iRhythm Holdings, Inc. ($IRTC)

[Audio Gap] and Senior Vice President of Finance and IR, Lisa Pecora. So thank you both for being here today.

Thanks for having us.

Maybe we can start with the positive update last week on the LCD. Some of the issues with the proposal were addressed as hoped, and there were some incremental positive updates as well. So it would be good to hear your thoughts on the update and those additional patient population opportunities mentioned.

Yes, yes, so thanks again for having us. It's good to be here and good to see you all. So really pleased with where that landed. As you know, kind of the initial language that was drafted had some kind of nuances and some complexities and contradictions that needed to be worked through. And, yes, that's ultimately the reason for the process that CMS runs and the MACs to solicit comments from industry, iRhythm as well as other industry participants all commented through that period, and that feedback was received and the final draft landed in a really favorable spot. You mentioned additional patient indications, and it was really encouraging to see that systemic emboli as well as pre- and post-TAVR. So really pleased with where the final LCD landed. Ultimately, we believe that increases access, not limits access. And that's on the back of kind of clinical and economic evidence that we presented, obviously, advocacy through the process as well. So really pleased with where that landed.

Great. And then maybe we can turn to your Q1 earnings, which saw a good 3% beat on revenues. Maybe you can just start high level with the drivers of strength between Zio monitor, Zio AT and the innovative channel part of...

Yes, really pleased with the start of the year. Q1 was another strong quarter for the company, both on the top and bottom line, sixth consecutive quarter of over 20% growth. So really encouraged to see the continued momentum in the business and contribution really from a number of different parts of the business, which is also encouraging. Zio monitor, our core Zio monitor in the U.S. continues to be the primary contributor to growth. That's obviously the biggest part of our business, saw good results there, volume-led growth in the quarter. Zio AT, we set up the year guiding that AT would grow slightly above company average. We saw that in the first quarter. So good momentum there. And then innovative channel, we talked about that being the fastest-growing channel in our business, and that remains our fastest-growing channel in the business. And that would be our expectation for the remainder of the year as well. Encouraging what we saw there out of innovative channel and also see a really healthy pipeline for that momentum to continue.

And then on the revenue guidance, just how you're thinking about the guide raised by the beat in Q1 and then the growth rate for the year steps down from Q1. So maybe you can talk about the tough comp dynamic and again, just how you're feeling about the momentum in the business.

Yes. Yes. So our guidance philosophy is always to make sure we're not getting ahead of ourselves and no change in terms of how we're setting up the remainder of the year. A lot of good contribution from the different areas of the business, as I was mentioning, and innovative channel, that is one that we like to leave primarily as upside given that's a newer part of our business, a little less predictable than our core business, and that's how we continue to approach guidance. As you were pointing to the tough comps, we knew that was coming with all of the success we had in 2025 and the growth that we saw really accelerating through the year in 2025. So the back part of this year, in particular, has difficult comps for us. If you look at a 2- or 3-year stacked growth chart, you will not see that deceleration. So from our perspective, it really is just a comp issue. And again, we're really encouraged about the momentum in the business.

And then the margin outperformance in Q1 was also pretty strong. EBITDA beat by $7 million, and you raised the guide by the beat there. So maybe you can also just touch on the margin strength in the quarter.

Yes, sure. Maybe I'll let Lisa.

Stephanie, I'd love to talk about margin. I'll take that one. So we really are proud of the progress, both on gross margin as well as the bottom line. So as you look at the gross margin, it really starts there. We've made great progress with our manufacturing efficiencies driven by past investments in automation. So that's a big component. But we've also driven good leverage with our clinical technicians and workflow efficiencies that, that enable that gross margin progress. So starting with gross margin and then moving down, Q1 actually demonstrated about 750 bps of year-over-year improvement with SG&A. And that's where we're targeted and focused with margin leverage. It's all about driving that scale, prioritized investments, making sure we're being really thoughtful to put the dollars in the best possible spot. So overall, that drove over 7% adjusted EBITDA margin in Q1 compared to a negative adjusted EBITDA Q1 last year. So great progress. We're excited to continue that through the year.

