iRhythm Technologies, Inc. (NASDAQ:IRTC) Q4 2023 Earnings Call Transcript

iRhythm Technologies, Inc. (NASDAQ:IRTC) Q4 2023 Earnings Call Transcript February 22, 2024

iRhythm Technologies, Inc. misses on earnings expectations. Reported EPS is $-1.26 EPS, expectations were $-0.6. iRhythm Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And thank you for joining the iRhythm Technologies Q4 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode and will be until the question-and-answer session at the end. I would now like to turn the call over to Stephanie Zhadkevich, Director of Investor Relations at iRhythm. You may proceed.

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, 2023. 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 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 report 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. Unless otherwise noted, all references to financial measures in this call, other than revenue, refer to non-GAAP results. This conference call contains time-sensitive information and is accurate only as of a live broadcast today, February 22, 2024. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise.

And with that, I’ll turn the call over to Quentin Blackford, iRhythm’s President and CEO.

Quentin Blackford: Thank you, Stephanie. Good afternoon and thank you all for joining us. Brice Bobzien, our Chief Financial Officer; and Dan Wilson, our EVP of Corporate Development and Investor Relations, join me on today’s call. My prepared remarks today cover business updates during the fourth quarter of 2023, as well as a 2024 outlook and initiatives. I’ll then turn the call over to Brice to provide a detailed review of our fourth quarter financial results and 2024 guidance. You heard from us in January that 2023 was a transformational year for iRhythm, on multiple fronts. We drove a banner year, reaccelerating our unit volume growth with a record number of new accounts, advanced our penetration into the primary care channel, introduced groundbreaking clinical evidence of superiority, continued market access traction and opened our Global Business Services Center in the Philippines, all while introducing greater operational discipline across the organization and launching the most successful product in the history of our company, in the Zio monitor.

This fueled our performance in the fourth quarter that led to full-year revenue of $493 million or growth of 20% versus the prior year, in line with our long-range plan, exceeding the high end of our guidance range and reflecting momentum across multiple channels. In the fourth quarter, we continued building upon the solid execution of the first nine months of 2023. We were pleased to see strong volume contributions from both new and existing accounts exiting the year. While nearly 70% of registration growth came from existing accounts, the fourth quarter was the second strongest quarter of new account openings in our history, setting up nicely as we move into 2024. The ease of use, accuracy and simple workflow of Zio monitor and Zio Suite digital products is resonating within the primary care channel, which represented approximately 21% of total U.S. Zio XT registrations during 2023, a figure that has grown consistently over the past few years and was driven by innovative PCP network account activations, as well as continued emphasis on our land-and-expand strategy within integrated health networks.

Zio monitor, which launched last September, has also progressed faster than planned, now representing nearly 70% of registrations for our long-term continuous monitoring services. We believe the combination of the Zio monitor form factor with its smaller profile and high rate of patient compliance, as well as our refreshed MyZio app, has continued to contribute to an improved device return rate of approximately 0.5% thus far in our product launch cycle. While in the early stages, Zio monitor has also improved the patient journey, resulting in fewer calls into our customer care teams from patients. In addition, we have seen that patients who are digitally engaged via the MyZio app have a much higher compliance rate, especially for home enrollment patients.

As we continue to transition all in-clinic accounts to Zio monitor throughout the first half of 2024, we are excited to see how the largest launch in the history of our company could catalyze additional momentum in the business. To further improve clinician workflow efficiencies, to streamline access to Zio services and to enable healthcare provider access to patients’ electronic health information, we also remain committed to investments in the service aspects of our systems, such as electronic health record integration offerings. During 2023, we implemented new bi-directional EHR integrations across nearly 950 customer locations and have now received more than 1.5 million all-time registrations for Zio services through EHR integrated accounts.

EHR integrations are intended to allow for an administratively simpler process and integrate Zio into existing workflows of our customers and their staff. By embedding the Zio experience into the native EHR platform of a health system or practice, these integrations allow streamlined access for ordering, document review and billing, thereby enabling our customers and their staff to spend more time with patients throughout the care pathway. Moreover, we know from experience that EHR integration accelerates same-store growth, such as making Zio directly available to primary care and non-cardiology specialists. The operational efficiencies we can drive for our customers is a clear differentiator, as we expect to have more exciting announcements on this front as we move through 2024 and beyond.

