Inogen - Q1 2024

Executive Summary

• Q1 2024 revenue of $78.0M rose 8.1% YoY and 2.8% QoQ, driven by stronger domestic and international B2B shipments; gross margin expanded 700 bps QoQ to 44.1% on lower component premiums despite mix shift to lower-margin B2B.
• GAAP loss narrowed to $14.6M and $(0.62) diluted EPS versus $(20.3)M and $(0.88) a year ago; Adjusted EBITDA improved to $(7.6)M from $(11.8)M YoY.
• Q2 2024 revenue guidance initiated at $81–$84M; management will provide 2H24 outlook on the Q2 call and noted only “very modest” tailwinds so far from a competitor’s U.S. exit.
• Stock reaction catalysts: above prior Q1 guide ($73–$74M) and margin expansion, plus narrative on potential share capture and a cleaner cost base after exiting a rental channel third-party relationship.

What Went Well and What Went Wrong

• What Went Well

  • B2B strength: Domestic B2B +31% YoY to $16.5M; International B2B +37% YoY to $26.0M, reflecting new and existing customer volume.
  • Gross margin expansion: Total GM 44.1% (+150 bps YoY; +700 bps QoQ) on lower component premiums; sales gross margin +490 bps YoY.
  • Operating discipline: Total OpEx down 3.8% YoY to $50.6M; Adjusted EBITDA loss improved to $(7.6)M vs $(11.8)M a year ago.

• What Went Wrong

  • DTC softness: Direct-to-consumer sales fell 15.6% YoY to $20.5M on lower headcount; management characterizes 2024 as a “rebase year” for DTC.
  • Rental pressure: Rental gross margin dropped 1,040 bps YoY to 43.7% on lower net revenue per patient, payer mix shift (more private pay), higher adjustments, and a lower Medicare rate in January.
  • Guidance visibility limited: Only Q2 provided; H2 outlook deferred; Philips U.S. market exit contribution so far “very modest,” tempering expectations for near-term windfall.

Transcript

Operator (participant)

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. To ask a question at that time, please press star followed by one on your key, on your keypad. If anyone has difficulty hearing the conference, please press star 0 for operator assistance. As a reminder, this conference is being recorded today, May 7th 2024. I would now like to turn the call over to Ryan Peterson, Investor Relations. Please go ahead.

Ryan Peterson (Associate Director of 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 and strategy for 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 7th 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 obligations 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 US 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. With that, I will turn the call over to Inogen's President and CEO, Kevin Smith.

Kevin Smith (President, CEO and Director)

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 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 endeavored a position for sustainable top line growth by evaluating and improving our sales and rental strategies while strengthening our relationships with distributors and stakeholders. We had many positive discussions with our business-to-business partners in the first quarter, some of which led to the completion of new sales agreements.

We will continue to focus on developing fruitful relationships and building awareness of our market-leading portable oxygen concentrators with partners across the globe. As part of this initiative, we are closely monitoring U.S. market trends and are prepared to fill any gaps that may arise from a recent competitor's temporary exit from the U.S. home respiratory market. At this time, we have seen very modest tailwinds as a result of that exit, and we will remain ready to capitalize the potential outstanding customer demand as the year goes on. We continue our efforts to reduce friction, increase synergies and efficiencies across our sales channels. We have seen encouraging results by promoting communication between our sales personnel and launching specific pilot projects to drive this cross-partnership.

These initiatives, including training our team to execute both direct-to-consumer and rental sales, partnership programs within our B2B customers, and new targets within our rental chain. 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 will 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 share 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 early 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?

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 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 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. Now I want to discuss our gross margins. Total gross margin was 44.1%, increasing 150 basis points from the same period in the prior year, primarily driven by a lower average cost of components in this quarter relative to a year ago. The benefit of lower component costs was partially offset by channel mix shift, with a greater proportion of total Q1 2024 sales from our lower margin B2B channel relative to total Q1 2023 sales. Sales revenue gross margin was 44.1%, an increase of 490 basis points, driven primarily by lower component premiums.

Rental revenue gross margin was 43.7%, a decline of 1,040 basis points, primarily due to lower net revenue per patient as a result of a decrease in the percentage of patients billed versus total patients on service, a mix shift from Medicare versus private payers, and higher rental revenue adjustments. Moving on to operating expense. 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 as 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 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-$84 million in the second quarter. We anticipate providing guidance for the back half of 2024 on our second quarter earnings call. With that, I will pass the call back to Kevin for closing remarks.

