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Operator: Good afternoon. Thank you for attending today’s iRhythm, Inc. Q4 2022 Earnings Conference Call. My name is Bethany and I will be the moderator for today’s call. I would now like to pass the conference over to our host, Stephanie Zhadkevich, Director of Investor Relations. Please go ahead.

Stephanie Zhadkevich: Thank you all for participating in today’s call. Earlier today, iRhythm released financial results for the fourth quarter and full year ended December 31, 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 facts should be deemed to be forward-looking statements. These are based upon our current estimates and various assumptions and reflect management’s intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance.

These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, filed with the Securities and Exchange Commission. Also during the call, we will discuss certain financial measures that have not been prepared in accordance with U.S. GAAP with respect to our non-GAAP and cash-based results, including adjusted EBITDA, adjusted operating expenses and adjusted net loss.

Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation of, as a substitute for or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10-K for a reconciliation of these measures to their most directly comparable GAAP financial measures. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 23, 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.

Quentin Blackford: Thank you, Stephanie. Good afternoon and thank you all for joining us. Brice Bobzien, our Chief Financial Officer; Doug Devine, our Chief Operating Officer; and Dan Wilson, our EVP of Corporate Strategy and Development, join me on today’s call. My prepared remarks today cover progress we’ve made during the fourth quarter of 2022 and discuss the near-term growth initiatives for our business. I’ll then turn the call over to Brice to provide a detailed review of our financial results. We are very pleased with our significant growth exiting 2022, recognizing $112.6 million in revenues for the fourth quarter and achieving 38% growth year-over-year. This was in line with expectations as registrations grew more than 20% compared to the fourth quarter of 2021 and we saw improvement in return device rates.

For the second time in the last 3 quarters, we realized another record quarter of new account openings for Zio XT, reflecting strong demand for our Zio services and setting us up for success as we enter 2023. Our Zio AT service continued to grow nicely, albeit growth did slow as expected when compared to the first 9 months of 2022. We continue to drive awareness and adoption with the cardiology and EP physician segments where we believe there is still significant greenfield opportunity. We are also continuing our push into primary care to deliver a complete ambulatory cardiac monitoring service to the right patients earlier in their treatment paradigm. As discussed in the past, we believe this opens up the potential for a vastly larger market opportunity with over 14 million patients showing up in their primary care provider with cardiac-related heart palpitations annually.

Patients can benefit from ambulatory cardiac monitoring earlier in their diagnostic journey and we believe our Zio services offer the right test the first time. As an example of this strategic expansion, we recently announced a nationwide agreement with One Medical with whom we share a dedication to delivering technology-powered and patient-focused solutions. We are very pleased with the progress we are making in the primary care segment and see significant opportunities to deliver Zio services to patients earlier in their care journey, ultimately benefiting patient lives and the health care system. On the pricing front, in November 2022, CMS published the calendar year 2023 physician fee schedule final rule containing payment rates for the 2 main CPT code sets related to long-term continuous ECG monitoring and recording that we used to seek reimbursement for the Zio XT service and the Zio Monitor service.

We were very pleased with the outstanding work by our teams and other industry groups working with CMS to enable this milestone. And importantly, this positions us to bring our innovative products to more patients. Through our continued focus on improving market access in 2022, approximately 75% of all Medicare and commercial patients eligible for coverage now have a $50 co-pay or less and approximately 25% of all Medicare and commercial patients eligible for coverage will not pay anything at all out of pocket for the Zio XT or Zio Monitor service. CMS national pricing also opens the opportunity to contract with state Medicaid programs and further expand market access for these patients who represent approximately 10% of the U.S. market. While the CMS national pricing for long-term continuous ECG monitoring provides stability in our core U.S. business, we continue to believe that CMS undervalues the clinical benefit that our service brings to Medicare beneficiaries.

We look forward to continuing to partner with CMS in the coming years as our industry moves towards gaining increased recognition of the clinical value of innovative AI technologies. On the innovation front, the clinical and economic evidence for a Zio XT service continued to build during the fourth quarter with the mSToPS economic analysis presented at AHA in November 2022. One-year follow-up findings from this trial were published in Heart Rhythm O2 in 2020 and demonstrated that active monitoring with our Zio XT service led to A-fib being newly diagnosed in 6.6% of patients who are actively monitored versus 2.4% in the observational control group receiving routine care. Three-year follow-up findings of mSToPS published in PLOS One in 2021, further more demonstrated the active monitoring with Zio XT service led to a statistically significant reduction in the combined primary endpoint of death, stroke, systemic emboli or myocardial infarction versus standard clinical care.

The mSToPS trial was the first study to observe the benefits of A-fib screening at 3 years. The economic outcomes analysis presented this past November demonstrated that targeted A-fib screening with our Zio XT service provides excellent value to the health care system by enabling early diagnosis. Over 3 years, individuals prescribe the Zio XT service were more likely than unmonitored individuals to have outpatient visits, including the cardiologists but less likely to require emergency department visits or hospitalization. More specifically, the analysis showed an incremental cost effectiveness ratio of approximately $17,000 per quality adjusted life year gained which is the academic standard for measuring how well medical interventions lengthen and/or improve patient lives.

For reference, the USPSTF recommended in 2021 to begin proactively screening for lung cancer with an incremental cost effectiveness ratio of $72,000. According to ACC and AHA, incremental cost effectiveness ratios for diagnostics under $100,000 are viewed as attractive, while anything under $50,000 is viewed as highly valuable. We believe that this continues to support our value proposition to payers as we build out our Know Your Rhythm program to proactively monitor properly targeted at-risk populations. Regarding product innovation, we are pleased to announce that we recently received FDA clearance for another set of software modifications to our ZEUS system. This 510(k) clearance includes the addition of A-fib burden estimates to be added to daily reports for our Zio AT service.

