Matt Bacso – Investor Relations Manager Scott Wilkinson – Chief Executive Officer Ali Bauerlein – Co-Founder and Chief Financial Officer.

Margaret Kaczor – William Blair Robbie Marcus – JPMorgan Mike Matson – Needham JP McKim – Piper Jaffray Danielle Antalffy – Leerink Partners Matthew Mishan – KeyBanc.

Good day and welcome to the Inogen 2018 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matt Bacso, Investor Relations Manager. Please go ahead..

Thank you for participating in today's call. Joining me from Inogen is CEO, Scott Wilkinson; and CFO and Co-Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the second quarter of 2018. This earnings release and Inogen's corporate presentation are currently available in the Investor Relations section of the company's website.

As a reminder, the information presented today will include forward-looking statements, including statements about our growth prospects and the strategy for 2018 and beyond, hiring expectations, and related government incentive packages, marketing expectations, international growth and tenders in the second half of 2018, manufacturing developments, the impact of CMS rate adjustments, expectations regarding newly implemented tariffs and financial guidance for 2018.

The forward-looking statements in this call are based on information currently available to us. 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 in our second quarter investor presentation 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 the 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’s use of 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. For future periods, we are unable to provide a reconciliation of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release.

With that, I'll turn the call over to Inogen's President and CEO, Scott Wilkinson.

Scott?.

Thanks, Matt. Good afternoon and thank you for joining our second quarter 2018 conference call. Looking at the second quarter of 2018, I'm proud to say we generated very strong total revenue of $97.2 million, reflecting record results in all three of our sales channels.

Our record direct-to-consumer sales of $38.3 million in the second quarter of 2018 exceeded our expectations, primarily due to increased sales representative headcount and associated consumers' advertising.

Given our recent success, our strategy is to continue to hire additional sales representatives and invest in advertising activities to increase consumer awareness, as we believe this is still our most effective means to drive growth of direct-to-consumer sales.

In fact, we now expect to have 500 Cleveland-based employees by year end 2020, which is up from our original target of 240 employees. We expect at least two thirds of these employees to be sales representatives.

With this additional headcount, we expect to receive a total incentive package of $3.5 million from the State of Ohio, up from an original package of $1.9 million.

The incremental $1.6 million we expect to receive comes in the form of a $250,000 JobsOhio Economic Development Grant and $1.4 million Ohio Jobs Creation Tax Credit extension, which equates to a 1.7% payroll credit for the next 10 years.

With this added headcount, we plan to occupy an additional 12,000 and 18,000 square feet of office space in our existing Cleveland facility in the third quarter of 2018 and first quarter of 2019, respectively. We are very proud of the team that we are building in Cleveland.

In the second quarter of 2018, we completed the direct-to-consumer price elasticity trial. We routinely run pricing trials to develop a representative demand curve for our products and, in turn, an optimal pricing structure to maximize total gross margin dollars.

The data indicated that, by lowering price, we can expand access to our products, while also improving our total gross margin profile. As of June 1, 2018, our starting retail minimum advertised price for an Inogen One G3 or G4 system $2,295 representing a decrease of $200 or 8% compared to our previous price point.

In addition, we're happy to announce that we began direct-to-consumer sales in Hawaii in the third quarter of 2018 based on recent legislative changes.

Second quarter of 2018 domestic business-to-business sales of $32.9 million was a record for us and exceeded our expectations, primarily due to continued success with our private label partner and traditional home medical equipment providers.

While we are very proud of our success in the second quarter and remain optimistic within the domestic business-to-business channel, it is important to remember that this business can be lumpy quarter-to-quarter.

While we believe the conversion to non-delivery technology is underway, we still think this will take seven to 10 years due to the inherent challenges facing providers, both from an infrastructure and financial perspective.

Second quarter of 2018 international business-to-business sales of $20.8 million was also a record for us, with growth primarily due to continued adoption from our European partners and favorable currency exchange rates.

