iRhythm - Earnings Call - Q2 2019

Transcript

Speaker 0

Good afternoon. My name is Celine, and I will be your conference operator today. At this time, I would like to welcome everyone to the iVitum Technologies Second Quarter twenty eighteen 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 call is being recorded. I would now like to turn the conference over to your host, Ms. Glyn Lewis from the Gilmartin Group. Please go ahead.

Speaker 1

Thank you. Thank you all for participating in today's call. Joining me are Kevin King, CEO and Matthew Garrett, CFO. Earlier today, I was going release financial results for the second quarter ended June 3039. 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 guidance for revenue, gross margins and operating expenses in 2019 are based upon 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 recently 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, July 3139. 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 now turn the call over to Kevin.

Speaker 2

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 $53,300,000 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 two twelve million to $216,000,000 up from $2.00 6,000,000 to $211,000,000 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. As we anticipated, the CPT code change application was accepted by AMA and will be reviewed for category one status at the September meeting. We were aware of and support the ACC and HRS's 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 or the construction of the codes.

After a code application is submitted to the AMA, the AMA has very strict and appropriate rules to prohibit any lobbying or public statements meant to influence the process. As such, we will be limited in the information we can share with you as we go through the process. We will however make every effort to update you on any new developments and we expect the meeting notes for the September CPT Editorial Panel Meeting to be available to the public in late October. In summary, we remain extremely confident in the value of our Zio service and our outlook has not changed. We are looking forward to the September meeting as the next step and we're excited to highlight the differentiated value of our Zio service as we go through the process.

Let's move to our commercial organization. Sales force expansion continues to contribute to 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. Our 2019 goal is to add a similar number of sales positions and bring our total sales headcount to 130 to 140. As we've done in prior years, we did complete the majority of our 2,009 hiring plan in the first half of the year.

To support the increased headcount, we have also created several new sales management positions and most of these positions were filled in the first half as well. I do want to remind everyone that it takes time for new sales reps to complete their onboarding, training and to contribute meaningfully to productivity. We also caution that we have historically experienced significant summer seasonality in the months of July and August. Longer term, we expect to continue to manage the commercial team headcount to meet the most cost effective size required to capture the full and untapped market potential that lies in front of us. Turning to account penetration, to fuel our rapid growth, we've been focusing on commercial strategy on growing our share of the large health system customers, which represents about 60% to 70% of the addressable market.

As we noted on our recent Investor Day presentation, while much of our growth is coming from this segment, we also believe that we are under penetrated with less than 20% overall share and thus have plenty of opportunity for additional expansion. The proven superiority and completeness of our Zio platform, which now includes both Zio XT and AT, is enabling our customers to measurably diagnose patients in less time, with fewer unnecessary repeat tests, and at lower costs. Zio also delivers a platform that requires significantly reduced resources compared to other approaches. During the first half of the year, we continue to experience increased velocity within existing accounts. We saw a several fold increase in year over year first month adoption from new large accounts.

This demonstrates our ability to meet our customers' demand as we change the standard of care across the enterprise. The outlook for the remainder of the year is favorable due to a significant pipeline of large accounts, successful expansion of our sales force, and the highly differentiated value of our proven and complete Zio service that now includes Zio XT and AT. It's important to note that selling into larger accounts is a highly complex and includes an array of decision makers across a variety of care settings. All with priorities that encompass patient satisfaction, operational efficiency, and standardization that can be lengthy and unpredictable. On the back of this new approach, we've invested in training programs for our commercial teams, which has in turn further improved the productivity of our tenured reps.

We expect that our commercial efforts and expanding service capabilities will continue to drive adoption in these larger accounts for the foreseeable future to ultimately become the standard of care for monitoring. I'd like to add a few words on our recent launch of Zio AT. As a reminder, Zio AT offers real time reporting for use in detecting and diagnosing arrhythmias associated with conditions such as syncope or fainting that require a more immediate notification and actions. Zio XT and Zio AT form factors, application processes, reporting platforms, and workflow tools are identical. This similarity across devices has reduced the burden on clinicians to learn and adopt the new capability.

