Good day and welcome to the Inogen Fourth Quarter 2019 Financial Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Bacso with Investor Relations. 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 fourth 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 2020, hiring expectations and strategy, expectations regarding international sales and tender activity, HME strategy and expectations, our rental strategy, expectations for all revenue channels, marketing expectations, manufacturing and cost of Inogen One G5, expectations regarding competitive bidding, our expectation on TAV rollout and TAV sales and financial guidance for 2020. The forward-looking statements in this call are based on information currently available to us as of today’s date. 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 investor presentation 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 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 and make operating decisions. Reconciliations for 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 fourth quarter 2019 conference call. Before moving into a review of our quarter results, I would like to take a moment to provide some high-level context around our view of the market, our recent performance and our vision for the future. We believe we are a leader in POC technology with our product offerings and market for our technology remains underpenetrated. However, following multiple years of high revenue growth. Our recent performance has exhibited a slowdown in revenue growth as well as some headwinds to profitability. In 2019, we launched the best in class Inogen One G5, acquired new areas to expand our technology and product portfolio and improve the productivity of our direct-to-consumer salesforce. However, we also recognize we had multiple challenges in 2019 primarily due to a slowdown of orders from a national provider. Volatility in business-to-business orders, direct-to-consumer salesforce reductions and component availability shortages. We are working relentlessly to optimize our business with a focus on improving margins and meeting our target growth objectives. We've made progress on some fronts. However, we still expect the home medical equipment providers to continue to have lumpy buying patterns overtime given their restructuring and financing constraints. We are assessing our organization from both a commercial and operational perspective in order to identify how to best maintain an attractive revenue growth profile while also delivering leverage into our business model. Already we have identified several opportunities in which to do so. And we are now in the process of evaluating each. We are committed to our mission to drive freedom and independence for oxygen therapy patients through our innovative products and services. While we have our challenges, we believe we can create long-term shareholder value by focusing on increasing patient and…

Thanks Scott and good afternoon everyone. During my prepared remarks, I will review our fourth quarter of 2019 financial performance and then provide more details on our 2020 guidance. As Scott noted, total revenue for the fourth quarter of 2019 with $78.9 million representing a decline of 8.8% from the fourth quarter of 2018. Turning to gross margin for the fourth quarter of 2019, total gross margin was 43% compared to 50.4% in the fourth quarter of 2018. Our sales gross margin was 43% in the fourth quarter of 2019 versus 51.4% in the fourth quarter of 2018. The decrease in sales gross margin was primarily due to higher cost per unit associated with certain manufacturing efficiencies in the period that contributed to higher labor overhead expenses and product sales mix with increased sales of the Inogen One G5, which was still at a higher cost than the Inogen One G3 during the period. As mentioned previously, we expect the Inogen One G5 to be our lowest cost product manufacturer when we reached full scale production, which we expect as early as the third quarter of 2020. Rental gross margin increased to 43.3% in the fourth quarter of 2019 versus 36.2% in the fourth quarter of 2018, primarily due to lower depreciation and service expense. As for operating expense, total operating expense increased to 39.2 million in the fourth quarter of 2019 versus 38.8 million in the fourth quarter of 2018 primarily due to New Aera cost of 1.9 million intangible amortization. $800,000 of expense for the change in the fair value of the earnout liability and $100,000 of acquisition related costs. These costs were partially offset by decreased personnel related expenses. Research and development expense increased to 3.6 million in the fourth quarter of 2019 compared to 1.7 million…

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question will come from Margaret Kaczor with William Blair. Please go ahead.

Hey, good afternoon guys. Thanks for taking the question. First one for me -- just a little bit of follow-up on the G5, so it sounds like maybe you've been able to get back to that full supply on that one component, a little bit faster than it seemed like when we met with you in January. Is that fair? And then can you give us a sense of what the feedback or impact in the fields has been given that lack of supply, and again, relative to what you guys have seen or expect in January?

