Inogen Inc (INGN) 2017 Q1 法說會逐字稿

Ladies and gentlemen, Thank you for your patience. Once again, I will introduce [Mr. Ismael] for Inogen's 2017 First Quarter Financial Results Conference Call. Sir, you may begin.

Thank you. Thank you for participating in today's call. Joining me from Inogen is CEO, Scott Wilkinson; and CFO and co-founder, Ali Bauerlein.

Earlier today, Inogen released financial results for the first quarter of 2017. This earnings release and Inogen's corporate presentation are currently available in the Investor Relations section of the company's website.

During the call and the subsequent Q&A session, we will be discussing plans and projections for our business; future financial results and market trends and opportunities, including, among others, statements regarding our Inogen One G4 rollout; expectations for international sales and anticipated patient preference; market opportunities and increased use of portable oxygen concentrators; our ability to continue revenue growth and our expectations for our business-to-business and direct consumer sales channels; our strategic focus and objectives; hiring expectations; expectation regarding timing of reprocessing of claims associated with the 21st Century Cures Act; estimates of patent defense expenses; expectations regarding our new facility in Europe; expectations to open a new facility in Cleveland, Ohio in 2017, including with respect to expected tax credit and incentives from state and local government; the expected impact of our European acquisition; implementation of a new customer relationship management system in the second quarter of 2017, including with respect to its short-term and long-term impact to productivity on the 2017 guidance, including revenue, net income, adjusted net income, adjusted EBITDA, net cash flow, the need for equity financing, effective tax rates, tax benefit and adjustments and the expected cadence of our quarterly revenue for 2017. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results.

Information on these and additional risks, uncertainties and other information affecting Inogen's business operating results are contained in Inogen's annual report on Form 10-K for the year ended December 31, 2016 and in its other filings with the Securities and Exchange Commission. Additional information will also be set forth in Inogen's quarterly report on Form 10-Q for the period ended March 31, 2017 to be filed with the Securities and Exchange Commission.

We advise investors to review these risk factors carefully. The forward-looking statements in this call are based on information available to us today as of today's date, May 9, 2017, and we disclaim any obligation to update any forward-looking statements, except as required by law.

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 and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures to compare Inogen's performance relative to forecasts and strategic plans to benchmark Inogen's performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our earnings release, which can be found in the Investor Relations section of our website. For future periods, we have not reconciled our non-GAAP guidance to the most directly comparable U.S. GAAP measures because the timing and amount of material items that impact these measures are inherently unpredictable or out of our control. Accordingly, we cannot provide a quantitative reconciliation of these non-GAAP measures without unreasonable effort.

I will now turn the call over to Scott Wilkinson. Scott?

Thanks, Jamar. Good afternoon, and thank you for joining our first quarter 2017 conference call.

Looking at the first quarter of 2017, we build on our success in prior quarters, and we saw solid performance with revenues of $52.5 million. This represented 22.1% growth over the same period last year, reflecting great results in our domestic business-to-business sales channel, strong results in our direct-to-consumer sales channel and solid increases in our international business-to-business sales channel. And as we've seen in prior quarters, expected decline in rental revenue was more than offset by the increases in revenue from our business-to-business and direct-to-consumer sales channels.

In the first quarter of 2017, we delivered net income of $5.9 million and adjusted EBITDA of $10.9 million, which represents 135.3% and 34% growth, respectively, over the first quarter of 2016. We are continuing to scale sales of our newest product, the Inogen One G4; invest in sales force additions; and implement our new customer relationship management or CRM software system while delivering solid bottom line results. And we did this in spite of the rental reimbursement headwinds. Looking at our revenue streams in more detail, we saw strong demand for our portfolio of innovative oxygen concentrators across all of our sales channels in the first quarter of 2017.

We are very pleased with our domestic business-to-business sales in the first quarter of 2017, which increased 84.2% over the first quarter of 2016. Business-to-business sales was our largest revenue channel for the first time in the first quarter of 2017, and growth here was primarily due to purchases from traditional home medical equipment providers and strong private label demand. We continue to see more traditional HME providers turning to portable oxygen concentrators to lower their operating costs in the face of reimbursement reductions, and they are turning to Inogen as the leader in the space. Revenue from our private label partner and traditional HME providers combined represented more than half of the domestic business-to-business channels total sales revenue in the first quarter of 2017.

International business-to-business sales were also solid in the quarter, reflecting 14.6% growth over the same period last year. We are pleased with this result, especially on the heels of a very strong 2016. However, we are mindful that international sales can be lumpy over time due to the timing of tender contracts and customer buying patterns.

