Inogen, Inc. (INGN) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Inogen 2015 First 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 be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today’s program, Lynn Pieper, Investor Relations. Please go ahead.

Thanks Jonathan and 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 its results for the first quarter ended March 31, 2015. Inogen’s earnings release and a corporate presentation are currently available in the Investor Relations section of the company’s website. 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 current views with respect to 2015 full year 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 the launch of our the Inogen One G3 product upgrade, our assessment of the impact of the strengthening U.S. dollar, our assessment of the timing and size of international sales, and our views regarding our private label relationship with Applied Home Healthcare. The 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 the 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 our 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, 2014 and in Inogen’s subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission including Inogen’s quarterly report on Form 10-Q for the year ended March 31, 2015 to be filed with the Securities and Exchange Commission. 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. 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, May 12, 2015. With that I'll turn the call over to Ray Huggenberger. Ray?

Thank you, Lynn. Good afternoon everyone and thanks for joining our first quarter 2015 conference call. Recognizing it has only been a few weeks since our last conference call; my remarks will be brief and cover the following agenda. First, I would like to highlight our recent business and operational accomplishments and we will then review the financials and 2015 guidance and at that point we will open the call up for questions. We are off to a very strong start in 2015. We achieved record revenue of $33.8 million in the first quarter of 2015, representing 42.8% growth from the same period last year and strong performance in each of our business segments, especially on seasonably strong business-to-business demand in both our international and domestic markets. Our positive results also included improving adjusted EBITDA and net income results, while at the same time maintaining a high sales growth rate. Adjusted EBITDA was $6.4 million in the first quarter of 2015, representing 46.7% growth over the same period in 2014 and then 18.9% return on revenue. This included the increased investment we made in sales as well as the majority of the one-time costs associated with the audit committee investigation. Net income in the first quarter was $1.6 million, representing a return on revenue of 4.7%. We continued to see stronger than anticipated growth in our domestic and international business-to-business sales channels as well as growing patient demand and brand awareness in our direct-to-consumer channel. International business-to-business, which grew nearly 89% over the same period in the prior year was our fastest growing segment and has substantially exceeded our expectations, particularly in light of the less favorably currency exchange rates. We currently sell our products in 44 countries outside the United States including Germany and France, where the impact of reimbursement coverage for Inogen One G3 has been a significant factor to our growth in those countries. We have great partners especially in Europe, which represents over 80% of our international revenue. As part of a strategy to more proactively approach international sales, we’ve recently hired our first international sales representative. He is located in the Netherlands and we’ll focus on expanding distributor partnerships throughout Europe and working more closely with our existing partners to drive conversion from the traditional delivery-based systems. Business-to-business sales domestically also saw exceptional growth in the first quarter with nearly 71% year-on-year improvement. We believe the traction we are gaining in this channel is primarily the result of reseller demand for portable oxygen concentrators as we and others increased marketing spend to target existing oxygen patients. We also saw some incremental revenue in the quarter from Applied Home Healthcare’s private label, sale of our Inogen One. However, it was an immaterial contribution to the quarter. While it is still very early in this partnership and we believe it will may takes many quarters to determine what the true potential could be, we do see some early interest. We are starting to see the benefit of the additional sales headcount, we added in the fourth quarter of 2014, direct-to-consumer sales grew approximately 26% over the same period in the prior year, and direct-to-consumer rentals grew 22%. Combined direct-to-consumer sales and rental revenue represented almost 58% of our total revenue reflecting the strength of our direct-to-consumer model and growing brand awareness. We would expect to see continued seasonally adjusted steady growth in our direct-to-consumer channel throughout 2015 as the additional headcount comes up to full speed and we continue to add to our sales headcount throughout the year. So let’s turn to product updates following the launch of Inogen At Home stationery oxygen concentrator last October and the subsequent pricing optimization study. We saw some early indication of positive sales traction late in the first quarter as a result of selling our Inogen At Home combined with our Inogen One product line. This strategy enables our direct-to-consumer sales teams to continue to focus their time on the higher margin Inogen One products, while at the same time generating an up sell opportunity to customers that maybe interested in purchasing a packaged solution for a slightly discounted price. Based on the early interest, we expect to continue improving the strategy as it provides an opportunity to incrementally sell the Inogen At Home without diluting our Inogen One sales assets. The combined solution is proving to be optimal for patients who want the flexibility of a portable oxygen concentrator with a home use alternative. We continue to make ongoing R&D investments to stay at the forefront of patient preference in the oxygen concentrator field. This is a key strategy for us. Recently, we’ve been working on an upgrade to our Inogen One G3, which includes increased oxygen production and allows us to add an additional setting to the product. The enhanced G3 is also expected to benefit from additional design and manufacturing cost efficiencies, enabling us to manufacture the upgraded product at a lower cost while maintaining the same retail price. We expect the upgraded Inogen One G3 to be available towards end of 2015. Our primary manufacturing facility in Richardson, Texas is now in full operation and shipping product. We are continuing with the build out of our former manufacturing facility in Texas to provide office space for the addition of sales, customer service and billing personnel as well as other administrative functions. We expect to complete the transition of this space in the second half of 2015. I’m very proud of the momentum we have achieved in developing and bringing to market a best-in-class product portfolio of innovative oxygen concentrators. We are executing on a strategy that combines the expansion of our domestic direct-to-consumer marketing efforts, increased sales capacity, increased physician referral networks, more private payer contracts, continuous product innovation and increasing adoption of our product portfolio across our domestic and international business-to-business channels. With that, I’ll now turn the call over to Ali to provide more details on the financials.