Despite the absence of major tender activity in the first half of 2018, we believe there will be tenders in the second half of 2018. Further, we also received French reimbursement coverage of the Inogen One G4 in the second quarter of 2018.

We believe we remain the preferred provider of portable oxygen concentrators in Europe and expect to see a long-term opportunity for growth ahead as the market transitions from tank and liquid oxygen systems to non-delivery solutions.

We are also proud of our operations team and supply chain for continuing to steadily increase output to meet our customers' demands. As stated on our first quarter earnings call, we signed a new lease in Richardson, Texas to expand our manufacturing and operations footprint by approximately 23,000 square feet.

This additional space was completed in early July and now gives us approximately 60,000 square feet in total manufacturing and inventory space, which should provide for significant capacity expansion.

Transitioning to the subject of the newly implemented tariffs on imported Chinese materials and products, we expect the overall financial impact to our business to be immaterial. Most notably, lithium ion batteries and printed circuit board components have been excluded from the most recent tariff list.

Going forward, we will continue to monitor any new tariff proposals and economic policy changes and take the necessary steps to protect our financial interests and reduce our supply chain risks. On the topic of U.S. reimbursement. In early May, CMS announced it would resume the 50-50 blended rate schedule, effective June 1, 2018.

We note this will extend through December 31, 2018 in rural and noncontiguous areas not subject to the competitive bidding program. Specifically, HCPCS code E1390 will increase to $121.46, up from $77.16, representing an increase of 57%.

As a reminder, this increase is specific to rural and noncontiguous areas which, we estimate, accounts for 10% of the total Medicare market. Unlike the Cures Act, this is a non-retroactive benefit, which we estimate will result in incremental rental revenue of $500,000 in 2018.

Lastly, in mid-July, CMS proposed changes to its competitive bidding program and current fee schedule for oxygen reimbursement. Specifically, the proposal advocates to set reimbursement based on winning bids for lead items, whereas the current system was executed based on a composite bid.

Additionally, the proposal recommends setting reimbursement at the maximum winning bid for lead items instead of the median rate for winning bids.

With the current competitive bidding program contracts set to expire at the end of 2018, if this proposal is passed, beginning January 1, 2019, beneficiaries may receive DME equipment from any Medicare-enrolled supplier until new contracts are awarded under the next round of competitive bidding.

We currently have 103 CBA respiratory contracts of the 130 total Medicare regions, which we estimate account for 85% of the Medicare competitive bid oxygen therapy market. As a reminder, we estimate 41% of the total market is not subject to competitive bidding.

In addition, the rural rate relief, effective June 1, 2018 through December 31, 2018, is proposed to be extended until December 31, 2020. CMS also communicated they do not expect the next round of competitive bidding to take place for 18 to 24 months.

Overall, we are in favor of the restructuring of the competitive bidding program that CMS is undertaking, and we believe it will result in increased access for patients who will now be able to receive portable oxygen concentrators from any supplier, not just bid winners.

Looking ahead, I'm very proud of our Inogen associates and the progress made thus far in 2018. While we've been engaged in multiple initiatives to fuel future growth, we've accelerated our current growth, especially in the domestic direct-to-consumer and business-to-business sales channels.

I'm very pleased with the increased adoption in these markets with our best-in-class and patient preferred products.

Looking at 2018, we are increasing our full year revenue guidance range to $340 million to $350 million, up from $310 million to $320 million, and expect to continue to invest heavily in our sales force, advertising – excuse me efforts and operations in order to drive portable oxygen concentrator adoption worldwide.

With that, I will now turn the call over to our CFO, Ali Bauerlein.

Ali?.

Thanks Scott. And good afternoon everyone. During my prepared remarks, I will review our second quarter of 2018 financial performance, and then provide details on our increased 2018 guidance. As Scott noted, total revenue for the second quarter of 2018 was $97.2 million, representing 51.6% growth over the second quarter of 2017.

