iRhythm Technologies' (IRTC) CEO Kevin King on Q1 2019 Results - Earnings Call Transcript

About: iRhythm Technologies, Inc. (IRTC)
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Earning Call Audio

iRhythm Technologies, Inc. (NASDAQ:IRTC) Q1 2019 Earnings Conference Call May 7, 2019 4:30 PM ET

Company Participants

Lynn Lewis – Investor Relations

Kevin King – Chief Executive Officer

Matt Garrett – Chief Financial Officer

Conference Call Participants

David Lewis – Morgan Stanley

Robbie Marcus – J.P. Morgan

Cecilia Furlong – Canaccord Genuity


Good afternoon, ladies and gentlemen, and welcome to the iRhythm Technologies, Inc. Q1 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Lynn Lewis with Investor Relations. Please go ahead.

Lynn Lewis

Thanks, Sarah. Thank you all for participating in today’s call. Joining me are Kevin King, CEO; and Matt Garrett, CFO. Earlier today, iRhythm released financial results for the first quarter ended March 31, 2019. A copy of the press release is available on the Company’s website.

Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, our examination of operating trends and our future financial expectations, which include expectations for hiring, growth in our organization and reimbursement, and guidance for revenue, gross margins and operating expenses in 2019, are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. 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 quarterly report on Form 10-K with the Securities and Exchange Commission.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2019. 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.

With that, I’ll turn the call over to Kevin.

Kevin King

Thanks, Lynn. Good afternoon, and thanks for joining us. 2019 is off to a very strong start. We achieve first quarter year-over-year revenue growth of 54% reaching $47.2 million. Q1 gross margins increased by 3.4 points to 75.2%. Our business continues to strengthen on many fronts driven by accelerated adoption of our highly differentiated Zio platform with an existing and new accounts particularly and targeted large hospital networks.

Zio has proven clinical superiority. The completeness of our service combined with our increased organizational strength, give us the confidence to increase our 2019 revenue guidance to $206 million to $211 million up from $201 million to $206 million, which represents annual growth of 40% to 44%. The three primary components that remain key to our short and long-term growth strategy are, sales team expansion and continued productivity improvements, increase market penetration with our single Zio platform strategy and expanding our addressable market into new indications.

I’d like to take the next few minutes to highlight our progress on each of these objectives as well as some of our near-term catalysts and then I’ll turn the call over to Matt for a detailed financial review of the quarter and additional annual guidance. Starting with our commercial organization, salesforce expansion continues to be a key contributor to our sustained growth rates. Over the past several years, we have successfully increased the size of our sales channel by 20 to 30 high quality reps per year, while increasing the productivity of our most tenured reps.

As mentioned on our last call, our 2019 goal is to add a similar number of sales positions bringing our total sales rep head count to 130 to 140 reps. We have also created a number of regional sales manager positions to support the increased headcount. Similar to our hiring trend in 2018, we plan to have the majority of these new hires in place by the end of the first half of this year. Importantly, we will continue to expand our commercial team to whatever cost effect of size is required to capture the full and untapped market potential that lies in front of us.

Turning to account penetration, we continue to see adoption in new and existing accounts. The proven superiority and completeness of our Zio platform enables accounts to measurably diagnose more patients in less time with fewer unnecessary repeat tests and at lower cost and with fewer resources compare to other approaches. Zio AT a newer component of our platform strategy addresses our – expands our addressable market into a previously unaddressed segment of the market provides our customers with a more complete solution on a single platform. We are increasingly encouraged by Zio AT’s impact with on our early customer sites.

As we’ve discussed in prior earnings call, the payer landscape for this market segment remains challenging as measured by the number of health plans with no or negative coverage policies for the technology, the percentage of plans that have a narrow set of indications for use and a relatively higher bar for medical necessity including sales first line testing. These challenges played a key role in our decision to implement a phased rollout of Zio AT.

I’m pleased that we have now achieved a threshold of AT contracting that allows us to more rapidly expands Zio AT into the market in the second half of this year. At the Heart Rhythm Society Meeting this week in San Francisco, we plan to more broadly unveil our Zio AT. Clinical evidence remains a key pillar not only in our discussions with payers, but also as a driver for competitive differentiation and market adoption.

