iRhythm - Earnings Call - Q1 2019

Transcript

Speaker 0

Good afternoon, ladies and gentlemen, and welcome to the iRhythm Technologies Inc. Q1 twenty nineteen 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'd now like to turn the conference over to your host, Ms. Lynn Lewis with Investor Relations. Please go ahead.

Speaker 1

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 3139. 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 include forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions 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. All forward looking statements, including without limitation, our examination of operating trends and our future financial expectations, which include expectations for hiring, growth in our organization and reimbursement and guidance for revenue, gross margins and operating expenses in 2019 are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent quarterly report on Form 10 ks with the Securities and Exchange Commission. This conference call contains time sensitive information and is accurate only as of the live broadcast today, 05/07/2019. IRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. With that, I'll turn the call over to Kevin.

Speaker 2

Thanks, Lynn. Good afternoon and thanks for joining us. 2019 is off to a very strong start. We achieved first quarter year over year revenue growth of 54%, reaching $47,200,000 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 within existing and new accounts, particularly in targeted large hospital networks.

Zio's 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 $2.00 $6,000,000 to $211,000,000 up from $2.00 1,000,000 to $2.00 $6,000,000 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, increased market penetration with our single Zio platform strategy, and expanding our addressable market into new indications. I'd like to take the next few minutes to highlight our progress on each of these objectives as well as some of our near term catalysts. And then I'll turn the call over to Matt for a detailed financial review of the quarter and additional annual guidance. Starting with our commercial organization, sales force expansion continues to be a key contributor to our sustained growth rates.

Over the past several years, we have successfully increased the size of our sales channel by 20 to 30 high quality reps per year, while increasing the productivity of our most tenured reps. As mentioned on our last call, our 2019 goal is to add a similar number of sales positions, bringing our total sales rep headcount to 130 to 140 reps. We have also created a number of regional sales manager positions to support the increased headcount. Similar to our hiring trend in 2018, we plan to have the majority of these new hires in place by the end of the first half of this year. Importantly, we will continue to expand our commercial team to whatever cost effective size is required to capture the full and untapped market potential that lies in front of us.

Turning to account penetration, we continue to see adoption in new and existing accounts. The proven superiority and completeness of our Zio platform enables accounts to measurably diagnose more patients in less time, with fewer unnecessary repeat tests, and at lower cost and with fewer resources compared to other approaches. Zio AT, a newer component of our platform strategy, expands our addressable market into a previously unaddressed segment of the market and provides our customers with a more complete solution on a single platform. We are increasingly encouraged by Zio AT's impact within our early customer sites. As we've discussed in prior earnings call, the payer landscape for this market segment remains challenging as measured by the number of health plans with no or negative coverage policies for the technology, The percentage of plans that have a narrow set of indications for use.

And a relatively higher bar for medical necessity, including failed first line testing. These challenges played a key role in our decision to implement a phased rollout Zio AT. I'm pleased that we have now achieved a threshold of AT contracting that allows us to more rapidly expand Zio AT into the market in the second half of this year. At the Heart Rhythm Society meeting this week in San Francisco, we plan to more broadly unveil our Zio AT. Clinical evidence remains a key pillar, not only in our discussions with payers, but also as a driver for competitive differentiation and market adoption.

An prospective randomized study was published in the February 11 online issue of the Journal of Interventional Cardiac Electrophysiology. The diagnostic capabilities of our Zio service was compared against the event monitor, as well as two other ambulatory ECG monitoring technologies, including another patch based monitor. The study design was unbiased, in that the performance of each of the monitors was compared against an implanted pacemaker, which is widely accepted as the gold standard for atrial fibrillation detection. Results demonstrated not only that Zio was significantly more accurate in detecting AFib than the event monitor, but also that Zio was the most accurate of all ECG monitoring modalities tested with an R squared value of 0.999 compared to the gold standard pacemaker. The statistical probability of having a correct AF diagnosis as measured by the odds of a correct diagnosis reveal that Zio was 12.3 times higher than the event monitor.

