iRhythm Technologies Inc (IRTC) 2018 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the iRhythm Technologies Q3 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Ms. Leigh Salvo of Investor Relations. Please go ahead.

Thank you, Sarah, and thank you all for participating in today's call. Joining me are: Kevin King, President and CEO; and Matt Garrett, Chief Financial Officer. Earlier today, iRhythm released financial results for the quarter ended September 30, 2018. 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 expectations, which includes expectations for hiring, growth in our organization and reimbursement, guidance for revenue, gross margins and operating expenses in 2018 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 the SEC.

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. This conference call contains time sensitive information and is accurate only as of the live broadcast today, October 30, 2018.

And with that, I'll turn the call over to Kevin.

Thanks, Leigh. Good afternoon, and thanks for joining us. Our third quarter results demonstrated continued strong sales execution and market penetration. Revenue for the quarter was $38.1 million, up 55% as adjusted for Topic 606 over prior year and gross margins increased by 2 points to 73.9%.

Zio XT and Zio AT continue to drive improved account penetration and new account expansion, particularly in targeted large hospital networks. As a result of the growing market acceptance of our systems combined with the improving productivity of our expanded sales organization, we expect revenues for 2018 will now be $142 million to $144 million, up from $138 million to $144 million, which represents growth of 49% to 52% over prior year.

I'll take the next few minutes to discuss some of our recent business highlights and turn the call over to Matt for a detailed financial review of the quarter and additional annual guidance.

Key to our short- and long-term growth strategy are 3 primary components: sales team expansion and productivity; increased market penetration with Zio XT and Zio AT; and expanding our addressable market into new indications.

Starting with the sales team expansion and productivity, as noted in the last quarter, we achieved our initial hiring goal of 110 reps in the first half of the year. We also mentioned on our last call that our focus for the remainder of the year would be on training and development of the recent new hires and ramping their overall productivity. We're not anticipating any material hires before the end of the year, and our target of 130 to 150 remains unchanged and we will provide an update for 2019 goals on our next call.

As we've indicated in the past, it typically takes 3 to 6 months for a new sales hire to become productive, and on average, several years to reach peak productivity. Importantly, our ramp rates and peak productivity levels have both increased as a result of greater brand awareness, the evidence that we've generated, the payer contracts that we've completed and the strategy of selling to large integrated delivery systems as opposed to smaller independent physician practices.

Market penetration is the key component of our growth strategy as we are merged to become the standard of care in long-term continuous cardiac monitoring. Our ability to now offer both Zio XT and Zio AT on one platform is driving improved account penetration, with an increasing number of accounts now migrating from legacy monitoring options to the full range of Zio applications. Momentum in both new and existing accounts continued throughout the quarter, driven in large part from in-network contracting and our focus on sales to larger, but more complex, integrated delivery networks.

The rollout of Zio AT provides another meaningful opportunity to gain share by enabling us to operate a full portfolio of ambulatory cardiac monitoring services on a single platform to our customers. As expected, we did see usual seasonality of the third quarter. However, the improved productivity of our sales organization, coupled with a broader product line, minimized much of the seasonal impact. I'm delighted to see the strength of our platform-based approach to delivering a complete solution being realized in the field.

Turning to our markets. I thought it would be helpful to revisit our current view of iRhythm's total addressable market both now and in the future.

We view our U.S. addressable market as a funnel of patients who progress through the detection, diagnosis and management of their cardiac arrhythmias. Today, the legacy ambulatory monitoring market is primarily focused on the initial diagnosis of symptomatic patients and amounts to over 4.5 million tests per year. We estimate that our share of this existing market is now double digits, as we have broadened our presence and displaced legacy Holter events and mobile telemetries with our XT and AT services.

Our accelerating share gains are not coming -- are coming not only from clinical utility of our diagnostic, but also from the completeness of our service that improves practice workflow, enabling us to emerge as the standard of care in long-term continuous monitoring.

Moving down the funnel, there is also a growing population of patients who have already been diagnosed, but require ongoing monitoring and characterization of their arrhythmias to manage their conditions. Examples include patients who are undergoing procedures such as cardioversion or ablation to treat their arrhythmias, or patients suffering from intermittent AF, who need to be optimized on their medications.