In our Zio AT business, we continue to work diligently and collaboratively with the FDA to remediate concerns noted in their warning letter to us last year. We have now submitted two 510(k) applications. One is a catch-up for changes previously made as letter to file to the Zio AT system before our receipt of the warning letter, and a second 510(k) to capture changes to design features and labeling updates following our interaction with the FDA. While we believe that our next-generation Zio MCT device will further strengthen our competitive positioning in this space, we still believe that there are meaningful market share gains to be made with our Zio AT product compared to the approximate 7% penetration that we currently hold in the mobile cardiac telemetry category.

In the MCT category, we estimate that every 10 points of share gain represents roughly $80 million to $100 million of incremental revenue to iRhythm, a significant opportunity for growth as we aim to deliver on our $1 billion revenue target in our long-range plan. As we continue to progress our product innovation roadmap, we have also continued to build upon our substantial body of clinical evidence with strong fourth quarter publication output in top-tier medical journals and at conferences. The mSToPs cost-effectiveness data was published in November 2023 and demonstrated that proactive monitoring for atrial fibrillation in an at-risk population with the iRhythm Zio XT patch provided high value from a health economic perspective. The CAMELOT study, which has been part of our commercial narrative for much of 2023, was published in the American Heart Journal in December.

The manuscript, with independent statistical analysis, extends the initial findings in several ways. One, it shows Zio’s long-term cardiac monitor superiority for highest odds of arrhythmia encountered diagnosis and lowest odds of retesting not only across different categories of monitoring, such as Holter and event recorders, but directly against specific competitor products and services. And two, it showcases Zio’s long-term cardiac monitor performance and clinical superiority for specific critical arrhythmias, such as heart block and ventricular tachycardia, which can have major clinical consequences if missed. This peer-reviewed publication continues the long history of evidence that the Zio long-term continuous monitoring service provides high value and performance with the highest diagnostic yield and lowest likelihood of retesting across a wide range of ambulatory cardiac monitoring services.

We also continue to make strides in AI. The December publication in Nature Digital Medicine by the Scripps Research Translational Institute in collaboration with our team demonstrated the performance of developed AI to identify patients at risk of near-term AFib based on patients who had no AFib on their initial Zio patch. This early work could help identify which patients should have repeat testing. Additionally, research from our collaboration with the Duke Clinical Research Institute presented at November’s American Heart Association meeting demonstrated the ability to more robustly predict heart failure hospitalization when adding Zio ECG features to existing clinical risk models. Both studies advance our thesis that 14 days of continuous uninterrupted Zio monitoring has valuable biometric information that can classify and predict conditions or risks well beyond the arrhythmias we diagnose with ECG monitoring today.

These insights demonstrate feasibility of adjacent market opportunities and validate our ability to provide novel insights through our platform for future value creation. These are also being proven from a business model perspective by our teams. We were excited to see our first Know Your Rhythm pilot launch this quarter aimed at identifying arrhythmias in asymptomatic populations, and while early, we are seeing very encouraging data supportive of the value proposition. Similarly, we are seeing several national primary care networks employing proactive screening approaches with targeted populations aimed at finding arrhythmias sooner and avoiding the devastating downstream cost of care that come from patients unaware of existing arrhythmias.

iRhythm is uniquely well-positioned to address the macro shift in healthcare towards value-based care for an aging population as cardiac monitoring with Zio adds value to all five objectives of the quintuple aim of healthcare. We look forward to sharing more details on these initiatives as they progress. We also expect to be launching our very first pilot into the sleep space in the coming months. With deep relationships with cardiologists, electrophysiologists and primary care physicians, as well as our experience with remote diagnostic services, iRhythm is well-positioned to validate our belief that there is a need for a streamlined diagnostic pathway into what we have heard can feel like a fragmented and disjointed sleep diagnostic journey for both patients and clinicians.

