INGN - NASDAQ

Welcome to Inogen's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 7, 2024. I would now like to turn the call over to Ryan Peterson, Investor Relations. Please go ahead.

Thank you all for participating in today's call. Joining me are President and CEO, Kevin Smith; and CFO, Mike Bourque. Earlier today, Inogen released financial results for the first quarter of 2024. This earnings release is available in the Investor Relations section of the company's website, along with a supplemental financial package. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects in 2024 and beyond, expectations related to our financial results for Q2 2024, progress of our strategic initiatives, including innovation, our expectations regarding the market for our products, on our business and supply, and demand for our products in both the short term and long term. The forward-looking statements in this call are based on information currently available to us as of today's date, May 7, 2024. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligation to update these forward-looking statements, except as may be required by law. We have posted historical financial statements and our investor presentations in the Investor Relations section of the company's website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures, provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. With that, I will turn the call over to Inogen's President and CEO, Kevin Smith.

Good afternoon, and thank you for joining our first quarter 2024 conference call. I'm excited to be joined for the first time by Inogen's new CFO, Mike Bourque. We are thrilled to have Mike on the team, bringing with him over 2 decades of financial leadership experience. During today's call, I will provide updates on our progress against our 3 strategic priorities: driving top line growth, advancing our path to profitability and expanding on our innovation pipeline. First, we endeavored a position for sustainable top line growth by evaluating and improving our sales and rental strategies while strengthening our relationships with distributors and stakeholders. We had many positive discussions with our business-to-business partners in the first quarter, some of which led to the completion of new sales agreements. We will continue to focus on developing fruitful relationships and building awareness of our market-leading portable oxygen concentrators with partners across the globe. As part of this initiative, we are closely monitoring U.S. market trends and are prepared to fill any gaps that may arise from a recent competitor's temporary exit from the U.S. home respiratory market. At this time, we have seen very modest tailwinds as a result of that exit, and we will remain ready to capitalize the potential outstanding customer demands as the year goes on. We continue our efforts to reduce friction, increase synergies and efficiencies across our sales channels. We have seen encouraging results by promoting communication between our sales personnel and launching specific pilot projects to drive this cross partnership. These initiatives including training our team to execute both direct-to-consumer and rental sales, partnership programs within our B2B customers and new targets within our rental channel. These initiatives, while in early stages, are showing promising results. Secondly, we remain focused on establishing and advancing our path to profitability. As part of our efforts to better manage our cost and margin profile, we recently made the calculated decision to target hospitals in addition to individual practitioners through our rental business. By expanding our scale, efficiency and throughput in the rental channel, we anticipate driving higher profitability over time. In addition, we are in cost benefits in the form of lower sales and marketing expenses due to the recent exit of a third-party relationship in the rental channel, which we spoke to on our last quarterly call. We are also rolling out pilot programs to drive a return to growth in our high-margin direct-to-consumer business. As a reminder, we have materially downsized our DTC team on a year-over-year basis, and we have now achieved a healthy organization size and are beginning to see improving productivity per rep. As always, we are carefully considering the return potential of every dollar we invest into the business and we'll maintain this philosophy going forward. Regarding our efforts to expand our innovation pipeline, we remain diligently focused on bringing new innovative products to market and supplementing our current market-leading POCs with necessary software and accessories to ensure a best-in-class provider and patient experience. I would also like to touch on our plans to expand Physio-Assist availability in the U.S. We remain excited about the addition of Physio-Assist to our portfolio, and we are pleased to show that we have engaged in healthy discussions with the FDA. We look forward to bringing this product to the U.S. market in the future. We have an exciting pipeline in store, and we look forward to updating investors on specific launches later this year. I would like to briefly highlight our first quarter 2024 results before turning the line to Mike for a full review of our financials and outlook. We achieved $78 million in total first quarter revenue, reflecting 8% year-over-year growth and 3% from our fourth quarter 2023. Our results are a reflection of really execution against our strategic goal. Now I'd like to turn the call over to Mike for a more detailed review of the financial results. Mike?