Yeah, Margaret, this is Scott. I'll take that one. I’d say your assessment is one target that since we discussed our results at JP Morgan and our expectations and the issues around G5. We were able to fill in that back order maybe a little more quickly than we expected, but not much. We thought it would certainly have an impact in the first quarter. It did. I was hopeful that we would have it resolved at that time by the end of February. It was probably more like mid-February, so slightly ahead, but we certainly did have an impact particularly in the month of January until we really got the parts flowing and then kind of dug out of the hole. So, today we're back to shipping on time. But as we said, there's kind of some damage done in January with that back order that is going to hurt our results for the quarter. As far as the providers as well as patients, really happy with the adoption of the product, I mean, there's, that's kind of a good news in this message that it's a preferred product. We really think we have a winner. As I said in my remarks, it strengthens our competitive position. But there are a lot of providers that they took the approach that I'm going to wait for my order. They don't place new orders when you're already back ordered and that's why we'll have some impact in the first quarter as well on the volume front. We tried to reflect that in everything that we said from the JP Morgan conference to-date. So we're really pleased with the acceptance. I think we always thought this would be a product that the providers would like with a higher flow rate, it serves a wider range of patients. So you've got one product is going to serve more patients to avoid those switch out costs from product-to-product. And of course, in this fixed reimbursement environment that providers are really focused on reducing their costs. But I think it's been a real pleasant surprise for us how much the patients have adopted and liked the product as well, even to the tune, if you recall that we have charged a small premium for this product on the retail front so that people literally put their money where their mouth is and they're willing to pay a little bit more for the product on the patient's side.

Got it and so its fair to say, I guess at this point that you guys feel comfortable with the visibility going forward especially now with the relaunch?

On supply chain, yeah I mean we've continued to caution people and again, I said it in my remarks. Well I certainly don't expect to be into a back order or a stock out situation. The provider channel will continue to be lumpy. I mean it has been forever and I don't think the best going to change so we're going to have our usual lumpiness. Don't see that going away, but as far as kind of backed more predictability and certainly no stock outs, yes.

Okay. And then just one more follow-up, Scott. I think at the front end of the call you talked about several opportunities. You've identified the drive template, top line growth as well as that bottom line growth. And so can you guys give us any kind of examples of that or give us a sense of what you find is attractive for both of those? And I don't know if it's been single digit top line growth, double digit, higher, kind of that same topic for margins. Maybe kind of where long term margins could end up. Thanks.

Let me kind of say as the front end, Margaret, we're looking at both top end and bottom end because we've got to drive both. We've got, as I said a market that's still vastly under penetrated, so we see a lot of opportunity in front of us. But a lot of that opportunity has come through the provider community and they're really struggling with the transition. This restructure exercise for them is a tough one, while we've had considerable success over the last few years, we've had the starts and stops that I've mentioned. And so we're looking for ways that we can capitalize on this opportunity, I'll say in a more steady manner rather than the lumpiness. Now when I talked about top line and bottom line, I mean, on the bottom line, we've got to attack the cost of G5, one of the good news is in the earlier adoption, as we said, when we have the volume up the cost should come down when we cost it out. It should be a lower total cost product than our other products in the portfolio. But today it is not. It's my expectation with the more rapid adoption of that product that we can bring that in sooner rather than later but certainly attacking manufacturing costs and cards. And then on the top line, I guess at a high level I'll say, we've mentioned in the past we still very successfully drive tens of thousands of leads every month through our advertising campaign. We're looking at multiple ways where we can use more of the leads than we currently use. We've paid for them, they're part of our advertising spend. And so that actually if we can optimize or utilize more of those leads, that's going to help us on both the top and the bottom line because I don't need to pay more for that, I just get more revenue out of that pile.

The next question comes from Danielle Antalffy with SVB Leerink. Please go ahead.

Hey, good afternoon guys. Thanks so much for taking the question. I guess my first question is on the new EBITDA guidance and how much of that is, and sorry if I missed this in the prepared remarks, but how much of that is tied to the issues that have already occurred versus what you see on a go forward basis? I guess how much of that reduction is already behind us and then I have one follow up.

