Lynn Lewis – Investor Relations Kevin King – President and Chief Executive Officer Matt Garrett – Chief Financial Officer Derrick Sung – Executive Vice President-Strategy and Corporate Development.

Mike Weinstein – JPMorgan David Lewis – Morgan Stanley Jason Mills – Canaccord.

Good day ladies and gentlemen and welcome to the iRhythm Technologies Q4 2016 Earnings Conference Call. At this time, all participants are in 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 call will be recorded.

I would now like to introduce your host for today’s conference, Ms. Lynn Lewis, Investor Relations. You may begin..

Thank you, Catharine. Thank you all for participating in today’s call. Joining me are Kevin King, President and Chief Executive Officer; and Matt Garrett, Chief Financial Officer. Earlier today, iRhythm released financial results for the quarter and full year ended December 31, 2016. 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 guidance for revenue, gross margin and operating expenses, in 2017, 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 see our filings with the Securities and Exchange Commission included in our third quarter Form 10-Q filing made with the Securities and Exchange Commission on December 5, 2016.

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, February 15, 2017.

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

patients, providers and payers. For patients, our biosensor delivers high compliance and that it is wire free discrete and non-disruptive to daily activities. Once applied to the chest, it is more continuously for up to 14 days without any need for charging of batteries, data uploads or any type of maintenance.

For providers, our service has been proven to be more accurate in detecting arrhythmias than other methods. It provides physician with highly actionable diagnostic reporting that is curated from over 30,000 pages of continuous heart rate, heart rhythm and patient activity.

Additionally, our system provides needed system level tools that streamline clinical work flow in increase staff productivity.

For payers our low cost high yield service has been demonstrated to change medical decision when compared to traditional monitoring methods and our high yield service enables a faster time diagnose, thereby reducing the need for follow-on test and potentially awarding costly medical complications down the line.

We have invested heavily in our patented biosensor, powerful algorithms and analytics extension, coverage policies and in-network contracts.

Importantly, we have also made significant investments in a fourth component of our system or service, which is our information systems infrastructure that enables expansion of our service within large integrated delivery systems.

In our experience, the large integrated delivery systems that routinely deploy our Zio Service are complex with upwards of a few hundred prescribing physicians working in as many as seven to nine subspecialties and spread across as many as ten different locations.

Patients prescribe Zio within these systems can be associated with upwards of 140 different health plans.

To meet the needs of these large systems, we are required to provide secure enterprise wide physician accessibility to our service and seamlessly manage the bidirectional flow of patient health and financial information including electronic prescribing, patient education, eligibility verification, clinical event notification, results reporting, claims processing and inventory management.

To illustrate the complexity, patients entering an emergency department with dizziness and palpitations may be prescribed a Zio at discharge by an emergency department physician. It’s unlikely that that emergency department physician will be the person to interpret the patient’s report.

More likely that physician will be a cardiologist or electrophysiologist and the patient’s physician is unlikely to be either one of those but rather a primary care physician.

It is critical that all these stakeholders are kept informed in a timely manner and accurately and that patient information and results flow between the physicians as well as to the patients’ health plan. This information systems infrastructure is an additional core competency that we’ve invested significant time and effort to develop.

Combined we expect to continue refining and improving our service, so that it remains well aligned with the long term goals of the U.S. healthcare system, improving population health, enhancing the patient experience, and reducing per capita cost.

With that, I’d like to turn it over to Matt Garrett, our CFO, for a more detailed review of our financial results and guidance.

Matt?.

reduction in device related manufacturing costs and continued productivity gains through our machine-learned algorithms associated with report generation. In addition, we also experienced some mix shift in contracted claims driven by the success of our contracting efforts and account education of those arrangements leading to some price expansion.

Operating expenses for the fourth quarter 2016 were $17.3 million, an increase of 27% compared to $13.6 million for the same period the prior year.

The increase in operating expenses was primarily due to sales, general and administrative expenses related to our expansion of our sales force and to support the costs associated with becoming and being a public company.

