Welcome to Inogen’s First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded today, May 4, 2023. I would now like to turn the call over to Agnes Lee, Senior Vice President of Investor Relations and Strategic Planning. Ma’am, the floor is yours.

Thank you, Karen. Hello, everyone, and thank you for participating in today’s call. Joining me on the call today are President and CEO, Nabil Shabshab; and CFO, Kristin Caltrider. Earlier today, Inogen released financial results for the first quarter of 2023. This earnings release is currently available in the Investor Relations section of the company’s website, along with a supplemental financial package. As a reminder, the information presented today will include forward-looking statements including, without limitation, statements about our growth prospects and strategy for 2023 and beyond, expectations related to our financial result in 2023, expectations related to a return to profitability in 2023, expectations regarding increasing productivity of our internal and external sales teams, progress of our strategic initiatives including innovation, our expectations regarding the market for our products, on our business and supply and demand for our products in both the short-term and long-term. The forward-looking statements in this call are based on information currently available to us as of today’s date, May 4, 2023. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the SEC. Actual results may vary, and we disclaim any obligation to update these forward-looking statements except as may be required by law. We have posted historical financial statements and our investor presentations in the Investor Relations section of the company’s website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of Inogen’s core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. With that, I will turn the call over to Inogen’s President and CEO, Nabil Shabshab. Nabil?

Thanks, Agnes. Good afternoon, and thank you for joining our first quarter 2023 conference call. Our disciplined execution allowed us to make progress during the first quarter in support of our growth strategy and return to profitability. While our revenue was in line with the expectations, we have communicated during our Q4 2022 earnings call, our gross margin and EBITDA performance were above our internal expectations. We continue to leverage the investments we have already made to drive our commercial strategy, launch new products, progress the innovation efforts and clinical work and round up the capability that we have embarked on. In 2023, we remain focused on delivering low to mid-single-digit revenue growth and return to positive adjusted EBITDA by the fourth quarter. We are expecting the year to be an inflection point for Inogen as we set up for stronger top and bottom-line growth in the years ahead. On the supply side, our forward semiconductor buys during 2022 helped us cover demand for a significant portion of 2023, and based on the improvement we have seen so far in the regular supply channel, we feel that we will be able to meet demand for 2023. Before I provide an update on our commercial progress, I would first like to discuss some of the elements behind our strategy. As the leader in POC-based portable oxygen therapy, our vision entails patients and prescribers having wide access to the most appropriate therapy modality irrespective of the point of prescription or how patients might qualify for coverage for POCs. Our channel strategy was designed to improve our ability to serve patients at the point of diagnosis and prescription through Inogen and HME partners while refining our DTC model to meet the needs of patients who desire to switch to POC-based therapy later in…

Thank you, Nabil, and good afternoon, everyone. Total revenue for the first quarter of 2023 was $72.2 million, in line with our internal expectations. Revenues decreased 10.2% year-over-year from the first quarter of 2022. The decrease was driven primarily by lower international sales and lower direct-to-consumer sales, partially offset by an increase in U.S. business-to-business sales and rental revenue. For the first quarter, foreign exchange had a negative 170 basis points impact on total revenue and a negative 460 basis points impact on international revenues. On a constant currency basis, first quarter total revenue decreased 8.5% from Q1 2022. Looking at first quarter revenue on a more detailed basis. Rental revenue increased 25.4% to $16.3 million in the first quarter of 2023 from $13 million in the first quarter of 2022. One year after we began investing in our prescriber initiative, it continues to bear fruit, resulting in continued growth in rental patients on service. Rental revenue was also positively impacted by higher Medicare reimbursement rates. Domestic B2B revenue increased 146.7% to $12.6 million in the first quarter of 2023 compared with $5.1 million in the comparable period of 2022. It is important to note that the domestic business-to-business revenue was down considerably in Q1 2022 due to supply constraints that limited shipments to the channel. International B2B sales decreased 32.1% to $19 million in the first quarter of 2023 from $27.9 million in the comparable period of 2022. Last year, international sales were higher as we prioritized shipments to Europe due to the pending expiration of the EU MDD certificate in May of 2022. Direct-to-consumer sales decreased 29.2% to $24.3 million in the first quarter of 2023 from $34.4 million in the first quarter of 2022 driven primarily by lower volumes due to fewer inside sales representatives, partially offset…

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And we’ll take our first question from Robbie Marcus from JPMorgan. Please go ahead, Robbie.

Hi, this is actually Lily on for Robbie. Thanks so much for taking the question. Domestic B2B was a lot softer than what we were thinking, so can you talk a little bit about the drivers of that? Are you prioritizing the supply that you have elsewhere in the business? Or is there something else going on there? And how do you see that segment trending over the course of the year?

