Earnings Call Transcript - INGN Q2 2024

Operator, Operator

Welcome to Inogen's Second Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, August 6, 2024. I would now like to turn the call over to Ryan Peterson of Investor Relations.

Ryan Peterson, Investor Relations

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 second 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 the full year 2024, and progress on our strategic initiatives, including innovation, our expectations regarding the market for our products, and 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, August 6, 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 in 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.

Kevin Smith, CEO

Good afternoon, and thank you for joining our second quarter 2024 conference call. During today's call, I will provide updates on our progress towards our three strategic priorities: driving top-line growth, advancing our path to profitability, and expanding our innovation pipeline. I will then turn the line to Mike for a full review of our financials and outlook. Before I provide updates on our strategic priorities, I would like to briefly highlight our strong second quarter 2024 results. We achieved $89 million in total second quarter revenue, reflecting 6% year-over-year growth and 14% growth from the first quarter of 2024. Our performance in the quarter was reflective of strong commercial execution from our team worldwide. We have also now completed our executive leadership transition and are excited to move forward with the concrete team in place. Now turning to updates on our strategic initiatives, I will start by highlighting our progress on driving top-line growth. The highlight of the quarter was growth in our business-to-business channels. Our team continues to do an outstanding job building and strengthening relationships with new and existing customers worldwide. We believe our differentiated POC offerings resonate with our customers as Inogen offers the highest quality POCs, the lowest total cost to serve, and a host of digital health and value-added services that make us an attractive partner. In addition, we saw a modest tailwind in our B2B channel related to a recent competitive exit from the market. This nicely complemented our base growth in the quarter, which overall was driven by our differentiated offerings and strong commercial execution. In our direct-to-consumer sales channel, we again saw year-over-year declines but also generated 10% sequential growth. This sequential growth in the channel reflects our progress on improving lead generation and rep productivity. As a reminder, we are operating with a downsized and more efficient sales force on a year-over-year basis. We are excited about the progress we are making as we continue to optimize our approach to this attractive and high-margin channel. Across the business, we are also continuing to work through our previously announced hospital and patient-first pilot programs. The hospital initiatives in our rental channel target hospitals in addition to individual practitioners. By targeting hospitals, we are able to access patients earlier in their care pathway, increasing the duration over which we can receive payments. Our patient-first initiatives in our DTC channel involve the cross-training of sales reps to execute both cash sales and insurance rentals. Our goal is to ensure that everyone who wants to receive an Inogen POC can receive them quickly and easily. We are seeing encouraging results and look forward to providing more updates on those programs as they are formally put in place. Switching over to our progress on reaching sustained profitability, we made significant advances in the quarter. I'm thrilled to report the first quarter of adjusted EBITDA profitability in my tenure at Inogen. This is an exciting milestone and a meaningful step in the right direction. But please note our path to durable profitability will not necessarily be linear, as we will continue to invest thoughtfully in support of growth. Over time, we do see a pathway to sustainable adjusted EBITDA profitability with our current innovation pipeline and product portfolio. During the quarter, we continued to drive operating improvements in our DTC sales and rental channels to position for higher go-forward margins in these areas of our business. These are part of a host of initiatives we are executing, including a variety of programs to optimize our operating profile. We are excited about the prospects of these initiatives, but they will take time to begin flowing through the financials. Turning to operating expenses, we experienced and expect further increases in advertising costs as we approach the November election. These costs primarily affect our direct-to-consumer sales channel, which relies heavily on TV advertising to reach consumers and generate leads. Finally, I would like to share updates on our innovation pipeline. We look forward to bringing the Simeox product to the U.S. market and continue to make meaningful progress toward FDA clearance. We will provide updates as they become available. Moving to our POC portfolio. We continue to expect the launch of the newest generation POC, the Rove 4, in the back half of the year. The Rove 4 offers patients a new fourth flow setting, a service life of up to eight years, and the highest oxygen production in the lightest weight POC available in the market. These innovations represent our mission to provide patients on oxygen therapy with an opportunity to maintain mobility and quality of life as they undergo treatment. Additionally, we continue to invest in our digital offerings to ensure Inogen devices remain as easy to utilize and maintain as possible. With that, I would like to say I am proud of the significant progress our team has made towards our strategic initiatives in the quarter. We will continue to position Inogen for near- and long-term success. I will now turn the call over to Mike for a more detailed review of our financial results.

