Good day, ladies and gentlemen, and welcome to the Inogen, Inc. 2014 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Lynn Pieper of Westwicke Partners. Ma'am, you may begin.

Thank you. This is Lynn Pieper with Westwicke Partners. Thank you for participating in today's call. Joining me from Inogen is President and CEO, Ray Huggenberger; and CFO and Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the first quarter ended March 31, 2014. If you've not received this news release or if you'd like to be added to the company's distribution list, please call Westwicke Partners at (415) 513-1281. Before we begin, I want to remind you our comments today will include forward-looking statements within the meaning of federal securities laws. Forward-looking statements include, among others, statements regarding our expectations, goals or intentions, including, but not limited to: Our assessment of growth opportunities in specific product markets; our assessment of the impact from Competitive Bidding; market share expectations; our current views with respect to our ability to achieve revenue; net income, EBITDA and adjusted EBITDA target; our expectations regarding the stationary market and anticipated product releases in that category; and our expectations regarding the impacts of our medical billing and claim collection efforts. These forward-looking statements are based on management's current expectations, estimates, forecast and projections and are subject to risks and uncertainties that could cause actual results and events to differ materially from those stated in the forward-looking statements. Our business is, and any financial projections provided today, are subject to numerous risks and uncertainties, including: The possibility that Inogen will not realize anticipated revenues; the impact of reduced reimbursement rates in connection with the implementation of the Competitive Bidding process under Medicare; the possible loss of key employees, customers or suppliers; intellectual property risks if Inogen is unable to secure and maintain patent or other intellectual property protections for intellectual property used in its products. Information on these and additional risks, uncertainties and other information…

Thanks, Lynn. So good afternoon, everyone, and thanks for joining our first quarter call. Before covering our first quarter 2014 results, I would like to share that Inogen continues to make progress on executing the strategy that we laid out early in the year, and we look forward to delivering on the milestones that lay ahead. What we're going to do this afternoon is break down our comments as follows: first, I'll walk through the first quarter 2014 financial results; then, I'll touch on some business highlights from the quarter; then I'll turn it over to Ali and she will provide more detail on our financials and update the guidance for 2014. And then we will wrap up the prepared remarks and open it up for questions. So with that, let me dive right in Q1 2014. We're pleased with an unseasonably strong first quarter performance, which included the highest quarterly revenue we have ever recorded. We saw strong top line growth, marked by continued acceleration in our highest-margin sales revenue channel, which is the direct-to-consumer sales channel. Total revenue was $23.6 million in Q1, up 50.1% year-over-year in spite of reduced reimbursement rates from Medicare Competitive Bidding. Looking at our 2 revenue streams, sales revenue for the first quarter was $14.9 million, up 67% versus the same 2013 period. Total units sold increased to over 6,300, up 75% from Q1 2013. Rental revenue was $8.8 million, up 28.1% versus the same 2013 period and the rental patient population increased to over 23,000 as of the end of Q1 2014, reflecting growth of 49.4% over Q1 2013. That is more than offsetting the rate reductions by Competitive Bidding. In addition, we increased our private payor contracts to 53, up 20.5% from 44 at the end of 2013. Our total gross…

Okay. Thanks, Ray, and good afternoon, everyone. During my prepared remarks, I will review the details of our first quarter financial performance and provide our full year 2014 outlook. Starting with our first quarter revenue and growth drivers, as Ray already mentioned, our total revenue was $23.6 million, which is an increase of 50.1% year-over-year. This reflects strong performance on the top line and growth in all segments, with less-than-expected impact from seasonality. Similar to last quarter, we continued to see a shift towards cash sales from rentals in some markets, but still managed growth in rental revenue. Total units sold in the first quarter increased to over 6,300 units sold, which is a 75% year-over-year increase. Direct-to-consumer sales was our fastest-growing segment at 90.6% year-over-year growth and accounted for 29.5% of total revenues in the first quarter. Direct-to-consumer rentals accounted for 37.1% of the first quarter total revenues, growing 28.1% year-over-year in spite of Competitive Bidding reimbursement rate reduction. Again, as Ray already mentioned, net patients on rentals increased to over 23,000 patients, which is a 49.4% increase since the first quarter of 2013. Sequentially, from the fourth quarter of 2013, this is an increase of approximately 1,700 net patients on rentals, which is an 8% sequential increase. Business-to-business sales accounted for 33.4% of the first quarter total revenues, broken down as 14.6% of total sales for domestic business-to-business sales and 18.8% for international business-to-business sales. Business-to-business domestic and international sales in the first quarter of 2014 grew 70.8% and 37.9% year-over-year, respectively. We were pleased to continue to see strong revenue growth in all categories. Now moving to gross margin. Our total gross profit dollars expanded 47.1% year-over-year, which is slightly behind our top line growth at 50.1%. Gross margin for the first quarter was 50.5%, down from…