Today, the process of referring a patient to a sleep specialist, prescribing a sleep lab or a home sleep test, all the way through to a formal diagnosis can be a cumbersome experience. Our initial pilot will be aimed at exploring the value of a process from the ordering of a sleep test to the delivery of the interpreted results and diagnostic report to the prescribing physician via a streamlined integration with a single portal, such as our Zio Suite platform. We see sleep as an important adjacent market and have multiple initiatives in place to explore how we can bring our innovative capabilities into this space for the benefit of clinicians and patients. Turning towards our international efforts, we were thrilled to have received CE Mark under European Union Medical Device Regulation or EU MDR for Zio monitor and the ZEUS system at the end of 2023.

This marks the jumping-off point to introduce our innovative technology into more European markets and enable further global expansion. Importantly, the EU MDR is arguably one of the most stringent regulatory frameworks for product approvals globally and receipt of this certification demonstrates our commitment to providing the highest quality products and services. With CE Mark in hand, we are continuing market access evaluation and market expansion efforts in prioritized countries across Europe, including four countries targeted for entry in 2024, where there are approximately 800,000 ambulatory cardiac monitoring tests performed annually. In preparation for these launches, our market access teams have been hard at work with various countries on our roadmap, and encouragingly, Switzerland has just released an updated National Reimbursement Decision for long-term ECG examinations in excess of CHF1,000.

We have also continued to pursue national reimbursement in the U.K. As we continue to progress with the public health systems while we await a decision on national reimbursement by the National Health System, we continue to advance our efforts within the U.K. private payer sector that demonstrated significant growth in 2023. Through The Artificial Intelligence in Health and Care Award from the NHS England in September 2020, real-world evaluation of Zio XT at scale across the NHS Trust has shown that Zio service has an overwhelmingly positive impact on patient waiting times, hospital resource utilization, clinical diagnostic yield and pathway cost savings. We will continue to work through contracting at private U.K. sites where this message is clearly resonating.

In Japan, we continue to be excited about the upcoming entry into the second largest cardiac monitoring market in the world with approximately 1.5 million ACM tests being prescribed per year. Recall that we received a high medical needs designation from the Japanese MHLW last year and it is important to note that this designation is not specific to long-term patching but is instead specific to Zio. This designation, at the recommendation of the Japanese Heart Rhythm Society, has created significant interest with potential commercial partners and we are pleased that after thorough search, we have identified our distribution partner for Zio in Japan. We are actively collaborating with them to prepare for the launch in early 2025, while we continue to engage with the Japanese PMDA on a regulatory dossier in parallel.

Lastly, but very importantly, we are committed to continue driving operational efficiency and financial sustainability through an intense focus on organizational discipline as we work towards achieving our adjusted EBITDA targets stated in our long-range plan. While there is still work to do to achieve the 15% adjusted EBITDA margin goal we set for ourselves for 2027, I have been pleased by our ability to drive 1,000 basis points of improvement over the past two years. The performance of the newly minted Global Business Services Center in Manila has exceeded our expectations thus far and the process excellence this group has driven will be a key enabler for the global growth towards which we are striving in the years to come. Additionally, within the first half of 2024, we anticipate implementing automation in our production lines for Zio monitor that will drive scale, reduce our cost to manufacture and serve as the basis for our next-generation Zio MCT platform.

We are excited about these initiatives and others that continue to create leverage throughout our P&L and we are energized to drive programs that will allow us to serve more patients more efficiently around the globe. With that, I’ll now turn the call over to Brice to discuss our recent financial performance.

Brice Bobzien: Thanks, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discussed today will be presented on a non-GAAP basis. Reconciliations to GAAP can be found in today’s earnings release and on our IR website. Fourth quarter 2023 results demonstrated continued strength in our core markets as revenue grew to $132.5 million, representing 6% sequential and 18% year-over-year growth. As Quentin mentioned, this was driven by strong volumes from new accounts opened in the prior 12 months, continued penetration of existing accounts and reduced account churn. New store-same store mix, with new store defined as accounts have been open for less than 12 months, accounted for approximately 34% of our year-over-year volume growth.