Since entire A-fib burden has been associated with a higher risk of stroke as well as higher prevalence of heart failure, we believe this is a clinically important enhancement to our service offering. And importantly, this further demonstrates our ability to continue developing innovative solutions and enhancements to our existing services for patients and customers and set the stage for continued innovation around our Zio AT service. Turning to 2023, I’m excited for the year ahead and expect to build on the solid momentum we’ve seen in the past few months. On a macro level, while health care systems did experience staffing challenges in 2022, we’re seeing early signs of improvement in early 2023. The operational efficiency associated with our Zio service has been resonating with accounts and driving adoption by allowing clinicians to streamline their workflow and focus their time on patient care.

With 99% physician agreement with the Zio report and 98% patient compliance, the value of our Zio services continues to be appreciated by clinicians and continues to underlie our competitive advantage. We continue to see a steady pace of new account openings thus far in 2023 and we are particularly pleased with the early progress in primary care volumes from recent account openings that continue to validate our belief that the primary care market will, in fact, open up and be a nice contributor to growth for years to come. We also anticipate significant catalysts over the next 18 months to drive our business forward and position us for success in both the near term and long term. Most importantly, we expect there will be significant data upcoming at ACC 2023 in New Orleans, including important information further demonstrating our value proposition with our Zio services compared to other ambulatory cardiac monitoring offerings in the ACM market.

We look forward to speaking with you about them after the ACC presentation in the coming weeks. On the product front, we continue to anticipate full commercial launch of our next-generation biosensors, the Zio Monitor to replace our current Zio XT patch form factor in the back half of 2023. As a reminder, this new patch is 72% smaller, 55% lighter and 20% thinner than our existing Zio XT form factor, all of which we believe has a positive impact on patient experience and may have an associated improvement in wear times and device return rates. The Zio Monitor is currently in limited U.S. commercial launch and we are very excited to get this into the marketplace in the hands of physicians and their patients. We also anticipate submissions to the FDA for an updated MCT service in the latter part of 2023 for potential commercial launch in 2024.

There is significant runway ahead of us in the MCT market, where we have less than 10% market share today. The submission on the hardware side will include an upgrade to our new biosensor platform which was built for automation and will, therefore, improve our scalability once volumes are ramped across all modalities. We also expect to submit software improvements to add enhanced detection features, monitoring flexibility within a single device and longer wear time optionality. We are excited about this next generation of our Zio AT product which we believe will better position us to compete in this space and drive market share gains into the future. As we’ve discussed in the past, our Zio Watch is also expected to enter limited market evaluation in 2023.

Using a continuous PPG AI-based algorithm, the Zio Watch not only detects A-fib but also characterizes the amount of A-fib over time to calculate an A-fib burden estimate with accuracy compared to that of the Zio XT patch as a reference. This contextualization of patient A-fib presence or absence collected through the monitoring period is important and clinically meaningful to aid in a potential diagnosis. The Zio Watch is intended to be complementary to Zio patches by adding modality with longer wear times for patients who require long-term monitoring. The anticipated market evaluation in 2023 will enable us to gain real-world experience with the product and service to gather patient and physician feedback and to consider the appropriate reimbursement approach for this uniquely positioned prescription-based monitoring service.

Finally, we’ve outlined previously how driving operational efficiency is an important strategic pillar for iRhythm to serve millions more patients across the globe in the future. After nearly 10 years, we served our 5 million patients in late 2022. With our current growth assumptions, we expect to serve our next 5 million patients in just a few short years. This requires us to think bigger than we have before. In anticipation of this, we are sharing 2 transformative steps that we are taking to advance our strategic plan and enhance our internal infrastructure to meet the significant demand ahead of us. These steps include the establishment of a global business services center located in Manila, Philippines, as well as efforts to enhance the experience that our physicians and patients have with iRhythm.

These efforts will enable us to scale and develop our clinical, operational and administrative functions more quickly, thereby enabling us to continue providing excellent support to our patients and customers globally. In addition, we’ll leverage third-party service providers where necessary that will allow us to grow and scale more aggressively over time. While we expand our operations internationally and leverage our new service providers to meet our operational goals, these actions will enable our ability to grow globally and add team members where they are needed, both in the U.S. and abroad. These transformative steps mark a defining moment in iRhythm’s journey. We know that patients, especially those seeking access to the care they need as well as physicians rely on Zio services to help unlock opportunities for better care and improved outcomes.

Removing friction and barriers to access is a critical part of our mission and we need to ensure operations allow us to do this. The changes I just outlined will equip us to improve access for patients worldwide. With solid momentum in our core business and significant opportunities on the horizon, I’m truly excited about our future at iRhythm in 2023 and beyond. I’ll now turn the call over to Brice to discuss our financial results and 2023 guidance.

Brice Bobzien: 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. Fourth quarter results demonstrated solid momentum in our core business as revenue grew to $112.6 million, representing 8% sequential and 38% year-over-year growth. On a full year basis, we recognized $410.9 million in revenues, representing 27% growth compared to 2021, driven by both volume growth as well as ASP improvements. Looking at new store same-store mix, new store, defined as accounts that have been opened for less than 12 months, accounted for approximately 40% of our year-over-year growth.

Home enrollment for Zio services was about 20% of volume in the fourth quarter. Moving down the rest of the P&L. Gross margin for the fourth quarter was 69.9% and through full year 2022 was 68.5% or the midpoint of our guidance range. Both sequential and year-over-year benefits were achieved through ASP improvements as we continue to optimize our pricing strategy and we realized nice improvements to cost per unit as volumes scaled throughout the year. Fourth quarter adjusted operating expenses were $97.1 million, up 8% sequentially and up 16% year-over-year. Full year adjusted operating expenses were $363.7 million, up 16% compared to 2021. While higher on an absolute basis, this compares to year-over-year full year revenue growth of 27%, demonstrating our ability to realize leverage in the P&L.