Six times more likely to accurately detect AF compared to the Nuvo VEST monitor. And twice as likely to accurately detect AF compared to the CAM monitor. Studies such as this continue to demonstrate the superior accuracy of our Zio service and its potential to positively impact patient treatment decisions compared to legacy monitoring technologies and new patch based offerings. Silent AF remains our other key market expansion priority. This is a population of 10,000,000 plus patients who are undiagnosed with AF, but have risk factors such as age, hypertension, and diabetes.

We published last year the MSTOP study that demonstrated the utility of Zio in diagnosing AF in this asymptomatic population. At the annual meeting of the American College of Cardiology last month, a poster was presented on one year health resource utilization from the MSTOPS trial, which showed that patients who were diagnosed with AF in the Zio monitored group had a significantly lower rate of hospitalizations and emergency room visits than the non monitored control group. Evidence such as this to build the case for targeted detection of AF by Zio in the asymptomatic population. In 2020, we expect the three year outcome for healthcare utilization data from MSTOPS to be published, which will be an important data point for clinicians and payers in opening up this market. Finally, I'd like to discuss reimbursement.

During the last quarter, many opinions and perspectives surfaced in the media related to the reimbursement landscape and its impact on Zio XT. Now that we are able to comment on it, I will discuss the current status, how we see the process unfolding, and our views on any potential reimbursement change. It's important to start this discussion by noting that Zio XT has rapidly become a standard of care for long term continuous ambulatory cardiac monitoring across the country. Our service is covered and reimbursed by nearly all national, regional, and government health plans. Medicare accounted for about 27 of our total sales in Q1.

The mechanism by which we report our services to these health plans and receive payment is through a category three CPT code, which is by definition a temporary billing code established for new technologies. In the case of our Zio service, a new long term continuous ambulatory monitoring code was established and brought forth by the ACC to the American Medical Association in close partnership with iRhythm in 2012. In 2017, the ACC, again in close partnership with iRhythm, successfully brought forth the code for renewal. Since then, we have continued to work closely. After both use data and published clinical evidence is gathered over time, eventually the temporary code can become a permanent code, or what is called a category one code.

The process to convert a code from category three to category one is governed by the American Medical Association, or AMA, and CMS or Medicare. The way the process is designed, a physician specialty society which has an official advisory seat on the CPT committees, sponsors the code conversion, presents the data and clinical evidence to the AMA committees, and choreos the code through the process. In our case, the specialty society who will sponsor our code is the American College of Cardiology or the ACC. Importantly, we have been collaborating with the ACC on what is termed a CPT code change application. Which is necessary to convert the code from a category three to a category one status.

In order for the ACC to effectively sponsor the code application, it needs what they term an industry advisor. And iRhythm is the primary industry advisor as the leader in the category. As ACC has a formal and official seat within the AMA CPT process, it is very important that we, as the primary provider of the service, be in alignment with them, and we are. The work we've been engaged in with ACC involves a review of all available clinical literature, of which Zio XT is the primary monitoring technology involved in nearly all of these studies to properly code the code change application. This code change application is based on physician usage and clinical studies.

Importantly, iRhythm has invested heavily in creating substantive clinical evidence in this category and also represents more than 95% of the volume of tests that utilize the current long term continuous monitoring code. We are very pleased with our interactions with the ACC to date, and view them as a key partner in this important process. As we previously discussed, if any changes take effect, it is expected to occur no earlier than 2021 and no later than 2022. Our preference is that this occurs sooner rather than later. And we are working with the medical societies towards a 2021 change.

However, the exact timing will be dictated by the calendar for submission of CPT applications. We should know later in the year whether our code change application will be considered for a 2021 calendar cycle. While the general code change application process is consistent, the specific pathway to a pricing outcome is unique to each code. Because physician usage and clinical studies dictate the definition, which is different for each code. Other examples are useful to aid in general understanding.