As we've shared previously, Zio AT addresses approximately 10% of the total ambulatory monitoring market or about 400,000 tests per year. In May, we began a targeted rollout of Zio AT into the market. As we've highlighted in the past, we took a very thoughtful approach to Zio AT's introduction and are encouraged by its impact within its early customer sites. Feedback has been extremely positive with customers noting the accuracy of our analysis, as well as the consistency and reliability of the platform. With our launch now underway, we're delighted to see the strength of our platform based approach delivering a more complete solution for ambulatory cardiac monitoring.

Regarding market expansion opportunities, silent AF remains our near term primary market expansion priority. We estimate that there is a population of more than 10,000,000 patients who have risk factors such as age, hypertension, and diabetes, and possibly have undiagnosed atrial fibrillation. We published last year the first phase of the MSTOP study that demonstrated the utility of Zio in diagnosing AF in this asymptomatic population. At the annual meeting of the ACC, one year healthcare resource utilization data was presented, which showed that patients who were diagnosed with AF in the Zio monitoring group had significantly lower rates of hospitalizations and emergency room visits compared to the non monitored control group. Evidence such as this continues to build the case for the targeted detection of AF by ZO in the asymptomatic population.

In 2020, we will continue to expect the three year clinical outcome and healthcare utilization data from MSToPS to be published, which will be an important data point for clinicians and payers in opening up this market. As is the case with the rest of our business, clinical evidence remains a key pillar, not only in our discussions with payers, but also as a driver for competitive differentiation. In addition to mSToPS, we continue to invest in clinical trials and partnerships to open up this large market opportunity. In closing, it's clear our market opportunity is large and growing and that demand for our Zio platform is increasing. The iRhythm team continues to deliver and I'm proud of our success in sales force expansion.

The traction we are achieving together in new and existing accounts. The recent launch of Zio AT and the potential benefits that our scalable platform provides our customers. We look forward to continuing this success for the remainder of the year and beyond. Before I turn the call over to Matt, I'd like to welcome Dan Wilson to iRhythm as our Executive Vice President of Strategy, Corporate Development and Investor Relations. For those of you who haven't met Dan, he is a highly accomplished medical technology and financial executive with deep industry and investment community relationships.

We're delighted to have him join our team and confident he'll be a significant contributor to our long term goals as our business grows. With that, I'd like to turn it over to Matt Garrett, our CFO for a review of our second quarter financials and guidance for 2019.

Speaker 3

Thanks, Kevin. Our ability to staff up in the sales organization while continuing to onboard large integrated systems were two of the three key areas of 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 twenty nineteen 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, with Zio AT pilot accounts, which has accelerated adoption of Zio XT in those accounts, demonstrating iRhythm's capability of being the full service solution offering. Taking a more detailed look at the quarter, revenue for the three months ended June 3039 was $53,300,000 an increase of 50% year over year and 13% sequentially. We continue to see sales force productivity levels rise as we penetrate these large integrated systems and as the reps hired over the past year achieved meaningful productivity levels. Some of the trends we continue to monitor and communicate to investors include same store new store revenue growth for the fourth consecutive quarter posted a mixed split of approximately 60% to 40%. We view this mix in a positive light as we continue to deeply penetrate existing networks while maintaining a strong target pipeline, creating true productivity scale within our sales force.

In a related item, we continue to see material growth in our largest accounts where our top 25 accounts grew approximately 50% over the prior year. As we mentioned last quarter, improved brand awareness, EHR implementations and overall workflow enhancements enabled by our comprehensive Zio service not only accelerate growth, but can also lead to greater volumes than were originally forecast within these large integrated systems. We've also been able to aggressively hire most of the new sales reps for the year bringing us to within our guidance target of 130 to 140 reps in the first half of the year. Our attention will now turn to onboarding and training for multiple product lines where we continue to see sales reps getting productive at a faster pace. And finally, in accounts where we have piloted AT, we continue to see double digit volume expansion for Zio XT in the months after AT launch.

