Ladies and gentlemen, thank you for standing by, and welcome to the iRhythm Technologies Incorporated Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker, Leigh Salvo, Investor Relations. Please go ahead.

Thank you, Sydney, and thank you all for participating in today's call. Joining me are Kevin King, CEO, Matthew Garrett, CFO and Dan Wilson, EVP, Strategy and Corporate Development and Investor Relations. Earlier today, iRhythm released financial results for the fourth quarter and full year December 31, 2019. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions for 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, or statements related to market expansion and penetration, productivity improvements, reimbursement, release of clinical data, 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 profitability 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 recent annual and quarterly report on Form 10-K and 10-Q respectively with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 27, 2020. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections of forward-looking statement, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Kevin.

Thank you, Leigh. Good afternoon and thanks for joining us. I'll start with a brief recap of our 2019 accomplishments, before turning the discussion to our focus and company goals for 2020 and beyond. We enter 2019 with significant momentum. And as we've done successfully in the past built on that throughout the year. Our full year 2019 revenue was $214.6 million, representing 46% growth over prior year and exceeding our initial guidance range of $201 million to $206 million, as well as the guidance of to $213 million to $214 million, issued most recently in late December. Gross margin for the year was 75.5% a 1.8 point improvements over the prior year. Fourth quarter revenue was $59.1 million up 41% compared to the prior year period, and gross margins increased to 76.5%, a 2.4 point improvements over the same period in 2018. Confidence in our ability to grow and expand the business remains very high. Our competitive differentiation driven by our complete platform demonstrated clinical superiority, and our intense focus on serving the needs of our customers, plus, puts us in an incredibly strong position to continue to grow in 2020 and beyond. Accordingly, we anticipate full year 2020 revenues to range from $280 million to $290 million, which represents annual revenue growth of 31% to 35%. Matt will provide our complete full year 2020 guidance metrics later in his remarks. We continue to make substantial progress driving each of our growth initiatives as evidenced by several achievements in 2019. Briefly this past year, we expanded the size of our sales channel to include two new areas, seven new regions, and added approximately 30 sales reps along with increases to our customer facing support infrastructure. Sales force productivity improve meaningfully both in terms of time to ramp and peak…

Thanks, Kevin. We're very pleased with our performance in 2019 and more importantly, continued initiatives and strategy for the company has set us up well moving into 2020. Our continued focus on sales force productivity, sales support infrastructure, integrated system penetration and gross margin expansion remain the key drivers for the company as we move into 2020. And after three years of heavy investment in the organization to support revenue growth, we see 2020 is a key year to demonstrate productivity up and down our P&L. Highlights for the fourth quarter 2019 are as follows, revenue growth of 41% year-over-year and sequential growth of 8%. Non-adjusted gross margins of 76.5% and 76% as adjusted, an increase of 2.4% and 1.9% over the prior year, respectively. The successful launch of Zio AT in late October, making our MCT monitoring solutions available to all customers across the country. And finally, continued improvement in sales force productivity levels through the development and onboarding of new reps, investments in the sales organization, continued penetration of large integrated systems and of course, the launch of Zio AT. Taking a more detailed look at the fourth quarter financial results, non-adjusted revenue for the three months ended December 31, 2019 was $59.1 million, an increase of 41% year-over-year and 8% sequentially. As we described, on our December 23 call, revenue is negatively impacted in the quarter by the one-time reserve of approximately $1 million for non contracted revenue. This is in direct response to actual collection rates falling short of historical rates due to rising patient deductibles and co-payments. While we continue to monitor this trend closely, non-contracted revenue now accounts for only 5% to 6% of total revenue, diminishing the potential for any material impact moving forward. Without the adjustment revenue would have been approximately $60…

Thank you. [Operator instructions] Our first question comes from David Lewis with Morgan Stanley. Your line is open.

Good afternoon. Just a few questions for me. I guess, Kevin, first off, I appreciate your updated thoughts on the RVU process and sounds like things are going kind of in line with expectations. At this point is, is the best way to think about this is the full disclosure of your values is probably going to come in July and no sooner?

This is full disclosure from us coming in July, David. I'm sorry, I missed -- I didn't quite hear.

From anyone. You obviously talked about notification. The AMA will be sent to CMS and probably already has, but from your perspective, the earliest notification that we're going to get around the RVU value is likely to come from CMS in July?

Yes, I believe that to be the most likely case.