Kevin Smith (President, CEO and Director)

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

Operator (participant)

... Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Matthew Blackman with Stifel. Please proceed with your question.

Colin Clark (Healthcare Equity Research Analyst)

Hi, this is Colin on for Matt. Congrats on a great quarter. I guess I wanted to start on the US B2B business. A couple dynamics there. You saw a little bit of a tailwind from a competitor exit in 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 (President, CEO and Director)

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

Colin Clark (Healthcare Equity Research Analyst)

Okay, great. 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 prescrible 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 (President, CEO and Director)

You want me to start with that?

Mike Bourque (CFO)

Yeah, please.

Kevin Smith (President, CEO and Director)

Yeah. So I'll start at the beginning, part of that. So from the impact from the third party we saw, as we had characterized that before, we exited the third-party relationship. We brought select members of that team who were the highest performing members of that team in-house, directly part of the Inogen team, and integrated that team into the family here. We saw a little bit of, I'll say, a transition, you know, period there, whereas we're integrating the team into Inogen, it caused a little bit of just some, you know, lost steps and so forth. But that is behind us.

That 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, yeah, Mike, I'll let you, chime in on the gross margin.

Mike Bourque (CFO)

Thanks, Kevin. Yeah, Colin, this is Mike. Just a little bit on the on your question on the gross margin. So we're not, we're not providing specific guidance in terms of gross margins going forward. But I can tell you kind of what the impacts were and kind of where they came from in that rental business for Q1. So kind of we'll start with the rental revenue. A couple of things impacting us there unfavorably. We did have lower Medicare rate that kind of went into effect on January of this year. So that's part of, you know, that's part of the impact. We're also seeing a unfavorable mix with a higher percent of our patients coming from the private payer payer as opposed to Medicare.

So, 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, we'll revisit that at the Q2 call.

Colin Clark (Healthcare Equity Research Analyst)

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

Operator (participant)

Thank you. Our next question comes from the line of Margaret Kaczor with William Blair. Please proceed with your question.

Margaret Andrew (Former Senior Sell side Analyst and Partner)

Hey, good afternoon, and thanks for taking the questions. I'm gonna try to dive a little bit into the second quarter guidance, if I may, by business line, and apologize in advance for the series of questions. But, you know, number one, usually Q2 would see DTC and B2B domestic just seasonally increase in a double-digit pace sequentially. So is that the assumption here, and why or why not? Two, are you assuming any benefit from Philips being off of the mark in the second quarter, benefit or headwind, frankly? And three, you know, relative to our number, we saw, you know, a lot of upside coming from B2B international.

you know, was there something specific to that number, and how repeatable, you know, is that $26 million as we go along, both into Q2 and, and the rest of the year?

Mike Bourque (CFO)

So, Margaret, this is Mike. I'll take the first part of that question. So in terms of kind of what we're guiding to, so, you know, we're, 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 things, the evolution of our channel, the channel mix, the new leadership team that's in place here. And in terms of the question about DTC, I think it's important also that we consider 2024 to be a rebase year at DTC, given the new size of our team. But we have seen early signs of higher productivity, which is very encouraging.

Just in terms, maybe a little bit more in terms of that guidance of the, the revenue guidance, just kinda maybe it'll be helpful to say how we approached it. We look at the pipeline, and we look at what is most likely to occur, what is unlikely to occur, and it's more of a bottoms-up forecasting that we're instituting in the business. And that gets us to that low, the low end, of the range that we provided. To get to that higher end, we really have to see higher percentage of upside in some large, larger B2B orders coming in.

Kevin Smith (President, CEO and Director)

Yeah, and I'll just add on to that a little bit, you know, Margaret, therefore, you know, one, on the assumptions of the benefit from Philips. You know, we have—we've seen, you know, very modest tailwinds coming from Philips so far. And as we characterized previously, we see that there's opportunity out there. We're gonna position ourselves. We have been positioning ourselves to take advantage of it, but it's something that we've not been seeing coming in in more than the dribs and drabs, let's say, opportunities that have presented themselves that we could, you know, particularly contribute back to that.

But 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 see that continue, we're not forecasting anything right now past Q2, and we haven't broken down the channel-by-channel mix. But we've seen good results coming from the B2B in general, and we do anticipate those opportunities continuing to be there and us taking advantage wherever we can.