Home enrollment for Zio services was approximately 21% of volume in the fourth quarter. Average selling prices during the fourth quarter were down approximately 400 basis points year-over-year and down slightly quarter-over-quarter. Moving down the rest of the P&L, gross margin for the fourth quarter was 66% and for the full year 2023 was 67.3%. As previously discussed, we expected temporary gross margin pressure in the back half of 2023, primarily driven by costs associated with the transition from Zio XT to the new Zio monitor. We continue to see positive marketplace reaction to Zio monitor. This has resulted in a faster than anticipated transition from Zio XT and has created near-term pressure on the gross margin due to the accelerated recognition of costs of our legacy XT components.

This accelerated transition does not yet have the benefit of automation and scale, which resulted in an increased cost per unit. We believe that this will be mitigated once automation lines for Zio monitor are implemented. Finally, we completed the current phase of building our center of excellence in our San Francisco IDTF in the fourth quarter. We’ve incurred costs related to scaling and training newly onboarded clinical cardiac technicians that resulted in inefficiencies in the short-term. These investments were important to ensure the quality of our services provided to our patients and we expect the associated costs to abate as the team come up to speed over the next couple quarters. Fourth quarter adjusted operating expenses were $113.8 million, up 6.2% sequentially and 17.2% year-over-year.

Full year adjusted operating expenses were $430 million, up 18.2% compared to 2022. Sequentially, the increased spend was driven by legal, regulatory and professional fees. Compared to the fourth quarter 2022, this increase in adjusted operating expenses was primarily due to increased personnel to scale operations, as well as the previously mentioned professional fees. During 2023, we incurred approximately $9 million of legal and consulting fees, as well as other company expenses related to the FDA warning letter and DOJ subpoena. Despite these temporary expenses and rolling out the most significant product launch in the company’s history, we were able to drive 120-basis-point improvement in adjusted operating expenses as a percentage of revenue.

Adjusted net loss in the fourth quarter was approximately $25.8 million or a loss of $0.84 per share, compared to an adjusted net loss of $17.9 million or an adjusted net loss of $0.59 per share in the fourth quarter of 2022. Adjusted net loss for the full year 2023 was approximately $96.5 million or $3.16 per share, compared to an adjusted net loss of $84.5 million or a loss of $2.82 per share during 2022. Fourth quarter 2023 business transformation costs were $1.8 million, bringing full year 2023 business transformation costs to $15.9 million, in line with guidance as we finalize the transition to our Global Business Services Center. Additionally, we recorded an impairment charge of $11.1 million, related to the capitalized value of our San Francisco office, as a result of the continued declining commercial real estate market conditions within San Francisco.

Adjusted EBITDA in the fourth quarter 2023 was $2.4 million, reflecting an increase of $2 million sequentially and an increase of $1.3 million year-over-year. Adjusted EBITDA for the full year 2023 was minus $4.9 million, representing 180-basis-point improvement to adjusted EBITDA margin compared to 2022. Absent the expenses related to legal and advisory fees, as well as other company expenses associated with the FDA warning letter and DOJ subpoena, adjusted EBITDA margin would have been approximately 0.8%. Turning to guidance, we are reiterating our 2024 outlook as presented earlier this year and anticipate full year revenue of approximately $575 million to $585 million, driven predominantly by volume growth in our core markets. As we think about the first quarter, we did see weather-related impacts in January.

However, we’ve seen registrations rebound nicely thus far in February. We believe that the first quarter revenue trend will be closer to 22% of full year revenues, considering weather-related impacts in January of approximately $1 million to $2 million. Excluding this, we would have expected to see first quarter 2024 in line with historical averages at approximately 22.5%. Turning to gross margin, we are providing full year 2024 gross margin guidance in the range of 68% to 69%, an improvement of approximately 120 basis points at midpoint. During the first half of 2024, we anticipate continued direct and indirect costs from the transition to Zio monitor, natural inefficiencies from the implementation of automation to produce Zio monitor at scale, and the optimization of our center of excellence in San Francisco.

