Welcome to Inogen's Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded today, November 2, 2022. I would now like to turn the call over to Agnes Lee, Senior Vice President of Investor Relations and Strategic Planning.

Thank you, Brock. Good morning, everyone. Joining me today are Nabil Shabshab, President and CEO; and Kristin Caltrider, our CFO. Earlier this morning, we released financial results for the third quarter of 2022. This press release is available in the Investor Relations section of the company's website along with the 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 2022 and beyond; expectations related to our financial results for the fourth quarter of 2022 and expectations related to a return to profitability; our expectations with respect to supply challenges and cost inflation related to semiconductor chips and other product parts used in our POCs; our expectations on European regulatory clearances and approvals; future reimbursement rates; expectations regarding increasing productivity of our internal and external sales teams; progress of our strategic initiatives, including innovation; hiring expectations; 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, November 2, 2022. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic report filed with the SEC. Actual results may vary, and we may disclaim any obligation to update these forward-looking statements, except as may be required by law. We have posted historical financial statements and our investor presentation 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 US GAAP and non-GAAP results are presented in the tables within our earnings release. With that, I will turn the call over to Inogen's President and CEO, Nabil Shabshab. Nabil?

Thanks, Agnes. Good morning and thank you for joining our third quarter 2022 conference call. I'm incredibly pleased with our team who did a tremendous job of fulfilling our B2B backlog orders from Q2, as well as driving revenue in Europe and the countries where we were granted delegations or exceptions. We have also demonstrated excellent progress against our subscriber strategy that we started at the end of Q1 2022, delivering excellent growth and contributing to the strong performance this quarter. The extraordinary efforts of our team resulted in third quarter year-over-year constant currency revenue growth of 14.5%. Similar to the other MedTech and consumer health companies, we are focused on understanding and addressing to the extent possible emerging risks associated with the unprecedented ongoing market conditions, macroeconomic and inflationary pressures are generally outside our control, hence we are acutely focused on levers in our control to mitigate part of those risks and more critically stay the course with our transformation aimed at delivering durable and sustainable growth and return to profitability in the medium to long term. Hence, during this call, I would like to take a moment to frame our strategic initiatives and time horizons then address how we are managing the remaining supply chain challenges, update on the progress around commercial excellence and productivity and share initial thoughts on optimizing operating expenses. These elements are intended to help deal with some macroeconomic and market headwind, and more importantly continues to drive the ongoing transformation. Let me cover our strategic pillars and related time horizons first. Our strategic pillars include driving oxygen therapy, market penetration and accelerating new product introductions in our core markets, while diversifying our portfolio. At the right time, we plan to expand our portfolio channel and global presence through inorganic efforts. We see our…

Thank you, Nabil and good morning, everyone. [Technical Difficulty] domestic business-to-business customer orders. For the third quarter, foreign exchange had a negative 130 basis points impact on total revenue and a negative 550 basis points impact on international revenue. On a constant currency basis, third quarter total revenue increased 14.5% over Q3 2021. Looking at revenue on a more detailed [Technical Difficulty] 2022 from $21.8 million in the comparative period, driven by a limited ability to ship internationally due to the expiration of the EU MDD certificates. Domestic direct-to-consumer sales decreased 9.1% to $33.1 million in the third quarter of 2022 from $36.3 million in the comparative period, primarily driven by lower-volume as [Technical Difficulty] and higher Medicare reimbursement rates. Now on to discuss our gross margin. Sales revenue gross margin was 38.4% in the third quarter of 2022, declining 1,170 basis points from the third quarter of 2021 due to the unfavorable channel mix and higher material costs driven by open-market buys and inflationary pressures, partially offset by higher selling prices. Rental revenue gross margin was 54.5% in the third quarter of 2022 versus 58.9% in the third quarter of 2021, a decline of 440 basis points. The decrease was primarily driven by increased service costs and device write-offs, partially offset by higher Medicare reimbursement rates. Moving on to operating expense. Total operating expense increased to $53.1 million in the quarter compared to $41.3 million in the third quarter of 2021, an increase across all categories. First, we have continued to invest in research and development with a total spend for the quarter of $4.6 million, an increase of $800,000 versus the third quarter of 2021. The majority of this increased spend was in support of product development activities. Our sales and marketing total spend for the quarter was…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question today is from Mathew Blackman of Stifel. Please proceed with your question.

