iRhythm Technologies, Inc. (IRTC) Q3 2022 Earnings Report, Transcript and Summary

Hello, and welcome to today's iRhythm Technologies, Inc. Q3 2022 Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Stephanie Zhadkevich, Director of Investor Relations. The floor is yours, please go ahead.

Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the third quarter ended September 30, 2022. 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 provision 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 U.S. 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 of 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 the most directly comparable GAAP financial measures. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 1, 2022. 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.

Thank you, Stephanie. Good afternoon, and thank you all for joining us. Brice Bobzien, our Chief Financial Officer; Doug Devine, our Chief Operating Officer; and Dan Wilson, our EVP of Corporate Strategy and Development, join me on today's call. My prepared remarks today cover progress we've made during the third quarter of 2022 and discuss the near-term growth initiatives for our business. I'll then turn the call over to Brice to provide a detailed review of our third quarter financial results. Third quarter results demonstrated steady growth with revenues increasing 22% year-over-year, and were up 2% on a sequential basis. As anticipated, typical seasonal slowdowns in the summer months and ongoing staffing challenges impacted registration volumes. Despite this, registration volumes were up 22% year-over-year, our strongest registration growth of the year and were up 3% on a sequential basis. Stock volumes in the early part of the quarter lasted longer than anticipated into August, but we saw a nice pickup in September where daily registrations were the highest in the company's history. Despite the encouraging registration performance, we continue to experience ongoing staffing challenges and capacity issues at our customer accounts that impacted volumes. Furthermore, we saw lower percentage of returned devices, which is what allows us to provide our services and recognize revenue. Within the quarter, our rate of received devices was 1 to 2 percentage points lower than our historical averages, primarily driven by staffing and capacity challenges resulting in patients leaving the office with the packaged device to be applied at home. We have seen that received device rate trends back towards historic rates, but it continued to be lower than prior experience and drove softer revenue realization in the quarter. While we are disappointed that our third quarter results fell below our expectations, we remain encouraged by the health of the business and the demand for our Zio service as demonstrated by our healthy registration rates. On the pricing front, we anticipate the publication of the CMS Medicare Physician Fee Schedule for calendar year 2023 that could contain payment rates for the two main CPT code sets related to long-term continuous ECG monitoring and recording that we use to seek reimbursement for the Zio XT service. Following the proposed rule released in July, 2022, there was a public comment period that ran through early September, 2022, during which we fully participated in the rule making process to share relevant information at CMS to potentially finalize its rates for calendar year 2023. We hope to be able to share news on this front very soon. Turning to the progress we've made in raising awareness in target international markets. In late August, we attended the European Society of Cardiology, or ESC to support data presented on the AI awards evaluation with two internationally renowned UK institutions. This is the premier cardiology conference in Europe, and we were encouraged by the positive reception of these data points that effectively demonstrated the operational value of Zio in real world settings. Data presented by clinicians from Liverpool Heart and Chest Hospital, showed that Zio XT had an arrhythmia detection rate nearly 3x greater than that of traditional Holter monitoring. Zio XT also resulted in faster turnaround times, 25 fewer days compared to the traditional Holter monitors, and was associated with dramatically reduced outpatient appointments by nearly 20%. Data presented by clinicians from Barts Health NHS Trust also showcased the efficiency and accuracy of the Zio service, demonstrating improved clinical workflows to save them time during management of their stroke patients. Coupling this newly presented data with national guidance for Zio at its first of its kind with NICE, we are confident that our services provide clinicians with the accuracy needed to diagnose patients more efficiently and effectively at scale. Zio is an ideal solution for these hospitals to get results faster, improve patient management and release resources for hospital systems in support of a more sustainable cardiac monitoring service. We look forward to receiving additional data from our other AI award evaluation sites and sharing those in due course. Also, on the clinical innovation front, we presented at the Heart Rhythm Society for Digital Health or HRX in September, which was a new meeting for us in alignment with our increasing focus on digital health and AI innovation. This allowed us to highlight our unique platform that represents a competitive advantage within the ambulatory cardiac monitoring marketplace. Data retrospectively analyzed for more than a 10,000 patients with Syncope indication demonstrated how artificial intelligence using our Zio AT monitor could identify clinically actionable arrhythmias in this patient population, including AFib, pause and atrioventricular block that required physician notification. This study also identifies the relationship between AFib burden and pause episodes. Patients with a lower AFib burden had fewer pauses, but of longer duration. As patients with a history of syncope are at a high risk for sudden death and a reported one-year mortality rate of approximately 30%. Identification of arrhythmias in this patient population is critical for timely diagnosis and potential life saving interventions. We are excited to be able to present data such as these as we continue to advance our AI and algorithm within the Zio service platform. Lastly, we are excited to have a significant presence at this coming weekend's AHA Conference in Chicago, Illinois, which has historically been one of our biggest clinical data meetings of the year. We look forward to sharing the data with you in the week ahead and sharing a steady cadence of data over the coming months in accordance with our dedication to bringing innovative solutions to our patients and our customers. Before turning to Brice, I'd like to address the change in revenue guidance. While we are pleased with registration growth in the third quarter and expect that growth rate to remain steady into the fourth quarter, we did reduce the revenue outlook for the full-year. We now expect revenue to range from $407 million to $411 million for growth of approximately 26% to 27% year-over-year down from prior guidance of 29% to 30% growth. As noted earlier, our received device rate, which is what allows us to provide our services and recognized revenue, was lower than expected in the third quarter, and continues to be a bit lower than historic averages, resulting in a reduction to our full-year expectations. The ongoing reduced received device rate is primarily being driven by physician practices that are having patients leave the office with the device in the box to be applied at home to address capacity challenges. In addition, while registration volumes are expected to step up in Q4, staffing and capacity challenges and physician accounts are negatively impacting the rate of volume growth. Within the month of October, we saw several meaningful new accounts beginning to do business with iRhythm to further all onboarding efforts to late in the quarter as a result of staffing challenges. We continue to be bullish with respect to the momentum that we are making with key accounts in the marketplace, but these staffing challenges are impacting our pace of progress. Finally, coming into the fourth quarter, we voluntarily issued a customer advisory notice to our Zio AT customers. We have updated language related to the precautions in the Zio AT clinical reference manual, an important information pamphlet as it relates to the Zio AT patient registration process in Zio AT patient and auto triggered transmission limits. From experience, these types of customer notices are relatively common in the life science space for which we do not expect the long-term impact to the company. However, we have seen reduced growth with Zio AT within the fourth quarter to date. With the customer advisory notice and based on other considerations discussed, we have adjusted our Zio AT forecast for the quarter to grow closer to approximately 20%, which is a step down from the upper 40% growth we had seen through the first nine months of the year. While disappointed in reducing our full-year revenue outlook, we continue to be encouraged by the underlying momentum that is growing in our business and our ability to overcome these headwinds. Our fourth quarter guidance implies strong year-over-year registration growth and revenue growth well north of 30%, our strongest quarter of the year. We remain confident in the long-term growth trajectory of the ACM market and our ability to capture share. We see significant runway for growth within our core market that we serve today as we continue to shift the standard of care to Zio and we are committed to developing and implementing innovative solutions throughout all areas of the business to capitalize on the sizeable market opportunities ahead of us. As highlighted during our Investor Day, we continue to invest in our mid and long-term initiatives that will leverage our technology platform and new geographies and across new markets. We look forward to sharing more of our progress in the future. I'll now turn the call over to Brice to discuss our financials.

