iRhythm Technologies, Inc. (NASDAQ:IRTC) Q1 2024 Earnings Call Transcript May 4, 2024
iRhythm Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the iRhythm Technologies, Inc. Q1 2024 Earnings Conference Call. My name is Terry, and I will be the conference operator today. [Operator Instructions] I would now like to hand over to Stephanie Zhadkevich, Director of Investor Relations, to begin. Please go ahead.
Stephanie Zhadkevich: Thank you all for participating in today’s call. Earlier today, iRhythm released financial results for the first quarter ended March 31, 2024. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. These are based upon our current estimates and various assumptions and reflect management’s intentions, beliefs and expectations about future events, strategies, competition, products, and 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 additional information should not be considered in isolation as a substitute for or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10-Q for a reconciliation of these measures to the most directly comparable GAAP financial measures. Unless otherwise noted, all references to financial measures in this call other than revenue refer to non-GAAP results. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 2, 2024. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.
And with that, I’ll turn the call over to Quentin Blackford, iRhythm’s President and CEO.
Quentin Blackford: Thank you, Stephanie. Good afternoon, and thank you all for joining us. Brice Bobzien, our Chief Financial Officer; and Dan Wilson, our EVP of Corporate Development and Investor Relations, joining me on today’s call. My prepared remarks today cover business updates during the first quarter of 2024 as well as our annual outlook. I’ll then turn the call over to Brice to provide a detailed review of our first quarter financial results and updated 2024 guidance. During the first quarter of 2024, we achieved revenue of $131.9 million representing 18.4% growth compared to the first quarter of 2023. Over 0.5 million registrations in Q1 contributed to another quarter of record revenue volume, while our average selling prices remained steady with the prior year.
Drivers of growth continued to come from the focus of our land and expand strategy by going deeper and broader within existing accounts as well as a meaningful contribution from new account openings. The first quarter was again a strong quarter of new account onboarding as we matched our highest ever quarter for new account openings for Zio long-term continuous monitoring, reflective of our team’s ability to capitalize on our pipeline opportunities and providing confidence in our 2024 outlook. Our teams drove solid momentum during the first quarter as we have seen strong market demand for our Zio products and services thus far in Q2 as well. These factors have resulted in our updating of annual revenue guidance, reflecting our ongoing confidence in the underlying fundamentals of the core business and optimism for continued market capture in 2024.
Our excitement for the primary care channel continues to grow as our two-pronged approach to opening that opportunity gains traction. As a reminder, we are approaching this opportunity by working from the ground up within large health networks that our current cardiologists and electrophysiologists are part of today while also targeting the large national innovative primary care providers. During the quarter, we were pleased to have entered into additional partnerships with several innovative national primary care networks, further demonstrating these groups growing appreciation for Zio’s ease of use, high patient compliance and ability to deliver clinical accuracy while reducing the cost of care. Importantly, we have seen the continued uptick in utilization from these early national primary care adopters over the course of the quarter and are excited about their potential throughout the year and into 2025.
Important to our growth, we have seen continued traction from within large integrated multidisciplinary care networks where Zio’s value proposition as a workflow efficiency tool is clearly resonating as these networks push prescribing further up the care pathway into the primary care channel. Out of all accounts ordering the Zio Services in 2023, almost half had at least one primary care prescriber in their care network. But perhaps more importantly, volume growth in 2023 from cardiologists was higher in those accounts that were part of multidisciplinary care networks, and that had at least one primary care prescriber compared to accounts that do not have a primary care prescriber in their network. This diversification into different specialties is not only a driving factor and further penetration within these networks, but it is also a validation that primary care is an important partner to alleviate backlogs associated with capacity constrained workflows.