Good morning, everybody. Thank you for taking my questions. Just two for me. Maybe Nabil, I think one of the biggest challenges in our seat is trying to get a sense of true underlying demand in each of your channels, especially in the US, given the supply noise, but also price increases. Is there any way you can talk to what you think the demand picture looks like in the US DTC and B2B businesses? And then I've got one follow-up.

Yes. Hey, Matt. How are you today? So let me start by saying, I wish that we were in a full supply situation for me to really have a strong assessment, can we actually meet and do we have excess capacity versus the demand in case just it's like softening a little bit. In general, we have not seen a major softening in demand as evidenced by either the cash sales in the DTC channel and/or the B2B orders that we've remediated. And we continue to see a very healthy conversation in terms of how we're going to end the year and get back to normalized supply situations on the B2B side, as I said, especially in the US. So it's difficult. We know that the macroeconomic conditions potentially inflationary pressures might have an impact, we are working hard to try and isolate that. As you said, it's not easy to be able to pull that out from the performance, but we're being very diligent in terms of how we're watching for that. But so far, I think the demand is, I would say, steady and we're keeping an eye in terms of if there is any impact from the macroeconomic conditions.

Great. And then the follow-up. As we think about the fourth quarter, what percent of your OUS business do you have line of sight to be able to sell into. And it also sounds like the delegations you do have will expire by year end. I know you don't want to speculate on timing of approval, but is it realistic to expect MDR approval could come such that there isn't a gap early next year? Thanks.

So maybe there is -- so thank you for the question, Matt. Let me start first of all with the -- we have not moved so far from the progress that we have seen, that we are cautiously optimistic about. We have not moved the approval date for the EU and BR certificates from Q4. Also, if you remember, we actually not only got the delegations and the exception. In fact, five countries that allowed us to continue to supply those specific countries, but we also had shipped a little bit more in terms of -- against open orders in Europe to make sure that we can meet the demand. We believe that between the three variables at play, we would be able to cover the gap that you might be thinking around or modeling for in the revenue for this year.

Thank you. Appreciate it. The next question is from Mike Matson of Needham and Company. Please proceed with your question.

Hey, Mike.

Hi, this is Joseph on for Mike this morning. So I guess just first one, it seems like with inflation, the labor shortage that we're seeing, the economics of POCs may have become more favorable for HMEs. Just kind of want to get your guys thoughts on that and what you've been hearing from your B2B customers?

So maybe, Joe, let me go back to the basic premise. I think if you look at the industry coverage and the lobbying by the HME industry, I think the macroeconomic condition than the inflation beat in wages or in other costs are not favorable to the HME model. I think they are maybe favorable to the rental model slightly. But if you look at how the lobbying is happening in terms of the reimbursement rate, the first and foremost thing that is sited in the increasing cost of the HME delivery model, that's why we think that the demand delivery model in terms of POC based therapy remains advantage and continues, I think, to be a very strong proposition in terms of overcoming some of those challenges. I think to -- the second part of your question was with respect to what we're hearing from B2B. Ongoing, I think healthy conversations in terms of how -- first of all, so we mitigated most, but not all of the backlog orders, which I think was received very positively in the channel itself and the B2B business. Now the discussions are ongoing in terms of how we mitigate the remainder of the orders for the year as well as when we get back to normalized sales levels, what does that look like? But we are continuing to see healthy orders coming in, in general with a few exceptions here and there, but they're not notable in general.

