Inogen, Inc. (INGN) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Inogen 2014 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Lee Savo [ph], Investor Relations. Ma'am, please go ahead.

Thank you for participating in today’s call. Joining me from Inogen is President and CEO, Ray Huggenberger; and CFO and Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the fourth quarter and the year ended December 31, 2014. As you know, Inogen distributes its earnings release to its Investor Relations website located at www.inogen.com/investor. Before we begin, I want to remind you that our comments today will include forward-looking statements within the meaning of federal securities laws. Forward-looking statements include among others statements regarding our expectations, goals or intentions, including but not limited to our assessment of the impact from competitive bidding under new Center for Medicare and Medicaid Services, CMS rules and regulations, our expectations regarding our pricing and sales strategies, and future avenues for growth. Our current views with respect to our 2015 revenue, cash flow, net income, and adjusted EBITDA guidance, as well as our estimate of our 2015 effective tax rate, current estimates of the Audit Committee investigation cost, our expectations regarding the classification timing and launch of our fourth generation portable oxygen concentrator, the Inogen One G4, our assessment of the impact of the strengthening U.S. dollar and our assessment of the timing and size of international sales. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections, and are subject to risks and uncertainties that could cause actual results and events to differ materially from those stated in the forward-looking statements. Our businesses and any financial projections provided today are subject to numerous and continually changing risks and uncertainties, including the possibility that Inogen will not realize anticipated revenue, the impact of reduced reimbursement rates in connection with the implementation of competitive bidding under new CMS rules, the possible loss of key employees, customers or suppliers, intellectual property risks if Inogen is unable to secure and maintain patent or other intellectual property protection for the intellectual property used in its products and risks relating to a recently filed securities class action lawsuit against the company and certain members of its executive management team in the United States district court for the Central District of California. Information on these and additional risk factors, uncertainties and other information affecting Inogen’s business and operating results is contained in Inogen’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013 and in Inogen’s subsequent reports including Inogen's Annual Report on Form 10-K for the year ended December 31, 2014 to be filed with SEC. Forward-looking statements made during this call are made only as of the date thereof and the company undertakes no obligation to update or revise the forward-looking statements whether as a result of new information, subsequent events or otherwise. Discussions during our call today will also include certain financial measures that were not prepared in accordance with the U.S. generally accepted accounting principles or GAAP. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in today’s earnings release and on Inogen’s current report on Form 8-K. For future periods, Inogen is unable to provide a reconciliation of non-GAAP earnings and adjusted EBITDA to net income as a result of the uncertainty regarding, and the potential variability of the amounts of interest income, interest expense, depreciation and amortization, stock-based compensation, provision for income taxes, and certain other infrequently occurring items, such as the acquisition-related costs that maybe incurred in the future. This conference call contains time sensitive information and is accurate only as of the live broadcast today, April 27, 2015. I'll now turn the call over to Ray Huggenberger. Ray?

