Good afternoon everyone and welcome to the Inogen 2017 Third Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Matt Bacso, Investor Relations Manager. Please go ahead.

Thank you for participating in today's call. Joining from Inogen is CEO, Scott Wilkinson and CFO and Co-Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the third quarter of 2017. This earnings release and Inogen's corporate presentation are currently available in 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, hiring, marketing expectations, European growth, manufacturing developments, and projected financial results for 2017 and 2018. 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 and Exchange Commission. Actual results may vary significantly, 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 third quarter investor presentation on the Investor Relations website under SEC Filings and News & Market Information, respectively. Please refer to these filings for more detailed information. During the call, we'll also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to provide a reconciliation of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort, as discussed in more detail in our earnings release. With that, I'll turn the call over to Inogen's President and CEO, Scott Wilkinson. Scott?

Thanks, Matt. Good afternoon and thank you for joining our third quarter 2017 conference call. Looking at the third quarter of 2017, we build on our success over the past several quarters, and I'm very proud to say that we saw record total revenues of $69 million. This represented 26.8% growth over the same period last year, reflecting great results in our domestic direct-to-consumer and business-to-business sales channels and impressive performance in our international business-to-business sales channel. Overall, we saw minimal financial impact from the multiple major hurricanes that hit the United States in the third quarter of 2017, and we were glad to hear from many of our patients that our portable oxygen concentrators helped enable them to evacuate in advance of these hurricanes. As we've seen in prior quarters, the expected decline in rental revenue, which represented less than 10% of our revenue in the quarter, was more than offset by the increases in revenue from our sales channels. In the third quarter of 2017, we delivered net income of $7.3 million and adjusted EBITDA of $14.1 million, which represented 39.9% and 30.6% growth respectively over the third quarter of 2016. We continued to steadily invest in direct-to-consumer sales force additions in the United States. We also worked to optimize our new customer relationship management or CRM system, and I'm pleased that we have delivered such strong sales and solid bottom line results during the third quarter while we were still investing in training and productivity improvements in the system. Looking at our revenue streams in more detail, we saw strong demand for our portfolio of innovative oxygen concentrators across all our sales channels in the third quarter of 2017. Our direct-to-consumer sales in the third quarter of 2017 increased 43.5% over the third quarter of 2016, also…

Thanks, Scott and good afternoon everyone. During my prepared remarks, I will review the details of our third quarter of 2017 financial performance, and then I will review our guidance for 2017 and 2018. As Scott noted, total revenue for the third quarter of 2017 was $69 million, representing 26.8% growth over the third quarter of 2016. Looking at each of our revenue streams, and turning first to our sales revenue, total sales revenue of $63.1 million represented 91.5% of total revenue in the third quarter of 2017 and reflected 33.8% growth over the same quarter of the prior year. Total units sold increased to 36,000 in Q3 2017, up 35.3% from 26,600 in Q3 2016. Direct-to-consumer sales in the third quarter of 2017 were $23 million, representing 43.5% growth over the third quarter of 2016, primarily due to increased sales representative headcount, increased marketing expenditures, and increased productivity. Domestic business-to-business sales of $22.9 million in Q3 2017 reflected 41.7% growth over Q3 2016, with strong demand from our traditional HME providers and our private label partner. We also demonstrated impressive international business-to-business sales of $17.2 million in Q3 2017, which reflected 14.9% growth over Q3 2016. Sales in Europe represented 90.1% of international sales in the third quarter of 2017, which was down slightly from 90.8% in the third quarter of 2016 due to the sales growth in other international markets. With robust business-to-business sales again in the third quarter of 2017, average business-to-business selling prices declined over the same period in the prior year, primarily due to the shift in sales towards traditional home medical equipment providers and private label sales and additional discounts associated with the increased sales volumes worldwide. Rental revenue represented 8.5% of total revenue in the third quarter of 2017 versus 13.3% in the…

[Operator Instructions]. And our first question today comes from Robbie Marcus from J.P. Morgan. Please go ahead with your question.