And important perspective randomized study was published in the February 11th online issue of the Journal of Interventional Cardiac Electrophysiology, the diagnostic capabilities of our Zio service was compared against the event monitor as well as two other ambulatory ECG monitoring technologies including another patch based monitor. To study design was unbiased in that the performance of each of the monitors was compared against an implanted pacemaker which is widely accepted as the goal standard for Atrial Fibrillation detection.

Results demonstrated not only that Zio was significantly more accurate in detecting AFib than the event monitor, but also that Zio was the most accurate of all ECG monitoring modalities tested with an r squared value of 0.999 compared to the gold standard pacemaker. The statistical probability of having a correct AF diagnosis as measured by the odds of a collect diagnosis reveal that Zio was 12.3 times higher than the event monitor, six times more likely to accurately detect AF compared to the [indiscernible] monitor and twice as likely to accurately detect AF compared to the CAM monitor.

Studies such as discontinued to demonstrate the superior accuracy of our Zio service and its potential to positively impact patient treatment decisions compared to legacy monitoring technologies and new patch based offerings. Sign on AF remains our other key market expansion priority. This is a population of 10 million plus patients who are undiagnosed with AF, but have risk factors such as age, hypertension and diabetes.

We’ve published last year the mSToPS study that demonstrated the utility of Zio in diagnosing AF in this asymptomatic population. And at the annual meeting of the American College of Cardiology last month, a poster was presented on one year health resource utilization from the mSToPS trial, which show that patients who are diagnosed with AF in the Zio monitored group had a significantly lower rate of hospitalizations and emergency room visits. Then the non-monitored controlled group.

Evidence such as just to build the case for targeted detection of AF by Zio in the asymptomatic population. In 2020, we expect the three year outcome for health care utilization data from mSToPS to be published, which will be an important data point for clinicians and payers and opening up this market.

Finally, I’d like to discuss reimbursement. During the last quarter, many opinions and perspectives surfaced in the media related to the reimbursement landscape and its impact on Zio XT. Now that we are able to comment on it, I will discuss the current status, how we see the process unfolding and our views on any potential reimbursement change. It’s important to start this discussion by knowing that Zio XT has rapidly become a standard of care for long-term continuous ambulatory cardiac monitoring across the country.

Our services has covered and reimbursed by nearly all national, regional and government health plans. Medicare accounted for about 27% of our total sales in Q1. The mechanism by which we report our services to these health plans and receive payment is to a category three CPT code, which is by definition a temporary billing code established for new technologies. In my case of our Zio service, a new long-term continuous ambulatory monitoring code was established in brought forth by the ACC to the American Medical Association in close partnership with iRhythm in 2012.

In 2017, the ACC again in close partnership with iRhythm successfully brought forth the code for renewal. Since then, we have continued to work closely. After both use data and published clinical evidence is gathered over time, eventually the temporary code can become a permanent code or what is called a category one code. The process to convert a code from category three to category one is governed by the American Medical Association or AMA and CMS or Medicare.

The way the process is designed. A physician specialty society, which has an official advisory seat on the CPT committees, sponsors the code conversion, presents the data and clinical evidence to the AMA committees in carriers to code through the process. In our case, the specialty society who will sponsor our code is the American College of Cardiology or the ACC. Importantly, we have been collaborating with ACC and what is termed a CPT code change application, which is necessary to convert the code from a category three to a category one status.

In order for the ACC to effectively sponsor the code application it needs what they term in industry advisor and iRhythm is the primary industry advisor as the leader in the category. As ACC has a formal and official seat within the AMA CPT process, it is very important that we as the primary provider of the service be in alignment with them and we are. The work we’ve been engaged in with ACC involves a review of all available clinical literature, of which Zio XT is the primary monitoring technology involved in nearly all of these studies to properly code – to code change application.

This code change application is based on physician usage and clinical studies. Importantly, iRhythm has invested heavily in creating substantive clinical evidence in this category and also represents more than 95% of the volume of tests that utilize the current long-term continuous monitoring code.

We are very pleased with our interactions with the ACC to date and view them as a key partner in this important process. As we’ve previously discussed, if any changes take effect, it is expected to occur no earlier than 2021 and no later than 2022. Our preference is that this occurs sooner rather than later and we’re working with the medical societies towards a 2021 change.