This has already played out at several representative IDNs where we have seen primary care participation and we believe that we are only getting started to expand patient access to Zio and many more of these opportunities to continue driving this workflow efficiency for our customers, and enable even more streamlined access to Zio for our patients in the future. We were very excited to have recently announced a collaboration with Epic Aura, becoming the first medical device manufacturer to join the Epic community to use Aura. This collaboration will expand access to our Zio services across the continuum of patient care within health care systems from cardiology to primary care to hospital to home and beyond, and should help systems simplify operations while optimizing clinician workflows.
Through this partnership, iRhythm and Epic will enable health systems to implement Zio services more efficiently, and we estimate that institutions can save up to 75% of the time it typically takes to integrate Zio services into local emphasis of Epic. The initial inbound interest from accounts wanting to leverage the iRhythm Epic partnership has been terrific and we have already started to partner with early adopters to integrate Zio Services into the Aura network across their health systems. As we advance this effort, we expect to begin offering this solution to both existing and new Zio customers starting in early 2025. Further contributing to our record success has been traction in large innovative care networks, where Zio has become the ambulatory cardiac monitor of choice for monitoring programs within asymptomatic patient populations.
With mSToPS economic analysis published showing the benefits of identifying patients who are at risk for undiagnosed arrhythmias before their symptoms become severe, proactive screening programs using Zio services are gaining traction within innovative primary care groups, home health groups and accountable care organizations. These accounts are highly focused on preventative care and value-added patient wellness programs for their members, and they have been very receptive to our strong clinical evidence demonstrating that monitoring for up to 14 days with Zio long-term continuous monitoring service maximizes diagnostic yield compared to monitoring with Holter for 24 to 48 hours. This means that Zio monitor services have the potential to provide the right answer the first time for those patients and better inform the care pathways for those individuals, potentially reducing downstream clinical events and the future cost of care associated with those clinical events and possibly addressing the growing capacity challenges within the health networks we serve.
As a fantastic example of this, recall that we began to pilot our Know Your Rhythm program with our partner, Physician Care Centers, or PCC, for clinicians to proactively screen patients to identify those that meet the mSToPS inclusion criteria and are believed to be at the risk of undiagnosed arrhythmias to determine if they would benefit from Zio monitor services. This program was primarily designed to identify patients that may be at risk for experiencing asymptomatic Afib by implementing proactive screening guidelines according to the mSToPS exclusion criteria. Of the initial asymptomatic patients that were ordered the Zio monitor services in this pilot, 80% of these patients had at least one arrhythmia identified. Since there is a 3x greater risk of developing heart failure and a 5x greater risk of stroke if Afib is a comorbidity, we believe that early identification of Afib is crucial to develop clinical intervention strategies and reduce downstream adverse events.
We are excited that this initial pilot is now transitioning into commercial launch, and we look forward to providing additional updates around this movement into the asymptomatic population as we move throughout the year. In our international business, we continue to move forward with our expansion efforts into multiple European countries as well as Japan. During the first quarter, our teams drove strong registration growth in the U.K. with volumes above forecast through expansion within the private sector hospitals. These sites have recognized the value of Zio Services as having a positive impact on patient waiting times, hospital resource utilization, clinical diagnostic yield and pathway cost savings. In parallel, we continue to advance efforts to argue for an enhanced long-term reimbursement rate in the U.K. Additionally, now that we have received CE marking under EU MDR for Zio monitor and our ZEUS system, we kicked off a market evaluation in two Spanish hospitals in March and continue to anticipate the commercial launch of the Zio monitor services in the Netherlands, Spain, Switzerland and Austria in the back half of 2024.
In Europe as well as Japan, we believe there remains significant unmet clinical need for improved arrhythmia detection as the prevalence of arrhythmias and stroke continues to rise with the predominant monitoring technology still being Holter monitors. In our Zio AT business, recall that we submitted two 510(k) files in January, one is a catch-up for changes previously made to the Zio AT system as a letter to file and a second 510(k) for design features and labeling updates to further address areas of focus noted in the FDA warning letter. Since these submissions early in the quarter in support of Zio AT we’ve been in dialogue with the FDA and continue to believe that we could receive a clearance decision from the FDA on our submissions in the second half of 2024.
