Scott Wilkinson - Chief Executive Officer Ali Bauerlein - Chief Financial Officer & Co-Founder Matt Bacso - Investor Relations Manager

Good morning, everyone, and welcome to the Inogen, 2019 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please also note, today’s event is being recorded. And at this time, I would 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 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 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 and strategy for 2019 and beyond, expectations related to sales headcount, hiring expectations and strategy, HME strategy and expectations, rental strategy changes and the timing and impact of such changes, expectations for all revenue channels, marketing expectations, the rollout of Inogen One G5, expectations regarding the impact of Chinese tariffs, expectations regarding competitive bidding, our expectations on the benefits in market, opportunities of the Tidal Assist® Ventilator or TAV, the potential of TAV to disrupt the non-invasive ventilator market and expand to treat COPD patients, our expectation on TVA sales, our expectation to integrate TAV technology into our oxygen concentrators, financial guidance for 2019, including the impact of the expected new Aera 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 and Exchange Commission. Actual results may vary and we disclaim any obligation to update these forward-looking statements, except as may be required by law. We have posted historical financial statements in our second quarter investor presentation and a separate presentation on the new Aera acquisition in the Investor Relations section of the company’s website. Please refer to these files for a 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 the 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 Inogen’s core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business to 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 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 $1 million threshold for the 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 2018, primarily due to increased sales representative productivity, partially offset by an approximate 17% reduction in sales representative headcount 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 were 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 headcount 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 2019. 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 onboarding. We have also made key changes to management personnel to drive better productivity, lower attrition and improved sales predictability. However,…

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 2019 guidance. As Scott noted, total revenue for the second quarter of 2019 was $101.1 million, representing 3.9% growth over the second quarter of 2018. Turning the 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 2019 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 G5 launch and increased tariffs. 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 costs. As for operating expense, total operating expense increased to $38.1 million in the second quarter of 2019 or 37.7% of revenue versus $34.4 million or 35.4% of revenue in the second quarter of 2018. Research and development expense decreased to $1.5 million in the second quarter of 2019, compared to $1.8 million reported in the second quarter of 2018, primarily due to decreased personnel-related expenses. Sales and marketing expense increased to $27.8 million in the second quarter of 2019 versus $23 million in the comparative period in 2018, primarily due to increased advertising expenditures, partially offset by decreased personnel-related expenses. In the second quarter of 2019 we spent $11.6 million in advertising as compared to $6.3…

[Operator Instructions]. Our first question today comes from Danielle Antalffy from SVB Leerink. Please go ahead with your question.

Hey, good morning everyone. Thanks so much for taking the question. Scott and Ali, I just wanted to start with a sort of higher level question. I guess what gives you – you know it feels like initially this was an issue in the B2B domestic side of things with the major HME provider slowing purchasing. Now it feels like you’re getting ahead a little bit on all sides and I guess what the first question is, what gives you the confidence that it’s not something deeper, more underlying in market dynamics. You know I get that POC concentration or penetration sorry is increasing, but you do have another competitor out there. Is it increasing to the extent that we thought, is there something that has to do with the pricing dynamic, and if you can give us a little bit of color about what gives you confidence that the underlying growth is still there, number one, number two and that Inogen is still in a winning position, because I do know you guys price it at a premium to the competition. So just a little color on your confidence behind the underlying growth here?

Yeah, thanks Danielle. Its Scott, I’ll take that one. So let’s kind of peel back the onion in a couple of different areas for a second. First I’ll start with you know 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 HCPCS codes, you know the market is still way below the full penetration point. We have confidence in that and we also validate 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’re trying to get you know a POC. So I think when we assess, is the market saturated or fully penetrated, you know those numbers indicate that we still have opportunity not only now, but into the future and that’s why we are you know 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 the D2C sales, you know we’ve talked about in the last call or so that some of the reps that we hired in 2018, we struggle to get them up the curve and we continued to work with them to a point where you know in the second quarter a lot of them worked themselves one way or another out of the company. Some of them left at their own accord, because they didn’t, they weren’t successful, they didn’t make the money they extracted because they didn’t hit their quotas. You know and some after you know…

Daniele, I know you also asked about you know pricing and competition. We really aren’t seeing anything dramatically different in the market in those areas. You know pricing, well our business-to-business customers are always price sensitive. We aren’t seeing any new dynamic from a competitive front, so we believe we are continuing to maintain our market leadership position there and that those are not the dynamics impacting our changes and assumptions going forward.