Maybe just a quick continuation on that and then one more. If possible, do you think you can size the backlog, I guess, still remaining with the US customers that have been worked through? And then just a follow-up on that. In terms of the physician sales force and I guess some of the productivity improvements, is there any way you can kind of give more detail on the metrics of the productivity gains? Just kind of give a little bit more color about what you guys have done there this quarter, this last quarter? Thank you.

Okay, Joe. So let me take the simple one first. We're not going to make comments on sizing the backlog of the orders in B2B. I think if you look at the performance in the quarter, really we remediated the significant portion of the backlog. And if you look at historical rates in B2B shipments, you realize that this was a significantly strong quarter in that channel and Kristin can comment on that later on. So let me go to the physician sales force or the prescriber sales force. As we indicated earlier in the year in March, this is relatively new, but this was our key strategic focus in terms of actually expanding penetration of POC based oxygen therapy. I think the productivity that we're seeing relates to three things basically. One is an ability to actually get the right coverage of the prescribers that are the highest [profile] (ph) and they are the biggest prescribers in oxygen therapy. Secondly, get to the right frequency. Thirdly, get to the right -- to shorten the sales cycle in terms of getting referrals from them. And I'm going to add one which is the ability to now onboard new prescribers that we have never done business with before. Now across the existing and the new prescriber, we are also looking at repeat business that we get from them. So I don't get one referral, I get repeat referrals from them. We are not in a position until we get to steady state in that organization to start talking about metrics, but we hope that in 2023 we'll be able to put some very specific but finite metrics that will demonstrate the progress. I would say that, if you look at the performance from the revenue base, you realize that the strategy is working. The one thing I will add to it is, we are learning and reapplying in terms of tightening our coverage and frequency plan, because the first six months was tremendous in the experience as well as the insights that we gained on top of the database approach that we have. So we're blending this back from the field response as well as the data that we have. We're now actually reorienting the organization to do call and frequency slightly differently and more productively. And we see that after institutionalized that for the remainder of the year that we're expecting that acceleration early in 2023.

Okay, great. Thank you very much.

The next question is from Margaret Kaczor of William Blair. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking the question. I wanted to start maybe with guidance, especially as we look at kind of a -- initially the fourth quarter, what gets you to the high end, what gets to the low end. And really, I'm trying to put into context a little bit how we should think about '23? How are you guys would think about the various inputs like supply, like a potential recession or any other items because the guidance in Q4 I guess is a little wide and I just wanted to kind of get a good sense of what -- on what and how you look at '23? Thanks.

Hey, Margaret. I'm going to have Kristin answered the guidance question and then I'm going to comment on 2023.

Hi, Margaret. Thank you for the question. As we look into Q4, if you were to look at our Q3 results, you'll see that our B2B domestic had an extraordinary quarter as we fulfill those backlogs or the majority of our backlog in that period. As we look back to what the normal ordering patterns were for this channel. You have to look back prior to the supply constraint timing and that began to kick-in in Q4 -- late Q3 and into Q4. So if you look at the first three quarters of last year, you'll see kind of what we see as a normal ordering pattern for that channel. And if you make that adjustment along with the seasonality that we see over the many years, Q4 tends to be a softening quarter, roughly 3% down from the prior quarter. Those two together will walk you to our estimates.

So, Margaret, I'll make some comments on 2023. So I think the earlier, like, opening prepared remarks around the macroeconomic conditions and potential inflationary pressures. That's something that we're continuing to watch. We also feel that the demand remains steady moving forward. So as we think about potential growth rates moving forward, we'll make more comments towards the end of the year when we have a little bit more visibility to the runway. But we don't expect that the growth rates will accelerate further or decelerate in general. So we'll give you an update at the end of the year.

