Inogen, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison with Q1 2018. Financial amounts below are in U.S. dollars and millions unless noted. Inogen develops, manufactures, sells and rents portable oxygen concentrators. It reported one operating segment.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $90.2 | $79.1 | +14.1% |
| Gross profit / margin | $44.4 / 49.2% | $37.7 / 47.7% | Margin +1.5 percentage points |
| Operating income / margin | $4.9 / 5.4% | $8.7 / 11.0% | Down 44.2% |
| Net income / margin | $5.3 / 5.9% | $10.8 / 13.6% | Down 50.7% |
| Diluted EPS | $0.24 | $0.48 | Down 50.0% |
| Adjusted EBITDA (non-GAAP) | $11.1 | $15.5 | Down 28.4% |
| Operating cash flow | $(1.8) | $12.2 | Declined $14.1 |
Sales revenue rose 15.3% to $84.8 million; rental revenue declined 1.5% to $5.4 million. The company sold approximately 50,400 systems, up 11.0%. Domestic direct-to-consumer sales increased 35.9% to $39.0 million and international business-to-business sales increased 17.1% to $19.8 million. Domestic business-to-business sales fell 7.0% to $26.1 million.
Cash and cash equivalents were $190.2 million and marketable securities were $49.0 million at quarter-end, a combined $239.2 million. Net working capital was $278.0 million. Total liabilities were $66.3 million, including $7.0 million of operating lease liabilities recognized following lease-accounting adoption. The filing does not report funded debt. Management said available liquidity and expected cash generation should meet projected operating and investing requirements for at least 12 months.
Operating cash use reflected working-capital movements, including higher accounts receivable and inventory, and the adoption of lease accounting. Cash and cash equivalents declined $6.4 million during the quarter. Investing cash use was $6.9 million, including net purchases of marketable securities; financing cash provided was $2.4 million.
Material changes and management commentary
- Revenue growth was led by direct-to-consumer and international sales, partly offset by lower domestic business-to-business sales. A national provider purchasing through the private-label partner generated $0.7 million of revenue in Q1 2019, compared with $9.3 million a year earlier.
- Sales and marketing expense increased 56.3% to $28.2 million, including media and advertising spend of $10.2 million versus $4.8 million. Management cited higher lead costs and slower-than-target productivity among newer sales representatives. Total operating expenses rose 36.3% to $39.6 million.
- Gross margin improved, supported by a higher mix of domestic direct-to-consumer sales, lower unit costs and better rental economics. Sales gross margin was 50.4% versus 49.8%; rental gross margin was 30.8% versus 20.0%.
- Net income was also affected by a higher effective tax rate: 12.7% versus a tax benefit rate of 11.1% in Q1 2018, primarily reflecting substantially lower excess tax benefits from stock-based compensation.
- The company launched the Inogen One G5 in its direct-to-consumer channel in April 2019 and expected a business-to-business launch by year-end. It anticipated modest rental revenue growth in 2019 and higher rental gross margin, while stating that greater rental additions may not materially benefit revenue until later periods. No specific full-year revenue or earnings guidance was provided.
Outlook, risks and unusual items
- Reimbursement: Management cited a 3.9% Medicare reimbursement reduction effective January 1, 2019. The next competitive bidding round could further reduce rates; the company estimated that combined E1390 and E1392 rates could decline approximately 15% under the described methodology, with E1392 potentially falling about 42%. Actual future pricing remained uncertain.
- Rental base: Rental patients fell 11.5% year over year to approximately 26,200. Capped-rental patients rose to 19.5% of patients on service from 16.9%; suppliers generally continue providing service after the 36 reimbursed months, often without further equipment reimbursement.
- Customer and supplier exposure: The top 10 customers accounted for 34.8% of total revenue. One business-to-business customer had $18.6 million in gross receivables and extended payment terms; credit insurance covered up to $20 million, subject to a deductible and retention. Three vendors represented 43.6% of raw-material purchases, and certain key components have single-source suppliers.
- Commitments: Outstanding vendor purchase orders were approximately $61 million at quarter-end. The filing also lists $1.5 million of specified non-cancelable contractual obligations, separate from lease obligations.
- Litigation: Two securities class-action complaints filed in March 2019 allege, among other things, misleading market-size statements and deceptive sales practices. The company denied the allegations and said it intended to defend itself. Damages sought were unspecified; the filing does not provide a clear estimate of potential loss.
- Other notable items: Inogen adopted lease accounting on January 1, 2019, recognizing approximately $6.4 million of operating lease assets and liabilities; the adoption had no material reported effect on results. Management reported disclosure controls were effective as of March 31, 2019 and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether sales-force productivity and advertising efficiency improve enough to support growth without continued disproportionate increases in sales and marketing costs.
- Monitor domestic business-to-business demand, including private-label partner volumes and the concentration and collectability of customer receivables.
- Verify the timing and economics of Medicare competitive bidding, reimbursement changes, and any prior-authorization requirements affecting oxygen rentals.
- Assess rental patient additions, capped-patient mix, revenue per patient and the service costs associated with capped rentals.
- Follow G5 launch execution, manufacturing costs, product acceptance and the anticipated business-to-business rollout.
- Review developments in the securities litigation, the $61 million of purchase orders, and the company’s working-capital needs given negative Q1 operating cash flow.