The net loss for the fourth quarter 2016 was $6.3 million, or a loss of $0.37 per share, compared with net loss of $7.7 million or a loss of $5.46 per share for the same period the prior year. I now like to offer our initial financial guidance for 2017.

We expect 2017 revenue to be in the range of $85 million to $90 million, which represents annual growth of 33% to 40%.

Gross margin for 2017 is expected to range from 69% to 71% and operating expenses are projected to range from $82 million to $86 million including $11.5 million to $13.5 million for research and development and $70.5 million to $72.5 million for SG&A.

Our success in obtaining coverage and contracting policies has driven large scale investments in our sales force. We plan to continue selectively expanding our sales force and sales operations teams as we grow and as we move closer to reaching the maximum number of contracts that we can obtain in United States.

As Kevin noted, we ended 2016 with 66 quota carrying reps and plan to hire an additional 15 to 20 during 2017 predominantly in the second half of the year.

To add some color around our sales expansion model and expectations, we have seen historically that it takes approximately 3 to 6 months for new sales hires to begin contributing and on average three to four years to reach peak productivity, which we currently estimate to be approximately $2 million per year.

Even with broad contracting and accelerating awareness, there can still be considerable lag in reaching meaningful volume growth as we work towards converting physicians to our Zio Service from our largest competitor that being the status quo.

As Kevin said earlier, we are very pleased with the progress we made in 2016 and look forward to updating you on our progress on future calls. That concludes our prepared remarks today. And with that we’d like to open the call up for questions, turning it back over to the operator..

Thank you, ladies and gentlemen. [Operator Instructions] And our first question comes from Mike Weinstein with JPMorgan. Your line is open..

Thank you and congratulations on another very strong quarter guys and for the guidance. Let me spend a minute just if I can on the 2017 guide and the plan. Can you just talk a little about your thought process as you kind of went through the budgeting for 2017? You talk to us about the repetitions that you’re expecting when you set your guidance.

Can you talk about your thoughts on rep productivity? And how you thought about the right number of reps to add over the course of the year?.

Sure. Hi, Mike. This is Kevin. I’ll take a stab at that and Matt and Derrick can chime in too as well here. So maybe it’s a two part question. The number of reps that we have and when they are occur I think is the second part of it as it relates to our guidance if I understood your question. So we ended the year with 66 people.

And the view that we have in the business now is we have to build our sales channel for the long-haul. This is a very large market. We’ve stated previously that we think it takes upwards of 125 to 150 people to really cover the U.S.

And when we ended the year, we looked at the number of sales reps per sales manager and found it to be at the upper limit. So this was a reason why we gave you both numbers the 66 and I forget what the other number was 73 or something like that.

If you do the math on that we find out that our sales reps are managed by – manager has about a span of control about eight or nine per person. And that’s really, really at the upper limits of being able to be successful.

So the plan that we have here is really focused in the beginning of the year and we started this a little bit at the end of last year to really bring on more managers such that we are in position for not only the rest of this year, but well positioned for 2018 from a structural standpoint.

And therefore as we add reps, they’re not being added to a manager that’s already overloaded. And so that’s the primary reason. And then also just our ability to onboard people quickly, you know, adding 20 people to an organization that is – well actually in this case, it’s more than that, it’s 20 sales reps plus the sales manager.

As you know, it’s going to end up being about 30 people in total. That’s a lot for a company our size. We’re growing as fast as we can. If there is opportunity for us to do more, we certainly will or as aggressive as possible.

But at the same time, we do have a rather disciplined approach to how we do things and think that that’s been a good guidepost for us up until now..

Kevin, can you talk about the call strategy and how you weigh the breadth of accounts you are calling on versus going deeper into those accounts and kind of where you feel like you are at this point?.

Yes, you know, Matt has talked about this in the past. I think our same-store new store sales ranges from 50:50 to sort of 60:40 overall. So we’re growing our existing accounts just as much as we’re adding new accounts. We do have an emphasis on large integrated delivery systems.