Thanks, Quentin. As mentioned, third quarter results demonstrated steady growth in our core business as revenue grew to $103.9 million, representing 22% year-over-year and 2% quarter-over-quarter growth. Despite staffing shortages at customer accounts, we still saw substantial growth in account openings during the quarter. New accounts onboarded declined slightly in the third quarter compared to the second quarter, but the absolute number of new accounts opened was still the second highest in the company's history. This seasonal drop was in line with historic norms observed pre-pandemic, but significantly improved compared to 2021. Looking at new store same-store mix, new store defined as accounts that have been opened for less than 12 months accounted for approximately half of our year-over-year growth. This was up from 38% in the second quarter of 2022. Home enrollment was about 20% of volume in the third quarter, approximately flat compared to the second quarter. Turning to the rest of the P&L. Gross margin for the third quarter was 68.3%, a 50 basis point decrease from gross margin in the second quarter at 68.8%, and a 260 basis point improvement from the third quarter of 2021 at 65.7%. The sequential decline was primarily driven by lost inventory associated with the reduced device return rate, while year-over-year benefit is achieved primarily through ASP improvement as we continue to optimize our pricing strategy. Third quarter adjusted operating expenses were $89.7 million, down 4% from the second quarter and up 13% year-over-year as we start to see the business become more discipline with spend. As previously communicated, our investments remain strong in R&D while we begin to create efficiencies in our SG&A profile. Please note, we did incur approximately $2.3 million of expenses related to business transformation activities in the quarter. Net loss was $21.5 million or a loss of $0.71 per share versus the net loss of $23.9 million or $0.80 per share in the second quarter of 2022. This compares to a loss of $0.81 per share or a $0.10 improvement versus the same period of 2021. Adjusted EBITDA, which excludes depreciation, amortization, share-based compensation, and business transformation charges was negative $2.6 million during the third quarter. This represents an improvement of $2.3 million compared to the second quarter of 2022 and an improvement of $6.1 million compared to the third quarter of 2021. Adjusted EBITDA margin of minus 2.5% was the highest of the year and a 770 basis point improvement over the prior year, driven by efficiencies in current gross margin as well as improved operating leverage. Liquidity remains strong with cash and short-term investments of $203.5 million at the end of Q3, which will allow for continued investment in our growth initiatives. Turning to guidance. For the remainder of 2022, as Quentin previously mentioned, our full-year revenue is expected to range between $407 million and $411 million, reflecting year-over-year growth of 26% to 27%. This reflects sequential fourth quarter revenue increase of between 5% and 9% in line with historical pre-pandemic trends. Based on progress made related to our cost initiatives and operating discipline within the business, we are maintaining gross margin guidance with the range between approximately 68% and 69% and reducing anticipated adjusted operating expenses to range between approximately $360 million and $365 million. We expect full-year 2022 adjusted EBITDA to range between negative $10 million and negative $12 million as we continue to anticipate adjusted EBITDA breakeven or better in the fourth quarter. This reflects an improvement of approximately 850 basis points as a midpoint year-over-year. As a reminder, adjusted EBITDA excludes restructuring costs and transformation costs and will continue to exclude stock-based compensation expense. With that, I would like to turn it back over to Quentin for some closing remarks.

