iRhythm Technologies, Inc. (NASDAQ:IRTC) Q3 2023 Earnings Call Transcript
iRhythm Technologies, Inc. (NASDAQ:IRTC) Q3 2023 Earnings Call Transcript November 2, 2023
iRhythm Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.89 EPS, expectations were $-0.65.
Operator: Hello and welcome to the iRhythm Technologies Inc. Q3 2023 Earnings Conference Call. My name is Alex, I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host Stephanie Zhadkevich, Director of Investor Relations. Please go ahead.
Stephanie Zhadkevich: Thank you, all for participating in today's call. Earlier today iRhythm released financial results for the third quarter ended September 30, 2023. 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 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 facts should be deemed to be forward-looking statements. These are based upon our current estimates and various assumptions and reflect management's intentions, beliefs and expectations about future events, strategies, competition products operating, plans and performance.
These statements involve 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 annual and quarterly reports on Form 10-K and Form 10-Q respectively filed with the Securities and Exchange Commission. Also during the call we will discuss certain financial measures that have not been prepared in accordance with US GAAP, with respect to our non-GAAP and cash-based results including adjusted EBITDA, adjusted operating expenses and adjusted net loss.
Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation as a substitute for or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10-Q for a reconciliation of these measures to their most directly comparable GAAP financial measures. This conference call contains time-sensitive information and is accurate only as of the live broadcast today November 2 2023. 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.
And with that I'll turn the call over to Quentin Blackford, iRhythm's President and CEO.
Quentin Blackford: Thank you, Stephanie. Good afternoon, and thank you all for joining us. Brice Bobzien, our Chief Financial Officer; and Dan Wilson, our EVP of Corporate Development and Investor Relations joining me on today's call. My prepared remarks today cover business updates during the third quarter of 2023 and progress made against our growth and operational initiatives. I'll then turn the call over to Brice to provide a detailed review of our financial results and updated guidance. Third quarter 2023 results reflected continued execution across multiple channels building on the solid momentum our teams drove in the first half of 2023. Revenue of $124.6 million in the third quarter of 2023 was in line with our expectations, representing growth of 20% year-over-year and came from continued traction within the primary care space, market expansion within existing accounts and sustained volume growth across all service lines.
The strength of our core business continued as we realized another quarter of record registrations and volume from new accounts at near record levels. Within the quarter, we were excited to have launched our new Zio monitor platform, the largest launch in the history of our company. This included the eagerly anticipated Zio monitor patch that builds upon the already best-in-class product of Zio XT, together with a new MyZio 2.0 app and an enhanced on-boarding experience for our patients providers. I'm incredibly proud of our teams and the efforts that went into making this a reality but we know that our work is just beginning. Adding to the excitement of this recent launch is a great momentum in the business, together with exiting the third quarter with our new account pipeline the fullest it has ever been.
Importantly, volume growth was well balanced across our specialty groups but we were particularly encouraged by the strong contributions from the primary care channel. As a reminder, we have approached the opening of this channel in two manners, one of which is increasing the prescriber base and large enterprise health systems that already had robust cardiology and electrophysiology utilization and the other is by partnering directly with large national primary care networks. The early effect of these efforts has resulted in registration growth from this channel moving faster than our other specialty channels and continues to confirm our belief that a tremendous opportunity exists to more broadly open the primary care space. Encouragingly, we have started to see examples within large national primary care networks, where customers are beginning to proactively monitor their patient populations and patching appropriate patients who meet certain risk criteria such as the mSToPS criteria and who may benefit from early identification of arrhythmias.
In some cases, we have seen these large national primary care accounts begin to expand their initial inclusion criteria based upon the early success of their Zio adoption and the high diagnostic yields within their targeted populations. In support of this, we are proud to announce that the results of the mSToPS Cost Effectiveness Study have recently been published. This was an independent external investigator-led health economic analysis of AFib screening from the mSToPS trial. The study was previously shown that two weeks of continuous monitoring with Zio XT led to the detection of more AFib and was associated with improved clinical outcomes at three years. This new analysis models the health economic value over the lifetime of the patient and found that proactive monitoring for AFib in individuals prescribed Zio patch monitors over the three-year period was associated with high economic value based on willingness to pay thresholds.