All right, thanks, Ali. So 2014 will continue for us to be a year of execution, and we have started the year on very solid footing. We believe that as we continue to progress on our corporate objectives, we will bring significant value to shareholders, innovation to the market and continue to fill an unmet need in the current oxygen therapy market. Our priorities continue to be executing our already formulated strategy, generating leverage on our investments in our go-to-market capacity while capitalizing on our technology investments and process improvements to drive productivity, raising awareness of our innovative product portfolio in the long-term oxygen therapy category and breaking into the stationary oxygen market by offering a differentiated novel product that satisfies an unmet need for consumers in the current marketplace. And lastly, continue our focus on driving revenue growth while adding leverage to the bottom line. With that, I'd like to thank you for joining us today again, and we look forward to updating you on our progress in future calls. And we'll now open it up for questions. So Sam?

[Operator Instructions] Our first question comes from Mike Weinstein of JPMorgan.

I want to start, Ray, with the DTC piece of the business, which looks like it hit an inflection point this quarter. And I was hoping you could shed a little bit more light on what you saw in the quarter and talk a little bit if you could about the productivity of the sales force you've put in place to drive that business.

Okay. So the Q1 results were strong and they were stronger than what we've seen historically. The -- frankly, the direct-to-consumer sales portion outperformed the other segments of the business, but that was expected because of the focus we have been talking about in kind of pushing this side of the business, part of, just changing our script and changing our advertising. And what we have been doing is apparently working. I do want to point out that it's -- on the sales side, that domestic business-to-business sales grew at almost, not quite, but almost the same rate at almost 71%. So in general, I think we've just seen a very strong quarter, very strong demand, both on the business-to-business side, as well as on the direct-to-consumer side. I think the part that we had expected that with that focus shifting a little away from the rentals and a little towards the sales, that we would see a stronger deceleration of the rental demand. And that didn't really materialize, at least nowhere near the extent that we had expected. Whether that -- don't forget that we have been in this mode with this focus for 1.5 quarters now, so I don't know how much we can extrapolate from 1.5 quarters. But it certainly has not materialized as much as we had expected in the first quarter. So the real surprise, if there was any, was the fact that the rental demand did not diminish or did not decelerate as much as we had expected because of our focus on sales.

I don't want to make too much of one quarter, but is it fair to say that the DTC effort is essentially accelerating in the awareness point of care, obviously, in particular, your product?

There's no question about that, there's no question about that. The fact -- our DTC efforts directed at the consumer is creating awareness and is creating demand. A lot of that demand comes to us, but not all of it. And that results in our domestic business-to-business growing at over 70%.

Okay. Anything at all that you would view as being one-time in the quarter or anything that may not repeat?

I'm sorry, could you repeat that question?

Yes, Ray or Ali, jump in here too. Anything you view as being one-time in a quarter that may not repeat in the second quarter or going forward?

Yes, so in terms of that, we did see what we -- historically, the first quarter has been a slower quarter for that. We saw some of the demand that we typically see picking up in the April timeframe, really picking up earlier in the year, in the March timeframe. So some of that seasonality that we've historically seen, it may not be as pronounced of a seasonality this year that we've seen in historical periods, because of the demand that pulled through, particularly in March. So certainly, that's something that is unique to the quarter. We did have some nonrecurring IPO-related expenses, but they were pretty immaterial at about $0.2 million. And then, of course, the change in the tax accrual.

Okay. And then, maybe just Ali, on that. So we've obviously had a meaningful change in the tax picture over the course of the last few months. Can you give us thoughts beyond this year about your ability to manage the tax rate? And given kind of what's played out here, are you guys going to start to maybe think about some tax strategies that would lessen the burden?

Certainly, tax planning is a priority for us, especially as we get into future years. Remember at this point, we're using our carryforward losses, so while this is an expense, it is not a cash impact to the business. But tax mitigation will be critical, especially as we get into 2015 and beyond, and that is something that we see as important to minimizing that tax rate go forward. So yes, there is a plan to do that, but we do think that our tax rate for 2014 will come in at around that 39%.

