Q3 2019 Earnings Call

Back to 1995 any statements contained in this call that are not statements of historical facts should be deemed to be forward looking statements.

All forward looking statements, including without limitation, our examination of operating trends in our future financial expectations, which includes expectations for hiring growth in our organization in 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 factor section of our most recent quarterly report on Form 10-K with Securities and exchange.

Commission.

This conference call contains time sensitive information and is accurate only as of the live broadcast today have revised 2019, I rhythm disclaims any intention or obligation, except as required by law to update or revise and in advance.

Yes.

Right.

Whether because of new information future events or otherwise.

With that I'll turn the call over to Kevin.

Thank you and good afternoon, and thanks for joining us.

Third quarter results continue to demonstrate strong execution and increased market penetration.

Achieve third quarter year over year revenue growth of 47%.

Reaching $56 million, where third quarter gross margins, increasing by 1.5 points to 75.4%.

Our initial guidance range of 37% to 40% growth has been increase throughout the year driven by the increased confidence in our business outlook.

Going into the last quarter the year, we're raising our revenue guidance again.

Now, we now expect full year revenues to be in the range of $215 million to $217 million up from 212 to 216, which corresponds to a 46% to 47%.

Year over year gross.

Our business continues to strengthen on many fronts driven by the proven superiority and completeness of our zero platform.

Veritiv customer data confirms that adoption of our highly differentiated zero platform enables customers to measurably diagnose more patients in less time with fewer unnecessary repeat tests and at lower costs.

Zero platform also requires significantly reduced resources compared to other approaches.

Our proven and complete platform consist of a technology stack with four layers that works seamlessly with one another through creative source of competitive differentiation.

So for technologies leaders includes.

Hey, proprietary xeo data repository layer that contains more than 600 million hours of annotated.

Based heart rate heart rhythm and patient level information.

A data duration layer that deploys proprietary artificial intelligence algorithms to reliably reproducibly and accurately sure a massive amounts of collected heart rate heart rhythm and activity information into actionable reports for medical management by prescribed.

I think physicians.

In information system layer that stream lines workflow processes buyer order entry results reporting capture of relevant patient demographic and health plan information physician notes and other medical record information.

And finally, our patented single use patient worn biosensors, xeo XT and Xeo 80 that enable continuous uninterrupted long term cardiac monitoring.

Our clinical and R&D investments continue to build upon this innovation stack and we remain focused on enhancing this integration platform.

Before we review the key components of our growth strategy I wanted to provide a status update on the CPT code renewal process.

At the end of September the am a hosted its CPT editorial panel meeting where the long term continuous ambulatory monitoring CPT code change application was reviewed.

The CCN HRS submission proposed replacing the existing temporary codes with permanent codes with confirmation of approval made by the EMEA on October 20 sift.

Two new code sets with four codes each are set to replace the temporary codes in January of 20 to 21.

Each new code set will cover an extended period of where time and recognize the increased clinical value that longer term monitoring provides as well as the utilization of resources required to deliver those services.

The existing holter event, and MCT monitoring codes remain unchanged.

Were very pleased to see the process unfold in a manner consistent with our previously stated expectations and this of course gives us increased confidence as we move into the final stages of the process.

In the next stage, we plan to collaborate and provide inputs to the model to be used by HCC HRS at the am a rock meetings scheduled for January 2020 .

It's expected that minutes from this meeting will be available toward the end of February .

The final stages for CMS.

Review approve or modify the recommendation of the am a rock with communication in July of next year.

As I noted on our last call the amas very strict inappropriate rules that prohibit any lobbying or public statements meant to influenced the process.

As such were limited in the information we can share with you.

We will be as transparent as we can be while honoring the process that the PMA has established and look forward to provide updates.

Turning the company turning to the components of our growth strategy, which include the following three items.

Sales expansion and continued productivity improvements.

Increased market penetration with our single zero platform.

And expanding our addressable market into new indications.

For the first item Salesforce expansion continues to contribute 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 for year, while increasing the productivity of our most tenured reps.

As previously reported we completed the majority of our 2019 hiring plan and the first half of the year.