We estimate this market to be over 1 million patients and it is fully reimbursed and addressable to us today. Results from our KP-RHYTHM study have opened up this market to us by demonstrating the value of true AF burden, measured by Zio, and helping to drive clinical decision-making for this population of patients. As such, the total reimbursed addressable market available to iRhythm today exceeds 5.5 million patients in the U.S. alone.

Sitting above our currently addressable market in the funnel lies the opportunity for detection of asymptomatic atrial fibrillation in patients with risk factors such as age, hypertension, diabetes or prior stroke. Following the publication of our mSToPS Study in JAMA, we've spent considerable time with clinical thought leaders, payers and the pharma community to understand this market. And we've grown even more excited about its potential.

Based on the inclusion criteria of mSToPS, we now estimate a market of greater than 10 million high-risk patients who could be -- potentially benefit from screening for AF. In order to fully access this market, we will need to show positive data on clinical outcomes, and we expect such data to be available from mSToPS and other studies over the next few years.

We continue to build evidence around the utility for Zio for the detection of asymptomatic AF, with our most recent contribution being a study from the MESA trial, which was published online in the Journal of Electrocardiology in late July. MESA is a large multiethnic population health study that enrolled 6,800 participants over the age of 45 who were free of any cardiovascular disease in order to study the progression and pathogenesis of subsequent cardiovascular disease over time.

A subset of 1,100 patients were monitored at least once with our Zio service with a mean wear time of 14 days. Among patients with no prior history of atrial fibrillation, 4% newly diagnosed AF or AF flutter was found in this population. Results from this study further demonstrate the clinical utility of Zio in driving population health management through the detection of silent atrial fibrillation.

Finally, sitting at the very top of the funnel is the general population of hundreds of millions of individuals in whom there is likely to be 1% to 2% prevalence of atrial fibrillation. It is in this general population that we believe consumer wearable technologies may offer some promise in channeling the appropriate patients to be diagnosed with an ambulatory ECG monitoring technology such as Zio.

While we're very excited about the potential for recent developments in the consumer space to drive greater awareness of AF and utilization of our Zio service, we believe there are many unknowns, such as the high rate of false positives. That will then need to be worked out in order to provide a complete solution that will ultimately drive benefit to our health system.

One final comment on our markets, in growing awareness of our Zio service is the recent support of the National AFib Awareness Month in September. A high priority for our team is reaching out to the community and building awareness. During the month, we were especially active securing TV and radio news spots in multiple cities involving interviews with clinicians who are passionate about Zio. This resulted in about 5 million audience impressions, with more opportunities opening during the quarter.

Our goal is to draw public attention to prevalence of AFib in U.S. while also highlighting the superior monitoring capabilities of Zio as an enabler of better patient care. Interview clips can be found on our website.

Before I turn the call over the Matt, I want to take a few minutes to acknowledge the many employees at iRhythm who have been instrumental in our growing momentum and success. The third quarter marks our eighth quarter as a public company, and I'm pleased with our growing track record of sustained top line growth and operational performance. Our strategic approach to driving market penetration and expansion is rooted in our proven clinical superiority and scaling at a high level with a single platform.

With that and in looking at our current trajectory and our fundamentals of our business, we are stronger than ever before. We're combining health care and technology to make a tremendous impact in the lives of patients, and we're deeply committed to this endeavor and remain steadfast.

With that, I'd like to turn over to Matt, our CFO, for a review of our financial results and guidance for 2018.

Thanks, Kevin. Given the annual challenge we faced with summer seasonality in the third quarter, we are very pleased with our overall financial performance and particularly in our top line revenue growth. Our focus during the quarter on sales force productivity, large integrated system penetration and infrastructure support of the sales operation continues to drive our growth story.

Financial and qualitative highlights for the third quarter as adjusted for Topic 606 include: Revenue growth of 55% year-over-year and sequential growth of 7%; gross margins of 73.9%, an increase of 2 full percentage points over prior year; successful launches of AT in key pilot accounts, which subsequently led -- lead to adoption of iRhythm as a full solution in those accounts; and an increase in sales force productivity through the development and onboarding of new reps, as well as continued impact of penetrating large integrated systems with our operational infrastructure set up to support those accounts.

Taking a more detailed look at third quarter results as adjusted for 606, revenue for the 3 months ended September 30, 2018 was $38.1 million, an increase of 55% year-over-year and 7% sequentially. Sales force productivity levels continue to rise, as we penetrate these large integrated systems and as reps hired over the last 9 months start to achieve meaningful productivity levels.

