Q2 2020 Inogen Inc Earnings Call
Greetings and welcome to indulge in second quarter 2020 financial results Conference call.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation. If anyone should require operate assessed on a conference. Please press Star then one on your telephone keypad. As a reminder, this conference is being recorded I'd now like to turn the conference over to the day to Mr. Matthew Pigeon Investor Relations. Thank you you may begin.
Thank you for participating in today's call joining me from Energenic, CEO, Scott Wilkinson, and CFO and co founder Ali Bauerlein earlier today Energen released financial results for the second quarter 2020. This earnings release and it just corporate presentation are currently available in the Investor Relations section.
Company's website as a reminder, the information presented today will include forward looking statements.
Without limitation statements about our growth prospects and strategy for 2020.
Beyond our ability to create shareholder value by driving awareness of our product expectations regarding international sales and tender activity.
Patients in our domestic sales channels, including expectations related to our rental channel hiring expectations and expectations regarding our sales and marketing balls.
She is regarding reimbursement and regulatory changes and the impact of Kobe 19, public health emergency or P. H E on our business and demand for products forward looking statements. In this call are based on information currently available to US as of today's date. These forward looking statements are only predictions and involve risks and uncertainties.
There are set forth in more detail in our most recent periodic reports filed with Securities Exchange Commission actual results may vary and we disclaim any obligations to update these forward looking statements except to say maybe 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 non cash items and other expenses that are not predictive of Inogens core operating results.
Management uses non-GAAP measures internally to understand manage and evaluate our business and to make operating decisions reconciliations between U.S. GAAP and non-GAAP results presented in tables with in our earnings release for future periods.
We are unable to provide a reconciliation of our non-GAAP guidance. The most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release with that I will turn the call over to Inogens, President and CEO Scott Welcome Scott.
Thanks, Bob Good afternoon. Thank you for joining our second quarter 2020 conference call.
As everyone is aware the covert 19 virus forgotten, having a significant impact in the U.S. and the first calendar quarter up this year I continued to have a meaningful impact throughout the second quarter.
The covered by 10 pandemic led governments to order residents to shelter in place a practice social distancing to reduce further transmission.
Such orders have come at a time when our business typically benefits from a seasonal increase of patients ordering portable oxygen concentrators or P.O. sees.
To travel and be active outside of the home.
In addition physician offices in the U.S. and assessment centers in Europe have limited patient interactions that traditionally what to new oxygen patient referrals.
Furthermore, it's your me providers turned their purchasing focus to stationary oxygen concentrators to treat covert 19 patients well also minimizing patient interactions in response to the covered my team PHG, which includes replacing existing patients set ups with PRC.
These factors have made for a challenging second quarter for our business. However, we saw increased patient interest in our product sequentially in May and June.
In addition, we're pleased with the positive early indicators, we are seeing from our greater focus on the rental channel and its contribution to our gross margins.
Before discussing our financial results I want to quickly give an update on the cares <unk> impact on our business.
I didn't bidding round 2021.
As we noted on her last earnings call. The cares Act stimulus Bill increased Medicare reimbursement rates modestly, which is reflected in our second quarter results.
In addition, the cares active stab watched a provider relief fund for Medicare provider certain suppliers.
Superpad prepare for and respond to the covert might see nphs.
As a Medicare supplier, we received $6.2 million and funds in the second quarter of Twentytwenty, which Ali will cover in more detail when she reviews the financial results.
CMS is not announced the delay and competitive bidding round 2021 for oxygen has previously said competitive bidding pricing will be announced in the summer of 2020 with contracts going into effect on January 1st 2021.
With that I will now provide details around her second quarter 2020 revenue by channel.
We generated total revenues of $71.7 million, reflecting the decline of 29.1% compared to $101.1 million for the second quarter of 29 team.
Domestic business to business sales in the second quarter of 2020 decreased 27.3% to 21.6 dollars compared to $29.7 million in the second quarter of 29 team.
The decrease was primarily driven by reduced demand from our age for me providers on resource for P.O. sees.
We believe this decreased demand was due to physician offices limiting patient interactions that traditionally have led to new auction patient referrals lower retail sales it Jimmy providers minimizing the replacement of existing oxygen patients setups, what plc is to limit patient interactions in response to the covert night chain PHG.
