Welcome to the iRhythm Technologies, Inc. Q1 2023 Earnings Conference Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Stephanie Zhadkevich, Director of Investor Relations, to begin. Stephanie, please go ahead.

Thank you all for participating in today's call. Earlier today, our iRhythm released financial results for the first quarter ended March 31, 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 safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact could 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 states. 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 as a substitute for or superior to results prepared in accordance with GAAP. Please refer to enables 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, May 4, 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.

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, join me on today's call. My prepared remarks today cover progress we've made during the first quarter of 2023 and discuss the growth initiatives for our business. I'll then turn the call over to Brice to provide a detailed review of our financial results and updated guidance. In the first quarter of 2023, we continue to build upon the solid momentum we had exiting last year, recognizing revenue of $111.4 million or 21% growth year-over-year. Our commercial team did a terrific job building upon the discipline and rigor introduced in the back half of last year to capture key strategic wins driven by a continued push into primary care as well as increasing penetration into large and national accounts. The outperformance in the quarter was driven by the strength of our Zio XT business, fueled by better-than-expected volume and another record quarter of new account openings. Additionally, we were pleased with the performance of a return device rate for the quarter as well as the performance of our Zio XT business, which grew 21% year-over-year on a revenue basis, both in line with our expectations. Encouragingly, growth during the first quarter came from across the business as we saw strong contributions from all regions, deeper penetration in our existing accounts and a record number of both new accounts and new prescribers. Volume from cardiologists prescribers grew nicely during the quarter, while contributions from primary care continued to outpace overall company growth. The interest in Zio from primary care physicians continues to grow, evidenced by the significant and growing interest from large national primary care networks. We continue to believe that the…

Thanks, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discuss 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. As Quentin mentioned, first quarter results demonstrated continued momentum as we realized revenue of $111.4 million, representing 21% year-over-year growth. This strength was driven by significant volume growth in our core U.S. business, slightly offset by a low single-digit pricing decline in line with expectations. With national CMS rates in place as of January 1, 2023, we began leveraging our San Francisco IDTF with approximately 25% of Zio XT volume processed through the San Francisco location, also consistent with expectations. Looking at new store same-store mix, new store defined as accounts that have been opened for less than 12 months accounted for almost 35% of our year-over-year growth. While we continue to drive record new account openings contributing significant growth, this new store same-store contribution mix is also reflective of tremendous volume growth from existing accounts, implying reduced account turn and increasing penetration in these accounts. Home enrollment for Zio Services was about 20% of volume in the first quarter. Moving down the rest of the P&L. Gross margin for the first quarter was 67.9%, representing a 200 basis point decline compared to fourth quarter 2022. This decline was primarily driven by expected ASP fluctuation sequentially as we began processing claims for the CMS business at updated national rates beginning January 1 as well as expected slight declines in our commercial realized ASP. However, gross margin in the first quarter of 2023 represented a 100 basis point improvement from first quarter 2022. This was driven by a reduction in unit cost to serve as we ramp volumes significantly, and we're able to leverage…

[Operator Instructions] Our first question comes from Allen Gong from JPMorgan.

Congrats on the good quarter. I just had one quick one on the quarter and then a follow-up, but definitely encouraging to see the quarter starting off on a bit of a strong note with AT growing 21%. But when I think about -- you had talked about how it seems like AT is improving, device return rates are improving. How is that really tracking relative to the expectations so far in the second quarter? And what more do you need to see before we can maybe see guidance moving up not to beat a dead horse, but up towards the 20% LRP?

Yes. Thanks for the question. I've been very pleased with what I've seen in the business thus far with return device rates in the AT business. I would say that more or less, we've been right in line with our expectations, if not slightly ahead of where we expected to be, but not materially. You look at the first quarter, the driver of the business is just the underlying volume strength that we're seeing. Our registrations in the quarter were up in the mid- to high 20s as we start to approach 30%, some of the strongest registration growth we've seen in almost two years now, and that's getting back into some COVID comparisons that start to get a little bit unique, right? So the registration growth has been phenomenal. And that's really what's driving the overall growth in the business. I still continue to believe that as we make progress with return device rates and AT returns to historic growth rates, that has the opportunity to provide some upside to the guidance that we've laid out today. But really, the strength of the quarter was driven on the registration growth in the business.

Got it. And then for a less fun question, this Department of Justice inquiry is news to us. I believe you said it was civil. So hopefully, a downside is limited. But when I think about -- do you have any sense of what they're actually looking into, the timelines that you should expect or any updates on the process and just what the downside could be to the inquiry?

