Q2 2023 Inogen Inc Earnings Call
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Welcome to your Energen second quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
Following managements prepared remarks, we will hold a Q&A session.
To ask a question at that time, Please press star one on your Touchtone phone.
If anyone has difficulty hearing the conference. Please press star zero for operator assistance.
As a reminder, this conference is being recorded today August seven 2023.
I'd now like to turn the call over to Agnes Lee Senior Vice President of Investor Relations and strategic planning.
Thank you, Doug Hello, everyone and thank you for participating in today's call. Joining me on the call today are president and CEO , Nabeel shop shop, and CFO Kristian called Schrader.
Earlier today Inogen released financial results for the second 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 results for 2023 expectations regarding increasing productivity of our internal and external sales team.
<unk> 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.
Looking statements in this call are based on information currently available to US as of todays date August seven 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 presentation in the Investor Relations section of the company's website. Please refer to these files for more detailed information during.
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.
Fried useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of <unk> 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 <unk> President and CEO .
She'll shop shop N B L.
Thanks, Agnes good afternoon, and thank you for joining our second quarter 2023 conference call. During today's call, we would like to work our way through high level comments around our performance in the quarter, how that relates to our outlook for 2023 and provide an update on our progress and mitigation plans, then we will transition to Cree.
Then who will walk through the details of our financial performance and our annual guidance before we take your questions at the end of the call and.
In summary, while we have made progress with the execution of our commercial strategy. We are disappointed with the performance this quarter our revenue for the quarter fell short mainly due to two factors need to be headwinds primarily with a few key accounts predominantly in the U S and slower than expected progress on our DTC productivity initiatives.
Despite continued sequential improvement.
Considering the shortfall this quarter and understanding that our mitigate mitigation actions might take longer than expected to materialize. We are resetting expectations for revenue and adjusted EBITDA for the balance of the year 'twenty.
2023 revenue is now expected to be within the range of $3 15 billion to $3 $20 million. Despite the decrease in revenue our focus on cost containment allows us to limit the impact on adjusted EBITDA, hence expecting the full year to be a loss in the range of 20 million to $25 million.
I would like now to spend some time talking through factors that impacted our revenue in the quarter and the actions that we're taking.
We believe patient demand for long term oxygen therapy remained stable and is slowly recovering however, and the beat to the channel some customers continue to face pressure relating to capital deployment cost of borrowing one focus on margin accretion coupled with the aggressive competitive pricing activities. This continued to impact outperform.
Especially with some of our large customers.
The supply chain constraints related to semiconductor availability from mid 2021 through 2022 required us to prioritize the channels that could deliver higher revenue and margin. When we were not able to fully meet market demand. This provided an opportunity for lower cost competitors aggressively push for share gains during a prolonged button.
Necessary period of back orders MD USB to be channeled.
We were able to remediate most of the back orders by end of Q3 and into Q4 of 2022, but subsequently sold increased aggressive competitive pricing tactics into 2023.
Based on our analysis, we now understand that this backlog and the resulting circumstances had the bigger impact on some of our key accounts than we had expected.
Our focus has been on regaining some of the business loss in key accounts as well as winning new customers our strategy and B to B channels include delivering enduring benefits to our customers through a very strong total cost of ownership model high patient and prescriber brand recognition best in class device quality and top tier after sales.
Service, our strong value proposition is allowing us to win back some of the lost business as well as incrementally win new accounts, we are focusing on advancing customer conviction around the benefits of the non delivery long term oxygen therapy model and image and ability to consistently deliver value beyond the only dimension in Burnett.
<unk> of lower acquisition price is.
Recently, our business development efforts now include the value of future partnerships would be to the customers as a result of images investment in innovations and how that could expand our customers access to patient populations and indications beyond COPD via new product introductions over the next two to four years.
We are also pleased by our recent completion of the necessary regulatory steps to allow us to commercialize on euro six as the POC with an approved eight year expected service life.
The eighth year expected service life will also cover the current <unk> POC and in both cases is a critical element that further strengthens imaging value proposition as it relates to delivering a better return to be to be customers due to and optimize total cost of ownership.
