iRhythm Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the iRhythm Technologies, Inc., third quarter 2020 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Lee Salvo. Thank you. Please go ahead, ma'am.

Thank you, Zen, and thank you all for participating in today's call. Joining me are Kevin King, CEO, Doug Devine, CFO, and Dan Wilson, EVP of Strategy, Corporate Development, and Investor Relations. Earlier today, IRhythm released financial results for the third quarter ended September 30, 2020. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. are forward-looking statements, including, without limitation, those statements related to the impact of COVID-19 on our business, expectations for economic recovery, market expansion and penetration, productivity improvement, reimbursement, release of clinical data, operating trends, and our future financial expectations, including revenue, growth margins, profitability, and operating expenses, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. In addition, we will refer to adjusted EBITDA, which is a non-GAAP measure that is used to help investors understand iRhythm's ongoing business performance. 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, with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 5, 2020. 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 now turn the call over to Kevin.

Thanks, Lee. Good afternoon, and thank you for joining us. In my prepared remarks today, I'll discuss the key highlights and accomplishments of our third quarter and provide our current view of the market environment as we close out the year. Doug will go into more financial details before we open the call up for your questions. The iRhythm team continues to rise to the challenges presented by the current environment, and we not only continue to deliver high-quality patient care each and every day, we are also building a stronger company for the future. The strength of the company starts with our employees, and I am thankful for their resilience, commitment, and passion they bring every day. Our future and our ability to make a positive impact on the lives of patients has never been brighter. Overall, the positive recovery trends we experienced in Q2 continued throughout the third quarter and helped lead to significant growth. Total revenue in the third quarter was $71.9 million, reflecting year-over-year growth of 31.6% and sequential growth of 41.4% over the second quarter. This quarter's results were driven by further penetration of ZOXT in both existing and new accounts, continued ramp of ZOAT, and continued utilization of our home enrollment service in telemedicine settings. We're very pleased with these results given the challenges that remain in the market and believe that the results signify the strength of our platform and our capabilities. In addition to our top line results, gross margins were also strong at 74.7%. Importantly, third quarter operating results include positive cash generation for the quarter, demonstrating our path to profitability while maintaining platform and future growth investments. Turning back to our top line results and the market backdrop, we saw steady improvement in the overall market conditions during the third quarter, but also continue to see a number of challenges. On the positive side, a significant number of our accounts are prescribing ZO at volumes well above levels at the start of the year. These accounts contributed to our strong growth. However, we're partially offset by roughly equal number of accounts that remain below pre-COVID levels. The primary reasons for these constraints remain essentially unchanged from our prior discussions. Lower patient throughput due to stringent safety protocols, resource constraints due to furloughed or reduced staff, or continued hesitancy by patients to visit their health system. We did successfully open a significant number of new accounts compared to the second quarter's rate. This rate, however, is slightly below pre-COVID levels. The largest hurdle we face in opening up new accounts continues to be account limitations to in-person selling, particularly in regions that have been slow to open up or have had recent resurgence. Overall, we're pleased with the trend towards improved market conditions, yet continue to remain cautious on the overall outlook. Importantly, we have high confidence in our platform, our near and midterm strategic priorities, and our ability to continue to grow our share of the market. To that end, we remain focused on our three-pronged strategy to drive sustainable high revenue growth and to deliver operational efficiencies as we scale. We made important progress against each of these initiatives during the quarter. As a reminder, our strategy consists of increased market penetration with Xeo Platform, increased operating leverage through continued productivity and automation improvements, and expanding our addressable market into new indications and geographies. Starting with increased market penetration with our Zio platform, while the pandemic undoubtedly has created unprecedented challenges, it has also served to escalate awareness of the benefits of the digital platform compared to alternatives. For example, Zio has demonstrated unique advantages relative to traditional Holter monitors, including being more patient-friendly, and the ability to maintain patient care in telemedicine environments. To that end, our home enrollment capability remains an important component of our service delivery. And while we saw a spike in the early part of the COVID outbreak, we have seen this stabilize to around 25% of our registration volumes. We believe there will always be a need for physicians to see patients in person, particularly new patients or those with an emergent situation. but virtual care pathways are becoming increasingly accepted and critical to ensuring continuity of patient care as well as providing for greater staff and patient safety. We expect this to be another critical differentiator and competitive advantage of our platform going forward. Turning to ZOAT, we had another quarter of strong market traction and growth for ZOAT. Our single platform strategy that leverages our entire innovation stack distinguishes ZOAT from traditional MCT technologies. The experience and trust that our customers have with ZOXT has benefited ZOAT. And further, enabling our customers to standardize to a single ambulatory cardiac monitoring