Thank you, Lee [ph]. Good morning everyone and thank you for joining our fourth quarter 2014 conference call. I'm pleased to report another solid quarter of revenue growth which provided a strong finish to 2014 for Inogen. We exceeded our revenue guidance for 2014 achieving total revenues for the year of $112.5 million. Both adjusted EBITDA and net income were also higher than our expected range for the full fiscal year coming in at $24 million and $6.8 million respectively. Fourth quarter 2014 revenues were $29.1 million reflecting 47.3% year-over-year growth. This was primarily due to stronger than anticipated growth in our domestic and international business-to-business sales channels. 2014 was a transformational year for Inogen. We completed a successful IPO in February and a secondary follow-on offering in October. On the product development front, we expanded our product portfolio with the receipt of FDA clearance and release to market of the Inogen At Home, the lightest 5 liter per minute continuous flow oxygen concentrator on the market today. Our Inogen One G3 portable oxygen concentrator received a positive reimbursement decision in two major European markets, France and Germany. We currently sell our products in 44 countries outside the United States. Lastly, we successfully expanded our head count to include 129 in-house direct-to-consumer sales reps, 12 field sales reps targeting physicians' referrals and 5 employees in business-to-business sales as of December 31, 2014. Many of these additions came in the fourth quarter of 2014, so the growth we experienced during 2014 is a result of the shift in sales strategy we made at the end of 2013 which resulted in productivity improvements throughout 2014 and only minimal contribution from these hires in the fourth quarter. I am very proud of these results we achieved in 2014 and confident that we have put in place multiple avenues to continue to drive our future revenue and earnings growth. I'd like to provide some additional comments on our recent financial and business highlights. I'll then ask Ali to dive deeper into the financials for the fourth quarter and full fiscal year and then provide guidance on 2015. I'll close with some remarks on our strategy and growth drivers as we enter 2015 and then we'll move forward to your questions. Our business model continues to gain momentum as the only oxygen concentrator manufacturer that currently employs a direct-to-consumer business model in the United States. We were successful in building strong patient demand and brand awareness. Our 2014 revenues reflect nearly 50% year-over-year growth. We are not only seeing the impact of our investments in R&D and sales and marketing driving increased patient demand, but we also believe they are generating domestic business-to-business sales growth from a pull-through effect as consumers become more aware of our oxygen therapy products. Finally, as I've mentioned earlier, we continue to deliver solid adjusted EBITDA and net income results while maintaining a high sales growth rate. Adjusted EBITDA was $5 million in the fourth quarter of 2014, which was an increase of almost 55% over Q4 2013. This included the increased investment we made in sales as well as one-time costs associated with the follow-on offering and reflects 17% return on revenue. Net income in the fourth quarter was $1.5 million, bringing the full year 2014 net income to $6.8 million, a return on revenue of 6.1%. As you may recall, we launched the Inogen At Home product in October of 2014. With the introduction of the Inogen At Home we now have a strong product portfolio able to fulfill the clinical requirements of most oxygen patients as well as a more patient preferred product to use as a backup oxygen source for our rental patients. While the Inogen One product line is clinically validated for 24/7 use, the Inogen At Home gives us a compelling solution for nocturnal only oxygen therapy patients that do not yet require a portable solution. Our market is estimated to represent greater than 30% of total oxygen patients in the United States. We recently completed a pricing optimization study in various regions on the Inogen At Home concentrator to determine the appropriate sales price to maximize margin dollars and we have concluded that our U.S. retail price should be $14.95. While it is still too early to provide any meaningful commentary on sales trends, we did have a minimal contribution to sales in