But because each pathway is unique, one cannot assume an outcome for one code based solely on other experiences. Any such supposition is truly speculative. Of course, there are examples of category three to category one code changes where final pricing went up or down compared to their category three price. This is understandable since a category three code is established when a service is new and experience is low or nonexistent. It is only after industry and physicians gain experience that the technology can be better defined.

And through that change in definition, the pricing may go up or down on a relative basis. With this in mind, I want to reiterate our confidence in the value of our Zio service and that we do not currently anticipate a substantial change to our Medicare reimbursement rate during this process. The value and differentiation of our Zio XT service has been proven in over 30 peer review clinical studies, including those which directly compare our service to legacy Holter monitor and Event Monitor technologies. We believe that this differentiation is clear in the minds of the medical societies and payers, the two key constituents involved in any reimbursement decision. Our Zio XT service has also been rigorously and independently valued by hundreds of commercial health plans with whom we have established in network contracts, as well as our local Medicare administrative contractor.

These health plans have considered our published clinical evidence, the clinical utility, and health economic benefits of our Zio service, along with our proprietary analysis methodology to conclude that our Zio service is appropriately valued. We expect the process and outcome for establishing a national Medicare rate when the code moves to a permanent status to be no different. I want to note however, that we may be limited in the frequency of updates and availability of new information we share because interested parties involved in the coaching process are legally bound by non disclosure in confidentiality agreements. That said, we are confident in our path forward and we'll make every effort to update you to the extent we are able to, to disclose new information. In summary, we have confidence in our highly competitive positioning and differentiation, including Zio's proven clinical superiority and the completeness of a platform that routinely creates meaningful value for our customers, large and small.

We look forward to continuing this success in 2019. And with that, I'd like to turn it over to Matt Garrett, our CFO for a review of the first quarter financial results and guidance for 2019. Matt?

Speaker 3

Thanks, Kevin. Our focus on 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 sales force productivity levels. We are also starting to show material improvement in our financial performance up and down the P and L. Highlights for the first quarter twenty nineteen are as follows. Revenue growth of 54% year over year and sequential growth of 9%.

Gross margins of 75.2%, an increase of 3.4 percentage points over the prior year. Continued contracting successes for both Zio XT and Zio AT that has led to further mix shift away from non contracted and legacy client billing claims, now both in the single digits. And finally, continued success with Zio AT and key piloted accounts, which then accelerates adoption of Zio XT demonstrating iRhythm's capability of being the full service solution in those accounts. Taking a more detailed look at first quarter results, revenue for the three months ended March 3139 was $47,200,000 an increase of 54% year over year and 9% sequentially. We continue to see sales force productivity levels rise as we penetrate these large integrated systems and as reps hired over the last year achieve meaningful productivity levels.

As we've done in the past, we'd like to dive a bit deeper into some of these positive growth trends we are seeing, which supports the confidence we continue to project in the business. Some of the trends we'd like to highlight include, same store new store revenue growth for the third consecutive quarter posted a sixtyforty split. We view this mix as very positive sign of our ability to deeply penetrate existing accounts while maintaining strong growth and pipeline opportunities in newly onboarded accounts. We continue to see impressive growth with our largest customers where all of our top 25 accounts grew significantly over the prior year. This demonstrates productivity level improvement for some of our reps even in our most deeply penetrated accounts as workflow enhancements brought on by the use of our Zio platform leads to greater volumes than originally forecasted within those hospitals and clinics.

As we pointed out last quarter, sales rep productivity levels were raised to 2,500,000 on average at scale. What is of equal importance here is that we continue to see new reps achieve greater productivity levels much earlier than reps hired in prior years. And finally, we continue to see dramatic Zio XT volume expansion in accounts where we have launched Zio AT. In fact, the average XT volume growth percentages one month post Zio AT launches are approaching 50% with continued double digit growth of XT in the following periods. Turning our attention to the rest of the P and L, gross margin for the first quarter twenty seventeen was 75.2% compared to 71.8%, a 3.4 percentage point improvement over the same period in 2018.