Our next question comes from Danielle Antalffy of Leerink Company.

So just a follow-up on Mike's question regarding -- Ali, you mentioned the lack of as pronounced seasonality this first quarter. Is that something that was in response to is this a one-time thing. I mean, why would it revert back to being a seasonally weak Q1 in 2015? Maybe walk us through how to think about the seasonality now, given this really strong quarter. And is it perhaps a result of the seasonality in your business may be changing for some reason, as direct-to-consumer sales grow faster? Any color there or insights would be great.

Yes, so when we look at seasonality, I think we're really going to have to see how all of 2014 develops in order for us to really get a good feel for if there has been a true shift in that seasonality curve or not, especially with the shifting dynamics of our business of -- with the focus on the direct-to-customer cash sales. So it's a little early for us to tell. I think especially as we get into the second and third quarter, we'll be able to have more visibility into how that may look in 2014 and go forward. But all we really know at this point is that the first quarter tended to be stronger and -- especially in the second half of the first quarter.

Okay, that's great. And then as we look at the rest of the year, you did raise revenue guidance, but you had a really strong quarter. And just curious as to why 50% revenue growth year-over-year, and your guidance implies a much lower rate as we go through the year. Midyear, you're going to anniversary the Competitive Bidding cut. You're also adding focus to the sales force -- adding to the sales force, focusing more on direct-to-consumer sales, et cetera. So why would the momentum slow from here, just as we look out to the rest of 2014?

Okay. So but the -- I mean, let's start with the big wildcard, is the seasonality. The -- we have typically seen the first quarter to be, by far, the slowest of a calendar year. The way that the revenue came in throughout the quarter, it was relatively as expected in the first half of the quarter and then started to take off in the second half of the quarter. That makes us a little cautious relative to how pronounced seasonality is going to materialize in 2014. Don't forget that we have a certain shift towards sales and how that plays into actual seasonality, we won't know until at least the second quarter is over. So that's the big wildcard and we're just reasonably cautious about that until we get through the second quarter.

Okay. I think the other note on that, Danielle, is if you remember, we grew headcount pretty quickly in 2013, and we, in 2014, are focusing more on those productivity improvements. So as you go further into the year, there's less of a growth rate in the quarter-over-quarter period in that headcount line. So you're not going to have that same impact of headcount, it's more productivity driven.

Our next question comes from Ben Andrew of William Blair.

Just a few questions for us perhaps. First, can you talk about the growth in competitively bid areas compared to nonbid areas, both on the, I guess, primarily on the rental side?

Yes, so in terms of growth, we followed the market pretty closely. So the growth in competitive bid areas versus noncompetitive bid areas was relatively consistent because we do nationwide advertising. So there wasn't any material shift in our business associated with competitive bid areas versus noncompetitive bid areas.

So Ali, when you think about the trends in terms of rental versus selling, obviously, were the trends in sales then stronger in the CB areas such that obviously, people were getting turned down as a rental patient and you were able to convert them or was that consistent?

That again was pretty consistent across the nation, but we did see overall higher demand. It may have been slightly higher demand in the competitive bid areas for cash purchases, but again not materially. It was more a nationwide look at overall demand increases for our product in the quarter.

Okay. And then, and I know we had been expecting kind of a big sequential decline and then Q1 seasonality, but you beat our rental patient add number by something like 70%, and should we consider them kind of bumping up those expectations, because we had kept that relatively flat on rental patient over the course of 2014?

Yes, so I mean, obviously, we don't give specific guidance on the number of net patients that we add. But obviously, we had expected to see that additional flowing in the new rental patient adds. It's still pretty early in that shifting process, but initial results definitely say that the trade-off is not as large as we had expected. You do have to remember that, again, this is a net number, so as our patient population grows and we have patients coming off of service because of death and other reasons, you have to replace just to keep even. So do we think that it's -- certainly, the first quarter was an indication that it was much stronger than what you had in your model and others have in their models, and -- but remember that doesn't manifest itself into revenue immediately. And that is part of the reason why we have that additional upside in the revenue guidance.

Sure. And then 2 related questions to that. Was the patient churn, if you will, or turnover, unusually high in this quarter? Or was it consistent with kind of the average that we've seen in the last year or so?

