Welcome to Inogen's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 6, 2024. I would now like to turn the call over to Ryan Peterson of Investor Relations.

Thank you all for participating in today's call. Joining me are President and CEO, Kevin Smith; and CFO, Mike Bourque. Earlier today, Inogen released financial results for the second quarter of 2024. This earnings release is available in the Investor Relations section of the company's website along with a supplemental financial package. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2024 and beyond, expectations related to our financial results for the full year 2024, progress on 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, August 6, 2024. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligation to update these forward-looking statements except as may be required by law. We have posted historical financial statements in 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, Kevin Smith.

Good afternoon, and thank you for joining our second quarter 2024 conference call. During today's call, I will provide updates on our progress towards our three strategic priorities: driving top line growth, advancing our path to profitability and expanding our innovation pipeline. I will then turn the line to Mike for a full review of our financials and outlook. Before I provide updates on our strategic priorities, I would like to briefly highlight our strong second quarter 2024 results. We achieved $89 million in total second quarter revenue, reflecting 6% year-over-year growth and 14% growth from the first quarter of 2024. Our performance in the quarter was reflective of strong commercial execution from our team worldwide. We have also now completed our executive leadership transition and are excited to move forward with the concrete team in place. Now turning to updates on our strategic initiatives, and I will start by highlighting our progress on driving top line growth. The highlight of the quarter was growth in our business-to-business channels. Our team continues to do a stellar job building and strengthening relationships with new and existing customers worldwide. We believe our differentiated POC offerings resonate with our customers as Inogen offers the highest quality POCs, the lowest total cost to serve and a host of digital health and value-added services that make us an attractive partner. In addition, we saw a modest tailwind in our B2B channel related to a recent competitive exit from the market. This nicely complemented our base growth in the quarter, which overall was driven by our differentiated offerings and strong commercial execution. In our direct-to-consumer sales channel, we again saw year-over-year declines but also generated 10% sequential growth. This sequential growth in the channel reflects our progress on improving lead generation and rep productivity. As a…

Thank you, Kevin, and good afternoon, everyone. Unless otherwise noted, all financial comparisons are to the prior year comparable period. Total revenue for the second quarter of 2024 was $88.8 million, an increase of 6.1% compared to the prior year. The increase was primarily driven by higher international and domestic business-to-business sales, partially offset by lower direct-to-consumer sales and rental revenue. For the second quarter, foreign exchange had a negative 10 basis points impact on total revenue and a negative 30 basis points impact on international revenue. Looking at second quarter revenue on a more detailed basis. Direct-to-consumer sales decreased 15.6% to $22.6 million from $26.8 million in the prior period driven primarily by lower representative headcount. Domestic business-to-business revenue increased 16.5% to $21.3 million versus $18.3 million in the comparable period driven by increased volumes with new and existing customers. International business-to-business revenue increased 31.1% to $30.5 million compared to $23.3 million in the prior period. Similar to our domestic business, the increase was primarily driven by increased volumes with new and existing customers. Rental revenue decreased 6.2% to $14.3 million from $15.3 million in the prior period, primarily driven by lower average billing rates due to the mix shift to private payers. Now on to discuss our gross margins. Total gross margin was 48.1%, increasing 740 basis points from the same period in the prior year, primarily driven by lower premiums paid for components as well as onetime favorable adjustments to reserves which drove a benefit of approximately 300 basis points. We expect gross margins to be in the low to mid-40s in the back half of the year. Sales revenue gross margin was 48.5%, an increase of 1,000 basis points, driven primarily by a reduction in premium price components and increased volumes. Rental revenue gross margin was…

The first half of 2024 was the time of transition for Inogen as we welcomed Mike to the CFO role, and I am excited to have our new management team in place. Our team remains steadfast in their determination to deliver best-in-class care to respiratory therapy patients around the globe, and we will maintain that approach into the second half of 2024. We look forward to updating you on our progress as we continue to expand our impact for patients with respiratory disease. With that, I will open it up for questions. Operator?

[Operator Instructions] Our first question is from Robbie Marcus with JPMorgan. Please proceed with your question.

Hi. This is actually Lilly on for Robbie. Thanks for taking the question. Maybe starting with DTC. Hoping you could give a little bit of color on the sales force. How are you thinking about the progression of the size of the sales force over 2024? And how should we be thinking about productivity in the commercial organization ramping from here?

Sure. Hi Lilly, thanks for the question. This is Kevin. I'll start with that one, Mike. Yes. So as we indicated in our -- I believe it was in our last call or a recent call, the sales organization, the DTC side is in at 150 to 170 range. And so we're not going to continue to comment on that size of that organization unless it varies outside of that significantly. But that size is the size team that we are comfortable with going forward. We believe that we have a good team building the tenure of the training and so forth that we need to what they have in order to grow. We're seeing positive traction come out of them. We're not going to go into individual metrics within that other than as we're talking about revenue here today, but we are focused on increasing that productivity. Within that DTC channel, we do have the patient-first pilot that we had referenced as well. We're trying to make it as easy as possible for any patient who wants to have an Inogen POC to get an Inogen POC. So we're making that smooth and efficient. And we believe that's going to help us continue to grow in the future.