And providers focusing on supplying stationary oxygen concentrators with higher flow characteristics to treat covered 19 patients.
We believe competitive bidding round 2021 also impacted eight Jimmy provider purchases as they waited to see the rates and winners of these three year contracts.
Domestic business to business accessory sales were also down significantly in the second quarter 2020 compared to the same period prior year. When we typically experience higher sales due to increased patient trial.
International business to business sales in the second quarter of 2020 decreased by 38.5% on an as reported basis and 37.4% on a constant currency basis $13.9 billion compared to $22.6 million in the second quarter of 29 thing.
The decrease was primarily driven by the temporary closure of certain European respiratory assessment centers due to the covert might team pandemic and continued tender delays in certain European markets.
In addition, like in the United States providers turned their focus to supply stationary oxygen concentrators with higher flow characteristics in response to the cobot 19 Phs.
Direct to consumer sales decreased 30.9% to $30.2 million in the second quarter of 2020 from $43.6 million I'm, a second quarter of 29 team.
We believe the decrease was primarily driven by government mandated shelter in place initiatives across the United States, reducing travel and mobility among our patient population combined with a decline in consumer confidence, resulting from an economic slowdown.
Its lack of mobility and economic uncertainty impacted our direct to consumer channel at a time when patients typically experienced the greatest benefits appeal to use for travel and activities outside the home.
However, we did see sequential monthly improvements throughout the second quarter with April being the lowest month in terms of purchases and close rates.
Given the challenges of remote hiring training and coaching we've been closely monitoring our direct to consumer close rates and adjusted or hiring practices to be primarily focused on replacement sales rep attrition for the remainder of 2020.
Rental revenue in the second quarter of 2020 increased to $6.1 billion from $5.2 million and the same period in the prior year, an increase of 16.9%.
We had approximately 26400 patients on service as of the ended the second quarter up 2020, which was up by 7.3% sequentially compared to the first quarter of 2020, as we made considerable progress and using more of our leads for rental startups and training our rental in take Tam during the quarter.
Such efforts should lead to increased rental set ups as well it's increased productivity of our inside sales force.
We remain excited about our focus to drive new oxygen patient rentals as we see meaningful patient interest in our products, especially if they can use their existing health care benefits. The cover a large portion of the cost.
Believed that the rental channel is a future growth opportunity. They should also provide margin expansion to our overall business.
As we announced in June I have decided to retire by the end of 20 to 21 and as a result, the board has initiated a process are finding a new chief Executive officer antigen.
We haven't games just search firm no Canada has been selected and we're still early in the process.
I remain committed to supporting Energen and this transition period as we continue to execute on our initiatives to offer innovative respiratory medical devices as the market leader for portable oxygen concentrators.
Furthermore, in support of our growth objectives, I'm very pleased to announce the with the board of directors support Aaron <unk> has accepted an offer to join antigen as executive Vice President of Upsales effective August 17th 2020.
This role will report to the Chief Executive Officer, and be responsible sales efforts across all sales channels worldwide.
Aaron comes to us with broad sales experience, including over 19 years in various sales roles across allegiance health care, Cardinal health care fusion and I can dickinson.
I read Meyers, who is currently the executive Vice President of sales and marketing will become executive Vice President of marketing responsible for all marketing and product management efforts worldwide.
We believe that with our expectations of future growth, we required dedicated senior leadership that bifurcate the growing responsibilities for sales and marketing we're excited to have Aaron and vibrant as leaders roles.
We believe we're a leader in PRC technology with our product offerings the market for our technology remains under penetrated.
All the covert night team has created a challenging short term impact.
We're still working relentlessly to optimize.
We believe we can execute on our plan to create long term shareholder value by focusing on increased patient and physician awareness of our innovative products and services.
Lastly, given where inogen stands today and in spite of the challenges we on the global economy have been facing.
We believe our strong cash cash equivalents and marketable securities of $218.6 million with no debt outstanding provides us with a certain level of stability and liquidity operate be adaptable. During this unprecedented time.
We still see plc used to the future for oxygen therapy patients worldwide as they provide increased freedom than independence for patients also decreasing service and delivery cost to providers.