It was consistent. There was no...

As a percentage.

As a percentage of the patient population, it was consistent.

Okay, that's helpful. All right, and then as we think about gross margin, obviously, it sort of historically has been pretty volatile quarter-to-quarter on the rental side. Again, was there anything unusual in this particular quarter that we should think about there? Is the volume helping you, that you had this quarter, in terms of the rental patient adds on an absolute basis?

Yes, the volume helped, but then of course, you do have higher costs associated with new setups for patients versus just kind of the status quo costs, because you have the cost to actually ship the product to the patient and setup of a patient. In the short term, you have lower revenue and higher costs. There were some higher costs in the first quarter that accounted for about $0.3 million of costs that were kind of nonrecurring in nature that we experienced.

That was in gross margin, you mean?

In gross margin, yes.

Okay. And I had actually skipped the second part of my 2-part question a minute ago. But so just coming back to the markets where Competitive Bidding is being implemented, are you -- you said it's early in that process. I mean, that started July 1. Does that suggest that we could still see an accelerating impact from the implementation of CB2? Or are you comfortable that, that's actually mostly played out?

No, that has been played out. The shifting impact that I said, that was our own internal shifting sales process towards the direct-to-consumer sales versus rentals in some markets.

And one of the things we've heard from other home care players is that the just the changeover to Competitive Bidding and the subsequent volatility and who's managing some of these patients has kind of restricted patient flows in the short term. It doesn't sound as though you've seen any of that, given the results.

We really didn't. Now remember, oxygen is not like -- not all of DMEs -- you have the grandfathering provision. So when somebody is on oxygen, they could stay with their current provider if that provider wanted to continue to service the patient at the CB2 rate. So we didn't see as much volatility because we saw that most providers grandfathered, and the patients that didn't, we were happy to bring those patients on our service in those areas.

And our next question comes from Tom Carroll of Stifel.

A couple of questions. Inogen At Home, the launch, maybe give us an update in terms of timing there. And does that change kind of anything relative to the rest of the quarters this year in terms of, I don't know, higher marketing costs? Or is that behind you? Give us a sense of that.

Yes. So the 510(k) for the Inogen At Home has been submitted. If you're asking me to predict how fast the FDA is going to give us an answer, I'm sorry. Then you're asking too much of me. We fully expect that the launch will happen this year. We always said it will be the second half of this year. We're still saying it's the second half of this year. When exactly the FDA is going to come through is really hard to predict. In terms of...

I'm sorry. Does that depress second half earnings at all?

It's not going to have a huge impact because, Tom, depending on a little bit, depending on when in the second half. But it's not going to be a huge number one way or the other, because there's always a ramp. And so if we're starting in the second quarter, the impact, both on our revenue as well as on cost, is going to be -- is going to ramp up over a number of months. So the actual impact for 2014 is not going to be huge. It's not going to be material.

Yes, we're not expecting any one-time, large expense associated with the launch. And the costs that we do expect to incur are already included in the guidance provided. But there is no revenue in the guidance provided associated with the launch of that stationary product.

Okay. So -- I'm sorry, so you said no revenue, you said no revenue associated with that essentially?

Correct.

Okay. And then, we had talked in the past about your activities direct -- kind of direct outreach to physicians in order to almost turn them into pseudo sales people. Any update there? Anything you're doing along those lines?

So we're continuing to -- obviously, we have a team of physician sales force out there. We're continuing to see success in that side on a small scale with that physician sales force. But growth is relatively slow due to the hiring ramp curves, as well as physician adoption. So it is included in our direct-to-consumer rental business, but it is a small portion of that overall top line.

Great. And then just lastly, what specifically -- I think I'm still a bit confused -- what specifically, if you could give us some examples, do you attribute just the very strong direct-to-consumer business this particular quarter? Is it just a heightened focus that you guys have had, and you guys have said you're going to be through that, or is there some -- where along the income statement are you having success versus other places?

Yes, so we really focused on driving that shift towards direct-to-consumer sales through our optimizing our advertising mix, looking at our sales process and determining the best way to explain our products and show patients how this is the right solution for their needs, also working through payment options and also product configuration. So all of that was kind of optimizing that sales process and marketing process. And that contributed to the higher top line.

And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any further remarks.

Okay. Well, thank you very much for your questions. We're looking forward to you joining us for our next release in about 3 months. And thanks for joining us today, and have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.