Mike Bourque, CFO

Thank you, Kevin, and good afternoon, everyone. Unless otherwise noted, all financial comparisons are to the prior year comparable period. Total revenue for the second quarter of 2024 was $88.8 million, an increase of 6.1% compared to the prior year. The increase was primarily driven by higher international and domestic business-to-business sales, partially offset by lower direct-to-consumer sales and rental revenue. For the second quarter, foreign exchange had a negative impact of 10 basis points on total revenue and a negative impact of 30 basis points on international revenue. Looking at second quarter revenue on a more detailed basis, direct-to-consumer sales decreased 15.6% to $22.6 million from $26.8 million in the prior period, driven primarily by lower representative headcount. Domestic business-to-business revenue increased 16.5% to $21.3 million versus $18.3 million in the comparable period, driven by increased volumes with new and existing customers. International business-to-business revenue increased 31.1% to $30.5 million compared to $23.3 million in the prior period. Similar to our domestic business, the increase was primarily driven by increased volumes with new and existing customers. Rental revenue decreased 6.2% to $14.3 million from $15.3 million in the prior period, primarily driven by lower average billing rates due to the mix shift to private payers. Now on to discuss our gross margins. Total gross margin was 48.1%, increasing 740 basis points from the same period in the prior year, primarily driven by lower premiums paid for components as well as one-time favorable adjustments to reserves, which drove a benefit of approximately 300 basis points. We expect gross margins to be in the low to mid-40s in the back half of the year. Sales revenue gross margin was 48.5%, an increase of 1,000 basis points, primarily driven by a reduction in premium price components and increased volumes. Rental revenue gross margin was 46.2%, a decline of 430 basis points driven by a decrease in the percentage of patients billed and a mix shift towards private payers. Moving on to operating expenses, in the second quarter, total operating expenses increased to $49.8 million compared to $45.8 million in the prior period, representing an increase of 8.7%. The increase was primarily due to higher personnel-related expenses, partially offset by lower sales and marketing consulting expenses due to the exit of our third-party relationship as we manage our spend in this area thoughtfully. We also saw higher advertising expenses given elevated costs of television advertisements associated with the U.S. presidential election season, and we expect that trend to continue into the second half. In the second quarter of 2024, we reported a GAAP net loss of $5.6 million and a loss per diluted share of $0.24. On an adjusted basis, we had a net loss of $1.6 million and an adjusted loss per diluted share of $0.07. Adjusted EBITDA was positive $1.3 million compared to a loss of $3.2 million in the prior year period. We're pleased to report positive adjusted EBITDA and are managing our expenses closely as we continue into the back half of the year. That said, our second quarter performance should not necessarily be viewed as predictive of upcoming quarters. Moving on to our balance sheet. As of June 30, 2024, we had cash, cash equivalents, marketable securities, and restricted cash of $121.2 million with no debt outstanding. Before I turn the line back to Kevin, I would like to share our revenue expectations for the full year 2024. Based on our progress in the first half of the year and trends in our business today, we expect full-year 2024 revenue to be within $325 million to $330 million, reflecting approximately 3% to 5% year-over-year growth. In addition, as I mentioned earlier, we expect gross margins to be in the low to mid-40s in the back half of the year. And with that, I will pass the call back to Kevin for closing remarks.

Kevin Smith, CEO

The first half of 2024 was a time of transition for Inogen as we welcomed Mike to the CFO role, and I am excited to have our new management team in place. Our team remains steadfast in their determination to deliver best-in-class care to respiratory therapy patients around the globe, and we will maintain that approach into the second half of 2024. We look forward to updating you on our progress as we continue to expand our impact for patients with respiratory disease. With that, I will open it up for questions.

Operator, Operator

Our first question is from Robbie Marcus with JPMorgan. Please proceed with your question.

Lilia-Celine Lozada, Analyst

Hi. This is actually Lilly on for Robbie. Thanks for taking the question. Maybe starting with DTC. Hoping you could give a little bit of color on the sales force. How are you thinking about the progression of the size of the sales force over 2024? And how should we be thinking about productivity in the commercial organization ramping from here?

Kevin Smith, CEO

Sure. Hi Lilly, thanks for the question. This is Kevin. I'll start with that one, Mike. Yes. So as we indicated in our last call, the sales organization on the DTC side is in the 150 to 170 range. We are comfortable with the size of that organization going forward. We believe we have a strong team with the necessary training to grow. We're seeing positive traction coming out of them. We're focused on increasing that productivity. Within that DTC channel, we do have the patient-first pilot that we referenced. We're trying to make it as easy as possible for any patient who wants to have an Inogen POC to get an Inogen POC. So we're making that smooth and efficient. We believe that's going to help us continue to grow in the future.

Lilia-Celine Lozada, Analyst

Great. Thank you. And then on the rental side of the business, you talked about the hospital strategy. So can you give a bit more color on how those efforts have been progressing and how we should be thinking about how big of an opportunity this can be for you relative to individual practitioners?

Kevin Smith, CEO

Sure. Thanks so much, Lilly. When looking at the hospital pilot, some additional color, this is going a bit further upstream. So that rental channel goes through prescribers. The sales team goes to the physicians' offices to gain referrals. Previously, we had a third-party organization that we were partnered with, but that is now purely an in-house team, although scaled back a little bit, and we're satisfied with the results that team is achieving. We're happy with that. It's an opportunity for us to continue to build. By going into the hospital, we can get the patient set up with oxygen right after their discharge, allowing us to capture that billing more efficiently. This pilot phase does not yet fall into the financial statements, until we are fully executing on that one.

