Q1 2024 Inogen Inc Earnings Call

Participants

Ryan Peterson; Investor Relations Associate; Inogen Inc

Kevin Smith; President, Chief Executive Officer, Director; Inogen Inc

Michael Bourque; Chief Financial Officer, Executive Vice President, Treasurer; Inogen Inc

Margaret Kaczor; Analyst; William Blair & Company

Mike Matson; Analyst; Needham & Company Inc.

Presentation

Operator

Welcome to Inogen's First-Quarter 2024 earnings conference call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will hold a question and answer session question. (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.

Ryan Peterson

Thank you, all for participating in today's call. And 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 and strategy for 2024 and beyond.
Expectations related to our financial results for Q2 2020 for 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. 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, 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.

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 Energen's new CFO, Mike Burke. We are thrilled to have Mike on the team, bringing with him over two decades of financial leadership experience. During today's call, I will provide updates on our progress against our three strategic priorities, driving top-line growth, advancing our path to profitability and expanding in our innovation pipeline.
First, we endeavor to 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 US market trends and are prepared to fill any gaps that may arise from our 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, increased 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 seeing cost benefits in the form of lower sales and marketing expenses due to the recent exit of our 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 US.
We remain excited about the addition of Physio-Stim to our portfolio, and we are pleased to share that we have engaged and 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 of 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?

Michael Bourque

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% 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 decreased 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.
I now 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 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 in mix shift from Medicare versus private payers and higher rental revenue adjustments.
Moving on to operating expense in 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 is a key objective.
Moving on to our balance sheet. As of March 31st, 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 on going 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.

Kevin Smith

Please visit our organization, make meaningful steps in the right direction during the first quarter. Our resilience and progress are a testament to the strength of our team and Energen. We recognize there's 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?

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions)
Mathew Blackman, Stifel.

Hi, this is Colin on for Matt. Congrats on the great quarter. I guess I wanted to start on the U.S. B2B business. 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?

Kevin Smith

Thanks, Karl, and this is Kevin. I'll go ahead and field 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 I interfering with our business.
The feedback that we have from us on the strong we are we've been forecasting building bottoms up within this on the month to month and quarter to quarter basis. And we feel pretty good about our ability to why we feel over the next quarters, we're providing guidance to be able to continue to want to build changes. So as to ensure we're not seeing any any constraints from Capital Markets.

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

Kevin Smith

Let me start with a pretty high. So our costs are starting to gain a huge part of that. So from the impact from the third party side, yes, we had characterized that before we exited the third party relationship. We've brought the West London members of that team has already had the highest performing members of that team in-house direct being part of the Energen team and integrated that team into a family here.
So we saw a little bit of a bump, yes, I'll say a transition period there where as we're integrating the team into why antigen because a little bit of idea of just somebody lost steps and so forth. But that is and that is behind us then is is working well now moving forward. And we like what we're seeing out of that team and the collaboration that we have more broadly. But Mike, I want you to chime in on gross margins

Michael Bourque

Thanks kevin. Colin, this is Mike of just a little bit on the US your question on the gross margin. So we're not we're not providing specific point 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.
Couple of things impacting us there and favorably. We did have lower Medicare rate that kind of went into effect on January of this year. So that's part of this part of the impact. We're also seeing a unfavorable unfavorable mix with a higher percentage of patients coming from the private payer or a payer as opposed to Medicare.
So and those two 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 into the patient pay plans and the patient mix going forward. But we're not we're not able to share concrete rental gross margin outlook at this time, and we'll revisit that at the Q2 call.

Great. Thank you, Kevin and Mike, for taking my questions.

Operator

Margaret Kaczor, William Blair.

Margaret Kaczor

Hey, good afternoon. Thanks for taking the questions. And I'm going to trying to dive a little bit into the second quarter guidance, if I may, but by business line. And I apologize in advance for the series of questions. But yes, number one, usually Q2 would CDTC. and B. to be domestic just seasonally increased at a double-digit pace sequentially.
So is that the assumption here? And why or why not add to are you assuming any benefit from Philips paying off on the margin, the second quarter benefit or headwind, frankly, and three, relative to our number, we saw a lot of upside coming from B to B international or was there something specific to that number and how repeatable is that $26 million as we go along it goes into Q2 and the rest of the year.

Kevin Smith

So Margaret, this is kevin. This is unlikely I I'll take the first part of that question. So in terms of kind of what we're guiding to, so 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. I will take into account a lot of different things, the evolution of our channel, a channel mix and the new leadership team that's in place here.
And in terms of the question of what do you see, I think it's important also that we consider 2024 to be a rebase year or do you see given the new size of our team. But we have seen early signs of higher productivity, which is very encouraging. But just in terms maybe a little bit more in terms of that guidance at the revenue guidance, just kind of maybe will be helpful to see how we approach that.
We look at the pipeline and we look at what is most likely to occur, what is late unlikely to occur, and it's more of a bottoms up forecasting that we're instituting in the business that gets us to that low end, the low end of the range that we provided to get to the higher end, while we really have to see higher percentage of upside in the US, a large larger piece of the orders coming in.