Q4 2014 associated with the Inogen At Home product, which we started shipping late in October 2014. We are still evaluating what the appropriate sales and marketing strategies are to incrementally sell the Inogen At Home without diluting our Inogen One sales efforts, which have a higher margin. We have begun deploying the Inogen At Home to our rental patients to reduce our servicing costs on backup stationary concentrators over time. But as a reminder, we are only deploying this product to net new patients on service, so we will continue to use our existing fleet of stationary concentrators as well. Turning to product development and operations, we are committed to making the ongoing R&D investments required to stay at the forefront of patient preference in the oxygen concentrator field. Our fourth-generation portable oxygen concentrator, the Inogen One G4 is still in the design stages. The G4 is expected to be smaller, lighter and less expensive to manufacture than our current Inogen One G2 and G3 products. We are on track to complete the final design towards the end of 2015 with commercial launch expected in the first half of 2016. The Inogen One G4 will not require new 510(k) clearance. Additionally, we continue to focus our efforts on other design and functionality improvements that enhance patient quality of life, while at the same time seeking opportunities that will allow us to reduce the cost of materials and improve the reliability of our existing product line. In December, we announced that we entered into a lease agreement for an additional 24,000 square feet in Richardson, Texas to be used as our primary manufacturing facility and in March we announced full operation of this facility. The new lease agreement enables us to reduce our average per square foot cost for manufacturing, while providing for manufacturing capacity expansion. We plan to convert our existing manufacturing space in Richardson, Texas into office space to allow for the additions of sales, customer service and billing personnel as well as other administrative functions. Our goal is to balance our infrastructure growth with a focus on cost control through scalable manufacturing, reliability improvements, optimizing asset utilization and reducing service cost. During our Analyst Day in December, we provided Medicare data that I wanted to highlight again today. This market data which was released to the public in the fall of 2014 comes from the annual CMS release of data and covers full year 2013. While the information provided has some limitations when used to assemble a picture of the O2 therapy market such as the absence of brand or manufacturing information, we believe that the information can serve as a good proxy for the entire market given that Medicare covers over 50% of that market. Based on the data sets the share of portable oxygen concentrators in the O2 therapy market grew from 4.4% to 5.9% over the course of 2013. Home transferring equipment also picked up market share and grew from 6.2% to 7% in 2013. While the share of stationary concentrators remained stable, portable tanks lost two percentage points of market share. Despite this loss, tanks still dominate this space, but their share of the ambulatory market dropped from 76.3% to 73.8% in 2013. This data suggested non-delivery solution gained share and within that markets POCs grew faster than transferring products. The 2013 year-over-year growth of POCs was 28%. This compares to Inogen's growth rate during the same period of approximately 50% in the same period, demonstrating our traction in gaining market share in 2013, which is the latest data available. As discussed in our Q3 2014 earnings release, CMS has issued a final ruling on the geographic areas currently not subject to competitive bidding. We still expect a 3% to 4% total revenue headwind in 2016 associated with these reductions and reimbursement rates. In addition, competitive bidding around two areas were rebid in Q1 of 2015 for the contracts beginning July 1, 2016 and going through December 31, 2018. We don't expect to have any visibility on any changes in rates in these areas until the fourth quarter of 2015 at the earliest. Lastly, on the positive side Medicare has granted an inflation adjustment increase of 1.5% effective January 1, 2015 for stationary oxygen services in areas not subject to competitive bidding. With that, I'll now turn the call over to Ali to provide more details on the financials.