However, the exact timing will be dictated by the calendar per submission of CPT applications. We should know later in the year, whether our code change application will be considered for a 2021 calendar cycle. While the general code change application process is consistent, the specific pathway to a pricing outcome is unique to each code, because physician usage and clinical studies dictate the definition, which is different for each code. Other examples are useful to aid in general understanding, but because each pathway has unique, one cannot assume an outcome for one code based on solely on other experiences, any sub-supposition is truly speculative.

Of course, there are examples of category three to category one code changes were a final pricing went up or down compared to their category three price. This is understandable since a category three code is established, when services new and experience is low or nonexistent. It is only after industry and physicians gain experience that the technology can be better defined and through that change in definition, the pricing may go up or down on a relative basis.

With this in mind, I want to reiterate our confidence in the value of our Zio service and that we do not currently anticipate of substantial change to our Medicare reimbursement rate during this process. The value in differentiating on our Zio XT service has been proven in over 30 peer review clinical studies, including those which directly compare our service to legacy Holter monitor and event monitor technologies.

We believe that this differentiation is clear in the minds of the medical societies and payers, the two key constituents involved in any reimbursement decision. Our Zio XT service has also been rigorously and independently valued by hundreds of commercial health plans with whom we have established in network contracts, as well as our local Medicare administrative contractor.

These health plans have considered our published clinical evidence, the clinical utility and healthy economic benefits of our Zio service along with our proprietary analysis methodology to conclude that our Zio service is appropriately valued. We expect the process and outcome for establishing a national Medicare rate when the code moves to a permanent status to be no different.

I want to note, however, that we maybe limited in the frequency of updates and availability of new information we share, because interested parties involved in the coaching process are legally bound by non-disclosure and confidentiality agreements. That said, we are confident in our path forward and it will make every effort to update you to the extent we are able to disclose new inflammation.

In summary, we have confidence in our highly competitive positioning and differentiation, including Zio’s proven clinical superiority and the completeness of a platform that routinely creates meaningful value for our customers, large and small. We look forward to continuing the success in 2019.

And with that, I’d like to turn it over to Matt Garrett, our CFO for a review of the first quarter financial results and guidance for 2019. Matt?

Matt Garrett

Thanks, Kevin. Our focus in large integrated system engagement and penetration continues to pay dividends not only in top line revenue growth, but also in our ability to scale the organization with benchmark salesforce productivity levels. We’re also starting to show material improvement in our financial performance up and down the P&L.

Highlights for the first quarter of 2019 are as follows: Revenue growth of 54% year-over-year and sequential growth of 9%; gross margins of 75.2%, an increase of 3.4 percentage points over the prior year; continued contracting successes for both Zio XT and Zio AT that has led to further mix shift away from non-contracted and legacy client billing claims, now both in the single digits; and finally continued success with Zio AT in key piloted accounts, which then accelerates adoption of Zio XT demonstrating iRhythm’s capability of being the full service solution in those accounts.

Taking a more detailed look at first quarter results, revenue for the three months ended March 31, 2019 was $47.2 million, an increase of 54% year-over-year and 9% sequentially. We continue to see salesforce productivity levels rise as we penetrate these large integrated systems and as reps hired over the last year achieved meaningful productivity levels.

As we’ve done in the past, we’d like to dive a bit deeper into some of these positive growth trends we were seeing, where supports the confidence we continue to project in the business. Some of the trends we’d like to highlight include, same-store new store revenue growth for the third consecutive quarter posted 60-40 split. We view this mix is very positive sign of our ability to deeply penetrate existing accounts, while maintaining strong growth and pipeline opportunities in newly onboarded accounts.

We continue to see impressive growth with our largest customers, where all of our top 25 accounts grew significantly over the prior year. This demonstrates productivity level improvement for some of our reps, even in our most deeply penetrated accounts, as workflow enhancements brought on by the use of our Zio platform leads to greater volumes than originally forecasted within those hospitals and clinics.

As we pointed out last quarter, sales rep productivity levels were raised to 2.5 million on average at scale. What is of equal importance here is that we continue to see new reps achieved greater productivity levels much earlier than reps hired in prior years. And finally, we continue to see dramatic Zio XT volume expansion and accounts where we have launched Zio AT. In fact, the average XT volume growth percentages one month post Zio AT launches are approaching 50%, with continued double-digit growth of XT in the following periods.

Turning our attention to the rest of the P&L, gross margin for the first quarter 2017 was 75.2% compared to 71.8%, a 3.4 percentage point improvement over the same period in 2018. Operating expenses for the first quarter 2019 were $43.5 million compared to $32.6 million, an increase of $10.9 million, our growth of 33% over the same period in the prior year.