With that I'll now turn the call over to our CFO Ali Bauerlein Alley.
Thanks, Scott and good afternoon, everyone. During my prepared remarks, I will review, our second quarter of 2020 financial performance.
I stopped noted total revenue for the second quarter 2020 was 71.7 million representing a decline of 29.1% from the second quarter of 29 team.
Turning to gross margin for the second quarter of 2020 total gross margin was 45.7% compared to 49.7% in the second quarter and 29 team.
Our sales revenue gross margin was 45% in the second quarter 2020 versus 50.7% in the same period of 2019.
A decrease in sales revenue gross margin was primarily due to increased mix towards domestic business. The business sales would have a lower gross margins in our international business to business and direct to consumer sales.
Lower mix of accessory sales and increased overhead costs per unit due to lower sales volumes.
In addition average selling prices were down in the second quarter 2020 versus the same period in the prior year across all sales channel.
Rental revenue gross margin increased to 53% and the second quarter of 2020 versus 30.4% and the second quarter 2019, primarily due to higher Medicare reimbursement rates lower revenue adjustments and lower servicing and depreciation expense.
Well, we're proud of the improvements in our rental revenue gross margin, we believed that the lower servicing costs in the second quarter 2020 were partially due to the lack of mobility of our patient populations and hoping that team, which may not occur in future periods.
As for operating expense total operating expenses decreased to 35.1 million in a second quarter 2020 versus 38.1 million in the second quarter 2019, primarily due to a reduction in advertising expense, partially offset by the impacts associated with new era intangible amortization and.
Change in the fair value at the earn out liability.
Research and development expense increased to 3.3 million in the second quarter of 2020 compared to 1.5 million in the second quarter and plenty Nike and nearly associated with the 1.9 billion of new era intangible amortization expense.
Sales and marketing expense decreased to 22.1 billion in the second quarter 2020 versus 27.8 million comparative periods of 29 team primarily due to decreased advertising expenditures of 7.2 million in the second quarter 2020, as compared to 11.6 million.
In the second quarter 2019.
General and administrative expense increased to 9.7 billion in a second quarter of 2020 versus 8.8 million in a second quarter of 2019, primarily due to increased consulting fees and point 9 million expense from the change in fair value of the new era earn out liability.
As Scott noted, we received 6.2 million from the Cures Act provider Revvy fund all of which was received and recognized in the second quarter 2020 <unk>.
In regards to receiving these bonds, we recorded 5.6 million in other income which was associated with lost revenues from the Tobin X Gene Phd and also recorded a point 6 million dollar benefit in general and administrative expense due to covert 19 PHG related costs incurred in the core.
The second quarter of 2020, we generated an operating loss of 2.4 million and adjusted EBITDA of 10 million.
In the second quarter 2020, we reported net income of 2.6 million compared to 10.2 million in the second quarter 2019.
Earnings per diluted common share was 12 cents in the second quarter of 2020 versus 45 cents in the second quarter of 2019.
Now turning to guidance because of the unprecedented market uncertainties. We are still unable to provide guidance for the full year 2020, given the uncertain scope and duration of the cobot 19 ph D., we are unable to estimate the impact on our financial results, including our revenue revenue mix net income and adjusted EBITDA estimates for the full here.
Given these uncertainties, we are continuing to be cost efficient by decreasing certain personnel hired and reducing advertising spend while also increasing rental set ups to improve lead utilization.
I also want to reiterate stop comments, our liquidity position.
We believe our strong cash cash equivalents and marketable securities of 218.6 million with no debt outstanding provides us the stability and liquidity necessary to operate during this time of uncertainty.
That will be happy to take your question.
Thank you at this time, we will conduct a question answer session.
If you will like to ask a question. Please press star one well your telephone keypad <unk>.
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Participants use the speaker equipment and may be necessary to pick up your handset before prices Starkey once again that star one to ask a question at this time one moment, while we pull my first question.
My first question comes from Danielle Antalffy with F. B B Leerink. Please proceed with your question.
Hey, good afternoon, everyone. Thanks for taking my question and let me start basing Scott Congratulations on your retirement it'll be very very nice and thanks for all that you've done I guess my first question is you know you actually did come in ahead of us on D to C and I think the street as well modestly.