Maybe I'll just add. I think there's some inherent leverage in the business that maybe isn't fully appreciated. I made reference to this on our Q1 call. The innovative channel as that continues to grow, we've talked about that being a one-to-many selling model. That is a highly-efficient model for us, that's driving good leverage for us. EHR integration, that has been a great way to grow the business efficiently and that leads to leverage in the business. And then the other thing I would say is AT is calling -- we're calling on the same physicians and same accounts that are prescribing Zio monitor. So as we're successful there, that's naturally leading to leverage in the business as well. So we're encouraged by it.

Great. And then on the Q1 call, it sounded like you received some additional clarity from the FDA on the regulatory path for Zio MCT and reiterated the first half of 2027 timing. So can you just talk about what's needed for the package you're going to submit to the FDA later this year and why you're able to maintain that timing?

Yes. So as folks know, we made a decision to move to a mobile phone gateway in the beginning part of this year. With that, the design work is essentially done, but there's additional testing that we have to do, and this is software verification testing, electronics testing, just more kind of routine in nature. It takes time to run that testing and collect the data and ultimately get that back to the FDA. In conversation with the FDA, it was our view, it was the better approach to hold that data until it's all completed and then resubmit back to the FDA later this year rather than doing it on a rolling basis. So we're going to take that approach. That was one path considered when we guided to first half '27 launch for Zio MCT, which was why we're able to reiterate that guidance.

Got it. And then post approval, maybe just remind us how you're thinking about potential adoption ramp. At the beginning of this year, you shared you're at 15% market share in MCT, which I think was about a 5-point increase year-over-year. So maybe just how you're thinking about MCT and ramp of additional share capture?

Yes. So we've been successfully increasing our market share in that segment. It's a segment that we are very excited about. If you think about the overall market, long-term continuous monitoring, which is our bread and butter with Zio monitor, that's the fastest-growing segment in the market, high teens growth. MCT segment is kind of the next segment that's growing in the overall market and call that high single digits. And we have a big opportunity ahead of us where we're only 15% share in that market versus 72% share in long-term continuous monitoring. So it's a market segment we're excited about. We have been pretty open that Zio AT has competitive gaps and Zio MCT will start to close those gaps. And we believe it's the product that can really start to accelerate our share gains in that market. It is a segment that is pretty fragmented, and there's different features and business models within that segment, and we'll be evaluating that and continuing to innovate and make sure we're putting ourselves in the best position to gain our share of that market. It is our goal ultimately to be the market leader in that segment. And it's, again, a segment we're excited about and committed to.

And then you also, on the earnings call, talked about the next-gen algorithm that you expect FDA approval for later this year that will be launched with MCT. And you noted how this could be a really big financial lever for the business. So could you maybe talk about the enhancements and the benefits to COGS that you expect?

Yes. So AI has been core to our business from the very beginning. When you are collecting 14 days of data, continuous data that's 1.5 million heartbeats on average, you need very, very sophisticated AI tools to curate that data and kind of pull out the relevant insights. And we're on our second-generation deep learned algorithm today. We have developed our third-generation. It's with the FDA. That's the one that we mentioned on the Q1 call. The testing that we've done on that algorithm shows really meaningful savings in terms of time needed to ultimately finalize the report and deliver it to the physician. So it's going to put us in a really favorable position to scale efficiently. And we called out 50% scan-time savings, over $100 million in cost savings over a 5-year period. So it's something we're excited about. We did mention we'll launch that with Zio MCT in that first half '27 window and excited about what that impact is going to be to margins and our ability to scale.

On the $100 million in value over a few years that you noted, could you maybe explain how you get there?