Okay. Very helpful. And then you Matt or maybe Kevin, a couple questions here first, first off of the fourth quarter, appreciate the update on the contraction reserve of $1million but can just give us a sense of the dynamic of delayed returns that was disclosed in late December, any sense of the magnitude of those delayed returns had on fourth quarter and would have on the first quarter. Do you have any sense of the quantification of that?

Sure. So on the December 23, call the Update Call that we had, we noted that we were running about a day behind, which we estimated to be about a $1 million in total. We received in the final few days of the month, a good portion of those devices, but not all of them. Many of them carried over to January. We now believe that we've received all the ones that we should be expecting. So think of it as kind of a two-third, one-third 70-30 type of thing, 70% in December 30% in January thereabouts.

Okay, so investors are trying to get a good sense of your underlying growth rate in the fourth quarter apples-to-apples if we add it back to contractual reserve of maybe $0.5 million benefit you had expected you perhaps the right way to think about the fourth quarter growth rate is something like 45% to 47%, relative to the 40% that was reported. Is that a decent way of thinking about it?

Yeah, I think so. I've got Dan and Matt shaking their head. They're doing math quickly. Yeah, I think that's about it.

Yeah, the ACR [ph] would raise you to 44$. And if you go two-third, one-third, which is roughly what we perceive it to be, there's another couple of percentage points in there. So yeah, that's right. 45%, 46%, 47% somewhere right in there.

Perfect. And lastly Kevin maybe for you, I know we're probably not going to get an absolute quantification of the AT impact for 2020. But you started to share some slides and case studies around the impact AT could have or XT could have or AT-XT -- sorry, can have an XT pull through. How should we think about the impact of AT on 2020 from a growth perspective? Thanks so much.

Absolutely. This is a really tough balancing act for us, David. We want to be as transparent with investors in the markets as possible. And at the same time, this is a really highly competitive market space. So we're cautious about tipping our hands. I think you've heard from our qualitative comments that we're incredibly pleased with where we are with AT. And it is absolutely contributing to our growth. What's most important, I think for everyone to understand is that AT is enabling us to be a more complete solution. And that's -- and as evidenced by their Zio XT pull through and wins that we've had, that it is on an individual AT device level. Customers greatly value having a single platform, even though the percentage of patients that actually get AT prescriptions is relatively small compared to XT. But I think you should think about it a platform play more than you should individually. We're going to do our best to provide more detail as we go forward but it's still rather early days for us.

Okay, thanks so much. I'll jump back in queue.

Thanks, David.

Thank you. And our next question comes from Robbie Marcus with JPMorgan. Your line is open.

Great. Thanks. And congrats on another good quarter. Kevin, I just wanted to firm up your comments a little bit here. You said, no change from your thoughts before on the ultimate outcome of reimbursement. Just want to make sure we should be thinking about no change as before was flat up in terms of how you were thinking about the potential outcomes for reimbursement.

Yeah, I'm talking about no change in our degree of confidence and no change relative to the comments we started talking about back in, I don't know, '17 or so relative the likelihood of this going up as much as it is going down, and we're confident that it's going to probably stay pretty much the same. Because there's no change to that at all. We're not able to comment about that rough process, but going into and coming out of the rough process, we have absolutely no change. And we're quite pleased and fully anticipate that the AMA put forth the materials that we had sent to them. And that's made its way over to CMS. And there are still some final meetings going on but we should be hearing back as in based on prior question in July timeframe.

Great, and maybe just one follow up. Just to further discuss the AT here. When you walk into accounts, is this a product you lead with or is it mostly coming in established XT accounts. And then, if it is new accounts what's driving them so much to adopt it. They can finally, adopt a full workstream of products? Is it the workflow benefits? Is it the better device? What is it? And then I'll leave it there. Thanks a lot.

Sure. So when we think about our marketplace today, the market for ambulatory monitoring is largely fully penetrated. And what we're competing against with is changing what we refer to as status quo. And the status quo unfortunately is one where physicians and their staffs are just overloaded, have a high degree of job dissatisfaction, have too much information coming at them every day and unless you give them a solution that requires less inputs and less effort, you don't stand a chance of adopting it. And so to answer your question near the part of your question that you stated there was, is it around workflow? It's absolutely around workflow, and it's absolutely around being clinically superior. If you don't have a better mousetrap, so to speak compared to anything else, why would I change? And if I'm already overloaded, why would I take on doing more work? So you have to have a combination of those. Now, playing into that workflow theme is do I have to interface to multiple systems for order entry and results reporting, do I have to train my staff on multiple devices, et cetera, et cetera. And that's where the single platform for Zio allows clinicians to adopt in a more streamlined fashion. We don't necessarily lead with AT. AT is our -- the high acuity patients is a relatively small percentage, and really not likely to cause people to shift from status quo. It's really XD in combination with AT and the full line. Is that helpful, Robbie?