Yes. Thank you, Lily for the question. This is Nabil. So if you go back sequentially and you think about the messaging that we had, 2022 was part of the remediation efforts that we had in B2B. So we had pushed to really remediate the back orders that were in the system for an extended period of time, sometimes an excess of 12 months. So there was a major push in the – towards the end of the year to be able to meet the demand, remediate those orders and focus our customers on the Inogen value proposition. So that’s – a little bit went into the quarter and led to a soft start. As we said that, there were some challenges in the B2B U.S.-specific channel in terms of our customers thinking a little bit about capital deployment, restructuring in terms of operating expenses. So we continue to work with them in terms of landing ordering where we need it to be. The start was a little bit softer, but we’re very encouraged by the progress that we’re making.

Got it. That’s helpful. And just with the backdrop of the supply challenges, how should we be thinking about the cadence over the course of the year? Should we see this as being a more backloaded year as trends hopefully continue to improve? Or do you think we could see more normal seasonality in 2023? Thanks so much.

Thank you, Lily. So maybe let me start with also the other part of the message. And on the DTC side, we have said that we’re going to take the first half of 2023 to be able to get back to the productivity that we need. So that is an indication that you’re going to see a little bit different performance in the first half of 2023 with a relatively ramp in the back half of the year across all channels. But it’s not supply-related. I just want to make sure that I stress that. We have enough supply to meet the demand. It’s just the rollout of our channel strategy and the execution around this and the focus to not only land B2B where it needs to be, back to a normal ordering pattern, but getting DTC to direct productivity levels that we have planned. And we’re making very good progress on in the first quarter, as we commented in our remarks earlier.

Great. That’s helpful. Thanks so much.

Thank you, Lily.

Thank you. And we’ll take our next question from Mike Matson from Needham & Co. Please go ahead, Mike.

Yes. Thanks. I guess I’ll start with the second quarter. So I understand you’re giving kind of rough annual guidance, but I understand – I also understand that like the first quarter, you’re seeing that your own expectations, but unfortunately it didn’t meet the analyst expectations. So is there any help you can give us in terms of modeling the second quarter revenue? Like do you expect it to be up, down, flat relative to last year?

Yes. Thank you, Mike. It’s Nabil. We’re only going to make comments on the annual guidance for the time being. We can have a little bit more detailed conversations later on the calls. But for the time being, we’re doubling down on two things. One is a low to mid-single-digit revenue growth and return to adjusted EBITDA positive by Q4 of the year. And so that’s what we can comment on for the time being.

Okay. Got it. And then just your comments on not being supply constrained anymore. I just was wondering if you could clarify, are you implying as of today? Or does that mean that the revenue in the first quarter was really dictated by demand as opposed to supply?

Yes, so maybe two part answer to this. As we stand here today and look towards the end of 2023, we’re comfortable between what we preordered and the commitments that our suppliers are meeting from the regular channel that we will not be supply constrained for the totality of the year, Mike. And the Q1 performance was not constrained from a supply perspective, just for complete transparency.

Okay. All right. And I mean just given that, I mean, it seems like you’ve got a pretty big ramp to get to that mid-single-digit growth. And just your confidence level in being able to grow for the year?

Yes. Naturally, if you do the math like you’re doing quickly on the call, there is a ramp in the back half of the year. I think I’m going to take it back to the fundamentals. We are seeing really good progress on the DTC productivity, strategy in terms of the discipline we’re putting in place. We’re making encouraging progress around B2B U.S. in terms of – despite the challenges in the market dynamics, we’re making progress because our value proposition remains very solid in terms of the components I listed on the call. . Also, international B2B is – has been – the demand has been steady and growing, so we’re pleased with that. And then, of course, you saw the results on the prescriber channel that we’re bound to continue to scale and drive forward with increased focus on acquiring new prescribers and also productivity within that channel. So naturally, there’s a steep back half of the year, but we’re comfortable with where we stand in reiterating the overall annual guidance.

Thank you. And next, we’ll go to Matthew Mishan from KeyBanc. Please go ahead, Matthew.

Hi, Nabil. Thank you for taking the questions.

Hi, Matt. How are you?

I’m good. I – just on the direct-to-consumer sales, you made a lot of changes to the commercial sales force. Do you think you’ve done this in enough time to really take advantage of, I guess, what your spring-summer, you’re entering the seasonally strong period for when you would generate the most amount of your sales in that segment? And also, just kind of – can you remind us what the lead time is between like point of contact and actually being able to close this out?