Operating expenses for the first quarter twenty nineteen were $43,500,000 compared to $32,600,000 an increase of $10,900,000 or growth of 33% over the same period in the prior year. This year over year OpEx growth was the lowest the company has experienced in nearly three years, further demonstrating our ability to scale a business up and down the P and L with minimal cash burn while maintaining benchmark growth. For the quarter, the year over year spending increases continue to be driven by sales force expansion, organizational support of our network sales strategy, expansion of R and D activities, bad debt expense associated with higher sales volumes and ongoing stock compensation expense. Net loss for the quarter twenty nineteen was 8,000,000 or a loss of $0.33 per share compared with a net loss of $11,100,000 or a loss of $0.47 per share for the same period of the prior year. In addition to our traditional operating commentary, we felt that it might be worth spending some time providing additional color on how the company accounts for contractual allowances and bad debt expense.

Under guidelines for topic six zero six, iRhythm treats any payer allowable amount below the contracted rate as a price concession. There are any number of reasons for price concessions such as the inability to provide appropriate medical records, patients admitted to the hospital, or a non covered indication. The amount of these allowances that offset our gross revenue has remained consistent with historical averages in the range of 6% to 7%. In addition to these revenue allowances, iRhythm is also responsible for attempting to collect the patient portion of every claim that has been deemed allowable by the commercial or government payer. When subsequent patient invoices are not paid after repeated attempts at collection, the company books a bad debt reserve.

The OpEx expense has also remained relatively consistent as well at 3% to 4% of gross revenue. In the first quarter of this year, the company identified a non material footnote misclassification in the presentation of changes in the allowance for doubtful accounts and for the contractual allowance disclosures in our quarterly ports for the periods ending March 31, June 30 and 09/30/2018. Specifically, the copay portion of contractual allowances were displayed in our roll forwards as allowances for doubtful accounts rather than as contractual allowances. The total balance for the year was 2,900,000.0 and was appropriately classified as contractual allowances in our Q4 eighteen ten ks. This issue made it appear as though our contractual allowances against revenues doubled in the fourth quarter from 6% to 12%.

It is important to note that while these non material balances impacted our footnote disclosures, they did not impact the company's consolidated balance sheet, statement of operations or statement of cash flows. What is also of importance is that our quarterly expenses for contractual allowances and bad debt expense through 2019 remain consistent with prior periods. Reconciliations for both the contractual allowance and allowance for doubtful accounts on a quarterly basis for the March 2018 will be included in our Q1 'nineteen ten Q filing. Finally, it's important to point out that at no time does the company submit claims for services with contracted or non contracted payers that are not consistent with the doctor's diagnosis code or the actual services performed. Turning to guidance for the remainder of 2019, given the strong start to the year and ongoing strength in the business, we are raising revenue guidance for the full year twenty nineteen to two zero six million dollars to $211,000,000 from $2.00 1,000,000 to $2.00 $6,000,000 This represents annual revenue growth of 40% to 44% demonstrating our continued confidence in our ability to scale the organization as we continue to produce benchmark top line growth.

Gross margin guidance for the year remains in a range of 75% to 76%. And finally, are raising operating expense guidance slightly reflecting incremental commission and bonus accruals due to better than anticipated performance in the business. The new range of 193,000,000 to $199,000,000 is up from 191,000,000 to $197,000,000 including 28,000,000 to $30,000,000 for research and development and $165,000,000 to $169,000,000 for SG and A. Finally, this range reflects our expectation that OpEx will continue to trend downward over time even as we continue to scale the business. With that, we now like to open the call up for your questions.

Operator?