Hi, and congrats on a great quarter. Wanted to start in what happened in third quarter, and DTC and U.S. B2B both did much better than, I think, even the best estimates out there. So maybe you can just help us understand what exactly is going on in DTC, what hits productivity, what offset it, and how we should be thinking about rolling that into 2018.

Yes, sure. I'll take that one, Robbie. So really, the success that we saw in the third quarter was associated with the increased headcount that we saw on the DTC side. We have continued to hire throughout 2017, as we've said. That's really the factor that allows us to grow our direct-to-consumer. Marketing spend is up, having the sales capacity to work with the leads when they do call in. So we have been able to increase that. We also mentioned that we have been able to improve productivity year-over-year in the cash sales side. So our reps have become more productive, and that's in spite of the headwinds that we saw on the CRM implementation. So we knew that we would take a small step-back associated with the implementation of a new system and people coming up the learning curve on that. That did happen. But even in spite of that, our productivity in the third quarter of 2017 was improved compared to the productivity in the third quarter of 2016. So we're really proud of our sales team's ability to both hire and train the sales personnel. We've been able to continue to add to our Cleveland site as well. And while you know that those sales reps take four to six months to come up to productivity, we are starting to see the contributions from the people we have hired in the first half of the year, and we expect the people that we hired in the second half of the year to really contribute more materially going into 2018. And that's really why we still expect in 2018 direct-to-consumer sales to be the fastest-growing channel in our business because we are continuing to invest there. And that's why we really expect that to continue to be the key driver to our sales growth.

Now historically, you've always commented that with DTC, since you're in control of the process, you can always guide a little more aggressively because you have more visibility into that channel. Is that how we should be thinking about the initial guidance for 2018 that DTC, you have the most confidence in? And then U.S. B2B, maybe you still have a lot of confidence. You accelerated sales growth from second to third quarter, that maybe you're taking a bit more of a conservative stance just because you're once removed from the process?

Yes. I certainly think that, that's still the case, Robbie. I mean, the closer we are to the end consumer, the more visibility we have, the more sales analytics. And we have -- know the number of sales reps and we can predict their curves of coming up to speed and the media spend, so that is much more predictable in terms of response rate. And it's more down to how many new people do you hire and what's the productivity of that team. On the business-to-business side, we still continue to be more cautious there, just because of the underlying dynamics of how they will end up converting their business model to POCs. And while we have become more optimistic on that over time and we've kind of shifted from being, what I would call, very conservative there to more seeing the high level of growth and putting that into guidance, we still are more cautious there than we are in the direct-to-consumer side of the business. So that guidance philosophy is the same as we have had previously.

Okay. And then just last for me, there has been some rumblings from competitors about product launches. Is there anything that you'd like to point out in terms of new product launches or anything on the horizon that you think we should be aware of? Thanks.

Yes. Thanks, Robbie I'll take that one. I mean, we -- as I think you folks know, the engine for growth for us is really having a patient-preferred product. And we've got a lot of things going on, I'll say, behind the curtain right now on the R&D pipeline to make sure that we maintain that patient preference. That's what drives our direct-to-consumer engine and has really built our brand over the last 10 years. But today, it's still a little early to unveil exactly what and when we're going to roll out the next generation. I will tell you, and I think I've said this in the past, our engineers were working on what I'll loosely call a G5 pretty much the day after we launched the G4. So we've got a robust product pipeline, but it's still far enough away that we don't want to give away anything to the competition and tip our hand.

Great, thanks a lot.

Our next question comes from Margaret Kaczor from William Blair. Please go ahead with your question.

Hey, good afternoon guys. Thanks for taking the questions. First off, as we look at the B2B domestic side, can you talk about some of the tailwinds that you've seen the growth and more specifically, your share of HME placements at this point is probably, you tell me, bit over 40%, so how much of a benefit has share been relative to market adoption rates accelerating? And as you look out into 2018, what does your guidance imply for share relative to accelerating market adoption of POCs on the market?