Our investments remain strong in R&D and we have started to see efficiencies in our SG&A profile. Adjusted net loss in the fourth quarter was $17.9 million or a loss of $0.59 per share compared to adjusted net loss of $19.1 million or a loss of $0.63 per share in the third quarter of 2022. This compares to adjusted net loss of $1.10 per share or a $0.51 improvement versus the fourth quarter of 2021. Adjusted net loss for the full year 2022 was $84.5 million or $2.82 per share compared to a net loss of $101.4 million or a loss of $3.46 per share during 2021. We are beginning to realize value from an increased focus on operational discipline, achieving positive adjusted EBITDA of $1.1 million in the fourth quarter. This represents an improvement of $3.7 million sequentially and an improvement of $18.4 million year-over-year.

Adjusted EBITDA for the full year 2022 was minus $11.3 million, representing an 830 basis point improvement to adjusted EBITDA margin compared to 2021. We are focused on disciplined spending in our operating expenses but also continuing to invest in strategic initiatives that we believe could enable future growth opportunities. Note that we did incur approximately $2.3 million of expenses related to business transformation activities in the fourth quarter, bringing our full year impairment, restructuring and business transformation costs to approximately $31.7 million in 2022. Very importantly, we are extremely pleased to announce that we have cleared the material weakness of our internal control environment. Over the past several years, we took actions designed to improve our internal controls and remediate deficiencies that led to our material weakness.

These have included enhancing the depth and experience within our finance organization by hiring additional accounting and finance personnel with relevant expertise, providing additional management oversight over financial reporting, including the establishment of a SOC steering committee within our internal audit functions and implementing new controls and processes. We remain committed to advancing our culture of operational excellence and will continue to add skilled talent as complexities grow and needs arise. Turning to guidance for 2023. We anticipate full year revenue growth of approximately 16% to 18% compared to 2022, representing a range of approximately $475 million to $485 million. This contemplates national CMS pricing in place beginning January 1, 2023 and we believe that our ASP in 2023 will be generally in line with what we experienced in 2022.

With pricing stabilized, we believe that the volume contributions will be the main driver of revenue growth during the year. We anticipate gross margin will range between approximately 69% and 70% for the full year. Continued gross margin improvements will be realized through volume growth contributions to our per unit cost as well as improvements to our fixed cost structure. Notably, our full year guidance contemplates a bit of pressure to gross margin as we launch our Zio Monitor service into the U.S. commercial marketplace which will include an evaluation of our current XT inventory levels and will reflect underutilized cost for our Zio Monitor system. We believe that adjusted operating expenses in 2023 will range between approximately 415 and $425 million as we scale our business to meet increased volume demand.

We believe that adjusted EBITDA margin in 2023 will range between approximately minus 0.5% and 0.5% of revenues. As a reminder, adjusted EBITDA will continue to exclude restructuring costs, transformation costs and stock-based compensation expense. In 2023, we do anticipate incurring approximately $15 million to $20 million of onetime non-GAAP business transformation and restructuring costs related to the ongoing globalization efforts to drive efficiency, improve scalability and provide continued high-quality customer and patient experience. We believe that expenses incurred related to these activities in 2023 will further enable operating leverage into the future, especially as we grow to serve more patients in our core markets and internationally.

Please note that we also anticipate $8 million to $10 million of capital expenditures related to standing up new facilities and system solutions. In closing, we exited 2022 at a strong financial position with $213.1 million of cash on hand to drive continued growth from our core business, invest in innovation and lay the foundation for future expansion into new markets. We are excited for the strong momentum in our business to continue and look forward to upcoming catalysts that we anticipate can drive growth in 2023 and beyond. With that, Quentin, Doug, Dan and I would like to now open the call for questions. Operator?

Operator: Our first question comes from the line of Allen Gong with JPMorgan.

Allen Gong: I just had a quick one and then a follow-up. When I think about the 16% to 18% guidance range you put out, I think in the past, you’ve talked about how the 20% LRP is still achievable for the year. You’re coming in a step below that. I think in the past, you’ve said you do want to see more progress made some of the challenges you were experiencing at the tail end of 2022. So could you just provide an update on how those have really progressed and your confidence in that 20% number?

Quentin Blackford: Allen, this is Quentin. I’ll jump on that. Look, I think at this point, we feel really good about where things are at in the business. Clearly, we spoke about the return device rate with our XT business and we knew that we had some of the growth headwinds with AT coming off the operational issues in the fourth quarter. I would say we’ve navigated through those pretty well. Our fourth quarter came in right in line with expectations, maybe showing a bit of opportunity to improve upon that. But the way we set up expectations for 2023 is that we’ll continue with that return device rate more or less the way we exited the year. That will be into the low end of the guidance range and that the AT business continues to perform in line with what we saw coming off the fourth quarter as well.

To the degree that we make progress over the course of the year, then you can start to see that step up beyond the 16% and ultimately get into that 18% range. And the assumption is that we’ve made that progress by sort of the mid part of the year. We can make that happen faster than great. There’s further upside to where we’re at. But that’s how we thought about the guidance. And I do believe with progress made on the operational side, we can see our way back to the 20% but it’s early. We’re 7, call it, 8 weeks into the new year. We’re not going to get ahead of ourselves at this point in time and we’re going to go execute and ultimately deliver and we’ll see where that takes us.