Pursuant to our plan to establish a physical presence in Europe in 2017, we acquired our former distributor, MedSupport Systems, in early May 2017. We believe this acquisition will enable us to offer multilingual customer service, repair services and increased distribution with the goal of deepening our European customer relationships and increasing European market penetration and customer support at a lower cost. This is also expected to allow us to capture their incremental distributor margin, which will increase our sales. The acquisition was an all-cash transaction, and we believe that this may lead to a small positive impact on our revenue and earnings per share in 2017 and going forward. We will continue to work with our other existing European distributors to ensure smooth ongoing service to them and their end customers. We have also added an additional European sales representative in the first quarter of 2017 to increase our sales capacity and customer support activities.

Direct-to-consumer sales in the first quarter of 2017 increased 27.8% over the first quarter of 2016. We added new insight sales representatives in the first quarter of 2017, and we are pleased with our team's success. We are planning to hire additional sales employees throughout 2017 as this is still our largest bottleneck to growth in direct-to-consumer sales. We believe that additional insight sales employees will help to achieve our plan for the remainder of the year.

We are making progress on our plan to secure an additional facility in the Cleveland, Ohio area to ensure adequate space to support our future sales and support team's growth. The facility is expected to provide an ideal area for recruitment across all of northeastern Ohio, and we expect that the facility will be operational in the second half of this year. As we said on the last earnings call, we are planning on adding additional headcount of approximately 240 people in the Cleveland area location over the next 3 years. We look forward to having a sales and service support location based in the Eastern Time zone, which we think will allow us to better serve our customers. While the Cleveland facility will require an investment and tenant improvements, we are expecting to receive tax credits and incentives from the state and local governments of up to $1.9 million over 3 years based on our forecasted headcount additions and facility tenant improvement costs. Reiterating what we said on our last call, there are no changes planned to our other current facilities as they are functioning today.

We are continuing to roll out our new CRM system, which should be completed in the second quarter of 2017. We believe this new system will help improve productivity of our sales, customer service and billing departments, especially as we look into 2018. We do expect to see a short-term decline in productivity in these departments during the first few months, post implementation, as we invest in training and a new system.

We've seen steady gains in sales mix toward the Inogen One G4 since its introduction in May of 2016, and that trend continued this quarter. As we've mentioned before, the Inogen One G4 is smaller, lighter and has a lower manufacturing cost than our Inogen One G2 and G3 products. In the first quarter of 2017, we increased volume of the Inogen One G4 as a percent of our total oxygen concentrator volume in the direct-to-consumer sales channel to above 50% of the volume. Remember that as part of our sales strategy, we are not currently making the Inogen One G4 available for rental, and we are using the upgraded Inogen One G3 product as the primary ambulatory solution deployed in our rental fleet at this time.

Our international sales channel also remains focused on the upgraded Inogen One G3. There is no change to our expectation that international sales of the Inogen One G4 will begin by mid-2017 and ramp up in the second half of 2017 depending on the timing of product regulatory and reimbursement approvals.

Coming out of my first quarter as Chief Executive Officer, I am pleased that we've maintained our growth momentum as we provide the best-in-class and patient-preferred products, which drove solid increases in adoption within the oxygen therapy market. And I'm pleased that ongoing successful execution of our sales strategy across multiple revenue streams is resulting in increased traction that we are seeing in the oxygen therapy market.

With that, I will now turn the call over to Ali. Ali?

Okay. Thanks, Scott, and good afternoon, everyone.

During my prepared remarks, I will review the details of our first quarter of 2017 financial performance, and then I will review our guidance for 2017.

As Scott noted, total revenue for the first quarter of 2017 was $52.5 million, representing 22.1% growth over the first quarter of 2016.

Looking at each of our revenue streams and turning first to our sales revenue. Total sales revenue of $46 million represented 87.6% of total revenue in the first quarter of 2017 and reflected 40.1% growth over the same quarter of the prior year. Total units sold increased to 25,600 in the first quarter of 2017, up 50.6% from 17,000 in the first quarter of 2016.

Strong domestic business-to-business sales of $17.5 million in the first quarter of 2017 reflected 84.2% growth over the first quarter of 2016, with strong demand from our traditional HME providers and our private label partner.

We also demonstrated solid international business-to-business sales of $11.4 million in the first quarter of 2017, primarily driven by demand from our European and South Korean partners. Sales in Europe represented the majority of international sales at 73.2% in the first quarter of 2017, which was down from 90.8% in the first quarter of 2016, primarily due to the addition of South Korea and increasing sales in Canada. With strong business-to-business sales again in the first quarter of 2017, average business-to-business selling prices declined over the same period in the prior year, primarily due to the shift in sales towards traditional home medical equipment providers and private label sales and additional discounts associated with increased sales volumes worldwide.