Moving to our direct to consumer business. We have remained focused on scaling the new disciplines in DTC as we work towards achieving scalable and profitable growth measured through productivity per sales representative.
As a result of institutionalizing, the new sales disciplines and the broader DTC organization. We have delivered sequential improvements of about 30 percentage points in both unit and revenue productivity per rep with a double digit reduction in the number of sales reps and low single digit reduction in marketing leads.
We believe that during the remainder of 2023, our progress on the revised sales management strategy would get us closer to steady state and set us up to meet our 2024 exploration for that channel both in terms of growth and profitability.
For our international <unk> business, we continue to drive our value proposition to expand business with current customers as well as win new ones.
Oh six launch in Europe is progressing well and we have been recently notified that the last remaining signature required to publish the new reimbursement code in France has been secured we also believe that the eighth year expected service life for robotics will play a role in making imaging value proposition to beat to be customers even stronger.
Rental revenue continues to benefit from improved prescriber team productivity with double digit increases in referrals per sales rep as compared to Q1.
We expect to continue to see steady progress as we further optimized sales territories and call frequency to drive scale per account and overall growth.
In summary, we believe headwinds in B to B are generally transient in nature and could be addressed in short to medium term by working through challenges and opportunities with existing customers, while equally focusing on winning new accounts.
As part of our plans to provide the path forward to revenue growth and profitability in the medium term, we are maintaining critical investments while closely managing operating expenses and adjusted EBITDA during 2023.
Part of our ongoing investments supporting organic growth are directed at expanding the patient population and indications we saw beyond COPD. Additionally, with respect to inorganic growth upon the close of the transaction. So as you assessed will provide an opportunity for imaging to enter the airway clearance adjacency through a clinically differentiated.
<unk> cause you assist will allow imaging to access respiratory patients earlier and before the required long term oxygen therapy, hence expanding a patient's lifetime value for the company.
This acquisition met our strategic clinical financial and capital deployment criteria and we expect to now paused, our M&A efforts and upon close focus on executing on our commercial clinical and regulatory milestones to deliver expected returns.
I will now turn the call over to Kristin for a review of financial results Kristen.
Thank you Emil and good afternoon, everyone.
Unless otherwise noted all financial comparisons are to the prior year comparable period.
Revenue for the second quarter of 2023 was $83 $6 million, a decrease of 19, 1% versus the prior period.
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 second quarter Foreign exchange net of hedging had a negative 60 basis points impact on total revenue and a negative 130 basis point impact on international revenue.
On a constant currency basis second quarter total revenues decreased 18, 5%.
Looking at second quarter revenue on a more detailed basis domestic business to business revenue increased 63% to $18 $3 million in the second quarter of 2023, compared with $11 $2 million in the comparable period.
It is important to note that the domestic business to business revenue was down considerably in the second quarter of 2022 due to supply constraints that limited shipments to the channel.
Despite the good growth, we had expected an even larger increase in domestic <unk> sales now that the supply constraints have been diminished.
International <unk> sales decreased 37, 8% to $23 $3 million in the second quarter of 2023 as compared to $37 $4 million in the prior period.
Last year International sales were higher as we prioritized shipments to Europe .
The pending exploration that EU M. D D certificates in May of 2022.
Given the tough comparable we expected a year over year decrease that sales were short of our expectations.
Direct to consumer sales decreased 34, 1% to $26 $8 million in the second quarter of 2023 from $46 million in the prior period, driven primarily by lower sales volumes due to fewer inside sales representatives and lower marketing and advertising spend.
As we continue to drive towards improved profitability in this channel.
Rental revenue increased eight 6% to $15 $3 million in the second quarter of 2023 from $14 $1 million in the prior period, we have seen continued growth in rental patients on service and higher Medicare reimbursement rates.
This was partially offset by rental revenue adjustments, which were part of our work to improve collections processes and cleanup age receivables.
Now on to discuss our gross margin.