Okay, thanks Ray and good morning everyone. During my prepared remarks I will review the details of our full year 2014 and fourth quarter financial performance and then I will update our current guidance for full year 2015. As Ray reported, for the full year 2014 total revenues were $112.5 million representing 49.2% growth over 2013 and above our guidance range for the year of $106 million to $110 million. The better than expected results in the fourth quarter were primarily due to the continued strength of our business-to-business sales both domestically and internationally. For the full year 2014 revenue from sales were $73.1 million reflecting 62.8% growth over the prior year. Revenue from rentals in 2014 were $39.4 million representing 29.2% growth over the prior year. For the full year 2014 business-to-business sales in the U.S. were $19.3 million, up $9 million reflecting growth of 87.2% over 2013 and represented our fastest growing segment in year-over-year percentage increase. International business-to-business sales for the full year were $24.4 million, up $7.7 million reflecting 45.8% growth over 2013. Direct-to-consumer sales for the full year 2014 were $29.3 million, 64.6% higher than 2013. This segment produced the most revenue dollar growth year-over-year with an increase of $11.5 million primarily driven by the sales strategy shift towards retail sales and the increased productivity of the direct-to-consumer sales force. Rental revenue for the full year of 2014 was $39.4 million, a 29.2% increase over 2013 in spite of the significant headwind associated with the shifting sales strategy and the decrease in Medicare reimbursement rates. Our business-to-business domestic sales channel increased as a percentage of total revenue for the full year of 2014 to 17.2% from 13.7% and our direct-to-consumer sales channel increased to 26.1% from 23.6%. Our rental channel was still our largest individual channel with a percentage of total revenue decline to 35% in 2014 from 40.5% in 2013. Our international business-to-business segment was relatively stable at 21.7% of revenues in 2014 compared to 22.2% of revenues in 2013. Turning to a more detailed look at our fourth quarter revenue, our total revenue was $29.1 million, which was an increase of 47.3% over the fourth quarter of 2013 and reflects continued strong performance on the top line and year-over-year growth in all segments. Looking at each of our revenue streams, the sales revenue for the fourth quarter was $18.4 million, an increase of 64.9% for the same period last year. Total units sold increased to approximately $8,900 in Q4 2014 up 85.4% from Q4 of 2013. We saw especially high unit sales in the quarter to major customers that tend to order in larger quantities. While the business-to-business sales raise our volume it does have a negative impact on our margins as the units are negotiated at a lower average selling price in direct-to-consumer sales. In addition, our margins were further negatively impacted by increased sales of previously rented and refurbished Inogen One G2 units in our domestic business-to-business and direct-to-consumer channels. These sales incrementally contributed to revenues, but the lower margins had a diluting impact on our sales gross margin for the quarter. More specifically, direct-to-consumer sales were $6.5 million reflecting 36.3% growth in Q4 over the same period in 2013 and accounted for 22.2% of total revenues. Sales declined slightly from the third quarter of 2014 as anticipated due to the seasonality that we see in consumer buying patterns in the fourth quarter, but still exceeded our expectations for the period. Direct-to- consumer rental revenues in the fourth quarter were $10.8 million, which was a growth rate of 24.7% over the same period in the prior year and accounted for 37% of total revenue. At the end of the fourth quarter we had approximately 28,400 rental patients on service, 33.3% increase over the number of patients on service as of December 31, 2013. This was a 6% sequential quarterly increase, the equivalent of approximately 1600 net patients added in the quarter. Business-to-business sales in the U.S. were $4.9 million, and once again our fastest growing segment in the quarter, up 92% in the fourth quarter of 2014 versus the comparative period in 2013 and represented 16.7% of total revenue. B2B international sales were $7 million, which was a growth rate of 82.3% reflecting 24.1% of total revenue. International B2B sales grew consistently throughout the year and were especially strong in the fourth quarter of 2014, as we benefited from the impact of the new French and German reimbursement for the Inogen One G3 product as well as the increased purchases from our key customers in Europe. International sales may vary quarter-over-quarter due to the timing and size of distributor orders as they manage their inventory and receive new tender contracts. As we primarily price and invoice our international sales in the U.S. dollar, its relative strength may have a damping impact on sales and/or prices into those countries with relatively weaker currencies. Looking at gross margin, gross margin for the fourth quarter of 2014 was 47.4% as compared to 51.5% in the fourth quarter of 2013, down approximately 410 basis points. Sales gross margin for the fourth quarter of 2014 was 43.7%, which was down from 47% for the same 2013 period. The margin decline over the fourth quarter of 2013 in sales margin was primarily due to the increase in the sales mix of lower gross margin business-to-business customers domestically and internationally that negotiate lower average selling prices as well as a sale of refurbished units at lower gross margin levels in order to dispose the rental assets no longer needed. Rental gross margin for the fourth quarter was 53.8%, down approximately 350 basis points from the same period in 2013, but consistent with the gross margin in the