Yeah, I'll take that one, Danielle. So on the EBITDA side, as we said we expect a loss in Q1 so that also will translate into a lower EBITDA than what we've seen in our historical base and we expect that to be more similar to Q4 in terms of EBITDA levels in Q1 of 2020. So as a result that is a significant driver of the lower EBITDA for the full year 2020 expectation. The other drivers when we look at EBITDA, there is naturally just like with revenue, a little bit of seasonality in our business with Q2 and Q3 tending to be higher than Q1 and Q4. We still expect that trend this year on the top line, but we do expect EBITDA to be slightly more backend loaded in the second half versus the first half due to the improvements on the gross margin side expected with the G5 cost improvement really starting in the third quarter. So that also will contribute to a little bit more EBITDA leverage in the back half versus the first half.

Okay got it. And then it's just a longer term as we look at the business and obviously the noninvasive ventilation pieces of business that's higher ASP. So that should help be a positive leverage driver, but given what we've learned over the last, call it, 12 to 18 months on the D2C side of things and spend required to drive the sales, et cetera. And also as this eventually shifts to a more B2B heavy mix, like how do we think about the long-term EBIT margin potential for this set of business? Has anything changed in your view? I know you've never given long-term guidance, but I mean if you could help frame for us a long-term positive leverage levers, that would be helpful. Thanks so much.

Yeah, sure. So we're not today also going to give long-term EBITDA guidance, but we do expect to be able to improve that over time when we look at the drivers of the compressed margin, the real opportunities are on the cost side, as Scott said, on lowering the cost of goods sold, improving the manufacturing of labor and overhead costs as well as productivity improvements. We have continued to see improvements on that as well as basically flat costs per lead year-over-year in our marketing spend. So that is also important looking at 2020. We also continue to plan on getting G&A leverage, long-term, as you said, the TAV product should help improve both our operating margins as well as our gross margin. And we really are looking at those business opportunities to improve our revenue growth and our operating leverage holistically. But you know, Scott's example of looking at direct-to-consumer leads and better utilization, that’s one of many ideas that we have to expand our operating margin and as we get closer to executing on those specific initiatives, we will comment on them.

Let me just add to that, at the risk of being a little redundant. We have said in the past, as you drive more leads, you drive more volume, obviously that advertising costs goes up. And so I think we've done a pretty good job of improving our salesforce productivity over time to help offset that cost increase. It doesn't offset at 100%, but it certainly pushes that needle in the other direction, for an offset. And then really the key to really show and leverage here is using more of those leads. Now that's where you mentioned TAV, I wanted to say, you know, TAV is a part of that in the long term, even though this year is kind of a learning and figure out our sales process and who's the right patient for this and we'll run the appropriate pricing trials to figure out what the optimum price is. You know, when we've got this at scale and rolled out to everybody, those leads should be coming right from the current leads that we're driving. So while this year we've been pretty conservative in what our expectations are in TAV, we said let's learn and do this right. If you look at where we're going long term and how we drive leverage, as I said, we've got to use more of those leads and TAV will be a part of that.

The next question comes from Mike Matson with Needham and Company. Please go ahead.

Hi. Thanks for taking my questions. I guess just starting with the gross margin, the manufacturing inefficiencies that you experienced. Was that related to the component shortage or was that a separate issue? And is that related to just the scale up of the G5 or something else?

It's really both. So it's both the combination of the higher costs for the G5 versus the G3 and with G5 being a larger mix than it had been in prior quarters, as well as the inefficiencies on the manufacturing side that drove higher cost on the labor overhead, because clearly we didn't scale down the team associated with the component shortages and we also had expedited freight, those types of items. So all of that was part of those challenges and that does continue into Q1 of 2020 as a headwind on the gross margin side. And a major contributor just like it was in Q4 to the loss, we expect a loss in Q1 of 2020, again, associated primarily with that lower gross margin.

Okay, thanks. And then I guess I'm a little confused about the pricing in the DTC channel in the fourth quarter because I think you said pricing was down but you also said you were getting a premium on the G5, so how do I reconcile those things?