As we did in the prior quarter, we think it's valuable to spend some time going into more detail on the positive trends we are seeing in our business that support our ongoing confidence in the business and related revenue guidance.

These trends include: volume to price mix revenue growth remained near an 80-20 ratio, indicating a continued positive mix shift in our pricing, inclusive of, albeit on a minimum scale, AT unit volume; new store same-store unit growth continues to trend around a 50-50 ratio, with a slightly higher mix towards same-store due to summer seasonality with new account activation and our own internal focus on adoption in these large systems; continued improvement of sales force productivity levels that support both our near-term and long-term hypothesis around economy of scale in our business; and finally, for both new and existing accounts piloting AT, we continue to see significant higher XT volume growth rates versus the core business.

All of these trends continue to speak to our ability to scale this high-volume business in a meaningful way around our strategic approach to opening and penetrating large volume accounts.

Turning our attention to the rest of the P&L, gross margin for the third quarter 2018 was 73.9% compared to 71.9%, a 2 percentage point improvement over the same period in 2017. Margin expansion for the quarter was driven in large part by our higher mix of contracted revenue and improved operational efforts in collections of patient owed deductibles and contracted payments from health plans. Operating expenses for the third quarter 2018 were $37.9 million, an increase of 60% compared to $23.7 million for the same period of the prior year.

As in the past few quarters, a significant amount of this incremental spend can be directly attributed to our continued focus on sales force expansion and sales support hiring needs out in front of our guidance and internal expectations for the year.

In addition to these drivers, incremental spend includes commissions, additional bonus adjustments and bad debt expense associated with our over delivery on top line expectations. Finally, we continue to run stock comp expense at a rate higher than planned or external guidance, given stock price appreciation.

Net loss for the third quarter 2018 was $10.2 million or a loss of $0.43 per share compared with a net loss of $6.5 million or a loss of $0.29 per share for the same period of the prior year.

Turning to our guidance for the remainder of 2018. Based on the aforementioned positive trends in our business, and as Kevin noted earlier, we are again raising our 2018 revenue guidance range to $142 million to $144 million from $138 million to $141 million, representing annual growth of 49% to 52%.

Gross margin exiting 2018 is expected to range from 73.5% to 74.5%, up 0.5 percentage point from the prior quarter guidance. We are also raising operating expense projection slightly to a range of $147 million to $149 million, including $18 million and $19 million for research and development and $129 million to $130 million for SG&A.

Finally, I'm pleased to announce the refinancing of our debt facility with Silicon Valley Bank with an attractive interest rate, adding more confidence to our balance sheet.

Thank you all for listening, and we'd now like to take this opportunity to answer questions. Joining me for Q&A today is: Kevin King, President and CEO; and Derrick Sung, our Executive Vice President of Strategy and Corporate Development. Operator, I will turn it back over to you.

(Operator Instructions) And your first question comes from the line of David Lewis from Morgan Stanley.

Kevin, I want to start with you. I had maybe a few quick questions here. But first of all, obviously you're maintaining 55% growth in the quarter. It's actually a better quarter-on-quarter growth number than you put up in the year-ago period.

So help us understand the single largest driver of the business growth today between new accounts, same-store sales, the rep adds. What is the bigger driver? And to what extent is the KP study or other dataset starting to drive the market? And I had a couple of follow-ups.

David, Kevin. Biggest driver between rep adds, accounts and what was that third one? I'm sorry, could you repeat that?

Just same-store. New accounts, existing accounts or the rep adds. I'm just trying to get a sense of what is the definitive driver of the business right now?

David, I don't know if I have that clearly in my head, but I would say most likely equal contributions, maybe 1/3, 1/3 and 1/3. We've got sequential productivity in the quarter and equal to the growth rates, the sequential growth rate. Because the rep adds were essentially flat quarter-over-quarter. The same-store, new store growths are roughly 50-50. So I think it's across-the-board in its entirety.

KP-RHYTHM, is it contributing? It's contributing in awareness of the brand. Whether or not we're actually seeing prescribing patterns for patients that are previously diagnosed with AFib, now being monitored for burden, I don't know if we can collect that data yet. It's probably a little bit early.

But certainly the physician population, the folks that I speak to when we hear from our commercial teams are well aware and the benefits of true AF burden by Zio are understood -- increasingly understood by the medical community. It's still got a long ways to go, but very important.