It did feel like before Covidien started to season stabilization in that business and I was wondering Scott. If you are actually if you could give a little the enough color on you've talked in the past about where you are from a lead and close rate her perspective, and maybe just did a little deeper on on whether you're seeing <unk> or how.
How much you're seeing trends improve there from a close perspective, and then I have one follow up.
Yeah. Thanks, Danielle I'll start with that one and you know valley has something to add she can chime in first thanks for your kind comments.
I feel like I'm kinda, leaving one family here ultimately it energen of course.
Yeah, I'm not going yet so I'd like to reemphasize that but I'll be leaving one family family I've been here 15 years, and it's been like family, but kind of going back to my other family being on the road.
They're excited about about having me around a little bit more and I'm excited about that too, but thank you for your comments on the you know we went through some trials and tribulations you know a year ago.
And made some changes in the salesforce with our hiring practices, our training practices changed out some management and through you know probably the last four or five months of last year in the first two to three months of this year you know we got enough runtime under our belt that we felt really good about the changes that we've made and felt like we corrected the route root cause.
Issues and we're kinda back on the horse and you know anxious to get into 2020 improved.
And I think as things were going at the beginning of the year. We felt very good about that covert night team has impacted close rates you know pretty substantially we had said in the last call that close rates were down about a about 20% versus par and normally close rates would go up as you start getting into the warmer months. So.
We gave that number to give some context of you know, it's not like the travel industry or the hospitality industry, where things are down 95%, but it also does have an impact on US you know the nature of the calls that we take a little bit different you know people certainly aren't aren't going on the crews have a lifetime like the.
It used to right now and virtually none of the elderly what are the most susceptible you know to cope with my team they aren't traveling but they do want to get out of the house. They even if its go for a walk down the street or get out and working their garden. So yeah, we do still have demand, but the close rates are down and then you're.
You made the impact of just the uncertainty in the economy with a and you'd be surprised because with higher higher unemployment rates most of our our clients are off our retired but they have family members that maybe are laid off temporarily and you know we hear that hey, I might I might have to help my son or daughter.
And make a house payment you know while there are unemployed so while they're very interested in the product in the freedom that it can give them and the independents that it can give them you know close rates are down people are little bit more stingy with their pocket book, So having said all of that our lead flow is very strong.
As strong as it's been a so we're pleased with that the phone still ring when we run the ads.
You know cost per lead cost per sale still very attractive to us. So that part of Oh, you know our process is working very well now the retail close rates as I said are down we've tried to be a little bit more careful with hiring and this time because it is gonna be a a little bit longer raptor proficient.
At the lower close rates, a and a little bit longer routes to breakeven. So we've been much more selective in our hiring practices and we've kinda also gone through a transition where we've we've moved a significant number of our office personnel to work from home you know focusing on their their safety and health. So we had to work through that as well so.
Will still continue to higher as we said in our remarks through the rest of the year. We don't want to go down in head count on the Salesforce, but we're being very selective and very careful right now.
We do inherently think that weve fix those problems that we had a year ago, but we think we'll still be challenged from a close rate standpoint as long as there's economic uncertainty now. We did you is more of our leads to do rental set ups and as I mentioned and I also mentioned, but that's been.
A great opportunity for us as we look ahead with the lead flow being strong and people being able to use whether it be a Medicare and private insurance benefit you know we did a lot more placements that way to use those leads.
Because we don't want to waste them and that that should be a big part of our future as well. So we're excited about that hopefully that answers. Your question Anally did I Miss anything you want to add.
Yes, I mean, I'd just add a couple of comments there you know.
Really we're proud of the reduction in the marketing spend that we had in a quarter or Scott mentioned it but you know is about a 38% decline in marketing spend year over year.
The second quarter compared to the second quarter of 2019, and we saw you know about a 31% reduction in direct to consumer sales. So we were able to get more leverage on our media spend and that's in spite of the additional leaves going to the rental side of the business and using those leads before rental side.
So that is something that we are I'm proud of we were able to reduce our cost per lead on a year over year basis.
And you know in spite of what's going on with that the cobot 19, P.G. I. So we were happy with the results and as Scott said, we did see a sequential increase throughout the quarter in our direct to consumer sales, which was also a positive trend for.