We expect the first half to be relatively consistent with the 2023 gross margin exit rate. In the back half of the year, however, we anticipate an improvement in gross margin due to the majority of our business being transitioned to the new Zio monitor platform, initial ramp of automation lines to produce Zio monitor and our clinical operations team in San Francisco operating at full capacity. For 2024, we anticipate adjusted EBITDA margin to range between 3% and 4% of revenues, which would represent a 400-basis-point to 500-basis-point improvement compared to 2023, in line with our slated path to adjusted EBITDA targets in 2027 and driven by our focus on sustainable operating leverage improvements throughout the P&L. As a reminder, adjusted EBITDA will continue to exclude impairment and restructuring costs, business transformation costs and stock-based compensation expenses.

We have contemplated in our adjusted EBITDA guidance approximately $8 million to $10 million of legal, consulting and other company expenses in 2024 as we continue to remediate findings associated with the FDA warning letter and navigate responses to the DOJ subpoena. As we make progress on these two issues, the vast majority of these costs will come out of the P&L in the future. Finally, we ended 2023 in a strong financial position with approximately $133.8 million of cash and short-term investments. As you’re aware, we improved our capital position at the beginning of 2024 with the introduction of financing with Braidwell to mature our capital structure ahead of our next phase of growth. As a reminder, year-end cash and short-term investments balance does not include the repayment of $35 million to Silicon Valley Bank or the $75 million term loan drawn down from Braidwell at the beginning of 2024.

As we continue to grow and mature, we will evaluate our capital structure to ensure financial flexibility in alignment with shareholder interests. With that, I’d like to turn it back to Quentin before we open it up for questions.

Quentin Blackford: Thanks, Brice. Looking into 2024, we couldn’t be more excited about the position that we are in. We have multiple levers for revenue growth as we continue to go deeper and broader within our existing accounts, with our land-and-expand strategy, capitalize on the significant pipeline of new accounts waiting to come on board and rapidly expanding in the primary care channel. Furthermore, we’re in the early innings with our international business, which we expect will contribute nearly a point of growth in 2024. We’re in the very early stages of value being realized in proactive screening of at-risk patients and the significant workflow efficiencies that can be enabled by our products and services, which has the potential to multiply the current market we serve.

As a reminder, nearly 15 million patients show up in their primary care physician offices each year with heart palpitations noted in their medical records. Zio has the potential to provide the right answer the first time for those patients and better inform the care pathways for those individuals, potentially reducing downstream clinical events, while lowering the future cost of care and addressing the growing capacity challenges within the health networks we serve. And importantly, we see a clear line of sight to deliver an increase of 400 basis points to 500 basis points in our adjusted EBITDA margin, a meaningful improvement in our profitability profile. Long-term, we are building the cardiac monitoring product and services portfolio of the future, and we are uniquely positioned to address the quintuple aim of health care within ACM.

With significant accomplishments in 2023 and so many opportunities in the months and years ahead, I could not be more excited for our future at iRhythm. With that, Brice, Dan and I would like to now open the call for questions. Operator?

See also Top 20 Most Valuable Travel Companies in the World and 25 Safest Cities in Asia to Visit In 2024.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question will come from the line of Allen Gong with JPMorgan. Your line is now open.

Allen Gong: Thanks for the question. Just to start off, I had one on the guidance for the year. You’re reiterating the full year, but you’re talking to some weather-related headwinds in first quarter. So when I think about the fact that you’re taking a couple, $1 million to $2 million out of first quarter by reiterating the guide, could we think about that as a recapture dynamic with those sales being pushed out to maybe second quarter or are you just seeing stronger momentum in February so far that you’re expecting to continue through the balance of the year?

Brice Bobzien: Hey, Allen, good question. Yeah. We did see a bit of pressure in the month of January. However, recovery has been incredibly nice in February. And so we’re thinking more of it as a recapture as we get into the later periods of the year, and for us, there’s no reason to adjust for those weather-related impacts, especially with the beat we had in Q4. So we felt like reiterating was the appropriate result in this situation.

Quentin Blackford: And keep in mind, Allen, as those registration volumes have improved really nicely over the course of February and have come together well, with our revenue recognition model, those devices go out. They’ve got to come back to us before we can recognize that revenue as we process the report. So there ends up being a bit of timing there in the strength that we saw back in February.