Okay, thanks Ray and good afternoon everyone. During my prepared remarks, I will review the details of our first quarter financial performance and then I will provide our current guidance for full year 2015. Revenue for the first quarter of 2015 was $33.8 million, representing 42.8% growth over the first quarter of 2014. Once again, we saw continued strong performance on the top line and year-over-year growth in all revenue streams. Looking at each of our revenue stream, sales revenue was $23 million reflecting 55.1% growth over the same quarter of the prior year. Total units sold increased to approximately 11,000 in the first quarter of 2015, up 74.6% from the first quarter of 2014. Revenue from rentals in the first quarter was $10.7 million, representing 22% growth over the same period in the prior year. Direct-to-consumer sales for the first quarter of 2015 were $8.8 million, representing 25.9% growth over the first quarter of 2014. Sales were higher both sequentially and over the same period in the prior year despite the anticipated seasonal impact of reduced buying patterns in the fourth and first quarters of the year. The increase was driven largely by the additional headcount brought on board in the fourth quarter of 2014, improved productivity at the sales force and growing brand awareness as a result of our marketing campaign. Direct-to-consumer rental revenue was our largest individual revenue stream at $10.7 million, a 22% increase over the first quarter of 2014. Rental revenue represented 31.7% of total revenue in the quarter. Rental revenue was slightly lower than the fourth quarter of 2014 due to a higher return rate of patients on service experienced in the first quarter of 2015. While our total patient population increased by 1,600 net patients in the first quarter of 2015 compared to the fourth quarter of 2014, an increased number of our total patients were only billable for a portion of the quarter due to the timing of when the service. At the end of the first quarter, we had approximately 30,000 rental patients on service, a 30.4% increase with a number of patients on service as of March 31, 2014. This was a 5.6% sequential quarterly increase. International business-to-business sales were particularly strong at $8.4 million and represented our fastest growing segment in the quarter at 88.9% versus the comparative period in 2014. We continue to benefit from strong partnership throughout Europe as well as reimbursement in Germany and France for the Inogen One G3 product. We do expect that international sales may continue to be lumpy 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 currency. We have begun selling to some of our customers in Europe, which have had a dampening impact on our average selling prices. Domestic business-to-business sales were also especially strong in the quarter, growing 70.7% over the same period in the prior year. This was largely due to our expanded consumer marketing and the success of our reseller partnership. Turning to gross margin for the first quarter of 2015, gross margin was 47.5% as compared to 50.5% in the first quarter of 2014, down approximately 300 basis points. Our sales gross margin was 45.4% in the first quarter of 2015 versus 49.2% in the first quarter of 2014. Similar to the fourth quarter of 2014, the decline in sales gross margin percentage was primarily related to a shift in sales mix towards lower gross margin business-to-business segment domestically and internationally versus direct-to-consumer business. In addition, average-selling prices declined across business-to-business sales as volume increased and as a result of price concession due to the relative strength of the dollar versus the euro. Our rental gross margin was 52% in the first quarter of 2015 versus 52.7% in the first quarter of 2015. The slight decline in rental gross margin percentage was