Welcome to the Inogen 2016 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to introduce your host for today’s conference Ms. Caroline Corner, Investor Relations. Please go ahead, ma'am.

Thank you for participating in today’s call. Joining me from Inogen is CEO, Ray Huggenberger; President and COO, Scott Wilkinson; and CFO and Co-founder, Ali Bauerlein. Earlier today, Inogen released financial results for the third quarter ended June 30, 2016. This earnings release and Inogen's corporate presentation are currently available in the Investor Relations section of the company’s website. During the call and the subsequent Q&A session, we will be discussing plans and projections for our business, future financial results, and market trends and opportunities, including among others, statements regarding our Inogen One G4 rollout, our expectation to establish a European presence in 2017, expectations from international sales and anticipated patient preference, market opportunities, and increased use of portable oxygen concentrators, our ability to continue revenue growth and our expectations for our business to business and direct to consumer sales channel, our strategic focus and objectives, hiring expectations, estimates of patent to funds expenses and bad debt charges, seasonality, our estimates of the Medicare and private payer insurance reimbursement rate declines and the impact of such declines. Our ability to offset reimbursement reductions, changes to the competitive bidding process, and 2016 and 2017 guidance including revenue, net income, adjusted EBITDA, adjusted net income, net cash flow, effective tax rates, and tax benefits, and adjustments. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results. Information on these and additional risks, uncertainties, and other information affecting Inogen's business operating results are contained in Inogen's annual report on Form 10-K for the year ended December 31, 2015 and in Inogen's subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission, including Inogen's quarterly report on Form 10-Q for the…

Thank you, Caroline. Good afternoon everyone and thank you for joining our third quarter 2016 conference call. On our call today I will start with the financial and business highlights then Scott will cover our recent operational developments and finally Ali will review the financials and provide updated 2016 guidance and also introduce our 2017 guidance. At that point we will open the call up for your questions. Our solid performance in 2016 continued in the third quarter with quarterly revenues of $54.4 million which represented 33.5% growth over the same period last year despite the continued headwinds we are facing in our rental business. We continued to see the trend of rental revenues declining but this was more than offset by successes without direct to consumer and business to business sales channels. Demand for our portfolio of innovative oxygen concentrator remained very strong across all of our sales channels and sales revenue grew 61.3% in the third quarter of 2016 when compared to the comparative period in 2015 and represented 86.7% of our total revenue in the third quarter of 2016 up from 71.7% in the comparative period in 2015. International business to business sales were our strongest growth channel in the quarter increasing 90% in the third quarter of 2016 compared to the third quarter of 2015 primarily due to strength in Europe with our distribution partners and key accounts. Sales in Europe represented the majority of international sales at 90.8% of international sales in the third quarter of 2016. While we have very pleased with our European sales results we are mindful that international sales can be lumpy overtime and due to all the time and due to the timing of it tender contract and custom buy patterns. We plan to build upon on recent momentum in…

Thank you, Ray. We have moved forward with the continued launch of the Inogen One G4 for portable oxygen concentrator in the third quarter which has been very well received since we first started initial sales in May. As we've mentioned before the Inogen One G4 is smaller and lighter than our current engine Inogen One G2 and G3 products and feedback thus far is that patients are pleased with the new offering. We are steadily expanding shipments of the Inogen One G4 to our domestic business to business channel as plans, remember that as part of our sales strategy we do not plan to make the Inogen One G4 available for rental and we use the upgraded Inogen One G3 product as the primary ambulatory solution deployed in our rental fleet at this time. Our international sales channel remains focused on the upgraded Inogen One G3 and we expect a minimal of any sales of the Inogen One G4 in that channel in 2016. We expect that international sales of the Inogen One G4 will begin in the first half of 2017 depending on the timing of product regulatory and reimbursement approvals and ramp up in the second half of 2017. We also initiated the direct to consumer pricing trial in the third quarter of 2016 and completed in the fourth quarter of 2016. The results indicate that to maximize our overall direct to consumer operating margin we should sell our portable oxygen concentrators at price parity and maintain the current retail prices across all configurations. On the Medicare reimbursement front recalled on September 8, 2016. We received notification that we won contracts in 10 of the 13 competitive bidding areas by CMS as part of the competitive bidding round one 2017 recompete. These new contracts and rates are…

