Earnings Call Transcript - INGN Q1 2024

Unknown Executive, 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 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 non-cash 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.

Kevin Smith, CEO

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 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 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 on 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 with our B2B customers, and new targets within our rental channel, 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 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 our 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, 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 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 headcount, partially offset by increased average selling prices and increased unit volume per representative. 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 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 a 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 expenses, total operating expenses for the first quarter 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 a 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.

Kevin Smith, CEO

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?

Colin Clark, Analyst

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?

Kevin Smith, CEO

Thanks, Colin. This is Kevin. I'll go ahead and fill that one, Mike. So we are 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 have been forecasting and building bottoms up on a month-to-month and quarter-to-quarter basis. And we feel pretty good about our ability to continue to build and achieve in the upcoming quarters. So in short, we are not seeing any constraints from the capital market.

Colin Clark, Analyst

Okay. Great. And I just had a two-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?

Kevin Smith, CEO

So from the impact from the third party, we saw a transition period when we integrated the team into Inogen. It caused a little bit of lost steps, but that is behind us, 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.

Michael Bourque, CFO

Thanks, Kevin. Colin, this is Mike. Just a little bit on your question on the gross margin. We are not providing specific guidance in terms of gross margins going forward. But I can tell you what the impacts were and where they came from in that rental business for Q1. We did have a lower Medicare rate that kind of went into effect on January of this year, which is part of the impact. We're also seeing an unfavorable mix with a higher percent of our patients coming from private payers instead of Medicare. These two factors are impacting gross margin. We do have 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.

Margaret Kaczor, Analyst

I'm going to try to dive a little bit into the second quarter guidance, if I may, by business line. Apologies in advance for the series of questions. But, number one, usually Q2 would see DTC and B2B domestic just seasonally increase at a double-digit pace sequentially. Is that the assumption here and why or why not? Two, are you assuming any benefit from Philips being off the market in the second quarter and any 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?

Michael Bourque, CFO

So Margaret, this is Mike. I'll take the first part of that question. In terms 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 account a lot of different elements, including the evolution of our channel mix and the new leadership team that has been established. In terms of the question about DTC, I think it's important to consider 2024 as a rebase year for DTC given the new size of our team, but we have seen early signs of higher productivity, which is encouraging.

Kevin Smith, CEO

I'll just add to that a little bit, Margaret. One of the assumptions of the benefit from Philips, we have seen a very modest tailwind coming from Philips so far. As we characterized previously, we see that there are opportunities out there. We're positioning ourselves to take advantage of it. But it's not something that we've been seeing coming in a more significant way. It may come down the line, and we're positioning ourselves to capitalize on every opportunity that comes our way. Regarding international B2B, 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 and, in general, we anticipate those opportunities continue to be there.

Margaret Kaczor, Analyst

As we think about the hospital channel, which seems to be a newer comment in your introduction, my understanding in the past was that the hospital wasn't really something quite as focused on by the company because the flow rates may not align with what the hospital needs. Could you walk me through that hospital strategy, including how big it is as an end market for you guys? And how aggressively are you going to pursue that?

Kevin Smith, CEO

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, leading to inpatient care. When the patient goes home, they need an oxygen supply upon discharge from the hospital. Thus, there is an opportunity for us to go upstream and gain a few months in billing prior to a patient hitting the capitated period. These patients, of course, have follow-ups by prescribers, leading 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 area and like what we're seeing so far. It's in early stages for us, but it looks promising at this point.

Margaret Kaczor, Analyst

Lastly, as we think about COGS, I appreciate not wanting to go too far into gross margins, but we can back into the COGS per unit number. It seems like that did quite well. Historically, you've talked about getting the high COGS consumables off the books, which directionally points toward continued gross margin improvement from here. Could you provide color around that and any long-term profitability comments that may have changed from the last quarter?

Michael Bourque, CFO

The improvement in COGS and related gross margins was largely driven by the continued depletion of those premium price components that we incurred in the previous year. We still do have some premium costs on our balance sheet, and we will see that make its way through the P&L over the course of the remainder of the year. However, it will not be at the degree seen in 2022 and 2023. We still have a little bit to manage through.

Michael Matson, Analyst

The DTC sales team, did the headcount change at all there? And what drove the decline in sales in that business?

Kevin Smith, CEO

Currently, we have a sales team that is in the range of 150 to 170 sales representatives in the DTC channel. We are comfortable with that headcount right now. We have initiatives running through them aimed at reducing friction to help each patient reach an Inogen POC, whether for a cash sale or as part of a rental plan. We're seeing positive results from that, but it is still in pilot phases. We're happy with the track we're on and with the size of that organization.

Michael Matson, Analyst

Just to clarify, what was the reason for the decline in sales in that business?

Kevin Smith, CEO

The DTC channel, one important point to keep in mind is that the size of that organization year-on-year has been considerably reduced. We're focused on growing that segment of the business profitably and have seen positive trends quarter-on-quarter. We are committed to growing it, but not merely at any cost; we want to grow it profitably.

Michael Matson, Analyst

What about pricing on the B2B side? You did see strong growth there with Philips Respironics having exited the market. Has there been a potential shortage of POCs that gives you some pricing power?

Kevin Smith, CEO

We feel that the characterization of that business potentially being part of an exit from a competitor has not been a meaningful contributor to the growth we’re seeing. We've experienced very limited impact from that. We are monitoring and positioning ourselves to take advantage, but we are strong against low-price competitors in the marketplace. We see price pressure, but our POC offers an 8-year useful life, which is three years longer than the next closest competitor. That gives us a distinct advantage.

Operator, Operator

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.