Yes, so I'll take that one, Margaret. I mean, our -- I guess, let's kind of take your question in order. So right now we have said in the last quarter that we're going to say that there's a conversion in process that people have talked about a trial, but sometimes people were actually in the middle of a conversion before they even realize it. I think the strength of what we saw in the third quarter is just really confirms what we said that there's a conversion in process. When you look at the reimbursement rates, I mean, they're certainly not going up. If we see some temporary relief in rural areas, it's not going to be enough to change the inherent dynamics that the delivery model just really isn't sustainable at these rates. So I'll say again, we think there's a conversion in process, that's still a long-term play. It's a 7 to 10 year play and our estimate could be a little faster, could be a little longer. There's all those dynamics out there of managing cash flow and credit that are barriers; and then to the providers, purchasing efforts. But we certainly think that we're climbing a mountain, and that really just goes to the results of the third quarter. I think, in our mind, it confirms that. Now as far as where we are, our goal, if you look at our growth goals and the guidance that Ali just talked about and those growth percentages, those percentages are a little higher than what we've seen as far as the market growth of POCs. So in the past and our expectation in the future is that we're going to grow at a higher rate than the conversion rate is, at least right now, unless it were…

And one of the follow-ups to that is this idea of maybe fleet upgrades and existing POCs that are already on to -- in the market, that are your competitor POCs. Are you seeing maybe an acceleration in those POCs being replaced with yours and maybe it doesn't necessarily have to do with patient adds accelerating, but you are seeing a benefit from that as well?

It's hard to really have visibility on that. So I mean, anything we would say there would be more anecdotal in nature. We know that certainly a portion of it is a replacement cycle of POCs. But the majority certainly is tied to these patient additions or people converting their existing patient fleet. But it's hard to say how much is really tied to a POC replacement due to the life cycle.

Okay. And then just as a second topic, in terms of your international growth, obviously, very strong results on a tough comp this quarter. So is that related to your integration of med supplies? Are you seeing some kind of tender wins or just stable underlying market growth? Thanks.

Yes. Overall, I'd say it's more stable underlying market growth. You're right and that it was a tough comp for third quarter 2016. If we look at the sales, though, it's pretty well diversified across our European customers and partners. I think certainly bringing MedSupport into Inogen helps, but I wouldn't say that's the key driver. It's -- we saw growth across the board throughout Europe, and I'm pleased that we're in a position to harvest that. And I'll say again, we're pretty happy with that result because we knew it was a tough comp going into the third quarter. So to post the almost 15% growth that we did, I think it's 14.9%, we're certainly pleased with that result.

Yes, and Margaret, just to answer directly there were no major tender offerings in the third quarter. So this wasn't tied to a specific tender that drove that increase.

Great, thanks guys.

Our next question comes from Danielle Antalffy from Leerink Partners. Please go ahead with your question.

Hey, good afternoon guys. Congrats on another very good quarter. Yeah, sure, no problem. So I was hoping to get a little bit more color on this rep productivity, how to think about the reps that are coming online here in Q3 and Q4 at the Cleveland facility, when you think they'll start to really contribute to the top line, number one? Number two, how we think about -- as your DTC business gets bigger, it is very much tied to sales rep productivity and the number of sales force hired, so just how we think about incremental operating leverage. And maybe I can ask the question this way, why didn't we see even more positive leverage given the amount of the top line beat that you had this quarter, is it pricing, what's going on that's offsetting some of that? That's my first question. Thanks