Thank you, Kevin, and good afternoon, everyone. Unless otherwise noted, all financial comparisons are to the prior year comparable period. Total revenue for the first quarter of 2024 was $78 million, an increase of 8.1% versus the prior year period. The increase was primarily driven by higher international and domestic business-to-business sales as a result of increased volumes from existing and new customers during the quarter. For the first quarter, foreign exchange had a positive 50 basis points impact on total revenue and a positive 180 basis points impact on international revenue. Looking at first quarter revenue on a more detailed basis. Direct-to-consumer sales decreased 15.6% to $20.5 million from $24.3 million in the prior period, driven primarily by lower representative head count partially offset by increased average selling prices and increased unit volume per rep. Domestic business-to-business revenue increased 31.3% to $16.5 million compared with $12.6 million in the comparable period, driven by new customer business and increased demand from resellers. International business-to-business revenue increased 37.2% and to $26 million compared to $19 million in the prior period. Our year-over-year growth in this channel was primarily driven by higher sales volumes to existing customers. Rental revenue increased 8.3% to $14.9 million from $16.3 million in the prior period, primarily driven by a higher mix of lower private payer reimbursement rates and higher rental revenue adjustments. Now I want to discuss our gross margins. Total gross margin was 44.1%, increasing 150 basis points from the same period in the prior year, primarily driven by a lower average cost of components in this quarter relative to a year ago. The benefit of lower component costs was partially offset by channel mix shift with a greater proportion of total Q1 2024 sales from our lower margin B2B channel relative to total Q1 2023 sales. Sales revenue gross margin was 44.1%, an increase of 490 basis points, driven primarily by lower component premiums. Rental revenue gross margin was 43.7%, a decline of 1,040 basis points primarily due to lower net revenue per patient as a result of a decrease in the percentage of patients billed versus total patients on service, a mix shift from Medicare versus private payers and higher rental revenue adjustments. Moving on to operating expense. The first quarter total operating expense decreased to $50.6 million compared to $52.6 million in the prior period, representing a decrease of 3.8%. The decrease was primarily due to restructuring costs of $1.8 million incurred in the prior year period as well as lower sales and marketing expenses, primarily resulting from last quarter's exit from a third-party sales partnership. In the first quarter of 2024, we reported a GAAP net loss of $14.6 million and loss per diluted share of $0.62. On an adjusted basis, we reported a net loss of $10.4 million and adjusted loss per diluted share of $0.45. Adjusted EBITDA was a loss of $7.6 million compared to a loss of $11.8 million in the prior year period. We are pleased to be driving improvement in our adjusted EBITDA metrics as we continue to manage the business carefully with profitability as a key objective. Moving on to our balance sheet. As of March 31, 2024, we had cash, cash equivalents and marketable securities of $119.8 million with no debt outstanding. Before I turn the line back to Kevin, I would like to share our revenue expectations for the second quarter. We are continuing to make progress on our strategic priorities through the second quarter, including our ongoing work to evaluate and optimize some dynamics in our sales and rental channels. Based on trends in our business today, we expect total sales to be $81 million to $84 million in the second quarter. We anticipate providing guidance for the back half of 2024 on our second quarter earnings call. And with that, I will pass the call back to Kevin for closing remarks.

I'm pleased that our organization made meaningful steps in the right direction during the first quarter. Our resilience and progress are a testament to the strength of our team at Inogen. We recognize there is much work to be done, but we will continue to execute against our strategic goals and remain excited about the future. With that, I will open it up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Matthew Blackman with Stifel.

This is Colin on for Matt. Congrats on a great quarter. I guess I wanted to start on the U.S. B2B business. A couple of dynamics there. You saw a little bit of a tailwind from a competitor exiting the market, but I'm also curious about any improvement in the capital environment for HMEs. Has anything changed to how we should think about these dynamics going forward? And how do you think about that when laying out the guide for the second quarter?

Thanks, Colin. This is Kevin. I'll go ahead and I can fill that one, Mike. So we don't -- we're not seeing any real headwinds that are sitting in front of us here as far as the capital markets. It hasn't been interfering with our business. The feedback that we have from B2B is strong. We are -- we've been forecasting, building bottoms up within this on a month-to-month and quarter-to-quarter basis. And we feel pretty good about our ability to at least here over the next quarters, we're providing guidance to be able to continue to build and achieve. So in short, we're not seeing any constraints from the capital market.

