iRhythm Technologies, Inc.

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. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to Stephanie Zadkovich, Director of Investor Relations. The floor is yours. Please go ahead.

Thank you all for participating in today's call. Earlier today, Iberdom 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 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. These are based upon our current estimates and various assumptions and reflects 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 factor 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 in 10-Q for reconciliation of these measures that are most directly comparable GAAP financial measures. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 1st, 2022. Either of them disclaims any intention or obligation, except it's 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 Quinton Blackford, Arboretum's President and CEO.

Thank you, Stephanie. Good afternoon, and thank you all for joining us. Bryce Bodzien, 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 Bryce 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. Soft 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 a 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 one to two 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've seen that the 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 ZO service as demonstrated by our healthy registration rates. On the pricing front, we anticipate the publication of the CMS Medicare position 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 ZOXC 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 rulemaking process to share relevant information as CMS potentially finalizes 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 and 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 ZO in real-world settings. Data presented by clinicians from Liverpool Heart and Chest Hospital showed that ZOXT had an arrhythmia detection rate nearly three times greater than that of traditional HULTR monitoring. ZOXT also resulted in faster turnaround times, 25 fewer days compared to the traditional HULTR monitors. and was associated with dramatically reduced outpatient appointments by nearly 20%. Data presented by clinicians from BART's Health NHS Trust also showcased the efficiency and accuracy of the Xeo service, demonstrating improved clinical workflows to save them time during management of their stroke patients. Coupling this newly presented data with national guidance for Xeo 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. Xeo 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 ward 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 from more than 10,000 patients with syncope indication demonstrated how artificial intelligence using our ZOAT monitor could identify clinically actionable arrhythmias in this patient population, including ACEV, pause in atrioventricular flocks that required physician notification. This study also identified the relationship between 8-bit burden and pause episodes. Patients with a lower 8-bit 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 potentially life-saving interventions. We are excited to be able to present data such as these as we continue to advance our AI and algorithms within the Xeo 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 Bryce, I'd like to address the change in revenue guidance. While we were 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 recognize 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 in 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 full 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 ZOAT customers. We have updated language related to the precautions in the ZOAT clinical reference manual and important information pamphlet as it relates to the ZOAT patient registration process and ZOAT patient and auto-trigger transmission limits. From experience, these types of customer notices are relatively common in the life sciences space for which we do not expect a long-term impact to the company. However, we have seen reduced growth with ZOAT within the fourth quarter to date. With the customer advisory notice and based on other considerations discussed, we have adjusted our ZOAT 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, in 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 sizable market opportunities ahead of us. As highlighted during Investor Day, we continue to invest in our mid- and long-term initiatives that will leverage our technology platform in 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 Bryce 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, Newstore, defined as accounts that have been open 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 was achieved primarily through ASP improvements 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 disciplined 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 for 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 includes 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 even a margin of minus 2.5% with 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 Quinton previously mentioned, our full year revenue is expected to range between 407 and 411 million, reflecting year-over-year growth of 26 to 27%. This reflects a 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 a range between approximately 68 and 69% and reducing anticipated adjusted operating expenses to range between approximately 360 and 365 million. We expect full year 2022 adjusted EBITDA to range between negative 10 and negative 12 million as we continue to anticipate adjusted EBITDA break even 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 Clinton for some closing remarks.

Before I turn it over to Q&A, I'd like to highlight our confidence in iRealm's 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 ZO 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 ZO monitor that is in the middle of a market evaluation and showing encouraging signs of positive impact for patient compliance. We look forward to enhancing our ZOAT 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. And with that, Bryce, Doug, Dan, and I would like to now open the call for questions. Operator?

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Margaret Kayser 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, at least relative to our numbers. We saw a $2 million maybe lower number this quarter. Can you walk us through the individual impacts of return devices versus account staffing versus kind of AT utilization declines, especially as it relates to Q4?