Allen Gong: Got it. And then just as a quick follow-up, gross margins this quarter, I think, relative to your expectations, came in a little bit disappointing as you’re transitioning to Zio monitor and continuing to invest back into the business. When we think about not just 2024, but also 2025 with international coming on to the stage, how should we think about international’s impact on gross margin? What should we think about that as maybe adding a little bit of further pressure, potentially offset by MCT coming on to the same platform? Just how to think about your gross margin progression beyond 2024? Thank you.

Quentin Blackford: Yeah. Allen, and this is Quinton here. But when we think about the pressure in the fourth quarter and Brice can speak a bit more to it, obviously, you had a bit of pressure coming from the transition from XT onto monitor, which is moving faster than what we had anticipated and ultimately a good thing for us because we know monitor has a better gross margin profile, particularly after we get automation put in place. But we also had tremendous progress made in the fourth quarter with our hiring efforts to build out our center of excellence in San Francisco, hiring well over 100 people in the fourth quarter, which is far in excess of the pace we had been able to achieve through the first nine months of the year.

And so when we saw that opportunity in the fourth quarter with the hiring momentum, we didn’t want to relent on that, because that opens up the ability into the future to continue to build out the center of excellence in San Francisco, which has a nice benefit to it. So the right investment decisions certainly being made within the fourth quarter. Longer term though, to your point on international, I actually think with the countries that we have on the roadmap, they should be accretive to the gross margin profile. Obviously it depends on where reimbursement comes in, but you think about Switzerland, which just approved reimbursement at north of a CHF1,000, which is more than a US$1,000 per ACM test. That’s going to contribute a nice gross margin profile for us.

Japan, pricing’s yet to be set, but we know they generally use a reference pricing model with the U.K. and the U.S. and in other countries. And so that ought to be a pretty attractive price point as well that we’re looking forward to. So I think that it can be accretive over the planning horizon. We’ll continue to evaluate that, and as we go broader into other markets, we’ll have to look at each one on a one-off basis. But I do think that international can contribute nicely to the gross margin profile over time. And then to your point, Zio MCT, when we get it onto the monitor platform is going to bring with us some nice benefits that we aren’t realizing today. So again, feel good about where the gross margin is progressing towards and the line of sight we have to get into that low-to-mid 70s profile that we put out there with the long range plan.

There was a bit of noise in the fourth quarter, but those were primarily investments made to set us up for the long-term.

Operator: Thank you. The next question is from the line of David Saxon with Needham. Your line is now open.

David Saxon: Great. Thanks. Good afternoon. Thanks for taking my questions. Maybe I’ll start with Brice. So the OpEx in 2023 was, I guess, 18% growth year-on-year. But by my math, the guidance is implying mid-single-digit OpEx growth in 2024. So, I guess, is that the duplicative cost kind of rolling out of the model or what’s really driving that leverage?

Brice Bobzien: Yeah. So as I think about it, David, it’s not quite that low as you’re talking about. Remember, in 2023, we had business transformation related costs, but we also had some of those — the one-time item with regards to the impairment of the right of use asset in San Francisco. Those two will not repeat. They’re not out there. But when you look at what we call adjusted operating expenses, it’s more in that 15% or so range. There’s about 250 basis points of OpEx leverage baked into the guidance range as it stands and a lot of that leverage is coming from that Global Business Services Center that we stood up in Manila and we’re starting to see the benefits. I will tell you, this is Phase 1 of the benefits you can ultimately see from this and that’s on top of investments we’re making in the company.

So this is going to be a real lever for us moving forward. But it’s about 250 basis points of op margin leverage that we see from 2023 to 2024, removing some of those one-time items.

David Saxon: Okay. Great. Thanks for that. And then maybe for Quen, so you talked about the EHR connection, benefiting the utilization. So I wanted to ask what portion of the new accounts are also doing that EHR connection, and how should we think about the utilization ramp of those new accounts relative to what you’ve seen with prior cohorts and new accounts? Thanks so much.