In the third quarter, we completed additional new hires and conducted extensive sales training and development.

We will provide an update on our 2020 hiring goals on our next earnings call.

As we've always done we'll structure the commercial team to meet the cost effective size required to capture the fold and untapped market potential for IRA them.

Encouraged by the success within early customer sites in October we initiated the full commercial launch of Xeo 80.

We are seeing increase growth in prescribing volumes and number of accounts.

Feedback remains extremely positive with customers, noting the accuracy of our analysis as well as the consistency and reliability of the platform.

It's important to highlight here that we believe Xeo 80 is an exceptional device and service we remain steadfast in our view however that XT is the most appropriate solution for the vast majority of patients.

Faced with patient and information overload and constantly part pressed for time customers placed significant value on using a single platform to improve the effectiveness of their monitoring operations.

Enabled by our highly integrated technology stack that includes identical wearable form factors application processes reporting platforms and workflow tools are single platform based approach to the market is unique.

Turning to sales expansion opportunities the silent active market as a major part of our expansion strategy. The one year publish them stops results, which provides an early look at the health economics and utilization data gives us increased confidence into what it is that's going to be needed to open up the market.

We will continue to explore opportunities with this market with our Xeo XT solution and we will complement those efforts by payers pursuing a more complete solution was even higher yields which may result in even better economics.

Accordingly in September we announced an IRA them and virally, we'll be working to develop next generation atrial fibrillation products that combine both companies technologies to improve the screening and diagnosis and management of patients with April Ciber asymptomatic atrial fibrillation.

This collaboration brings together our experience in AI based algorithm diagnoses.

Please advance health data analytics technologies to address the millions of patients living with undiagnosed Jason.

Our teams are now working together to combine the strengths of our collective capabilities to develop a complete solution over the next 24 months and we will provide updates as we move forward on this initiative.

And as a final update on the quarter. We raised net proceeds of approximately 107 million from a follow on offering in September .

The proceeds of this offering will be used to fund important growth initiatives, including additional salesforce expansion.

The virally collaboration and related silent aftermarket development efforts and international expansion.

We're very pleased that our strengthened balance sheet enables us to pursue these important initiatives and we look forward to updating you on our progress in the future.

In closing our strategic approach to driving market penetration and expansion is rooted in our ability to demonstrate clinical superiority with our proven service based platform.

Our confidence remains high with our fundamentals and business outlook as strong as ever.

We're combining our expertise in cardiology monitoring data analytics and commercial ex execution to make a tremendous impact in People's lives and we are deeply committed to this endeavor and remain steadfast in our efforts.

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

Thanks, Kevin despite the challenges in our business that come in summer the company continued to perform well as we head into the fall highlights for the third quarter 2019, more revenue growth of 56 million or growth of 47% year over year, and 5% sequentially gross margins of 75.4% an IND.

Greece of 1.5% year over year continued success moving away from non contracted claims and improved claims adjudication efforts further reducing reserve requirements, while improving overall asps and finally, a number of Onboarding Xeo 80 accounts successes, which in turn accelerates adoption of zero eight.

And those counts, where we've launched 80, demonstrating our capability of being the full service solution offering.

Taking a more detailed look that third quarter results revenue for the three months ended September Thirtyth 2019 was $56 million, an increase of 47% year over year and 5% sequentially.

We were pleased with this outcome given the headwinds associated with summer seasonality trends at Lumpiness of lot of launching large integrated systems. During this period.

We continue to view the pipeline is very robust, which is now enhanced with the full launch of our Eightys service offering here in October .

Some of the trends, we continue to monitor and communicate to investors include.

Same store new store revenue growth as expected rose during the quarter to just under 70 that 30% given the challenges of launching new accounts during the summer months, we do anticipate a return to the more recent trend of 60% to 40% split as we move into Q4 and on into 2020 as it.

Related item in a sign of continued strength in existing accounts, our top 25 and top 100 accounts grew in excess of 40% year over year.

A new trend we're communicating this quarter relates to our success with HR implementations in 2019 accounts that have implemented our service increased equity volume by nearly 20% over the preceding six months run rate and HR accounts in total now contribute to nearly 10%.

Overall registrations.