Okay. Obviously, the growth rates are a little bit different throughout ‘22. So I hope that you're referencing maybe the full year growth that you guys saw or maybe slightly above, but we'll find out. I also wanted to touch on the demand maybe you're seeing on the domestic side. So just to follow-up, how much of that backlog that you saw was in the HME channel versus the online resellers? And again, looking at ‘23, is this a relatively sticky business assuming it's in the HME channel, maybe you have some tailwinds there? Or is it kind of maybe a little bit more similar to DTC channel with the resellers? Thanks guys.

So, Margaret, let me make sure I understand the question. You're asking, if the demand in the B2B channel is sticky, right?

Yes. The drivers of the backlog this quarter, was that online resellers or HME?

Yes. So let me -- so the demand is across the resellers as well as the B2B customers, both in large in size as well as medium to small sizes. So let me maybe talk a little bit about the stickiness of that. I think the brand itself and the demand for the Inogen POC remains very strong and is notably I think present in the HME channel. Also the fact that we had not remediated the backlogs and the fact that the old state almost intact if you look competitively, we're not going to quantify it. But the bulk of it, most of it did not get canceled or deferred is an indication of how sticky that business is and how strong the brand is? Also there is a lot of dialogue in terms of the total cost of ownership versus an acquisition cost. And this is aimed at making sure that people make the right decision in terms of when they expand their fleet and capitalize the business that they have by making the right decision for -- in totality for profitability. And I think also back to the earlier comments, so when we address other questions, some of the ongoing challenges in terms of increasing cost and so on, but probably making people think longer and harder about the non-delivery models versus the delivery model, which has a lot of margin compression. So we believe that business is healthy and sticky. Like the comments we made, we're working to look at what the normalized demand is going to be, but we are encouraged so far by the conversations we've had.

Thanks guys.

The next question is from Matt Mishan of KeyBanc Capital Markets. Please proceed with your question.

Hi. This is actually Liz on for Matt. Thanks for taking the question. If I could just follow-up on the 2023 comments, like what would you need to see -- in order to provide guidance for 2023 during your next earnings?

Yes. It's relatively a simple question. What we're looking for is visibility from a supply perspective and all honesty. So let me take a step back and characterize how we've evolved in terms of that and how we've managed it. Like at the peak of the crisis, we used to have a week by week visibility, nothing beyond that. Then we move to a monthly visibility. We're now around the quarter visibility, which is good. But I don't have full year visibility. And in our opinion, the biggest variable that will allow us to guide constantly is the fact that we have a line of sight for the full year supply chain. So we'll make sure that we can meet the demand that is in the market. And honestly, we meet -- if you look at the semiconductor industry and the outlook, I think things are going to extend into 2023. Now we're being very judicious and trying to forward buy and secure part of what we need in 2023. We will not stop at securing as much as we can, but it's simple that the supply is not all available for us. So towards the end of the year, we may be potentially early in 2023. If that abates as potentially a risk, we will start talking about longer term guidance.

Okay. And then assuming that you have enough supply to meet demand for DTC rentals as a top priority, what do you think the right long term growth rate for the business looks like?

Yes, that's the common thing on growth rates business by business. I think back to the prioritization of the channel. You're right earlier in the year, we prioritized that channel. It was really critical for us to meet as much of the demand that we've put in DTC. Just to maybe make a comment around how -- why things slipped around this quarter. We got to a point whereby we're balancing both strategic financial and potential business variables. So we decided to flip the balance or alleviating a long standing back order in B2B. We will get back hopefully to balancing these channels as much as possible, but those variables ebb and flow as you can tell from what's going on in the business as well as the market and from the competitor perspective, but we're not going to speculate since we're not guiding on any growth rates, either at the total level or at the business level.

Okay. And just the last question for me. As your supply improves, do you lift your advertising, do you increase the sales rep count or do you feed the B2B channels that have been more constrained over the last year?