Looking at each of our revenue streams and turning first to our sales revenue, total sales revenue of $92 million in the second quarter of 2018 reflected 58.5% growth over the same quarter of the prior year. Total units sold increased to 54,700 in Q2 2018, up 68.8% from 32,400 in Q2 2017.

Direct-to-consumer sales for the second quarter of 2018 were a record $38.3 million, representing 74.3% growth over the second quarter of 2017, primarily due to increased sales representative headcount and increased advertising expenditures. We also benefited from increased direct-to-consumer sales associated with the lower pricing.

Record domestic business-to-business sales of $32.9 million in Q2 2018 reflected 55.7% growth over Q2 2017, with strong demand from our private label partner and traditional HME providers, as more providers are adopting portable oxygen concentrators instead of tanks to service their oxygen patients.

Record international business-to-business sales of $20.8 million in Q2 2018 increased 39.1% from Q2 2017, and was driven mostly by strong European volume and an 11.2% benefit from favorable currency exchange rates. Sales in Europe represented 88.3% of international sales in the second quarter of 2018, up from 87.6% in the second quarter of 2017.

Average selling prices declined over the same period in the prior year, primarily due to the discounts granted for increased business-to-business volumes worldwide and secondarily associated with the direct-to-consumer pricing trial and subsequent lowering of retail pricing effective June 1, 2018.

Rental revenue represented 5.4% of total revenue in the second quarter of 2018 versus 9.5% in the second quarter of 2017.

Rental revenue in the second quarter of 2018 was $5.3 million compared to $6.1 million in the second quarter of 2017, representing a decline of 13.7% from the same period in the prior year, primarily due to a decline in net rental patients on service of 11.8% compared to the second quarter of 2017. Turning to gross margin.

For the second quarter of 2018, total gross margin was 49.8% compared to 49.2% in the second quarter of 2017. The increase in total gross margin was primarily due to a favorable mix shift towards sales revenue versus rental revenue. Our sales gross margin was 51.1% in the second quarter of 2018 versus 51.8% in the second quarter of 2017.

The sales gross margin decline was due to lower average selling prices in both business-to-business channels due to increased volumes and in the direct-to-consumer channel due to the pricing trial and subsequent lowering of direct-to-consumer pricing nationwide.

This decline was partially offset by increased mix towards direct-to-consumer sales and lower average cost of sales revenue per unit. Rental gross margin was 27.6% in the second quarter of 2018 versus 25% in the second quarter of 2017. The increase in rental gross margin was primarily due to lower depreciation expense.

As for operating expense, total operating expense increased to $34.4 million in the second quarter of 2018 or 35.4% of revenue versus $23.1 million or 36% of revenue in the second quarter of 2017.

Research and development expense was $1.8 million in the second quarter of 2018 compared to $1.3 million recorded in the second quarter of 2017, primarily due to increased personnel-related expenses.

Sales and marketing expense increased to $23 million in the second quarter of 2018 versus $11.9 million in the comparative period in 2017, primarily due to increased personnel-related expenses as we continued to hire inside sales representatives at our Cleveland facility and increased advertising expenditures.

In the second quarter of 2018, we spent $6.3 million in advertising as compared to $2.7 million in Q2 2017.

General and administrative expense declined to $9.7 million in the second quarter of 2018 versus 9.9% in the second quarter of 2017, primarily due to a $1.1 million decrease in bad debt expense and a $0.9 million decrease in patent litigation costs. This was partially offset by increased personnel-related expenses.

In the second quarter of 2018, we reported an income tax benefit of $1 million compared to $0.8 million income tax expense in the second quarter of 2017.

Our income tax benefit in the second quarter of 2018 included a $3.9 million decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation compared to $2.5 million in the second quarter of 2017.

Excluding the stock-based compensation benefit, our non-GAAP effective tax rate in the second quarter of 2018 was 21.2% versus 36.2% in the second quarter of 2017, primarily due to the impacts of U.S. federal tax reform.

