iRhythm Technologies, Inc. (IRTC) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call indicates strong revenue growth, increased market penetration, and raised guidance for 2025. Despite some concerns about seasonality and cautious guidance, the company's strategic partnerships and product integration with Epic are driving significant growth. The Q&A reveals optimism about sustainable reorder rates and market share expansion. The positive revenue outlook and strategic developments suggest a positive stock price movement, especially given the company's market cap, which allows for a more pronounced reaction.

Key Financial Performance

Revenue $186.7 million, representing more than 26% year-over-year growth, driven by acceleration within our core long-term continuous monitoring business, continued progress with innovative channel partners, and sustained strength in our Zio AT product line.

Adjusted EBITDA Margin 8.4%, marking a 500 basis point improvement from 3.4% in Q2 2024. This improvement is attributed to robust top-line growth, operational efficiencies, and strategic investments.

Gross Margin 71.2%, ahead of expectations, driven by volume leverage and operational efficiencies, offsetting higher blended cost per unit from increased Zio AT product mix.

Adjusted Operating Expenses $145.2 million, a 16% increase year-over-year, primarily driven by ongoing remediation activities, global volume growth, and funding of innovation and commercial growth initiatives.

Adjusted Net Loss $10.2 million or $0.32 per share, compared to $18.8 million or $0.61 per share in Q2 2024, reflecting improved financial performance.

Home Enrollment for Zio Services 23% of volume in the U.S. during the second quarter, contributing to overall growth.

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Operating Highlights

Zio AT product line: Achieved record revenue quarters driven by sustained momentum across both new and existing accounts. Expanded adoption within long-standing customer base and integrated Zio monitor and Zio AT into workflows.

Next-generation Zio MCT product: Expected to file 510(k) this quarter. Key improvements include smaller footprint, better adhesion, extended battery life, and advanced software for enhanced detection parameters.

Epic Aura solution: Generating strong customer interest and early operational impacts. Over 40 health systems actively implementing or preparing integrations, leading to volume growth and improved patient access.

International market expansion: Strong demand in the UK, steady uptake in 4 additional European countries, and broad commercial launch in Japan with 8 new commercial accounts.

Innovative channel partnerships: Added over 1,000 prescribers at Signify Health, launched with CenterWell, and renewed a program with a previous partner. Now have 12 partners under contract covering approximately 2 million potential patients.

Operational efficiencies: Expanded adjusted EBITDA margins by 500 basis points year-over-year. Achieved through process optimization, strategic automation, and focused investment in growth opportunities.

Regulatory compliance: Implemented measures exceeding FDA requirements and planning a third-party audit to ensure best-in-class quality processes.

Proactive monitoring strategy: Shifted focus to early detection of arrhythmias in primary care settings, enabling proactive monitoring and reducing healthcare costs.

AI-driven early disease detection: Partnership with Lucem Health to utilize predictive AI for early arrhythmia detection, integrating real-world claims data and EHR systems.

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Risk or Challenges

Regulatory Compliance: The company is addressing FDA warning letters and 483 observations, which require significant remediation efforts and third-party audits. This could impact operational focus and resources.

Tariff Impacts: Proposed tariffs on global imports are expected to negatively impact gross margins by 20 to 40 basis points for the full year, with more significant effects in the latter half of the year.

Supply Chain Disruptions: The company is strategically building raw material inventory to mitigate potential supply chain disruptions, which creates a slight headwind to free cash flow.

Legal and Consulting Costs: Incremental legal and consulting fees related to FDA remediation efforts and DOJ subpoena activities are expected to cost approximately $15 million in 2025.

Market Penetration Challenges: Despite strong growth in Zio AT, the company holds a low double-digit market share in this segment, indicating significant competitive pressures.

International Market Risks: Expansion into international markets like Japan and Europe involves risks such as market awareness, regulatory hurdles, and competition from local offerings.

Economic Uncertainties: Flat pricing expectations and reliance on CMS rates, which represent 24% of revenues, could be impacted by broader economic conditions or policy changes.

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Guidance & Outlook

Revenue Guidance: Full year 2025 revenue guidance raised to $720 million to $730 million due to first half outperformance, continued momentum in core business, sustained AT strength, and contributions from innovative channels. Third quarter 2025 revenue expected to be slightly down compared to the second quarter due to normal seasonality.

Gross Margin: Full year 2025 gross margin expected to slightly exceed full year 2024 gross margin. Third quarter gross margin anticipated to decline slightly from the second quarter due to hiring within clinical operations teams ahead of anticipated volume growth.