That was great. Thank you.

You're welcome.

Thank you. And our next question comes from Jason Mills with Canaccord. Your line is open.

Thank you for taking the question, Kevin, Matt and Dan. Good afternoon. Can you hear me okay?

Yes, we can.

Super. So I wanted to talk a little bit more about the AT-XT pull through and Matt, it wasn't lost on me your voice inflection was fairly -- seemed fairly bullish, as you were talking about EHR integration and you're talking about that within the context of your targeting of IDN. I'm wondering if we can bring it back to what investors care about, which is obviously the growth guidance you've given for 2020. And what you sort of factored in for the XT pull through specifically vis-à-vis AT and IDN. And what upside exists relative to -- I'm sure you've given us more conservative estimates then various other models you have you built out with respect to this specific issue. I am wondering if you'd be able -- be willing to give us a little bit more color in your thinking on this front.

I can try at a high level, Jason. I think that what everybody needs to be -- as Kevin just alluded to, and I'll allude to here is we're still really early days, we're really early days. I mean, we didn't actually start the AT launch until October. And thus when you're trying to identify these sort of trends, that we're happy to call out where we can, you have to understand that we're coming off of a baseline in which a majority of those AT units, pre and post the overall launch are coming from existing accounts. So I think we've been pretty bullish and optimistic on XT pull through. And that's on accounts that we already had up and running. So as we move forward into 2020, and we actually start to bring on new integrated systems, you can imagine that there is a potential for higher XT pull through in those. And I'll just simply state that at this point it's still early days, but that as Kevin alluded to, as we get that sort of granular data, we'll try our best to provide more data. Does that help a little bit?

Yeah, it does, so I mean raises the question which is sort of an obvious one that. I mean, could -- on one hand, you have a lot of larger numbers as you're trying to set this guidance. On the other hand, you've talked about the percentage of first line monitoring that goes on in these ideas relative to the overall market. And you just mentioned the level of penetration or lack thereof you are at this point in time. So those two things are somewhat at odds, but nonetheless, seems like the conclusion that one could draw is that your guidance leaves room for upside specifically, if you have more success in IDN, this year, than maybe your guidance implies.

Okay, let's see if we're talking about whether our guidance is good guidance or not. First let's take a look at 2019,WW started the year with 37% to 40% growth. And over the course of the year, many of the investments that we made and plans that we had did better than expected and we turned out with 46% growth. Similar to those years, we have a lot to accomplish this year. We have a lot to digest. As we have in the past. I said in my opening comments, we've added two new areas, we've added seven new regions, we've added 30 new sales people. we are launching a brand new information system, Zio Suite, we are launching Zio AT we have a lot of work to do, such that the guidance we're giving you right now is our very best view of where the year will be. As we progress, it could get better, but right now I want to give you the best estimate that we have knowing all that we have ahead of us to still achieve relative to the people the products that I just described and the market segments that we're now going after.

It's helpful, Kevin. It's not lost, I mean the midpoint to your guidance is about where consensus was coming in. So it's not a criticism. It's just a discussion. Last question if I may.

Yeah, no -- I'm not -- we are not

We wouldn't expect you ask any other -- anything less, Jason.

The last question about [indiscernible]. Clearly there's data out there and there's data to come. How do you think the data that we will see later this year will, if at all impact your business or will that require perhaps data from GUARD-AF. How should we think about what is coming later this year, and how that may impact the market or the way that your customers look at using Zio XT? Thank you for taking the questions.

Sure, no worries. I think these large market opportunities unfold over time, as opposed to make a big splash, right? We're talking largely about changing the value proposition for health plans, and their members, their beneficiaries being patients or if they're not sick, they're members. And we have to provide to them compelling evidence to begin a screening protocol or a testing protocol that screens for something that is asymptomatic. So clinical evidence is clearly important. That said, I think that the economic, the utilization of services is as important and we intend to build relationships with our health plans that we have contracts with, to try to do more mSToPS like studies within health plans to unfold this market overtime. I think it's too early for us to begin projecting revenue or adoption. It's a very big opportunity. It's a complex one. The fact that we've got 3 major studies and a major partner, and we've got some good results under our belt says we've got a lead here. But it's not going to be a big bang. I'm absolutely convinced to that. As much as we would like it to be, of course.

Thank you.

You bet. Thanks, Jason.

