be taking place September 25 through September 28. As we anticipated the CPT code change application was accepted by AMA and will be reviewed for Category 1 status at the September meeting. We were aware of, and support the ACC and HRSs recommendation to replace the existing four temporary codes with eight permanent codes. At this point in time, we cannot comment further on the code application, we are in construction of the codes.

[Matthew Garrett:]

Thanks, Kevin. Our ability to staff up in the sales organization while continuing to onboard the large integrated systems, where two of the three key areas that focus in the quarter. Our continued ability to deeply penetrate existing accounts was the third, which continues to pay dividends on delivering consistent top line growth. Encouragingly, we made significant progress in all three of these deliverables. Highlights for the second quarter of 2019 include, revenue growth of 50% year-over-year and sequential growth of 13%, gross margins of 76% an increase of 2.8 percentage points over the prior year. Continued mix shift away from non-contracted and legacy client bill claims towards contracted claims and finally success with Zio AT pilot accounts, which has accelerated adoption of Zio XT in those accounts, demonstrating iRhythm's capability of being in the full service solution offering.

[Operator:]

First question comes from the line of David Lewis with Morgan Stanley. Your line is open.

[David Lewis:]

Hello, good afternoon. Sorry about that. I was on mute. Couple questions here. Kevin, we start with you, just – or Matt. Just guidance, thinking about the back half of the year, you've been conservative all year with the guidance, guidance in the back half of the year does imply some deceleration. Can you sort of talk about how you see commercial traction in the back half versus the first half? Just that back half guidance suggests some level of conservatism or any change in sort of how you see the underlying business? And I had a couple quick follow-ups.

[Kevin King:]

David, I would say aside from the seasonality that we see in the months of July and August, really not much difference in trend or trajectory in terms of first half, second half. And as Matt noted, we tend to perform better in the fourth quarter than we do in the third quarter as a result of that seasonality.

[David Lewis:]

Okay. And then just, cash flow trends year-to-date, maybe talk about how they've been year-to-date. What you specifically saw this quarter in terms of the burn rate in the second quarter versus the first? And how you see cash flow into the second half of the year and how you're feeling about the cash position? And then one last one for Kevin after that.

[Matthew Garrett:]

Sure, David. I mean, as you know, we don't give specific cash flow or EBITDA guidance. But as I said in the prepared remarks, we do continue to point towards decreasing OpEx growth levels below revenue growth. And I think the third consecutive quarter of that, and our belief that we are appropriately spending as we to say out in front of that revenue growth, right. So I believe it was 50% revenue growth and 38% OpEx growth. And this comes despite the fact that we've had a significant amount of sales and marketing pull-in related to getting to our target in the first half of the year for the reps, the stock comp expense and so on and so forth. But to answer your specific question, yes, look we don't, again, don't talk about EBITDA, but if you back out the non-cash EBITDA items, our Q1 EBITDA was roughly $3.5 million, Q2 is just slightly higher, still in the $3 million range and we actually had a cash flow breakeven quarter, with cash actually up slightly, obviously, that trend can't continue if we continue to burn a little bit more than we bring in from an oping perspective. But as I think the key point here is that we track this very carefully and we continue to see over time this continuing a decrease in the burn which as you can tell from Q1 and Q2 was actually quite small. As it relates to the rest of the year, we are going to see a relative increase in cash burning Q3 and that's because we are actually moving locations here in San Francisco and there was a good portion of TI expense that we're going to have to pay up front. So that would be the one mitigating item I think you would see on the other half of the year. But other than that from a P&L perspective, I would tend to think that we're going to continue to trend in that very low burn rate.

[David Lewis:]

Okay. Kevin, just last one for me, just the XT traction. What are you specifically seeing? Is it when you adopt the AT platform, people are using the system more broadly, so they’re converting their Holter business to far more comfortable, converting the Holter business, are you’re actually seeing customers say, look, there's enough value in XT where I don't have to rely on alternate forms like MCOT. I wonder how much of this is sort of XT in replace of MCOT? Or is it really more specifically driving AT in replacement of MCOT? Thanks so much.