In parallel, our teams continue to work diligently to prepare for the subsequent filing for our next-generation MCT product, Zio MCT, and we believe that 510(k) submission for that product will be submitted late in the second half of 2024. As these near and midterm opportunities are being further fostered within traditional cardiac monitoring, we have also begun to explore possibilities beyond pure arrhythmia monitoring and into natural adjacent markets. As mentioned, this past February, we have launched a sleep pilot program with approximately five to 10 existing iRhythm customers intended to validate the value of streamlining the current journey of getting to a sleep diagnosis for both physicians and patients. We intend to utilize our call point and establish customer relationships with a combination of cardiologists and primary care physicians to validate the potential commercial opportunity and physician desire to streamline the prescription of home sleep test and diagnose sleep disorders with a focus on obstructive sleep apnea.
The goal of this pilot is to determine if cardiologists and PCPs will prescribe a home sleep test, collect metrics such as to which patients these physicians may prescribe a home sleep test and determine how iRhythm can best be positioned to contribute to improved care for patients with obstructive sleep apnea, including through the delivery of this service through an integrated digital platform that will provide us a differentiated ability to address what we believe have been long-term challenges in this space. We have been encouraged by the interest thus far in this initiative, especially with the rapid onboarding of customer accounts for this pilot just beginning to launch. The early forays into adjacent markets are being further supported by scientific evidence.
Our teams and academic partners are generating in support of EKG as a critical vital sign for predictive clinical insights. As a recent example from ACC last month, study findings from our collaboration with Duke Health concluded that incorporating EKG data from long-term continuous monitoring with the CHAD VAS score has greater discrimination than the existing clinical scoring system alone for the risk of heart failure hospitalization and new onset heart failure. Furthermore, authors concluded that the risk scores developed via this new model were able to more accurately predict Medicare cost in both treated and in untreated patients. These conclusions are the starting point to develop risk models that include long-term EKG data, such as that provided by Zio products and services to inform diagnosis and management of high-risk patients while also being used by health systems and payers to develop interventions to reduce health care utilization and costs.
As multiple vital signs and digital data assets are increasingly combined to generate these type of clinical insights we are uniquely positioned for success far into the future. With that, I’ll now turn the call over to Brice to discuss our recent financial performance.
Brice Bobzien: Thanks, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discussed today will be presented on a non-GAAP basis. Reconciliations to GAAP can be found in today’s earnings release and on our IR website. First quarter 2024 results demonstrated positive momentum in our core markets as we achieved revenue of $131.9 million, representing 18.4% year-over-year growth. As Quentin mentioned, this was driven by strong revenue volume growth as well as a slight improvement to our average selling price of approximately 100 basis points year-over-year. New store growth with new store defined as accounts that have been opened for less than 12 months accounted for approximately 46% of our year-over-year volume growth.
Consistent with recent trends, home enrollment for Zio Services was approximately 21% of volume in the first quarter. Gross margin for the first quarter was 66.3% in line with expectations and with the guidance provided in February. As previously discussed, we have continued to see positive marketplace reaction to Zio monitor, and we are focused on managing the incremental costs associated with ramping capacity. We remain on track to realize the benefits of automation and scale for Zio monitor production in the second half of 2024. Additionally, since completing the last phase of our San Francisco IDTF investment in the fourth quarter, we are ramp utilization from a newly hired clinical cardiac technicians as planned, and we expect to see continued improvements in efficiency as they come up to speed.
First quarter adjusted operating expenses were $125.7 million, up 10% sequentially and up 15% year-over-year, in line with our expectations. Compared to the first quarter of 2023, this increase in adjusted operating expenses was primarily due to incremental resources to support volume growth in our operations. Sequentially, expenses were elevated due to seasonal items such as our global sales and leadership meetings, as well as annual compensation-related items. We continue to incur incremental legal and consulting fees as well as other company expenses related to the FDA warning letter and DOJ Subpoena, and these are in line with the guidance previously provided. Revenue growth outpaced increases in operating expenses, showing our ability to drive sustainable operating leverage throughout the P&L.