So if I heard the question correctly. So as we -- we're always trying to optimize the performance of all the teams. So I'm going to start with the DTC team. Of course, we tailor the advertising spend based on the supply situation also and balancing that was generating the right level of demand. We continue to be judicious in terms of how we're looking at those expenses and the acquisition cost of these patients. So that is something that is in flight. We do it all the time and just based on the supply demand situation. So I think that was mainly your question. If not, give me the second part and I can answer it.

That was good. Thank you.

Okay. Thank you.

The next question is from Robbie Marcus of JPMorgan. Please proceed with your question.

Hi, this is actually Alan on for Robbie. I kind of wanted to touch on the backlog, but maybe from a different angle. You mentioned that in the quarter the US DTC business suffered a little bit because you were prioritizing addressing the backlog in US B2B. So while I don't want to push you on projecting that business forward. What should we think of as being the actual underlying demand of US DTC in the quarter that you would have been able to satisfy if you hadn't been prioritizing the backlog in B2B?

So DTC -- so maybe as I said earlier in I think the first question we answered. I wish we were in full supply conditions to be able to really determine if demand is softening or staying steady and stable. So short of that happening, it's very difficult for us to [indiscernible] and speculate about the funnel and the weakness, because the DTC business per se have funnels that are shorter than the regular business. So -- and then by the way, they don't have a backlog for me to go measure easily. So it's a very difficult sort of set of variables to tease out and to isolate some of them. Now in general, we are not [indiscernible] the sales organization. A lot of noise around inflation or weakening demand. But I will also remind, as we said earlier on call, that we also took this opportunity by balancing the other factor and this quarter specifically and last quarter for Europe, channeling some of the volume to the B2B US, as well as European to optimize the sales organization on the DTP side. We have work ahead of us in terms of driving productivity and efficiency in the sales force and we continue to use that time, call it, a little bit of a downtime to be able to complete some of the training, upgrades, the new disciplines in sales management. And we feel that that will help us continue to drive the performance in that channel, as well as make sure that we combat some of the softening demand. Maybe let me also leave you with a couple of data points in terms of how we are thinking about inflation. So we actually did a primary set of research with our patients, both on oxygen therapy as well…

Got it. Thank you very much. And then just a quick follow on. When we think about your efforts to optimize the DTC sales force, should we think about that as basically continuing to pressure, if you will, your average sales rep number through the balance of 2022? And what should we really view as kind of a good steady state for your sales force going forward, recognizing that you are as you said in the process of figuring that out yourself? Thank you.

I think it's a good question. So when we piloted earlier, some of the new disciplines that I cited earlier on the Q&A. We realize that there is a lot of potential in terms of improving productivity and efficiency of our sales effort and overall cost of acquisition. So we continue to roll these out. I think the number and the zip code of 300 people is relatively where we should land, but there is continued effort to try and understand how do we drive the highest optimization of that sales force and other factors that we have in terms of the spent for the acquisition of the patient base. So roughly 300 give or take, but yes, you're right, we are not for increased productivity as evidenced by what we demonstrated through the pilots and institutionalizing and scaling that training and experience across the rest of the organization.

There are no additional questions at this time. I'd like to turn the call back over to Nabil Shabshab for closing remarks.

Thank you. I'm pleased with the incredible progress that we have made to manage and mitigate supply headwinds. I'm equally pleased with the steady and incremental improvement to drive commercial productivity, develop an innovation pipeline and start to build our clinical evidence dossier as part of our transformation. Although there is work ahead of us, we have made great progress in terms of rebuilding and strengthening the fundamental capabilities, while simultaneously growing revenue. In 2023, we will be well on our way in terms of institutionalizing scaling capabilities, processes, systems and embedding our Inogen culture and all that we do to help manage current and ongoing macroeconomic headwinds and in support of accelerated and sustainable performance and a path to profitability in the long term. As I conclude, I would like to thank our investors for their support and continued interest in Inogen. I would also like to recognize and thank the Inogen team for their dedication and hard work that has allowed us to continue to serve patients with oxygen therapies needs all around the world. Thank you and have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.