Alright, Kevin. Maybe sticking with this financial trend, Matt, and then I have a quick follow-up strategically for Kevin. But your guidance for the year basically implies revenue per rep based on your rep guidance, or my implied rep guidance. Revenue rep will grow for the first time here in the first quarter. Is that how you see the fourth quarter from a rev rep perspective?

And then for next year, should we be thinking about the type of rep additions in '19 that are similar to '18 or a bigger or smaller number? Then one more quick one for Kevin.

Let me start with the second question first. I'm not quite sure I understand the first. We haven't obviously provided guidance yet as it relates to rep additions in 2019. We have in the past stated at scale that we would be adding, at scale, somewhere between 130 and 150. But I think at this point, we see no reason why we would not want to add incremental reps much like we have this year.

So again, speculative at this point, but in that 25 to 30 range is probably what we are contemplating, but we will be able to provide better guidance obviously with Q4 earnings. What was the first question, David? I'm not quite sure I understood.

Sorry, Matt. I'm inferring from your commentary that you're going to be adding very few reps in the third and the fourth quarter. So you've actually had revenue per rep growth that's been negative throughout the year because you've added so many reps.

So the guidance sort of implies to me that for first time all year revenue per rep growth will be in the positive territory in the fourth quarter. And I just want to get your sense if that's how you see the fourth quarter playing out.

Yes, that's exactly how we see it playing out, David. Sorry, I didn't understand the question at first. I think that when you look at the new reps and their ability to gain traction much earlier in the sales cycle than, again, when we gave guidance 2.5 years ago, as well as this -- we talk about this pull through within existing high potential targets, it allows us to get more confidence around this -- these productivity levels that we're putting out. So there is no question that without a significant increase in reps in Q4, we'll see some significant uptick in that productivity level for Q4.

The headcount from Q2 to Q3 for sales was essentially the same. So we did see 7% sequential revenue growth and therefore, roughly 7% productivity growth per rep. And we're not expecting adding material numbers here in the fourth quarter, so whatever is built into the fourth quarter number here, I don't have that number off the top of my head, but that too was sequential growth.

I would say we've gotten good at doing waves of hiring. And as Matt said, too early to say what we will do in '19, but it could be a big number. I think we're increasingly confident about our ability to recruit, onboard and bring people up to speed quickly, now that we've had done this 2 or 3 times. It's becoming more mechanical for us. It could very well be that we'll bring a lot of people on board in the beginning of the year.

Okay. That's very helpful for next year, and just sorry, real quick here, if you'll indulge me. I'm getting a lot of questions obviously from clients on AT. And I wonder, Kevin, are investors thinking about the right way?

There is a lot of focus on AT in terms of penetrating the MCOT market, but I wonder if the opportunity frankly for XT or more specifically extended Holter, providing dramatically more value than primary Holter, begins to sort of cannibalize or eat into the MCOT market.

So are investors thinking about this the right way? Should they be more enthusiastic about AT going after the MCOT market or frankly XT's expanded capabilities being an attractive alternative to the MCOT market? Thanks so much.

The Holter market, David, in volume is several fold larger in size than is MCT. But MCT volume, I think, we estimate to be about 400,000 procedures a year. And on the Holter side -- and Holter and event combined is about $3.6 million to $3.7 million. So the whole displacement opportunity with Zio XT is to displace both Holter and event. That's the bigger play for the company.

What we're finding is that being a full-line service provider offering a wider range of capabilities, even though it's a small market share -- a small market, it's relatively important to customers to deal with one vendor. And that's the attractiveness, I think, of AT, in that allows us to be the full-line provider on a common platform of a wearable sensor, common analytical platform, common reporting platform and it really improves the clinician and their staffs workflow and time and obviously produces great results from a patient decision-making standpoint.

So I'd probably answer it with -- that way, that XT displacing Holter and event is a larger opportunity than is MCT. But AT rounds out the product offering in a very important way in that it allows us to be a single supplier. And we're increasingly seeing ourselves in many accounts as that single supplier.

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

Kevin, I want to start with a more 20,000-foot question and specifically the concept of AF burden. In your mind, how important is that clinical end point to your business, is the first part of that question.

Secondly, how universally recognized do you think the clinical community who treat these patients -- or not treat these patients, but see these patients that potentially are Zio customers, how universally recognized is AF burden?

And if not so much, what can iRhythm do besides, obviously, marketing the KP-RHYTHM study and others, to raise the awareness of and stress the importance of AF burden across the country? Just generally speaking AF burden is the question.