Before I turn it over to Q&A, I'd like to highlight our confidence in iRhythm sustainable growth model for which we are building the foundation. Our core business strengths are still very much intact and our long-term investment thesis is as intact as ever. While the reduction in revenue expectations for this year is disappointing, we see strong demand for the Zio service despite a difficult macroeconomic environment. The clinical evidence that we continue to generate and our pipeline of innovation continue at a healthy pace. We are very excited about the upcoming commercial launch of the Zio monitor that is in the middle of a market evaluation is showing encouraging signs of positive impact for patient compliance. We look forward to enhancing our Zio AT product to grow our market share in the MCT space, and I'm pleased with the progress that we continue to make in terms of operational discipline, driving rigor and process into the organization to scale for the business of tomorrow. With that, Brice, Doug, Dan and I would like to now open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Margaret Kaczor from William Blair. Your line is open.

Hey, everyone. Thanks for taking the question. I wanted to start with guidance. Maybe we're seeing the $8 million roughly decrease at the midpoint and at least relative to our numbers, we saw $2 million, maybe lower number this quarter. So can you walk us through the individual impacts of returned devices versus account staffing versus kind of AT utilization declines especially as it relates to Q4?

Yes. So Margaret, this is Quentin here. I think, we were a bit short in Q3 of our own expectations, call it a $1.5 million to $2 million to about $6 million in the fourth quarter. Really three buckets that you've identified and I would attribute the majority of this to the staffing and capacity challenges that we're seeing. In many respects, you appreciate the fact that we've got a product that works well in an environment where capacity is constrained and being able to take the product home with the patient. However, what we experienced in that scenario is a lower returned device rate. It becomes more comparable to our Home Enrollment program to be honest with you. Now, I think there are some things that we can do with that to address it. For example, in the Home Enrollment program, that's a different SKU where we provide greater information to the patient on how to apply the device. We have incremental video links that they can watch to help inform them. As well as from an operational perspective, we'll proactively reach out and make phone calls to the patient to make sure they've put the device on or applied the device. When a physician gives the patient the device in the clinic and has them take it home to apply it, we don't necessarily engage in those behaviors because we weren't aware of it. I think as we're becoming aware of it, we can begin to address it more aggressively into the future. But when you think about the impact on guidance in the quarter, in the fourth quarter in particular, I think about it as roughly a $1 million or so from the received device rate just being a bit lower than what we've historically seen. The capacity challenges with respect to onboarding new accounts. We had a handful of new accounts in October that began to use product with us, but deferred their full system implementation until late in the quarter around the December timeframe when capacities begin to open up a bit. I think that's somewhere around the $2 million impact in the quarters, how we sort of size that up. And then the additional one is the Zio AT customer advisory notice. We've been growing that business right around, call it, the upper 40s, nearly 50% through the first nine months of the year. Here through the first part of the fourth quarter in October, we're seeing that growth rate closer to 20%. I think that's about a $3.5 million to $4 million impact on our fourth quarter revised guidance is how we're seeing that play through. I do think we'll see the ability to address that as we work the advisory notice into the formal packaging and labeling and the [indiscernible] notice ultimately will end up going away, then I think it becomes less of a headwind. But here in the near-term, we are seeing that impact. So those are the impacts of guidance – the reduced guidance.

