Q2 2019 Earnings Call
Good morning, everyone and welcome to the Energen 29, <unk> second quarter financial results Conference call.
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Ill.
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At this time I'd like to turn the conference call over to Mr., Matt back So Investor Relations manager. Please go ahead.
Thank you for participating in todays call joining me from Inogen is CEO , Scott Wilkinson, and CFO and co founder Ali Bauerlein.
Earlier today Inogen released financial results for the second quarter of 2019. This earnings release and engines corporate presentation are currently available on the Investor Relations section of the company's website.
As a reminder, the information presented today will include forward looking statements, including statements about our growth prospects and strategy for 2019 and beyond expectations related to sales head count hiring expectations and strategy H.M. eastern strategy and expectations rental strategy changes in the timing impact of such changes expectations for all revenue channels marketing expectations. The rollout of engine. Once you five expectations regarding the impact of Chinese tariffs expectations regarding competitive bidding our expectations on the benefits and market opportunities are the type of lets just spend later or T.A.B. the potential of T.V. to disrupt the noninvasive ventilator market and expand to treat CR p. patients our expectation on TV sales or expectation to integrate GPU technology into our oxygen Concentrators financial guidance for 2019, including the impact of that so the expected new air acquisition and expectations for 2020.
The forward looking statements in this call are based on information currently available to US. 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 Exchange Commission actual results may vary and we disclaim any obligation to update these forward looking statements, except as maybe required by law, we have posted historical financial statements in our second quarter investor presentation in a separate presentation on the new era acquisition in the Investor Relations section of the company's web site. Please refer to these files for more detailed information during the call. We 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 indicative of an engine. Its core operating results management uses non-GAAP measures internally to understand manage and evaluate our business to make operating decisions reconciliations from U.S. GAAP and non-GAAP results are presented in tables in the earnings release for future periods. We are unable to provide a reconcile the.
One of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release that I will turn the call over to Inogen is president and CEO Scott Wilkinson Scott.
Thanks, Matt.
Good morning, and thank you for joining our second quarter 2019 conference call.
Looking at the second quarter of 2019, we generated record total revenue of $101.1 million, which is the first time, we have surpassed the 100 million threshold for a quarter and reflects growth of 3.9% over the second quarter of 2018.
Direct to consumer sales of $43.6 million in the second quarter of 2019 increased 14% over the second quarter of 28% primarily due to increased sales rep productivity, partially offset by an approximate 17% reduction in sales representative head count in the comparative period of the prior year.
The level of sales representative attrition was higher than expected in the second quarter as many of the reps that we hired in 2018, we're unable to meet our sales targets.
Furthermore, while sales representative productivity improvements more than offset the loss in sales headcount in the quarter. It did not meet our expectations.
Despite successful early trials, where we allocated more leads to top performing representatives when scaled across a larger group. This initiative did not generate the benefit we anticipated.
Given the reduced sales representative head count and less than expected productivity improvements, we expect to realize headwinds to growth and direct to consumer sales in the third and fourth quarter of 29 gene.
With realized improved productivity, we have restarted our sales capacity expansion efforts with the new sales representatives hired across all three facilities in August 2019.
Going forward, we plan to hire at a more controlled pace than what we did in 2018 and we believe we are making the necessary changes to improve our sales management infrastructure to support sales training and on boarding.
We have also made key changes to management personnel to drive better productivity lower attrition and improve sales predictability.
However, we expect sales representative headcount to be down significantly at year end 2019, compared to year end 2018, which is the largest driver of our reduced 2019 revenue expectations.
Given the number of leads we were able to consistently generate on a monthly basis. We believe the market remains underpenetrated, but we need to execute our sales capacity expansion and productivity plans to drive future direct to consumer revenue growth.
Second quarter of 2019 in rental revenue of 5.2 million decreased 1% compared to the second quarter of 2018, primarily due to a 9.1% decrease of patients on service, partially offset by higher rental revenue per patient.
We had approximately 25900 patients on service as of the end of the second quarter of 29, Tim.
In the second quarter of 29 team, we made a modest change to our rental intake criteria and initiated our plans to sale a separate rental team.
But we do not expect a meaningful contribution from this team until early 2020.
Good the reduction in sales head count, we now expect rental revenues to be down modestly in 2019 in spite of changes intended to increase rental revenue such as the change to the rental in take criteria and establishing a separate rental team.
We expect patients on service to increase in the back half of 2019 from the second quarter of 2009 Jane.
We expect to both patients on service and rental revenue to increase in 2020.
Second quarter 2019, domestic business to business sales of $29.7 million decreased 10% from the second quarter of 2018, primarily due to a decline in sales to a large national provider, who purchased through our private label partner and secondarily due to a decline in sales to our Internet reseller partners.
The large national provider that we discussed on our last earnings call accounted for revenue of $700000 in the second quarter of 2019 down from $8.3 million in the second quarter of 2018.
Sales to our Internet reseller partners were down in second quarter of 2019 versus the second quarter of 2018 as our reseller partners did not see the typical seasonal increase in orders as seen in previous spring and summer months.
Excluding this one national provider and sales store Internet reseller partners. We continued to see strong demand from traditional agency customers, while agent lead providers continued to convert and purchase portable oxygen Concentrators. We continue to expect that growth will be challenged due to ongoing restructuring efforts lack of access to available credit and provider capital expenditure constraints.