Allen Gong: Got it. So just like kind of like touching on that a little bit more, when we think about how you’re starting off the year, you kind of just qualitatively point towards the 16%. So should we think of that as basically assuming fairly usual seasonality or maybe a little bit of headwinds from labor and impacts from the device return rate, the improvement in AT and then transition into more growth in the balance of the year?

Quentin Blackford: I think you’re thinking about it the right way, Allen. Keep in mind, these efforts that we’re putting forward with respect to the return device rate and getting the AT growth rate back to where we’ve seen it historically, those are efforts that are ongoing right now. But naturally, we would expect to see progression over the course of the year which means you’re going to start at your low point from a guidance perspective here in the first quarter and hope to see progress beyond that. And so that’s how we think about it. I think that starting on the lower end of that here in the first quarter is the right way to think about it. And then as we make progress, we would expect to see that increase over time.

Operator: Our next question comes from the line of Marie Thibault with BTIG.

Marie Thibault: I wanted to ask one here, I guess, on the new sensor that’s in limited launch right now. I would love to hear what you’re learning so far in that launch? What will sort of trigger the move to a broader launch? And in particular, would love to hear if device return rates or compliance or physician opinions of the sensor are any different than the current generation?

Quentin Blackford: Yes. Marie, I would tell you one of the things I get most excited about over the course of 2023 is getting the Zio Monitor into a full commercial launch. The initial feedback that we’ve received around that device is that it’s a transformational sort of technology in this space. Again, it’s 72% smaller, it’s 50% lighter, it’s 20% thinner. It leads to a much better patient experience. And of course, when the patient experience is better, the physician experience ends up being better as well. And so we’re excited by what we think that can bring in the back part of the year. We really haven’t contemplated any sort of change in our guidance expectations with respect to having that new product out there. It’s one of those things where we think about it as let’s get into the market and then see how it performs and we can adjust our expectations from that.

But I’m very encouraged by what we’re seeing and the feedback that we’re seeing. There’s actually going to be data at ACC that’s going to be presented around Zio Monitor as well that demonstrates some of the improved patient experience and wearability factors associated with it, including the return device rate which is a bit better than what we’re seeing with the XT product. Now it’s in a limited launch phase, if you will, or limited evaluation at this point. So the number of patients are not significant but the early indicators are all very, very positive around this. So we’re bullish on this. Our expectation is we’ll roll it out in the back part of the year into a full commercial launch and we’ll step into it as quickly as we can which will really be driven by how fast we can produce the product off of our line.

So we’re ramping up that capacity as we speak right now to be able to meet the demand once we go with the launch. But we’re very excited by what we’re going to see with Zio Monitor.

Marie Thibault: Okay, that’s great to hear. And then if I could ask a follow-up here on the national rate with Medicare. I was curious about your comments on the possibility of working with Medicaid. Can you give us a sense of pricing discount or possible timing on when we might start to hear from some of the Medicaid organizations on that? And secondly, as part of that, where are we in the shift toward a San Francisco facility? Any chance you could give us any metrics on that?

Quentin Blackford: Yes. I’ll speak to this one as well. From a Medicaid perspective, it’s a bit too early to get out ahead of what our expectations are there. I will tell you, really any progress that we make in and around Medicaid is going to be an incremental benefit to us. We serve a lot of those patients today without charging anything at all for the product when they can’t afford it. And so once we get coverage in place, that will start to create a nice bit of a benefit for us just in the fact that we can begin to get reimbursed for some of those patients. But the reality was it was very hard to sit down and have discussions with any of these state Medicaid programs without having a CMS national rate in place. So now that it’s in place, we can begin to have those conversations, early conversations have begun to be had.

But in terms of where the pricing lands, it’s too early to say exactly what that will look like but just know that any pricing at this point would be upside to what we’re getting right now and serving that Medicaid population. On the San Francisco side, our expectation is that we’ll have enough folks hired in the seat to do about 25% of the CMS XT volume in San Francisco here in the first quarter, first part of the year and then ramping beyond that in the back half of the year. Right now, that still feels like the right assumption. I think we’re making good progress against our goals to hire relative to those percentage mixes in the early part of the year. But we’ve got a long way to go to get to where we want to in the back half of the year.

So still a lot of hiring to be done but good progress being made to date.

Operator: Our next question comes from the line of David Rescott with Truist Securities. Our next question comes from the line of Cecilia Furlong with Morgan Stanley.

Cecilia Furlong: I wanted to ask a follow-up question on AT. If you could just speak to where you are at this point running through the legacy SKUs of the prior AT before the addition of the notice. And then looking forward to, as you think about just what is incorporated in that 16% to 18%, can you speak to how you’re thinking at this point, at least about AT volumes recovering to a level or similar levels that you saw in ’22 pre the issue?

Quentin Blackford: Yes. I think from an AT perspective, coming off the fourth quarter and certainly how we thought about the guidance is that, that business is going to grow right around 30% for us. That’s where we saw it in the fourth quarter. That compares to the first 9 months of last year being closer to the 50% growth range. And so we certainly have seen a difference in that growth profile coming out of that field advisory notice. Now we’ve made all the updates in the labeling that we need to do and in the packaging that we need to do. Now it’s about just the confidence coming back in the commercial force and with the customers to see that growth return. Our 16% growth expectation would assume that we sort of continue at the current rate over the course of the entire year, getting to 18%, the higher end of our guidance range would assume that around the midpoint of the year, we’re seeing ourselves get back into those prior growth realms.

And so that’s how we thought about it. Obviously, if we can do better than that than that we’d be very pleased with it. But our focus is certainly on getting that business back to where we saw it historically. I think that the recent FDA approval with the AF burden, for example, that will make its way into that product certainly continues to position it is one that can be attractive in that space. But we want to see those results play out before we guide to them.