Yes. I think it's a bit early at this point, Allen, to really articulate anything more clear around the matter itself. We certainly will engage with the DOJ and try to learn as much as we can and we'll communicate as we have more clarity around what that looks like. I think at the end of the day, we know that within this industry, these things occur from time to time, we understand that. I will tell you, we've done an incredible amount of work over the course of the last 12 months to 18 months with the new leadership team in place, building out incremental more robust capabilities we've put in place a chief risk function, a chief risk officer. We have a dedicated compliance function. I mean we've continued to mature the organization over the last year or so that continues to give me confidence that quality, compliance, all of these things are very important to us and will continue to be, and we're elevating our capabilities in the organization. But to give you any specifics on what they might be focused on or where their focus is at, it's just too early at this point and there's not a whole lot more we can comment on at this point in time. But as we do get more information, we'll certainly be sharing it.

Our next question comes from Margaret Kaczor from William Blair.

This is [indiscernible] on for Margaret. Congrats on the quarter. So obviously, the PCP momentum has continued. And from our channel checks, what we've heard is there's been better access to iRhythm compared to before. So are there certain partnerships where that is happening more than others? And then just as a follow-up, is there a certain type of patient you're seeing now more than previous before you had these partnerships?

Yes. Thanks for the question. I'll tell you on the access side, we spent a lot of time over the course of 2022 really working to ensure that patients that needed access to our product could get it. And nearly 93% of all patients from a commercial perspective, have access into our product, the vast majority of which, without any prior authorization for Zio XT. So I think we've done a terrific job increasing access, creating awareness around it. One of the things that we're seeing in the marketplace, and it doesn't -- the product is so easy to use and apply that in many times, cardiologists are actually recommending that the primary care physicians, particularly within their own network, begin to prescribe the product and have the product apply much further upstream because it helps them really identify which patients they then need to see further downstream and spend time with. And so I think you've got the cardiologists who are making the push for this device to be utilized in more of the primary care setting. We're going directly at the primary care network. We announced the agreement last quarter with one medical. We continue to expand those with additional primary care networks that only increase the utilization of the product in that primary care space and certainly elevate the awareness of the value of the product. So I think it's a combination of things, both access that we're working to create and doing a nice job improving, but also just creating a lot of awareness in the primary care channel with respect to how easy this product is to use and how it can help them streamline the patients they're caring for and where they need to go next within their network.

That's great. And then just one real quick on Zio Monitor in terms of what's being assumed in the mix between Monitor and Zio XT once it does enter the full launch?

Yes. It's a good question. Thanks for asking. I would say from a guidance perspective, we're not necessarily anticipating an acceleration in volume or anything specifically related to Zio Monitor. What I would say is we absolutely believe this is a great product, and there's absolute opportunity for upside with it. But from a guidance perspective, not necessarily anything baked in specific to monitor.

Our next question comes from Marie Thibault from BTIG.

Congrats on a great quarter. I wanted to ask my first here on the Novitas final LCD that was out. We certainly got some questions on it. And I just wanted to hear your latest thoughts on the risk around that LCD, the possibility of spread to a Noridian or a different geography. And any details you can offer on the number of prescriptions that would meet the EKG requirement. Any details around that?

Marie, thanks for the question. Look, I don't view the final LCD out of Novitas is anything that gives me any concern really at all. I don't think it's significantly restrictive. I think it mirrors quite frankly, many of the commercial policies that are already out there that we navigate in and around every single day. I mean at the end of the day, if you look at where they landed with the final position of their LCD. And the reality is there's a handful. You can probably count 10 to 12 different criteria that so long as the patient is meeting or the physician believes it is taking place enable or allows them to prescribe a pass technology. And I think the initial concern was, is there going to be a requirement for a 12-lead ECG to be performed before they can step into something else? That's not the case at all. That's one of the 12 criteria, but they're all ours if you will, meaning if you meet any one of those significant list of criteria. So I don't view this as anything that's going to impact the momentum in the marketplace. Again, it's very much in line with what we see with the majority of our commercial payers. And if you get into the details even on the 12-lead ECG, for example, you just start to do some market checks. You're going to find that north of 80%, upwards of even 90% of physicians are already capturing this information, and we're providing it, like I said, in the commercial payer universe already. So I don't have any concerns around it. Certainly, we're mindful of it, but it's a normal part of how we operate the business today and how the physicians, I believe, interacts with their patients today. So no real concerns from our perspective there.