Michael Bourque

And then I'll just add on to that a little bit. I see a market there for one on the assumptions of the benefit from from Philips. We have we've seen a very modest tailwind coming from coming from Philip so far. And as we characterized previously, we see that there's opportunity out there. We're going to position ourselves. We have been positioning ourselves to take advantage of it, but it's something that we've not been seeing coming in and more than that drips and drabs, let's say, opportunities that present themselves that we could particularly it really back to that.
But that may that may come more down the road. And we are 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 want 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 we're seeing good results coming from the B2B in general, and we do anticipate those opportunities continue to be here and SinuNase taking advantage wherever wherever we can.

Margaret Kaczor

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

Michael Bourque

So it's a good, good, good dialogue there. So one of the when we look at the hospital opportunity, so the a fairly large percentage of patients are diagnosed in India, in a hospital from an event that triggers a visit to the to the emergency room or at least the inpatient care. And then when the patient goes home, they have to have a oxygen and upon discharge from the hospital.
So there's an opportunity for us to go even further upstream and be able to gain a few mines at the very least by some number of months in billing prior to patient hitting capitated period there. So in those patients, of course, at follow-up by prescribers surveys to a to another connected relationship back to the prescriber.
We see this as as an opportunity for us to continue to explore. We've been engaging and now 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.

Margaret Kaczor

Okay. And just last question for me is, as we think about COGS and I appreciate not wanting to go too far into gross margins. But yes, we can back into the COGS per unit number and it seemed like it naturally did quite well. And you've talked historically about getting a high cost consumables off the books, but directionally point to continued gross margin improvement further 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.

Kevin Smith

Thanks, Margaret. So just in terms of the improvement in COGS improvement in COGS, and related gross margin really was largely driven by continued depletion of those premium price components that we have that we hadn't been incurring in the previous year.
And in terms of kind of where we're looking at going forward with that, we we still do have some 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 than we've seen in 2022 and 2023 and so to a much lower level, but we still have a little bit to get through.

Margaret Kaczor

Thank you, guys.

Operator

Mike Matson, Needham & Company.

Mike Matson

Mike, you might still have yourself and yes, they are part of that on the DTC. cell team on the headcount change at all there, we're kind of mature. So the decline in sales in that business.

Kevin Smith

I'm sorry, my mistake. Maybe the 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 headcount on the DTC business?

Mike Matson

Yes, the sales salespeople that sell through.

Kevin Smith

Yes, so you know, it's yes, right now, we have we have a sales team that's in line in the range of 150 to 170 sales reps in the in the DDTC. channel entity. 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 an account that we feel comfortable with right now.
And we have initiatives that are running through that we've talked about with a with reducing the friction and certainly enabling any patient who reaches into the DTC channel antigen to help them all get at a advantage of POC, whether that be for a cash sale, whether that be somebody just cover buyer via rental plant, being able to leverage that sales organization and the contact point to allow that to happen.
We then see positive results coming from that. That still is now in pilot phases right now, but like we've had, it has had some trending and we're very comfortable and happy with the size of that organization. We're going to continue to focus on going to profit before.

Mike Matson

Okay. That just stood. 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?

Kevin Smith

You have some of the areas of the DTC channel aside, one thing to keep in mind there, too, which is and as an organization. The size that organization year on year from saying my same time prior year is it's been considerably reduced ads 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.

Mike Matson

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 on. Is there a bit of potentially a shortage of POCs? And is that an opportunity to raise it gives you some pricing power there.

Kevin Smith

So we feel that it was a couple of points in there, I think to wanted to raise in order to talk to you one by the end of the characterization of that business potentially being part of an exit from a from a competitor. We're not seeing that that has been has been a meaningful contributor to the growth that we're seeing there with the business that we have coming out of this past quarter.
And we've seen a very limited impact from that. We are going to continue to monitor and position ourselves to take advantage. But we are we are positioning ourselves strongly against low-price competitors in the marketplace. We see, yes, we see price pressure that is coming and what we have in POC with an eight year useful life on it, which is three years longer than the next closest competitor.
And those are being in 40 years that the HME that B2B partner could continue to deploy a POC and bill for 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 a patient's region to us through our DTC channel.
And more often than not patients are asking for Energen rather than asking for a POC is that brand name recognition that linked to the quality of Energen is all gives it gives us a distinct advantage. And right now we feel like we are sitting alone at the top as a premium player in the marketplace. So we're going to continue to or they have to fight on price pressure, but we feel we have a good message to one to sell.

Mike Matson

Okay. Got it. Thank you.

Operator

Thank you. There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.