Great. Thank you. And then on the rental side of the business, you talked about the hospital strategy. So can you give a bit more color on how those efforts have been progressing and how we should be thinking about how big of an opportunity this can be for you relative to individual practitioners?

Sure. Thanks so much. Certainly, Lilly. The -- when you look at the hospital pilot, -- so the -- as we're looking at that, what that is, and I've referenced this a little bit in the prepared remarks as well as before, but some additional color, this is going a bit further upstream, right? So that rental channel, you think about that is the prescribers. The sales team that's going to the physicians' offices to gain referrals from those offices. And we had previously a third-party organization that we were partnered with out there. That is now just purely an in-house team, although scaled back a little bit, but we're satisfied with the results that team is achieving. We're actually very happy with that. It's an opportunity for us to continue to build. But going into the hospital side, is going even further upstream. So by the time the patient leaves the hospital, they're set up with oxygen, often a tank as they're coming out of the center. We are, with the prescriber team trying to get those patients further downstream, but they've already had some months of billing that are eating away before they go into that capitated period, but if we go into the hospital, we get that patient day one coming out of the hospital, set them up with a POC, with an Inogen and be able to capture that billing. Plus we're more efficient with the number of patients we can have referrals for per sales call with the sales reps. That is, as I'll remind you, is in a pilot phase right now. We don't see that falling into the financial statements, until we're fully executing on that one, but I wouldn't expect to see that as a meaningful flow-through here in this coming quarter.

Got it. Thank you.

Thank you. Our next question is from James Beer with William Blair. Please proceed with your question.

Hi, guys. Thanks for taking the question. This is Jimmy on for Margarate. Congrats on the good quarter. I wanted to first start off on some of the B2B strength you saw, maybe looking first at OUS. Were there any large tenders during the quarter? I know it tends to be a little lumpier internationally. And then can you just give us a sense on your confidence on international continuing at that rate? And then also on B2B domestic, could you also just parse out? I know you mentioned that you saw a tailwind related to Respironics exiting the market. Is this also the market getting better and maybe, say, improved relationships on your end?

Thanks Jimmy. And Mike, maybe, do you want to start with that one and would like to add color?

Sure. Kevin, I'll take the first part of that question. So in terms -- Jimmy, in terms of your question on any large onetime owners of tenders. We really didn't receive any orders that we believe that we could call out onetime and not repeatable. The results in our B2B channels were the result of broad-based demand from both new and existing customers. So to answer that first question, no, there really wasn't anything we call outsized orders.

Yes. And those -- we do see the opportunity continued to build there internationally. For that reason, as Mike said, this is, I know, it can be pretty chunky at times, but we feel that the relationships that are being built is certainly adding to the growth that we'll see internationally. And on the domestic side of things, we certainly do see some tailwind from the exit of our competitor in the U.S. market. We see this as growth. We've gained new customers. We've also gained some additional business and existing customers. I don't see this as a onetime deals that we've gained because of that exit, but certainly, that tailwind is there.

Great. Thanks. That's helpful. And maybe switching gears a little bit. I wanted to touch on guidance. You grew 6% this quarter, 8% last quarter. I mean you're now growing high single digits, call it, in the first half of the year. I think the guide now implies a deceleration in the second half despite stay similar to easier comps. So maybe why the more conservative outlook and then maybe as you look to 2025 and long term, what's the right range of growth we should sort of model for this business going forward?

Thank you. Jimmy, thank you for that question. First of all, we're -- I'll start off by saying we're really pleased with the strong first half we had in 2024. I'll also talk a little bit just about our guidance philosophy. So our guidance philosophy is to really set prudent in achievable ranges, and we want to be able to commit to that number, meet or exceed it. In terms of our guidance for, say, the full year guidance and therefore, the second half of the year guidance, what we're seeing is we're anticipating headwinds beyond normal seasonality based on the national election. Advertising, we're expecting to be more expensive, may be difficult to obtain good slots, and we believe that may result unless ads being placed. So we may have fuel leads as a result of the advertising changes. So we kind of see that as an impact to our D2C business, and that's really what's driving that guidance for the second half of the year.

Great. That was helpful. Thank you, guys.

Now in terms of your question -- your other question about kind of future. So we kind of stick to what we've talked about in terms of guidance. And as we kind of progress towards the rest of the year, we get into our AOP process and kind of move forward, we'll determine what type of guidance we think going forward. But at this time, we're really not going to comment on 2025 or beyond at this point.

Great. Thank you.

Thank you. Our next question is from Matthew Blackman with Stifel. Please proceed with your question.

Hi, guys. This is Colin on for Matt. I wanted to start on the rental business. thinking specifically about the productivity ramp for the prescriber channel efforts that you brought in-house. How do you think about that productivity ramping? And could we see this return to being your fastest-growing business in the near term or even in 2025? What would left to chop there?