Okay. Good to hear you confirm that. I'll ask my follow-up here on the San Francisco facility. It sounds like about 25% of the volumes being processed through that facility. What are you expecting in the numbers you've given us for Q2 on guidance in terms of the shift toward that? How is hiring and all the hurdles you need to jump to shift more volume going on that side?

Sure. Marie, it's Brice. So yes, we still anticipate about 50% of the full-year volume running through the San Francisco IPF. No differential from what we anticipated from the beginning of the year. And as you can imagine, that would imply a ramp throughout the year. As it stands now, hiring is going well. It's still something we monitor on a regular basis, but no deviation from the contemplation in the original guidance.

Our next question comes from Nathan Treybeck from Wells Fargo.

Can you talk about the ASP declines you saw as you began processing at the new national rate? And how should we think about this as you shift your volumes to the San Francisco IDTF?

Sure. Jason, this is Brice. So in the first quarter, if you remember, looking back into 2022. From a CMS perspective, we're still navigating most of the volumes through the Houston IDTF. At that point, it was at a lower ASP point than what we ultimately ended up pushing through Chicago. So in the specific to XT, I would say there's actually a bit of pricing tailwind from a CMS perspective on the XP side. Now I will say on the AC side, it's almost exactly the other way and they effectively net each other off. There's a bit of overall pricing pressure. But on the AP side, the national rate was established and, call it, 11% less than what we saw in 2022. All volumes on the AC side go through San Francisco, both in 2022 as well as 2023. So that 11% impact is basically the way you can think about AC. On the commercial side, that low single digits played through. A portion of that was those commercial contracts that are tied to the CMS rate. The other portion of that would just be normal course of business and contracting. So effectively, it came in right in line with expectations as we think about Q1. And again, that's the reason we reiterated the ASP guide for 2023.

Great. And in terms of the video monitor, over what time frame should we think about you moving all your volumes -- your XT volumes to the monitor? And as that happens, how should we think about margins?

Yes. I think from a commercial perspective, you're going to see that migration taking place over the course of 2024. Obviously, I think as quickly as we can move towards the monitor, we're going to want to do that. But at the same time, we're ramping production volumes. We're introducing some automation on the Zio Monitor so that we can produce that in the lower cost in time and at scale. And so all of those are going to play into how quickly we can work through that conversion. But the hope is to get to monitor as quickly as we possibly can. I think in terms of the gross margin progression, Brice, certainly feel free to speak to that. But we know that we're going to have a bit of pressure in the third quarter, late third quarter as we think about transitioning into delivery lease of monitor, and it's not at full scale. So it's going to put a bit of pressure on the gross margin. We also got to think about how we step out of the DLX product. And do we have any inventory charges that we have to look at from a reserve excess obsolescence? And so we'll pay attention to those sort of things. All of which is contemplated in our forward-looking guidance. But then once we get into monitoring start to really fill that and ramp it and work into the efficiencies of that automation, I think you're going to see some benefits in that gross margin line. So we'll give more color and clarity around that when we're ready to set expectations for '24, but we certainly see Zio Monitor as something that can drive some nice gross margin improvement for us into the future.

Our next question comes from Cecilia Furlong from Morgan Stanley.

I wanted to ask about AT just following some of the recent disruption. It did look like strength in the quarter. But as you think going forward, are you back to what feels like a normalized growth rate for AT? How are you factoring that into your guidance relative growth versus XT? And then I wanted to ask to just tie in with that for MCT coming out in the future. How you're thinking about time frame for that? If it's 30 days shorter? Just love your outlook at this point.

Sure. So I think from an AT perspective, Cecilia, Brice mentioned this in some of his comments earlier in response to one of the questions, we saw I would say, low teens in terms of pricing pressure coming out of the AT business. Yet the CMS rate that was down about 11% with respect to AT. And on the commercial side, a couple of points of incremental pressure there. So think about it as the low teens in terms of pricing pressure, and we communicated that the AT business grew around 21%. So from a volume perspective, AT was up in the mid-30s. That's down from where it was at last year, which was closer to the upper 40s. So we're not back to those historic growth rates, but yet it is growing in line with how we expected it would in the guidance that we set. So to the degree that we can get that back up into those historic growth rates, then there's upside to the financial forecast that we put out there, but that's not something that we necessarily want to get ahead of ourselves with. We want to see that show up in the results and then we can reflect it more aggressively in the financial guidance that we put out there. But I will say we've been pleased with the progress. With respect to Zio MCT, we hope to get on file with the FDA here in the mid part of the year. Everything is tracking very well to that. Really pleased with the progress the teams have made to get on file from an FDA perspective. And then we would look to have approval sometime out in '24 and then potentially have that product into the market in the back part of '24. The…

Great. I appreciate the color. And then just turning again to PCPs and the strength that you've seen there. I don't know if there are any metrics you can put around it, but just how you're looking at '23 contributions going through that channel versus what we saw in '22? And from a top-line standpoint, really how you're thinking about that reflected in your overall guidance range.