In the second quarter of 2018, we reported net income of $14.6 million, compared to net income of $8.3 million in the second quarter of 2017. Earnings per diluted common share was $0.65 in the second quarter of 2018 versus $0.38 in the second quarter of 2017, an increase of 71.1%.

Adjusted EBITDA for the second quarter of 2018 was $19 million, which represented a 19.5% return on revenue. Adjusted EBITDA increased 32.2% in the second quarter of 2018 versus the second quarter of 2017, where adjusted EBITDA was $14.4 million, which represented a 22.4% return on revenue.

As a reminder, the reduction in second quarter 2018 EBITDA margin compared to second quarter of 2017 levels was primarily due to lower rental depreciation expense and our continued emphasis on sales revenue instead of rental revenue. We still generated improved operating margin in the second quarter of 2018 versus the second quarter of 2017.

Cash, cash equivalents and marketable securities were $208.4 million, an increase of $20.1 million compared to $188.3 million as of March 31, 2018. Turning to guidance.

We are increasing our full year 2018 guidance range for total revenue to $340 million to $350 million, up from $310 million to $320 million, representing growth of $36.3 million to $40.3 million versus 2017 full year results.

We still expect direct-to-consumer sales to be our fastest- growing channel, domestic business-to-business sales to have a significant growth rate and international business-to-business sales to have a solid growth rate, where the strategy will still be focused on the European market.

We expect rental revenue to be down approximately 10% in 2018 compared to 2017 due to our continued focus on sales versus rentals.

Additionally, we are increasing our full year 2018 GAAP net income and non-GAAP net income guidance range to $45 million to $48 million, up from $38 million to $41 million, representing growth of 114.3% to 128.5% compared to 2017 GAAP net income of $21 million and growth of 57.5% to 67.9% compared to 2017 non-GAAP net income of $28.6 million.

We are also increasing our guidance range for full year 2018 in adjusted EBITDA to $65 million to $69 million, up from $62 million to $67 million, representing growth of 27.9% to 35.7% versus 2017 full year results.

We estimate that the decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation will lead to a reduction in provision for income taxes of approximately $12 million in 2018 based on forecasted stock activity, which would further lower our effective tax rate as compared to the U.S. statutory rate.

This is an increase from our previous estimate of an $8 million benefit. Going forward, we expect our effective tax rate, including stock compensation deductions, to vary quarter-to-quarter depending on the amount of pretax net income, share price and on the timing and size of stock option exercises.

When excluding the benefit from the estimated $12 million decrease in provision for income taxes expected in 2018 from stock-based compensation deduction, we still expect a non-GAAP effective tax rate of approximately 25%. Lastly, we still expect net positive cash flow for 2018 with no additional capital required to meet our current operating plan.

With that, Scott and I will be happy to take your questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Margaret Kaczor of William Blair. Please go ahead..

Good afternoon, guys. Sorry about that. Thanks for taking the question. So first of all, I wanted to follow up on some of the discussion you guys had on the Cleveland facility in expanding the sales force potential there through 2020.

Given that you guys are bringing on new space so quickly, does that mean that you’re already maybe maxing out on the original square footage plans you had? And then, as we look at – with that in context, as we look at the second and third quarters, can you continue to hire at the same rate as you’ve been doing in the last few quarters?.

Hey Margaret, thanks for the question. I’ll take that one. Yes. I mean, we’ve – we kind of took down space in waves in that building. Now as I said in the past, one of the great things about that building is it has plenty of extra space around it.

So we looked at it as a long-term place where we could hang our hat and grow, and we felt that, frankly, no matter what our growth rate, we wouldn’t run out of space in that building for the foreseeable future. It’s a 1.3 million square foot building. And we’ve got options on space around us.

So we have the opportunity, if we needed, we can take down space, but we don’t pay for it until we need it. So the fact that we are taking down a couple of blocks of space, yes, that’s indicative that the space that we had up to now is more or less full. We are running a little bit ahead of our plan or schedule.