Got it, okay that’s helpful, thank you guys. And then I know you’re not giving 2020 guidance, but Scott you mention you thought double digit growth in return would be doable to double digit growth. I guess can I ask, could these fees issues that you guys, headwinds that you’re facing seem like it’s hard to predict, how quickly they’ll lift, and you know for example when the major HME provider will start purchasing again. And so I guess what are you looking at there that gives you the confidence? Are you having conversations with the large HME provider that makes you think they’ll start purchasing again in 2020? Can you give a little bit more color to the drivers of that comment there? Thanks so much guys.

Yeah, the large national that we’ve talked about in the past, we don’t have them in our growth plans or returning to purchase, so you know if they were to do that, that would be up-side. We continue to think that their struggles are more longer term to address their restructuring hurdles. The other home care companies out there, you know they face some of those similar hurdles. They just haven’t you know decided to stop purchases, they are up and down and you know you see one is up; another is down any given quarter. We don’t expect and 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 see POCs as the future, but they do convey the hurdles, you know so you have to balance that, that they are trying to convert their business, they are trying to serve patient demand, but they have some contract. You know so we’ll help them to 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 drive more of our own destiny and while to some extent we are little dependent on them, I mean they’re a pretty sizeable 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 headcount now and projecting were that would be next year, you know that gives us the confidence to make a statement that we feel we can return to double digit growth in 2020.

Yeah 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, we’re up 19.6%. So obviously we are dealing with a comp issue that gets, that eases a bit in the back-half of this year and is really, we’re through that headwind going into 2020. So that 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 B2C side, we also should be lapping the tougher comps there and that should help 2020 as well. We also expect as we said, you know 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 Kaczor from William Blair. Please go ahead with your question. Hey Ma’am, is it possible your line is one mute?

Yeah, can you guys hear me?

Yeah.

Perfect! Sorry about that. Good morning and thanks for taking the questions. First off, I was hoping to maybe drive a little bit more at Danielle second question, which kind of talk to that double digit growth rate that you guys had reference for 2020. So I understand that the underlying business right now is growing 19%. There’s still a few moving pieces obviously between the sales reps, you know returning back to productivity and what you reference with this kind of continued attrition maybe through year end, relative to where you guys finished 2018 with. So maybe you can talk through kind of the cadence of that as we move forward beyond just this year, and then are you guys looking at new products or new geographies or major drivers as you go into 2020 and beyond.

Yes, sure. So from the side of looking at this double digit expected growth going into 2020, we aren’t assuming any material contribution from new country. So our focus still will be in the U.S. and Europe as our primary market. Obviously we do plan to continue to look for opportunities outside of their, but that really isn’t contemplated in the numbers that we discussed here and that doesn’t include any contribution in new areas like China. From new products, we are assuming a relatively small contribution associated with the New Aera product portfolio which we are very excited to 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 does start to contribute in 2020. So on top of that just in terms of cadence, you know obviously we’re not given specific 2020 guidance today. It is you know very early for us to even comment on 2020. So you know we would expect the underlying seasonality trends to be similar to what we’ve seen in prior years, with 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 trend.

Okay, and then in terms of the New Aera acquisition that you guys had reference, and there is a few products I think in that category that have been out there. So as you looked at evaluating that market, which asset was the right asset to target, you know why then is it something that’s easier to incorporate into your device on your POC, and that gives you that competitive advantage in the space, and then if can give us a sense of the commercial model, you know if you are going to sell at B2C, and then your term, do you guys have a sense of ASP or gross margin contributions for that. And then just to tag one more in there, you know how do you expect traditional NIV players to respond to kind of you guys entering the market with kind of your unique combination? Thanks.