Sure. I'll take that one. So when we look at our year-over-year pricing in the DTC channel specifically, it was a down about a little over 1% compared to the fourth quarter of 2018. So it is a small decline in price but we do also have a premium for the G5. Now the G5 has a $100 premium, but other factors offset that in the quarter to bring down that average revenue per unit to little over 1% down.

Okay, thanks. And then just a couple on ad spending. So I mean it was down, which I guess is a good thing in a way, but I was wondering if any of that was just simply due to the fact that you've had limited supply in the quarter and then in addition how do we think about the advertising, the impact of the elections this year on your advertising spending?

I'll also take that one. So when we look at our advertising spend, as we said, it was about 9.5 million in a quarter versus 10.8 million in Q4 of 2018. So as a percent of D2C revenue, it was down compared to last year, which is a good thing. When we look at the real drivers, our number of leads that we generated were down in the period associated with the smaller salesforce. We do scale the number of leads based on the size of the salesforce, but we actually had more leads per rep than we had in Q4 of 2018. So, we actually had a good number there and as I said, cost per lead and also improved direct-to-consumer close rate as well on a year-over-year basis. So those were positive indicators. Obviously, going into 2020 and looking at marketing spend, that is a key item for us to continue to keep cost per lead relatively flat compared to 2019. And we do that through shifting our strategy on the media side. We don't want to get into the specifics there because we don't want to share specific information with our competitors around our strategy, but we do think that we have some good strategies in place to keep media costs in line with our expectations.

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

Good afternoon and thank you for taking the questions. I just want to start-off with -- what are the largest DMEs indicating to you on purchasing POCs over the next year? Are they pulling back from the category due to like NCB? Or is it just becoming more competitive with some of the other companies that are going after this market?

Yeah, I'll take that one, Matt and thanks for your question. Certainly, there's a lot of apprehension out there right now with competitive bidding, right? I mean, you've got unknown on where the rates are going to go. And when I say the rates, I mean the rates for all the items that were bid out. So their fears aren't just oxygen. NID is in the mix for the first time. There's some apprehension about where rates might go there as well as all the other items. So then you've got the other issue of, some people don't know if they're going to be in the game. Now I think if we are pragmatic about it, I think the big players are going to stay on the game. They may lose an area here and there. They always have lost an area. But if they want that area, they'll buy back in, they'll scoop up a small provider. So they're not going to be pushed out of the program. But some of the smaller people might be, you've got some small mom and pops, they lose, they’re out. So if you don't know, if you're in or out and you don't know what the rates are going to be, I will say you are very careful about spending right now. It's kind of like in tough economic times people don't go buy a new car. They may need a new car, they may want a new car, but they'll drive their older car for a little while until things get better or there's more certainty. It's the same thing with the home care guys. You know, in times like this where competitive bidding has a lot of uncertainty out there, they're going to try and squeeze the assets they have…

Now that definitely does. And then just shifting it over to direct-to-consumer. When do you annualize the lower salesforce or the salesforce reductions? And when you do annualize it, what is a more sustainable rate of growth for the salesforce from there?

I can take that one. So when you look at our headcount reductions, the largest headcount reduction that we had was in the second quarter of 2019. So once we get through the second quarter, that's really when you annualize those headcount issues or headcount reductions that we saw. Because of that, we do expect still to be down year-over-year in the first quarter of 2020 in that direct-to-consumer channel, returning to growth in the second quarter of 2020, and then getting to more higher, more sustainable growth after that. That should follow more closely with our hiring and how we can expand the salesforce as well as a little bit of improvement on productivity. We haven't put out a specific target there, but you should see our strongest growth in Q3 and Q4 compared to Q1 and Q2.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Scott Wilkinson for any closing remarks.

Thank you. Although 2019 was a difficult year for us, we're committed to optimizing our business in 2020 and beyond. We maintain our belief that the need and patient preference for our best in class portable oxygen concentrators remain strong. Before concluding, I would also like to thank our Inogen employees to whom we remain committed and for all of their hard work to improve the lives of oxygen therapy patients every day. Thank you for your time today.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.