Cecilia Furlong: Great. And if I could follow up on gross margins as well, how we should think about first half versus second half, especially as you launch the Zio Monitor to a greater scale and also into ’24 with Zio the MCT service, just the impact from initially ramping those products versus the longer-term benefit from a COGS standpoint?

Brice Bobzien: Cecilia, a great question. Gross margin. So in our guide, the way we think about it is, as you probably have seen the seasonality of gross margin is a little bit softer in the early part of the year, call it first quarter because it’s the lowest volume quarter of the year. So you’d expect to see something similar in 2023. The other thing I would note is with its scaling throughout the year, as it traditionally does as you push more volume through the system, there is a bit of a caveat in there, to your point, on the Zio Monitor side, where the launch of Zio Monitor will create a bit of inefficiency in the short run as we’re less than optimally utilizing that machinery upfront. So you can expect a bit of a blip maybe in Q3 or so associated with it.

And the real benefit of the Zio Monitor solution really come into play in 2024 as we’re able to fully leverage that machinery and equipment we have in place. But also that’s when the full automation will go into place as well. And honestly, at the back end of that MCT becomes or comes online as the same form factor as well. And that’s where you’ll really get that scale and efficiencies associated with the Zio Monitor. So the cadence, I would think about it a little bit softer in Q1 as it traditionally is from a seasonality standpoint. A little bit of pressure in Q3 and then the other 2 quarters relatively standard with what you’ve seen historically.

Operator: Our next question comes from the line of David Saxon with Needham.

David Saxon: Maybe I wanted to start with a follow-up on guidance and just the assumptions around pricing being in line with ’22. Just with the San Francisco facility getting to 25% of the volumes in the first quarter here and then ramping, I guess, why wouldn’t there be upside from an ASP perspective relative to ’22?

Quentin Blackford: Yes, David, I think that it’s a good question. But keep in mind, over the course of ’22, we had different dynamics playing out with respect to reimbursement around that XT product with the different MACs that we were able to contract with, right? And so over the course of the year, that rate got higher and higher as well. So the comp gets more difficult. So even as we increase the utilization of San Francisco in 2023 and might have a higher effective average selling price, that’s being compared to a prior year that also had a higher effective selling price as we move throughout the course of the year. And so for the full year on average, we do think that XT price is going to be pretty comparable year-over-year.

Maybe there’s a little bit of a benefit now that the PayGo aspect has been resolved from our original expectation when we were saying the XT pricing was going to be relatively comparable. There’s about a 4% benefit relative to that original expectation. But VAT pricing also came in a little bit lower in that final rule which sort of negates the PayGo benefit. So net-net, you’re about neutral year-over-year related to those items. So I hope that helps clarify it for you.

David Saxon: Yes. No, that’s super helpful. And then maybe I’ll follow up with maybe a longer-term question. You guys had a slide deck published in January that had a 25% EBITDA margin referenced in it. Just wanted to ask how we should think about that margin target relative to the LRP. Is that something you can hit in 2027, if you see contribution from some of these adjacent markets? Or is that more of a longer term post ’27?

Quentin Blackford: It’s a good question. Our LRP that we put out there around 2027 had us getting to roughly $1 billion in revenue at that point in time. It really didn’t contemplate contribution coming from the adjacent market opportunities that we’re certainly bullish on and hope to be able to open up. But the point of 15% was simply a point in time as we’re going through that $1 billion market, still growing at, in our minds, roughly 20% or better. In no way would that be a point that we’d be happy to stop at though. The business model here, when you think about it from a structural perspective and what is possible, there’s no question that we can get into those mid-20s and even the upper 20s from an adjusted EBITDA perspective.

When that happens, I’m not willing to sort of say exactly when that’s going to happen but I see that happening in the future of iRhythm. It’s probably when we move north of that $1 billion in revenue but it’s something that can be achieved here. And that was the purpose of putting that out there is that we wouldn’t be happy at 15%. That’s just a point in time when we cross through that $1 billion mark but the long-term trajectory ought to be able to get us into the mid-20s.

Operator: Our next question comes from the line of Nathan Treybeck with Wells Fargo.

Nathan Treybeck: Can you comment on how far along you are in your EHR integration? And how much of a driver is this in your ’23 guidance?

Quentin Blackford: It’s a great question because the EHR integration for us is such a critical aspect of how we think about creating stickiness with our accounts. I would tell you there is significant runway ahead of us as we continue to build out the EHR integration with our accounts. We are making good progress. It’s been a focal point internally and we know that once we get an account integrated with us, I couldn’t give you an account throughout the history of iRhythm that once integrated from an EHR perspective has walked away from iRhythm. It creates a tremendous amount of stickiness. And at the same time, the growth trajectory hits an inflection point once you get to that point of EHR integration. In terms of the amount of accounts that are integrated, I don’t think we’ve put that data point out there. It’s well less than 50% and it’s something that we are working to increase as quickly as we can.

Nathan Treybeck: Great. And then can you comment on what you’re seeing in your Know Your Rhythm commercial pilots? And is there any contribution in the guidance?

Quentin Blackford: Yes. We have not contemplated any contribution in our guidance relative to Know Your Rhythm at this point in the pilot. We expect to launch multiple pilots over the course of the year. But at this point, we’re still building out the operational capabilities of how those pilots would work. So to be completely transparent that there aren’t patients on our product in a Know Your Rhythm pilot just yet, that will start before too long. But right now, it’s about getting the operational aspects of how we’re going to work with our partner, get the devices on patients, capture the data. We’re in the midst of nailing down the final growth of the operational aspects as we speak. That will ramp over the course of the year. And to the degree that there is contribution from it, it ultimately will end up being upside to expectations. That’s how we thought about it at this point. We just — we’re not going to get out of ourselves with it.