Okay. Great. And I just had a 2-parter on the rentals business. Was there any impact during the quarter due to the exit of the third-party support contract for the prescribable channel? And how should we think about gross margin in that business going forward given the revised-down profile during the first quarter versus last year?

Do you want me to start...

Yes. So I'll start with the beginning part of that. So from the impact from the third party we saw, yes, we had characterized that before. We exited the third-party relationship. We brought select members of that team who are the highest-performing members of that team in-house, directly part of the Inogen team and integrated that team into the family here. We saw a little bit of, I'll say, a transition period there where as we're integrating the team into Inogen, it caused a little bit of just some [ lost steps ] and so forth, but that is behind us, that is working well now moving forward, and we like what we're seeing under that team and the collaboration that we have more broadly. But Mike, I'll let you chime in on gross margin.

Thanks, Kevin. Colin, this is Mike. Just a little bit on the -- on your question on the gross margin. So we're not providing specific guidance in terms of gross margins going forward. But I can tell you kind of what the impacts were and kind of where they came from in that rental business for Q1. So kind of we'll start with rental revenue. A couple of things impact there unfavorably. We did have lower Medicare rate that kind of went into effect on January of this year. So that's part of the impact. We're also seeing an unfavorable mix with a higher percent of our patients coming from the private payer as opposed to Medicare. So those 2 things are really directly impacting gross margin. In addition to that, rental gross margins were also impacted by some higher service costs in that channel during the quarter. We do have some visibility in the patient pay plans and the patient mix going forward. But we're not able to share concrete rental gross margin outlook at this time, and we'll revisit that at the Q2 call.

Our next question comes from the line of Margaret Kaczor with William Blair.

I'm going to try to dive a little bit into the second quarter guidance, if I may, by business line and apologize in advance for the series of questions but, number one, usually Q2 would see DTC and B2B domestic just seasonally increase in a double-digit pace sequentially. So is that the assumption here and why or why not? Two, are you assuming any benefit from Philips being off of the march in the second quarter benefit or headwind, frankly? And three, relative to our number, we saw a lot of upside coming from B2B International. Was there something specific to that number? And how repeatable is that $26 million as we go along both into Q2 and the rest of the year?

So Margaret, this is Mike. I'll take the first part of that question. So in terms of kind of what we're guiding to, we're not providing guidance at the channel level, but I would just say that our guidance is reflective of the trends that we're seeing in the business today. We're taking into kind of a lot of different things, the evolution of our channel mix, the new leadership team that took place here. And in terms of the question about D2C, I think it's important also that we consider 2024 to be a rebase year of D2C given the new size of our team, but we have seen early signs of higher productivity, which is very encouraging. Just in terms of maybe a little bit more in terms of that guidance, the revenue guidance. Just kind of maybe it will be helpful to say how we approached it. We look at the pipeline and we look at what is most likely to occur, what is unlikely to occur and it's more of a bottoms up forecasting that we're instituting in the business and that gets us to that the low-end range that we provided. To get to that higher end, we really have to see higher percentage of upside and some larger B2B orders coming in.

And I'll just add on to that a little bit, Margaret, there for -- one of the assumptions of the benefit from Philips, we have -- we've seen a very modest tailwind coming from Philips so far. And as we characterized previously, we see that there is opportunity out there. We're going to position ourselves. We have them positioning ourselves to take advantage of it. But it's something that we've not been seeing coming in more than the [indiscernible], let's say, opportunities that have presented themselves that we could particularly contribute back to that. But that may come more down the road, and we're positioning ourselves to be able to take advantage of every opportunity that comes our way. And on the international B2B on being able to see that continue, we're not forecasting anything right now past Q2, and we haven't broken down the channel-by-channel mix. But we've seen good results coming from the B2B. In general, we do anticipate those opportunities continue to be there and us taking advantage wherever we can.

Okay. And then as we think about the hospital channel, which is maybe a newer comment in your intro, my understanding in the past is hospital wasn't really something quite as focused on by the company because the flow rates maybe weren't aligned with what the hospital needs. So walk me through that hospital strategy, how big is that as an end market for you guys? And how aggressively are you going to be pursuing that?