Clinically, we believe that earlier detection of AFib or other undiagnosed arrhythmias could lead to earlier institution of AFib interventions, including ablation and rhythm control not just stroke prevention and avoidance of downstream adverse events such as progressive heart failure. We estimate that approximately 25% of the Medicare Advantage population may be at risk for asymptomatic AFib or other clinically actionable arrhythmias and we believe that it is only a matter of time until monitoring initiatives such as our Know Your Rhythm program are more widely considered and adopted over time. Additionally, we continue to make meaningful progress with payers who continue to recognize the value of monitoring with Zio for their patient populations.
During the third quarter, we saw influential payer updates that were driven by CAMELOT data that has continued to highlight the clinical utility of long-term continuous monitoring as a modality and Zio XT more specifically. In one example, a large national payer removed the need for event monitoring as a prerequisite for MCT coverage and instead identified long-term continuous monitoring as a step-through for MCT in the case of AFib. They also now allow for 14-day long continuous monitoring as a step-through to implantable loop recorders. To date, payer updates that we believe have been influenced by CAMELOT could impact over 16 million covered lives in the US going forward and are an important recognition of the value that long-term continuous monitoring brings for patients and healthcare systems alike.
Moving to product innovation. As previously mentioned, we achieved a significant commercial milestone in September with the launch of our next generation Zio Monitor patch our next generation long-term continuous monitoring platform and enhanced Zio service. Zio Monitor is gradually replacing Zio XT through our ongoing phased rollout and the platform continues to build upon the high-quality performance of Zio XT that our customers and their patients have come to expect from iRhythm. Zio Monitor is 23% thinner, 62% lighter and 72% smaller compared to Zio XT. The updated form factor was designed with patient comfort in mind and has supported 99% patient compliance with prescribed wear times. This improved patient experience has translated to higher device return rates and lower patient complaint rates compared to Zio XT.
We have heard anecdotally that patients love the sleekness of the new monitor for ease of wear while accounts have enjoyed a streamlined registration process in their workflow. In combination with our advanced AI efficient workflow for clinicians updated patient and prescriber apps and actionable clinical reports we believe the new Zio Monitor launch has meant that the best just got better. As part of the launch of the upgraded Zio Monitor, we also released the next version of the MyZio application app, MyZio 2.0 which is focused on enhancing the patient experience. The updated app includes a refreshed user interface as well as new features like easier symptom, logging educational videos and content and a redesigned help center to better address patient questions.
We know that patients who use the MyZio app on average log 2x more symptoms than patients who do not use MyZio and we believe that more symptoms logged means improved symptom rhythm correlation and better informed diagnosis. Patient digital engagement has also been associated with higher monitor return rates and operational efficiencies for iRhythm. Although the MyZio 2.0 launch is in the early days we have already seen a substantial increase in the percentage of Zio Monitor patients downloading the app and we believe this will continue to increase over the coming months. At iRhythm the patient is at the center of everything that we do and with that in mind, we also launched additional enhancements to our patient support processes to assist navigating insurance coverage questions and prior authorization requirements to ensure that they are able to get access to the care that they need.
We continue to roll out Zio Monitor in accounts throughout the United States with approximately half of all accounts having been transitioned to Zio Monitor thus far. As previously noted to the investment community many new accounts deferred their onboarding during the third quarter while they waited for Zio Monitor to be launched so that they did not have to be trained on Zio XT only to require training on Zio Monitor a couple of months later. As a result we ended September above our normal pipeline levels and are excited to bring these new accounts on board over the fourth quarter. Also on the innovation front this past week, we continued to improve our Zio AT product and its value proposition to customers through the commercial introduction of AFib burden estimates into the daily reports for our current Zio AT service.