Got it. Thank you for that and then my next question is it's kind of at a higher level I mean, so the HM east in the B to B business Theres, a lot of uncertainty right now right I mean, they sort of pre purchase some equipment. If you want to call. It that are stocked up on inventory immediately with co bid and now we're also weighed.
And for.
The competitive bid rates and things like that so and they're all crunch for cash at this point as well. So I'm just curious if you're having conversations with some of your b to b customers about how how long this sort of slows down their purchasing appears sees and at some point could lead to.
An acceleration of purchasing appeal to see once they are more stable financial position once the uncertainty around competitive bidding is lifted et cetera.
Yeah. It's a good question Danielle and we are having correspondence with a customer as both you know in the U.S. and abroad. We have some of the dynamics are similar you know as far as everybody focusing on trying to treat the cobot 19 patients.
You know top of mind is probably not going out and replacing tanks for people and giving them a P.O. see we've seen that people want to limit that interaction and exposure, but ironically when you think about future you know part of that conversation is hey, when the smoke clears. This is another push and value.
You have PEO sees in this non delivery and not in touch model that there is a solution for the future where you don't have to you know drag tanks, you know out the somebody's house or be in their home. So while you know now it's kind of the height of the pandemic here people are minimizing interaction. They also see further value of this conversion that we think you know that.
Should bode well for us in the future once some of the short term challenges pass now.
Now there's a there's a few kind of works in the road here, one is I'll say fairly discrete and and should take care of itself in a short term and that's competitive bidding.
There's still a lot of talk in a push about trying to delay competitive bidding.
You know it doesn't seem to make a lot of sense to essentially reduce the number of providers that can participate and provide oxygen therapy to patients at a time when you're in the middle Little pandemic and you know stationary oxygen is one of the primary treatments for cobot night team so strong.
Push there there hasn't been a decision yet we've been watching things day to day. So we were up to date with the release, but you are at a point with contracts going into place here at the beginning of next year in the rather short term like next let's call. It next month or so you either need to see it the way, which takes competitive bidding off the table.
For a while or you need to see rates announced then and then the winter is no who they are and then that uncertainty disappears and so that that should take care of one of the things that house people, a little nervous and a little reticent about making investments in the future when they're not really sure. How that's going to go that's short term no little longer term as you know cobot 19.
Don't know how long that's gonna go it certainly had an impact in diverted focus a you know from people converting their their model to the non delivery model and a lot of the resources and money has been tied up with treating these relatively short term auction patients that have contracted cobot my team, but we have seen you know some easing through.
The second quarter, it's difficult to predict the future if that's going to continue to ease up or if you know we have a relapse you know when the and the number of incidents you know rise at an even you know faster right now and cause continue or distraction and that's why we're hesitant to support guidance in place right now because of that uncertainty.
But if you look out long term I mean, we all know that cobot by team is not going to last forever and at the end of the day you know, it's a superior nod delivery model, it's more preferred by patients because of the freedom in independents that gives them and I'll emphasize independents now because again in the future you know people are going to look even more strongly.
You had a model that eliminates.
<unk> need and dependence on others 'cause this may not be you know the last virus that we that we see down the road I mean, these things don't happen every day, but they do happen every so often so I think the future for us in an underpenetrated market is still a very bright and we're excited about that despite you know kind of the short term setbacks.
That we faced right now because of cobot might take.
Thank you so much.
And I'd add just a little bit their danielle for additional Oh clarity, we saw a very strong April on the domestic business to business side, followed by a very weak may and then a recovery of sorts in June and so while that is a little bit different than a lot of other.
Medtech companies in terms of their cycle associated with Tobin 19, Oh, we do see that you know there is some level of a return to growth. There of course, there's still significant uncertainty going forward, but I do want to point out that you know while these patients are not currently.
Getting PEO season, there, maybe some delayed a treatment because physician offices are limiting physician or limiting patient interaction those patients still will eventually need oxygen, it's not like a patients with CR P.D. recover from C.L.P.D., and then no longer need oxygen in the future. So eventually.
It was patients should be prescribed oxygen and receive oxygen therapy I'd also like to point out in the domestic business to business channel of course, a portion of those say sales are to internet resellers and other resellers, who sell the the product on for cash and they of course.