Yeah, I mean we think that the New Aera product and technology you know fits perfectly with not only our oxygen product portfolio that we have today, but also is very complimentary with our go-to-market strategy. You know the great thing about this product is that we liked about it, it’s not only the efficacy, its 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, you know success formula for our POCs. So it’s a product that we think that we can leverage our sales force, as well as our marketing spend, because many of the current leads that we generate right now would be Canada; it’s for the New Aera product. So we can get some leverage there. It’s an area where we have expertise in respiratory and oxygen therapy services, so for our first acquisition, you know it fits close to home. It also allows us to get into adjacent markets, downstream in the non-invasive ventilation for really the sicker patients that need ventilation in addition to oxygen therapy, but also upstream where we think that we can impact a portion of some of the basic COPD patients that have breathlessness, where really 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 it in, you know obviously I just mentioned direct to consumer we think it fits nicely there, it will also be a perfect fit for our physician sales force,…

Alright, thank you guys.

Our next question comes from JP McKim from Piper Jaffray. Please go ahead with your question.

Hi, good morning and thanks for taking my question. Could you just help me get to just kind of down Q3 guidance? I’m just playing around with the model, and I – it’s hard for me to get there. Is international the only segment that’s going to grow?

So we don’t give specific guidance there, but we did say on the call that we expect both domestic B2B and D2C to be down year-over-year. Rental will also have a headwind that’s just associated with a strong Q3 and the change in both the rates that were effective January 1, and the change in bad debt accounting that was effective January 1. So those will all be headwinds to grow for us in Q3.

Okay, and then I kind of wanted to ask one. I think like of the DTC side, like I get there is more attrition and maybe the productivity ramp didn’t quickly ramp as you thought. But the fact that internet resellers are down as well makes me think like there seemed 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 you can talk about lead growth, whether that’s still growing or anything that can give us a little more confident that its, you know that the leads are there, given that the resellers and you guys are seeing the same sort of problem on closing business.

You know on the internet reseller side, as I mentioned in my comments that they didn’t see the seasonality benefit that we traditionally see. Now you have to remember, the internet resellers are, they are not investing for growth, they are typically you know privately owned companies that focus generally more on bottom line than growth, you know that’s their model. We can comment on what we’ve seen, you know because we don’t have visibility exactly to what their leads are, you know we obviously see their sales patterns and talk to them about their struggles and things and they didn’t see that up-tick. You know it was kind of a – if you look at it from a pure weather standpoint in the spring, it was a crummy; you know spring with colder than it usually is and we usually see that up-tick coincide with when the weather warms up. This was a little stranger weather pattern than what we’ve seen in the past, and you know we saw it consistently across all of them that they have a similar pattern that they didn’t bump up. Now, you know their purchases now are pretty consistent, meeting our expectations of what we would expect right now. If we look at our own you know metrics that we’ve got, which is obviously we have a lot more visibility of our own than theirs. I go back to you know the inherent productivity gains that we were able to drive with our season reps; you know 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 is a disappointment, but it’s one that you know we have to deal with and we have you know kind of dealt with that through the second quarter. Again, generating you know many thousands, tens of thousands of leads every month give us the confidence that you know there’s many, many patients out there, many more patients dragging around a tank that would like to be carrying a POC. And it’s our job to execute the sales and growth plan, so that we can harvest about opportunity, that’s what we’ll do going forward. But obviously if we you know 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 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 onto that point on the internet resellers, you know first of all I do want to say that for the internet resellers are the sub-section of the channel of the domestic B2B. Q2 was their toughest comp year-over-year. Q2 last year was a very strong number for them as we also saw in our business as well, so I want to point out that that was the very tough comp. I also want to point out that the resellers as a percent of our domestic B2B channel are less than a third of the total. So this is a smaller segment versus the traditional HME purchases that is the majority, vast majority of the US B2B segment.

Thank you.

Our next question comes from Robbie Marcus of JPMorgan. Please go ahead with your question.