Speaker 0

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

Speaker 4

I think reimbursement has been sort of asked and answered. So I'll I'll move on, Kevin, to some of the commercial elements here. I guess the thing, Kevin, I wanted to focus on here in this quarter is you're getting a very nice balance of mix between 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 than the existing 20 to 30 reps? And you had talked historically about a 150 reps being sort of the bogey for how to cover The U.

S. I guess, does that view change now in light of where you see your market penetration in The U. S. And some of the early success you're having in this commercial expansion?

Speaker 2

Hi, David. Thanks. It's Kevin. Thanks for the question. I appreciate it.

I'll answer the back half question first, and then we can talk about whether or not a company feels like it's in a position to accelerate the hire even more. Now back in 2016 when we cast this number out of about 130 to 150, you know, the market from our perspective, the addressable market was smaller, right? We did not have a 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 feel that the market is expanding and the completeness of our service relative to, you know, the needs of our customers is is increasing as well. I think these are the primary drivers for the people that we're hiring, and I think this is the primary driver for the increased productivity that Matt was talking about. So it's possible that the sales force 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. And we'll talk more about that, I think as we go forward.

The first part of your question

Speaker 4

Sorry about that. I was, I was just on mute. I think you basically answered, I think, most of those components, Kevin, with your detailed response. The maybe just a quick follow-up and then one for Matt. The first question, I guess, would be, Kevin, for you.

Just expectations in back half of the year for AT, we're assuming, are relatively modest. If you give us some sense AT and have your views on the percent of 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. But for Matt, in this particular quarter, there's been a lot of questions on relative expansion in the middle of the income statement. This particular quarter, you saw some revenue upside, but you saw some pretty decent drop through.

So is it safe to assume from here, we can expect that on additional revenue upside, we could see similar levels of drop through? So I guess what I'm asking is, is this the beginning of a trend from a margin perspective? And I'll jump back in queue. Thank you.

Speaker 2

Yes.

Speaker 3

David, look, I think that obviously from our guidance for the remainder of the year on OpEx, we're 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 one time expenditures in Q4, which is why you're seeing the sequential drop. Nevertheless, I do want to caution that our, 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 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 are showing that within a very short period of time, probably as short as a quarter, we can flip this thing to cash flow breakeven or EBITDA breakeven and offing breakeven within a quarter or quarter or two. And I think running at that level with the 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. That if we still see upside to continuing larger burn to support the top line growth, we're going to do that.

Speaker 2

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, you know, keep in mind that AT or MCT volume is, you know, onetenth of the total market. Right?

It's about 400,000 out of maybe 4,000,000 to 5,000,000 tests. So 9% to 10%. And we're still continuing to think that that's the volume percentage of our business, you know, 10% to 12%, 10% to 13% in the long run for us. And the real benefit here is the 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 here of AT is the pull through in the complete side, from our account perspective from an account perspective, converting new and existing accounts.

Speaker 0

Your next question comes from the line of Robbie Marcus from JPMorgan. Great.

Speaker 5

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

Speaker 2

Sure. Thanks for the question, Robbie. The short answer is no. We see a whole lot of success in some of the earlier level startups that have wearable technology, you know, patch 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 at all, clinical publications to substantiate the value that they have and hence why we talk a lot about Zio being proven, as referenced 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 than an event monitor, six times compared to a CAM monitor, and two times compared to the CAM and six times compared to the Nuvo, both of which are early stage companies. And then, you know, from a channel perspective as well, you know, it takes a lot to build a sales channel, a support channel, payer relations, customer, customer experience, and so forth. And so net net, I I think it's too early to say that the competitors are are rising to a level to, replace Zio in any way, 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 said, of course, we got a lot of respect for anybody who goes out there who's trying to make a go at the market from that standpoint.

Speaker 5

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 in what could be helpful in addressing the asymptomatic population.

I thought it'd be helpful if you could give us your take on this trial and the efforts moving into asymptomatic. And then as we think for ACC twenty twenty next year, what are the sorts of what should we look for in mSToPS and maybe the pathway forward for expanding into this untapped market here? How big of an opportunity can it be versus atrial fibrillation today? Thanks.