Impacted like our direct to consumer business by the lower travel and the lower consumer confidence so that subset of that channel was impacted a more significantly than the overall domestic business to business you know the traditional H.M. needs because of the consumer impact in that.
Upset.
Got it thank you so much.
Our next question comes from Matthew Mission with Keybanc. Please proceed with your question.
Great. Thanks for taking the questions guys.
First question is it.
Doug Doug Doug.
EBIT 19 pandemic impact any of your assumptions around the long term market opportunity.
For portable oxygen Concentrators is there is there's the potential yeah. I guess the question is around does the post acute a market for for for oxygen therapy increase as a result to this.
So good question, Matt we've we've heard that a couple times and and I'll say certainly there's nothing that we see it from cobot 19 that hurts our future opportunity.
There are a couple things that might help it but I want to be careful about that because it's it's still a little early to make that call, but I think you know directionally there some possibilities and let me let me just cover those quickly.
[noise] point, you know, there's even more value of a non delivery and not in touch model that people can see in the future now. It's it's always been our vision that the market would convert to that you know the it should be providers would eventually standardize on Pcs over tanks with time I think this is another little push of the benefit.
Yes, there that we're hopeful that you know once the urgency of the day passes that you know it helps with that conversion rate in the future now its part is as far as the opportunity for the patient pool.
There have been some folks that have.
You know theorized that this is a respiratory element and there could be long term impacts.
From Cobot 19, where you know more people in the future may need long term oxygen therapy, you know because they had cobot my team not just from the you know traditional diseases seal PD. Its a little early to say that is absolutely going to happen. There is that chance if it does it would.
Broaden or make the pool bigger for long term oxygen therapy patients so that would be a tailwind to our business in the long term its but it's a little early to say that's going to happen, but certainly there's nothing that would be a negative from but in the long term. So it should be the same or better in our view as far as the API.
<unk> okay.
Okay, and but about a year since since you've completed in the new era acquisition.
I just didnt I don't think I don't think I heard you mentioned it on the call have you finalize the commercial rollout of the of that product or is that on that on that on hold as we kind of given given.
The situation currently.
Yeah, it's not really on whole, but its kind of a I'll say in a relaunch stage. We started a a a limited launch at the very end of 2019. So we had a train didn't armed a subset of our salesforce.
With that product and we started to a cell phone you know first couple of months of this year, we had or own expectations I'll say that we we greatly exceeded our expectations in the first three months of the year.
But when we did get into covert 19, heading and we saw the negative impact on our close rates with P.S.C.. We also saw negative impact.
On T.V., our new era product. So we pulled back there we've kind of reformulated our approach to selling a we have trained our entire inside salesforce and re launched a in the last month. So now we are back to selling again.
With the entire team about just a subset of the team we've taken some of the feedback and learnings from the first couple of months refined our message refined our pricing.
And we're back on the horse. So I'd say you know we're on it again, but it's a cobot 19 did throw us a little bit of a curve ball there on TV as well.
Okay. Thank you and just just to add a bit there, but the real goal and where we see the true benefit is combining that T.A.B. product with our P. S C, which is still under developed Ben. So we don't expect material sales until we really get that combination product on that.
That is the the true game changer, and that's the best use of this technology.
Well I used to fall into that how long until you do you think you would have that product.
We haven't announced that specifically for competitive purposes.
Great.
Once again to ask a question that star one on your telephone keypad. Our next question comes from Mike Matson with Needham and company. Please proceed with your question.
Yeah. Thanks, Thanks for taking my question I had a couple on the rental business you know I was surprised to see the gross margin a strong as though.
I thought it would be it would actually drive margin expansion I thought that this business was a much lower margin for you guys. So maybe talk about.
The factors in the quarter and kind of where you think.
The gross margin can be I'm going forward. The factors that helped in the quarter everything can be going forward and then you know how do you know that when the bid levels come out that this will still be accretive to your overall margins.
Yeah sure I can take that one so.
We said we saw large improvements in our rental gross margin, 53% for the quarter. Some of that was just the fact that the patient population wasn't as mobile so things like servicing costs and disposable usages and a freight costs.
Those types of things were down in the period. We also benefited from there was a modest Medicare rate increase associated with the coupon 19 ph d. So that rate increase will continue for the length of the PHG, but at some point that will also go away so that will be.