Operator: Our next question comes from the line of David Rescott with Truist Securities.

David Rescott: Can you guys hear me now?

Quentin Blackford: Yes.

David Rescott: Great. Sorry about that. So I guess, first, just on the longer-range plan. You talked a little bit about PayGo essentially potentially being a slight tailwind. But just wondering on that long-range plan, if one that the kind of benefit that you have from PayGo going away or not being enacted this year, is potentially upside or whether or not that was included in the long-range plan or your initial view the long-range plan? And I guess the second part of that is, did your long-range plan from a top line growth perspective also account for maybe expansion to this Medicaid patient population?

Quentin Blackford: So on the PayGo aspect, in particular, we had assumed based upon what we knew at the time that PayGo would be in effect. In other words, it would be a headwind a bit in 2023. Ultimately, what we learned is that it wouldn’t be right and that we would get the benefit back. And so that was about a 4% benefit that we hadn’t contemplated in pricing over the entire long-range plan. At the same time, we hadn’t contemplated really that AT would be cut by CMS the way that it was. And so when you look at the 2 of those, I mean, literally, they offset each other almost to the $1 when you calculate the impact based on the mix in our business. And so I don’t see PayGo really driving any difference in the long-range plan and as a result of the AT pricing being updated as well. So overall, I think the 2 of them net each other out. What was the second part of that question, again?

David Rescott: The assumption around Medicaid or expanding into Medicaid, whether or not that was included in the LRP?

Quentin Blackford: No. We haven’t really contemplated the incremental benefit that can come from Medicaid. Part of the challenge there is just to — it alludes back to the question that was asked earlier, exactly what price are we able to establish in that population. That’s something we’re working through as we speak. And then how quickly can you get all the states that come along. We know that not all states are going to come out of the gate and it’s going to take work on a one-off basis. And so the way we’ll think about Medicaid contributing to that long-range plan is that we’ll give you updates as coverage gets put in place and then we can update our expectations in line with when that happens. But it’s too early to try to anticipate and know exactly when that would happen. And then if we don’t happen to get it exactly right, we’re talking about a variant. So I’d rather let that play out and then roll it into expectations as we get it filed in.

David Rescott: Okay. And then I’m not sure if I might have missed it earlier but in the past, you had kind of talked about the way in which you improve those underlying return to XT is through potentially shifting some more home enrollment cases toward those inpatient or the case was for otherwise prescribed by a physician in the office. So wondering if that was a big driver of the improvements here. And then the second part of that would be if there is an increased rate of home enrollment as a portion of total revenue in order to kind of keep those lower returns at a higher level or back on the store levels. Does that incrementally add any type of expense that would make you think about essentially shifting the kind of overall view on how you’re going to leverage the profitability profile of the company?

Quentin Blackford: Yes. I don’t think — nothing really came in much different than what we expected from a return device rate with respect to mix of volumes through home enrollment or in clinic or the newer sort of take-home model that we were seeing. I think that pretty much came in line right as we expected it would. And we made some improvements in that take-home model that was putting a bit of pressure on us throughout the course of the fourth quarter once we learned about it and could sort of adjust our approach to those patients and those physicians with a product that was — we provided better indications for use, how to apply the device, follow-up calls, those sort of things, we were able to see some improvement in that return device rate.

It’s not in line with an in-clinic return device rate but it has the potential that it could be better than a home enrollment return device rate. I believe the home enrollment program for us is an opportunity to really deliver sort of a competitive differentiated solution experience for our patients. It’s so easy to take this device, supply it at home and not have to be in the physician’s office to have that done. And then to be able to provide the report back to the physician without the patient never really having had to come in. I think home enrollment can be a significant part of how we grow the business into the future. But at the same time, the return device rate with our home enrollment program is roughly 90% compared to, call it, 98% within clinic devices.

I think there are some things we can do operationally that can improve that 90% over time and see us close that gap. But I think the value of home enrollment is that it can help us drive faster volume growth or faster adoption of the product, given the flexible model that it allows and it gives the physicians to utilize to address some of the capacity challenges they have in their own clinics. So while it has a lower return device rate, I think it has the potential to drive faster unit volume growth that can offset that lower device rate and then give us opportunity over time to operationally focus on improving the 90%. So I think home enrollment can be a significant driver of growth for us into the future when we think about some of the challenges we see in the market around capacity or just seeing patients or having to schedule them many weeks, if not months out.

I think home enrollment can start to alleviate much of that. So I think it becomes a nice solution for us.

Operator: Our next question comes from the line of Joanne Wuensch with Citi.

Unidentified Analyst: This is actually Anthony on for Joanne. Do you talk about how the international business performed this quarter and what your expectations are for this year? And then as a follow-up, can you just discuss any competitive dynamics you witnessed in the quarter?

Quentin Blackford: Yes. From an international perspective, the value continues to be realized quite nicely at what Zio can bring into the marketplace. So we continue to see volume growth there perform really, really well. I think one of the things that we have to navigate through in the U.K. business is coming off of the AI award and into formal NHS coverage of the product, right. And that’s something that we continue to work through with them and we continue to see great volume growth but getting a permanent rate established by the NHS is something that’s really going to open up the public sector for us into the future. So I expect it’s going to continue to grow really well. Volumes are going to continue to grow really well for us as we get into the private sector.

We’ve now entered into agreements with 3 of the largest private hospital groups in the U.K. That’s going to continue to progress nicely for us. And over time, I think international is going to be a pretty significant contributor for us in total. From a competitive perspective, I would tell you there’s nothing unique that we’re seeing in the marketplace relative to the competition. We’re very much aware of it. We pay close attention to it. We track it as well as we can through third-party market data that we have. I don’t think that you’re seeing any change in competitive trends over the course of the third quarter, the fourth quarter. Frankly, I think some of the challenges that we saw in the third and fourth quarter from a staffing perspective, I think they were felt industry-wide.