As we have discussed in the past eight your mi providers have communicated to us that they continue to be subject to capital constraints and certain providers have indicated that they intend to reduce or eliminate purchases in the future.
Additionally, we believe providers will be more conservative with capital investments in the next year, depending competitive bidding round 2021, and the lack of visibility as to who will win contracts and changes in reimbursement rates.
Even though we still believe the market is underpenetrated patient demand is strong and we have a market leading product offering given these challenges and uncertainties for a business to business customers. We are lowering our growth expectations for HIV providers and internet resellers for the remainder of 2019.
Second quarter 2019 international business to business sales were solid at $22.6 million, representing reported growth of 8.7% and 14.7% on a constant currency basis.
Underlying European demand trends remain strong as we remain the preferred provider of PRC is for key European accounts.
Transitioning to the Inogen one G. Five we launched in the direct to consumer channel in April 2019, and we believe we have strengthened our technology leader for the leadership position with this product.
As a reminder, this product is the smallest lightest quietest portable oxygen concentrator on the market today, the producers greater than 1000 milliliters per minute of oxygen.
As communicated on our first quarter call, we expect to roll out the Inogen one G five to domestic business to business channel in the third quarter of 2019, and then to the international business to business channel by the end of 2019 pending standard regulatory clearances in each market.
On the topic of competitive bidding round 2021 as expected the bidding window opens July 16th 2019.
Bids are due by September 18th 2019.
We still plan to bid in 129 of 130 regions, but we cannot discuss our bidding strategy publicly.
We expect pricing to be announced in the summer of 2020 and contract winners to be announced in the fall of 2020 before contracts go into effect January Onest 2021.
As part of the competitive bidding round 2021 bid preparation tools CMS provided 2017 and 2018 traditional fee for service Medicare beneficiary counts for each competitive bidding area by each hectic code.
In evaluating US data, we can now see that penetration rates for plc is our higher in CV A's versus non CBS areas.
In 2017, while the total traditional Medicare penetration rate for plc is in the total U.S. auction market was 10.8%.
It was 14% and CBS .
Well, we won't know the total 2018 penetration rate until the data is published in October 29th team. We can see that the traditional fee for service Medicaid Medicare beneficiary penetration rate for plc is in the total us long term oxygen therapy market in CBS was 18.8%.
Compared to 14% in 2017.
So you will see adoption is continuing to progress, but we believe we are still a long way from our estimated full market penetration of 65%.
Now I'd like to spend some time discussing the significant announcements today of the signing of the definitive agreement to acquire new era, and innovative developer and manufacturer of portable noninvasive ventilators for people suffering from various chronic lung diseases.
We are very excited to announce our plan to acquire new era in certain assets from a related entity for a cash payment of $70.4 million at closing.
With potential earn out payments of up to $31.4 million based on future sales performance and certain regulatory clearances.
We believe new era, as an innovator and ventilator nasal interfaces and a natural fit with our current business as it strengthens our position in our core auction therapy market, which aligns with our mission to increase freedom and independence for oxygen therapy patients through innovative products and services.
We plan to incorporate the title assist ventilator or TSV technology directly into our Inogen, one portable oxygen concentrators and make the sidekick TV product compatible with our Inogen at home stationery concentrate or to continue to advance patient preference and maintain our technology leadership position in the long term oxygen therapy market.
New era completed a small peer reviewed clinical trial comparing the use of their sidekick TV product with oxygen to standard oxygen alone for patients with either moderate to very severe CRPD or interstitial lung disease.
The trial showed these patients were able to exercise longer with markedly better oxygenation and less dystonia and like fatigue on TV therapy, then on oxygen therapy alone.
The trial indicated that 83% of patients responded positively to TV versus 11% on oxygen alone.
And showed a 136% mean endurance increase we believe this will allow us to strengthen our product portfolio and oxygen therapy, and allowing additional retail sales opportunity.
In addition, we plan to use this technology as a platform to expand our total addressable market into the high growth noninvasive ventilation or an ivy market.
We estimate enable you to be an addressable U.S. market opportunity of over $400 million and 2019 based on the estimated claims paid for traditional fee for service Medicare beneficiaries and has grown at over 20% per year since 2016.
We believe there is a significant worldwide untreated market opportunity.
We also believe the energy market could undergo disruption similar to oxygen given the pending reimbursement changes due to the inclusion of this category and competitive bidding round 2021, and the mobile nature of legacy and IB product offerings.
The monthly Medicare reimbursement rate is significantly higher for an ivy products than oxygen therapy at a minimum of $934 a month.
Also effective January Onest 2019, new Medicare Hick pick code has been added to allow billing for a multi function ventilator that includes ventilation and oxygen.
We are targeting to launch a product for this purpose in 2021.
Furthermore, we believe that this technology can be used to help a portion of the over 200 million C O PD patients worldwide.
We're currently not on oxygen therapy and are willing to pay out of pocket to reduce breathlessness, particularly during exercise. This technology represents an attractive new opportunity for us and an adjacent market that would leverage our existing direct to consumer expertise.
We plan to sell the existing sidekick TV product to consumers through our inside direct to consumer sales force and our physician sales force and also to business to business customers worldwide.