Thanks, Scott and good afternoon everyone. During my prepared remarks I will review the details of our third quarter financial performance and then I will review our updated guidance for 2016 and provide our guidance for 2017. As Ray noted total revenue for the third quarter of 2016 was 54.4 million representing 33.5% growth over the third quarter of 2015. Looking at each of our revenue streams and turning first to our sales revenue, total sales revenue was 47.2 million reflecting 61.3% over the same quarter of the prior year and representing 86.7% of total revenue. Total units sold increased to 26,600 in the third quarter of 2016 up 81% from 14,700 in the third quarter of 2015. We achieved record domestic business to business sales of 16.2 million in the third quarter of 2016 which exceeded our expectation with 65.1% growth of the same period in the prior year reflecting continued strong demand from our traditional HME providers and our private label partner. For the second quarter in a row revenue from our private label partner and traditionally HME providers again represented more than half of the domestic business to business channel total sales revenue in the third quarter of 2016. We also achieved record international business to business sales of 15 million in third quarter of 2015 to 2016 which exceeded our expectations with 90% growth versus the same period in the prior year primarily driven by strong demand from our European partners and due to a weak quarter in the third quarter of 2015 for international sales. With record business to business sales business to business average selling prices in the third quarter of 2016 declined over the same period in the prior year primarily due to the continued shift in sales towards traditional HME providers and…

[Operator Instructions]. And our first question comes from the line of Margaret Kaczor from William Blair. Your line is now open.

So the first question is on the B2B domestic side, it was good to see the growth accelerate this quarter but can you give us a sense of which HMEs are adopting or trialing the POCs? Is there more the large nationals or is there regional mom and pop players? And are they buying in bulk or just more regular as they get new patients online?

The answer is similar to what we saw and communicated in the second quarter and really the trialing and interest of the HME community comes in all shapes and sizes at this point. We don't discuss individual customers but I think it's pretty clear that the HME community is struggling with the new reimbursement cuts and the rates. They're looking for new solutions and how they can provide adequate services and still achieve an attractive financial return at these new rates and certainly POCs are at the forefront of that solution set but it's really across the entire geography of the USA as well as all shapes and sizes. It's some of the same customers continuing to buy and trial some new ones have been added to the mix. So it's really kind of an all of the above answer if you will.

And so given that demand that you're saying at that HME level does it make you guys want to start investing more in driving sales from HMEs and if that's the case how would you do that?

Yes our strategy is one of a patient preference and a direct to consumer approach to the market and that strategy hasn't changed. In fact it's one of the reasons that I think we are a compelling solution for the HME community because we know a little bit about taking care of patients probably more so than the average manufacturer but hasn't gone down the path of a direct to consumer play and direct to consumer care. Remember that we have an outstanding private label partner that helps us access that market without us diverting our attention away from our direct to consumer approach.

And so to be clear you guys have figured out how to show and share and educate the BMEs [ph] how they can make money and essential make this -- could it be as much as more profitable than the tanks that they are driving around and again to the original question is it for everyone of all shapes and sizes?

Yes And our answer is yes we believe it is for everyone of all shapes and sizes in the homecare channel and yes we've not only have been successful doing that and demonstrating it ourselves but we're happy to share that with anyone in the HME community whether that be directly or through our outstanding private label partner.

And then just on the DTC side and the G4 launch, you guys I think referenced the mix of what the G3 and G4 units were sold. Is there a reason why the G4 still remains were 50% of the sales and how should we think about that going forward?