Thank you. And our next question comes from Margaret Kaczor with William Blair. Your line is open.

Hi, good afternoon, guys. Thanks for taking the questions.

Hi, Margaret.

First one for me as I've said following up a little bit on Jason's question. And it regards kind of high risk population. And so small typecast, so maybe write it down. But one do you think, you need larger trials like GUARD-AF to build some that business there? And as you look at it, what do you think will move faster in the transition? Is it health systems and changing guidelines? Is it payers changing what they pay for more individual clinician base? And then do you need some kind of other product or price points to try to better address this population, especially given some of the early partnership comments you guys have made?

Sure. I don't -- I believe the larger studies will ultimately help but I think the power of mSToPS and the design of it is so compelling that its results can stand on its own relative to the utilization of resources. I think relative to where do you begin or which market segment? I don't think it is health systems, I think it is health plans, for the reasons that these patients have no symptoms that are less likely to be in front of their doctor, rather, the health plan that's at risk, they have contracts with employers or they have contracts with the government to provide a service at a fixed cost. Want to uncover these patients that are at risk, because the cost of diagnosing and monitoring them is less than the cost of the incidents of bad outcomes like stroke. So the value proposition in my view or in our view is targeted largely at health plans, not so much health providers. Then the third question was, do we have the right product? I think, Zio XT is a phenomenally good platform. And what we're trying to build was Verily is an even better platform. But there's nothing inadequate about Zio XT in terms of its detection rates, right, we found that threefold increase in AFib in the population that was monitored with XT compared to non-monitored. So I think that outcome is good. We hope to improve upon that by having longer and higher detection rates, but it shouldn't preclude us from starting.

Got it. No, that's helpful. And then just to go back to AT. I know it's been kind of limited launch and kind of early launch in terms of trying to launch it within the existing accounts. But what have you seen so far in respect to rep productivity has resulted AT both from a revenue perspective as well as from a sales cycle perspective.

Well [Indiscernible] , I think it's important to think about AT in the context of a complete platform sold to an account, not as a separate product line. This is not one device and then another product line. This is all one part of an integrated system or solution that we're offering to our customers. The total market for MCT or AT has only one 10th the size of XT. And so what we shouldn't see a disproportionate amount of AT coming out of sales reps. Also, the coverage policies for MCT are quite inhomogeneous across the country. Of the 37 or so Blue Cross and Blue Shield plans, the vast majority of them have negative coverage policies for MCT. And in some states where there's a very high raise of Blue Cross and Blue Shield patients, you see very little market adoption of MCT. So it's a small heterogeneous market. That said, it's a very important segment and that this is a high acuity group of patients. So we're -- I tend to think less of it as a product line and more of as a component of our overall platform that's helping us.

And I think the question really relates that and I think this is what I'm hearing from, is that a rep that has those XT and AT in their bag, whether it's driven by AT or not, by having AT in their bag, they -- you've seen them being more productive than that rep that only has XT in a bag, for whatever reason.

Yeah, I think at the account level, we see higher growth rates within those accounts that do a wider range of patients. I think that's directionally correct. I won't quantify it, but I think its direction. That's right. Yeah. That's right.

Great. Thank you guys.

You're welcome.

Thank you. And our next question comes from Kaila Krum with SunTrust. Your line is open.

Great. Hi, guys. Thanks for taking our question. So I think you’re giving some new commentary and timing on positive cash flow into 2021. So can you just speak to your visibility and confidence in those metrics again, just given those comments kind of step into 2021, so do you need to hit a certain revenue level, are you assuming reimbursement for XT is stable. Just want to make sure I'm clear on some of those rationales.

Sure, I'll do what I can. First of all we are assuming -- this obviously assumes no material change in pricing. So that is first and foremost. Secondly, we've not really put and I'm hesitant to put a particular revenue point, of crossing that chasm, if you will, for any number of reasons. I think that puts us in a bind in terms of our ability to guide moving forward and be it remains very fluid again, if we're seeing tremendous uptick in certain markets and we want to continue to invest we clearly want to give ourselves the degrees of freedom to do so. What I would share with you guys is that if you look at the midpoint of the ranges, you're starting to see some material decrease in the OpEx growth and as I called out on the prepared remarks, a significant decrease in overall operating growth. What I think is most important to think about is we're only calling again for the midpoint of the range of 255 on OpEx, that's $45 million of incremental spend, a good portion of that spend is related to sales support, and the additional sales reps that we're going to hire and a little bit related to stock comp. You take those out, and you see that they're -- not a significant amount of growth elsewhere. So I guess I would just caution folks that we're going to try much like with the AT to be a little bit more open as we move into the year as it relates to these expenditures. But when you carve out those, those one areas that continue to invest as relates to the development of the organization, you really see a scenario where we're cutting back significantly on that kind of core organic growth. Does that help.