Total gross margin was 47% in the second quarter declining 400 basis points from the prior period.
As the benefit realized from lower component costs was more than offset by the impact of unfavorable channel mix and lower selling average selling prices in the U S business to business channel.
Sales revenue gross margin was 38, 5% in the second quarter of 2023 declining 480 basis points from the comparable period, driven primarily by shift in channel mix with a higher volume of units sold through the domestic business to business channel versus the direct to consumer and inner.
Our national business to business channels, there was additional impact pricing pressure due to pricing pricing pressure in the b to B channel.
This was partially offset by lower premiums paid for components.
Rental revenue gross margin was 55% in the second quarter of 2023 versus 54, 2% in the prior period, a decline of 360 basis points.
Margin compression was primarily driven by higher patient servicing costs and the onetime impact of rental revenue adjustments, partially offset by higher Medicare reimbursement rates.
Moving on to operating expense in.
In Q2, total operating expense decreased to $45 $8 million compared to $49 $1 million in the prior period.
Representing a decrease of six 8%.
The reduction in spend is a result of the steps we have taken to mitigate the impact of the macroeconomic headwinds we have encountered in 2023.
The current quarter included restructuring and other related charges of $200000 in acquisition related costs totaling $500000. Excluding the one time charges operating expense decreased to $45 $1 million, representing a reduction of 11 eight.
Percent as compared with the prior period.
Excluding one time charges operating expense was reduced by $5 $1 million compared to the first quarter at 2023.
Going into more detail on our expenses in the second quarter.
We have continued to work on our innovation pipeline through investment in research and development with a total spend for the quarter at $4 $3 million. This spend was 29, 2% lower than the second quarter of 2023, primarily due to a decrease in amortization of intangible assets.
Sales and marketing expense in the period was $26 $9 million, representing an 11.5% decrease over the prior year.
The $3 5 million dollar reduction in spending was primarily driven by lower personnel related and media and advertising costs associated with our direct to consumer channel.
And finally, we incurred $14 $6 million for general and administrative expenses in Q2, representing a $1 $9 million increase as compared to the prior period, driven primarily by a $2 million in increase associated with the prior year benefit from a change in fair value.
<unk> of earn out liability.
As previously mentioned, we incurred $200000 for restructuring charges as well as $500000 in acquisition costs for diligence and legal activities associated with the physio assess purchase agreement.
This was partially offset by a decrease in personnel related expenses.
In the second quarter of 2023, we reported a net loss of $9 $8 million and a loss per diluted share at 42 on an adjusted basis, We reported a net loss of $5 $8 million and an adjusted loss per diluted share at 25 cents.
At EBITDA with a $3 2 million dollar loss, a sequential improvement from the first quarter of 2023, which reported an adjusted EBITDA loss of $11 $8 million.
This improvement is correlated with increased revenues and cost saving actions that we have taken in the first six months of the year.
Moving onto our balance sheet as of June 32023, we had cash cash equivalence and marketable securities of $171 million with no debt outstanding.
We continue to carry inventory of premium priced components for semiconductor chips purchased on the open market, but not yet built in finished goods.
These items reside on the balance sheet as inventory and as prepaid expense and other current assets as of June 32023, the value of premium components in our inventory and prepaid balances was $8 $6 million.
Due to the lower forecasted sales volumes, we now expect the cost for premium price components to continue to impact cost of goods sold through Q4, 2023 and potentially into early 2024.
I will now turn to our financial outlook as.
As <unk> mentioned, we are updating our guidance to reflect our year to date results and have adjusted expectations based on the challenges we have encountered in our business to business channel as well as our direct to consumer channel.
We now expect total company revenue for the full year 2023 to be in the range of $315 million to $320 million.
Despite the large decrease in revenues our recent cost reduction efforts will allow us to deliver an adjusted EBITDA loss in line with current street expectations.
In the range of a $20 million to $25 million loss for the full year 2023.
We remain focused on our return to profitability and we will continue to actively manage our expenses for the remainder of the year.
And with that we will be happy to take your questions.
Great. Thank you.