Jason, it's Kevin. 20,000-foot level, look, the prevalence of atrial fibrillation is high and the importance of diagnosing it or the importance of it being diagnosed relative to being left untreated is incredibly important as well.

So what's been happening over time is the clinical communities' understanding of the significance of atrial fibrillation. There wasn't so long ago that just a few minutes of atrial fibrillation was considered to be important, clinically significant, in a way that people needed to be managed.

But the reality is that anticoagulation therapy is not without risk; anticoagulation therapy is not without cost, and atrial fibrillation burden now gives the clinical community a more definitive measure, inclusive of all of the risk factors associated with age and diabetes and other types of comorbidities, whether or not the significance of your atrial fibrillation is important.

And that study showed and demonstrated that a combined atrial fibrillation burden of greater than 11% confers a threefold increase in stroke risk in patients that are not taking anti-coagulation therapy. It's a very, very important marker for physicians who are trying to decide do they give anticoagulation therapy to their patients of all ages.

That said, I don't think that paper that was published in June of this year is broadly known and disseminated to the medical community. It's just -- information doesn't flow that quickly. It's incumbent upon us, the medical societies and other organizations to continue to promote and make aware the importance here.

I think it's an important differentiator in that only iRhythm has been proven to be able to measure true atrial fibrillation burden in a large population of patients, in a major medical journal, if you will. So I think it's a differentiating factor for us. It's addressing an important and prevalent condition. It's changing how physicians treat their patients in a meaningful and proven way. That said, it's still early days for us.

That's helpful. And Kevin, I guess, bringing it down a few thousand feet, maybe a 5,000-foot question. Specific to integrated networks, you mentioned and talked a little bit about what's going on there and how important that part of the hospital network market is to iRhythm. Can you talk about now that AT is out there and launched to some degree, what is going on with integrated networks? And what sort of growth potential still lies within that realm of the end market?

The importance of integrated networks is the result of market consolidation trends, Jason. So right now we estimate 80% to 85% of physician practices have been acquired or now lease to a large delivery system.

We also know that the shift in delivery systems has gone from volume to value. No longer are people allowed to or incented to drive increased volume as a way of remuneration. They're measured more on the quality of the output.

So all of these physician practices that are now part of large networks and their value -- their volume to value propositions have changed, creates an opportunity for us in these large organizations, these large delivery systems in the U.S., of which there are thousands of them. I would say we're under-penetrated in these accounts. We're talking about having double-digit market share. My guess is these large integrated delivery systems probably comprise 60% to 75% of the total market.

We're here in Northern California, and there are 4 or 5 delivery systems in Northern California. There are probably 45 to 75 hospitals, but they're basically all part of 1 network: Kaiser, Dignity Health, Stanford Medical System, the UC System, et cetera. These are organizations that we're selling to in our sales channel and trying to bring our value to help them, both technically and from an operational standpoint. Net, net I think we're under-represented in that population.

Under-represented -- under-penetrated overall and even more under-represented in that population. Okay. And then lastly for me, perhaps one for Derrick. Could you make sure that we have the dates in mind, or timeline in mind as it relates to both mSToPS and further readout from that dataset, as well as any others you'd like to put on our radar screens?

And also, Matt, one for you. Would you -- you raised your guidance for gross margins. I'm sorry if I missed it, but did you say anything about the long-term targets that you've talked about in the past and whether those have changed at all? Or if you would you like to reiterate those? Thanks, guys, and great quarter.

This is Matt. I'll answer your second question and then Derrick can answer your first. The answer at this point, we are holding to our long-term guidance. Again, for those who are not aware, the question is about what do we guide long-term around gross margin? And that at IPO and continued since then was 75% to 80%.

Obviously, we are approaching the low end of that range in 2 short years, which we're very, very excited about, and we can continue to see deep learn algorithms and machine learn algorithms as well as price mix to really help drive additional gross margin improvement in the foreseeable future. So obviously we're very excited there, but at the present time, we're still holding to that 75% to 80% gross margin range. And Derrick, you want to take the other question?

Sure. I think your other question was around mSToPS, and I will tell you that since we published mSToPS, we've really had the opportunity to spend some significant time with key stakeholders around the silent AF market, whether it be key opinion leaders, big pharma, payers. And I think our conversations there have gotten us even more excited about the opportunity.