And as referenced in my prepared remarks, we have large accounts that have 100s of prescribers across multiple locations. And there we tend to deploy a sales rep to really go after those centers. And in many cases, those accounts are still not fully penetrated. So there’s a lot of opportunity for us to continue to grow..

And Kevin, the techs that you have and for those that are not familiar with this, iRhythm has technicians in Chicago and Houston at two different centers that are evaluating each of the datasets from each patient as they come in.

Are your hiring techs at the same rate? Is there any bottleneck risk there?.

No, there isn’t. The process for us works that the algorithms and machine-learned tools carried all of the data simultaneously from a record, so all 30,000 pages are analyzed by a machine. And they essentially present to a technician a preliminary report that is then edited.

And we have had to add people, but nothing to the extent of the growth rate that we have. And some of those – some parts of that organization have higher turnover than others, some of them are physicians that work for us during say medical school or residency. And then they go on to be successful as a doctor and so forth.

But by and large the scaling of that is not a limitation for us. We’re relying very, very heavily on the machine-learned algorithms and tools. It’s a big part of our R&D investment to continue to drive that both to manage the volume as well as even some new indications and applications that we have under development are machine-learned as well..

Okay. And last question, I’ll let some others to jump in.

Matt, do have any thoughts or any comments you want to make on just the cadence of the quarters in 2017, any thoughts relative to seasonality you think you see in your business?.

Yeah, Mike, I think what we have discussed in the past is that there is a cadence to the business and we do have a nice historical stream of understanding how the growth rates happen year-over-year and sequentially.

And our initial thought on 2017 is that there’s no material change from the prior year in terms of that year-over-year growth and more importantly the sequential growth. We do again have some seasonality in that Q3 timeframe. Physicians and patients take vacations. So there is some kind of slowdown if you will sequentially.

But again should be in tandem or in line with what we’ve seen in prior years..

Understood. Okay, I’ll let some others to jump in. Thank you, guys..

Okay, thank you, Mike..

Thank you. Our next question comes from David Lewis with Morgan Stanley. Your line is open..

Good afternoon and congrats on the quarter. Kevin I do want to start off on account penetration here for a second. So maybe you can answer kind of a two-part question.

How is penetration varying between Holters and event recorders at these accounts? Are you as successful on Holter versus event or are more successful one of the other? And also kind of related, what’s different about the practice that moves 10% of their business to Zio versus the one that we’re getting on diligence that’s moving 40% to 50% of their business on Zio? And I’ve had a couple of follow-ups..

Yes, I think, the difference between Holter and event monitoring is probably skewed towards slightly more Holter than events overall.

The reason for an event monitor would be longer – less frequent arrhythmias and that’s a perfect surrogate for substitute for zero as well in the Holter mode when this kind of it has been the traditional first line test. I don’t exact numbers, but my thinking and sort of the headset we have is it’s probably 65/35.

Something like that halter replacement to event replacement..

Event tends to be less used as well, I think, there are about 2.9 halters and about 1.6 million events. So that’s about a 2:1 ratio to begin with. And the second question about account penetration. That’s a complex one, the tenure of the account, how long they have been using ZIO tends to be a driver.

Whether or not the prescribers are all electrophysiologists, cardiologists, whether cardiologists allow the service to be prescribed and led by primary care. And then of course the big item here has to do with payor contracting.

So we do see that there is a need for selective prescribing relative to those areas where we have relatively low payor contracting versus high.

And that goes hand in hand with the fact that physicians are often measured on the patient experience and patients that may complain if you will if they get an out-of-network bill is a real issue in the industry and is an issue at iRhythm as well, one of the reasons why we're driving so hard for these contracts..

Okay and then Kevin in your recent work, it's pretty clear that the reason that people are not using the product is they’re not aware of it or they frankly they are having that salesforce interaction.

So in that regard 15 to 20 reps has been in line with our model, but still seems to be frankly a smaller number that I think you could do what sort of the market could service. So it sounds like for me your comments are you want to grow this business the right way to be in a position to add more reps, maybe in a team which I understand.