Okay. Thanks. And then, obviously the next question then becomes, if you're saying these persistent to Q4, how do we adjust this for 2023 without you giving too much guidance obviously, but can those new accounts maybe that you're onboarding and they still have capacity issues. Should we continue to assume that, I guess as we go into Q1 and beyond and any way that you could kind of help us figure out that numerically, I guess?

Sure. Understand the question. Look, I think the new account onboarding, they're beginning to use the product, it's just the full system-wide implementation has been deferred, like I said, out until that December timeframe. When capacity generally will open up, I mean, what happens is November is far and away the most heavy month of the year in terms of office visits, patients into the physician's office, application of the device. That usually will step down a bit into December. So I do believe these accounts see that in their scheduling and they're willing to then go forward with the full system implementation late in the quarter. So I think this is more of a near-term impact certainly on the Zio AT side. I think like I said, once we get the packaging updated, the labeling updated, the [field action notice] starts to subside. I don't think it becomes nearly as big of a headwind. What you're seeing in that business is our core accounts that are using AT continue to use it very nicely. Like I said, we're up 20% despite this headwind, but it's the new accounts onboarding. As you begin to address those accounts, you talk through the value of AT, and then there's a field advisory notice involved as well. It just gives them a bit of delay in bringing the product onboard. So I think we will work through that in the near-term, but it is going to be an impact in the fourth quarter.

[Operator Instructions] We turn to Allen Gong from JPMorgan. Your line is open.

Hi, team. Thanks for taking the question. I think just kind of diving deeper into the shortfall in the quarter. Specifically, I think a question that a lot of investors have is you hosted your Analyst Day near the tail end of September and why you didn't provide a concrete guidance update. I think a lot of investors kind of got the impression that the quarter was basically progressing as you had expected with some challenges from staffing and capacity constraints. But we didn't hear anything about this returned dynamic. So I guess what changed between the Analyst Day and the end of the quarter? Was it really that pronounced an impact or was it something that had just kind of built up over the course of the quarter and wound up being a bit more severe than expected?

Yes, Allen. So if you go back to our Investor Day, coming into that day, if you recall, even with our earnings call back in early part of August, we did talk about a bit of the softness with July and August that we had reflected in our results. And that lasted a little bit further into August, but not that much further that – that began to come back in line. At the time of our Investor Day, September was performing very, very well. As a matter of fact, September was a record month for us. During the course of the quarter, we were at nearly 30% daily average growth in our registration volume. So we were seeing very bullish results at the time of our Investor Day. And while we knew that the returned device rate was a bit lower than what we had historically seen, it was beginning to come back in line with historic trends. The trend line was moving back in the right direction. So coupled the fact that we saw incredibly strong registration growth in the month of September, and that received device rate beginning to bend back towards, what we've seen historically, we felt good with respect to the full-year number and where we were at, we felt very strong, particularly with respect to the strong registrations. And if you look in the month – or sorry, in the quarter itself, registration volumes were up roughly 3% despite the fact that we had given color in our guidance that we thought volumes would be roughly flat sequentially from Q2 to Q3. So registration volumes were actually ahead of where we thought, it's the received device rate that came in a bit lower than what we anticipated. And at the time of Investor Day, we absolutely felt like we were going to be able to recover that over the course of the fourth quarter and for the full-year be just fine. Unfortunately, as we've got into October, we didn't see that that received device rate close all the way back down to historic levels and there continues to be a bit of a gap there. So that was what we did not have visibility to at the time of Investor Day and have realized beyond that, that it's a bit of the changing behaviors in the physician offices where – in clinic, they're sending the patients home with the device, that was not something that we had fully expected or anticipated at that point.

Got it. And then just as a quick follow-up, offsetting a little bit of the softer topline, we're obviously seeing you cut operating spend by, I would say, that was always a stated goal of yours, but I think a little bit of a sharper cut than we were expecting so early, especially as, there it appears that there is still so much room for growth. So I guess to address investor concern then maybe the balance of operating spend cutting and focus on the topline is something that might need to take a look at. Like what do you have to say to the softer quarter, the softer guide and the SG&A reduction?