Adjusted net loss in the first quarter was approximately $38.1 million or a loss of $1.23 per share compared to an adjusted net loss of $33.4 million or an adjusted net loss of $1.10 per share in the first quarter of 2023. Adjusted EBITDA in the first quarter of 2024 was minus $12.1 million, reflecting minus 9.2% of revenue compared to minus 10.8% in the first quarter of 2023. We continue to make progress in our adjusted EBITDA margin profile driving a 160 basis point improvement in adjusted EBITDA as a percentage of revenue year-over-year in the phase of the temporal pressure on gross margin associated with the Zio monitor launch and the San Francisco IDTF investment. Turning to guidance. We are updating 24 outlook as presented earlier this year and now anticipate full year revenue of approximately $578 million to $588 million.
We believe that the year will be driven by sustained volume growth in our core U.S. market as we continue to drive penetration in both existing and new customer accounts. With strong momentum exiting the first quarter, we believe that our second quarter 2024 revenue will be in line with historical seasonality of approximately 25% of full year revenues. Turning to gross margin we’re reiterating our full year 2024 gross margin guidance in a range of 68% to 69%, an improvement of approximately 120 basis points at midpoint compared to the full year of 2023. Our outlook on phasing throughout the year remains unchanged with material improvement manifesting in the back half of the year. We expect efficiencies to be driven by the majority of our business being transitioned to the Zio monitor platform, the ramp of automation lines to produce Zio monitor and our clinical operations team in San Francisco operating at full capacity.
For 2024, we are also reiterating our adjusted EBITDA margin guidance to range between 3% to 4% of revenues, which would represent a 400 to 500 basis point improvement compared to 2023, in line with our stated path to adjusted EBITDA margin targets in 2027 and driven by our focus on sustainable operating leverage improvements throughout the P&L. Adjusted EBITDA excludes impairment and restructuring costs, business transformation costs, stock-based compensation expenses and the loss incurred in the first quarter associated with the early extinguishment of our debt with Silicon Valley Bank and Bradwell. Looking at the cadence of margin expansion throughout 2024, we expect to see second quarter adjusted EBITDA margin to be around breakeven with progressive margin expansion in the back half of the year.
Along with anticipated progress in gross margin efficiency, operating expenses are historically more elevated than the first half of the year relative to revenue. As mentioned last quarter, we continue to believe that there will be approximately $8 million to $10 million of cost predominantly incurred in the first half of 2024, associated with the FDA warning letter and responses to the DOJ Subpoena. As we navigate these two issues, the majority of these costs will come out of the P&L in the future. Finally, we ended the first quarter in a strong financial position with approximately $569.1 million in unrestricted cash and short-term investments. Inclusive of financing activities and uses of cash for operations and capital investments. As disclosed in March, we further bolstered our balance sheet with cost-efficient capital through the closing of $661.25 million of convertible senior notes at a 1.5% coupon interest rate.
As we have demonstrated, we will continuously evaluate our capital structure to ensure financial flexibility and alignment with shareholder interests. With that, I’d like to turn it back to Quentin before we open it up to questions.
Quentin Blackford: Thanks, Brice. We are incredibly pleased with the start of the year and couldn’t be more excited about the future in front of us. iRhythm is building a digital health care portfolio of the future. We are uniquely positioned for success as we continue to build our technology platform and leverage our commercial reach, established market position, patient-centric technology focus, expansive EKG data repository and robust evidence generation strategy, which puts us in a position to be a market leader in defining how patient monitoring can look in the future as we address the Quintuple Aim of health care in the years to come. With that, Brice, Dan and I would like to now open the call for questions. Operator?
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