Q3 2023 Inogen Inc Earnings Call

Okay.

Greetings and welcome to the Energen 2023 third quarter financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and as a reminder, this conference is being recorded.

It is now my pleasure to introduce to you Marissa Baisch from Gilmartin group.

Marissa you may begin.

Great. Thank you and thank you all for joining today's call.

Joining me are president and CEO and it would be all shop shop, and interim CFO My third is better.

Earlier Tonight, and I've been released financial results for the third quarter of 2023.

These releases are available on the Investor Relations section of the Companys 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.

Most of our strategic initiatives, including innovation, our expectations regarding the market for our products, our business and supply and demand for our products in both the short and long term.

The forward looking statements in this call are.

Based on information currently available to US as of today's date November 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 Securities and Exchange Commission.

Actual results may vary and we disclaim any obligation to update these forward looking statements, except as may be required by law.

We have posted historical financial statements and our investor presentations in the Investor Relations section of the company's website. Please refer to these files for more detailed information.

During the call. We will also present certain financial information on a non-GAAP basis.

Management believes that non-GAAP financial measures taken in conjunction with U S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of energen 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 that'd be all shop shop.

Thank you Melissa good afternoon, and thank you for joining our third quarter 2023 conference call. During today's call I will discuss our performance in the quarter on progress across our business initiatives and outlook for the rest of the year then Mike. So just get our CFO will walk walk through more details of our financials.

Performance in our annual guidance before we take questions.

We recognized $84 million in total revenue in the third quarter, while continuing to address some lingering headwinds solid business. Despite the typical third quarter seasonality. We grew total revenue by 40 basis points in the third quarter versus the second quarter.

Starting with our direct to consumer business in the third quarter, we recognized $25 $1 billion in DTC revenue.

Result of strong revenue per sales rep offset by fewer total reps as we continued to optimize the size of our team and focus on sales rep productivity.

We are continuing to drive efficiency in this channel and our productivity per rep. Both in units and revenue was up double digits on a year over year basis.

Turning to our domestic b to B business, we recognized revenue of $17 $3 million, which was impacted but it didn't do one headwinds to our business from the shared loss we experienced over the past year due to the 20th 22 supply chain related volume constraints and lower price competition and.

The third quarter, we made progress on recapturing market share, while diversifying our customer base.

And our international B to B business, we recognized $25 $6 million in revenue, reflecting strong double digit growth on a year over year and sequential basis, while we witnessed a significant delay in that all six French reimbursement approval. We did secure reimbursement in August and we are currently focused on introducing.

Oh, six the key customers in that market.

Please note that although our third quarter was relatively strong we expect a lighter fourth quarter in the international would be to be channeled with sales expected to be roughly flat year over year as we work through and they're all six introductions in France.

Our rental revenue was $16 million, increasing both year over year and sequentially.

Revenue continues to benefit from our broad prescriber team productivity with increases in their photos for CEVA as compared to Q2.

We expect continued steady progress as we further optimized sales territories and of course frequency to drive scale and number of prescriptions per prescriber and overall growth.

Shifting gears to our efforts to improve our cost structure and our operating efficiency, Mike will provide additional detail on our operating expenses, but in short we saw an increase in operating expenses in the quarter, primarily due to a noncash impairment charges related to that write down on goodwill.

Adjusted operating expenses fell to $47 $6 million in the quarter, a decrease of $5 $5 million year over year. This was primarily due to our initiatives to optimize productivity of our sales organization, while managing marketing spend.

Before I turn the call over to Mike I'd like to highlight that we are very excited to have closed our acquisition of physio assets during the quarter.

So do you have to expense all in all with the respiratory portfolio with the addition of semi oxi technology enabled airway clearance and mucus management device predominantly aimed at treating bronchiectasis.

Entering the adjacent airway clearance market provides us the opportunity to serve patients earlier in their disease journey, expanding their lifetime value for energen and standing up a business model that delivers a recurring revenue stream from consumables.

We did not recognize any revenue from somebody else in the third quarter and consistent with our expectations at the time of acquisition, we do not expect any material.

Acquisition this year.

I will now turn the call over to Mike for a review of our financial results Mike.

They seem to bill and good afternoon, everyone unless otherwise noted all financial comparisons are to the prior year comparable period.

Revenue for the third quarter of 2023 was $84 million, a decrease of 23% versus the prior period.

The decrease was driven by lower direct to consumer and domestic business to business sales, partially offset by increased rental and international <unk> sales.

For the third quarter Foreign exchange had a negative 120 basis point impact on total revenue and a negative 790 basis point impact on international revenue.