last two quarters of 2014. The decrease in the overall gross margin percent in the fourth quarter of 2014 from the sequential third quarter of 2014 was primarily due to the lower sales gross margin resulting from customer mix. In terms of operating expenses, overall operating expense was $12.04 million in the fourth quarter of 2014 versus $9.6 million in the same 2013 period, up 28.7% year-over-year, but down to 42.5% of revenue versus 48.7% of revenue in the same 2013 period. For research and development expenses we had $0.7 million in R&D expenditures in the fourth quarter of 2014 versus $0.6 million in the same 2013 period. Our selling, general and administrative expense, our sales and marketing expense was $6.4 million for Q4 versus $5.1 million in the same 2013 period. The additional spending was primarily associated with additional personnel related expenses in sales and sales support as well as media related marketing costs. General and administrative expense was $5.3 million for Q4 compared to $4 million in the same 2013 period. This increase was primarily associated with an increase in personnel related expenses and other incremental costs associated with being a public company. G&A expense also included approximately $0.4 million in one-time costs associated with the follow-on offering. Total SG&A expenses increased 29.6% to $11.7 million in Q4 versus $9 million in the same 2013 period, showing substantial expense leverage with revenues growing 47.3% in the same period. We had $0.1 million in net other expense in Q4 2014. Our interest expense declined since we paid up our outstanding bank debt in Q3 of 2014; however, we also incurred $0.1 million in other expense associated with foreign currency translation losses on a VAT receivable outstanding related to shipping costs on certain European sales. In addition, in Q4 2014 we recorded an income tax benefit of $0.2 million as we reduced our effective tax rate for full year 2014. In the second half of 2014 we initiated a tax efficiency program which has provided additional tax benefit and reduced our full year effective tax rate to approximately 32.1%. As a reminder, we revalued our deferred tax asset valuation allowance at year end 2013, which resulted in an income tax benefit of $21.7 million in Q4 of 2013. Our net income after tax in the fourth quarter of 2014 was $1.5 million compared to a net income of $22 million in the fourth quarter of 2013. Our net income for 2014 was $6.8 million, a 6.1% return on revenue. Moving to our cash balance. The company ended the fourth quarter with $56.8 million of cash and cash equivalents, an increase of $0.7 million in the quarter primarily associated with our increasing profits partially offset by working capital increases and additional investments in our rental fleet. At the end of the fourth quarter of 2014 we had no bank debt outstanding. In addition, I'd like to cover some key non-GAAP financial measures. Adjusted EBITDA for the fourth quarter was $5 million, which is 17% return on revenue. Our full year 2014 adjusted EBITDA was $24 million, an increase of 78.3% year-over-year and reflecting a 21.3% return on revenue. Our adjusted net income was $6.6 million in 2014 compared to $3.6 million in 2013, an increase of 81% year-over-year. Earnings per diluted common share on a pro forma non-GAAP basis were $0.07 in the fourth quarter of 2014 and $0.35 for the full year 2014. I would also like to cover the delay in the release of our fourth quarter and year end 2014 financial results. As previously disclosed during the first quarter of 2015 management discovered certain potential accounting matters prompting the Audit Committee with the assistance of an independent advisor commence an internal investigation. Specifically management found that certain direct-to-consumer sales representatives submitted modified documentation in violation of Inogen policy. The Audit Committee's investigation is now complete. Its principal finding is that five Inogen direct-to-consumer sales representatives falsified or improperly modified sales and rental order documentation and circumvented Inogen's order entry process. Revenue in the fourth quarter of 2014 was reduced by $0.3 million including prior period adjustments. The net income impact was a reduction of $0.1 million in the fourth quarter of 2014. Substantially all of this revenue will be recognized when the corrected documentation is finalized in 2015. The employees responsible for this conduct have been terminated. The investigation found that the company's senior executives did not know of or participate in this conduct. The Audit Committee's investigation did not reveal systemic falsification or alternation of sales and rental order documentation by other sales representatives. Now I will turn to our updated guidance for 2015. Looking at total revenue in our strong Q4 2014 results, we are raising our 2015 revenue guidance to a range of $133 million to $137 million, which represents year-over-year growth ranging from 18.2% to 21.7%. This compares to the previous revenue expectation of $130 million to $135 million, which was provided on December 15, 2014. We are confirming our 2015 adjusted EBITDA range of $27 million to $30 million representing an approximate increase of 12.7% to 25.2% over 2014. We are also confirming our net income to be in the range of $8 to $9.5 million, representing an approximate increase of 17.2% to 39.2% over 2014. We expect an effective tax rate in 2015 of approximately 35%. Due to the Audit Committee investigation associated with the accounting matter previous discussed, we expect additional general and administrative cost of approximately $1.0 million to $1.5 million, primarily in the first quarter of 2015. The Company still projects a net positive cash flow for the year with no additional equity capital required to meet its plan. I'll now turn it back to Ray for comments on our 2015 strategy.