The sidekick TV is a prescription required noninvasive ventilator designed for select patients with various chronic lung diseases.
Sidekick TV is unique design is approximately four ounces and its compatible with certain oxygen concentrators oxygen cylinders and wall guests, providing one to five liters per minute of oxygen and can deliver higher flowing pressure versus traditional oxygen therapy.
We expect sales of the sidekick JV product to begin in 2020, and we believe it will be gross margin accretive versus our existing oxygen therapy business.
Looking at 2019, we are reducing full year 2019, total revenue guidance to $370 million to $375 million down from $405 million to $415 million representing growth of 3.3% to 4.7% versus 2018 full year results, primarily associated with reduced expectations of our direct to consumer sales channel.
We expect revenue in the third quarter of 2019 to be down compared to the third quarter of 2018 due to headwinds in both the domestic business to business and domestic direct to consumer channels.
In spite of the expected increase in productivity of our sales representatives direct to consumer sales will be negatively impacted by a reduction in sales headcount compared to the same period in the prior year.
Given the difficult growth comparisons, we face and the domestic business to business sales channel the restructuring challenges of some providers and the decrease in Internet reseller purchases, we expect declines in the domestic business to business channel in the third quarter of 2019 compared to the third quarter of 2018.
We expect international business to business sales to have a modest growth rate for the remainder of 2019 compared to 2018 in spite of currency headwinds with easier comparables in the fourth quarter of 2019 due to lower growth rate seen in the fourth quarter of 2018.
We now expect rental revenue to be down modestly in 2019 in spite of the slight change to intake criteria due to reductions in sales head count, but we do expect the number of patients on service to begin increasing in the back half of 2019 from the second quarter of 2019.
Lastly, the new era transaction is not expected to materially contribute to Inogens 2019 revenue, but we do expect contributions in 2020.
While we are not providing 2020 guidance today, we believe we can execute on our plan to return to double digit revenue growth in 2020.
With that I will now turn the call over to our CFO Ali Bauerlein Alley.
Thanks, Scott and good morning, everyone. During my prepared remarks, I will review, our second quarter of 2019 financial performance and then provide more details on our updated 2009 guidance.
As Scott noted total revenue for the second quarter of 2018 was 101.1 million, representing 3.9% growth over the second quarter of 2018.
Turning to gross margin for the second quarter of 2019 total gross margin was 49.7% compared to 49.8% in the second quarter of 2018.
Our sales gross margin was 50.7% in the second quarter of 2018 versus 51.1% in the second quarter of 2018.
The sales gross margin decrease was primarily due to lower average selling prices, partially offset by increased sales mix towards higher margin domestic direct to consumer sales and lower cost per unit in spite of the Inogen one G five launch and increase here.
Rental gross margin was 30.4% in the second quarter of 2019 versus 27.6% in the second quarter of 2018.
The increase in rental gross margin was primarily due to increased rental revenue per patient on service and lower depreciation expense, partially offset by higher service.
As for operating expense total operating expense increased to 38.1 million in the second quarter of 2018, or 37.7% of revenue versus 34.4 million or 35.4% of revenue in the second quarter.
Research and development expense decreased to 1.5 million in the second quarter of 2018 compared to 1.8 million recorded in the second quarter of 2018, primarily due to decreased personnel related expense.
Sales and marketing expense increased to 27.8 million in the second quarter of 2018 versus 23 million in the comparative period of 2018.
Primarily due to increased advertising expenditures, partially offset by decreased personnel related expenses.
And the second quarter of 2019, we spent 11.6 million in advertising as compared to 6.3 million in Q2 2018.
General and administrative expenses decreased to 8.8 million in the second quarter of 2017 versus $9.7 million in the second quarter of 2018.
Primarily due to decreased personnel related expenses, partially offset by $23 million in cost.
Associated with the new era transaction.
Operating income for the second quarter of 2019 was 12.1 million, which represented 12% return on revenue compared to operating income of 14 million or 14.4% return on revenue in the second quarter of 2018.
The reduction in second quarter 2018, operating margin compared to second quarter of 2018 is primarily due to increased marketing expense.
And the second quarter of 2018, we reported net income of 10.2 million compared to net income of 14.6 million in the second quarter of 2018.
Earnings per diluted common share was 45 cents in the second quarter of 2019 versus 65 cents in the second quarter of 2018.
Now turning to guidance as Scott mentioned, we are reducing full year 2019 total revenue guidance to 370 to 375 million down from 405 to 450 million representing growth of 3.3% to 4.7% versus 2080 full year results.
Primarily associated with a reduction in expected direct to consumer sales.
We expect 5.2 million in incremental costs associated with the new era transaction in 2019, with approximately 2.9 million intangible amortization expense.
1.5 billion in other operating expense and acquisition and acquisition expenses of approximately 8.8 million equity point $3 million of expense incurred in the second quarter of 2019.
We are reducing full year 20, Nike net income guidance to a range of 23 to 25 million compared to our previous net income guidance of 36 to 38 million.
This decrease in net income guidance range is primarily due to the estimated reduction in revenue and increased expenses associated with the new era transaction, partially offset by an estimated production in other operating expenses.
We expect a GAAP effective tax rate of approximately 25% in 2019.