Okay. So let me – thank you, Matt. Let me start with the first part of the question. I think typically, the seasonality starts ramping up around early April, sometimes late March, early April. I think we have made enough changes like you have for us to put the right disciplines in place. And maybe the best evidence to point to is despite the fact that we lower the number of salespeople in Q1. We had – in the teens, double digit and the teens grow per sales rep in terms of both productivity and revenue, which is very encouraging. That says we have the right apparatus and the right team in place to meet the seasonality demand as well as we’re continuing to improve. Every week, there is an update and review in terms of where are we from a productivity perspective, and we’re encouraged by what we’re seeing. So I don’t see an issue from a seasonality and ability to capture the sales as the seasonality kicks in. Your second part of the question around lead time from point of contact. We typically do not comment on that, but like successful progression of an opportunity into the sales funnel into a close is typically in the, call it, 10 to 14 days typically. So if you’re going to capture that patient, it has to happen within the 14 days of contract.

And then just how important is it for you guys to reduce the volatility of sales on the B2B side? The swings have got – I’m not sure if the swings are tough – are difficult on your margins and difficult in your manufacturing. Is it – is there a potential to kind of make it more ratable moving forward around those sales?

Yes. So maybe let me go back to just like one point for context. As we always say, there is a lot of volume to be rolled up in the market, just evidenced by the low penetration of POCs out of total modalities, and that is to be achieved both by us and by our HME partners. Let me start with us. The reason – and this is sort of like a partial answer to your question. The reason we went to the prescribers, we want to be able to control part of our destiny moving forward and be able to make sure that we – when I look at both the prescriber and the HME channel in terms of covering that upstream patients at the point of diagnosis and prescription, I’m progressing well. The part in my control fully is the one that we are very happy with the progress on. The part that is through my partnerships is the one that, as you said, is important for me. It continues to be part of our strategy, but we’re working through a few headwinds in the interim. With that said, if I look at the overall progress despite the challenges from a market perspective, we’re happy in terms of the new customers we’re adding and we’re working with the customers that are in our base around some of the challenges depending on what they’re facing.

Thank you, Nabil.

Thank you, Matt.

[Operator Instructions] And we’ll take our next question from Mathew Blackman from Stifel. Please go ahead, Mathew.

Hi. This is Colin on for Matt. Just had a couple. Starting with DTC, I know you guys said productivity was improving throughout the quarter and those pilot study efforts you guys are putting in are progressing well either in absolute or relative to the plan. And to the extent you’re willing, can you give us a sense of productivity levels entering the first quarter versus exiting the quarter? And frankly, now that we’re nearly halfway through the second, where things stand right now?

Thank you, Colin. I’m going to comment on the quarter itself because we’re not going to make comments on Q2. As I said in the prepared remarks, we have accomplished productivity per rep on the DTC side that are in the teens, so double digit in the teens. We can put a little bit more color to it later on the call, but this is very good progress compared to where we were before. And that productivity also is around the same level when I look at the prescriber channel, too. So there is very good progress and the encouraging signs that we are on the right track in terms of that envisioned DTC model, whereby we can drive performance and profitability at the same time by optimizing not only the number of salespeople, but also the advertising spend. It’s starting to show the value of how we envisioned it and how we’re executing around it diligently.

Okay. One follow-up on the guidance. I was hoping you could decompose it a little bit from a growth standpoint. How much price is baked into the guide versus volume? You’ve got a bit of a U.S. tailwind with higher reimbursement. There could be some mix benefit from new products there. Any way to tease out the major components that roll into the full year guidance?

Yes, it’s a good question, Colin. I’m going to say the price element is a mix in general because – so one thing that we had not made the comment on yet is we took a price increase in DTC in April. Low single digits in April. We didn’t take a price increase and other things. But as you can maybe interpret from our comments, in B2B, we are running certain interventions and promotional, like, support activities to be able to make sure that we land the orders where they need to be. So that’s a net-net – bad guy versus the good guy on the other side. Overall, pricing and ASP is trending where we expect it to be. Albeit a little bit behind the curve, but we’re not very worried about us being able to recover.

Great. Thank you. I’ll hop back in the queue.

Okay.

[Operator Instructions]

Okay. If there are no questions, let me just make a few remarks in closing. So as we look into the future of Inogen, this year will be an inflection point as we execute on our channel strategy, launch new products and set up for future scalable growth while focusing on returning to positive adjusted EBITDA by the fourth quarter. I’m pleased with the progress we have made across the commercial channels and geographies, securing access to our devices for a large patient – larger patient population and continuing to build capabilities and processes that will support our plan to scale the business profitably in the years ahead. As I conclude, I would like to thank our investors for your support and your interest in Inogen. I’m extremely proud of the Inogen team’s collective efforts to progress our business so that we can fulfill our purpose of improving lives through respiratory care. Thank you so much, and have a good day.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.