As we approach a broader AT market launch, we view this as a positive indicator for the rapid expansion of XT in AT launched accounts, whether the account was using XT before or not. Turning our attention to the rest of the P and L, gross margins for the second quarter twenty nineteen was 76% compared to 73.2%, a 2.8 percentage point improvement over the same period in 2018. Operating expenses for the 2019 were $51,800,000 compared to $37,700,000 an increase of $12,300,000 or growth of 38% over the same period in the prior year. We continue to see operating scale improvements where for the third straight quarter OpEx growth has been materially lower than revenue growth as we move the business towards cash flow breakeven while maintaining minimal cash burn during this transition. For the quarter, the year over year spending increases continue to be driven by heavy first half investment in sales force expansion, organizational support for our network sales strategy, expansion of R and D activities and the impact of increasing stock compensation expense.

Net loss for the second quarter twenty nineteen was $11,500,000 or a loss of $0.46 per share compared with a net loss of $12,200,000 or a loss of $0.51 per share for the same period of the prior year. Turning to our guidance for the remainder of 2019 and as Kevin noted earlier, given the strong start to the first half of the year and the ongoing strength in the business, we are raising revenue guidance for the full year 2019 to $212,000,000 to $216,000,000 from $2.00 $6,000,000 to $211,000,000 This represents annual revenue growth of 44% to 47% demonstrating our continued confidence in our ability to scale the organization as we continue to produce benchmark top line growth. We once again take this opportunity to remind investors who are modeling the second half of the year that we are a services business that faces material summer seasonality. In addition to our typical vacation slowdown, we faced the added challenges this year related to the preparation for the commercial launch of our AT service offering and despite our robust pipeline, the added lumpiness of onboarding new integrated systems with their vacation scheduling issues. Thus we encourage investors to weight the impact of our improved guidance towards the fourth quarter.

Gross margin guidance for the year has also been raised by zero five percentage point to a range of 75.5% to 76.5%. While we see the continued scale in our margins and remain bullish on long term gross margins approaching 80%, we do anticipate some Zio AT drag in the near term as we more broadly launch the service later this year. And finally, we are raising operating expense guidance reflecting incremental commission, bonus accruals and non cash stock expense due to better than anticipated performance in the business. The new range of 198,000,000 to $2.00 4,000,000 is up from $193,000,000 to $199,000,000 including 29,000,000 to $31,000,000 for research and development and 169,000,000 to $173,000,000 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, Kevin, Dan and I would now like to open the call up for questions. Operator?

Speaker 0

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

Speaker 4

Good afternoon. Sorry about that. I was on mute. A couple of questions here. Kevin, maybe 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? Does that back half guidance suggest some level of conservatism or any change in sort of how you see the underlying business? Then I had a couple of quick follow ups.

Speaker 2

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.

Speaker 4

Okay. And then Matt, 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.

Speaker 3

Sure, David. I mean, 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 like 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 $3,500,000 Q2 was just slightly higher, still in the $3,000,000 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 I think the key point here is that we track this very carefully and we continue to see over time this continuing decrease in the burn, which as you can tell from Q1 and Q2 is actually quite small.

As it relates to the rest of the year, we are going to see a relative increase in cash burn in Q3 and that's because we are actually moving locations here in San Francisco and there's a good portion of TI expense that we're going have to pay upfront. So that would be the one mitigating item I think you would see in the other half of the year. But other than that from a P and L perspective I would tend to think that we're going to continue to trend in that very low burn rate.

Speaker 4

Okay. Kevin, last one for me. Terms of AT 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 or more comfortable converting their Holter business? Or are you 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? Is it really more specifically driving AT in replacement of MCOT? Thanks so much.

Speaker 2

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 were 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 pull through, 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.