Looking at third quarter revenue on a more detailed basis direct to consumer sales decreased 24, 1% to $25 $1 million in the third quarter of 2023 from $33 million in the prior period, driven primarily by lower sales volume due to fewer sales representatives.

Lower marketing spend as we continue to drive towards improved sales rep productivity and overall channel profitability.

Domestic business to business revenues decreased 59, 4% to $17 $3 million in the third quarter of 2023.

Compared with $42 $5 million in the comparable period. Please note that our year ago <unk> revenue had benefited considerably from pent up demand in the fulfillment of backlog orders into channel.

International business to business revenue increased 69.9% to $25 $6 million in the third quarter of 2023 as compared to $15 $1 million in the prior period.

Rental revenue increased eight 7% to $16 million into third quarter of 2023 from $14 $7 million in the prior period growth was driven primarily by an increase in the total number of rental patients on service.

Now to discuss our gross margins.

Gross margin was 42% in the third quarter declining 40 basis points from the prior period, primarily driven by higher warranty costs, and partially offset by lower consumption of premium priced components.

Sales revenue gross margin was 37, 2% driven primarily by a shift in channel mix with a lower volume of units sold through the direct to consumer channel as well as an impact from pricing pressure in the business to business channels.

Rental revenue gross margin was 53, 1%, primarily due to increased rental revenue adjustments and higher servicing cost per patients on service, partially offset by higher Medicare reimbursement rates.

Please note that we continue to carry inventory of premium priced components for semiconductor chips on our balance sheet is on hand inventory.

As of September 30th 'twenty to 'twenty, three the value of premium components in our inventory balance was $4 $8 million due to lower forecasted sales volumes. We now expect the cost for premium priced components to continue to impact cost of goods sold at a declining rate through the first half of 'twenty 'twenty four.

Sure.

Moving on to operating expense in Q3, total operating expense increased to $85 million compared to $53 $1 million in the prior period, representing an increase of 51, 6% the increase.

And expense is almost exclusively the result of one time $32 9 million dollar impairment charges.

As previously mentioned, we incurred the $32 $9 million of impairment charges.

This is a noncash expense that has no impact on the company's cash balance or business operations.

Excluding the one time charges operating expenses decreased to $47 $6 million, representing a reduction of 10, 4% as compared to the prior period.

Going into more detail on our expenses in the third quarter. We have continued to work on our innovation pipeline through investment in research and development with a total spend for the quarter of $4 $5 million. This spend was in line with the third quarter of 2022.

Sales and marketing expense in the period was $26 $1 million, representing a 22, 7% decrease from prior year to $7 $6 million 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 cost of $17 million of our general and administrative expenses in Q3, representing a $2 2 million dollar increase as compared to the prior period. The increase was primarily attributable to $1 $4 million and restructuring related costs as well as a $1 million one.

Dollars of acquisition related costs.

In the third quarter of 2023, we reported a net loss of $45 $7 million and a loss per diluted share of $1 97 on an adjusted basis, We reported a net loss of $8 $5 million and an adjusted loss per diluted share a 36 cents.

Adjusted EBITDA was a loss of $5 $5 million.

Moving on to our balance sheet as of September 30th 2023 and after closing the physio assist deal we had cash cash equivalents in marketable securities of $138 million with no debt outstanding.

I'll now turn to our financial outlook, we continue to expect total company revenues for the full year 2023 to be in the range of $315 million to $320 million.

We now expect an adjusted EBITDA loss of approximately $27 million for the full year inclusive of investments in our semi ox airway clearance portfolio, which we acquired through the physio assisted transaction.

And with that we'll be happy to take your questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two.

We have a question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please poll for questions.

And the first question comes from the line of Mathew Blackman with Stifel. Please proceed with your question.

Good afternoon. This is colin on for Matt.

I wanted to start with the DTC franchise for a moment I understand that the sales force productivity and the hiring efforts are still ramping and we're still dealing with tough comps from a footprint standpoint, but I'm curious when we'll start seeing any inflection in the DTC revenue line from the recent changes you've implemented to increase the head count and efficiency. It could just be a 2010.

For that for 'twenty.

Any color there would be helpful.

Hey, Colin it's gonna be a I'll take that question. Thank you for for the inquiry, so with respect to DTC.

Happy to continue to drive productivity per sales rep. Both in revenue as well as in the unit and as we had communicated on earlier calls when using this opportunity in 2023 to set up for a more productive 2024, our performance in terms of both continuing to drive the productivity per rep as well as getting to that I.

A number of people in the seats the THAAD productive silicon get the overall growth.

Okay understood and if I could ask one on the rental side.