Quentin Blackford: Yeah. Thanks, David. Look, our focus with integrated accounts is not any different with new accounts as it is with existing accounts, and I think, as we really increase the focus on EHR and then we’ve got a program inside the company to get it north of 50% and we’re making good progress towards it, that means we’re working to drive integrations in our existing accounts just like we are with the new accounts. So I would say it’s a balanced effort between the two, but we know that it’s a very, very important aspect of how we partner with our customers. When we can get EHR integrations put in place, the ease of ordering the product, the ease of reviewing the reports and for the physician to ultimately make the diagnosis from it and improve the overall experience has been tremendous and we see the growth really take off once we get these integrations complete.

But what’s also exciting about it, particularly with our push into primary care, is that once you get integrated with these large networks, not only is it the cardiologist and the electrophysiologist who is now able to easily get access to Zio within their integrated platform, primary care can easily get into it. Nephrology can easily get into it. These other specialties can easily access the Zio product and we start to see quite a bit of increase in subscriptions or prescriptions of the product come from these other adjacent specialties and other channels within their network. So that is quite encouraging and I think it’s a big part of how we think about continuing to expand within our existing accounts but also with new accounts. And I think that the more that we spend time there increasing or enhancing that opportunity to streamline the integration effort, the more value we’re going to see pay off.

And you should expect to hear us talk a lot more about this into the future because it’s such a big enabler of unlocking the potential within the accounts we’re in.

David Saxon: Great. Thanks so much.

Operator: Thank you. The next question will be from the line of Margaret Kaczor with William Blair. Your line is now open.

Unidentified Analyst: Hi, everyone. This is Macaulay [ph] on for Margaret tonight. Thanks for taking our question. In terms of just PCP momentum and kind of the success you saw last year, obviously, that was ahead of your initial expectations and you mentioned the 21% of registrations last year within the channel. So I guess what’s assumed in terms of PCP registration growth specifically within the guide and the mid-teens volume growth within XT and monitor?

Quentin Blackford: Yeah. Hey, Macaulay. Thanks for the question. You can imagine PCPs will continue to be a larger portion of the growth profile of the company moving forward. Won’t give the exact amount that’s contemplated here. What I would say is the 21% and this has been growing nicely over the last several years and that penetration level continues to increase. What gets me really excited is the 21% of our total registrations that comes through the PCP channel right now is really the integration with these large integrated health systems, right? And so in a lot of cases, it’s pushing this up the care continuum and ultimately the prescription comes from the PCP versus cardiologist. So there’s a bit of cannibalization in there.

However, as we get further integrated within these large PCP networks, the ones we’ve talked about, the Oak Streets of the World, et cetera, that’s where you really start to see a TAM expander and we’ve talked about 6 million ACM tests per year that are done right now, a small percentage of those in the PCP channel, but 15 million patients that go to the PCPs that have heart palpitations, right? That’s where you can start to see this TAM expansion happening and we have these contacts now that we hadn’t had in the past. And in our long range plan, we baked in, call it, 3% to 4% increase in our overall TAM from that 6 million ACM tests. We think this could go a whole lot faster once we get further integrated within these PCP networks.

So from a guide perspective, we have a growing north of that of cardiology, as you can imagine. We haven’t put that percentage out there, but we believe this is a real tailwind for us moving forward.

Unidentified Analyst: That’s helpful. Thanks for that. And then just want to quickly ask on the San Fran IDTF, obviously, doing a lot of hiring there and may take a few quarters, but in terms of the tailwind assumptions for ASP this year, what in terms of percentage of volumes could we expect? I know you mentioned north of 50%, hopefully exiting the year in 2023. So how much growth in terms of volume should we be expecting there for the coming quarters?

Quentin Blackford: Yeah. I think this could be a real nice tailwind for us heading into 2024. We mentioned the fact that we hadn’t gotten to that 50% of total volumes going through San Francisco for the full year of 2023. Really, the contributing factor there was not being able to hire as fast as we were looking for. However, I will say we exited well north of that 50% in Q4, and we anticipate, especially as these folks get up and are scaling and able to read the reports consistently with what we’re doing across the rest of the country, that volume is going to continue to grow. We’re not going to give the percentage per se, but what I would say, an important data point to understand this and we’ve talked about ASP for years here at this company.