But I guess if I think about your guidance the guidance seems to apply in that rep count kind of flattish revenue per rep trends in 2017.

Just given that 40% growth you had in revenue per rep in 2016, flattish trends at the fourth quarter seems a little conservative given it seems to be a year where adjusting reps could really drive some significant utilization.

Can you talk us through what would provide a year where revenue per rep was more flattish with the fourth quarter versus expanded at rates we've seen in the prior few quarters?.

Yes, so maybe just I’ll unpack that a little bit. So I’m not sure that you can take fourth quarter revenue and multiply it by four because the tenure of our folks in the fourth quarter of 2016 are at various levels of productivity. Some people are brand new, some people have been with the company for a long period of time.

And so the people that have been here for a long period of time are much more productive on the dollar sense but probably not growing at the rate of the company, right. And the new people are probably growing multiple times of that. So it's a little dangerous I think just to multiply the number by four.

And importantly if the headcount that we’ll add if they are added in the back half of the year they really won't contribute that much to revenue during the year. I would probably look at the 66 and divide that by our guidance and think about it that way, as the first proxy. And I think you'll see that that's a pretty healthy number overall..

Okay. And just maybe just a few quick ones, I’ll jump back in queue. Just Matt for you, gross margins had a very nice progression across the quarters. For next year gross margins very much in line with our model but it seems that that number could be a better number just in light of the growth rate.

Is there any impact from the real time launch in the back half of the year on DMs? And then maybe for Derrick could you just update us on data release updates potentially 4mSToPS and screening as you move into 2018. Thanks so much..

Yes sure David this is Matt. Look I think management is viewing gross margins in 2017 with some cautious optimism. You're right we are in line with what you've stated before. But we continue to make, as Kevin pointed out, some material investments in our infrastructure both in terms of algorithms and in terms of work flows.

And those cost to some extent do offset some of that productivity. So I think that's what you're seeing in our initial guidance here. Overall, I still think the management team feels very confident that we're going to be achieving our goals of reaching that 75% to 80% gross margin range..

[Indiscernible] long-term..

Long-term, all right..

Yes and Dave this is Derrick. In terms of the mSToPS and the SCREEN-AF studies which are silent Afib studies, we’re suspecting mSToPS both are enrolling as we speak. And mSToPS we think would have some sort of readout in 2018. And SCREEN-AF will likely be after that..

Thank you very much..

Thanks David..

Thank you. Our next question comes from Jason Mills with Canaccord. Your line is open..

Thank you very much.

Kevin can you hear me okay?.

Yes we can have..

Yes, hi Jason..

Hi, good afternoon. Congrats on a great quarter. Mike and David asked several good questions. See if we can find some other ones here. Just sticking first Kevin with the sales force or Matt, could you calibrate as appropriately, I want to make sure my model is calibrated separating managers from quota-carrying reps looking at the exiting 2015 timeframe.

It looks like by and large you exited 2016 with maybe a few more to quota-carrying reps that 2015. I'm sorry if I missed it, but if you could calibrate us there.

And the second part of the question Matt you gave us some good color with respect to the general ramp of the new sales rep very little contribution three to six months and it takes three to four years to get to peak contribution.

I'm wondering if you have seen any change to that as your training programs have improved over the years or whether you expect to see any improvements to that as you look to add the folks in the back half of the year looking out the next couple of years began just giving the improvements and training programs and learning some expertise. Thank you..

So in terms of the number of people in 2015, I think we previously reported that 2015 was about 50 to 52 people is where we exited the year and that was average. And….

Okay that's quota-carrying Kevin..

Yes exactly. Yes we've only reported – today is the first time we've mentioned anything beyond quota-carrying just to give the color on that span of control factor that we're trying to improve upon there.

Look when you think about rep productivity, I think David highlighted this a little bit about awareness of iRhythm and Matt commented on this term status quo.

The single largest challenge we have right is getting physicians time in the vast majority of delivery systems today physicians are extremely overloaded, they're overworked, they feel undervalued and despite new technology that can help them they often don't have time to really see you, meet you use it, and so forth.