A headwind to gross margin and rental revenue at the point that P.H. and he is over but in spite of that we're proud of what's hot improved on the rental gross margin side.
Obviously above 50% is a great gross margin compared to our corporate average that's what we were really comparing against of course, our direct to consumer gross margin is still our highest gross margin business that we have because of the the cash Uh huh.
This is paid there.
You know long term, we haven't put out a specific rental gross margin target, but we have been actively working on improving the gross margin about business and improving asset utilization, reducing freight costs, reducing our adjustments and denials and improving our percent.
Billable patients. So those are active areas that we're continuing to focus on of course competitive bidding is and uncertainty, but oh, we do feel that we are in the best position here is the manufacturer as a vertically integrated DMV for us to continue to improve our gross margin profile.
Filed there.
No right now we're continuing to add new patients for the first time in many many quarters and as we add new patients, but also should.
Helped improve our utilization and our cost profile because the units that were putting out into the rental fleet now are at significantly lower cost than the the products that we were putting out a you know a few years ago that have been depreciating now. So we do think that we continued to drive leverage here.
But there is of course uncertainty on the competitive bidding rate, but we do expect to know that a relatively soon.
Okay. Thanks, and then you commented that you'd seen increased interest from patients in May and June. So do you have any feel for whether those patients will translate into DTC sales are DTC rentals or is it just too hard to predict at this point I know you're trying to kind of build the.
The rental business, but you know the near term revenue benefit even if the margins are good is lot smaller from from rental.
Right. So yes, we did see improving close rates throughout the quarters. So we did see those convert into both sales and rentals. So.
So no of course that are some lag time on marketing spend versus when somebody decides to buy or rent the product, but we did see solid conversions in the quarter. After taking into account the March and April drop that we saw associated but so beds. So Ah you know we are continuing to run.
Fine that sales pitch to people in light of the current Oh market dynamics and what consumers are most interested in right now.
We have also seen you know lower purchases of items like accessories, an add on purchases, but overall, we think that you know that business did show improvements throughout the quarter and that is a good sign although of course, we are hesitant just around a potential second wave and <unk>.
He impact of that on a consumer focus business, but of course, the rental side of the business is a great opportunity for us.
Given the improvements we've seen in that business from a financial results perspective to be able to give access to our product to more patients and that is not as price sensitive since they're already paying a co insurance for their oxygen these are existing oxygen pace.
It is converting from tanks to PEO sees so we think that that is a great way, especially in light of the Kobin 19 challenges for us to build that base and while of course rentals are not as impactful on revenue right out of the gate. They do provide a stable.
Oh revenue stream over time would that patient pool.
That we can build on.
Okay, and then just one quick one on the B to B side. I mean, you comment you, obviously talked about May and June for DTC, but our beat a beat it did you see improvement as well in the latter part of the quarter. That's all I have thank you.
Yeah. So what we saw in the quarter was a little bit different for B to B, we saw a March and April very very strong.
In both the domestic and international B to B channels May was extremely weak in both those channels and then there was it recovery in June so we didn't see at the same cadence it happened a little bit delayed compared to the D to C impact on but we did see him.
Prove men in June off of the May Love.
Thanks.
Our next question comes from Margaret Cats with William Blair. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking the questions.
Yeah, maybe just to dissect a little bit further on on something Mikes question Oh, Yeah. More specifically are you seeing new patient flows back two questions for CRPD look there can you give any color around that and you've talked a lot about may and June but can you provide any july commentary as well.
Yeah, Margaret it's Scott I'll I'll take the first part of that as far as patient flow. We are seeing increased flow, but I wouldn't say, it's back to normal okay. What we've heard in Europe.
That assessment centers are running it.
Anywhere from 20, 20% to 40% at full capacity is what we've heard I would say you know in the U.S. it might be out a little bit better, but its not as clamped down as it was a few months ago, but it's certainly not what I would call back to normal. So you know as far as those.
ER physicians see impatience and the new patient flows you know kind of entering the pool I'd say, it's still at a at a stifled rate right now, but you know we seem to be trending a little better of course, we're always careful about you know looking ahead, because you know we all see the news and see the number of cases rising sea uncover.