That’s why we are increasing our own expectations as well as communication that over the three-year period that we forecasted over that we would expect to have 500 people, about 2/3 of them would be sales personnel versus the original 240 people.

And I think we communicated in the last call that while we didn’t give any specific numbers this year, the hiring rate was ahead of our expectations and ahead of that pace of 240 people over a three-year period. So that’s why we kind of updated our number. As far as space, I don’t expect to run out.

Like I said, we’re still a relatively small footprint in what’s a huge building and the space around us is vacant. Now your question on could we continue to hire at that rate is a good one. I think it’s one that you don’t know until you try. I mean, certainly, our expectation is that we could hire at a higher rate than we had originally planned.

So far, I think we’ve done a great job. We’re very pleased with the quality of personnel that we’ve been able to attract.

As I’ve also mentioned in the past, the location of the building in the Cleveland area is centrally located, so we have an advantage that we can really recruit from the east side of Cleveland, the west side and the south side and even pull from downtown.

I think that gives us maximum success from a recruiting area standpoint, and we will continue to hire at a rate that, as long as we can maintain the quality of the personnel, given that we’re such a long way from market saturation in POCs, we’re going to continue to invest in the sales force as long as we have people that meet our hiring criteria..

Got it, very helpful. And then in terms of the pricing trial, you guys have done this a few years now in a row. This is the first kind of major change you may be making following one of these pricing trials, it seems.

So maybe talk to us what was different this time? How much of a volume increase did you see that would actually make you want to make this change?.

Yes. And the change we made this time is really, I would call it, a relatively small tweak. In the past, if you go back several years ago, we made pricing changes in blocks of $500 at a time. If you go way back 10 years ago, our price in the retail channel was $49.95. So we’ve stepped down to where we are.

Part of the equation is not only demand but also our product cost, that all gets factored in to maximizing total margin dollars. So the $200 move is a relatively small tweak for the last two times that we’ve run such a trial, which covers roughly a three-year period because we do these things about every 18 months to 24 months.

But over the last three years, we hadn’t made a change. So we made a small tweak, that’s what the data said we should do as far as increase in volume that’s all factored into the new guidance that Ally already stated..

Got it. And last one for me, and this one is a much bigger picture. But you guys keep referencing that you think this is a 7 and 10-year change. And I fully appreciate that and understand that.

But maybe talk about what kind of indicators you could see in the market that would maybe make you change your tune a little bit? And maybe that’s the large players adopting I don’t know. You let us know. Thank you..

Yes. So I mean, the main metric that we look at is the penetration rate that we get from the Medicare data. Unfortunately, that data only gets updated annually. The next refresh would be the fall of this year, and that would cover 2017 data.

So I think that will be a key number for us to really understand what kind of curve that were drawn here from a growth rate. But certainly, as we’ve said, the last couple of years we moved from a 6.5 to high 6% in the 9%, admitting that, that doesn’t capture all the cash sales.

We’re probably more in the 12% penetration rate if you sprinkle those cash sales back in, which are unaccounted for. But we’re still such a long way from a saturation point and only growing it 1 to 1.5 percentage points incrementally a year.

Even if the market takes off and grows at a much faster rate than historical, we’re still quite a ways from the end of that curve. Now the reason that we said 7 to 10 years, inherent in that estimate is this range. And the reason we gave a range is it’s kind of a signal but it’s not an exact science. And there could be some air to that range.

Might it be six years? Sure. Might it be 13 years? Sure. But it’s our best estimate and best spread. And I think that’s the curve that we’re on.

I’ve also noted in the past that if you kind of equated this to a baseball game, a 9-inning game, then we’re probably in the second inning, somewhere in there, certainly, in one of the first three innings of the game. So we’ve got a long way to go, another reason we continue to invest in the growth of the sales force..