The rental business and your prescriber channel strategy in general seemingly content.

A highlight for you guys. So I was wondering if theres been any cannibalization of the DTC business as of yet.

And if not what revenue run rate with the rental business have any effect on your new patient acquisitions downstream in the DTC side of things.

Yeah. That's a good question Colin So let me maybe just so depict the journey in terms of the buying process that these patients go through when we go to that anthem prescribers. We intended to go upstream whereby we secured that prescription from the actual one a physician or the prescriber and we sell it as an H M E. R M.

<unk> ourselves.

Our downstream, which is the direct to consumer cash sales on patients that have gone through that journey and are dissatisfied with the devices that on and theyre not covered anymore by insurance, hence they're willing to actually pay for the device for cash and in general there is no overt or cannibalization that these material if you can.

Each of them upstream a little bit earlier and put them on that I device and rental there could be a slight impact on downstream, but typically the DTC patients are the ones that have run out of options and coverage for that and that's really the same patients and that's why we can sell them on cash because that's the only option left for them. If they wanted to get the latest technology and you would have.

Nice and they have no other option there.

Okay, Great that was really helpful. Thanks for answering my questions.

Thank you Bonnie.

And the next question comes from the line of Margaret Kesar with William Blair. Please proceed with your question.

Hey, good afternoon, and thanks for taking the question.

Maybe just to start I'm not sure I heard in the intro comments, whether or not you guys are seeing any kind of a macro impact whether it's on DTC or b to b domestic knows it all harder for folks to get financing is there any kind of change in friction or.

Oh, the commercial dynamics with the sales force and so on.

Time, all good thanks for the question so you're right we didn't actually go into the details as I said, we're dealing with some lingering headwinds that are in the <unk> business and they are as you characterize them. There is still an overhang in terms of access to capital in some instances or the cost of borrowing with some customers. What we're doing is we're working at that and then of course people are looking for.

Our margin accretion in their own businesses. So we're working very diligently to actually continues to put forth a value proposition that we believe is resonating with these types of customers in terms of our total cost of ownership versus an acquisition price head to head whereby as you operate that asset and generate revenue from it.

If you look at your total margins and return as a result, do you actually see it favorably of course naturally. This is a work in progress with customers and that everybody uses the right metric to make it a bunch of thing decision, but definitely that is the remaining overhang in terms of some of the challenges from a financial market perspective, and we're making good progress with the types of.

Customers that we are focusing on to be able to not only regain some of the market share, but also diversify our customer base.

Okay and that was in reference more to be to be domestic or is that both DTC and b to be domestic that's it. Thanks for the clarification must be to be domestic and DTC and generally we have not seen an impact in terms of.

A price elasticity.

And elasticity in terms of the pricing that we are at now DTC seems to be stable.

Okay, Great. That's helpful. And then as we think about the to be international.

It seems like maybe that business, especially as we get into 2024 ships.

Maybe return to growth is the right way is a trailing it how.

How do you look at kind of tender contracts as best as you can see them today as you go out into 2024.

And kind of the market growth rate in your growth rate potentially whether its 24 or beyond.

Yes, so Mike let me start with a comment on the question on the tenders. So there hasn't been a little bit of delays in Europe in general in terms of actually moving forward with them. The decisions. We're seeing some of it remain we're seeing some of it actually move forward. Fortunately there is also a change in share in terms of the biggest customers that actually participate in those tenders.

And they all happen to be our customers. So our focus is on continuing to work with all parties that they provide them with the best value proposition in value and then in some cases, we are sort of like gaming in one place and losing in another place and generally within the same franchise of customers that we deal with them. So the hour.

For 'twenty 'twenty four is a more stable market and from what we can gather from the feedback from distributors that we work with and a little bit more of a return to the enormous demand that we used to see before.

Okay sounds good thank you.

Thanks Margaret.

And the next question comes from the line of Robbie Marcus with Jpmorgan. Please proceed with your question.

Hi this.

This is actually Robbie.

Just a couple of questions on our end.

Just firstly can you just walk through some of the puts and takes as you think about that into 2024, just between and we touched on this but just between some of the sales force attrition in DTC as well as the competitive pressures.

In the <unk> business.

Just to get a sense for how these are moderating and trending.

Relative to one another and then also just your views on the supply chain environment as you close out this year.

Okay. So thank you so let me start with the with the <unk>.

Or they're just quickly and then from a supply chain environment I think as we made comments in our prepared remarks, we're seeing that return to normal Norman the 11th like before we're still working through with some of the prepaid parts that we have on our balance sheet and burning them down as Mike said, we expect that to actually at the trick.