And finally, we have added a new a number of 80 accounts during the summer in preparation for the full launch here in October .

As we have seen in our piloted accounts, we witness considerable X T pull through in both new and existing accounts.

Since 80 usage is so highly concentrated in large systems. We believe this plays extremely well with our large integrated system strategy moving forward.

Turning our attention to the rest of the PML gross margins for the third quarter 2019 were 75.4% compared to 73.9% a 1.5 percentage point improvement over the same period in 2018.

Sequential gross margin dipped slightly due to the combination of onetime write offs for obsolete inventory that continued impact of the commercial launch of 80, and finally short term impact of tech productivity levels, given summer seasonality and vacation schedules.

Operating expenses for the third quarter, 2019, or 60.7 million inclusive of the development costs associated with virally compared to $37.9 million, an increase of 22.8 million year over year net of nonrecurring barely costs expenses were 55.3 million or growth of 46%.

Over the same period in the prior year.

For the quarter the year over year spending increases continue to be driven by the full run rate impact a first half investment in sales force expansion organizational support for our network sales strategy expansion of R&D activities, the move to our new corporate offices here in San Francisco and the impact of increasing stock.

In expense.

We also experienced an increase in bad debt expenses arising from environmental factors, specifically rising deductibles and increases the patient co pays.

Net loss for the third quarter 2019, including barely development costs were $18.6 million or a loss of 74 cents per share compared with a net loss of 10.2 million or a loss of 43 cents per share for the same period of the prior year.

Turning to our guidance for the remainder of 2009 team we are raising guidance for the full year 2019 to 215 to 217 million from 212 to 216 million. This resent represents annual growth of 46% to 47% demonstrating our continued confidence in our ability to scale.

The organization as we continue to produce benchmark topline growth.

We anticipate gross margins will reverse Q3 trends and maintain our previous range guidance of 75.5% to 76.5%. We continue to anticipate some 80 drag for the foreseeable future as we operationalize our work streams and more broadly launch the service over the next few quarters.

And finally, we are raising operation expenses guidance slightly reflecting reflecting the increases in bad debt expense incremental commission bonus accruals and noncash stock expense. The new range of 202 to 206 million is up from 198 to 204 million, including 29 at 31 million per.

Research and development and $173 million to $175 million for SGN a.

Inclusive of Virally development costs, we project annual Opex in the range of 210 million to $214 million, including 36 million to 38 million for research and development and 174 million to 176 million for SGN a.

These figures assume one additional milestone payment of 1 million and some amount of developmental costs in the fourth quarter related to the virally collaboration.

With that Kevin Dan and I would love to open the call out for your questions turn it back over to the operator.

At this time, if you'd like to ask a question, which is trust star did the number one on your telephone keypad again that is par the number one on your touchstone telephone.

Your first question from Robbie Marcus from Jpmorgan. Your line is now open.

Hey, guys is actually Alan on Friday, congratulations on the good quarter I just had one question on the.

Rocket process and then a follow up I guess my first one is we know that you're moving from four I believed a code, but this letting the first time that you've really highlighted two different codes sets. So I guess could you clarify like what the differences between these two coats assets and under which circumstance you would use one or the other.

Hey, Alan it's Kevin.

The only the only thing Thats been published right now is that the.

Separation of the code sets is along the lines of duration of where we've we've not been allowed to talk about the amount of where times.

Compared to what we have today a single code spans three days to 21 days.

And within that code set there are four codes a global code.

Patient Hookup code, a technical component and a physician and interpretation.

Those same for code sets will be replicated twice in the new coats and arrangement.

Got it and then kind of like I guess a broader question.

You can talk around and a bit but regardless of what the decision is.

In terms of like the value of these codes can you walk us through kind of the rollout once we do hit January 2021, like how much time will it take for whatever price changes implemented to kind of really start impacting the business and what does that for rollout look like along kind of the different mix.

And mix that consumers are you have thank you.

Sure. So so this this code so change affects our payment with CMS.

Which is about 26 or 27, 727% of our revenue.

That code change would go into effect in January of 2021.

Unless it were delayed for some reason or if it were appeals.