Lilia-Celine Lozada, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question is from James Beer with William Blair. Please proceed with your question.

James Beers, Analyst

Hi, guys. Thanks for taking the question. This is Jimmy on for Margarate. Congrats on the good quarter. I wanted to first start off on some of the B2B strength you saw, maybe looking first at OUS. Were there any large tenders during the quarter? I know it tends to be a little lumpier internationally. Can you just give us a sense of your confidence on international continuing at that rate? And then also on B2B domestic, could you also just parse out the effect of Respironics exiting the market?

Kevin Smith, CEO

Thanks, Jimmy. Mike, do you want to start with that one and add some color?

Mike Bourque, CFO

Sure. In terms of your question on any large one-time tenders, we didn't receive any orders that we believe could be called outsized and not repeatable. The results in our B2B channels were primarily driven by broad-based demand from both new and existing customers. So to answer that first question, no, there really weren't any outsized orders.

Kevin Smith, CEO

Yes, and we do see the opportunity to continue building internationally. As Mike said, while it can be chunky at times, we believe the relationships being built contribute to the growth we will see internationally. On the domestic side, we definitely see some tailwind from the exit of our competitor in the U.S. market. We've gained new customers, and we also see additional business with existing customers. This tailwind is certainly present.

James Beers, Analyst

Great. That's helpful. And maybe switching gears, I wanted to touch on guidance. You grew 6% this quarter, 8% last quarter. I think the guide now implies a deceleration in the second half despite similar easier comps. Why the more conservative outlook, and as you look to 2025 and long term, what's the right range of growth we should model for this business?

Mike Bourque, CFO

First of all, we're pleased with the strong first half we had in 2024. Our guidance philosophy is to set prudent and achievable ranges, committing to meet or exceed those numbers. For the full-year guidance, we anticipate headwinds beyond normal seasonality based on the national election. Advertising costs are expected to increase and may make it difficult to secure good slots, affecting our leads. This impacts our D2C business and drives our guidance for the second half of the year.

James Beers, Analyst

Great. That was helpful. Thank you, guys.

Mike Bourque, CFO

Now regarding your question about future guidance, we'll stick to our previous discussions. As we progress towards the rest of the year and navigate our AOP process, we'll determine our guidance going forward. At this time, we are not commenting on 2025 or beyond.

James Beers, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question is from Matthew Blackman with Stifel. Please proceed with your question.

Colin Clark, Analyst

Hi, guys. This is Colin on for Matt. I wanted to start on the rental business, thinking specifically about the productivity ramp for the prescriber channel efforts that you brought in-house. How do you approach that productivity ramping? Could we see this return to being your fastest-growing business in the near term or even in 2025?

Mike Bourque, CFO

Sure, Colin. So we see that the trend continues towards private payers and less towards Medicare. The lower reimbursement rates from private payers affect our top line and margin. Our patient-on-service has remained somewhat consistent over the past few quarters, with attrition offsetting new patients. We are focused on adding more billable patients to the funnel.

Kevin Smith, CEO

Yes, and looking at the hospital pilots, we have opportunities to generate more revenue per patient and secure more referrals. We do see potential for good growth, but it's too early to comment on how fast this channel will grow relative to others.

Colin Clark, Analyst

Understood. That's really helpful. And then I had one on gross margins. Beyond the higher cost inventory rolling off, can you walk me through the driving costs of the step-up from last quarter?

Mike Bourque, CFO

In terms of the uptick this quarter, we had some adjustments to our reserve accounts that produced a one-time benefit of about 300 basis points to our gross margin in Q2. The benefit flowed primarily through the sales gross margin line.

Colin Clark, Analyst

Okay, understood. Thank you.

Operator, Operator

Thank you. Our next question is from Mike Matson with Needham & Company. Please proceed with your question.

Michael Matson, Analyst

Thanks. I just wanted to ask one on pricing trends in the different channels. Specifically, what's happening with price year-over-year for domestic B2B, international B2B, and DTC sales?

Kevin Smith, CEO

Yes. On pricing in the channels, we’ve been maintaining some discipline. There's certainly price pressure from competitors. We're holding relatively stable with some downward momentum, particularly in our B2B channels, while we maintain our strategy. We do feel we have the right approach.

Michael Matson, Analyst

Okay. All right. And I just wanted to check in on the Simeox product. Were there any updates on the FDA pathway or timing?

Kevin Smith, CEO

No. We haven't given any updates on that timing. You should expect to see a firm update when we have regulatory clearance, which will inform our commercialization plan.

Michael Matson, Analyst

Okay. Great. Thank you.

Operator, Operator

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