[Kevin King:]

I think it may be a little bit of both, David. But in those accounts that have not been using AT or XT oftentimes MCT is used as a surrogate for low performing Holter or low performing Event monitors. And when we see accounts adopt XT, I think you know that the diagnostic yield of XT is close to 76%, it clearly replaces whatever you might be doing with Holter or Event. And if you are using MCT to augment those deficiencies with Holter and Event, you can now go to XT. And so I think that's where we're getting a lot of the lift and a lot of the Holter if you will. In those accounts that are now using AT, it's just a more streamlined operation for them. They no longer have to deal with multiple disparate systems or platforms they can use, iRhythm as a single turnkey. And as a result, I think the rising tide lifts all boats and we get the benefit of both AT and XT in that case.

[Operator:]

Our next question comes from the line of Robbie Marcus from J.P Morgan. Your line is open.

[Unidentified Analyst:]

Hi, this is actually Alan on for Robbie. Congratulations on the good quarter. I just had a question on the indication or I guess the clinical trial pipeline. So you mentioned obviously silent AF is the major opportunity that you guys have ahead of you that's a bit further out. But the one that maybe benefited you in the quarter and maybe will benefit you in the back half of the year is really KP-RHYTHM and paroxysmal AF. So I just was curious what kind of traction you're getting from that, whether or not it's a meaningful contribution to your growth that you're seeing.

[Matthew Garrett:]

I think the traction we're getting is a little bit broader than just the KP-RHYTHM study. For example, the remap study that was published earlier in the year, compared iRhythm to multiple technologies, where we were all compared to a gold standard pacemaker. And iRhythm outperformed competitive patch products, traditionally Event monitoring products and Holter like products and the marketplace is increasingly aware of that and that's building upon my comment to David on the earlier question. I think AF burden is increasingly – physicians are increasingly aware of the importance of AF burdens, I think it's still rather early days in terms of educating the market. And I would say there are some pull-through from that study, but I don't think we've come anywhere near the point of fully educating the market on the benefits of understanding that 11% atrial fibrillation burden confers an increased risk of stroke over patients that have less than that. I think we're still in the early days of educating the market. Nonetheless, it has gotten a lot of press and AF burden has increasingly been written about not only in editorials, but also in other discussion forums and in conferences. So we’re pleased with the traction, but I think it's early days.

[Unidentified Analyst:]

Got it. And then I guess a question on rep productivity. I think you've called that in the past that prior – compared to previous expectations, you're now seeing your most tenured reps are averaging around – I want to say 3 million, a year in terms of rep productivity. And that's with AT in very limited launch. So now that you're preparing to ramp AT into a full launch, when we think about peak rep productivity and even beyond, like how much higher I guess, do you think that can go?

[Matthew Garrett:]

Yes, I think that it's not 3 million. The number that we've provided guidance on was $2.5 million, but the average was right. So you could certainly have reps that are above $3 million number. I think the thing that we've talked about most recently in the last couple of calls, isn't a change to the $2.5 million as much as it's been that the reps that are younger or newer to the company are coming online quicker and they're coming online and being more productive faster. So I think when we gave original guidance back few years ago, it took three to four quarters for them to get to a level of any productivity and now they're able to do it in a matter of a couple of quarters. So that was probably the big change. And as we've said in the past that has a lot to do with better training, better on-boarding, brand awareness, contract things better all the usual suspects there. And obviously when you tap into some of these larger integrated systems, you have a chance to get productive considerably faster. So that's obviously the strategy moving forward. To answer your specific question, I don't think that we've ever said the cap is 2.5. I think we just said that we feel comfortable with 2.5 for now and as Zio AT launches, as we get more traction over the next two to three quarters with these larger integrated systems, I think we're going to be able to provide – we'll update our guidance accordingly.

[Unidentified Analyst:]

Thanks guys.

[Operator:]

Our next question comes from the line of Joanne Wuensch. Your line is open.

[Unidentified Analyst:]

Hi, this is Steve for Joanne.

[Kevin King:]

Hi Steve.