primarily related to a higher return rate of patients on service in the first quarter of 2015. This rental gross margin is consistent with prior years where we have seen lower rental gross margin in the first quarter of the year. In terms of operating expenses, overall operating expense was $13.5 million in the first quarter of 2015 versus $10.4 million in the same 2014 period, up 30%, but down to 40% of revenue versus 44% of revenue in the same 2014 period. For research and development expense, we had $0.9 million in R&D expenditures for Q1 2015 versus $0.6 million in the same 2014 period. The increase was primarily associated with additional personnel related expenses. For selling, general, and administrative expense, sales and marketing expense was $6.9 million for the first quarter versus $5.7 million in the same 2014 period. The additional spending was primarily associated with additional personal related expenses in sales and sales support. General and administrative expense was $5.7 million for the first quarter compared to $4 million in the same 2014 period. This increase was primarily associated with an increase in personnel related expenses and general accounting and legal fees. G&A expense also included approximately $0.9 million in one-time costs associated with the audit committee investigation, which was concluded in April of 2015. Total SG&A expenses increased 29.6% to $12.6 million in the first quarter of 2015 versus $9.8 million in the same 2014 period, showing substantial expense leverage with revenues growing 42.8% in the same period. We have $0.1 million in net other expense in the first quarter of 2015, primarily associated with foreign currency translation losses. In the first quarter of 2015, we reported income tax expense of $0.8 million compared to $0.6 million in the first quarter of 2014. Our effective tax rate was 35% in the first quarter of 2015 versus 39.4% in the first quarter of 2014. As a result, our net income after tax in the first quarter of 2015 was $1.6 million compared to a net income of $0.9 million in the first quarter of 2014, an increase of 77% in the comparative period. Moving to our cash balance. The company ended the first quarter with $61.1 million of cash and cash equivalents, an increase of $4.3 million in the quarter due to reduced working capital requirements and incremental profit. As of the end of the first quarter of 2015, we had no bank debt outstanding in our entire $15 million credit facility was available to meet future needs. In addition, I'd like to cover some key non-GAAP financial measures. Adjusted EBITDA for the first quarter was $6.4 million, which was an 18.8% return on revenue. Adjusted EBITDA increased 46.7% in the first quarter of 2015 versus the first quarter of 2014. Earnings per diluted common share on a pro forma non-GAAP basis were $0.08 in the fourth quarter of 2015 versus $0.05 in the first quarter of 2014. Now, I’ll turn to our guidance for 2015. We are confirming our 2015 revenue guidance provided on April 27, 2015 of $133 million to $137 million, which represents year-over-year growth ranging from 18.2% to 21.7%. We are also 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 continue to expect our net income to be in the range of $8 million to $9.5 million, representing an approximate increase of 17.2% to 39.2% over 2014. We continue to expect an effective tax rate in 2015 of approximately 35%. The one-time general and administrative operating expenses of $1 million to $1.5 million associated with the audit committee investigation is included in this guidance of which $0.9 million was included in general and administrative operating expenses 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 current plan. With that, Ray and I would now be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Margaret Kaczor from William Blair. Your question please.