Yes, and just to expand on that a bit, I just want to remind everyone that while we’ve seen great conversion and acceptance of POCs, particularly in the last couple of years from the business-to-business channel, there still is a lot of challenges for them to work through how they’re going to convert their business, how are they going to finance this conversion over time as well.

We’re certainly trying to partner with the HMEs and help them with that transition. It still is a significant change in their business model.

And that’s really the main reason why we do think that it will still take a lot of time for them to fully adopt POCs, even though we still believe it is – it should be – become the standard of care in the future..

Great. Thanks guys..

The next question comes from Robbie Marcus of JPMorgan. Please go ahead..

Great. Thanks for taking the question. I was hoping you could talk about the sustainability of business-to-business. This is one that can be lumpy, but it does look like it’s really moving in the direction of full adoption here.

So I think what people would really like to better understand is, what inning are we in, in terms of adoption from the larger players, the middle sized and the smaller players? And how sustainable is it in the near term? And what could be rallied here in your opinion? Thanks..

It’s – I just mentioned in the previous question that I think in the what inning we’re in, second inning, maybe third inning, but certainly, we’re in the first third of the game, if you will.

As far as sustainability, I think that that’s a time horizon type of question, because over that seven to 10 years, I mean, we absolutely believed POCs will be the standard of care and the end game is there will be a conversion. Now we also continue to reiterate that this can be lumpy.

Ali just mentioned though, despite the great success, there’s still challenges, providers that got to manage their cash flow, they got to manage their restructure, so different accounts can have starts and stops. Yes? I thought I heard a question, another question, I’m sorry.

So I think if you look over that period, we absolutely continued to believe that POCs will be the standard of care, and we’ll get to the end of the curve. But it could be lumpy along the way.

We’re pretty pleased with the way things are going now, but we see individual customers that they’ll have to put a hold on things because of cash flow management or other priorities in their business. The nice thing is when the whole market is moving, that when a customer here and there has to slow down, you don’t really see that.

It’s been a pretty smooth curve so far..

Yes, and just on the guidance side, we obviously did do a significant increase to guidance expectation toward 2018. And certainly, a contributor of that is both the performance we’ve seen on the direct-to-consumer side, but also the substantial growth we’ve seen on the B2B side..

And the next question comes from Mike Matson of Needham. Please go ahead..

Hi, thanks for taking my questions. I guess I just wanted to start with the news around Respironics attempting to sell some other POCs direct. They put up a website and it appears you can order them direct.

I’m not sure how much advertising they’re going to be doing or anything like that, but is that – how do you view that from a competitive direct perspective of things?.

Yes. So Mike, it really doesn’t change anything out there if you think about it because the Respironics product, along with several other competitive products, have been sold for retail to consumers for several years against ours. The difference is you’ve got other Internet resellers that have been doing that bidding.

But the fact is they’re starting to sell directly themselves. It’s still the same product, so the value and how it stacks up against our product is unchanged. We still believe that we are the most patient-preferred product.

And as I think you guys know, we focused on our design, on things like quiet and battery runtime that are really important to patients. I think that’s – we believe, that’s why we’re in a market leadership position because of that approach. So nothing really changes there.

The fact that they’re selling direct may actually make some investments in advertising to drive awareness of POCs. We believe that could help us as the market leader. Fundamentally, this is still, until you get full penetration, it’s a game of POCs versus tanks.

So anything that anyone does out there, whether it’s Inogen or another manufacturer that helps drive awareness of POCs, we believe will benefit us..

Okay, that’s helpful. And then just wondering with regard to the price cut you implemented in the DTC sales business, how should we think about the impact on your margins and revenue growth going forward? I guess we only saw maybe a month sort of that impact in the June quarter. Thanks..

Yes. So actually, the pricing trial, so to be clear, what happened with the pricing trial, we ran that in April and May. And when we run the pricing trial, we actually run it for prices much lower, so we can draw the appropriate pricing curve. So actually, for the full quarter, you saw lower pricing in the direct-to-consumer side of the business.