The guidance assumes that tariffs associated with imported Chinese materials and product theater rate of 25% for the remainder of 2018.
On August Onest, 2019, President Trump announced new 10% tariffs on up to 300 billion in additional good imported from China effective September 1st 2019.
We are still evaluating the impact of these tariffs on our financial results.
Going forward, we plan to continue to monitor any new tariff proposals and economic policy changes and take the necessary steps to protect our financial interest and reduce our standard material cost.
We are also reducing full year 2019 operating income guidance range to 26 to 28 million inclusive of the new era incremental.
Compared to previous operating income range of 42 to 44 million.
And we're also reducing our full year 2018, adjusted EBITDA guidance range to 49 to 51 million inclusive of the new era incremental non cash amortization costs down from 66 to 68 million.
With that Scott and I can take your questions.
Ladies and gentlemen, well begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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Hi, Charlie your questions you May press star into.
Once again that is star and then one to ask a question.
Our first question today comes from Danielle Antalffy from SBB Leerink. Please go ahead with your question.
Hi, good morning, everyone. Thanks, so much for taking the question.
Scott I just wanted to start with.
Sort of higher level question I guess what gives you.
Initially this was an issue.
The domestic side of things with the major.
Hmm provider slowing purchasing now it feels like you're getting hit a little bit on site and I guess the first question is what gives you the confidence that its not something deeper more underlying market dynamics, you know I get that you see concentration or penetration sorry is increasing but you have another competitor out there.
Is it increasing to the extent that we.
Is there something that has to do with the pricing dynamic any can you give us a little bit of color about what gives you confidence that.
The underlying growth is still there number one number two the inogen is still in a winning position because I do know you guys price at a premium to the competition. So just a little color on on your confidence behind the underlying growth here.
Yes, Thanks, Danielle, it's Scott I'll take that one so, let's let's kind of Peel back the onion in a couple of different areas for a second first I'll start with direct to consumer sales and the market and where we are in the market.
So if you look at all the numbers that Medicare provides whether it's through the recent competitive bidding tools or the penetration rates that we use traditionally tracking the hectic codes.
The market is still way below the full penetration point.
We have confidence in that and we also validate that that when we look at the number of leads that we can generate every month, it's tens of thousands of leads.
Of real oxygen patients that answer our advertising that they are trying to get a PSC. So I think when we assess as the market saturated or fully penetrated.
Those numbers indicate that we still have opportunity not only now but into the future and that's why we're getting back on the horse to expand our sales capacity again, so that we can drive growth in the future.
Now if you also peel back the onion on the issues with.
With the DSD sales you know weve talked about in the last caller. So that some of the reps that we hired in 2018, we struggled to get them up the curve and we've continued to work with them to a point, where you know in the second quarter a lot of them work themselves one way or another out of the company some of them left of their own accord because they didnt. They werent successful they didn't make the money they expected because they didnt hit their quotas you know in some after you know trying to work with them.
It was clear that they just couldn't do this job successfully so we proactively transition them out.
When you compare that with our other sales reps and and seasoned sales reps and you track their productivity and success, we still see great results with them. So if you had you know market saturation issues you'd see a decline in some of those other metrics with the seasoned reps.
So when we Peel that back in and we'll get we'll what could we do better.
Where did we.
Have execution challenges and how are we going to address those you know weve put real plans in place as far as improving our hiring and take criteria looking at better metrics to make sure that we consistently follow processes through the hiring and onboarding process, we put more infrastructure in place.
To support those reps as they come up the curve and we've also while it's been a small amount we have had to hiring classes.
With some of these changes implemented and we've seen great results with those small classes. So you know to smaller classes.
Those folks have beaten the historical productivity curves.
We have had almost no attrition attrition from those classes and they are having success. So when you roll all that up.
We have confidence to begin hiring again and expand our sales capacity, but you kind of have to.
Bite off some of the attrition that we had to swallow because you know obviously, we didn't execute as well as we have historically and that is going to take a toll on.
Our ability to grow the rest of this year, but long term, we think we're still in a great position for growth. We still are the market leader, we still have the best product patient preferred products and you know we talked a little bit in my prepared remarks about the gfive launch.
Not only have we traditionally had the best product, but we just launched an even better product and what's the best So we feel very good about the future and our ability to get back on that double digit growth wagon now that's on the DTC side and if we talk about B to B you know the struggles that we've described here and the challenge is really aren't any different than what we've talked about in the past you know providers.
You know I've always been undercapitalized, they've always been challenged with cash flow. We've developed some innovative financing programs to help them, but they still have to swallow the restructure.
Hurdle to really make the the non delivery model works. So we acknowledge that's going to continue to be a challenge I think you know competitive bidding kind of hitting them between the eyes and being right in the middle of the bidding window has a little bit of a psychological effect on everyone makes them a little more pessimistic and then for the smaller players you know, it's a very real challenge because there's a chance they could get screened out of the market. So we expect there will be a little more conservative going forward until that shakes out you know are they and are they out and what are the rate is going to be and these are headwinds that we've dealt with on and off through the past, they're just not going to go away. It's why we've always said despite PRC is being compelling from a cost to service standpoint, as well as a patient preference standpoint that this transition is a process not an event because of those hurdles.
And do that.
On their Danielle I know you also asked about pricing and competition.