Good afternoon everyone, few questions for us. First, at your Analyst Day at the end of the year, you guys have given some additional details on the components of guidance by line item. How much of that has changed at all particularly given the strength international and the conservative guidance at the time? And I hear you guys now assuming quarters were flat to down internationally for the rest of the year if it’s unchanged?

Well, Margaret, if you recall the kind of expectations we had around direct-to-consumer sales were in the – around 30%, we expect the rental to be around 20%, we expect the domestic business-to-business to be around 30% and we had intentionally kind of been very careful with international given the unpredictability of what the dollar exchange rates and everything was going to due to our international business. We have then three weeks ago brought up the guidance based on what we have been seen especially in the business-to-business both internationally and domestically that came in significantly better than what we had expected. It’s a little too early to basically say, well, we had 70%, 80% growth in those two segments, the rest was about where it’s supposed to be. And so, now let’s extrapolate that form throughout the year where we’re only one quarter into the year. So, we brought up the guidance moderately to bring up our expectations on both domestic business-to-business and international business-to-business, but with a lot of caution because again it’s been one quarter. We have not yet – the full impact of what currency translation is going to do to the international business we have not yet seen whether or not that’s going to dampen sales, it may not because we have adjusted our pricing. We have adjusted selling in euros and then international sales by definition are lumpy. So before we go and bring the expectations for the years, if up any further we would like to see the second quarter coming in ahead of expectations as well before we conclude that we were indeed too conservative.

Okay, that’s helpful. And just go into maybe a little bit more detail on the OxyGo partnership and it seems as though AHH is getting traction appeal although you did say the revenues have been immaterial this quarter. Can you maybe give us any color on what the sequential increases were either throughout the quarter or what you’ve seen early in Q2? And just broadly what the color has been in terms of feedback from your customers and their willingness to purchase the OxyGo?

Well – obviously, I can’t talk about Q2 and unfortunately there are not a lot of data points in Q1 because the partnership didn’t hit the market until very late in the quarter, effectively we had six weeks or so. So, it’s – there’s just not enough data points to conclude anything. We’re going to keep watching this. We saw some early interest. We’ve got some orders in. If you look at the scope of the quarter, it’s not really moving the needle one way or the other. But if that continues to build and extrapolates, it should be – it could contribute. But we have – we’re going to have to wait another one or two quarters before we conclude and actually talk about that as a separate line item or a contributor in its own right.

Yes, just to expand a bit on that. I mean, obviously we saw over 70% growth in that domestic category. And we did purposefully say that the growth was – what we saw from the AHH really was immaterial to the quarter in the dollar contributing standpoint. Certainly, we’ve seen positive indication, but this is something that we said also just a few weeks ago that it will take many quarters to build out this relationship and for them to build their pipeline of approved interest in OxyGo product. And while we’ve certainly seen positive indications to start, it is truly a material contribution to the first quarter success.

Thank you. Our next question comes from the line of Mike Weinstein from JPMorgan. Your question please.

Hi, good afternoon guys.

Hi, Mike.

So, let me start on FX and [indiscernible] answer this, but with the FX impact on the top line and its not just the translation, it’s the re-pricing of your OUS business. G2 will impact that had on gross margin in the quarter and do you have any commentary just on how it models out for you guys over the balance of the year?

Yes, we didn’t break that out specifically on the gross margin impact, but it was not as large of an impact as the mix shift towards the overall business-to-business category. So when you look at gross margin and you see even – going from 40 – 45.4% in the first quarter of 2015 versus 49.2% in the first quarter of 2014, most of that’s associated with the mix shift towards business-to-business. The secondary factor there and the much smaller factor is associated with the – either as the changing in pricing associated with selling in dollars or the lower euro pricing.

Great, I understood. Okay, so the B-to-B business obviously is coming in so far well ahead of your original expectations. The D-to-C sounds like it was owed to really at the start of the year, but picked up over the course of the quarter. So is that right characterization of it that the revenues came in a little – maybe a little bit light or so in that better than people expecting because the new patient adds really didn’t kick in until later in the quarter?

Yes, so, direct-to-consumer was pretty much in line with our expectations internally. On the direct-to-consumer sales side, obviously what – when we look seasonality, you see the seasonality starting to pickup in March. So that’s typically where we see the churns starting and happening and it was another strong March for us. So that’s certainly is good on the rental side of the business because of the churn that we saw, we just saw lower actual amounts build per patient in the quarter. So it really is an indicative of the overall demand with that patient population still growing 30% year-on-year, but the revenue was impacted associated with when the patients were added in the quarter and how much revenue we could per patient because of – and primarily associated with a higher death rate that we saw in the quarter.