So [indiscernible], there's one at the -- when we look at the hospital opportunity, a large percentage of the patients are diagnosed in the hospital from an event that triggers a visit to the emergency room, leads to inpatient care. And then when the patient goes home, they have to have an oxygen upon discharge from the hospital. So there's an opportunity for us to go even further upstream and be able to gain a few months at the very least but some number of months in billing prior to a patient hitting a capitated period there. So those patients, of course, have a follow-up by prescribers. So that leads to another connected relationship back to the prescriber. We see this as an opportunity for us to continue to explore. We've been engaging in that. We like what we're seeing so far. It's early stages to see how well we roll this out further, but it looks promising at this point for us.

Okay. And just last question for me. As we think about COGS, and I appreciate not wanting to go too far into gross margins, but we can back into the COGS per unit number. And it seems like it actually did quite well. So you've talked historically about getting the high COGS consumables off the books that directionally points to continued gross margin improvement from here, but maybe you can provide some color around that and kind of any long-term profitability comments that may have changed from the last quarter.

Thank you, Margaret. So just in terms of the improvement in COGS. The improvement in COGS and related gross money really was largely driven by continued depletion of those premiums, price components that we have been incurring in the previous year. In terms of kind of where we're looking at going forward with that, we still do have some premium costs on our balance sheet. And we will be seeing some of that. We kind of like make its way through the P&L over the course of the remainder of the year. But certainly, to no degree that we've seen in 2022 and 2023, sort to a much lower level, but we still have a little bit to get through.

Our next question comes from the line of Mike Matson with Needham & Company. Mike, you might still have yourself on mute.

Yes, sorry about that. [Technical Difficulty] the DTC sales team, did the head count change at all there? And what kind of drove the decline in sales in that business?

Sorry, Mike, I think maybe the first part of that might have been cut off, but I think I asked -- I think I heard you asking where we are right now with the head count on the D2C business.

Yes, the sales people, the inside sales people.

Yes. So it's -- right now, we have a sales team that's in the range of 150 to 170 sales reps in the DTC channel. And we're going to probably not provide any additional updates on that going forward unless there's any deviation from it. But that is a -- that's a head count that we feel comfortable with right now. We have initiatives that are running through them. We've talked about with reducing the friction and enabling any patient who reaches into the DTC channel and to Inogen to help them all get an Inogen POC, whether that be for a cash sale or whether that be somebody who's covered by a rental plan being able to leverage that sales organization and the contact point to allow that to happen. We've been seeing positive results coming from that. That still is in pilot phases right now, but what we like has been trending, and we're very comfortable and happy with the size of that organization. We're going to continue to focus on growing across [indiscernible] forward.

Okay. And then just -- I missed some of the prepared remarks, I apologize, you might have touched on this, but just the decline there in that business. I mean, what was the reason for that?

Yes, the DTC channel, one thing to keep in mind there, too, is that organization, the size of that organization year-on-year from the same time prior year has been considerably reduced. And we're focused on growing that piece of the business profitably. So quarter-on-quarter, we've been happy with what we're seeing coming out of that. We're happy with what we see in the -- going forward with that channel, but not just growing it at all costs but growing it profitably.

Yes. Okay. I understand. And then what about just in terms of pricing. So on the B2B side, in particular, I mean, you did see really strong growth there with Respironics -- Philips Respironics having exited the market. Has there been potentially a shortage of POCs? And is that an opportunity to raise -- give you some pricing power there?

So we feel that there was a couple of points in there, I think, to raise or to talk to. One, the characterization of that business potentially being part of an exit from there with a competitor. We're not seeing that, that has been a meaningful contributor to the growth that we're seeing there or the business that we have coming out of this past quarter. We've seen very limited impact from that. We are going to continue to monitor and position ourselves to take advantage, but we are positioning ourselves strongly against low-price competitors in the marketplace. We see price pressure that is coming in, but we have a POC with an 8-year useful life on it, which is 3 years longer than the next closest competitor. And those are meaningful the years that an HME, that B2B partner could continue to deploy a POC and bill for it. We have a very strong brand name recognition. We know from our experiences working with our B2B partners, working with prescriber channels and also having patients reaching to us through our DTC channel that more often than not, patients are asking for an Inogen rather than asking for a POC. So that brand name recognition that link to the quality of Inogen is all gives us a distinct advantage. And right now, we feel like we are sitting alone at the top of the premium player in the marketplace. So we're going to continue to have to fight off price pressure, but we feel we have a good message to sell.