Okay, I'll take it. I think it's more like three questions, but I'll try and take them all. So let me know if I missed any of them, though but -- so first, just starting in the quarter and with the operating leverage. I'll take the last one first. We did continue to invest heavily in the third quarter. So when you look at sales expense, we are expanding both the marketing spend as well as the number of new hires. And so we are really continuing to see this as we said, 2017 is an investment year and that's really what we're executing on. It's setting ourselves up for that strong 2018. So from an operating expense leverage, as we saw this increased sales coming in, we saw it was a great opportunity for us to continue to invest in the direct-to-consumer side to create that long-term value. Now on the rep side, they still take about four to six months to come up to productivity, but they start contributing in the first couple of months. So they certainly start making some sales and then ramp to that full productivity in months four through six. So it's a relatively quick turn from when a rep is hired to when they start producing. But when you hire a rep, it's not just the rep hiring costs that you're hit with, it's also the marketing costs. So they tend to not be as productive with leads initially out of the gate, so you have to spend more in marketing for those new hires. So, all of that is factored into our guidance for 2017 and 2018 and us continuing to grow that side of the business.

Okay, that is very helpful. Oh, sorry.

And when we do look at going forward into 2018, I know you were kind of asking about operating leverage going forward, we still see 2018 as really an investment year, where we're continuing to build out that sales force. So we're not maximizing for operating leverage going into 2018. And I know we don't give specific guidance on operating leverage. The other thing I would point out is that the more you have direct-to-consumer growing faster, you'll see less operating expense leverage because you have more investment in the SG&A side, but you also have higher gross margin. Now if you see the opposite of B2B growing faster, you see a lower gross margin profile but lower operating expenses associated with it. So that certainly factors into how you see operating leverage over time and kind of key to why we don't give specific gross margin or operating leverage guidance and focus on both top line and bottom line instead.

Okay, that's fair. And then just a question on the B2B side of things, are you seeing some of these home care providers getting more aggressive overall on putting patients on POCs, so even just outside of your own product, what are your sort of seeing in the environment out there? And then also, on top of that or because of that, are you seeing any of your competitors get more aggressive on price in the B2B channel? Thanks so much.

Yes, I'll take that one, Danielle. So I think what we've seen in the third quarter is pretty consistent with what we've seen in the last four or five quarters that providers, they've expanded the use of POCs. And in some cases, that's maybe a little bit different segment of patient that they're now going to use a POC on. In others, maybe expand to other branches within their organization. I think at 30,000 feet, the message is and the results are that they're using them more and more, whether that's across different branches or a broader segment of patients. And that's why you're seeing the growth that we're seeing, and that's all part of what I'll call the market conversion. So that's, I'll say, everywhere, more patients, more branches, more locations, etcetera. What was the second part of your question?

On pricing, what you're seeing from your competitors.

So yes, I mean, as you're seeing providers purchase more, I mean, we certainly see the competitive pressures from everybody else in the market. Price tends to be the language that primarily, I'll say, the homecare providers speak. Although if you go back to what I have said in an earlier question about providers, when they're changing their business model, they're taking some risk because they're using a product or relying on a product category that they haven't relied on. So there's a little bit of risk in that. So I think there's probably more of an emphasis on product quality than there are on products that, frankly, are commodities, like tanks and the run-of-the-mill delivery products. So I think that's where our quality has really helped us to stay in that driver seat. As you recall from the last conference call that we had, we announced that we expanded our warranty from three to five years in the business-to-business channel domestically. And that was for two reasons. One, we've got confidence in our own product quality, so we thought that we could do that at minimal expense on our side of the equation. But two, on the other side of the equation, it offers tremendous value and takes risk out of their side of that conversion. So while people do come after you with price, I think when you've got a model conversion, there's other things than price at play. And our quality is a big part of our -- and reliability is a big part of our success.

Got it, thanks so much.

Our next question comes from Mike Matson from Needham & Company. Please go ahead with your question.

Yeah, hi, thanks for taking my questions. I guess, just had a couple on the reimbursement situation. So first, with regard to around 2019, what are your thoughts around the timing of that, do you still expect it to happen during 2019, I guess? And then on this Bill that was introduced, do you view that as positive, negative or neutral for Inogen given that, on the one hand, it would help your rental business; on the other hand, if you relieve some of the strain on these rural HMEs, they might be less likely to switch to POCs, which could hurt the B2B business maybe? So I don't know, just your thoughts on those things.