Ladies and gentlemen at this time, we'll be conducting a question and answer session.
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Our first question comes from the line of Mathew Blackman with Stifel. Please proceed with your question.
Hi, This is colin on for Matt.
Just wanted to start with one on guidance.
Does the guide imply in the broader context of your efforts to turn around the various business lines.
Or are things just moving slower than you guys anticipated or are you encountering new challenges that you may not have foreseen for example has anything changed regarding your rep productivity outlook.
Thanks.
Thank you Colin I'll take I'll take the question.
So we are not seeing any new challenges to your point.
In terms of Rep productivity illiquid indicate that there is a very healthy productivity increase Q2 versus Q1 in the DTC channel as well as the prescriber channel the challenges with respect to the guide the new guideline mainly relates to b to B and a slower progress in terms of DTC revenue generation and that is that.
Directly related to the lower number of people in the seats with and as a reminder, we had focused on trying to actually achieve both growth and profitability in that channel are the progress is albeit a little bit slower, but the productivity per rep is actually where we expected it to be and that's very encouraging and that channel again from my perspective.
The beat to be challenges are a little bit more pronounced even though there are some in DTC, but the encouraging productivity indications are very positive for us.
Okay and given those.
Dynamics, you just mentioned should we expect <unk> to take a step back from the second quarter before things kind of start getting a little bit back on track in the fourth quarter, just what should we expect from a cadence standpoint there.
Yes, potentially there might be a small step back in Q3, I think maybe let me elaborate a little but so as we work through some of the challenges, but also the opportunity like we said in the prepared remarks with our large <unk> customers.
It might take a little bit longer than we expected. That's why we've been very judicious about calling down the number.
That said were seeing good progress and the ability to win back some of the accounts that we had lost as well as.
Promising progress in terms of winning new accounts and now some of the losses are in larger more concentrated accounts like we mentioned also in our remarks, but that is nevertheless progress we think it will take a little bit longer than we expected.
Okay. Thank you.
Thanks Collyn.
Our next question comes from the line of Robbie Marcus with Jpmorgan. Please proceed with your question.
Hi, This is actually Lili on for Robbie Thanks for taking the question can.
Can you talk a little bit more about what you're seeing in D. T. C. It sounds like productivity is improving so I guess head count is really the issue. There. So when can we expect turnover to start stabilizing and how are you thinking about the size of the sales force going from here.
Yes. Thank you Lillian I'm going to go back to maybe comments that we've made publicly before just as a reminder, we used to be in the 300 range in terms of salespeople. We had indicated recently that we're going to be closer to the 200 range give or give or take plus or minus 10%.
To your point, specifically the productivity actually is very encouraging its plus 30% both in terms of unit productivity as well as revenue productivity per rep. The number of reps embassy it's naturally as you dial up the accountability and the new expectations. There is a little bit more churn and that we had expected.
But it's not that all of it is regrettable in all honesty, but to go back into your other part of the question where do we think this is going to stabilize as part of our long range plan. Early in 2024, we will give an indication of where do we think that channel will be but with that said DTC will always be part of our go to market strategy.
It's a unique channel that differentiates us what we were trying to do and we are making progress against that is to get the right balance between growth, but at the right price from a profitability perspective, hence as we mentioned there is a reduction in salespeople in the seeds as well as a reduction in advertising spend in terms of the needs.
That we generate and an effort to continue to compensate for some of that revenue through increased productivity that we're seeing good progress on.
Got it that's helpful and then just as a follow up.
Can you give us an update on the state of the supply environment.
Do you feel you have good visibility through the rest of the year and when do you think you can get back to normal ordering patterns with your suppliers. Thanks, so much.
Yeah. So the state of the supply in general is I think trending normally there are no huge red flags that are a few issues here and there with very specific products that we're trying to source, but I would not characterize that as a major concern for us unless something material changes moving forward, which we don't expect it to be so this is we're not in a supply constrained.
Environment in general.
Great. Thank you.
Thanks Neely.
Our next question comes from the line of Matthew <unk> with Keybanc capital markets. Please proceed with your question.