Yeah. So, Margaret, this is Quinton here. I think, you know, we were a bit short in Q3 of our own expectations, call it $1.5 million to $2 million, 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, you know, 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 return 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 million dollars 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 quarter is how we sort of sized that up. And then the additional one is the ZOAT customer advisory notice. You know, 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 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 in the Field Act 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 seeing these persistence in Q4, how do we adjust this for 23 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 to need 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, you know, and they're 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 ZOAT side, I think that, like I said, once we get to 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, there's a field advisory notice involved as well. It just gives them a bit of delay and

and bringing the product on board so i think we will work through that in the near term but it is going to be an impact in the fourth quarter as a reminder to ask any further questions please press star followed by one on your telephone keypad now today we ask you limit yourself to one question and one follow-up thank you return to alan gong from jp morgan your line is open

Hi, team. Thanks for taking the question. You know, I think just kind of diving deeper into, you know, the shortfall in the quarter specifically, I think a question that a lot of investors have is you hosted, you know, your analyst day near the tail end of September and why you didn't provide a concrete guidance update. I think that 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, you know, we didn't hear anything about this return 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?

yeah alan so i you know if you go back to our investor day uh 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 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 uh month for us during the course of the quarter we were at nearly 30 percent uh 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 return 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 a couple of the facts that we saw incredibly strong registration growth in the month of September and that received device rate beginning to 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 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 got into October, we didn't see 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, you know, offsetting a little bit of the softer top line, we're obviously seeing you cut operating spend, you know, by, I would say, you know, 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, you know, it appears that there is still so much room for growth. So I guess to address investor concern, then, you know, maybe the balance of operating spend cutting and focus on the top line is something that might need to take a look at. Like, what do you have to say to, you know, the softer quarter, the softer guide, and the SG&A reduction?

Yeah, I think from a spending perspective, you know, there's nothing unique or different there that we've done in response necessarily to the top line. It's continued to be very disciplined with how we make the investments into the business and and how we structure the organization for future success. We're 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 Invest Your 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 you know that's something that we're committed to not only here in 2022 but out over the 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 to 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, too, 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?

Yeah, so our home enrollment receive device rate is usually about two to three times lower than where we're at on the in-clinic receive device rates. 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. 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 and 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 you know 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, you know, what we essentially have right now is sort of a hybrid model between the in-clinic and the home enrollment. 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 the updated guidance.

Okay, hopefully, 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 would love, I realize 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 seven million dollar impact is the right way to think about it you know with respect to q3 we came pretty close to the three and a half million that we expected we were just a bit shy but it wasn't material in any way um and for the full year seven million is still the right way to think about it with respect to the final rate i know that omb had released their approval i haven't seen the final rates just yet we expected that we would have 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 Surest 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, you know, at the annual state, you would outline this, you know, five-year growth strategy of 20%, you know, in order that it would be linear over that five-year timeframe. And, you know, at the time of the annual state, 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 lowered guide, when you're thinking about next year, do you think that this kind of 20-year or 20% growth on the top line 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 reflective of what you're thinking for next year perhaps?

Yeah, 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 Xeo Monitor into the marketplace next year. We know from market evaluation the device rate on that Xeo Monitor is meaningfully better than what we've seen with Xeo XT, both in clinic or home enrollment. So I'm excited to get that out there. I think we can address some of these, you know, near-term, shorter-term challenges with that product. Likewise, you're going to see us continue to innovate on the ZOAT side. You know, we continue to work with that product. I would expect we'll submit with the FDA in 2023 a revised version of ZOAT or ZOMCT. That continues to close some of the competitive gaps, and I think positions us really well for growth in that MCT space. I'm not going to speak to 23 at this point in time. I think that's something that, you know, 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 in the 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 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.

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 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 points, 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 Joanna Wunsch from Citibank. Your line is open.

Good evening, and thank you for taking your questions. I'm curious about something. Why do you think the staffing issues impacting the return rate because we've been having staffing issues for about a year. And I don't know what the ZOAT 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, positions 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 um q3 was far and away our strongest growth rate in registrations year over year that we've seen um all year long and september was by far our strongest month but keep in mind registration volumes were up 22 percent in the third quarter compared to roughly 11 to 12 percent 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 is 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 sent 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, you know, we've got to make some tweaks or better inform our customers to improve that received device rate. I think what you're seeing over the course of the summer into the late part of the summer here in the early part of fourth quarter is 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.

Yeah, 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 I 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.