And rates go out of our into the P&L by the middle of 2024, So in general no major issues and supply chain that at a few things here and there that remain as a lingering effect, but nothing that really is very concerning at this point in time with respect to sales force attrition I assume you're referring to.

The DTC comments that we made about three sizing the sales force so I'm going to answer it that way I think maybe the way I would provide the right context on that is as you raise the bar in terms of performance and productivity you're bound to get a normal attrition rate and the sales force as you continue to drive for the higher performance.

And the organization, sometimes that the attrition rate is a little bit more or less than you expect but we continue to work through it by making sure that we not only elevate the performance bar, but we have hiring classes that are ongoing to make sure that we replace them.

In kind with people that can come in are being set up on the right training the right doors and the oversight in terms of sales management and discipline and continue to work our way through what we believe will become an optimum size of the sales force in 2024, when we stabilize that organization and drive productivity at the same time your third.

Question was about <unk> pressures.

I think this is an ongoing it's the it's becoming a little bit more moderated, but it definitely exists. It's a day to day monitoring of not only the competitive pricing activity in the field, but also in terms of back to the overhangs from IV to be some people are engaging in providing financing or longer times in terms of credit.

Et cetera, et cetera, we had indicated before and we're still doing it now that we work on promotional levels as required we are not racing to the bottom of the pricing in the category that's not healthy for anybody so.

We are very selective in terms of the types of customers, we're engaging with and we've characterized them before as more people will see oriented and they're focused on the modality that we believe is the best locations and the conversion rates, but there is definitely a day to day management of that channel in terms of making sure that we don't.

Attrition any more shares but on the contrary to regain some of the shared as we mentioned in our prepared remarks.

Great. Thank you.

And the next question comes from the line of Mike Matson with Needham <unk> Company. Please proceed with your question.

Yeah. Thanks.

Just had one on the states.

Our rental business.

The growth I think it was around eight or 9% or something.

Here.

I know you've invested pretty heavily in that prescriber sales force. So you know just.

Just wanted to get an update there in terms of the impact that having them and get them a little surprised it's not seeing higher growth given that I think it was like 16 prescriber reps out there or something I don't know correct me, if that's wrong, but.

So Mike Thanks for the question. So we have about 60 favorite apps and are in the rental channel. If that's the question specifically, we're continuing to see productivity in terms of both the photos, but saves rep as well as the photos per prescriber Andrew.

Continuing to work through optimizing not only the size of the territories, but the frequency of calls for us to continue to drive that productivity upward.

We now have come to the conclusion that frequency also a method a lot for us. So we're in the process offset he finding that they'll get back into the higher growth rates, but that said, we're happy with the progress we made in terms of the new patients that we put on service as well as the progress that we're making in terms of prescribers.

Prescriptions, but office.

Okay. Thanks, and then.

<unk>.

EBITA guidance reduction.

What drove that I guess, what what happened that was kind of different from what you were expecting when you gave the 20 to 25 million loss versus the 27, you guys you know.

Yeah. This is Mike Yeah. The original guidance was I believe based on <unk> Standalone.

So now we've introduced physio assist into Q4 and given given the size of the revenue and the great products and so forth, but we're gonna have to do some investing.

To get that product lineup in and off the ground. So that that's what you're seeing kind of reflected in there is the impact of that on our Q4 revenues, Okay and I'll just add Mike that the majority of the investment goes to the clinic.

The regulatory work in terms of securing getting ready for filing in terms of the FDA approval.

Okay got it.

The kind of.

<unk> that you would have reiterated the prior guidance I assume.

We did that acquisition.

Yes, we would've been ending probably toward the lower end of that of the original guidance yes.

Okay got it thank you.

Thanks, Mike.

There are no further questions at this time I would like to turn the floor back over to Neil for any closing comments.

Okay. Thank you.

Our continued focus on executing our commercial strategy includes our plan to drive adoption of our current portable oxygen concentrators, while expanding our portfolio to serve the largest COPD patient population as well as extend into adjacent indications, including dyspnea and hypercalcemia. We also plan to efficient to integrate <unk>.

Says and pursuing regulatory clearance for <unk> in the U S.

Looking ahead, we remain focused on supporting our return to revenue growth, while diligently managing expenses and cash to conclude I would like to thank our imaging team quite a working diligently through some headwinds while remaining focused on setting the right foundation for growth in the years to come that passionate focus on our patients and on fulfilling our purpose.

Also improving patients lives through our respiratory care is foundational to who we are and then as in the past for wind.

That said, we thank you for your participation and conclude the call.

And this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Okay.

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