Speaker 2

Thinking about the market first and then the studies, we believe that the market here is upwards of ten million at risk patients that meet the profile of high risk factors inclusive of their age, right? I think it's men 55 and women 65. And then, you know, 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 US are highly interested in trying to manage this population for the reasons that stroke and stroke risk are both expensive and, very life altering if events do occur.

Typically the first stroke is not one that, you know, kills someone unfortunately. Not unfortunate, it's unfortunate stroke. But, you know, the first one is not the one that gets you. It's usually the second one and then it's costly and debilitating. So we're very confident in the market size.

As far as where we'll be with mSToPS in 2020, we'll have our readouts on the health economic side. And we're fully expecting that not only the trends for utilization of services, but also the incidence 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, you know, 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's 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, you know, was a good start. You know, it only confirmed about one hundred and fifty atrial fibrillation cases out of the four hundred and nineteen thousand patients that were, you know, surveyed. Some of that having to do with age.

Some of the folks were younger in the population. But even of the ones that had notifications, the 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 fourteen days like a 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.

So there's a reason to believe that as we get more involved in this market segment, we'll see an increased uptake in or detection of atrial fibrillation.

Speaker 0

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

Speaker 6

Hi. This is Steve on for Joanne.

Speaker 7

You guys

Speaker 5

have hey.

Speaker 6

You guys have consistently shifted from this fifty-fifty same store, new store mix to a sixty-forty one. Where do you see this mix trending, over the next year with AT really contributing more in the back half of this year and then into 2020?

Speaker 3

You know, 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 a sixtyforty, fiftyfifty split. When we first came out, we thought fiftyfifty was a really good mix for us. The reason why we've been so excited about the sixtyforty is because it's showing our ability to deeply penetrate accounts that we thought were 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 the neurology, in your cryptogenic stroke, as well as upstream into the emergency room. So we're delighted that this is happening. So it's actually a positive for us.

So I think that the guidance we would provide right now is probably to stay within that fifty-fifty over time. But if we are weighted a little bit more towards same store, I think we'll all find that an attractive place to be.

Speaker 6

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 in the continuum of care to emergency departments and primary care physicians. Can you maybe give us an update on this momentum? And is there anything that you can quantify there as a percent of ZEOs used in sort of this setting as an expansion?

Speaker 3

No, it's still too early and too anecdotal to be commenting on that sort of a position. I guess the one thing I would add that's changed from the prior quarter is we are having examples, not just of 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 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.

Speaker 4

Okay, great. Thank you.

Speaker 0

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

Speaker 7

Hi, Kevin and Matt. This is Cecilia on for Jason. I just wanted to ask about in your initial days rolling out AT and a limited launch, what's what you've seen just regarding the ease of shifting centers from traditional MCOT to AT? What have been the main impediments? 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 launch, and then just adding on current trends that you're seeing XT pull through and AT accounts, how you expect this to trend, with the full market launch?

Speaker 2

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

As it relates to

Speaker 7

As well as, the impact the Walmart launch Yeah. With XD.

Speaker 5

Yeah.

Speaker 2

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, or 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 notification criteria. And so we're seeing tremendous value add from that. I think to Matt's point also about workflow, you know, our customers have enormous pain, in terms of them being overworked, having too much information, too many patients, difficulty in managing inventories, etcetera. And by adopting Zio as a single platform, they greatly streamlined 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, you know, plays really well into being a single platform company now not only with Zio XT, but also Zio AT.

Speaker 7

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 over the long term?

Thank you.

Speaker 3

Yeah, well 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 required to monitor a 20 fourseven monitoring center. So we're gonna 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.

Speaker 0

Your next question comes from the 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'm currently showing no further questions at this time.

I would like to turn the conference back over to Mr. Kevin King, CEO.

Speaker 2

Great. 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.

Speaker 0

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