Thanks for the question. I was hoping you could just touch on you know your view. You said that you are still getting high quality leads, the reps just aren’t able to act on them. What gives you confidence that they are high quality leads? So you know 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 will be able to act on them differently than the ones hired in 2018.

Yeah, it’s a good question Robbie. So again, you know 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 really across the seasoned reps, as well as some of the newer reps that we were able to improve their performance and they you know remained with the company. Our real issue has been with a lot of the newer reps that we hired in 2018, where we frankly just you know in some cases probably didn’t hire the right people, we’ve tried and redoubled our efforts to retrain them and make them successful, but it just comes down to you know some of them were not successful, and they have you know transitioned out of the company, either of their own accord or you know they didn’t meet our performance expectations and we eventually took some steps to make changes. But when you measure it against our – the same reps that were here year-over-year, we are actually showing good productivity improvement.

Yeah, and just to elaborate on that a bit, when we look at the leads, they are randomly distributed to the reps, so it’s not like reps have specific territories and that the older reps would have you know maybe better performing lead quality source. The reps for each individual rep will work leads from a variety of sources and from a variety or portions of the country. So because of that random nature, you can really look at how the seasoned rep pool is performing for you know 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 performance and lead quality.

Okay. Just to follow up on that, so what will change going forward and I guess maybe what is it about the reps that are seasoned and performing well that’s different than the reps that you hired last year and what are you going to change going forward. I guess what gives you the confidence that things will change and the new reps will be more productive.

You know so we’ve changed you know our hiring criteria, our screening mechanisms to make sure that the people that we bring in are going to be, as good a match as possible, have a high probability of success. Of course you know it’s never a guarantee that 100% of everybody you hire is going to work out. But certainly we had a higher percentage that didn’t work out, than we’ve had in the past, so that’s hurt us and we’ve changed that intake criteria, we’ve changed our training program, we’ve 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, you know we have hired a couple of classes and measuring those classes that we hired against the you know areas where we had issues; we’re seeing success in those classes already. Going forward again, we are also going to hire in all three of our locations. So another key thing that we you know kind of found is that, those larger classes that we hired in the one single side, people don’t get as much one-on-one time through training on boarding, so we’re going to hire smaller classes and we’ll give them that more one-on-one time and 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, Ali we’ve seen operating margins decline in 2019. What gets it back to positive improvements, and is 2020 going to be another investment year or is that when we can start to see it tick back up? Thanks a lot.

Yeah 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 and guidance is associated with the costs for the New Aera transaction that wasn’t in previous guidance. Really what we need to do is execute on our B2C plan to improve their overall sales and marketing efficiencies, that is what’s needed in order for us to show improving operating margin. We have been showing great leverage on R&D and G&A, but sales and marketing is really the focus area to improve that, particularly going into 2020.

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

Yes, thanks for taking my question. I guess I just wanted to start with the DTC sales force. So I guess, I know there’s been some turnover, but I would imagine your numbers are probably still up significantly year-over-year, so let me know number one if that’s right? And then two, you know why not try to fix the issues with the reps that are still there, that haven’t turned over or left before you go on start adding more reps, because I’d imagine, you could still get some increased productivity which would drive growth. It just seems like you’re maybe putting the cart before the horse here by already 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 side. So the sales representative 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 us, it was the loss of capacity on a year-over-year basis and obviously we’re able to offset that with improved productivity of both. On a smaller side that actual improvement of the seasoned reps and then the non-seasoned coming up a curve as we have you know fewer people in the early stages of that productivity curve, but headcount was down significantly from a sales representative headcount side, on a year-over-year basis in Q2 and as part of the challenge going into Q3 and Q4, particularly since we hired significantly in Q3 of last year, that headwind to D2C sales growth will get bigger in Q3 because of that reduction in headcount on a year-over-year basis.