We really arent seeing anything dramatically different in the market in those areas.
Yeah pricing well our business to business customers are always price sensitive.
We aren't seeing any new dynamics from a competitive front. So we believe we're continuing to maintain our market leadership position there.
And that those are not the dynamics impacting our changes in assumption going forward.
Got it Okay. That's helpful. Thank you guys and then I know you are not giving guidance that Scott you mentioned you thought a double digit growth the return would be doable to double digit growth.
I guess Tonight.
These issues that you guys headwinds that you're facing seem like it's hard to predict how quickly though though.
And.
Sample one the major.
Provider will start purchasing again.
So I guess what are you looking at there that gives you the confidence are you having conversations with the large provider that makes you think they'll start purchasing again in 2020 could you give a little bit more color to it.
The drivers of that comment there. Thanks, so much guys.
Yes.
The large national that we've talked about in the past we don't have them in our growth plans are returning to purchase so if they were to do that that would be upside.
We continue to think that their struggles are more longer term to address their restructuring hurdles.
The other homecare companies out there.
Yes, they are.
Face some of the similar hurdles.
They just haven't decided stop purchases, there up and down and.
You see one is up another is down any given quarter.
We don't expect than we are in pretty close contact with people I'll say, we try to be in closer contact given what happened with that large national.
Nobody is telling us that they don't CPL sees as the future, but they do convey their hurdles you have to balance that that they're trying to convert their business, they're trying to serve patient demand.
But they have some control constraints.
No. So we'll help them to extent the extent that we can but what really is important to us and I think again, what's unique for us with our direct to consumer approach.
Is that we can we can drive more of our own destiny and well to some extent, we're a little dependent on them. I mean, there are pretty sizable portion of our revenue portfolio, they're not our entire revenue portfolio. So for us to continue to drive that sales capacity growth when we model that out and kind of lap where we are being down in head count now in projecting where that would be next year.
That gives us the confidence to make a statement that we feel we can return to double digit growth in 2020.
Just to expand a bit on that Danielle when we look at our total revenue excluding that national account on a year to date basis were up 19.6%. So obviously, we are dealing with a comp issue that get.
That eases a bit in the back half of this year and is really we're through that headwind going into 2020, so not just in and of itself should help the overall growth rate lapping those large sales that we saw in 2018 and with additional hiring and what we're seeing on the DTC side.
We also should be lapping the tougher comps there and that should help 2020 as well. We also expect as we said rental revenue to start increasing and not being a headwind to growth going into 2020 as well.
Thank you so much.
Our next question comes from Margaret Texstar from William Blair. Please go ahead with your question.
Yeah, Yeah, ma'am is it possible your line is on mute.
Yes can you guys hear me.
Yes.
Perfect sorry about that.
Uh huh.
Good morning, and thanks for taking the questions at first off I was hoping to maybe drive a little bit more Daniel second question, which kinda talk to that double digit growth rate that you guys have had referenced for 2020, so that I understand that the underlying business right now is growing 19% add theres still a few major moving pieces, obviously between the sales reps as you know are turning back to productivity and once you reference was kinda continued attrition maybe through your AD relative to where you guys finished at 22018 wed. So maybe you can talk through kind of the cadence of that as we move forward add beyond just this year and that.
You are you guys looking at new products or new geographies as major driver as you go into 2020 and beyond.
Yeah sure so from the side of looking at that double digit expected growth going into 2020, we aren't assuming any material contribution from new countries. So our focus still will be right in the us and Europe as our primary market.
Obviously, we do plan to continue to look for opportunities outside of there, but that really isn't contemplated in the numbers that we discussed here and that doesn't include any any contribution in new areas like China from new products. We are assuming a small relatively small contribution associated with the new era product portfolio, which we are very excited too.
Add to our product portfolio. Although there is some additional R&D work there to get full use of the technology over the next couple of years, but we are assuming that that.
That does start to contribute in 2020.
So on top of that just in terms of cadence, obviously, we're not giving specific 2020 guidance today. It is.
You know very early for us to even comment on 2020 so.
We would expect the underlying seasonality trends to be similar to what we've seen in prior years with I know higher sales in the second and third quarter versus the fourth and first quarter, but outside of that we need to get a little closer to the year before we comment on specific.
Seasonal strength.
Okay.
And then in terms of the new Aero acquisition that you guys had referenced.
Yeah, there's a few products I think in that category that have been out there and so as you looked at evaluating that market, which asset was the right asset to target you know why that is it something that's easier to incorporate into your device on your P.O.C. add that gives you that competitive advantage in the space and then if you can give us a sense of the commercial model that you know if you're going to sell it DTC and are your term you know do you guys have a sense of ASP your gross margin contributions for that.
Yeah, and just to tag one more in there you know how do you expect traditional at Ivy players to respond to kind of you guys that are in the market with with kind of your unique combination. Thanks.
Yeah, I mean, we think that the new era product and technology.
Fits perfectly with not only our oxygen product portfolio that we have today, but also is very complementary with our go to market strategy.
The great thing about this product is that we liked about it is not only the efficacy is proven in the clinical study peer reviewed study that they ran but also it's designed for patient preference and simplicity and ease of use which is kind of our success formula for rpcs. So.
It's a product that we think that we can.