Yes it takes a little while to turn things up. You've got to consider a few things one just the sales cycle with your average patient, it's not a one day or a one week cycle as you might you know appreciate if somebody is going to spend a considerable amount of money they take their time and choose carefully. In addition to that if you recall we scaled our advertising at the end of the second quarter and throughout the third quarter. So we didn't start all in we've scaled kind of as we've gone, we ended the third quarter with a mix of G4 in the direct to consumer channel of about 1/3rd of our sales. We continue to make progress throughout the fourth quarter. So we're on track that you know we're comfortable with and it's what we would have expected. I mean we saw the same thing when we launched you know G2 versus G1 and the G3 versus the G2. So it's a progress, it's not an event but we're happy with our progress and the patients are clearly happy with that product offering.

Right, and last month for me. I think we were a little bit surprised that the sales and marketing maybe didn't grow as much as it did earlier this year despite the fact that you guys launched the G4, so was that advertising or sales force hiring and was it where you wanted it to be or did you pull it for some reason? Thanks.

Yes in the direct to consumer channel again we launched at the end of May, now keep in mind we didn't start launching to the domestic B2B channel until the third quarter and that progressed even into the fourth quarter. So today we're selling across the domestic B2B channel G4 across customers but we've scaled that from the end of the second through the third, we've scaled up our manufacturing line, make sure that we keep up with demand in a controlled manner to make sure that we stay on top of quality on a new product again it's a model that we've kind of been through before and we have a method to our madness of how we scale things up so that we don't go too fast and screw things up so. We're right on track before we expected and we're pleased.

And our next question comes from the line of Robbie Marcus from JPMorgan. Your line is now open.

Ali maybe starting with a question for you. Looking down the P&L it was impressive to see the adjusted EBITDA and net income come in where it is. You know I guess it speaks to that you've been saying for some time there's been confusion on the street that the higher DTC sales have the higher gross margin and as B2B continues to improve that that will have a slightly lower gross margin but I think what we're seeing here is that it's coming out equal on the operating lines. So it's my question is can you affirm that with you and maybe talk about in the fourth quarter it looks like adjusted EBITDA is coming in a bit low versus trend, is that SG&A spending and the legal costs that you're going to see in the fourth quarter?

Yes. So starting first with the difference of business to business versus direct to consumer, as you noted our Direct to Consumer business does have a higher gross margin profile than the business to business side. However the direct to consumer side also has higher operating expenses associated with it both the sales force cost as well as the media costs associated with those sales. So yes on an operating margin basis they are relatively close and that's why when we look at how we give guidance and how we look at opportunities we really focus on revenue growth as well as net income growth and we don't give gross margin guidance because it really does depend on the mix of business to business verses direct to consumer sales so we have done a nice job of being able to get two relatively similar operating margin profiles. In terms of the fourth quarter. Yes we do expect lower adjusted EBITDA just given where the guidance midpoint comes out at, we are continuing to invest and we do expect that to continue in the fourth quarter and we do expect higher legal costs. So really the increase in cost is in that SG&A line.

Okay And then looking out to next year. Solid initial guidance next year came in about the street both on the top and the bottom line, you know one area that's been some confusion other than the gross margin has been kind of the ASP and the mix. So is there any way you can kind of give us your initial thoughts on what we might see on that ASP mix line for next year and then any just initial thoughts maybe on SG&A and R&D growth for next year so we can try and back into where you're thinking about cost of goods?

Sure. So when we think about our growth rate for 2017 as we said we do expect our highest growth rate of a channel to be direct to consumer sales. So that is inherent in the guidance that direct to consumer sales will be the fastest growing. We do expect still very robust domestic business to business growth as we’ve continued to see more providers adopt POCs as a strategy, we expect that trend to continue into 2017 and we expect pretty moderate growth on the international side. We've had such a strong year in 2016 internationally through primarily Europe and we do expect that we will continue to grow in those markets but that is more of a moderate area and we expect a slight decline in rental. So given those factors that would lead with higher direct to consumer sales as a higher percentage of the business all else equal leads to expanding gross margin percent but higher operating expenses associated with that portion of the business. So our approach to guidance has been very consistent with previous years where we focus on where we have the most visibility in the business which is really the direct to consumer side and then we look at the opportunities on the business to business side they continue to expand and maintain our market leadership position.