This year-over-year OpEx growth, which is the lowest the company has experienced in nearly three years. Further demonstrating our ability to scale a business up and down the P&L with minimal cash burn, while maintaining benchmark growth. For the quarter, the year-over-year spending increases continued to be driven by salesforce expansion, organizational support of our network sales strategy, expansion of R&D activities, bad debt expense associated with higher sales volumes and ongoing stock compensation expense.

Net loss for the quarter 2019 was $8 million or a loss of $0.33 per share compared with a net loss of $11.1 million or a loss of $0.47 per share for the same period of the prior year. In addition to our traditional operating commentary, we felt that it might be worth spending some time providing additional color on how the company accounts for contractual allowances and bad debt expense. Under guidelines for Topic 606, iRhythm treats any payer allowable amount below the contracted rate as a price concession.

There are any number of reasons for price concessions such as the inability to provide appropriate medical records. Patients admitted to the hospital for a non-covered indication. The amount of these allowances that offset our gross revenue has remained consistent with historical averages in the range of 6% to 7%. In addition to these revenue allowances, iRhythm is also responsible for attempting to collect the patient portion of every claim that has been deemed allowable by the commercial or government payer, when subsequent patient invoices are not paid after repeated attempts at collection, the company books a bad debt reserve.

The OpEx expense has also remained relatively consistent as well at 3% to 4% of gross revenue. In the first quarter of this year, the company identified a non-material footnote, misclassification and the presentation of changes in the allowance for doubtful accounts and for the contractual allowance disclosures in our quarterly reports for the period ending March 31, June 30, and September 30 of 2018. Specifically, the co-pay portion of contractual allowances were displayed in our roll forwards as allowances for doubtful accounts rather than its contractual allowances.

The total balance for the year was $2.9 million and it was appropriately classified as contractual allowances in our Q4 2018 10-K. This issue made it appear as though our contractual allowances against revenues doubled in the fourth quarter from 6% to 12%. It is important to note that while these nonmaterial balances impacted our footnote disclosures, they did not impact the company’s consolidated balance sheet, statement of operations or statement of cash flows.

What is also of importance is that our quarterly expenses for contractual allowances and bad debt expense through Q1 of 2019 remain consistent with prior periods. Reconciliations for both the contractual allowance and allowance for doubtful accounts on a quarterly basis for the three quarters of 2018 will be included in our Q1 2019 10-Q filing.

Finally, it’s important to point out that at no time does the company submit claims for services with contracted or non-contracted payers that are not consistent with the doctor’s diagnosis code or the actual services performed.

Turning our – turning to guidance for the remainder of 2019 given the strong start to the year in ongoing strengthen the business, we are raising revenue guidance for the full year 2019 to $206 million to $211 million, from $201 million to $206 million. This represents annual revenue growth of 40% to 44% demonstrating our continued confidence in our ability to scale the organization as we continue to produce benchmark topline growth.

Gross margin guidance for the year remains in a range of 75% to 76%. And finally, we are raising operating expense guidance, slightly reflecting incremental commission and bonus accruals due to better than anticipated performance in the business. The new range of $193 million to $199 million is up from $191 million to $197 million including $28 million to $30 million for research and development and $165 million to $ 169 million for SGNA. Finally, this range reflects our expectation that OpEx will continue to trend downward over time even as we continue to scale the business.

With that, we now like to open the call up for your questions. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of David Lewis from Morgan Stanley. Please go ahead.

David Lewis

Good afternoon. Thanks for taking the question. I think reimbursement has been sort of asked and answered. So I’ll move on Kevin to some of the commercial events here. I guess the thing Kevin I want to focus on here this quarter is, you’re getting a very nice balance with Mexican new accounts and existing accounts and you’re getting reps more effective earlier than expected. So I guess in light of your historical commentary, Kevin, why not expand the commercial organization more in the back half of the year, the existing 20 to 30 reps.

And you would talk to historically about 150 reps being sort of the bogey for how to cover the U.S. I guess is that you’ve changed now in light of what you see your market penetration in the U.S. and some of the early success you’re having in this commercial expansion.