Organic OpEx growth.

Organic OpEx growth. Excuse me.

Well, I guess that leads into the second question on top of that. I mean, how do you think about, the long-term growth of your business obviously over 30% growth in 2020, is great and I realize you don't want to comment on 2021. But you have AT ramping up new partnerships coming online, just any sort of directional thoughts on that long-term durable growth of the business would be helpful. Thanks, guys.

Yeah, look, I would say our sentiment or view is the same as it has been in the past. We think the market opportunity is large, we believe we have the right strategy, we believe the competitive dynamics fall in our favor. And that there's increasing value within and among our brand. So from that standpoint, we remain as bullish as ever. That said, I'm going to stop short of guiding a number beyond 2020. But there doesn't seem to be anything in our way. That said, as I said earlier, in this year, we have a lot to digest in that. We've put in new areas, new regions, we have new sales reps, we're still have sales reps that we hire last year that are new to the company, we have new products. There's a lot of execution still is required. But the good news is, that's all within our control. And we've got very talented teams and deep competencies in our business that gives us confidence. Not a cakewalk, lot of hard work, but the things that we have to do to continue to grow as we have been totally within our control.

Great, thank you guys.

You’re welcome.

Thank you. And our next question comes from Suraj Kalia with Oppenheimer. Your line is open.

Good afternoon, Kevin. Good afternoon, Matt. Congrats for the nice quarter.

Thanks, Suraj, how you’re doing.

Good, sir. So Kevin, one question for you and one maybe for Matt. Kevin, a lot of you guys have consistently expressed your view that Medicare rates will remain stable, or at least through this rough process. We haven't talked about the commercial side of the equation, which is about 70% of your business. Would I be fair in saying that if Medicare remains let's say status quo, you all do not expect to see any shift, short-term or long-term on the commercial side. And the reason I ask is, our check suggests commercial on average, is slightly higher than Medicare, any color that would be great.

Sure, so of the couple of hundred commercial contracts that we have. They have couple of hundred commercial contracts that we have, they have staggered rates of renewal, some of which or many of which are auto renewed, some of which and many of which are multi-year. So the sort of feathering in and feathering out of changes in price never occurs as a thunderclap, if you will, but rather changes over time. We've now seen over the last year, year and a half now that we're nearly fully contracted, less change and pricing because our contract levels are stable. I think the drivers of modifying or increasing our pricing amongst commercial carriers is often associated with evidence. So if we can drive a new indication or we can drive a broader value to payers we stand the likelihood of getting paid more. Not necessarily, I don't see much pressure on the downside from we've never had decreases in commercial contract rates. But we certainly have had increases in our commercial rates as our clinical evidence has increased over time.

Got it. And finally, Kevin Zio AT, to the extent you can, how is Zio AT using one product for let's say, up to 30 days, is it two products, and also just logistics for billing for Zio AT. Any color that would be great. Gentlemen, thank you for taking my questions and congrats again.

No worries. So Zio AT uses the same wearable platform that we have for Zio XT. So it's a single wearable sensor. It is most often prescribed for 14 days. Multiple patches can be used to get as many days as you like up to 28 days, I guess if it's 14 times to. The evidence that we have says that our diagnostic quality, the quality of our signal, the quality of our algorithms, is that we're achieving far greater diagnostic yield, and a faster time to diagnose with a single device than it is a second, a full 30 days. And also in our research, even though that the CPT coding language says up to 30 days, the average wear time for most MCT monitors is about 11.5 days. And the RVU calculation for MCT was based on less than 12 days of wear. So a lot of code say up to a certain period of time, but that doesn't -- that's not a requirement. Nor is our technology limited to a certain period of time. It's just what's optimal for the patient and optimal for physicians to get the diagnostic results that they need. Your second question was about contract.

No, I was just trying to understand. And I think so you answered that, Kevin. If you were to use only one form factor for [indiscernible] at one product, then the billing I think if it becomes obvious. So that itself answered my question. Thank you.

Wonderful. Very good. Thanks.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Kevin King for closing remarks.

Thank you, operator. Thank you everyone for joining our fourth quarter 2019 earnings call and full year earnings call. We appreciate your support and your interest in iRhythm and look forward to updating you as we move forward in the year. All the best.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a good day.