Yes. I think from a spending perspective, there's nothing unique or different there that we've done in response necessarily to the topline. It's continuing to be very disciplined with how we make the investments into the business and how we structure the organization for future success. We are as bullish as we've ever been around the opportunities to open new markets, adjacent markets, whether that's international, silent AF, getting into some of the other adjacencies like sleep, hypertension that we mentioned at our Investor Day or the Know Your Rhythm program, we continue to make all of those investments. As a matter of fact, in our implied fourth quarter guidance, you're going to see spending step up a bit from Q3 levels. So we continue to make the investments. It's just being very thoughtful around those sort of things and where we can bring more discipline into the organization, be more efficient with how we spend our dollars or how we transact our volumes. We're going to make sure we do that. And I think that's something that we're committed to not only here in 2022, but out over the next five years in terms of the long-term horizon that we laid out for you at our Investor Day. So I think you're just seeing the benefits of that flow through nothing unusual that we're reacting too differently in the business right now.

We now turn to Cecilia Furlong from Morgan Stanley. Your line is open.

Great. Good afternoon, and thank you for taking the questions. I wanted to start just with the device receive rate that you talked about. How does this compare with Home Enrollment? And as you think about to just in a continued environment that we're experiencing today, just how you're going to target those patients to increase the rate of returns going forward?

Yes. So our Home Enrollment received device rate is usually about 2x to 3x lower than where we're at on the in-clinic received device rate. And that's something that we've been able to favorably impact over the past 12, 18 months, particularly as we think about better ways to inform those patients with respect to how to apply the device, putting a phone call out to those Home Enrollment patients to ensure that they actually do apply the device. Those are things that we've done in that Home Enrollment space. There are several things that we've done there that we can take and begin to do with the in-clinic product as well. I mean, it's virtually the same product itself. It's just there's more informational materials that we provide in the Home Enrollment program that we can provide in the in-clinic, and we'll begin to do that very quickly. As well as – the one thing that if we're working with the clinics that we understand they're sending the clinics – for the clinics, they're sending the patients home with the devices, which we are now becoming very aware of where those clinics are at because in many cases it's a clinic-wide sort of decision or system-wide decision where they're doing it in all of their clinics. We can begin to make those outbound phone calls to the patients as well to ensure that they put the device on. So what we essentially have right now is sort of a hybrid model between the in-clinic and the Home Enrollment and the received device rate with these folks is better than Home Enrollment, but it's a couple points below where we've seen in-clinic. I think we can impact that as we move into the future, but here in the early part of the quarter, we certainly have seen the impact of it and we're reflecting that in our updated guidance.

Okay. Helpful. And also just wanted to follow-up, and you had talked about for the back half of the year, shifting volumes to NGS, the benefit from an ASP standpoint tied to that. Can you just walk through what you saw in 3Q? How you're thinking about 4Q? And it does look like the rates were finalized nationally, so I would love I realized that it just occurred, but just would love your high level thoughts on national pricing from CMS? And thank you for taking the questions.

Sure. So from an NGS perspective, we still believe the full-year impact right around that $7 million impact is the right way to think about it. With respect to Q3, we came pretty close to the $3.5 million that we expect, and we were just a bit shy, but it wasn't material in any way. And for the full-year, $7 million is still the right way to think about it. With respect to the final rates, I know that OMB had released their approval. I haven't seen the final rates just yet. We expected that we would've seen them either last night after market or this evening. I have not seen them yet. As soon as we have the opportunity to run those through our models and evaluate the impact, we certainly will put out some comments around them particularly if it's any meaningful movement off of the proposed rule. But I have not seen those yet, Cecilia.

Okay. Great. Thank you for taking the questions.

We now turn to David Rescott from Truist Securities. Your line is open.

Hey, guys. Thanks for taking the questions. I guess looking out to 2023 and kind of following up on a prior question. At the Analyst Day, you would outline this to our five-year growth strategy of 20% and know that it would be linear over that five-year timeframe. And at the time of the Analyst Day, I think consensus estimates pretty much had us at 20% growth or had consensus growth estimates at 20% into 2023. So just wondering given the lower guide, when you're thinking about next year, do you think that this kind of 20-year or 20% growth on the topline is something that's more reflective of the lower guide or do you think that perhaps the initial guidance that you gave or the initial thoughts that you gave on 20% growth at the time is more effective of what you're thinking for next year or perhaps?