platform allows them to streamline their workflows, which has never been more important. Now, a full year into market launch at ZOAT, we are very pleased with the pace of adoption, which has exceeded our initial expectations, and we're increasingly more confident that ZOAT can be the market leader within MCT. Turning to our second strategic priority, increased operating leverage through continued productivity and automation improvements. We were very pleased with the operating results during the quarter, which led to strong cash flow generation. Longer term, our focus remains on building the infrastructure to scale the business efficiently for the next five-plus years. And despite the challenges in the market environment, we saw a return to high Salesforce productivity in the third quarter. As evidence of this points to year-over-year revenue growth in the quarter, far outpaced the growth in the number of reps, suggesting continued improvement in Salesforce productivity. As mentioned previously, we were successful during the quarter in opening up new accounts. In certain regions, however, the resurgence of the pandemic continues to constrain account access by our sales team. While our ability to interact with existing customers is not difficult, we're finding that getting in front of new customers is a bit more challenging. We saw this challenge emerging early in the pandemic and put in place investments to build virtual selling skills and marketing presence. For example, in the form of a new media campaign to promote the benefits of Zeo Brand and peer-to-peer education and webinars to help our team reach our customers in new ways. Over the past several months, these investments have helped evolve our commercial team's competency to sell in this rapidly evolving market. And finally, our third strategic priority is around expanding our addressable market into new geographies and indications. We made good progress against this priority during the quarter and see a number of important catalysts in the near future. As it relates to expansion into new geographies, we achieved an important funding award in the United Kingdom that will not only drive increased utilization of ZIO in the near term, but also lays the groundwork for wider adoption. iRhythm was selected from over 500 applicants as a winner of the Artificial in Healthcare, Health and Care Award by the UK's National Health System, a first-of-its-kind digital health technologies pilot. The award funds ZIO trials in selected sites across the UK over a three-year period. Clinical pathway and economic outcomes will be monitored and evaluated in order to inform any future commissioning decisions around the adoption of ZIO within the NHS program. We're focused on building out our infrastructure and capabilities within the UK in order to meet the requirements of the program and to lay the foundation for future scale. Related to new indication expansion, we're coming into a number of important market development milestones related to the asymptomatic AF opportunity. As a quick reminder, we estimate that there are more than 10 million individuals in the U.S. that are at high risk of atrial fibrillation due to age and other risk factors. It's estimated that one-third of these individuals with AAF are not aware that they have it, and if left undiagnosed and treated, have a five-fold increased risk of stroke. We believe this large unmet need can be addressed through targeted long-term continuous monitoring. Once diagnosed, Initiation of anticoagulation therapy or other therapeutic interventions can be put in place that have already been shown to improve clinical outcomes such as stroke. And lastly, a virtual care pathway that diagnoses AF earlier in the disease progression has the opportunity to reduce unnecessary healthcare utilization and reduce the cost of care. The M-STOPS trial was designed to prove out this model. The trial, which began in 2015, is a collaboration between the Scripps Research Translational Institute, Aetna's Healthigen Outcomes Unit, and Janssen Pharmaceuticals and utilizes our Xeo service. Initial data from the trial demonstrated significantly improved AF detection rates at year one in an active monitoring group with Xeo versus an observational group. In addition, one-year health resource utilization data showed a decrease in emergency department visits and hospitalizations for the actively monitored group. And we are now just a couple of weeks away from the three-year outcomes data that is scheduled to be presented at the American Heart Association meeting in mid-November. In addition to mStops, we are expecting the results from the SCREEN-AF trial to be presented at the European Stroke Organization and the World Stroke Organization 2020 Virtual Conference this Saturday, November 7th. This trial is a randomized trial evaluating AF screening of primary care patients using Xeo. Patients over the age of 75 with hypertension and without known AF were randomized into either a standard group of care or an interventional group receiving AF screening, including Xeo. The aim of the trial is to demonstrate that continuous ECG monitoring with Xeo is superior to standard of care for AF detection in a high-risk asymptomatic population and ultimately to build evidence supporting practical and cost-effective screening strategies. We anticipate these trial results will be very important milestones and catalysts for our market development efforts, and we're looking forward to the results from reviewing the data with you when it is presented. In summary, we remain highly confident in our long-term strategy for the company and are pleased with the recent progress we made with several important milestones to come. Before closing, I want to discuss our outlook for the remainder of the year. Barring any unforeseen change in the market environment, we are confident that we can continue to grow the business at a similar level to the third quarter. While we remain cautious on the overall market environment, we have high confidence in our platform, our strategy, and our capabilities. And we're resolute in our focus on changing the standard of care and know that we can continue to have an even greater impact on individuals' lives. I'm extremely proud of the entire iRhythm team and the energy and effort they bring to it every day to deliver our service to the millions of patients that can benefit from it. With that, I'll turn the call over to Doug.