And as we said, that was a secondary impact on the lower gross margin profile in the sales gross margin channel. So it actually – from here, gross margin should improve because for two months of the quarter you did have lower pricing in select states. So what you saw was really representative of the margin profile going forward.

And remember, just as another point, gross margin is heavily mix dependent. So mix of B2C versus B2B has a large impact on our gross margin. And so that is why we don’t give specific guidance there because it is so mix dependent..

Okay. Thanks. Sorry for the confusion. For some reason, I thought that a price cut hadn’t been in place for the entire June quarter. So I guess my final question would just be on the – I know you commented on the changes to competitive bidding.

But just wanted to think through the potential impacts of that on your B2B business, do you think it’s possible that the reimbursement could actually eventually go up in the future rounds of bidding, given the change from median to maximum and then would that have any impact on reducing incentives for HMEs to switch to POCs from tanks?.

Yes, sure. So certainly, I think that that's a possibility. You would assume that a maximum price bidding strategy would be higher than a median bidding price. But what you don't know is the range and also what that bidding process will do to future bidding strategy.

So it's hard to know what that potential impact will be on future competitive bidding rounds. But I do think it's reasonable to think that a maximum bidding strategy would be higher than a median pricing strategy. That said, I don't think that it's likely we're going to see rates going back to what they were pre-competitive bidding.

So when you talk about could you potentially – it's a good scenario where you see a 10% or even 20% increase in rates, I think that would be a large increase in rates. However it, fundamentally, doesn't change the dynamics of POCs versus tanks.

And so because of that, it actually may give the providers just a little bit of additional funds to be able to actually make the conversion in their business without as much equity or debt investment to do it.

So that actually could accelerate the adoption of POCs if the rates were higher, because it both improves the P&L, which improves their ability to get financing, but also gives them a little bit of extra cash to do the conversion..

The next question comes from JP McKim of Piper Jaffray. Please go ahead..

Hi, good afternoon and congrats on this quarter. I wanted to follow up on the pricing strategy that you did in the quarter. And wonder if you guys included advertising as a variable.

Meaning, did you – if you lower the price, you need to – does the advertising spend not need to be as high in those markets? Or is that something you'll look at going forward? So I'm just trying to balance the price cut with what you're spending on the advertising going forward..

Yes, JP, thanks for the question and thanks for your comment on the quarter. Advertising expenditure is not included in that equation. It's a traditional price elasticity analysis where you look at close rates and then cost to develop total margin and you margin curve and you optimize for maximum margin.

Our advertising spend is really developed based on the sales capacity that we have. So you can't lower advertising, because you've got to drive enough leads to fill all of the reps up. So the equation on advertising is completely different. It's based on the number of reps that we have.

And also the mix of new reps versus seasoned reps because new reps, they don't have a pipeline, so they need more leads upfront. That's why as you have these many reps, we have to spend pretty heavily on advertising because they need more leads upfront than a longer-term or seasoned rep. But it's a completely different equation and analysis..

Okay, and then I guess the question is this, if you had, call it, 500 people in Cleveland, would – given your curve that you drew, would your price have come down more? So I guess that's a strategy to walk down price over time but you can't walk it down to quick because you don't have the back office support to support that increase in demand?.

No. Those curves are independent. So the optimum price is independent of sales capacity..

Got you. And then one more just on kind of next-generation, call it, whatever you’re going to call it internally, the G5. When can we expect to hear a little bit more about your next gen product? There’s been a lot more talk about connectivity of systems from some smaller POC players and larger ones potentially entering the market.

So just want to see where connectivity is in your list of upgraded features and timeline and thoughts around when we’ll hear more about your next gen product..

You’re kind of spoiling my closing comments. But yes, we will – and we are calling it G5 by the way. We’ve been working on G5 for two years. We are not ready to talk about G5 in detail today, but we will talk about G5 as well as our connectivity plans before the end of 2018..