Yes. We're not going to speak to 2023 just yet. I still feel very good with the long-term plan that we put out there and the ability to grow at 20% over that planning horizon. Nothing changes my perspective in and around that at all. Like I said earlier, I'm very excited to get the Zio monitor into the marketplace next year. We know from market evaluation, the received device rate on that Zio monitor is meaningfully better than what we've seen with Zio XT, both in-clinic or Home Enrollment. So I'm excited to get that out there. I think we can address some of these near-term, shorter-term challenges with that product. Likewise, you're going to see us continue to innovate on the Zio AT side. We continue to work with that product. I would expect we'll submit with the FDA in 2023, a revised version of Zio AT or Zio MCT that continues to close some of the competitive gaps and I think positioned us really well for growth in that MCT space. But I'm not going to speak to 2023 at this point in time. I think that's something that as we get through the quarter and head into next year, obviously we'll give our thoughts around it. But long-term, I don't have any concern with the long-term growth horizon that we put out there into 20% sort of target that we noted.

Okay. And then I guess just on the commercial side, I know in the past couple of years this Q3 timeframe, companies typically talked about how commercial payers will either not necessarily negotiate, but potentially notify the company around this time if there's any significant material changes toward their expectations for reimbursement in the forward-looking year. So just wondering where you stand based on any new conversations with commercial payers, how we should be thinking about commercial rates into 2023?

Yes. I think at this point there's no new news to share there around the commercial payer negotiations, I would say all are moving right down the path of how we would expect them par for the course. And certainly nothing there that would give us any indication that we're going to see something different flowing into 2023 than what we've seen historically. So I think that low single-digit sort of pricing pressure in the commercial business is the right way to think about it. If we see anything different in the business, we'll be sure to note that, but based upon conversations we've had to date, and to your point, those are conversations we'd be having around right now as we begin to think about 2023. There's nothing there that gives us any concern at all on the commercial side.

Okay. Thank you.

We now turn to Joanne Wuensch from Citibank. Your line is open.

Good evening, and thank you for taking the questions. I'm curious about something, why do you think the staffing issues now passing the return rate? Because we've been having staffing issues for about a year and I don't know what these Zio AT field service or issue was. If you could just refresh on that? And then all in the same bucket, is there anything else that's going on? Salesforce turnover, shifting competition, physicians waiting for final CMS approval, anything else that we need to maybe lift up the rock on and make sure that's not happening? Thank you.

Sure, Joanne. Look, I think to that point, Q3 was far and away our strongest growth rate in registrations year-over-year that we've seen all year long and September was by far our strongest month. But keep in mind, registration volumes are up 22% in the third quarter compared to roughly 11% to 12% in the first half of the year. So we saw a meaningful uptick in our registration volumes in the third quarter, and I expect that to be very steady into the fourth quarter. So I don't see this as being any competitive dynamic in the marketplace. We certainly have not seen that in any of the market analytics that we're doing. We haven't heard that in any of the competitive commentary around this space either. And certainly our data points with the strength and the momentum that it's building in the registration volumes would indicate that this is not a competitive dynamic. It's simply with the growth. The volume growth in these accounts, they are capacity constrained from a staffing perspective. And I think when you look at the seasonal nature of the business, September always steps up, October will generally step up from there, and then November is the heaviest month of the year. I think that these accounts are seeing incremental volumes come into the account. They're trying to find ways to navigate through it to be able to meet with all of those patients, and they're struggling. The thing that they identify with our product is, look, we can easily have this send home. You can apply it at home and it saves time in the clinic. I believe that's what you're seeing, and that's certainly the feedback we've heard from the numerous number of accounts who have begun to enact this sort of practice with our device. So on the one hand, I appreciate the fact that we've got a model that can work very well to help create capacity and improve efficiencies in the offices of these physicians. But at the same time, we've got to make some tweaks or better inform our customers to improve that received device rate. But I think what you're seeing over the course of the summer into the late part of the summer here into the early part of fourth quarter, this volumes continue to grow and these accounts are – they're constrained. They're having challenges from a staffing perspective to keep up with it.

Thank you.

Our next question comes from David Saxon from Needham. Your line is open.

Yes. Hi, good afternoon, and thanks for taking the questions. I hate to beat a dead horse, but I think I will. The PCP channel is somewhat of a newer market for iRhythm, so just wanted to ask if there's any link between the lower return rates and prescriptions done in that PCP channel, or if it's really just purely a staffing issue at all accounts?