Understood…

Yes, the other thing that Mike you might want to keep in mind is that the expansion of our sales force in 2014 happened pretty much towards the end of the year. So the ramp – I mean 20% or 25% or some number like that of our sales force was still in the middle of the learning curve throughout the first quarter. So just – have we been more successful in hiring earlier we might have seen a little bit more impact from those additional sales people than we did in the first quarter, but it came in right around where we expected it to be.

Okay. And so, Ray is it safe to assume given all that commentary that you expect the D-t-C side of the business to pick up over the balance of the year?

Relative to the first quarter, absolutely.

Okay. I mean obviously the part that’s just harder to forecast is the B-to-B side of the business?

Right, right.

Okay. And so if that does play out well, we’ll see what happens to B-to-B, but if does play out that would obviously be beneficial sequentially at least to your margins. And if it does as well it would seem to imply that the implied guidance for the balance of the year on the top line would be conservative. Is that fair?

Yes that is fair.

Mike, if business-to-business continues to come in as strong as it has that would be accretive to our guidance, but I do want to caution everybody that there – when you look at business-to-business and you look at what happened last year in business-to-business, the third quarter and the fourth quarter, we really started seeing ramp-up in both the international business and the domestic business-to-business. And so, the comps – yes, the comps are going to get much harder for us as we go further into the year compared to the first quarter, which was relatively light on the business-to-business side last year. So, well, the numbers are great and it’s a great year-over-year growth rate. I just want to caution people that those comps do get harder as we go further into the year.

Okay, perfect. I will let somebody to jump in. Thank you guys.

Thank you. Our next question comes from the line of Danielle Antalffy from Leerink Partners. Your question please?

Hi, good afternoon guys. Thanks so much for taking the question and congrats again on yet another great quarter. Ray, I was looking in for comment on obviously this winter was not as bad as last winter, but I have heard some of the smaller med-tech companies callout a weather impact. I am wondering if you could comment on that at all.

Yes, I mean, we certainly see a weather impact that impacts patient’s death rate. So that’s certainly is something that impacts our business. And as patients get sicker, when it is colder outside, we do unfortunately see patients pass away at a higher rate in our...

Yes, which is one other contributor to a higher return rate in the first quarter. The other thing, we did have a couple of operational challenges to overcome with ice storms in Texas and the logistics being very challenging with actually being able to have product picked up and delivered. And then we were able to make up for that by expedite shipments after the weather had cleared. We saw some cost increases on the logistic sides that is part of our cost of goods. So it was a challenging week or ten days or so in the middle of the quarter where we basically couldn’t get product out the door for one or two days. And hence we have higher logistics costs, which also didn’t help the gross margin, but overall that’s a very, very small contributor and we were able to catch that backup within days.

Got it, okay. So minimal impact you say to the top line may be contributed to higher OpEx overall?

Yes, I think the top line net contributed it all.

Okay, that’s helpful. And then my next question is on the direct-to-consumer segment. You know as we think about that piece of the business getting bigger, how – how sensitive are ASPs in this business? And sort of what’s the trend that you’ve been seeing I mean we obviously guesstimate in our model. So I am just curious if you can give us any color on a) what you’ve been seeing and b) what do you think, you will see potentially as some competitors get more active if they do on the GME side of things? And as your business-to-business – domestic business gets larger too in a sense that’s somewhat competitive to your direct-to-consumer business. So I am just curious how to…

Yes, there is really – I mean there are two factors that impact on the consumer side that impact the ASP, right. One is what are your competitors doing and that’s relatively easy to determine because you just go and look at their published retail prices. The other one is what’s the price elasticity and that changes over time that is a little harder because it’s not a number you can look-up on the internet. And that’s why we did a price elasticity study last year we’re most likely going to do an another one this year to kind of determine where these inflection points are at which volume would go up if prices come down. Interestingly enough, last year, we determined that it wasn’t necessary to bring – to bring pricing down because the volume uptake [indiscernible] been accretive to profits. And we’re constantly monitoring our competitions to see it, but it’s been pretty stable for the last nine months or so.