Yes. I think you -- I mentioned the 50% scan-time savings. If you use that metric, apply it to the service cost within our COGS line, you can get there. Think about it more as an enabler of scale. So we'll -- with those scan-time savings, we'll work into those types of savings over time. There is some amortization that will offset the benefits that we'll see, but that's pretty small in nature. And given the impact, we'll work through those offsets pretty quickly.

And then just wanted to, I guess, wrap up Zio MCT and the impact on the model there, just thinking about the 21-day wear time versus 14-day, you have more days of monitoring revenue and costs, and it will be on the Zio monitor form factor. So just how we should think about that on the model?

Yes, we do think Zio MCT can be accretive to the gross margins relative to Zio AT. You mentioned on the same platform. Lisa mentioned manufacturing, automation. And so we're able to leverage those benefits across the full platform once MCT moves to the common platform. It will have 21 days versus 14 days today. There's enhanced detection algorithms, more sophisticated detection algorithms on the device. So that likely offsets the increased wear time. Importantly, there's no revenue gain by going from 14 days to 21 days. We're still delivering the MCT service billing for the same CPT code. But again, believe that Zio MCT is a product that's going to move us more meaningfully into that segment and excited about the financial impact.

Got it. And then touched on AI before, but maybe just a follow-up there. It's obviously been topical given your capabilities and concern out there of potential commoditization of AI and in-sourcing by customers. So maybe you can just walk through what the barriers are there. And clearly, you're continuing to advance your capabilities. So can you talk about your moat there as well?

Yes, exactly. And you hit the punchline there. We believe AI is an enabler for us, not a disruptor. And we tried to hit that head on, on the Q1 call and articulate the moat that we've built around our platform. There's a lot that goes into delivering the service, the clinical service. We've been at it for 20 years. I mentioned EHR integration earlier that's critically important to the customers and making sure you are kind of easy to operate. There's a lot of aspects of just device management, making sure the device is there and ready, high patient compliance, and we've invested on the device side of our business, obviously, with the new platform and then all the AI capabilities that we've been building. Importantly, AI is only as good as the data that you are training it on. We have over 3 billion hours of curated ECG data that has been training that we've been utilizing to train our AI tools. And that is for sure, differentiated relative to other competitors and data sets out there. So we're -- again, we're going to continue to invest in AI. It's been an enabler of our business, and we expect that to continue.

And you mentioned on the last call that you're now in your first health system with predictive AI. So could you talk about the strategy for rolling this out more broadly with both traditional health systems and innovative channel partners and any economics to consider?

Yes, yes, it's clear to us that there's patients that are undiagnosed, remain undiagnosed, and they are either not aware of symptoms or they're having symptoms, but they're being confused with other disease states. And there's a lot of clear data that shows if you monitor these patients, you're going to find undiagnosed arrhythmias, the predictive algorithm that we're launching with the first health system, that really makes it easy for these accounts to identify the patients that are most at risk of having an undiagnosed arrhythmia, either based on risk factors or symptoms that are in their medical record but have been forgotten. So we're excited about what that can mean. We believe there's a 27 million-plus patient opportunity for undiagnosed arrhythmias. This algorithm is kind of one tool to open up that market for us. And obviously, we're early, and we're going to learn a lot in some of these initial deployments, but we're excited about what that can mean.

And then the innovative channel partners revenue today represents a low single-digit percent of your revenue. But as you mentioned earlier, it's very fast growing. So any way to think about what portion of your revenue this could become over time? Is it mid-single digits, high single digits?

I would say both of those are possible. And as I mentioned earlier, it's the fastest-growing segment of the business. So naturally, it will continue to grow as a percent of revenue. But more importantly, we believe we're still in the early innings of the opportunity. I mentioned 27 million patients. We're doing a lot of research around that now to identify where those patients are being managed and how to get to those patients. And we've been successful at this point in really working with kind of the early adopters. We call it innovative channel for a reason. These are innovative partners that are forward-thinking, and we will continue to work with partners of that type, but eventually want to start working our way into kind of the majority of the population. And this market research will certainly inform that, and there's other things that we need to be doing to open up that opportunity. Certainly, clinical and economic evidence -- continued clinical and economic evidence is going to be critical to opening up that market. We're working on those data sets now. And that real-world evidence is pretty powerful when it comes to selling these types of programs into partners. So we're excited about it.