I don’t think they were specific to us based upon all the market data we were able to pull together. So I don’t see any dynamics changing on the competitive front, although it is something that we pay very close attention to.

Operator: Our next question comes from the line of Bill Plovanic with Canaccord.

Unidentified Analyst: It’s John on for Bill tonight. Can I first start just on the PCP opportunity and maybe some more color around there. What are you seeing in terms of success? And how would you describe clinician comfort? And are these generally take home or home enrollment patients? And are you seeing any pushback from existing or ET or cardiology customers?

Quentin Blackford: Yes. What was the middle question in there? You were asking about the success or what success looks like and then home enrollment but I missed .

Unidentified Analyst: Just the permission, the PCP comfort around prescribing.

Quentin Blackford: Yes. No, a terrific question because it’s a dynamic that we are learning to navigate through. I will tell you that the success around the primary care space, the GP space has been more than what I would have expected at this point in time. I mean getting partners like One Medical signed up has certainly helped move the needle. We’ve had a couple of other large network, PCP network folks sign up as well. We won’t disclose those out of respect for their wishes but we’re certainly seeing the interest in the Zio product, making it way into that primary care space. And I think given the clinical data behind the product and just how easy it is to utilize both from a patient perspective as well as interpreting report, the comfort levels are quite high.

And I think it just validates for me that we’re absolutely going to open up the primary care space. And again, there’s 14 million patients in their primary care physician today that already have cardiac-specific palpitations noted in their medical records. That compares to 5.5 million ACM tests being prescribed in the U.S. I remain convinced that you’re going to see this market expand dramatically as we continue to push into the primary care setting, just given how easy it is to use the product, how accurate it is and the downstream benefits that you get with monitoring these patients sooner. It helps address so many of the capacity issues that we’re hearing by the specialists, by the EPs, even to the point where there are networks that we’re now working with, where we led into those networks by convincing the cardiologist or the EP of the value of Zio and they’ve been using the product but they see how easy it is they used to where they’re actually presenting within their networks to have the primary care physician begin to prescribe the product, have it placed on the patient and then let the cardiologist or the EP do the actual overread which they can do very easily in our Zio suite and help streamline who they’re actually spending time seeing versus not.

So in many ways, the specialists have embraced the ease of use of this product and how it can impact their home practices and make it much more efficient and effective. And I think that’s going to be a model that continues to really move into the future and drive some nice growth. Ultimately, the home enrollment model is the model that we would prefer to see utilize more than anything else in the primary care setting only because there are so many primary care specialists that are out there rather than sitting products on the shelf in every one of their offices, the home enrollment model just makes a whole lot more sense for us. At the same time, we want to see that return device rate improve beyond 90%. And so that’s where we got operational efforts internal focused on enabling that and making that happen.

But the home enrollment model is the way we want to think about serving that PCP or GP space.

Unidentified Analyst: And then just as a follow-up, how should we think about the international contribution in 2023 outside of the U.K.? I know you talked about that a little bit but the other European nations that you previously called out as target, any revenue contribution from there? And then have you submitted your Shonin application for Japan yet? And should we still expect approval late this year in reimbursement in 2024?

Quentin Blackford: Yes. In terms of the incremental international countries beyond the U.K., we still expect to be in to at least 3 of those countries selling product in the back part of this year. How quickly that goes is something that we’ll monitor as we get into those countries but we certainly expect to be in additional countries 3, at least by the end of the year. We probably go into the private sector first and then move into the public sector is how we think about that. It’s not going to move the needle in a meaningful way with respect to growth for the overall company in 2023. I mean today, international which is predominantly the U.K., is 1 point to 1.5 points. I think about 1.5 points or so of total revenue. And so that’s not going to move the needle in a significant way, just yet.

I do think international and tie-tin has an opportunity to be an incredible contributor to the overall size of the company and the growth profile of the company. With respect to Japan, we’ve had initial discussions with them around the high medical needs assessment. Clearly, we want to go into that market with a high medical need designation, if we can. It will certainly help from a reimbursement perspective. We had that first meeting with them. There’s a follow-up meeting that will happen here in the not-too-distant future. And right behind that, I would expect to submit for Shonin regulatory approval which we would hopefully get towards the back of the year, if not right at the beginning of the new year and then ultimately get into discussions around reimbursement and hopefully have our product in that market in the back part of ’24 some time.

Operator: Our next question comes from the line of Suraj Kalia with Oppenheimer.

Suraj Kalia: Quentin, can you hear me all right?

Quentin Blackford: We got you.

Suraj Kalia: Perfect. So Quentin, in one of your comments caught my attention, I believe it was for the next-gen XT for longer use, can you characterize that a bit more? Is the battery size bigger? Are you looking to accommodate 30-day usage? Just curious, given the past commentary, always look Zio AT is coming form is good enough for 14 days of use. If you just flesh out some additional details if you could.

Quentin Blackford: Yes. Suraj, our development teams have been — they’ve done an incredible job with the Zio Monitor. I mean I continue to believe it’s going to be a much bigger deal than what we’ve even anticipated as I hear feedback from it in the marketplace. And this is going to be the exact same form factor that we use on the next generation of the Zio AT product or the Zio MCT product. And you’re going to find some data even at ACC with respect to the Zio Monitor that demonstrates sort of the wear experience we’re getting out all the way up to 30 days which is pretty encouraging and pretty remarkable. It’s not larger size. As I mentioned, the form factor is 72% smaller than the existing form factor today. It’s just really a testament to what the team has been able to do from a technology perspective, getting it much smaller, much lighter that allows it to stay adhered to the body for a longer period of time and generate a good patient experience.