What we expect in 2024 is effectively flat ASP year-over-year and there’s some moving pieces when you get into it. You certainly know the CMS national rate was updated January 1st, and that had, call it, 3% to 4% net of inflationary impacts of pressure. AT had some similar movements in that direction. The normal single-digit pricing on the commercial side, all of that is expected to be offset by the optimization and the utilization of our IDTF space. So that’s kind of where we’re at, is we expect flat ASP year-over-year.

Unidentified Analyst: Awesome. Thanks again.

Quentin Blackford: Thanks, Macaulay.

Operator: Thank you. The next question will be from the line of Marie Thibault with BTIG. Your line is now open.

Marie Thibault: Good evening. Thanks for taking the questions. I wanted to ask here about the progress on the warning letter. Heard that you submitted the second 510(k). Congrats on that. Can you tell us a little bit more about what you’ve heard from the FDA, say, on the first 510(k), what we can expect timeline-wise going forward here and when we might get a little more clarity on those clearances?

Quentin Blackford: Hey, Marie. So we now have both 510(k)s on file with the FDA. Keep in mind that we filed the first one right at the turn of the year. The second one got filed just a matter of weeks later. The first one really focused on the letter-to-file matters that we had made a decision on in history that we agreed to bring into a 510(k) process, and then the second one really on the design enhancements, design features that we’ve been working on with the FDA, which is really around patient notification, improving the ability for the patient to see on the patch itself if they’re approaching, say, a max trigger limit or for the physician to see it right in the Zio Suite tool. Those have been submitted. We have not engaged with the FDA in any back-and-forth on those 510(k)s just yet.

I would expect we’ll get some questions back here shortly, but based upon all the dialogue that we’ve had to-date, I feel very good about those submissions. The FDA knows exactly what was going to be in those submissions, had worked with us on whether we should put them into one submission or split them into two submissions, and so I feel good about the fact that they’re very much aware of what’s in there and there’s been a great line of communication between the two of us. I would expect somewhere around the mid-part of the year, just after going back-and-forth, answering their questions, call it, roughly a six-month process, that we should see the formal approval of those two 510(k)s, which doesn’t really change anything with respect to how we’re positioning or selling the product in the market, but certainly puts that aspect behind us in terms of closing out the 510(k) itself.

The other thing that, I would say that, I just think is clarifying and important, throughout this process of working with the FDA on the Zio AT product, and we knew there were some questions earlier on around MCT. Through working with them, ultimately they’ve created a new category code themselves, which is more or less deemed to be MCT for ambulatory cardiac monitoring and we are the first product that’s been put into that new category code. So, again, through the collaboration of the teams, working with the FDA, answering the questions they had around it, I think, that’s a big first step as we step into this new category code, just being the first product into it that demonstrates just the good progress that’s taken place between the two entities, being the FDA and ourselves.

So we’re excited with what we’re seeing there.

Marie Thibault: Okay. That’s really helpful. And just as a quick follow-up there, does that mean some of your competitors on that side will also need to go through the same process?

Quentin Blackford: Marie, I don’t know exactly what they’ll have to go through. I would imagine some of it might just be an administrative process where they’re working with the FDA to get pulled into it, but I don’t know enough to speak to that with certainty. Again, I believe some of it’s probably just administrative, but we’ll watch and see how they play that out.

Marie Thibault: Okay. Fair enough. Thank you for being very clear. And then I wanted to ask about the sleep pilot. Sorry to sound a little naive, but what exactly sort of will you be — the effort on iRhythm’s part? When could we sort of see this become a business or a revenue contributor? I realize it’s just the first pilot and thanks for taking the questions.

Quentin Blackford: Yeah. This is something that we’re really excited about. I would expect to be out in the pilot within the next 30 days to 60 days. It’s coming together pretty well and we know exactly how we’re going to approach the pilot itself. I think it’s important to understand, like, this whole space of getting to a sleep diagnosis is entirely fragmented and it’s an incredibly cumbersome process for the physicians and the patients today, and now you have a significant competitor who just recently has stepped out of the whole home sleep test space themselves. And I look at our position, we have this incredible opportunity to leverage the call point that we have, being the cardiologist, the EP and now the primary care physician, which is where the initial prescription or referral onto a sleep specialist or a home sleep test or a sleep lab ultimately originates from.