[Unidentified Analyst:]

Hey guys. This is more of a big picture question for you, but given that you said roughly less than 20% penetrated today in the clinical and economic benefits of Zio are quite clear verse Holters. So what takes you meaningfully higher to say greater than 50% range? I mean, can you even get there? Does it require significantly larger sales force or much more clinical data that we'll see in 2020?

[Kevin King:]

Steve, this is Kevin. I think it's more time to get physicians and accounts to change what we call their status quo. I'm sure you're well aware of that change in health care takes place over long periods of time. I was at a conference recently and people were talking about that Warfarin as an anticoagulant is still about 40% market share despite all the benefits of oral anticoagulation therapy and all the marketing, healthcare changes quite slowly. That said I don't see any reason why we can't be a very, very high percentage of the market over time. And it's a multi-pronged effort if you will, certainly technology, sales force expansion, continued deep clinical evidence, strengthening our innovation stack that we've described previously, the five layers of our innovation stack, new indications. I mean all of those things are investments for us that will drive greater share, greater awareness and higher levels of adoption.

[Unidentified Analyst:]

Okay. Thank you. And then can you just give us an update on your efforts internationally? How is that sales force build going, will there just indirect efforts there? Can you mind us what countries you'll be targeting aside from the UK and maybe when we can expect some you to report revenue there?

[Kevin King:]

Yes, Steve, we've not publicly disclosed any of our market access efforts outside of the U.S. and the UK, we do have initiatives underway, but it's a highly competitive market and would rather not disclose that right now. I would say that the traction in the UK is increasing and it's on plan, now we are still small, as I've mentioned on previous calls, nearly all, if not all outside the U.S. markets are single payer systems and so it can take many years to gain market access, meaning remuneration for your service and that's where our investment is right now. We firmly believe that the markets are attractive. We firmly believe that the markets are large and we firmly believe our clinical evidence is transferable outside the U.S. to these new markets. So with that time will tell and – but we will be addressing other markets.

[Unidentified Analyst:]

Okay, great. Thanks. Congrats on the nice quarter.

[Kevin King:]

Great, thanks Steve.

[Operator:]

Your next question comes from line of Jason Mills from Canaccord. Your line is open.

[Unidentified Analyst:]

Hey, it’s David on for Jason.

[Kevin King:]

Hey David? Yes, it is just fine.

[Unidentified Analyst:]

I want to start first on guidance for 2019. I know you provided some commentary around the Q3 versus Q4 breakup rows, wondering if whether or not the increased guidance is coming more from increased confidence that you've seen in the Zio AT rollout so far this year, based on what's happened in the first half of the year, whether it's kind of more overall business confidence and general trends there?

[Kevin King:]

Yes. I don't think that we've really given any guidance or break out between Zio AT and Zio XT, I think I would just state it as that the growth is in line with our strategy for our penetrating not just Zio XT but Zio AT over time in these large markets. So I think internally, we look at it as we're just beating our own internal estimates, maybe not quite weighted evenly but pretty close to that. It's not coming from one source over the other I guess is the way to say it.

[Unidentified Analyst:]

Okay, thanks. And then looking and thinking about margins for the first half of the year and second half of year in 2020, could you provide some detail around the kind of bad as well as what type of impact do you think we could see or have seen thus far with Zio AT as well, once Zio AT hits the full scale?

[Matthew Garrett:]

Yes, I don't really think I have much else to offer on that particular front today other than what we shared on the guidance, which is that we are raising the 76.5%. And internally our expectation is that we will over time continue to guide and raise eventually towards the 80% gross margins, I don't think there's anything internally that has changed our minds really – again, back to my previous answer, the mix between Zio AT and Zio XT from a margin perspective, we think that they're both very attractive gross margins and even with the added costs associated with Zio AT those being offset obviously by higher price point that they blend in very well together. So again, we still feel very good over time about that 80% gross margin.

[Unidentified Analyst:]

Okay. Thanks for taking the questions. And good progress in the quarter.

[Kevin King:]

You're welcome. Thanks David.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Mr. Kevin King, CEO.

[Kevin King:]

Great. Thanks everyone. We really appreciate you for dialing into our second quarter earnings call and look forward to updating you on our third quarter results in the near future.

[Operator:]

This concludes today's conference call. You may now disconnect.