And then on the economic data that you were talking about, I think you expect some of that later this year, and you're kind of just touching on this, but I would think that, that data can be helpful to get other potential partners interested. So maybe just interested to hear like how big of a catalyst do you think that economic data could be?

I think it can be pretty meaningful. A lot of times, we're engaging with partners. The first question will be, well, who else are you doing this with? We've been able to answer that question now. And then the second question is, well, what does the data look like? We do -- we are able to piece data together to tell an economic story, but there's nothing that is as powerful as real-world evidence to show this partner in this program for 12, 24 months, these are the outcomes they saw both from a clinical standpoint and an economic standpoint. So we know it's important to continue to open up this market. That data is important for us, and we're working with partners today, and we'll look to have that evidence published at some point later this year.

And then this innovative channel partner and focusing on asymptomatic patients, this strategy is differentiated versus what peers are doing. So maybe you can just remind us of how you're uniquely positioned to go after this opportunity versus peers?

I don't want to give too much there given our competitive advantages there. But clearly, I mentioned 72% share in the long-term continuous monitoring segment. These partners are using long-term continuous monitoring. I would point to all of the clinical and economic evidence that we have today, over 140 peer-reviewed publications. That's a great starting point, even if it's not economic evidence from these programs. And think about the CAMELOT data, the AVALON data that we've produced over the last couple of years, that shows Zio is very clearly the best long-term continuous monitor in the market, highest diagnostic yield, lowest retest rate, lowest healthcare resource utilization. Those are all matters or factors that matter to these innovative channel partners. And then I would say our scale and our ability to integrate efficiently with these partners that's differentiating as well. The one-to-many selling model that I mentioned, some of these partners want to monitor a big number of patients in a short amount of time. Our scale allows us to serve those partners uniquely relative to our competitors.

Got it. And then on the -- you've mentioned that the increased focus from CMS on chart scraping behaviors could be a tailwind and maybe it's still early, but are you seeing any impact? Or how do you expect this to be a tailwind?

Yes, yes, I'd say probably too early to see an impact there. We do feel very strongly that our program is -- has a really good kind of product market fit for what Medicare Advantage is meant to be and highly compliant in line with kind of the guidelines around these types of programs. It has a patient encounter. It is a definitive diagnostic where a patient is wearing the device. It's being reviewed by cardiologists and ultimately leading to a definitive diagnostic. And we're also going to market with strategies to ensure that there is a care pathway that follows a diagnosis. And that's important in these plans as well to show that there's follow-through, once you identify the patient, you are then continuing on the caring and managing for that patient, and that's part of our go-to-market strategy.

And then I wanted to ask about the data at HRS, which showed that short-term Holter misses a large proportion of AF recurrence post ablation. So just curious if you expect this data to impact practices in these patients and help conversion opportunity from...

Yes, it certainly should. And if you combine that with other clinical data recently where physicians are making a determination to stop anticoagulation therapy, you want to be certain that there is not recurrence of AF. If you do short-term monitoring, you're going to miss a good number of patients that have recurring AF. So we believe it's one more data set of very clear clinical evidence that supports long-term continuous monitoring with Zio over short-term Holters. That segment of the market has been declining for several years now. There's still, call it, 1.5 million short-term Holters being done in the U.S. each year, but declining and evidence like this will ensure that it continues to decline and convert to long-term continuous monitoring.

Yes. And I just wanted to touch on just sort of how you view the AFib ablation market and sort of the growth you see from there and just as a driver of the business...