Margaret Andrew (Former Senior Sell side Analyst and Partner)

Okay. And then as we think about the hospital channel, which is maybe a newer comment in your intro, you know, my, my understanding in the past is, hospital wasn't really something, quite as focused on by the company, because the flow rates maybe weren't aligned with what the hospital needs. So, you know, 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 gonna be, pursuing that?

Kevin Smith (President, CEO and Director)

So, yeah, so good, good, yeah, good dialogue there. So one of the... When we look at the hospital opportunity, so the, a large percentage of the patients are diagnosed in the, in the hospital from an event that triggers a visit to the, to the emergency room, leads to inpatient care, and then when the patient goes home, they have to have a, oxygen as, upon discharge from the hospital. So there's an opportunity for us to go even further upstream and be able to gain a few months, at the very least, but some number of months, in billing prior to a patient hitting a capitated period there. So, and those patients, of course, have follow-up by, by prescribers, so that leads to a, to another connected relationship back to the prescriber.

We see this as an opportunity for us to continue to explore. We've been engaging in that. We like what we're seeing so far. It's early stages to see how well we roll this out further, but it looks promising at this point for us.

Margaret Andrew (Former Senior Sell side Analyst and Partner)

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

Mike Bourque (CFO)

Oh, yeah. Thank you, Margaret. So just in terms of, you know, the, the improvement in COGS, the improvement in COGS and in related gross margin really, was largely driven by continued depletion of those premium, price components, that we had, we had, you know, been incurring in the previous year. 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, and we will be seeing, some of that really kind of like, make its way through the P&L over the course of the remainder of the year, but certainly to no degree that we've seen in, 2022 and 2023.

So to a much lower level, but we still have a little bit to get through.

Margaret Andrew (Former Senior Sell side Analyst and Partner)

Okay. Thank you, guys.

Operator (participant)

Thank you. Our next question comes from the line of Mike Matson with Needham and Company. Please proceed with your question. Mike, you might still have yourself on mute.

Mike Matson (Senior Equity Research Analyst)

Yeah. Yeah, sorry about that. The DTC sales team, you know, did the headcount change at all there? And, you know, what kinda drove the decline in sales in that business?

Kevin Smith (President, CEO and Director)

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

Mike Matson (Senior Equity Research Analyst)

Yeah, the sales people, the inside sales people.

Kevin Smith (President, CEO and Director)

... Yeah, so, you know, it's, you know, right now, we have a sales team that's in the range of 150-170 sales reps in the DTC channel. And, you know, we're going to probably not provide any additional updates on that going forward unless there's any deviation from it. But that is a, that's a headcount that we feel comfortable with right now. We have initiatives that are running through there that we've talked about with reducing the friction and enabling any patient who reaches in through the DTC channel into Inogen to help them all get an Inogen POC.

Whether that be for a cash sale or whether that be somebody who's covered by a rental plan, being able to leverage that sales organization and the contact point to allow that to happen. We've been seeing positive results coming from that. That still is in pilot phases right now, but we like where that has been trending, and we're very comfortable and happy with the size of that organization. We're gonna continue to focus on growing it profitably forward.

Mike Matson (Senior Equity Research Analyst)

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

Kevin Smith (President, CEO and Director)

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

Mike Matson (Senior Equity Research Analyst)

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

Kevin Smith (President, CEO and Director)

It was a couple of points in there, I think, to raise or to talk to. One, you know, the characterization of that business, potentially being part of an exit from there with a competitor. We're not seeing that that has been a meaningful contributor to the growth that we're seeing there or the business that we have coming out of this past quarter. We've seen very limited impact from that. We are going to continue to monitor and position ourselves to, you know, to take advantage. But we are positioning ourselves strongly against low-price competitors in the marketplace.

We see price pressure that is coming in, but we have a POC with an eight-year useful life on it, which is three years longer than the next closest competitor, and those are meaningful years that an HME, that a B2B partner could continue to deploy a POC and bill for it. We have a very strong brand name recognition. We know from our experiences working with our B2B partners, working with the prescriber channels, and also having patients reach into us through our DTC channel, that more often than not, patients are asking for an Inogen rather than asking for a POC. So that brand name recognition and that link to the quality of Inogen all gives us a distinct advantage.

Right now we feel like we are sitting alone at the top as the premium player in the marketplace. So we're gonna continue to have to fight off price pressure, but we feel that we have a good message to sell.

Mike Matson (Senior Equity Research Analyst)

Okay, got it. Thank you.

Operator (participant)

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.