Our expectation that said it would go into effect at that time frame and.

And so whatever the decision is in the July timeframe to either except or modify or to.

Change.

Relative values that are being assigned here in February timeframe that will go into effect at that period of time.

Your next question is from David Lewis Your line is now.

Good afternoon.

Hey, John on for David.

Kevin I had two quick questions and then a follow up I was wondering if you could talk about the underlying momentum in the business. If you look at guidance into the fourth quarter. It may be implies a little bit weaker quarter over quarter growth into into the fourth and.

In light of be fully T. launch I was wondering if you could talk about.

How we should think about.

The incremental pull through of either a trx D.

Now the device is fully underway and then I had a quick follow up for Matt.

Sure.

Look I would start off by saying you know from a momentum standpoint, I don't think we could be in a better off position right. Now we have a large number of positive growth drivers.

I think everyone understands and accepts that were really well positioned competitively and got a very very long runway ahead of us here.

And growing salesforce competitive differentiation abundance of clinical evidence on that's allowed us to raise our estimates throughout the year I think relative to the fourth quarter here and looking forward it's important to note.

Changes in growth rates don't imply less opportunity or imply a weaker are weaker execution. It really implies the segment that we're targeting as different now than the segment that we targeted than the past.

And I'd like to think about it from the standpoint of when we study our opportunity funnel, we now or characterize saying ourselves as having transition from.

Let's call it early adopters, where those early adopters, we're in order to change their status quo were largely looking for a demonstrated clinical benefit.

And we did that really well and we continue to do that well in terms of an unsurpassed assurance of accuracy.

Proven ability to change medical management, and the 30 plus peer review publications that we have that show that were superior.

Today, I think were more in the middle market. The middle majority of the market and there are those customers are asking us not only for the clinical benefit, but they're asking for productivity gains.

Gains that help them to be world class in terms of delivering clinical operational and financial value.

And in our set in our prepared remarks that we've got comparative customer data that confirms.

That we measure and diagnosed patients in fewer and less time with fewer that unnecessary repeat tests with fewer resources and lower cost that's what people want.

And that takes a lot of energy for us to work with these large accounts in order to get them over the hurdle.

To change their status quo. There are over work there pressed for time and in order for them adopt they have to have not only to the proven clinical superiority, but the complete a subtle platform.

And so I like in our trajectory that were on right now more related to the segment of the market that we're addressing.

It is certainly as large and growing but it's it's a little bit harder, but tap because the requirements of bounced customers have for us I wouldn't read into it I wouldn't read anything into it other than that.

As far as ex TN 80 pull through maybe Matt can address though we continue to seem very strong.

X T pull through in 80 accounts, Matt I think you said a few things on your prepared remarks. There have you want to go into that yes, we'll I think that Thats right, Kevin Knight before before we dive into that everyone. I understand that the 80 product is a completely different work flow and work stream.

Our excitement of launching that product and the feedback we've gotten from the field has been outstanding and we've provided updates for I guess three quarters now on pull through that we see in those pilot accounts, but again those pile of accounts are extremely limited and we're just now starting to launch it. So I think there's going to be some learning curve here.

As we move into November December as relates to.

Providing change of our guidance around 80, so I think the what I would strongly suggests is that we will continue to provide feedback as we move to this broader commercial opportunity around the X T pull through particularly as it relates to new accounts or Greenfield accounts, I think thats going to have some interesting outcomes for.

So obviously that for now.

I think you have another question Eric you want to follow up with me on another question.

The union either either for matter, Kevin as you think about the the recent capital raise how should we think about incremental investment into commercial infrastructure and any potential ads.

For the fourth quarter earlier in 2020 next year.

No I don't I don't think so I think everything is.

And with maybe one small caveat I think everything is exactly the same.

As we've talked about on the raise.

Weve, whereas it we just highlighted we've already spent about five and a half million on virally development. Obviously, a significant portion that was the initial milestone payment and that's certainly going to be a good portion of it.

The other the other two areas that we talked about are consistent with where I think our thinking is now as we move into kind of the budget and planting season and that is the salesforce expansion as well as some dollars related to international expansion I think those are absolutely still front center in our minds.