Kevin King

Hi David, thanks. It’s Kevin. Thanks for the question. I appreciate it. I’ll answer the back half questions first and then we can talk about whether or not the company feels like it’s in a position to accelerate the hire even more. Back in 2016 when we cast this number out of about 130 to 150, the market from our perspective, the addressable market was smaller, right. We did not have Zio AT product. We did not have an asymptomatic high risk population targets in mind. The Kaiser KP-RHYTHM study for paroxysmal AF burden was not really on the horizon.

And so now we see all that the market is expanding and the completeness of our service relative to the needs of our customers is increasing as well. I think these are the primary drivers for the people that were hiring. And I think this is the primary driver for the increased productivity that Matt was talking about. So it’s possible that the salesforce can get larger. I’m not going to commit to something here on this call, but I think directionally with a larger market and an increased productivity expectation it is right for us to consider looking at further expansion.

I am – we’ll talk more about that, I think as we go forward. The first part of your question…

David Lewis

Sorry about that. I was just on mute. I think you basically answered, I think most of the components, Kevin what your detailed response, maybe just a quick follow-up and one for Matt. The first question I guess would be Kevin for you, just expectations at the back half of the year for AT, we’re assuming are relatively modest, if you gave us some sense as AT and have your views on the perceptive business that could contribute in the out years at that 10% rate. Does that still make sense?

And then I’ll ask my follow-up as well for Matt, in this particular quarter has been a lot of questions on relative, expansion in the middle of the income statement. This particular quarter, you sell some revenue upside, we saw some pretty decent job through. So the safe to assume from here we can expect that additional revenue upside. We could see similar levels of drop through. So we’ll guess [indiscernible] is this the beginning of a trend from a margin perspective? And I’ll jump back in queue. Thank you.

Kevin King

Yes. First, Kevin if you want to take that…

Matt Garrett

Yes. David, look, I think that obviously from our guidance for the remainder of the year on OpEx were not significantly changing that guidance. So I think it’s fair to assume that with a little bit of a raised revenue that we have incorporated some of those costs into OpEx. I’ll also remind everyone or the investors on the call that we did have a number of onetime expenditures and Q4, which is why you’re seeing the sequential drop.

Nevertheless, I do want to caution that our to – basically to your first question, right, which is if we do see the potential for upside and we’re going to and want to go after that, we’re going to fund it. We’re going to fund it with headcount both in terms of reps as well as in terms of the support for those organizational teams.

I think the most important message out of the quarter related to OpEx David is that once again we’re showing that within a very short period of time, probably short as a quarter, we can flip this thing to cash flow breakeven or EBITDA breakeven, and often breakeven within a quarter or quarter two. And I think running at that level with a lower burn is appropriate given our size. But we’re not going to put a specific timeframe on when that flips because of the reasons that Kevin mentioned on that. If you still see upside to continuing larger burn to support the topline growth, we’re going to do that.

Kevin King

Thanks, Matt. David relative to AT, first on the revenue side, the expectations for the year are built into our guidance that we’ve just given here. So that’s factored in there already. Relative to the percent of our business, keep in mind that AT or MCT volume is one-tenth of the total market, right. It’s about 400,000 out of maybe 4 million to 5 million tests, so 9% to 10%. And we’re still continuing to think that that’s the volume percentage of our business 10% to 12%, 10% to 13% in the long run for us.

In the real benefit here is to completeness of our offering. And we’ll talk a little bit about this as we go forward as well sort of our innovation stack that we have, but the main benefit here of AT is the pull through in the complete side from our account – from an account perspective, converting new and existing accounts.


Your next question comes from the line of Robbie Marcus from J.P. Morgan. Please go ahead.

Robbie Marcus

Great. Thanks a lot. First of all, congrats on a good quarter. And second, there’s been a lot of noise in some of your in a smaller or want to be competitors trying to break into space here. I was hoping you could give us your current lay of the landscape. Do you see any competitors taking any share, if they are aware and what type of accounts are they taking share? And just remind everyone if you can, the difference in what you offer versus the competitor is that – why that is such a roadblock everyone else entering the space here?

Kevin King

Sure. Thanks for the question, Robbie. The short answer is no. We don’t see a whole lot of success in some of their earlier level startups that have wearable technology, packs like technologies. Most of them, if not all of them really lack that full range of offering, inclusive of the ability to curate massive amounts of data to the level that we do, very few have any, if it all clinical publications to substantiate the value that they have and hence why we talk a lot about Zio being proven as reference by this remap study that I just described on the prepared remarks, right.