And that's probably the biggest challenge we face is getting physicians to sort of embrace the need to change the way that they're doing things today. That's the single largest driver. So making people aware, getting time with them, educating them once they start using the service they use it really well.

Not withstanding the payor contracting related issues which line up quickly behind that. As far as training sales reps, and does that help improve productivity? Yes I think nominally it does, sure.

Overall the more they can tell the depth and breadth of our story that includes the benefits to the patient that I was describing, the benefits to them in terms of their ability to make clinical decisions faster and more accurately and then also describe the benefits of that information infrastructure and how it helps them to streamline their productivity and derive high patient satisfaction or patient engagement.

When our sales reps are able to message all four of those elements we're extremely successful. And you know that story has evolved over the last two to three years as we’ve built more and more competency in the business..

Okay that's helpful. Thanks Kevin for the color. I guess another way to look at it and David may have touched on this a little bit. With respect to the types of accounts you've targeted here Q4 and those that you may be targeting over the next say 12 to 24 months.

Is there a demonstrable difference in the complexion of the account that you have sort of under the candid base point in time versus those will be targeting over the next one to two years. And does that at all pose any risk if it relates to sales rep productivity.

I guess what I'm thinking about there is if you're targeting perhaps the counsel have are smaller in some way or lower volumes. Perhaps it's harder to keep the climb the productivity curve or vice versa, I suppose as well. .

I don't think so Jason. I think the primary driver in the marketplace has been physician practice acquisition and consolidation. It's estimated at somewhere between 75% and 85% of cardiology practices are owned or leased by hospital systems. It wasn't that way when we started ZIO® in 2012. It was less than that.

And that's actually made our job maybe a little bit easier in that the drive towards value versus drive towards volume plays well into our strategy overall. So selling to large health systems, selling a value proposition that is quantifiable to patients and providers in patients makes our job a little bit easier.

And I am less worried about being able to penetrate based upon size. It's more of the market dynamics of what's going on with physician practices, challenges with payors, things of that nature that are – that we've talked a lot about in the past..

Thank you. That's very helpful. Just a few a few quick ones and I will let others step in as well. You mentioned O-U.S. investments.

Kevin I'm wondering is we model out over a longer period of time, when should we start to see some contribution from the international markets? And in what form will that be, will it be a similar model to the United States or is it too early to give us anything on that front.

And then Matt for you gave some general color on unit and growth contribution – unit sorry and ASP contribution to growth in the quarter. Is it dissimilar in any way to sort of the trends we’ve seen in recent quarters and recent years? And if so could you give us a little bit more color on that front too? Thanks a lot..

Okay, I'll take the first one on international and I will pass it to Matt and he can talk about your second question. Jason I think it's too early for us to give any color on international market’s timing, costs, volume impact and so forth. I think it's way out in the future for us. And I just caution you to think about a large U.S.

market that’s got 4.5 million tests in it that we’re very, very aggressively going after. As we said in the prepared remarks we’re planning for the longer term in some of these investments, new products, new indications and new geographies. Nothing to be pursued or nothing to be measured in the short term for us here over the next couple of years.

I wouldn't do that..

Okay..

And on volume..

Yes Jason on the other one, yes that’s – I don't think I mentioned that specifically in the call today but I think historically we have indicated that our growth overall is typically, is predominantly volume-driven. And I think we have been specific around 80%, 20%; 80% volume and 20% price.

And our expectation remains that again as we mentioned in the past that in the next year 18 months we expect it to remain in that 80%, 20% sort of round..

Thank you guys, congrats again..

Okay..

Thanks Jason..

Thank you. I'm showing no further questions at this time, I'd like to turn the call back to Mr. Kevin King for any closing remarks..

Well thank you. Thank you all for joining us today on the call. We truly appreciate your interest in iRhythm. We look forward to keeping you informed about our progress on our next update. And operator we can end the call here. Thanks very much everyone..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect. Everyone, have a great day..