Yeah, 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, you know, 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 see 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, you know, aspect with the primary care versus our traditional colleges.

Okay, got it. And then I think cost-effectiveness data for M-STOPs 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 23 schedules out, but longer term, do you think this economic MSTOPS piece fits into kind of the broader reimbursement conversation going forward? Thanks so much.

Yeah, no, 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 continue to articulate the value associated with proactively monitoring patients. And so, yes, I think absolutely it will be something that will be utilized and will reflect nicely.

We now turn to Bill Plevanek 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 know, you mentioned a couple new products may help you overcome some of the challenges you're facing today in terms of going into FML on the Xeo Monitor. and the approval in FML on the ZOAT. I was wondering if you maybe could provide us with maybe a little more granularity on the timing of those, i.e., is the ZO monitor going early 2023 and then AT mid-23, or how should we think about them coming in for full launch? Thanks.

Yeah, Bill, I'm going to have Bryce jump in on the discussion 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. I, 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 Bryce, feel free to share your thoughts, and then I'll hit the new product timing and cadence.

Yeah, 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. You know, most of this is playing through with efficiencies that we've been putting in, you know, to the company for the last several quarters, and we're seeing it play through the numbers. I would say, you know, 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 have expected. We're just creating efficiency within the business and a different level of, I guess, rigor on efficiency.

managing operating expenses. And with respect to the timing of the new products, Bill, you know, geo monitors and market evaluation as we speak. So with that in the market in very limited ways, I will note, you know, the patient compliance of the device rate on that geo monitor is noticeably higher than what we're seeing with geo XT. I think a lot of that comes back to the smaller form factor, just the wearability aspect of it is 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 23. 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 by with the FDA in 2023. And I would expect that's more of an early 24 sort of market introduction, is how we think about that.

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

Yeah, Bill, I'll take that one. You know, 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 23 and beyond.

Was that headcount reductions? Was that investment? Can you help me out?

Yeah, it's a bit of headcount-related or structural considerations around how we set the organization up for the ability to think about it offshoring, outsourcing, those sort of things where we can complement 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. Yep. Perfect. Hey, Quentin. So I know everyone has beat this delay in returning the scripts to death, so I'll stay away from that. Longer term, Quentin, if you look at the 20% tagger that you mentioned on the investor day, what percent of it do you think comes from just the ZO monitor versus ZOAT 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.

Yes, Raj. So I think in terms of long-term, you know, contribution of growth towards that 20%, I think you're going to see the ZOXT 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 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 collection of the 20% growth over time. Doug, feel free to speak to the incremental new volume growth or price.

Yeah, I'll take it. So based around, so, you know, the incremental volume growth related to new accounts is really those accounts that have been open for less than 12 months and how much they're contributing to the overall growth rate. So what we mentioned was 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 Polak from Wolf Research. Your line is open.

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 in-office? I heard 2 to 3x, but I think that just feels high. Is it 2 to 3 points? Just kind of framing that variance and then where kind of home discharge from office sits. I'd appreciate a clarification.

Sure. So the home enrollment's about two to three times 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. Oh, OK.

So two to three x?

Right. Think about it as a couple points of loss in that return device rate. It's a couple, two to three times higher than that if it's home enrollment. And then the in-clinic sort of hybrid that I guess we're sort of explaining now, which is, you know, you get the device in the clinic office and you're set 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 two to three times. Hopefully that's clear.

What is Vault Park, the in-clinic return rate? Are we at 95% or, you know, where is that number? Yeah.

You know better than that. It's a couple points.

Okay, I understand now. Sorry, a lot of tidbits to triangulate there. And then my second topic, you know, and I'm not, I can't tell if this is relevant, if it matters, so I'm interested in your perspective, but, you know, 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, you know, 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, you know, over what time horizon might you have, you know, visibility into this? the change in their coverage policy. So thanks for taking the questions.

Yeah, I think, Mike, 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 in working through any of this. I would also just keep in mind, you know, We've seen volumes moving away from Novitas over the course of the year as we've had MACs 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 of 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 MACs have 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. ZOXT 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 impact of the reduced return device rates in our ZOAT 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. Thank you for your participation. You may now disconnect your lines.