You heard Kevin mention on his prepared remarks that we now think that market is easily 10 million or more patients. What we've also learned about that market through our discussions is that we do feel that, in order to fully open up that market to us, we will need to demonstrate clinical outcomes. And the good news, as you know, is that we will be showing that from our mSToPS data.

That data is a 3-year end point. So it should be coming out sometime in the 2020, maybe 2021 time frame. So that's the next endpoint of mSToPS that will be coming out. There are other studies that are also underway that should be coming out with additional clinical outcome data that we are encouraged around and think will also help to develop that market. So that's the kind of time frame we're looking at for the full development of the silent AF market.

Your next question comes from the line of Robbie Marcus from JPMorgan.

Matt, maybe I'll start, I know you're not giving formal 2019 guidance today. But as I look at Street numbers, Street is modeling around 35% growth for next year, down from the current 50%-plus you're doing this year.

You have on one hand some strong sales rep productivity, some improvements in the payer mix, but at the other hand there is just a wall of large numbers. So maybe as we sit here, are there any comments you could give on how you view current Street growth forecast for next year? And any pluses or minuses you think we should be thinking about?

Yes, Robbie, again that's really hard to answer without going into specifics around our expectations for growth next year.

I guess, if I could provide some optimism to the growth numbers, it would simply be around what we tried to accomplish on this call, which was the discussion around significant improvement of sales rep productivity even out in front of additional same rep hires, as well as deeper penetration within these very large integrated systems that offer thousands of units versus the smaller mom and pops that may have been in our lifecycle 2 to 3 years and a vital part of our growth at that point.

So again, I think that we are cautiously optimistic but we're going to withhold from any sort of specific commentary on revenue guidance until the Q4 call in some point in late January or early February. Kevin, I don't know if you have any...

Maybe to add to Matt's comment here, sales force productivity and contracting and things of that nature are sort of the end. The means here is that the demand for Zio that's proven, that is reimbursable, that meets the needs of clinicians and administrative staff and so forth is growing.

And our share is small. I don't want to say that the demand is insatiable, but the demand is overwhelming from a standpoint of how much value Zio has created for customers and their continued adoption. If you think about the metrics we've been describing here quarter after quarter, we're talking about 50% of our growth coming from same-store sales. This is quarter after quarter after quarter. This is the demand of Zio penetrating inside of large organizations.

And granted these large organizations are getting larger through acquisitions themselves, but nonetheless the demand for the product is not diminishing in any way, and our share is still relatively small, right. It's low double digits.

So I'm even more optimistic -- and this is why I made the comment on the prepared remarks. I'm even more optimistic and more bullish about our future than I ever have. This is the eighth quarter of being a public company, and we're feeling really strong and really confident about where we are. That I think is -- that's all due to the hundreds and hundreds of employees here at iRhythm, but nonetheless there is a lot of value to be created here, Robbie, for us, and we're very confident about it.

Very clear. Maybe just a quick follow-up. One of the things I hear from a lot of investors is fears around competition. So maybe you could give us maybe your thoughts on when you go into accounts, are you seeing any competitive devices there? Are you ever losing competitive accounts when you go in?

And if you help us understand what's the biggest roadblock that you see right now? Is it just feet on the street? Is it reluctance from hospitals to switch over from Holter still? Reimbursement? Maybe give us just the latest thoughts on that. I appreciate the questions.

Sure. Robbie, we've talked about this in the past and I don't think my view has changed much on this, and that is we're competing with what we call status quo. So the market for ambulatory cardiac monitoring service is essentially fully penetrated.

Every hospital, every provider has some ambulatory monitoring solution in play. And every hospital and every provider faces the same issues day in and day out. They have too much to do. They have too little time to do it and they know that tools are inefficient that they're working with, but yet they don't have a way to pivot from the old to the new.

And that's what takes us the time is to go through a, I don't know, call it a discovery process with our customers, to help them to understand how much better their operation could be, how much better their patient care could be if they were using Zio. And once we do that, I think they flip quite quickly.

From a competitive standpoint, the competition is legacy technology. As I said earlier, about 2.8 million Holter monitors, 1.3, 1.4 million event monitors and less than 0.5 million MCT products. That's how we think of the competition, as legacy. I don't really think of it as a sales process with 2 companies standing toe-to-toe as much as I see it as the status quo of what's already penetrated.