Direct-to-consumer sales for the first quarter of 2017 were $17.1 million, representing 27.8% growth over the first quarter of 2016, primarily due to increasing consumer awareness from our ongoing sales and marketing efforts.

Rental revenue represented 12.4% of total revenue in the first quarter of 2017 versus 23.7% in the first quarter of 2016. We saw the expected trend of rental revenues declining in the first quarter of 2017 versus the first quarter of 2016, primarily due to the known reimbursement changes. Rental revenue in the first quarter of 2017 was $6.5 million, representing a decline of 35.8% from the same period in the prior year.

Turning to gross margin. For the first quarter of 2017, total gross margin was 49% compared to 49.5% in the first quarter of 2016. We saw a slight decline in our overall gross margin primarily due to the rental reimbursement declines and a shift in sales revenue towards our business-to-business channel, partially offset by lower cost to manufacture our Inogen One concentrators.

Our sales gross margin was 52.3% in the first quarter of 2017 versus 49.7% in the first quarter of 2016. Sales gross margin percentage improved, primarily associated with lower cost of goods per unit, mostly due to lower material cost, partially offset by higher sales mix of domestic business-to-business sales, which have lower average selling prices.

Rental gross margin was 25.9% in the first quarter of 2017 versus 48.9% in the first quarter of 2016. The decline in rental gross margin was primarily due to lower net revenue per rental patient, which was primarily driven by the reimbursement rate reduction, and partially offset by lower cost of rental revenues, which was primarily associated with lower depreciation cost per patient.

As for operating expense, total operating expense increased to $20.2 million in the first quarter of 2017 or 38.4% of revenue versus $18 million or 41.9% of revenue in the first quarter of 2016. Total operating expense decreased as a percent of revenue from the comparative period in the prior year even with strategic investments in additional personnel and increased patent defense legal costs. The first quarter of 2016 included $1 million incurred for a litigation settlement expense that did not recur in the first quarter of 2017.

Research and development expense was $1.3 million in the first quarter of 2017 compared with $1.2 million recorded in the first quarter of 2016.

Sales and marketing expense was $10.5 million in the first quarter of 2017 versus $9 million in the comparative period in 2016, primarily due to increased sales force personnel-related expenses and increased marketing expense.

General and administrative expense was $8.3 million in the first quarter of 2017 versus $7.9 million in the first quarter of 2016, primarily due to increased personnel-related expenses and patent defense legal costs, and partially offset by a litigation settlement expense of $1 million incurred in the first quarter of 2016.

In the first quarter of 2017, our effective tax rate was negative 0.9% compared to 25.9% in the first quarter of 2016. We saw a lower-than-expected tax rate this quarter due to a $2.2 million decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation associated with Accounting Standards Update or ASU 2016-09 in the first quarter of 2017 compared to $0.2 million in the first quarter of 2016. The decrease in provision for income taxes associated with ASU 2016-09 lowered our effective tax rate by 37.6% in the first quarter of 2017 and by 4.5% in the first quarter of 2016 as compared to the U.S. statutory rate.

Our net income in the first quarter of 2017 was $5.9 million compared to $2.5 million in the first quarter of 2016, an increase of 135.3% versus the comparative period in the prior year, and a return on revenue of 11.3%.

Earnings per diluted common share were $0.27 in the first quarter of 2017 versus $0.12 in the first quarter of 2016, an increase of 125%.

Adjusted EBITDA for the first quarter of 2017 was $10.9 million, which was a 20.7% return on revenue. Adjusted EBITDA increased 34% in the first quarter of 2017 versus the first quarter of 2016, where adjusted EBITDA was $8.1 million or an 18.9% return on revenue.

Cash, cash equivalents and marketable securities were $128.2 million, an increase of $14.4 million compared to $113.9 million as of December 31, 2016. We continue to expect Medicare to reprocess claims associated with the 21st Century Cures Act beginning in May of 2017.

Turning to guidance. We are maintaining our 2017 revenue guidance of a range of $233 million to $239 million, which represents year-over-year growth of 14.9% to 17.8%. In spite of the strong growth reported in our business-to-business sales channel in the first quarter of 2017, we expect to direct-to-consumer to be our fastest-growing channel and domestic business-to-business sales to have a solid growth rate and international business sales to have a moderate growth rate. With the near-term strategy, we'll continue to be heavily focused on the European market. We expect rental revenues to decline in 2017 compared to 2016 by approximately 25% to 30% based on lower average rental revenue per patient and a focus on sales versus rental.