Leverage our salesforce as well as our marketing spend because many of the current leads that we generate right now would be candidates for the new era product. So we can get some leverage there. It's an area, where we have expertise in respiratory respiratory and oxygen therapy services.
So for our first acquisition.
It fits close to home.
It also allows us to get into adjacent markets downstream and the noninvasive ventilation for really the sicker patients that need.
Ventilation in addition to auction therapy, but also upstream where we think that we can impact a portion of some of the basic C. O PD patients that have breathlessness.
We're relieved that there isn't any coverage.
Criteria or anything that they fit under but it's a retail opportunity for us and we have a great retail model that we've proven over the last 10 years. So again, we think that fits nicely with our core competency and where we are unique.
As far as the channels, we would sell within.
Obviously, I just mentioned direct to consumer we think it fits nicely. There. It will also be a perfect fit for our physician salesforce something that they can showcase in front of doctors.
And we think that it could play a big role.
To get the product Jumpstarted and get some exposure in pulmonary rehab facilities.
We've already seen that in the very limited sales that new era has actually had.
They got their after FDA clearance last year, and just started to sell a small amount of products and then.
Got to a point, where it made sense that take to take this to the commercial stage that they would hand that off to somebody that had more horsepower rather than develop that themselves.
Lastly, we will sell this to the business to business community just like we do Pfcs, we want to use.
That that community to broaden access to this product concept of patients just like we do PEO sees.
It's as I said patient preferred but it's also.
Relatively low cost, we think that cost and Ivy is going to be more important as you look forward. If indeed it remains included in the competitive bidding program and again, we think that products that have kind of gone through that program, where there is downward reimbursement pressure there's opportunity for disruption.
As far as what other people are going to think about is probably I'd rather they answer what they are going to think but I think that we've shown we're a strong competitor in PRC is as a market leader. We've got a unique go to market strategy, we're going to leverage all of that horsepower.
To take full advantage of the TV product and technology.
Great. Thank you guys.
Our next question comes from JP Mckim from Piper Jaffray. Please go ahead with your question.
Hi, Good morning. Thanks for taking my question can you just help me get to cut down Q3 guidance I'm just planar out the model a night.
It's hard for me to get there.
International the only segment thats going to grow.
So we don't give specific guidance there, but we did say on the call that we expect both.
Domestic feed a b and the C to be down year over year.
Rental will also have a headwind just associated with the strong Q3 and the change in.
Both the rates that were effective January 1st and the change in bad debt accounting that was effective January one so.
Those will all be headwinds to growth.
Laura in Q3.
Okay, and then I guess I will ask one I think.
Like on the DTC side like I get there's more attrition and maybe the productivity ramp is the quicker it quickly ramp as we thought but the fact, the internet resellers are down as well mix is things like Theres seems similar issues and like their business model, probably hasn't changed in terms of selling on the direct channel as well.
So maybe if you could just.
If it's if you can talk about lead growth, whether that's still growing or anything that can give us a little more confidence that it's.
Yes that the leader there given that the resellers and you guys are seeing the same sort of problem on on closing business.
Yes on the Internet reseller side as I mentioned in my comments that.
They didnt see the seasonality benefit that we traditionally see now you have to remember.
The Internet resellers are they're not investing for growth there typically privately owned companies that focus generally more on bottom line than growth.
There.
That's their model.
We can comment on what Weve seen because we don't have visibility exactly to what their leads are we obviously see their sales patterns and talk to them about their struggles and things and they they didn't see that uptick it was kind of a.
If you look at it from a pure weather standpoint in the spring it was a crummy spring with colder than it usually is and we usually see that uptick coincide with when the weather warms up.
This was a little strange or whether power than we've seen in the past and we saw consistently across all of them that they had a similar pattern that they didnt they didnt bump up now.
Their purchases now are pretty consistent meeting our expectations of what we would expect right now if we look at our own.
No.
Metrics that we've got which is obviously, we have a lot more visibility of our own than theirs I go back to.
The inherent productivity gains that we were able to drive with our seasoned reps.
Our issues tended to be more with the reps that we're trying to bring up the curve and as I said there is unfortunately, a higher percentage of those reps that were not successful than we anticipated that as a disappointment, but it's one that we have to deal with and we have kind of dealt with that through the second quarter again.
Generating many thousands tens of thousands of leads every month.
Gives us the confidence that there's many many patients out there are many more patients dragging around a tank.
That would like to be carrying a PFC and it's our job to execute the sales and growth plans.
So that we can harvest that opportunity. That's that's what we'll do going forward, but obviously if we.
I thought that we were hitting a saturation point.
We wouldn't be back to hiring more reps and expanding our capacity there.
All the numbers that we have to say that we still have room to grow in oxygen therapy, and we're going to continue to use that sales capacity to drive that growth.
And just to add a little bit on to that.
Point on their Internet resellers, no first of all I do want to say that for the Internet resellers as a sub.
Section of the channel that domestic B to B Q2 was their toughest comp year over year Q2 last year was a very strong number for them as we also saw it in our bar business as well so I want to point out that that was a very tough comp.
I also want to point out that the resellers as a percent of our domestic b to B channel are less than a third of the total. So this is a smaller segment versus the traditional HMV purchases that is that the majority vast majority of the U.S. b to B segment.
Thank you.