If I could just sneak one last one in maybe for Scott, I think second quarter was nice to see the U.S. B2B sales increase like they did, you had a lot of enthusiasm about it. We had you on the road in September, again a lot of enthusiasm and now we see that the data point in the third quarter. So it's starting to look like two points is a trend more than a one off. You touched on it a bit but do you think now with the reality setting in that the rate cuts aren't going to go away and what used to be the standard allowable regions. Do you think we'll start to see more of a hockey stick adoption over to POCs in some of these regions maybe in the rural areas where people are just giving up because it's unprofitable or how do you see that developing from here on now? Thanks.

You're right now we have a couple of points. We're still pretty cautious and I'd say you know two points are aligned not quite a trend. We are I will say equally enthused this quarter as we were last quarter but really we feel we need a little bit more time under our belt to say that there is wholesale change afoot. I think it is clear that people are struggling to cope with the new reimbursement rates and they're certainly looking at all possible solutions to ride the ship in their business with these new reimbursement levels but it's going to take a little bit more time for us and more success and to see that continue to climb before we would say you know there is a hockey stick and we’re in the middle of it. It's still too soon to call that at this point.

And our next question comes from the line of Danielle Antalffy from Leerink Partners. Your line is now open.

I'm sorry if I missed this I'm jumping on a few earnings calls at the same time. But the guidance you are assuming some deceleration on the topline in Q4 and I just wanted to better understand what might be driving that, did you maybe see a [indiscernible] of the G4 that might moderate a little bit in Q4 or is there anything any color you can give there would be great.

Yes there are a couple factors there. So first of all seasonality is important to remember in our business typically in the warmer summer months that’s when we tend to have stronger demand for our product versus the winter months where there's a weaker demand for our product. On top of that remember we also have the rental revenue headwind and we continue to expect those headwinds in the fourth quarter and expect those to increase slightly in the fourth quarter compared to where we were in the third quarter of 2016. We also had a very strong international quarter as you saw in the third quarter of 2016 and as we said those sales can be very lumpy in nature and it was a record quarter for international sales and we did see strong orders there from our customers and so we're a little cautious on the international side of how repeatable that is in the fourth quarter given those factors. So those are in direct.

And then my last question is just on the rental revenue. I mean I think I asked this last quarter as well but just wondering if your thoughts have changed here. I mean at some point do you guys just take as a rental business or is there some reason. that you guys should still be involved in the rental part of the POC world? Thanks so much.

Yes Danielle, the rental business is a part of how oxygen therapy is being reimbursed. The issue is that what we're undergoing right now is called growing pains, the entire reimbursement world through competitive bidding has changed significantly and the pendulum has probably swung a little bit from the left side all the way to the other side. That doesn’t mean that it won't be won't come back you just got give that a little time and there really is the question will we be in the rental business for ever and the answer is I don't know but will we be in the reimbursement business for as far as we can see the answer is yes. Right because it doesn't always have to be rental, it is today but it doesn't have to be, but in reality to kind of go and say well let's punt on the rental business because it provides us with a couple of difficult challenging quarters, [indiscernible].

Let me add to that Ray, I mean maintaining as broad market access as possible is part of our strategy. So being able to use reimbursement as a vehicle to help patients acquire our product is something that we will continue to use as one of our tools to get product in patients hands. On the other front I think as we navigate through these challenges I go back to something that I said earlier who better to help the other HME folks out there than have to navigate the same challenges than somebody that's walking in exactly the same shoes that they are. So we can help them from a level of experience and we're all kind of tackling the same challenges together.

And our next question comes from the line of Mike Matson from Needham & Company. Your line is now open.

So you called out the patent litigation cost and I think here is some patent dispute going on, so I was wondering if you could just give us an update on where things stand with that, where the potential implications?