Hey, guys. This is Brad on for Matt. Thanks, So much for taking the questions.
Wanted to start off on a question regarding the ROE of six announcement. This morning that you touched on during the prepared remarks as well.
Just curious if you could walk through what's changing around the value proposition given the extended service life and as a follow up there does that mean that the product will now have an eight year warranty and does anything change around the economics for inogen around asps or warranty revenue given given the improvement there.
Yeah. Thank you Matt I'll take that question also so let me start with the characterization. So at all six of them update of G. Five, but it's very important for us to actually think of it as the new platform for the innovation that we said is coming around 2024 in terms of a larger than six setting device. So they improve.
<unk> and this device basically through the user interface, the alarming capability as well as the cannula placement. So with that said, we also managed to achieve an eight year started with sort of a life expected service life, which is really critical if you think if you were to be to be customer and you're thinking about the return on that invested capital that you have in the fleet of beer.
See us it's very important for you to be able to buy a device that is approved and has a label of eight years.
From a regulatory perspective versus a five year label. So we're very excited about the fact that the value proposition. We're trying to drive before continues to get stronger and to our knowledge. We don't know of any other devices that have an eight year expected service life yet in the marketplace. So that's very important for us and that applies both here as well as in Europe .
Back to your question about the warranty we don't have an intention to extend the warranty beyond the five years in the sense that people can potentially like today, we have a three year and five year warranty on the five year device and we believe that will want to stay within the five year warranty, but we will allow we wouldn't our self service.
Those devices after warranty expires as well as allow the key large customers like they do now service their own devices by providing them with the right parts and service support.
Alright got it that's very helpful and then just.
This might be a little bit of a tough one to answer but just trying to maybe take a step back.
Could you maybe touch on just.
Underlying patient demand perspective, especially in the direct to consumer channel is shipping back some of the changes in sales force levels like what can you say about just the level of demand, especially as we proceeded into the summer months. When you typically would see a step up.
Are there any positive.
Early signs you can point to that that would give a little more positivity on what we might see into next year at a lower number of sales reps.
Yeah. So Brett Thanks for the question I think let me start with the DTC channel that you sort of called out first and then positive I can see there is as a reminder, we took price increases successively in the last year in the half despite back through productivity and the ability to continue to serve the patients that don't have any option in terms of insurance base.
Coverage, we see that the demand continues to be there. Despite the price increases that we've taken which.
Honestly intended to price for value more than anything else and they were partially intended to cover the premium pricing for semiconductors. So from a demand perspective, I don't see any softness in that I think let me transition to the second the other part of the business with respect to demand and B to B in general if you look at the prescription rates of people that are getting.
<unk> diagnosed and prescribed it's actually steady and recovering slowly so from a patient perspective. The demand is there what we saw in the quarter and in the preceding quarter is a little bit of softness in terms of the b to b customers and their willingness like we said in the prepared remarks to deploy capital at.
Cost of borrowing as well as making sure that they get a return on that capital, but then again I would label it as transient in nature, where people sort of look the other way above acquisition price and now are starting to slowly turn around and saying there's a different way to look at this model. So we believe the demand will slowly start getting back on track.
And to what we believe is a normal level of demand and the B to B channel also.
Alright, thanks, so much for taking the questions.
No more no widespread.
Okay.
I'd like to add.
Mr Shaw for closing remarks.
Thank you.
In the near term, we are focused on improving our commercial execution strengthening our portfolio through innovation beyond COPD and positioning the company for sustainable growth and profitability.
Our transformational journey continues and we remain committed to driving value for our patients customers and shareholders over the medium to long term organically and with an expanded portfolio, including airway clearance solutions.
As I conclude I would like to thank our investors for your support and your interest in Inogen I'm extremely proud of the imaging teams collective effort to work through these short term challenges continually improving our execution, while building needed capabilities fulfilling our purpose of improving patient lives through respiratory care, while driving growth.
And eventually profitability remains an exciting through node for all of US. Thank you again and enjoy your afternoon.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.