Yes. And just to expand a bit on the relationship with the B-to-B side, well, yes, our business-to-business side has been growing and that’s primarily on the domestic side associated with that referral business. We worked with those partners to have consistent advertised pricing strategies. So we are not bidding against each other for customers. We have consistent prices that are released to the market through us and our partners.

Okay, that’s helpful. Thanks so many guys.

Thank you.

Thank you. Our next question comes from the line of Mike Matson from Needham and Company. Your question please.

Hi, thanks. I guess I wanted to follow-up on Daniel’s question on pricing, just asked a similar question about the B-to-B side of the business because you did call out price declines, I understand the currency effect in Europe. But I guess I am more interested in what sort of pricing declines you’re seeing in the U.S.?

Yes.

Yes, I mean, that’s largely driven by the volume uptick. So we’re basically with our business-to-business customers we have pricing structures that in the nutshell say you get price A if you buy one unit, if you buy five you get price B, you buy 10 you get price C, you buy 25 you get this 50 or 100. And – since they have – they are facing bigger demand, they place larger orders that in itself without us really changing the pricing, but it drives the average selling price down because they order in 25s and 50s instead of 1s and 5s.

Yes, and just to clarify I mean we don’t breakout our selling prices by each of the revenue streams, but clearly our ASP has trended down with revenues, sales revenue growing 55% and units growing almost 75%. So, certainly, we’ve seen an impact there. It primarily nicks, as Ray said, associated with those business-to-business accounts, buying more. It really isn’t on the direct-to-consumer side. There are small variations around what types of units people buy, but truly the real change in – those ASP is associated with the business-to-business side. And I want to also clarify that when we look at the business and make decisions of what prices we want to sell at and why. We’re not looking to maximize gross profit percentage, we’re looking at how we can maximize operating margin. And so that is very important to us to look at the whole cost bottom line not just focus on margin and while business-to-business has reduced our gross profit percentage, it has been accretive on an operating margin side. And that to us is way more important than whether gross profit is 50% or 47.5%.

Okay. But just back to the volume price breaks, I mean I guess in – part of the reason that companies do that is because you’re getting a leverage effect as well and your margin…

Correct.

The more you produce. So I mean is that I would assume that’s offsetting as your volumes go up, you’re offsetting some of that price decline at…

Yes, we have seen our prices, our cost of goods reduced over time, so that’s certainly…

On a per unit basis...

On a per unit basis has reduced. So that has offset a portion of ASP decline, but the bigger impact has been the operating expense leverage that we’ve received because the business-to-business side of the business has very minimal operating expenses associated with it. So those gross margin dollars fall through to the bottom line almost on a dollar for dollar basis.

Okay, thanks. And then the returns in the D-t-C business deaths – I mean you mentioned patient death is that’s really what’s driving that or these – or there patients that are buying the units and then returning them for some reasons – other reason…

No.

It’s by far, death is by far the biggest individual contributor to returns. You also have a phenomenon always in the first quarter when people change [indiscernible] insurance plans, all right. They go from straight forward medicare PPO to managed care. And as such they may go from 20% co-pay to an out of network benefit, the co-pay goes up and then they return. I mean there is a lot of things that that happen every year, especially in January, February when people enroll in new plans. That kind of tape us off after the first quarter, but we’ve seen that time and again in the first quarter that we have lower gross margin than in the rest of the year and lower sales per patient simply because of deals announced in the first quarter.

And just to clarify that really only impacts the rental business, so while we may see a similar death rate on our cash sales. Those units are not returned to us, so there is no churn associated with the cash sales. The phenomena really only impacts our rental revenues.

Yes.

Okay. And then finally just on the domestic B-to-B business, you mentioned resellers but I am just wondering does that mean other – is it still mainly the internet, retailers or is it the conventional HMEs that are [indiscernible] the product?

And it’s still first and foremost the cash resellers, the internet retailers.

Okay. That’s all I have. Thank you.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Ray Huggenberger.

All right, thanks for your questions and for making time for us this afternoon. We look forward to seeing some of you on our upcoming investor marketing trips and conferences. We’re going to New York, Boston, Chicago, Toronto, Montreal and Kansas City in the next couple of months and I look forward to catch it up. Thank you.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.