Speaker 0

Our next question comes from the line of Robbie Marcus from JPMorgan. Your line is open.

Speaker 5

Hi, this is actually Allen 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, Silane AF is the major opportunity that you guys have ahead of you that's a little 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 meaningful a meaningful contribution to your growth that you're seeing.

Speaker 2

You know, 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, traditional event monitoring products and Holter like products. And you know, 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 if physicians are increasingly aware of the importance of AFib burden, I think it's still rather early days in terms of educating the market.

And I would say there's 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 AFib 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.

Speaker 5

Got it. And then I guess a question on rep productivity. You know, I think you've called that in the past that prior compared to previous expectations, you're now seeing your most tenured reps averaging around, I wanna say, 3,000,000 a year in terms of rep productivity. And that's, you know, with AT in very limited launch. So now that you're preparing to ramp AT to a full launch, when we think about peak rep rep productivity

Like how much higher, I guess, do you think that can go?

Speaker 3

Yes. I think that it's not $3,000,000 The number that we've provided guidance on was $2,500,000 but the average was right. So you could certainly have and do have reps that are above $3,000,000 number. I think the thing we've talked about most recently in the last couple of calls isn't a change to the 2.5 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 a 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 onboarding, brand awareness, contracting is 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 AT launches, as we get more traction over the next two to three quarters with these larger integrated systems, I think we're going be able to provide we'll update our guidance accordingly.

Speaker 5

Got it. Thanks, guys.

Speaker 0

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

Speaker 6

Hi, this is Steve on for Joanne. Guys.

Speaker 2

Hi, Steve.

Speaker 6

This is more of a big picture question for you. But given that you are you said roughly less than 20% penetrated today and the clinical and economic benefits of Zio are quite clear versus Holter's. So what takes you meaningfully higher to say greater than a 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?

Speaker 2

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 that change in healthcare 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, you know, 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, of those things are investments for us that will drive greater share, greater awareness and higher levels of adoption.

Speaker 6

Okay, thank you. And then can you just give us an update on your efforts internationally? How is that sales force build going? Or will there just be indirect efforts there? Can you remind us what what countries you'll be targeting aside from The UK?

And and maybe, when you we can expect some you to report revenue there?

Speaker 2

Yes, Steve. We've not publicly disclosed any of our market access efforts outside of The US 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, albeit still small. As I've mentioned on previous calls, nearly all, if not all, outside The US 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 fully believe that the markets are attractive. We fully believe that the markets are large. And we fully believe our clinical evidence is transferable outside The US to these new markets. So with that, time will tell, but we will be addressing other markets.

Speaker 6

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

Speaker 2

Great. Thanks,

Speaker 0

Again, if you have a question at this time, please press star then the number one key on your touch tone telephone. If your question has been answered or you wish to remove your request yourself from the queue, please press the pound key. Your next question comes from the line of Jason Mills from Canaccord. Your line is open.

Speaker 7

This is David on for Jason. Can you hear me all

Speaker 0

right?

Speaker 2

Hey, David. Yes. Hey, David. Just fine.

Speaker 7

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

Speaker 3

Yes, don't think that we've really given any guidance or breakout between AT and XT. I think I would just state it is that the growth is in line with our strategy for penetrating not just XT, but AT over time in these larger 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 or the other, I

Speaker 2

guess is the way to say it.

Speaker 7

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

Speaker 3

Yes. 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 that internally our expectation is that we will over time continue to guide and raise eventually towards 80% gross margins. I don't think there's anything internally that has changed our minds. Again, back to my previous answer, the mix between AT and XT from a margin perspective, We think that they're both very attractive gross margins.

And even with the added costs associated with AT, those being offset obviously by a higher price point that they blend in very well together. So again, we still feel very good over time about that 80% gross margin.

Speaker 7

Okay. Thanks for taking the questions and congrats on the quarter.

Speaker 2

You're welcome. Thanks, David.

Speaker 0

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

Speaker 2

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

Speaker 0

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