Okay, that’s helpful. Thank you..

The next question comes from Danielle Antalffy of Leerink Partners. Please go ahead..

Hey guys, good afternoon. Thanks so much for taking the question and congrats on the another really strong quarter. Just wanted to dig down a little bit on rep productivity because, obviously, it’s the addition of new reps that has been contributing to some of those direct-to-consumer sales outperformance.

I’m wondering how much is just the adding of new reps versus greater productivity that maybe you’d previously expected. These reps are either – these new reps are either ramping faster or even better productivity across the organization.

Is there any of that going on?.

Yes. So the primary impact is associated with the additional sales rep capacity, so productivity is a secondary factor.

We have seen improved productivity across the facilities that have the seasoned reps, the California and Texas facilities, so that productivity is increasing, but of course, Cleveland is heavily influenced by the number of new reps in that facility.

So really, the increase is primarily associated with just the increased capacity and not a productivity improvement, particularly if you’re just looking at a base of the total number of employees and how their productivity has changed year-over-year..

Got it. And then just a follow-up question on B2B, strong growth there as well.

I don’t know if you guys can comment, but how much of it was existing customers purchasing more versus entirely new customers making the transition to POCs?.

It’s both. It certainly is a mix of both. We have good relationships. But just as a reminder, a portion of our volume does go through that private label partner.

So we don’t have perfect visibility on exact customer buying patterns, but we have seen both new customers deciding to implement POCs and buy either our product or the private label partner product. And we’ve also seen existing customers buying even more and really expanding their use of nondelivery technology..

Got it. Thanks so much guys..

The next question comes from Matthew Mishan of KeyBanc. Please go ahead..

Great. Thank you for taking the questions and congratulations on a nice quarter.

Is the increase in people in Cleveland and reps in Cleveland solely to meet the POC opportunity? Are you starting to see some other products or services that you could potentially flow through longer-term through the direct-to-consumer channel?.

Yes. For right now, it's just oxygen therapy products. So primarily, POCs, we do have a stationary concentrator that we also manufacture. That's a little different than the other products on the other market. Like our POC model, we focused on what do the patients really want. So it's quieter, it uses less power.

And that's attractive to patients, so smaller footprint, much lighter to move around a home. So we sold that as well. But right now it's focused on oxygen therapy products only.

Now we do think that we've built not only a great sales team but a great go-to-market strategy in direct-to-consumer and direct response advertising and selling that this approach would be conducive to other products. And we do screen other products to see if they're a match for our criteria to put in this pipeline.

That's certainly a strategy that we have more for the longer-term is to diversify our product line and look for other disruptive unique solution products that would serve patients in the home with the medical products. But for today, it's just oxygen therapy equipment..

Okay, great.

And as far as production meeting capacity goes, are you meeting full demand at this point for the product? Or is there – or as like the backlog develops that gives you some pretty good visibility into the next quarter or so?.

Yes. We’ve done a good job with our ops team as well as our supply chain, keeping up with the demands of the customers. So we've continued to expand our inventory to make sure that we can meet the demands of our customers. So there is no significant backlog of orders in the pipeline..

Okay. Thank you very much. Scott and Bauerlein [ph]you guys made be the mostsuccessful team in Cleveland..

[Operator Instructions]. This concludes our question-and-answer session; I would now like to turn the conference over to Scott Wilkinson, President and CEO, for any closing remarks..

Thanks. I’d like to close on a few comments as we look to the second half of 2018 and into 2019. We're excited about the future of oxygen therapy and still expect portable oxygen concentrators to become the standard of care for ambulatory oxygen patients worldwide in this large and growing market.

We continue to invest in product development, and we anticipate sharing more details on our fifth generation portable oxygen concentrator and connectivity plans by the end of this year. Lastly, I'd like to thank all of those who participated in today's call and for your interest in Inogen..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..