And on your second part of your question Mike, you know why wouldn’t we focus on the reps that are struggling as opposed to going back and hiring reps before you fix the issues, that’s actually the process that we’ve worked through. You know 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 – peeling back the onion again you know uncovered some deficiencies through our training process, our support process. Those are things that you can fix and lest say apply it to the reps that are already in place. But there’s also frankly issues with our screening process and we concluded and some reps also concluded themselves that they just weren’t 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 than we were, to make those reps you know more successful. So we’ve corrected those fundamental issues; as I said, applied all of those changes to a couple hiring classes. We are seeing successful on those classes and that’s why you know we’re resuming hiring. We’ve actually started this week and we have new classes in this weekend in three of our location.

Okay, I guess I’m just struggling with the math here, because my understanding was that you added about 70% to your rep count in the second half of last year, and now you’re saying not even lapping that yet, and you’re saying your down 17% for where you were in the first half. So that implies almost like a 100% reduction in your – sorry, like a 50% reduction in your reps or something?

Yeah, no the 70% increase that we saw was throughout all of our 2018 in our rep base. So we went from 236 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% was throughout 2018. When we look at our hiring grounds, we did hire throughout the year in 2018, so those increase were significant in those periods. Obviously we did see a bump up in Q3 in our headcount trend, but there was significant hiring in the first half of 2018 as well.

Okay, 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 year.

So we do have standard attrition in the business as well. So this is an inside call center that already you know you are having to deal with attrition level to get back to your base business. So that’s built into the numbers as well.

Alright, and then just you know where your stock is down considerably, do you have a 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.

Yeah, I mean 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. You know New Aera as we mentioned is you know the first acquisition. Obviously in the short term we’re going to focus on integrating that business and harvesting about opportunity, but no, that’s really not our plan right now, it’s to go do a buy back. It’s to continue to look for those unique disruptive opportunities where we can leverage our go-to-market approach 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 you made some comments about it, but I guess how big of a part of your business do you want that to become and how much are you really going to try to promote that part of the business. I mean is that something that you know could be 20%, 25% of your revenue at some point. I know it will take some time to get there, but...

Yeah, 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. It wasn’t meant to be a you know large shift in our total strategy. So that combined with our focus on having a separate rental intake team that would just focus on patients who are interested in coming on rental services and separate that out from the sales team, we think that that will drive increased rentals over time. Now it takes some time to build up that rental intake team. We have continued 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 that's why we expect, you know really going into 2020 is when you start, will 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 that the primary focus. So while we do expect rental revenue to increase, grow into 20% to 25% of revenue, it is not realistic in the near or medium term.

Yeah, let me add to that. And Mike, so you know 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 you know the traditional HME community. If they are able to continue to grow, make our product readily available to patients, it's probably obvious that you know more patients are going to want to access the product using a rental or a Medicare insurance benefit than can pay cash. If they can help us there, you know then we probably don't push rental quite as hard. But if they can't, you know it's a way to make sure that patients aren’t blocked from the market to access our product. And so there is kind of 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, you know 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, we are able to utilize more of those leads that we pay for, but that’s kind of how it fits in our business.

Okay, that's helpful. Thank you.

And our next question comes from Matthew Mishan from KeyBanc. Please go ahead with your question.

Thank you for squeezing me in guys. You’ve done a lot of work on pricing and elasticity of demand. I mean just 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?

Yeah, so we are in Q2 lapping the pricing trial. So Q3 should be a clean quarter for us on a D2C pricing side versus what we saw in the prior year where we changed pricing in the middle of the second quarter of last year. We both continue to look at pricing over time. We’ll do another pricing trial at some point in time. But so far pricing has not been a major concern on the D2C side, because you know competitive products have not been priced at a discount to what we are currently offering.

And ladies and gentlemen, we’ve 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. While this has been a challenging period for Inogen, we are committed to our mission of improving the freedom and independence of oxygen therapy patients and we are focused on increasing our sales force, enhancing sales force productivity, and helping our home care partners overcome their restructuring challenges. I also want to reiterate, we are very excited about the New Aera acquisition as we believe it allows us to maintain out 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 will end today’s conference call. We thank you for joining. You may now disconnect your lines.