AFib burden or the proportion of time a patient spends in AFib over the analyzable wear period, has been associated with a higher risk of stroke as well as a higher prevalence of heart failure. While knowing that a patient has AFib is an important first step for their treatment journey, a physician knowing how long the patient is in AFib, and how AFib is behaving can guide, how to treat that patient more rapidly and more accurately. Thus, the addition of AFib burden estimates to the daily Zio AT reports is an important clinical feature that physicians can consider when altering patient treatment pathways during the wear period and when managing patient responses to medications and procedures. This dynamic clinical tool was long requested by our physician customers and demonstrates our continued commitment to physician-led innovation that drives value for our customers and the patients they serve.
Turning to additional pillars for iRhythm's long-term sustainable growth, we continue to be excited about the upcoming entry into the second largest cardiac monitoring market in the world. Having received the high medical needs designation from the Japanese MHLW has created significant interest with potential commercial partners that we are currently evaluating as we settle on our plans to enter the market in early 2025. At this time, we continue to engage with the Japanese PMDA on our Shonin submission are working collaboratively with the review team to address their questions, and plan to continue our engagement in person. Our application clearly has their attention and their focus, and we look forward to providing you with additional updates as our discussions progress.
To eventually serve this growing global population, we are also thrilled to announce the formal opening of our Global Business Services Center in Manila that took place during the third quarter. In September, we hosted a ribbon-cutting ceremony to open our new permanent office space there, and our Manila team now includes almost 150 team members, who are part of iRhythm's global clinical operations, customer care, finance, human resources, information technology, and revenue cycle management functions. Recruitment and onboarding have continued at a rapid pace, and we have been pleased thus far with the high quality of service that our newest team members have started to provide to patients, customers, and internal stakeholders. This has been a critical step in not only transforming our way of doing business of today, but also ensuring that we can scale efficiently into the business of the future that we aspire to be.
We will continue to make progress in driving operational excellence throughout the organization, positioning the company to maintain patient satisfaction, scale globally, and perform more efficiently. Lastly, we would like to provide an update on the status of our interactions with the FDA following our receipt of a warning letter on May 25, which focused on our Zio AT system and alleged non-conformities related to medical device reporting requirements and quality system requirements. Since receipt of the warning letter, we have submitted a thorough response to the FDA's concerns, have had ongoing and collaborative engagement with the FDA, and have previously agreed to make the requested labeling changes that allow us to continue to market Zio AT as a device for ambulatory MCT services.
Additionally, we proposed enhanced design features to the product that further address areas of focus and have continued to work with the CDRH product review team regarding changes that occurred under letters to file. Following a recent meeting with the FDA, we have aligned on a path forward which will include submitting a 510(k) as a catch-up for changes previously made to the Zio AT system as letter to file, as well as a 510(k) submission for the design features and labeling updates previously noted. We are currently working on the content of the 510(k) submissions and expect to submit the first 510(k) by the end of the year. While always subject to change until their review is completed, we are pleased with the progress with the FDA and will continue to work collaboratively with them to address their concerns.
With that, I'll now turn the call over to Brice to discuss our financial performance.
Brice Bobzien: Thanks, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discussed today will be presented on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release and on our IR website. Third quarter results demonstrated continued momentum in our core markets, as we reported revenue of $124.6 million, or 20% year-over-year growth. As Quentin mentioned, this was driven by strong volume from new accounts opened in the prior 12 months, continued penetration of existing accounts, and reduced account churn. New store-same store mix, with new store defined as accounts that have been open for less than 12 months, accounted for approximately 33% of our year-over-year volume growth.