All right, thanks, Ali. I will keep it short because not much is changing from our strategy that we have employed so far. We entered 2015 in a position of strength stemming from the continued traction we have achieved in developing and bringing to market a best-in-class product portfolio of innovative oxygen concentrators. We have multiple avenues with the potential to drive our growth including the continued expansion of our direct-to-consumer and physician referral networks, increasing adoption across our domestic and international business-to-business channels, additional private player contracts and new products like the Inogen One G4 and the Inogen At Home. We look forward to updating you throughout the year on our progress and Ali and I will schedule additional investor meetings after our first quarter conference call which we expect to do before the May 15, 2015 deadline. With that, I will now open it up for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Mike Weinstein of JPMorgan. Your line is now open. Please check your mute button.

Can you hear me?

Yes, now we can.

Okay, sorry for that guys. So, first question just with the resolution of the Audit Committee investigation what comes next and the expected release of the 1Q results will be when?

Yes, so we do expect to release before the May 15, deadline for Q1, so we are in process of preparing those financials as well. The big next step in terms of the results of the investigation is implementing our remediation plan. So that includes some new and revised control procedures in that order review process as well as compliance program, supplemented document retention policies on our sales documentation, additional core release screening through data analytics to confirm compliance with our policies and improved processes and controls in our customer relationship management software system.

Perfect. Ray, you talked about the size of the DTC sales force today, can you just talk about how you are thinking about that as you've built it out over the last 18 months and kind of where you see that going?

Yes, so I mean, in 2014 because we made that shift in the sales strategy, we got a lot of productivity improvement in the first six to nine months of the year and almost all of our hiring or expansion of the headcount of the sales force was in the fourth quarter. We don’t have the benefit of a new productivity step change in 2015, so as we expand to 2015 it should be less lumpy and a little bit more straight lined throughout the year.

Okay. And you made a comment Ray on the call about G4, I think you said that it wouldn’t require 510(k) approval, did we hear that correctly?

That is correct, that is correct, because it is essentially just a new version, a letter to file is sufficient.

Okay. Great, I will jump back in queue, thank you guys.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Margaret Kaczor of William Blair. Your line is now open.

Hi, good morning guys. Just a few questions from me, on the audit and the reps that were terminated, have you guys already hired those replacements? I mean, does this change any of your annual hiring plans when you started before this event?

Yes, it really doesn’t change our strategy of continuing to hire reps, so it will five reps out of 129 basis about 4% of our rep population, so its within normal churn and yes, we have replaced them and continue to grow that sales force.

Okay, and then in terms of the private label partnership that you guys have with Applied Home Healthcare, how is that contract worked up this year, is it above or below expectations and how much of that contract is in your guidance?

We have included, we did know about the Applied Home Healthcare when we put out our original guidance for 2015, so we knew that that was a portion of it. Obviously, it is still early in the development of that relationship and something that will take many quarters to fully reach full potential. So it is a contributor to guidance, but it is something that will take some time to develop and it is on track. We have seen traction there thus far.

And in terms of how many new DME customers that you guys may have now, whether as a result of that contract or not, but may be how many of those, how many DME customers have bought your products before at the launch of the OxyGo and then after and i.e. going into how much of the Greenfield opportunities just for you guys?

Well, I mean it is somewhat of a, I don’t know if I would call it a Greenfield, but I mean the fact of the matter is that our business model will preclude a number of DMEs to buy directly from us and believe it or not, some will buy from OxyGo we knowing fully wall that it is an Inogen product. So we will see how big this animal gets and as Ali said, it’s going to take quarters to develop, so far it’s been meeting our expectation. And we have not really seen a meaningful decline in the number of DME customers buying directly from us.