Yes. I will tell you, I think a lot of the volume strength that we saw in the first quarter, again, a record for us in nearly two years now is being fueled by the strength of the primary care adoption of the technology. Now it's interesting in terms of how it's showing up. And I think you see a little bit of this in the statistic that Brice pointed out in terms of 35% of our growth is coming from new accounts and, call it, 65% coming from existing accounts. But what you're seeing is in those existing accounts, a lot of further penetration into the account itself and starting to work with the primary care physician within the account versus just the cardiologist. So it's driving a lot of the growth in our existing accounts as well as we move into other channels of the account we're already in. I think it's a bit too early to give specific measures around the progress with respect to PCP. I think that's something we'll continue to think about into the future. But right now, I would tell you the majority of the outperformance is really coming from these incremental channels that we're starting to really position the product forward, but also utilizing the voice of the cardiologist just in terms of how easy the product is to further upstream and get into these other channels. And it's quite encouraging in what we're seeing. As I shared, the strength of the quarter was on the back of the true underlying volume in the period itself. We want to see that continue to play out before we update any financial guidance but very encouraged by what we're seeing there.

Our next question comes from Richard Newitter from Truist.

Quentin, I was hoping or wondering, could you comment a little bit on the month-to-month trends through the quarter, particularly as you exited in March and what you saw in April.

It's a good question, Rich. I will tell you in the first quarter, January, February were incredibly strong months for us. We did see March pull back a bit. And we saw that remain at that lower level through the early part of April, but it came back very strong in the back part of April and has been very strong here in the very early part of May as well. And I attribute that, this is something we pay very close attention to, and I think have a good finger on the pull. I do think the holiday period, the spring break period through that late March, early April time frame, did feel like it was a bit heavier than what we've seen historically. And I think through some other channel check, that's been validated. But what we've seen in late April and into the early part of May has been really, really encouraging and something that we're very excited to be seeing. And I think it comes back to why we just don't want to get ahead of ourselves at this point in time, but the most recent trends in the business are something we're very pleased with.

Okay. That's really helpful color. And then maybe just a follow-up here. Thinking about the guidance move 16% to 18% to 17% to 19% now year-over-year. You just did 21%. I guess A, any color you can give on the quarterly cadence between 2Q and 4Q? Anything you'd want to call out here? Do you feel comfortable more or less where consensus is for 2Q? And then B, why wouldn't you hit the 20% marker or stay in the 20% arena for longer? What's the reason why growth would decelerate?

Yes, Rich, I think it's a fair question. And I think there's certainly the potential there to be at 20%, but I look at it as we're a quarter into the year. We certainly aren't going to get out ahead of ourselves. We're incredibly bullish on what we're seeing in the business. But I think there's a lot of economic uncertainty that continues to remain out there, and we want to be mindful of that. When we put something out there and tell you that we're going to deliver on it, we want to deliver on it. And so I think we just need a little bit more time to get comfortable to raise it up into that 20% range. But certainly, if you look at the first quarter, return device rates, we're not all the way back to where they were in the prior year. '18 is not all the way back to where it was yet volume was incredibly strong, and we grew north of 20%, nearly 21%. So we know that we can grow more than 20%, but we want to see this continue to play out for a little bit of time before we get ahead of ourselves. In terms of the quarterly cadence, I look at Q2, I'll give you a bit of color around it. Historically, we're going to drop 24.5% to 25% of revenue into the second quarter. I think that's the right way to continue to think about it sequentially, it's probably going to step up right around that 8% range or so. It's how we've modeled it. And I think that's the way you ought to think about it for the time being. And if you're around those ranges that I think we're all probably thinking about the second quarter in the similar way. And then, look, we'll see how volumes play out and we'll deal with the back half of the year as we have more confidence in what the volumes might look like. But right now, we feel very good with that back-end guidance that we put out there.

Our next question comes from Bill Plovanic from Canaccord.

So I'm a little different. I'm just curious, Medicaid as a state by state, and that's something I think before the CAT 1 code, you didn't get paid on a lot. There are a lot of states you didn't even go after. I'm just curious if you could help us understand what have you seen since the implementation of the CAT 1 code. And then how should we think about the potential opportunity that you could pick up from this over the next -- in the time frame in which you could capture this?