Yes, I would say -- and investors have heard us say this, I believe it is a tailwind in the business. We would not say it's the #1 kind of tailwind or driver of our business, just given absolute numbers of ablations in the U.S. Our move into primary care certainly is a bigger driver of our business. But it has been helpful to the market, and that market will continue to grow as -- and so we believe it will continue to be a tailwind for our business as well.

And then just also wanted to touch on the sleep pilots and how those are going and sort of the opportunity you see from home sleep tests and the willingness of patients to do that.

Yes. Yes. We're encouraged by the early signs of what we're seeing with our pilots, have had a number of accounts signed up. We -- our research suggests that 20% of our prescribers today already prescribe the home sleep test. As we make it easier for those physicians and other physicians to prescribe a home sleep test, we believe that can be an even more meaningful number. Our pilots are confirming that. We're excited about what we're learning. The long-term vision is ultimately to do what we've done in cardiac monitoring in the home sleep test market. A lot of the same kind of operational aspects in delivering cardiac monitoring are there in sleep testing, and we believe we've built those capabilities over 20 years that can put us in a really favorable position to make a positive impact in that market.

Also on international, that's been low single-digit percent of your overall revenue, but Q1, I think you mentioned was the best quarter in company history there. So what's driving the momentum internationally?

Yes. Yes. We're still pretty early in the 4 Western European countries. U.K., we've been in that market for a few years now. That was the primary driver of the Q1 results, really encouraged by the momentum we're seeing there. Primarily in the private market as we're continuing to look to open up the public market there and have various pathways we're pursuing there. Japan is another market we're really excited about. We do need to secure higher reimbursement there, and we're working on the head-to-head clinical evidence that will be needed to ultimately get to that premium reimbursement that we believe Zio deserves. But very encouragingly, good adoption of Zio in Japan, really strong pipeline there. We're seeing accounts convert and bringing Zio in. So we're excited about the early momentum in Japan. Certainly, once we get to premium reimbursement, that could be more of a needle mover for the company.

And then on the CID, it sounds like no update since December, but anything you would say on how you're thinking about the potential outcomes there?

Yes, yes, no updates to share there. We continue to be responsive and work with the DOJ to provide context to the information that we're providing. I can't speculate on what that outcome may be and when and what that may look like. Certainly, we're motivated to get it behind us and remove a bit of an overhang. And we don't fully control that, but we'll certainly look for opportunities to try to get that behind us.

And then maybe just wanted to come back to margins and longer-term profitability. You talked about some good drivers of gross margin expansion and SG&A leverage. But yes, maybe you can just touch on longer-term drivers and opportunity within SG&A still.

Back in 2022, we actually, at Investor Day, had put out 15% adjusted EBITDA for 2027, and we feel really good that the traction that we're gaining supports that. We had also talked about 73% on the gross margin line. And given all the pillars of leverage that we've spoken about with automation and manufacturing scale, we also feel good on gross margin. And with our new and incremental next-gen AI algorithm, we feel that, that will continue as well. So sky is the limit. We're not done with 2027. We continue to feel that there's really good progress to gain on margins from there.

And then also just wanted to touch on free cash flow in the last minute here. You achieved your positive free cash flow goal last year, continuing to grow it this year. So maybe just how you're thinking about free cash flow growth as a priority.

Yes. Yes, I'd say very consistent with the comments Lisa made on profitability. We did reach an important target last year as a company, first year of positive free cash flow. A lot of focus on it internally. Our expectation is that, that will grow relative -- meaningfully grow relative to last year. I would also mention that is while reinvesting back into the business. And we talked about the different points of leverage in the business that we're seeing, and we're balancing that by reinvesting back into the business, back into the opportunities that we see that drive kind of near-, medium- and long-term growth. I believe that's the kind of the right balanced plan.

Okay. Great. Well, I think we're just about out of time. So thank you both for being here today.

Thank you so much. Appreciate it.

Thank you.