Yes. It's not specific to primary care. We certainly have looked at that pretty closely. It's more specifically tied to some of these larger national accounts, national groups, which have made a decision overall to push down into all their clinics, sort of send the device home or a hybrid of a Home Enrollment, in-clinic sort of set up. So nothing in particular primary care setting. I will note, two of the last three quarters, so Q2 was an all time record quarter for us in terms of new accounts onboarding. Q3 was the second largest quarter in the history of the company. We continue to seek good momentum. Primary care continues to be a big contributor to the new account openings. But we're not seeing a difference in sort of that in-clinic or Home Enrollment aspect with the primary care versus our traditional…

Okay. Got it. And then I think cost effectiveness data for mSToPS should be out at AHA this weekend. Just wondering, if you can use that data when going out and selling the Know Your Rhythm campaign. And I guess the 2023 schedule is out, but longer term, do you think this economic mSToPS piece fits into kind of the broader reimbursement conversation going forward? Thanks so much.

Yes. And without question, I think it absolutely will. We look forward to seeing the final data as it gets published and I think it absolutely is going to be some information that's going to be very useful as we can see to articulate the value associated with proactively monitoring patients. And so, yes, I think absolutely it'll be something that will be utilized and will reflect nicely.

We now turn to Bill Plovanic from Canaccord. Your line is open.

Great. Thanks. Good evening. Thanks for taking my question. I wanted to circle back on the question of just the relationship between the revenue slowdown and the implementation of the operating expense efficiency improvement efforts. Have you looked at the correlation there or is there a correlation? And then you mentioned a couple of new products may help you overcome some of the challenges you're facing today in terms of going into FML on the Zio monitor and the approval in FML on the Zio AT. I was wondering if you maybe could provide us with maybe a little more granularity on the timing of those i.e., as some Zio monitor going early 2023 and then AT a mid-2023, or how should we think about them coming in for full launch? Thanks.

Yes. Bill, I'm going to have to write something on the [discount] side and share some thoughts there. Again, we haven't changed anything specific to what we've seen with the reduced revenue expectation here in the near-term. Again, think it's more of a near-term impact that we'll navigate through, but we haven't changed things from a spending. But Brice feel free to share your thoughts and then I'll hit the new product timing and cadence.

Yes. Bill just to echo Quentin's commentary there, nothing has changed materially in the way we're investing in the business and where we're ultimately driving long-term growth. Most of this is playing through with efficiencies that we've been putting in to the company for the last several quarters, and we're seeing it play through the numbers. I would say the vast majority of the benefit we're seeing in the reduced operating expenses is coming from that SG&A side, primarily the G&A front. So the investments are being made into R&D and sales and marketing just as we would've expected. We're just creating efficiency within the business and a different level of, I guess, rigor on managing operating expenses.

And with respect to the timing of the new products Bill, Zio monitors and market evaluation as we speak. So with that in the market in very limited ways, I will note, the complete patient compliance or the received device rate on that Zio monitor is noticeably higher than what we're seeing with Zio XT. I think a lot of that comes back to the smaller form factor, just the wearability aspect of it as a better experience. But we're excited to get that out. I would expect to see that launch more fully sort of in the mid-year timeframe of 2023. You'll hear more and more about it as we come into that. With respect to AT, there's quite a bit that we're doing there to really enhance that product. And that's something that we'll get on file with the FDA in 2023. And I would expect that's more of an early 2024 sort of market introduction is how we think about that.

And then can you – I think there is $2.3 million of charges in the quarter. Can you just kind of clarify what that was for?

Yes. Bill, I'll take that one. That's really for costs we've incurred as we're planning on the globalization of the organization, looking for opportunities to create efficiency down the P&L, it's working on the plan to ultimately be able to execute as we move into 2023 and beyond.

Was that headcount reductions, was that investment, can you help me out?

Yes. It's a bit of headcount-related or structural considerations around how we set the organization up for the ability to think about it [indiscernible] outsourcing those sort of things where we can compliment the organization to make sure that we can grow more effectively and efficiently and scale, but it's really transforming the organization in that way.

Thank you.

We now turn to Suraj Kalia from Oppenheimer. Your line is open.

Good afternoon, everyone. Quentin, can you hear me all right?

We got you. Yes.