Our next question comes from Robbie Marcus from JP Morgan. Please go ahead with your question.
Thanks for the question.
I was hoping you could just touch on.
You said that you are still getting high quality lead the reps just aren't able to act on them. What gives you confidence that they are high quality leads so you know.
What what is it that's causing reps not to be able to act on them like they would have let's say a year ago and what gives you the confidence that the new reps that you'll be hiring going forward, we'll be able to act on them differently than the one tired and 22.
Yes, it's a good question Ravi so again.
We kind of measure things year over year.
To make sure it's apples to apples looking at what we call our seasoned reps and if you look at the productivity and close rates and the success of our seasoned reps.
They are actually improving I mean, that's part of the productivity gain that we showed in the second quarter. That's that's really across the seasoned reps as well as some of the newer reps that we were able to improve their performance and they remained with the company our real issue. It's been with a lot of the newer reps that we hired in 2018, where we frankly, just you know in some cases, probably didnt hire the right people.
We've tried and redoubled, our efforts to retrain them and make them successful.
But it just comes down to some of them were not successful and and they have transitioned out of the company either of their own a corridor.
They didn't meet our performance expectations and we eventually took some steps to make changes, but when you measure it against our.
The the same reps that were here year over year, we're actually showing good productivity improvement.
Yeah, and just to elaborate on that a bit and when we look at the lead they are randomly distributed to the rap. So it's not like reps have specific territories and the older reps would have.
Maybe better performing lead quality.
Is performing for indications of lead quality that you may not see in a specific.
Rep class so that I think is an important thing to understand when looking at.
That performance and lead quality.
Okay.
Just to follow up on that so what will change going forward then I guess, maybe what is it about the reps that are season and perform well that's different.
Then the reps that you hired last year and and what are you going to change going forward.
I guess, what gives you the confidence that things will change in the new reps will be more productive.
Yeah. So we've changed you know our hiring criteria are screening mechanisms to make sure that the people that we bring in are going to be as good a match as possible I have a high probability of success of course, you know, it's never a guarantee that a 100% of everybody or higher is going to work out, but certainly we had a higher percentage that didnt work out than we've had in the past. So that's that's hurt us and we've changed that intake criteria. We've changed our training program, we changed our support.
Structure.
And amount of support that we give people and your question is a good one well what gives you confidence I go back to the <unk>, we have hired a couple of classes and measuring those classes that we've hired.
Against the areas, where we had issues we're seeing success in those classes already.
Going forward again, we're also going to hire in all three of our locations. So another key thing that we.
Kind of found is that those larger classes that we hired in the one single site people don't get as much one on one time through training and on boarding.
So we're going to hire smaller classes will give them that more one on one time make sure that we've got enough management infrastructure to support them coming up the curve and again that follows our success formula that we've had in the past.
And if I could just sneak one more in here Alley, we've seen operating margin.
Decline in 2019, what gets it back to positive improvements and is 2020 going to be another investment here or is that when we can start to see it pick back up.
Yes, I do expect us being able to show some improvement from the 2019 numbers.
I do want to remind you that a portion of that change in guidance is associated with the cost.
For the new era transaction that wasn't in previous guidance.
Really what we need to do is execute on our our D to C plan to improve their overall sales and marketing efficiencies.
That that is what's needed in order for us to show improving operating margin.
We have been showing great leverage on R&D in DNA, but sales and marketing is really the focus area to improve that.
Particularly going into 2020.
Our next question comes from Mike Matson from Needham and company. Please go ahead with your question.
Yes, thanks for taking my questions.
Yes, just wanted to start with the DTC sales force. So I guess I know theres been some turnover, but I would imagine your your numbers are probably still up significantly year over year. So let me know what number one if that's right and then too.
Why why not try to fix the issues with the reps that are still there that haven't.
Turned over or left before you go out and start adding more reps because I'd imagine you could still get some increased productivity, which will drive growth. It just seems like you're maybe putting the cart before the horse here by going forward and going out and trying to add more reps before you fix the problems that you have here.
Yes, so I'll take the first question and then I'll, let Scott jump into the strategy site.
So.
The sales rep headcount that we saw in Q2 of 2019 on average was down about 17% compared to Q2 of 2018. So that was a significant headwind for Ed was the loss of capacity on a year over year basis, and obviously were able to offset that with improved productivity of both on a smaller side. The actual improvement of the season wraps and then that a non season coming up the curve as we have fewer people in the early stages of that productivity curve.
But head count was down significantly from a sales representative head count side on a year over year basis in Q2, and Thats part of the challenge going into Q3, and Q4, particularly since we hired significantly in Q3 of last year.
That headwind too.
D to C sales growth will get bigger in Q3 because of that.
Reduction in head count on a year over year basis.
Yes in the second part of your question Mike.
So why Wouldnt, we focus on the reps that are struggling as opposed to.
Going back and hiring reps.
Before you fix the issues Thats actually the process that we've worked through.
We have been working with the reps that were struggling really for the first half of this year.
And working with them, that's where we see it.
Peeling back the onion again uncovered some deficiencies.
Through our training process, our support process. Those are things that you can fix and let's say applied to the reps that are already in place.
But there is also frankly issues with our screening process and we we concluded and some reps also concluded themselves that they just work cut out for this job and that's where the attrition comes in so we've actually been trying very hard.