Did mentioned that although it's not going to be material.

Moving forward the amount Rick required for bad debt expense is probably going to go up slightly I think we've guided in the past at 4% that is probably leaning more towards five maybe 5.5% as we're just seeing this significant increase in.

And in deductibles and incremental amounts owed by the patient that's coming with the environmental territory that were presiding and so other than that small adjustment I think everything else is exactly as we laid it out with the with the with the follow up.

Thank you.

Your next question from Jason Mills from Canaccord Genuity. Your line is now open.

Hi, Kevin mentioned, Dan Thanks for taking the questions.

One follow up on.

Metrics that seem to be important to model. So you talked a lot of not Kevin I mean, it's called the larger health networks mediums.

Humid underpenetrated and relative to the amount of the market today.

Preside over could you talk about sequentially.

Your.

You are successfully penetrating that particular account base and how eight key may help you in fourth quarter and 2020, not only vis-a-vis the sale of 80, but PXP pull through I think you alluded to it to some extent, but that is that want against a follow up.

To that question is is that one potential area that could drive upside to your to revise guidance is that is going to an area that.

Perhaps is is under appreciated in terms of the group potential near term.

Hi, Jason it's Kevin So maybe maybe to just make sure that I Carlo sort of first one was relative to same store new store. It did how to out of new store due in the quarter matching cover that.

80 upsides.

I think the answer is yes.

Yes.

Those are akcea XT upside as well I mean, but the numbers of small number from starting.

But nonetheless, I think to pull through is probably more significant than than the actually t. volume.

And then the other one was I think yes, Jason I think what you're going for as that from our strategy of these large systems, what does that sizing compared to the overall market and I. We have not we've not done a deep dive into that number since last quarter, but based upon guidance since new store same store sales.

The answer is exactly the same in that as the overall opportunity and those accounts as it relates to our market penetration is almost on par with the broader market. So if were however, you guys are defining the market whether its billion in three quarters or 2 billion with what some of these add on indications where we're.

Whatever 10 or 15% penetrated in the broader markets. We're also still 10 or 15% Trent penetrated in these large integrated system. So again, we think that bodes extremely well.

For us moving forward does that help.

Yes, it does gets exactly.

It was going about Matt. Thank you.

And then just a few other metrics in the past you talked about.

Not yet seen the.

All the peak level of your productivity level you've added.

Our reps this year than you originally thought.

Perhaps the.

Some of the productivity gains.

Just curious if you're if you at this point and been able to identify.

Productivity level per year, increasing sales.

Yes, Jason I mean, good question, we weren't trying to hide that obviously with a quarter that didnt doesn't see as much growth because of the summer right. There was not a huge change to to those numbers and thus we weren't calling out a higher productivity level at this time I think the last one week.

Called out is about 2.5 million, although we have talked about the ability to pull that in.

I think the Genesis of the question in the Genesis of the answer is that I don't believe any of us in the room feel as though we've reached peak productivity and I think with the on boarding of these large integrated systems and the potential volume that comes with them clearly would indicate that we havent reached peak productivity.

I just don't think there are ready to call out anything higher right now given all of the given what Kevin just talked about in terms of the strategy given the 80 launch and given that we're a quarter away from from guidance on 2020, So long story short, where we're still guiding the two five but I don't think any of us feel that that we've achieved the.

Half of that that threshold yet.

Thanks, Jason I might add to than to say that we've added.

40 people a year or for the last two years that would imply that roughly 60% of our sales forces with us less than two full years this year in last year.

And in Oman peak productivity number is when people are with US three to four years three to four correct. So where we feel like we've got opportunity to grow there, but that peak productivity number.

Thats peak to peak of the peak prototype number is still rather elusive for us to define.

Understood. Thank you.

You bet.

I'm showing no further question at this time I'll like I would now like to turn the conference back Kevin King seal for some closing remarks.

Great. Thanks, everyone. Thank you for joining our third quarter earnings call. We look forward to updating you on our yearend results and outlook for next year on our fourth quarter earnings call early next year, thanks very much.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation in other wonderful day, you may all disconnect.

Okay.

[noise] [noise].