I'm sure companies in maybe the robotic surgical space might think of it that way as well, that, hey, how do I convince surgeons to not to use their hands, but to use a machine. That's their competition. For us it's how do we get people to migrate from old to new.

And your next question comes from the line of Glenn Novarro from RBC Capital Markets.

Two questions. First, I just want to address 2018 revenue guidance. You had another really strong quarter, put up $38 million for 3Q, and the implied guidance for 4Q is $38 million to $40 million. So that's really not a big sequential step up after having a nice step up from 2Q to 3Q and then last year from 3Q to 4Q, you also had a nice step up. Is this just conservatism? I just want to make sure I'm not missing anything. So that's my first question.

I don't think you're missing anything. Hi Glenn, this is Kevin. I don't think you're missing anything there. We give guidance, everybody goes to the upper range automatically. So I think you have to think about the $40 billion (sic) [$40 million] number. And I think you have to look in the total year, right.

We're looking at 52% growth year-over-year, and we've increased our guidance sequentially here by 15 points throughout the year. So you can call it conservatism, if you want. I think we're very confident in our numbers and we're very confident in our ability to meet or exceed them. And I think most people tend to look at the high range, not the low to high or the mid. They immediately go to the high number.

Okay. Good. My follow-up is on the asymatic -- asymptomatic AF number you gave us of 10 million patients. Previously, you talked about that market being 3 million patients. So you've expanded the opportunity here on this call. Help us understand how you've gone from 3 million potential patients to 10 million?

Yes. That's a very good question, Glenn, and this is Derrick. As I mentioned to Jason, following our publication of mSToPS, that's really put us in the limelight, and we have kind of been in the center of discussions around the asymptomatic AF market with a variety of stakeholders, including some of the professional societies, and KOLs, as well as payers. And I think a couple things that we've learned from that.

One, there is a huge set of groundswell of excitement and interest and expectation around this market that's developing around kind of all the stakeholders. And secondly, as we've really kind of dived into this market, we've had a chance to revisit our view of the size of the market.

And to get to that 10 million number, very simply, if you simply look at the inclusion criteria of our mSToPS study that we published, and that inclusion criteria was any patient over the age of 75 or any patient younger than 75, age over 60 or 55 with 1 or more risk factors, including hypertension and diabetes. That in itself is a huge population. Age over 75 in the U.S. alone is 20 million people.

So we can argue is it 10 million, is it 20 million, is it bigger than 20 million, but I think given kind of where our discussions have been in looking at the inclusion criteria of ours and others' studies, we feel pretty confident that it's at least 10 million, if not more.

Okay. And then just, Derrick, as a follow up, because I know mSToPS is going to get at that 10 million with the longer-term data. Are there any other studies planned that will get done over the next couple years or longer that gets to this study in a bigger way?

Yes. There are. Certainly, studies that we're participating in include SCREEN-AF, which is another study that is an international study that's currently enrolling. It's being conducted by PHRI up in Canada, as well as there is a German site. And that study, we expect to see kind of top line readout probably in the next year or so.

And then there are some other studies that are being run by pharma companies and other companies that are looking at this sort of silent or asymptomatic AF population through other modalities, including implanted pacemakers or ICDs that I think will also provide additional data points to help grow and develop this market.

So all of those studies kind of tend to read out over the next couple of years, next 2 or 3 years. So I think over the next 2 to 3 years, we really expect potentially the momentum to increase and this to develop into a real market.

And, I guess, just for you Kevin, this is what's getting you so excited about the outlook, just the size of the TAM continuing to grow?

Yes. Exactly, Glenn. Nothing like a big denominator when you're thinking about needing to grow a business at high rates for a long period of time. Yes, it's a large market with big demand and a great service. We feel pretty good about it.

Your next question comes from the line of Joanne Wuensch from BMO Capital Markets.

May I add my congratulations on a great quarter to everybody else's. A couple of thoughts on this one. How do we think about AT becoming a material part of the business? Or do we just think of AT as being part of the package with XT?

Joanne, are you asking whether or not we'll break it out or are you thinking about...

Yes, that's where I'm going with that one.

What's that?

That is where I'm going with that one.

It's early days for us, so small numbers tend not to be very helpful in directional -- in giving direction to people. If we went from 1 to 2 and I said we grew 100%, what would that mean? So I think for us material is when this thing gets to be on the order of maybe 10% or 15% of our total business and we're not there yet.