Zio was 12 times more likely to give a positive diagnosis of AF an event monitor, six times compared to a CAM monitor and two times compared to the CAM and six times compared to the [indiscernible] also which are early stage companies. And then from a channel perspective as well, it takes a lot to build a sales channel or support channel, payer relations, customer experience and so forth.

So net net, I think it’s too early to say that the competitors are raising to a level two replace the oven anyway shape or form. I think it’s quite the opposite that Zio continues to take share mostly from the status quo and don’t really see a whole lot of success from the early stage companies that that set of course, you’ve got a lot of respect for anybody who is out there, who is trying to make a go with the market, and from that standpoint.

Robbie Marcus

Thanks, appreciate it. And then maybe just one follow-up, at the ACC meeting, we saw data from the Apple Heart Study. This is probably the first and largest, what could be helpful in addressing the asymptomatic population. I thought it would be helpful if you could give us your take on this trial and the efforts moving into symptomatic. And then as we think for ACC 2020 next year, what are the sorts of – what should we look for an mSToPS and maybe the pathway forward for expanding into this untapped market here and how big of an opportunity can it be versus atrial fibrillation today. Thanks.

Kevin King

Thinking about the market first then the studies, we believe that the market here is upwards of 10 million at risk patients. That meet the profile of high risk factors inclusive of their age, right, I think, it’s men over 55 and women over 65. And then one of the risk factors or two of the risk factors associated with diabetes, hypertension, sleep apnea and things of that nature. So we think the market’s pretty large. We know that the health plans in the U.S. are highly interested and trying to manage this population, for the reasons that a stroke and stroke risk are both expensive and very life altering, if events do occur. Typically, the first stroke is not one that kill someone. Unfortunately, not unfortunate, it’s unfortunate stroke, but the first one is not the one that gets you what’s yours or the second one and then it’s costly and debilitating.

So we’re very confident in the market size. As far as where will be with mSToPS in 2020, we’ll have our readouts on the health economics side and we’re fully expecting that not only the trends for utilization of services, but also the incidents of stroke as compared to the normal or unadjusted arm will be significantly reduced. And so that should help us in a big way. Related to the broad view of whether it’s the apple heart study or anyone else, there’s a lot of interest in this market, right. It is a very large market. It’s important and the disease is prevalent.

So we would expect continued progress here. That said, I think the Apple Study was a good start. We had only confirmed about 150 atrial fibrillation cases out of the 419,000 patients that were surveyed. Some of that having to do with age, some of the folks who were younger in the population, but even of the ones that had notifications, so number of events were quite small.

I happen to believe that what this is really going to take is longer term continuous monitoring on the order of 14 days, like Zio, not necessarily intermittent monitoring and not necessarily short-term biosensor monitoring. I believe the patch that was used in the Apple Study, their average wear time was about six days. So it’s like one half of Zio and we know that many, many arrhythmia events occur after day seven. And so there’s a reason to believe that as we get more involved in this market segment. We’ll see an increased uptake or detection of atrial fibrillation.


Your next question comes from line of Joanne Wuensch from BMO Capital Markets. Please go ahead.

Unidentified Analyst

Hi, this is Steve on for Joanne.

Kevin King

Hey, Steve.

Unidentified Analyst

Hey, you guys have consistently shifted from this 50-50 same-store new store mix to a 60-41. Where do you see this mixed trending over the next year with AT really contributing more in the back half of this year and then into 2020?

Kevin King

I don’t believe that we’ve given any guidance on that at this point. I think our – I guess, our hope is that we continue to see 60-40, 50-50 split, when we first came out with 50-50 was a really good mix for us. The reason why we’ve been so excited about the 60-40, because it’s showing our ability to deeply penetrate accounts that we thought were pretty, pretty penetrated.

So as you can imagine, we’ve been selling in some of these accounts for six, seven years. We thought we might be fully saturated, but we’re finding out is that there’s actually more room to grow, more room to grow downstream in neurology and your cryptogenic stroke, as well as upstream into the emergency room. So we’re delighted that this is happening. So it’s an actually a positive for us. So I think that the guidance we would provide right now is probably to stay within that – the stay with that 50-50 over time. But if we are weighted a little bit more towards a same-store, I think we’ll all find that an attractive place to be.