And thought that we would be more successful than it turns out that we were to make those reps.
More successful so weve corrected those fundamental issues.
As I said applied all of those changes to a couple of hiring classes. We are seeing success on those classes.
And Thats why we are resuming hiring we've actually.
Started this week and we have new classes in this week in three of our locations.
Okay, I guess I'm, just struggling with the math here because my understanding was that you added about 70% tier rep count in the second half last year and now you are seeing and we're not even lapping that yet you're seeing you're down 17% from where you were at the first half so that implies like up 100% reduction you're not sorry, not like a 50% reduction under wraps or something.
Yes, no. So the 70% increase that we saw what throughout all of 2018 in our Rep base. So we went from 263 sales reps at the end of 2017 to 446 at the end of 2018 again those are net numbers. After attrition so that increase of 70% leased through out 2018, when we look at our hiring Brown, we did hire on.
Through out the year in 2018, so those increases.
Were significant in those periods, obviously, we did see a bump up in Q3.
In in our head count trend, but there was significant hiring in the first half of 2018 as well.
Okay, but the but the reps that you added in the second half of last year are essentially completely gone and then more right because you're already down in the first half from where you were last November .
So we do have standard attrition in the business as well. So this isn't inside call center that already you.
Yes.
Having to deal with that attrition level to get back to your base business. So that that's built into the numbers as well.
All right and then just if youre your stock is down considerably you do have a can.
Fair bit of cash on the balance sheet I understand you want to do M&A and you've done a deal now but.
Would you consider buying back stock given the steep decline here that we've seen.
Yes, I mean, we've we've had that discussion in the past and we think that the best use of capital for US is to continue to look at growth opportunities and drive growth New era. As we mentioned is the first.
Acquisition.
Obviously in the short term, we're going to focus on integrating that business and harvesting that opportunity.
But.
No. That's that's really not our plan right now is to go do a buyback its to continue to look for those unique disruptive opportunities, where we can leverage our go to market approach of of patients first and direct to consumers and leverage that expertise of direct to consumer marketing and drive growth in the future.
Okay and then just finally can you update us on the rental strategy I mean I.
You've made some comments about it but.
I guess, how big of a part of your business do you want that to the comment and how much are you really going to try to.
Promote that that part of the business I mean is that something that.
It could be 20% to 25% of your revenue at some point.
No it would take some time to get there but.
Yes, so I'll take that one so as we said on our first quarter call. We did make a small change a slight change to our intake criteria wasn't meant to be as.
Large shift in our total strategy.
So that combined with our.
Focused on having a separate rental intake team that lets just focus on patients who are interested in coming on rental services and separate that out from the sales team. We think that will drive increased rentals overtime.
Now it takes some time to build up that rental intake team we have.
And we continue to build out that team, but we expect that to take through the end of this year for us to build out that rental intake team.
So thats why we expect.
Really going into 2020 is when you start we'll start to see rental contributing at a higher level.
However, our focus still is on direct to consumer sales as that is a higher margin business for us.
So that will be the the primary focus so while we do expect rental revenue to increase.
Growing to 20% to 25% of revenues.
It is not realistic in in.
The near or medium term.
Yes, let me add that.
Hey, Mike So.
What rental does for us it gives us broader access to the market, okay and to the extent that we need to use that really depends on the traditional HMH community, if they're able to continue to grow.
Make our product readily available to patients, it's probably obvious but.
More patients are going to.
Want to access the product using a rental or Medicare insurance benefits and can pay cash if they can help us there.
Than we probably don't push rental quite as hard.
But if they can you know, it's a way to make sure that patients aren't blocks from the market to access our product and so there is kind of a.
It's a it's a strategy to make sure that we have access that patients have access the other thing that it does is it lets us better utilize the leads that we generate.
And we've talked about that in the past that we want to drive more efficiency and lead utilization. So to the extent that we take on more rentals were able to utilize more of those leads that we pay for but thats kind of how it fits in our business.
Okay. That's helpful. Thank you.
And our next question comes from Matthew Me, Sean from Keybanc. Please go ahead with your question.
Thank you for squeezing me in guys.
You've done a lot of work on on pricing and less to city of demand.
It is how is that factoring in here is there a pricing headwind year over year and are you getting the increased volume from a lower price point.
Yes. So we are in Q2 lapping the pricing trial, so Q3 should be a clean quarter for us on the pricing side versus what we saw in the.
A major concern on on the DTC side because.
Competitive products have not been priced.
At a discount to what we're we're currently offering.
And ladies and gentlemen, we have reached the end of the allotted time for today's question and answer session I'd like to turn the conference call back over to management for any closing remarks.
Thank you.
Well this has been a challenging period for Inogen, we're committed to our mission of improving the freedom and independence of oxygen therapy patients and we're focused on increasing our salesforce enhancing salesforce productivity and helping our home care partners overcome the restructuring challenges.
I also want to reiterate we're very excited about the new era acquisition as we believe it allows us to maintain our market leadership position, while also allowing us to expand into new adjacent market opportunities to meet our goals and execute on our plan to return to double digit revenue growth in 2020.
Thank you for your time today.
Ladies and gentlemen that we'll end today's conference call. We thank you for joining.
You may now disconnect your lines.