I think your earlier comment is an important one, which is the pull through factor. And we've mentioned this a few times that when we become the sort of full-line supplier in account, we see not only XT growth -- AT growth, but we also see increased XT growth. And that's helpful. So the complete package is as important as the individual increment.

Is there a way to quantify what percentage of the hospitals are buying complete package at this stage?

Well, I would say, back to my earlier comment that Robbie was asking about, the market is fully penetrated. So most accounts have Holter monitors, event monitors, and to some degree, some usage of MCT. They may have it in different mix configurations, 90% Holter and 10% MCT. It could be 40%, 40%, 10%. It could be 90%, 10%, 0%. It really depends upon the physician preference.

The important thing here is that Zio now has the ability to replace everything that's there, and that's what we're increasingly doing. Prior to AT, we were taking share, if you will, from the legacy markets of Holter and event and to some extent MCT where the patients were getting prescribed MCT for the purposes of longer duration, but not necessarily the life critical nature of the arrhythmias that they may have underlying.

And then my last question, all of this great growth is coming from the United States. I would assume at some stage, you would enter the international market. What are your thoughts on that?

Yes. Joanne, we had an initiative in the U.K. going on for a couple years now. I think this might be the third year, second or third year. The issue in international markets is that they are public health systems with single payers. So the work that gets done on market access is very different from what we do in the U.S., where we have 15,000 to 2,000 different health plans that we can negotiate with. You can have contracts with 20% of them and get a business started.

In the United Kingdom or in Germany or France or these other places, you essentially have no business until you market access complete. And we have investments ongoing to help understand how to navigate through those systems and secure payments. We are making very good progress in the U.K. We don't break out those dollars, but I think we've got a good read on how to do that.

Our remuneration rates are strong and our growth rates are strong, but we're -- still have a long way to go there. And there's a sequence of countries that we're going after. We've not gotten into a whole lot of details with people, but the applicability of Zio is global. There is nothing specific about the U.S. about the Zio service here.

Your next question comes from the line of Suraj Kalia from Northland Securities.

Kevin, 2 questions. First, did you all give the contribution from IDNs in the quarter? I'd love to get that reconciled with the SG&A expense.

And the second thing, the KP-RHYTHM study, Kevin, forgive me if my memory fails me here, I thought this was a retrospective study and this was primarily for patients who are not taking coumadin or warfarin. I'm curious if there was any inclusion for any of the new novel oral anticoagulants.

And part of the reason is we all know in AFib the biggest thing is a lack of compliance from coumadin, and coumadin usage in AFib has gone down. So I was hoping if you could thread the needle for me and help me understand how the KP-RHYTHM study fits into your marketing message, given all these factors? Any color would be great.

Sure. I'll have you repeat the first question in a minute, but while the second one is top of mind, so the KP-RHYTHM study was a retrospective study of about 3,000 patients, I think, that had Zio, were diagnosed with atrial fibrillation, who were not on anticoagulation therapy. So they were at risk. So the question of warfarin or novel anticoagulation therapy really was not the primary question here.

That said, my understanding is Kaiser has a very strong warfarin clinic with high compliance and so on so forth. But that's a separate issue from here. These were patients who were at risk of having AFib and not on anticoagulation therapy. And therefore, the detection of atrial fibrillation was present and the burden is what we measured.

So we wanted to figure out what percent of patients had strokes that were off anticoagulation therapy, that had AF and what was the burden. And it turned out if you had a burden measurement of greater than 11%, which I think was about 22,000 minutes or something of AF burden over 14 days, you're at an increased risk of stroke by factor of 3.

So hopefully that -- hopefully I said that right. I think I did and hopefully that helps. What was your questions, Suraj, on the IDN? I'm sorry, I didn't grab that.

I was just curious and maybe I missed it, if what -- you mentioned larger IDNs are becoming a target for you guys. And I wasn't sure of y'all had mentioned any contribution from the large IDNs specifically in the quarter.

From a revenue perspective, no. We don't split out revenue by customer segment, location, geography or anything like that, no. And it's not just this year. The IDNs have been or large networks have been focus of ours for the last 2.5 years or so.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Kevin King.

Great. Thank you, operator. Thanks everyone for joining our Third Quarter 2018 Conference Call. We look forward to updating you at the end of the year, both on the fourth quarter and our outlook for 2013 (sic) [2019]. Wish you all great holiday season coming forward here. Take care.

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