Home enrollment for Zio services was approximately 21% of volume in the third quarter. Average selling prices during the third quarter were down slightly year-over-year and up slightly quarter-over-quarter. Moving down the rest of the P&L, gross margin for the second quarter was 66.2%, representing a 330 basis point decline compared to the second quarter of 2023, and a 210 basis point decline versus the third quarter of 2022. As previously discussed, we expected temporary pressure in the third quarter. This pressure was primarily driven by costs associated with the transition from Zio XT to the new Zio monitor, including a $3.1 million excess inventory reserve related to the legacy Zio XT product. Additionally, the marketplace reaction to Zio monitor has been very positive, resulting in a faster-than-anticipated transition from Zio XT that is expected to create near-term temporary pressure on our gross margin, as a result of accelerated recognition of the cost of our legacy XT components.
Our operations teams have been laser-focused on our ability to ramp capacity for Zio monitor, which over time has a better gross margin profile. While these items were contemplated in our prior guidance, the accelerated transition from Zio XT to Zio monitor has resulted in higher-than-anticipated transition costs. Absent these costs during the third quarter, gross margin would have been very comparable to gross margin we experienced in the second quarter of 2023. Third quarter adjusted operating expenses were $107.1 million, up 7.4% sequentially and up 19.4% year-over-year. Sequentially, increased spend was driven by headcount-related costs to support growth in our business, advancement of current and future product offerings and increases in software and hardware costs to support growth in our infrastructure.
As we previously discussed, we have also incurred elevated legal and advisory fees for activities associated with the ongoing FDA warning letter remediation and DOJ subpoena. Compared to the third quarter of 2022, this increase in adjusted operating expenses was primarily due to increased personnel to scale with operations. Adjusted net loss in the third quarter was $24.1 million or a loss of $0.79 per share compared to adjusted net loss of $13.1 million or an adjusted net loss of $0.43 per share in the second quarter of 2023. Third quarter 2023 business transformation costs were $3 million in line with expectations, as we are finalizing our transition to our Global Businesses Services Center. Adjusted EBITDA in the third quarter 2023 was $0.4 million, reflecting a decrease of $4 million sequentially, but an increase of $3 million year-over-year.
We continue to stay focused on sustainable improvements to our operating leverage profile. Turning to guidance, we are increasing our 2023 outlook to reflect anticipated full year revenue growth of approximately 19% compared to 2022 representing a range of approximately $487.5 to $490 million. We continue to anticipate that the fourth quarter will be our strongest volume quarter of the year and have been pleased with strong demand for our Zio services thus far this quarter. However, we do anticipate mid single-digit pricing pressure compared to the fourth quarter of 2022, due to a difficult year-over-year comparison in average selling prices. Considering the gross margin pressure in the third quarter, as well as ongoing costs anticipated with the accelerated recognition of Zio Legacy XT circuit boards, we are updating our gross margin guidance to a range of 68% to 69% for the full year.
We also now believe that adjusted operating expenses in 2023 will range between approximately $425 million and $429 million. These increased costs consider ongoing legal and advisory fees, tied to the FDA warning letter remediation and DOJ investigation correspondence as well as elevated compensation expense offset by continued thoughtfulness on operating expense management within the organization. We continue to believe that adjusted EBITDA margin for 2023 will range between approximately 0% and 0.5% of revenue. Our adjusted EBITDA guidance continues to reflect focus on the sustainable improvements to our operating leverage profile. As a reminder, adjusted EBITDA will continue to exclude restructuring costs, business transformation costs and stock-based compensation expenses.
In 2023, we continue to anticipate incurring approximately $15 million to $20 million of non-GAAP business transformation and restructuring costs related to the ongoing globalization efforts to drive efficiency, improve scalability and provide continued high-quality customer and patient experience. We believe that the expenses incurred related to these activities in 2023 will further enable operating leverage into the future, especially as we grow to serve more patients in our core markets and internationally. Finally, we ended the third quarter in a strong financial position with $158.5 million of cash in short-term investments to drive continued growth in our core business, invest in innovation and lay the foundation for future expansion.
With that Quentin, Dan and I would like to now open the call for questions. Operator?
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