Yes, so starting with competitive biddings around 2019. We really don't have any additional visibility, so we've been waiting to hear more from CMS. There's been no indications that they're going to delay the round. But it is getting to the point where we need to see them begin the bidding process within the next month or two, otherwise I think it will be tough for them to do an accelerated bidding process. So we certainly are watching that closely to see what comes out there and if there will be any changes to the bidding process, but we don't have any visibility on what those may be at this point. On the side -- on the rural rate relief side, this legislation, we do view as a potential actual benefit to us not just on the rental side of the business, but in the rural areas, it is more expensive to deliver oxygen versus the competitive bid areas. So we do think that now the rates are basically the same with the competitive bid areas and the non-competitive bid areas in oxygen because of the adjustments that was done at the beginning of 2017. And so giving a little bit of additional reimbursement to these providers, while that does take away some of the urgency to replace tanks, it doesn't change the underlying dynamics that POCs are a better business model and that, that will save them money over time. So we think that, that additional little bit of money may actually help them make the conversion in their business models because we know that this is an industry that is chronically undercapitalized. So we actually see that as a positive because it doesn't change the fundamental underlying dynamic that tanks are challenged in profitability over time.

Okay, thanks. And then the B2B, you've talked about how that growth is being driven by more HME purchases both from -- directly from Inogen and through your private label partner. So I was just curious, if you had any feel for how much of those units are being actually used for rental with patients that have insurance, primarily Medicare, I guess, or cash sales because I know that HMEs are kind of hungry for more cash sales. So I guess, it would be DTC but through one of the HMEs. So I mean, maybe you're not able to determine that, but I was just curious, I mean, when you see them buying these things, do you believe that they are really converting or is it just cash sales?

Yes, so we believe that the vast majority of those sales are being used for rentals. We've got our own group of online resellers that we manage pretty closely. And the private label partner, they've done just a terrific job of going out and calling on HMEs. They've got finance programs to help the HMEs through this process and educational programs. But our private label partner does not have access to online resales. That's outside of their territory rights. So at least the sales that go through the private label partner, those products cannot be sold online for cash. A provider could sell them in a one-on-one transaction in their showroom for cash, but that's a pretty small amount. So given the private label partners' territory, given our own dialogue with the customers that we have direct sales and relationships with, we're confident that the vast majority of those sales are going into the rental channel.

Okay, thanks, yes. I was kind of getting at the end of the cash sale in the -- setting. So you don't think that's a big part of what's happening right now? Is that...

Providers love to do that when they can, but that's really not how they've built their business and where they have expertise. I mean, their whole go-to-market strategy is based on calling on physicians and driving referrals their way. So while certainly, if they have a walk-in patient that's interested in a cash sale, they're going to avail themselves of that opportunity to make that sale, that's really small potatoes in the big picture in the mix here.

Okay, understand. And then my final question, just seems like a couple of your competitors now -- admittedly, I don't think the products are as good as what you're offering, but they are kind of pushing this idea of connectivity and cloud software, etcetera. And I'd imagine, your ResMed is probably going that direction at some point too. So I know you've gotten this question before but one, can you give us some confidence that you can -- you're headed in that direction as well, just given being a smaller player maybe even ResMed or Respironics, for example, do you feel like you've got the engineering and software capability in-house to set something like that up? That's all I have, thanks.