Bill, it's Brice. Good question. Medicaid is one that we're actually really coming on to our radar and frankly, we've internally set up a committee that's focused on just this. And so we're really taking a state-by-state approach in certain situations where we see the highest portion of our patient population ultimately coming through those channels. And so that, honestly, what you have to do. You have to have a code in place, not only with the CAT code for broader coverage from basically the category being in place on the Medicare side, but also have that code in place with the individual states from a Medicaid perspective. And honestly, we're going down the line and saying which ones do we work on first. Some are a little bit easier to get after than others, but we have a process where we're working into each. Now I will tell you, for the most part, we're still covering those patient populations. And what's happening is effectively it's going without payment. So what you'll see as we make progress is that non-contracted bucket that we reported in our 10-Q will continue to shrink. And ultimately, it will shift up and you'll start to see the ASP benefits associated with it. So I think for us, I would say it's absolutely something we think about, and we're making it a priority, and we're pushing it forward.

And then if you had to quantify that, like how much of an opportunity is that as dollar-wise, if today, if all of that Medicaid that you're not getting paid for, you did get paid for it some reasonable reimbursement rate?

Yes. So maybe that's quantified on a unit basis, where I would say, effectively now maybe we're getting $25 to $30 per unit, I could see a path, it's usually a percentage of the Medicare established rate, call it, 70%, depending on the state. So think about that as going from that $30 price point up to $170. We haven't necessarily put volume out there as to what the percentage is of that noncontract is, but it's pretty substantial on a per-unit basis. And again, not all states will happen at once, but it becomes a reasonable opportunity for us.

Okay. And then if I could just ask on international. Just any update on Japan designation reimbursement?

Yes. Thanks, Bill. Certainly excited by Japan. I think we're going to hear very shortly the high medical needs designation, whether we're going to receive that or not, I expect it sometime within the next 30 days. Once we have that, our file is ready to be submitted from a regulatory perspective and we'll be on file immediately. So I think we'll be filing any time here in the next, call it, 30, 60 days there in Japan and hope to have an approval sometime in the course of '24 and then moving on to getting the product in the market. But we're very close. I think that it's probably quite honestly been a month or two beyond where we were hoping to be, but a high medical need is something that's worth pursuing, and we're going to get an answer to it soon.

Our final question comes from Suraj Kalia from Oppenheimer.

Quentin, can you hear me all right?

We got you.

Sorry, I'm on a train. So pardon the background noise. Quentin, I'll ask 2 questions, both of them together. The Zio Monitor and its introduction for, let's say, the Zio XT 300 day, should we think about a staged approach first 21 days and then 30 days? And what's the status of the gateway for 21-day battery? And my second question, Quentin, where are you on the discussions with the payers for off-shoring the report readout and analysis, you'll set up a facility in Manila. Curious how payers are responding to that.

I appreciate the question. Look, Zio Monitor, just to be clear, the initial launch of Zio Monitor will replace Zio XT, which is a 14-day product and the initial deal monitor will be put into the market as a 14-day product. But that platform, the very same form factor is what will be used for our Zio MCT product when we launched that. And that's going to be anywhere from 21 to 30 days in terms of this wear period. So we continue to work through that with respect to Zio MCT, but that will be the longer duration wear period. Now I think what you're referring to is we had put out a study, there was some trial data that was published back at MCT that just demonstrated the Zio Monitor, which again is the same form factor as what Zio MCT has very successful wear properties with it all the way out to 30 days. So we'll keep Zio Monitor in terms of what's going to replace Zio XT at the 14-day period for the time being, but I think it creates some flexibility if we want to think about that over a longer duration. With respect to the gateway, the gateway is something that we're working with also to extend the duration of its usability, if you will. Today, well, it's 14 days with Zio AT, but with Zio MCT, I think we can get that out to 21-plus days I think if we start to look at that in a little bit of a different way than maybe where we make it rechargeable, then of course, it can go as long as it needs to go, depending on how many days we have the Zio MCT-pats working, which could be up to 30 days potentially. So…

Thank you. We have no further questions. So I will now hand back over to the management team for closing remarks.

Terrific. Well, thank you. I will say we're extremely encouraged by the start of the year and the momentum that we see building within our business as we focus on driving towards our strategic objectives. I want to take the opportunity to thank all of our teams for their hard work, their dedication to really advancing our card as we aim to serve all patients who can benefit from our products and services, and that list continues to grow each and every day. Thanks for joining our call, and we look forward to catching up the next half.

This concludes today's call. Thank you for joining. You may now disconnect your lines.