Yes. So the problem with that is that we can't comment on ongoing procedures. All we can say is what we have been saying all along is that we don't really see no basis for these cases that have been brought up and that they have absolutely no merit and that we do plan to defend ourselves in the most rigorous way possible. We have at this point not accrued any contingencies, in our financials because we are very much convinced that there's no basis and no merit to these cases. The cost is really the defense cost. ongoing legal expense. I mean that's pretty much all I can say about ongoing litigation.

And then I was just curious the rental decline was pretty large and I know you obviously cited the Medicare cuts but, I was wondering if the fact that you guys are requiring patients that want the G4 to buy it out of pocket it's kind of helping to steer people to be DTC purchases rather than using insurance. So did that factor into that decline at all?

It certainly factors in at a very small level. So when you look at our net patient additions for the quarter we added 100 net patients. So the fact that we had a very low net addition on the rental side of the business that would be a natural reason is that for those patients that did want the G4, they are only option to get the G4 was to purchase it outright from us. So that certainly can have an impact, the largest impact was of course the actual cuts from competitive bidding from Medicare both the application of applying the national rates across the Board to the large portion of the market as well as a new competitive bidding rate for around two areas and then the fact that we've continued to see private insurance payers follow Medicare and reduce their rate. So those were the large factors because each individual patient you add in the quarter does not have a material impact on the rental revenue for that quarter.

And then as the G4 goes up as a percentage of the mix, does that have any positive or negative impact on the gross margins? That's my last question. Thank you.

It has a positive impact on the gross margin but it is the small impact. So when you look at the improvement that we had from the Inogen One G3 to the upgraded version that we did in late December of 2015, that was a large change. Here this is a smaller change then that impact and because it's only hitting a portion of the mix and it's rolling in overtime, it's smaller incremental steps over the quarter instead of what the G3 when we rolled it out very quickly across all of our channel you saw that impact very quickly in the first quarter of 2016.

[Operator Instructions]. And our next question comes from the line of Matthew O'Brien from Piper Jaffray. Your line is now open.

This is Matt in for Matt [ph]. So I'm going to ask the question I think that might have been asked really but slightly different. Have you guys noticed in any CBAs where DMEs are actually pulling out of oxygen altogether given the lack of profitability and as a result have you benefited from this trend within your DTC sales segment?

You know I wouldn't say that we've seen anything material in any specific geography. We've maintained market access, broad market access with our success in the CBAs. ourselves. You know most of the -- what we've seen from competitive bidding is more I'll say inquiries for help or assistance and how you run a non-delivery business because that's exactly what we're doing. As opposed to you know picking up big chunks of business.

Okay. And then also is there anything that you guys can compare to international opportunity, just really Europe to the U.S. and do you guys have any estimates on what penetration rates are there?

Yes it's a real tough question and let me tell you why it's tough. First of all from an oxygen or healthcare standpoint there is no Europe. There's a collection of countries that all have different healthcare systems. Some are somewhat similar to the U.S. Some are very dissimilar. The only thing that's consistent in Europe is the EU and the currency and we have some multinational customers that cover various countries but other than that you get a slug it out country by country. There are some areas where we have much higher penetration than others. We know that our penetration for example in Spain is higher than some of the other countries, that's one of the countries that we had early success in if you go back 7, 8 years ago. It's driven by tenders which tend to be blocks of business. So when you win a block of business you may you may get 10% of the country in one fell swoop. A country like France is just the opposite. There is no tenders, it's a government health care system and you win it one patient at a time through the providers and distributors that you have in place. I will say that the penetration of POCs seems to be lesser in Europe than in the USA. Although it's much more difficult to get hard data around that. So I'll say that's kind of a feel for what we've got in sales and what we see in the market but they face the same challenges that we do and that there reimbursement while generally a little richer than ours it's still is trending downward and you've got the same dynamics of people looking at POC as a future solution but they're not under the gun like we are here given the rather dramatic rate declines that we've seen across the U.S.

That concludes our question-and-answer session. Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.