I've been starting to take little more aggressive action to try and curb the spread again. So that's why you know we're not sure. If you know where the trends going to go here, but if I just look at the last couple of months it's improved.
Okay that and July any comments there to the company I get better at least stable.
I can take that there were no material change in trend in July.
Okay, and that's D to C and B to B.
Correct.
Yeah, and then as we look at a you know the competitive bidding out.
I know, there's some some thoughts it might get delayed or would that swing you one way or the other or if there's a change in rate would that's when you one way or the other in terms of in Boston.
No.
Okay.
I mean, I mean, I mean, I mean, let me, let me back up and expound a little bit more just to know [laughter] I mean, I mean look you know we don't see the rates changing dramatically. We've said that in the past right. I mean, the first wave 10 years ago. We saw you know 30% drop since then we've seen a couple of percent here and there.
Some people have suppose that rates might go up some of said they might go down but in general we think they're going to move such that it's gonna be the status quo, it's going to remove uncertainty of what they are and it's going to remove uncertainty of who the winners are.
But if it goes up a couple of percent, it's still put strain on the delivery model. If it goes down a couple of percent.
Livery model, you know remain superior even more valuable and can be profitable you know what a couple of percent off as far as what we're doing from a go to market strategy of trying to drive awareness with patients and physicians doesn't change that strategy at all so.
Well continue to do that.
We're showing you know we've worked hard over really a two year period than a lot of the heavy lifting in the last year. She will improve our rental gross margins that's that wasn't by accident or luck. It's it's a lot of driving out cost and optimizing some things no to put us in a position where this is attractive so it doesn't it doesn't change.
Yeah, the rates, one way or another couple of percent. It does it doesn't matter, how it's going to come out doesn't change things for us and our approach.
Okay helpful. And then just a one more in this is maybe a slightly a bigger picture question, but just as you guys look at investments within a driving top line revenue.
Versus trying to prioritize operating margin and cash flow where are you guys right now as you look at it strategically that yeah, maybe over the next 12 months and then maybe over the next three to five years that does that there. Thanks.
Yeah. So you know with a with cobot night tandem we've seen a lot of companies you know really struggled with cash flow with reduced revenue.
You know not covering their costs. Our primary objective in the very short term is is to not burn our cash you know weve emphasized a really scrutinizing our.
Expenses.
The only hires that we're making or what we consider critical hires for the future, but they are investments for the future. So our hirings aren't zero, but we're being careful.
As I already mentioned you know, we really tried to cranked out our advertising spend a little bit and use more of a wage with a radical approach where you have a broader close right.
And you know save some money there on advertising and I think we did a pretty good job in a difficult time in the short term you know we said at a couple of times, we're in a great position from a cash standpoint, we're not really worried about being able to navigator operate and whats you know really a difficult time for a lot of companies long term, though the.
Money that we have on our balance sheet that is earmarked for growth are we still think there's great opportunity for us the market is underpenetrated, we've got a superior model a superior product in a market leadership position. So you know that's earmarked for growth whether it be you know investing in a expanding another internet.
National markets, New product development commercialization of driving more awareness through advertising or new products, whether that's developed internally or other acquisitions and that includes continuing to scale up our TV product, a and integrating that into our PEO sees as Alan said so.
That's where the body's out it's a I'll say, it's just a flight emphasis on growth, but we want to do it while we drive some leverage as well so it's not growth at all expense and you know to heck with the bottom line, we want to grow and show leverage lockstep.
Got it thanks guys.
Thank you at this time I'd like to turn call back over to management for closing comments.
The covert 19, Phs has placed all of US an unprecedented times and we continue to respond by making sure. We are part of the solution that helps patients with respiratory disorders. While also keeping our employee is healthy and safe.
However, despite these immediate challenges, we continue to believe or future as bright and that portable oxygen concentrators will be the standard of care for oxygen therapy patients in the U.S. and worldwide.
Given our strong balance sheet, we believe we have the ability to weather the storm and once this turbulence passes we believe we can execute on our plan to deliver attractive revenue growth with improvements in operating leverage.
With that I would like to thank our employees for the extraordinary effort. They make every day to take care of patients to require oxygen therapy.
Thank you all for your time today.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation have a great day.