Colin, I'll start. Basically, I think it's just maybe helpful to give kind of our view on what's going on in that rental business at this point in time, and then we can expand on some of the other questions you had. But what's going on as we see it, we're still seeing the trend towards private payers, less in Medicare. So the lower reimbursement rate per month on the private payers versus Medicare. Part of that trend relates to the patient shifting to Medicare Advantage. As we look at patients-on-service, we're up compared to, say, Q2 of last year, but our patient-on-service has stayed somewhat consistent over the past few quarters with attrition offsetting new patients. So what we're seeing is more CAP patients, therefore, less bill patients. Those are kind of the dynamics impacting our rental business, obviously, on the top line, but those are also drop downs impacting our gross margin as well. We are focused on adding more billable patients to the funnel. Kevin, maybe you can add some color here on kind of how we're approaching this channel.

Yes, certainly. And that will go back to the -- looking at the hospital pilots that we're working through that channel, opportunities to get more opportunities per sales rep, further up that food chain, right, and to be able to get more months of billing before a patient enters the capitated period, so more revenue per patient. And then also opportunity to have more referrals per sales call, if you will, going into the discharge planners at the hospital. So we do see opportunities for that to continue to build that accretiveness. I won't comment on the future of the specific channel there as to how that will compare with the other ones at this point in time, but we do see good opportunities.

Understood. That's really helpful. And then I had one on gross margins. Beyond the higher cost inventory rolling off, can you walk me through again the driving costs of the -- the driving forces of the step-up from last quarter and particularly, which gross margin line rental or sales, the onetime adjustments really affected during the second quarter?

Sure, Colin. So in terms of what we're getting a little bit of an uptick this quarter from some adjustments to our reserve accounts. So the typical adjustments that we went through in our closing process always consistently reevaluating and estimating what those are going to be. But those, we're calling them onetime adjustments, representing about 300 basis points of favorability to our gross margin in Q2. And in terms of -- what was your other question, I'm sorry, the second part of that question?

Really which gross margin line sales or rental did that flow through during the quarter to understand which parts fall off going forward?

Sure. That's under the sales gross margin line.

Okay, understood. Thank you.

Thank you. Our next question is from Mike Matson with Needham & Company. Please proceed with your question.

Thanks. I just wanted to ask one on pricing trends kind of in the different channels. So domestic B2B, international B2B and DTC sales, in particular. I guess, just on a year-over-year basis, what's happening with price in this channel?

Yes. It's -- with the pricing in the channels, we've been maintaining some pricing discipline as we go through there. There's price pressure Yes, certainly. We see that. We feel that from competitors. But we do the other that we have the right that we've got the right messaging to be able to pull through on that. But we've been holding relatively stable. There's a little bit of downward momentum on that, but it's particularly in our B2B channels, we've been holding on tight to that. We certainly see some -- when you see the DTC sales, we see some pressure certainly there on price with resellers and so forth. And there's a moment certainly when we start to compete with ourselves on that, still imaging device that we are -- that we're working through there. But we do feel that we've got the right pricing strategy. We've got the right messaging and it's particularly important when we start to look at B2B on how we can maintain our pricing with the lower margin sales.

Yes. Okay. All right. And then I did miss some of the prepared remarks. I apologize if you mentioned this, but I just wanted to check in on the Simeox product. Were there any updates there in terms of FDA pathway or timing or anything like that?

No. We haven't given any updates on the timing for that one. What you should expect to see a firm update on timing would be when we have the regulatory clearance from that, then we the updates and basically that outlook as to what that commercialization plan and time line will look like.

Okay. All right. And then just on the DTC sales business, so it's been declining for a while now. And I know there's been kind of a scaling back in the rep headcount and so forth. But what is it going to take, I guess, to get that business back to growth? And when do you think that could potentially happen?

Yes. So, Mike, I guess just from a high-level perspective, when you talk about what's going on with that business, Again, as we've talked earlier about rep counts in that. So clearly, that is what's driving that -- pretty much driving the reduction, if you look on a year-over-year basis for Q2 and the year-to-date. We are seeing that we're seeing. We're seeing some favorable things there. We're seeing higher revenue per rep. We're seeing some pretty decent ASPs as well, but as we look in that, I'll let Kevin comment more on the future and we want to talk about that, but effectively, that's what you're seeing that drop. We've cut a lot of cost out of that D2C sales force. We're seeing that benefit running through selling and marketing on a year-over-year basis, but we're trying to rightsize that channel.

Right, and as a reminder, that's -- we are getting this as a rebaseline year. And the -- and with that DTC headcount, we feel we've got the right team in place, the right leadership in place. We have excellent marketing effort that we believe is put together and supporting that team as we go forward. in this pilot program that we've been running that we've talked about a little bit here with that patient-first, enabling any patient that wants to get an Inogen to easily be able to get that, smoothly and easily be able to get an Inogen POC regardless of whether they come in as a potential cash sale or if they have -- they're choosing insurance coverage for that option. So we're working through the pilots on there, working on making sure that we're managing the cost within that to optimize, but we feel good with the structure that we have today going forward.

Okay, great. Thank you.

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.