Adjusted EBITDA Margin: Full year 2025 adjusted EBITDA margin guidance updated to 8% to 8.5% of revenues. Third quarter 2025 adjusted EBITDA margin expected to range between 9% and 9.5%.

Free Cash Flow: Company anticipates being slightly free cash flow negative for full year 2025 and becoming free cash flow positive for full year 2026.

CMS Rates for 2026: Preliminary estimates suggest CMS rates in 2026 versus 2025 will be flat to slightly up for Zio monitor and up approximately 2% for Zio AT. CMS represents approximately 24% of total company revenues.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What are the drivers of the guidance increase for the full year?

A:The core business is the biggest driver, contributing roughly 2/3 of the $30 million increase in guidance. This is fueled by strong execution from the commercial and EHR integration teams, onboarding of new accounts, and sustained performance of Zio AT. Innovative channels contributed about 1/4 of the increase, with notable contributions from partnerships like Signify, CenterWell, and Oak Street.

Q:What was the volume contribution from innovative channel partners in Q2, and what is the timeline for the 40 accounts in active discussions?

A:Management did not provide a specific breakout of the volume contribution from innovative channel partners but noted it stepped up from Q1. For the 40 accounts in active discussions, management expects a steady cadence of onboarding over the remainder of the year and into next year but did not provide specific timelines.

Q:What is driving increased volumes in Epic accounts post-integration?

A:Post-integration with Epic accounts, there is an average 20% increase in prescribing patterns, with some accounts seeing as high as 40%. This is attributed to streamlined workflows and the adoption of both Zio monitor and Zio AT as a single solution for entire systems. 65% of accounts using EMRs are Epic-related, presenting a significant opportunity.

Q:What drove the outperformance in Q2, and how does it compare to the full-year guidance increase?

A:The outperformance in Q2 was primarily driven by the core business, with Zio AT and innovative channels contributing equally to the remainder. This aligns with the full-year guidance increase, where $20 million of the $30 million increase is attributed to the core business, and the remaining $10 million is split between Zio AT and innovative channels.

Q:Which innovative partnerships are driving growth, and how sustainable are their reorder rates?

A:Key partnerships driving growth include Signify, CenterWell, and Oak Street. These partners are contributing significantly, with expectations of repeat monitoring opportunities. Most partners anticipate retesting patients annually or onboarding new patients continuously, indicating sustainable reorder rates.

Q:What are the preliminary thoughts on the ambulatory specialty model proposal and its potential impact?

A:Management is exploring the proposal, which includes incentives for early detection, and sees it as a positive initiative. While it is not expected to take effect until 2027, it could create greater awareness of disease prevalence and potentially increase demand for their products.

Q:Why is Q3 expected to be down sequentially despite strong momentum?

A:Q3 is expected to be down approximately 1% sequentially due to seasonality, as physicians and patients take vacations during the summer. Additionally, management is being cautious with guidance, particularly with the growing contribution from innovative channels.

Q:What is the outlook for the renewed partnership with the channel partner in Q4?

A:The renewed partnership is expected to be less lumpy than in Q4 of the previous year, as the program now targets a broader patient population. However, management is cautious and wants to observe prescribing patterns before fully incorporating expectations into guidance.

Q:What is driving the growth acceleration, and is it due to market expansion, share gains, or other factors?

A:The growth acceleration is driven by a combination of market expansion, share gains, and contributions from the PFA market. The company is expanding prescribing into primary care, which increases patient access and streamlines workflows. Market share in long-term cardiac monitoring has increased to approximately 72%.

Q:Are innovative channel partners included in new store growth, and how does this impact margins?

A:Yes, innovative channel partners are included in new store growth, which has ticked up recently. While still early, management believes innovative channels can be a profitable part of the business due to the one-to-many selling model and expects them to contribute meaningfully to margins over time.

Q:What is the outlook for Zio AT and the MCT market?

A:Zio AT is performing well, with competitive advantages like 14 continuous days of monitoring. The upcoming Zio MCT product, expected to be submitted to the FDA this quarter, will address competitive gaps and target 80% of the MCT market. Management is optimistic about capturing more market share in this space.

Q:What is the status of the FDA warning letter and the Zio MCT submission?

A:The company has addressed all concerns related to the FDA warning letter and is awaiting an inspection to close it out. The Zio MCT submission will be filed this quarter and will run in parallel with the FDA's review of the warning letter.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the volume contribution from innovative channel partners in Q2 and the timeline for onboarding the 40 accounts in active discussions. Additionally, they did not provide specific numbers for the impact of the ambulatory specialty model proposal or the exact prescribing patterns of the renewed channel partner in Q4.

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Earnings Word Cloud

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