Okay and then last one from me, can you guys walk us through the sales growth margins, may be in even more detail? This also happened in 2013, it looks like and it bounced back pretty quickly. So is this a similar situation or should we expect gross margin to come in, in 2015, and then wouldn’t you get leverage on the sales and marketing line despite the lower gross margins since you are selling B2B and have fewer sales and marketing expenses? Thank you.

Yes, so on the gross margin side, yes, the margin obviously did come in lower in the quarter compared to where we had been trending. It really is because of those strong business-to-business sales that we had where we do give price on the top-line, but we do see very few operating expenses associated with that portion of business, so they are still profitable sales for us. We also had some sell off of assets that we were no longer wanting to redeploy into our fleet and those are done at low ASPs, so that does have a diluting impact on that margin, but those are kind of one-time impacts as you move through that. I mean, go forward and looking at 2015 gross margin, obviously we don’t give specific guidance on gross margin, but it is most heavily impacted by the mix of direct-to-consumer and business-to-business. So, as we see items, one of those areas perform stronger than the other, you would see margin either increase or decrease proportionally to that on the gross margin side. On net margin side, you see a similar net margin profile where in the end both businesses are quite profitable for us.

Yes and as far as the bounce back is concerned Margaret, in the first quarter 2014 we had a bit of a benefit from the shift in our sales strategy that pushed the direct-to-consumer retail sales up. If you remember we had 60% to 70% growth in that area in the first quarter last year. We’re probably not going to see the same benefit of this bounce, the step change reflected in the margin, so I wouldn’t necessarily expect the same bounce that we experienced in 2014 to happen again in 2015.

Thank you.

Thank you. And our next question comes from the line of Danielle Antalffy of Leerink Partners. Your line is now open.

Thank you so much, good morning guys and congrats on another great quarter. You know obviously, your business-to-business segment is growing very rapidly and I was hoping you guys could comment on what you are seeing in the competitive environment as far as some of these DMEs taking more notice clearly, at least some of the mom-and-pop shops are, but at what point do the larger DMEs or Lincares' of the world take notice and get more competitive here in your view?

Well, it’s very difficult for us to predict what Lincare is or is not going to do. But if you look at the overall trend, what you can see is that POCs continue to penetrate the market, so we see that on the Medicare data. We see that on our business-to-business growth rate. I mean we are far away from any meaningful penetration that would slow growth down, but we see that the adoption rate is increasing. Now, whether or not that is because other DMEs are actually making a conscious decision to employ POCs as the default mode of providing oxygen services or whether or not that is a direct response to increasing patient demand is pretty much anybody’s guess. Our interpretation of the relatively small penetration numbers is that it is still first and foremost driven by patient demand and that the DME industry is responding to some extent to that patient demand, but more in a defensive way than in a provocative way.

Great, okay that makes a lot of sense. And then obviously international has been strong for you and you recently got reimbursement for the G3 in Germany, just wondering if you could comment on any potential expansion from a geographic perspective that we should be cognizant as we head into 2015?

Yes, so there is no additional reimbursement on the horizon that we haven’t already talked about with Germany and France coming on board and seeing the growth of those areas. It’s really, for international driving it through our partners. We have great partners especially in Europe. Europe is about 80% of that overall international line, so it’s continuing to work with our partners to drive conversions from tank and liquid based systems. There are opportunities for us to continue to expand in other areas outside of Europe. We take those sales at this point pretty opportunistically, but eventually those are large markets that we would consider going after, but with over half of the market being in the United States, the focus is still on the U.S. for us.

Okay, that’s fair, thanks so much guys.

Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Tom Carroll of Stifel. Your line is now open.

Hey, good morning.

Good morning.

Good morning, Tom.