We expect different revenue cadence in the remainder of 2017 from prior years for several reasons. In the direct-to-consumer channel, the factors that we believe will impact this are the result of hiring few new direct-to-consumer sales reps in the fourth quarter of 2016, the timing of sales rep additions expected in 2017 once we get our new Cleveland facility operational and the expected short-term decline in productivity from our new CRM system implementation.

As HME providers adopt portable oxygen concentrators, this could change our historical sales seasonality in the domestic business-to-business channel as well, which was previously mostly influenced by consumer buying patterns. Given these changes, we expect our strongest sales to be in the third and fourth quarters in 2017 in contrast to our historical pattern of the second quarter being the strongest.

We are increasing our 2017 net income and adjusted net income estimate to $22 million to $24 million, representing 7.2% to 17% growth over 2016 full year actuals. This compares to the previous guidance range of $21 million to $23 million. We estimate that the adoption of ASU 2016-09 will lead to a decrease in provision for income taxes by approximately $6 million in 2017 based on the forecasted stock activity compared to $5 million previously expected.

Excluding the $6 million decrease and our provision for income taxes for stock compensation deductions expected in 2017, we estimate an effective tax rate of approximately 37%. We expect our effective tax rate, including stock compensation deductions, to vary quarter-to-quarter depending on the amount of pretax net income and on the timing and size of stock option exercises.

We are maintaining our guidance range for the full year 2017 adjusted EBITDA of $46 million to $50 million, representing 6% to 15.2% growth over 2016 full year adjusted EBITDA.

As we outlined before, we expect patent defense legal costs within general and administrative expense to significantly increase in 2017 over 2016 associated with the 2 pending lawsuits.

In addition, we are investing in our new Cleveland facility, European facility and the CRM system in 2017.

We are confirming our expectation for net positive cash flow for 2017, with no additional equity capital required to meet our current operating plan.

With that, assuming our phone systems work, Scott and I will be happy to take your questions.

(Operator Instructions) Our first question comes from Margaret Kaczor with W. Blair.

First question for me is on the large growth. Obviously, you guys saw on the B2B domestic channel. Can you guys give us any additional clarity beyond what you said on the call regarding how much of growth (inaudible) being in the private label versus your

(technical difficulty)

Margaret, we're not sure we caught the full question.

Apologies. It looks like Ms. Blair's (sic) [Ms. Kaczor's] line has been interrupted. If you'd like, we can move on to another line while we wait for Ms. Blair to queue back up.

Yes, I don't know if -- oh, she's back.

Okay. We'll try it again. In terms of the B2B domestic growth, what were the drivers of that? And are you seeing any signs in the field where you would assume that, that growth would slow or accelerate?

Yes. So I think we kind of called out in the B2B bucket, at least in this call, the growth was driven by the traditional HME providers that by -- directly from Inogen as well as our private label partner that sells to other home care providers. The growth, I'll say, was robust in both of those buckets. Now we don't generally break those out individually, but the 2 of them combined were more than half of the total sales in our HME bucket. The other third leg of that stool being the Internet resellers. So those 2 were more than half. The growth was robust in both of those buckets. And I think it's fair to say at this point, now that we have a little bit more time under our belt here as far as HME's trialing, experimenting, trying to understand where POCs could fit into their business in the face of reimbursement decline, we're seeing pretty steady progress in those trials, in that transition, and it supports our long-term belief the POCs will eventually become the standard of care for oxygen therapy. So I mean, there's nothing changed in our expectation. I will caution you, Margaret, and everyone, to really repeat what I've said in the past. I think this transition will be a process, not an event. I know we get a lot of questions about: Do you think we're at the hockey stick? And is this the tipping point? I'm not sure there is such a point. I think it's going to be a process, where you're going to see a curve that, certainly, if you look in the rearview mirror over the last 18 to 24 months, that's what we've seen. We expect that to continue.

All right. And our next question comes from Robbie Marcus with JPMorgan.

All right. It seems that we're still having our audio issues as well. Would you like just to end the call for now?

Sure. So we thank everybody for the time. We will be available for follow-up calls given that we couldn't take Q&A in this session, so please feel free to reach out as needed for additional follow-up questions. Thank you for your time.

Thank you.

Ladies and gentlemen, apologies. This does conclude today's conference. Thank you very much for your participation and your patience. You may now disconnect.