Yes, so let me start my answer with revisiting product pipeline again. Remember, I said we had a robust product pipeline, but we weren't at a point today that we wanted to try out all the intricacies of that. I can assure you that we have got people that are quite capable of helping us launch a wireless program, if that's really what is going to have value for the providers. But I think if you go back to what's really important when you're converting your model; number one, is you got to have the right reliability and the right price. So that's what we've focused on. We've continued to focus on patient preference as well and patients don't really have a burning need for connectivity right now. So again, I think these wireless launches that you're seeing or discussions that people are having on the competitive front, I still think it's a solution that's a little ahead of its time. I think that reliability and the right price are paramount to that. And you've also got to look at -- you don't have the compliance requirements today in oxygen that you do have in some other products like CPAP. So while ResMed has a very robust wireless program for CPAP and it really helps with the problem of compliance, it's -- in oxygen, it becomes the solution without a current problem. Now do I think that long-term there will be a place for wireless and connectivity in oxygen, I absolutely do. I've said that in the past, and that's why we have engineers that are working on that. We've also built our products so that it would be relatively easy. They're, what I'll call, connectivity ready, if you will. So we're not ignoring that. We just don't think it's the most important thing right now. And I guess, at the risk of sounding a little arrogant, I think the results that we have kind of showed some substance to what I've said as far as what people are really valuing.

Alright, thank you.

Our next question comes from Michael Martin from Michael J. Martin & Associates. Please go ahead with your question.

Congratulations and thanks for taking my call. I was wondering if you could tell us a bit about your corporate culture, how you attract, train, and motivate people, how you share the wealth, what's your turnovers like, if you can give us some color on that, I'd appreciate it?

Yes, let me take that one. So we try and run our company according to five core values and I'll tell you what they are right now, and you can digest that. We have these core values posted in every conference room, it's pretty much in every person's desk. It's what we call out in meetings, it's what we use when we make tough decisions, and I'll tell you what I found is when you have a really tough decision to make, if you refer back to our core values, usually, the decision is pretty obvious. So, the first one is self-responsibility. We look for people to drive themselves. We look for them to monitor their own results and to manage themselves. That's number one. And that's the type of person that we look for, somebody that embraces that responsibility. Number two is open communication. We're pretty transparent with our employees and what our plans are and our results and our expectations. We expect them to be transparent with each other. If there's issues, we confront them directly. We don't sweep them under the rug. And direct and open communication is valued in our organization even if the risk of maybe turning somebody off, that's better than ignoring an issue or sweeping it under the rug. Number three is continuous improvement. We expect every area of our business to improve year-over-year. We have productivity goals in every department. We have productivity goals with each individual. Staying the same is unacceptable in our organization. You've got to be a fast mover and you've got to have a passion for getting better day in and day out and year in and year out. Number four is integrity. We honor commitments with each other, we own up to our mistakes, and our motto is we do the right thing; we don't do the easy thing. And lastly, service. We are a patient-focused business, so we look for every opportunity to meet and exceed not only patient expectations, but all of our customer expectations, internal and external. So with those five things, that's what we measure new hires against, that's what we preach in our company, and that's kind of the template that we use to model behavior and -- for the right behaviors that we're looking for as far as young leaders that we're going to move up in the company. As far as some of your other questions, we don't specifically disclose our turnover. We have said in the past, though, since we've said it, I'll say it again our turnover in our direct-to-consumer sales are similar with what you would see in a typical call center. So there's nothing that's out of the ordinary there. But other than that, that's -- those aren't numbers that we disclose.

Okay, and what kind of financial incentives do you use throughout the organization?

Yes, we've got people that -- everybody can participate in our bonus program, there's different levels, but we try and share the wealth. And that's outlined in our prospectus as far as what those parameters are. But everybody is able to share in our financial results, if they're great, everybody is able to share in that and if they're not, then everybody is going to take a hit together.

That's great, appreciate your help.

Sure, thank you.

And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Thank you. I'd like to close with a few comments on our strategy for 2018. We expect to seek ways to accelerate the adoption of portable oxygen concentrators worldwide. We're working with providers worldwide to convert to a non-delivery model, increasing our direct-to-consumer investments in the United States, and pursuing product registration in new and emerging markets. At the same time, we're still focused on developing innovative oxygen concentrators to stay at the forefront of patient preference and reducing costs to manufacture our product as we gain additional scale. We're excited about the future of oxygen therapy industry, where we see portable oxygen concentrators becoming the standard of care for ambulatory patients in the next 7 to 10 years. And we thank you for your interest in Inogen.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.