So, just a couple of questions, it looks like the inappropriate documentation crossed into the rental business as well to some degree. I was wondering if you could tell us you know how much may be affected that part of the business and does this increase in your mind the likelihood of CMS looking into this a bit more?

So, we didn’t break out specifically, I mean 0.3 million in total is pretty immaterial regardless of the breakout between rental and sales. We have in the situations where any refunds were required we have done those, so we don’t believe this will lead to any further action from CMS or anybody else. The numbers we are talking about are very small and they were very minor issues overall.

All right, great, and then secondly, given your growth in 2014 and what you have done around the sales force, I wonder if you could comment a bit more on any kind of quarterly seasonality that we might see different in 2015 then prior years. And Ray, I think you mentioned earlier that you know things should be less lumpy was that correct?

Yes, in terms of the additional expansion of the sales force it should be less lumpy. As I said last year, almost all of our expansion happened in the fourth quarter. That would certainly be way more spread out this year. In terms of the seasonality, we don’t expect the seasonality to be fundamentally different in 2015 than in previous years. We have always seen a relatively weak fourth and first quarter and the relatively strong second and third quarter and we are not expecting it to be any different this year. The amplitudes may change a little bit from year-to-year, but in principle, I think the same distribution or very similar distribution should apply.

Great, thanks for that.

Thank you. And our next question comes from the line of Mike Matson of Needham & Company. Your line is now open.

Hi, good morning, thanks for taking my question. I guess, I just wanted to start with the recent changes to some of the bidding rules that were included in this "doc fix" bill. I know it’s going to be a few more rounds before any of that sort of kicks in, but with the binding bids and so forth, do you see that affecting Inogen at all, is it a positive, is it a negative?

It’s kind of a neutral. I mean, we see it as a good thing that CMS is looking to continue to refine that bidding process and making it fair. So, we are supportive of the changes that were made. Basically what this will require is bidders will get surety bonds for each CBA, so you will be getting 100 or so surety bonds of $50,000 to $100,000 each. And if the supplier bids lower than the median price, they either have to accept the contract or forfeit their surety bond. So this should reduce the likelihood of low ball bids coming in with people just hoping to win a contract because they will be binding in nature.

Okay, thanks. And then can you just comment on, I didn’t hear you, I might have missed it, but I didn’t hear you quantify the impact that you expect from foreign exchange on both revenue and earnings during 2015, what's sort of baked into your guidance here, and has that I guess increased since you gave the guidance, I would imagine it has increased since you gave the original guidance back in December?

Right, so in 2014 we sold almost exclusively in dollars. We have now shifted to begin to sell in euro to some distributors in key accounts. So, we’ve shifted that and then we are putting appropriate hedging strategies in place on the euro, so we will see some impact of foreign exchange in 2015. We don’t expect it to be significantly material, but we have seen some price pressures associated with the strengthening dollar.

Okay and then…

And that’s included in the guidance given.

Okay. And then do you, I know that you periodically do these pricing tests, do you expect to do any of those in 2015? And is there any, what’s the possibility that we could see your prices change on either the portable or at the At Home unit?

Well, you never know what the outcome of any pricing trial, this is why you're doing a trial. So, what we can say is, for I think for the last two trials we have, the result was that we should not change our retail pricing. Yes, you can expect that we are going to do another one sometime this year. And, I mean, I can’t predict whether the elasticity has shifted or not. If it hasn’t shifted then we know that we're good with our current retail pricing. If it has shifted then we will trade some margin dollars for volume.

Okay. That’s all I have, thanks a lot.

Thank you.

Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Ray Huggenberger for any further remarks.

Thank you. So, I would like to thank everybody for joining us today. It’s been a long time coming. We've waited for this call more than anyone of you have and now that we are back on track we definitely plan to release Q1 in time, so that should be in not too distant future. And we look forward to talking to you then and hopefully seeing some of you as we get back out on the road and talking to investors. So, for now thanks for coming in early today and joining us for this call and we will talk to you again soon. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Have a great day everyone.