Unidentified Analyst

Okay, great. That’s helpful. And then last quarter you used the term workflow enabler where the Zio platform was really increasing its presence upstream and the continuum of care to emergency departments and primary care physician. Can you maybe give us an update on this momentum? And is there anything that you can quantify there as a percentage Zio’s used in sort of this setting as an expansion.

Kevin King

No, it’s still too early and too anecdotal to be commenting on that sort of the physician. I guess, the one thing I would add that’s changed from the prior quarter as we are having examples, not just a moving upstream or downstream, but within the brick and mortar clinics that we have, that workflow is improving and that they’re actually able to bring through more patients, which obviously increases the large – increases the use in that core market. We’re seeing a little bit more examples of that and that’s all workflow driven. So we’re obviously excited about that as well, but I don’t think that we’ll be providing much more than anecdotal guidance on that for the foreseeable future. It’s very difficult to be able to break that out in a meaningful way.

Unidentified Analyst

Okay, great. Thank you.


Your next question comes from the line of Jason Mills from Canaccord Genuity. Please go ahead.

Cecilia Furlong

Hi, Kevin and Matt, this is Cecilia on for Jason. I just wanted to ask about in your initial days, rolling out AT in a limited launch. What you’ve seen just regarding the ease of shifting centers from traditional MCAR to AT, what have been the main impediment. And then just moving forward, thinking about the full market launch coming up, how your takeaways have informed. How you plan to drive a full lunch. And then just adding on current trends that you’re seeing XT pull through in AT accounts. How you expect this to trend with the full market launch.

Kevin King

So Cecilia – so the first – this is Kevin. So the first part was what did we experience during the limited launch, what new learnings did we have? That was your first part of your question. And then the second part is what do we expect for learnings going forward.

Cecilia Furlong

As well as the impact from the…

Kevin King

I think one of the early findings that we had with AT was just how misinformed so many clinicians are or were about what mobile cardiac telemetry is. Not surprising, many customers believed or have believed that this is in essence a real time telemetry system with nanosecond response time, similar to what you’d see in a hospital telemetry ward. And I think that gave customers a false level of security relative to what really happens in the MCT space.

I think that was more of a surprise to us than what we had expected. That said, we are focused on timely notifications of information to physicians about life critical events and we do that extremely well and our customers have been extremely happy with the way in which we not only provide them with those timely notifications. But we also are and we also provide them with a full report at the end of the study period to show them not only what they saw during the wear period, but also anything that might have not met a criteria – notification criteria. And so we’re seeing tremendous value add from that.

I think to Matt’s point also about workflow, our customers have enormous pain in terms of them being overworked, having too much information, too many patients, difficulty in managing inventories, et cetera. And by adopting Zio as a single platform, they greatly streamline many, many of those elements to a point where tangible results occur, right. They diagnose more patients in less time with fewer resources and fewer unnecessary repeat tests. And that just plays really well into being a single platform company. Now, not only with Zio XT but also Zio AT.

Cecilia Furlong

Okay, thank you. And then just turning to gross margins, can you talk a little bit about drivers in the quarter expectations for the year and then just as you’re rolling out AT, its relative impact on margins of the long-term. Thank you.

Matt Garrett

Yes. I don’t think I have anything other to say in terms of the guidance for the year, which remains at 75% to 76%, in terms of the improvement or continued expansion of gross margins, our guidance still remains at scale that we believe we can achieve as high as 80% over time. As it relates specifically to AT, I think you can imagine that as we launch a product in a more material way, there will be some initial absorption if you will improvement related to that. On the flip side, there is a significant amount of overhead relate, required to monitor a 24/7 monitoring center. So we’re going to have a little bit of drag there as we initially launch and it’ll be gradual. And again, as Kevin pointed out earlier, we’ve already incorporated that into our guidance.


Your next question comes from line of Suraj Kalia from Northland Securities. Please go ahead. Suraj Kalia from Northland Securities, your line is open. You may have yourself on mute. I am currently showing no further questions at this time. I would like to turn the conference back over to Mr. Kevin King, CEO.

Kevin King

Thank you, operator. This concludes our Q1 earnings call. I’d like to thank you for your continued interest in the company and look forward to providing you with future updates. If you happen to be in San Francisco this week, please stop by our exhibit at the HRS booth at the Moscone Center and get a look at some of our new innovations that will be on display there. Thanks very much.


Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.