Perfect. Hey, Quentin. So I know everyone has beat this delay in returning the scripts to [indiscernible], so I'll stay away from that. Longer term, Quentin, if you look at the 20% CAGR that you mentioned on the Investor Day, what percent of it do you think comes from just the Zio monitor versus Zio AT versus new channel versus new indications? I guess just trying to understand how should we start stress testing some of these assumptions. And at the same time, maybe Doug or someone else, if I could just throw it in, the 50% year-over-year growth in new store sales. Can you just help us understand what new store, how do you define that? Thank you for taking my question.

Hey, Suraj. So I think in terms of long-term contribution of growth towards that 20%, I think you're going to see that the Zio XT business grow in the mid to upper teens. And then you're going to get a nice compliment from the AT business as we close the gap in terms of the market share that we have in our XT business. I believe we can see a representative sort of market share in the AT business within that MCT space over time as well, particularly as we continue to evolve that product line, and then you're going to get some nice contribution from international coming in those outer periods also. So that's the way I think about the inflection of the 20% growth over time. Doug, feel free to speak to the incremental new volume growth or Brice, either one.

Yes. I'll take it. Hey, Suraj. The incremental volume growth related to new accounts is really those accounts that have been opened for less than 12 months and how much they're contributing to the overall growth rate. So what we mentioned was is that it accelerated in Q3 versus Q2, it's about half of the growth. So half came from existing accounts and half came from those accounts that we deem to be new, which is open for less than 12 months.

We now turn to Michael Polark from Wolfe Research. Your line is open.

Hey, good evening. I just want to understand on the device return rate commentary, I heard some conflicting disclosures. What is the delta between Home Enrollment and office? I heard 2x to 3x, but I think that just feels high. Is it two to three points? Just kind of framing that variance and then where kind of home discharge from office sits? I'd appreciate the clarification.

Sure. So the Home Enrollment is about 2x to 3x higher than what we see with the in-clinic application. So just reaffirming the language I used earlier, that is the right way to think about it.

Okay. So 2x to 3x?

Think about it as a couple points of loss in that returned device rate. It's a couple, 2x or 3x higher than that if it's Home Enrollment. And then the in-clinic sort of hybrid that we're – I guess we're sort of explaining now, which is, you get the device in the clinic office and you send home to apply it at home. We're seeing a couple points higher than our in-clinic rate at this point in time. So that's a couple points versus 2x to 3x. Hopefully that's clear.

What is ballpark of the in-clinic return rate? Are we at 95% or where is that number?

Yes, better than that. It's a couple points and so on.

Okay. I understand now. Sorry a lot of tidbits to triangulate there. And then my second topic and I'm not – I can't tell if this is relevant if it matters. So I'm interested in your perspective, but Novitas has opened the review of its LCD for cardiac monitoring defined broadly. I think they're consolidating some articles from themselves and from their sister organization. And they used a sentence to describe. Why they're doing this that kind of was unusual, ongoing claims analysis indicates aberrant utilization of cardiac monitoring services. And so I'm just curious, what do you think is going on here? What are they looking at? What are they hoping to accomplish? And over what time horizon might you have visibility into the change in their coverage policy? So thanks for taking the questions.

Yes. I think my specific to that, I can tell you there's nothing that we've been engaged with here at iRhythm directly with Novitas in and around that. So I wouldn't read into anything there and certainly I couldn't provide you any more color in terms of trying to understand better what they might mean by it because we have not been engaged with them and working through any of this. I would also just keep in mind, we've seen volumes moving away from Novitas over the course of the year as we've had Max begin to contract with us in other regions, Chicago in particular, is one of those that we've talked about over the course of the year. So our volumes with Novitas have not been nearly as prevalent as what they have been historically, particularly with our mix. So there's nothing there specific to iRhythm that I could refer to. I think all these max up their normal process. They work through each and every year. I think that this is just part of them updating their language or their guidelines, but there's nothing specific to iRhythm that I could refer you to or even speak to as they've not engaged with us in any way around that.

This concludes our Q&A. I'll now hand over to the management team for final remarks.

Terrific. Well, I'd like to thank you for joining us on today's call. While disappointed with the reduction in our full-year revenue expectations, I am pleased with the progress that we're making in the business as well as the increasing momentum that we're seeing in our U.S. Zio XT business. We've continued to make great strides over the course of the year on the profitability front, resulting in the improved earnings outlook that we outlaid today. We view the impacts of the returned – reduced returned device rates in our Zio AT business as near-term headwinds that we will navigate through and remain confident in the long-term trajectory of the business. Thank you for your time.

Today's call is now concluded. Let's thank you for your participation. You may now disconnect your lines.