So we know that one of the gaps in our existing AT product is while we think we can — and the data would tell you this, we can monitor as well as any product in the market during the course of those first 14 days, we know that a large part of the market is looking for something that goes beyond 14 days. And our first step will be to extend that out and the Zio Monitor platform that you see is going to be that platform that will enable that with the AT product. So we’re excited by what we can see or what we’re going to realize there in time.

Suraj Kalia: So forgive me, Quentin, for belaboring this point. So you’re saying the new form factor with Zio Monitor form the AT application will have the same size battery. I presume it will — it needs to have real-time connectivity. Just trying to understand to your comments, basically, you’ll have real-time connectivity but the form factor is not — a battery form factor has not increased. Did I paraphrase that correctly?

Quentin Blackford: You’re thinking of it correctly. That’s right, Suraj. The battery life in the existing Zio Monitor, we believe can get out well beyond the 14 days that we’re at today.

Suraj Kalia: Interesting. Okay. Quentin, one last question. So Quentin, one of the things that you’ll be crystal clear in terms of OpEx leverage in terms of shifting between IDTFs of 50-25-25. And see as you exited ’22, FY ’22, can you set stage how was the IDTF distribution for your scripts so that as FY ’23 and beyond progresses, we can just sort of compare and contrast and map it for our own modeling purposes?

Quentin Blackford: Yes. I think maybe at the highest level, Suraj, we didn’t have any contracts in place from a MAC perspective with IDTFs really outside of Novitas and then NGS in Chicago that we were utilizing. We did end up getting some additional contracts put in place over the course of ’22 but knowing or expecting that we were going to be able to get a national rate put in place, it didn’t make sense to set up physical facilities and hire people into these other locations. So we ended up managing most of the XT workflows through the Novitas and NGS MACs, if you will. Over the course of ’23, as you know, we’re hiring and expanding our presence in San Francisco and in that IDTF. Frankly, just the volume growth in the business requires us to hire more folks into the business just to keep up with the overall volume, we’ll be hiring the majority of those folks into our San Francisco location that will be again to be able to do some of the XT product for us as well.

Keep in mind, we’ve done AT out of San Francisco historically. Now we’ll begin to do some of the XT. So in the prior year, in terms of the mix between the Novitas and NGS, I can’t speak to that specifically off the top of my head but we started off with Novitas and certainly move towards NGS over the course of the year here in 2023, about 25% will be in San Francisco in the first part of the year and the expectation is to move north of 50% in the back part of the year as we hire out resources to do the work in San Francisco, keeping up with the overall volume growth in the business.

Operator: Our next question comes from the line of Michael Polark with Wolfe Research.

Michael Polark: I’m curious on Manila timing over what period of time will this facility ramp up? And is this a facility for clinical operations, G&A functions, both? And is it going to be positioned to serve U.S. patients or designed to serve your future OUS growth opportunities?

Brice Bobzien: I’ll take that. Sorry, Quentin. Yes, I’ll take that one. So it will ramp up over 2023. The biggest utilization there will be for our back office functions. There will be some clinical ops and customer ops functions that will roll through there as well. As you know, there’s compliance aspects that we need to adhere to and we’re very mindful of on the Medicare front. And so nothing that needs to be processed domestically. We’ll move into those locations. That’s not at all the plan. But for commercial contracts that have that ability to move over there, that’s what we will do. So it’s going to ramp up over 2023 and then it will be fully up and operational by the end of 2023.

Michael Polark: That is helpful. For my follow-up, just to level set models and there was some 1Q commentary already. But the pricing and volume has bounced around here through the COVID era and through the reimbursement cycle. I guess 1Q revenue in your plan versus 4Q down, flat or up sequentially? What’s the best direction?

Brice Bobzien: Yes. So traditionally, if you look at the seasonality of the business, it steps back a bit. And if you work your way into the sort of the commentary of Q1 being on the lower end of that guidance range, it will help you get into the place that we think it’s going to be from a Q1 perspective. And again, that’s natural seasonality playing through the business. Nothing unique to this year than what we would expect outside of that. Now there is a bit of a tailwind as we talked about from original expectations with regards to PayGo and then XT there’s a bit of tailwind there but most of that is offset by the AT pricing pressure. So if you work your way into the bottom end of the guidance range there, you’ll get the feel for what the seasonality looks like. And historically, let’s call it, 22-ish percent and we don’t think it’s going to deviate much from that.

Operator: There are no additional questions waiting at this time. I would like to pass the conference back to the management team for any closing remarks.

Quentin Blackford: Well, thank you. And in closing, I want to take the opportunity to thank each of you for joining our call and I want to thank each of our team members at iRhythm for the tremendous work that they do each and every day to make our company what it is. We have a tremendous future in front of us at iRhythm and look forward to an exciting year in 2023. We exited 2022 with strong registration volumes in both Q3 and Q4, including another record number of new account openings in the fourth quarter. And we have exciting clinical data that’s going to be presented at ACC in just 1.5 weeks that continues to demonstrate the superiority of our Zio XT product and we’re preparing for the launch of Zio Monitor which will be the largest launch in our company’s history.

In addition, we’re focused on getting the newly designed Zio AT on file with the FDA leading to a potential launch in ’24 in a space that we are well underrepresented in today as well as submitting in the next few months for regulatory approval in Japan, the second largest market in the world. Our future has never been brighter and I look forward to speaking to all of you again on our Q1 earnings call. Take care.

Operator: That concludes the iRhythm, Inc. Q4 2022 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.