Inogen leans on rental revenues

GOLETA, Calif. - Inogen's rental revenues saved the day in a second quarter where its direct-to-consumer and business-to-business sales struggled due to the COVID-19 pandemic.

The company reported that rental revenues increased 16.9% to $6.1 million in the second quarter ended June 30, 2020, compared to the same period in 2019, in part due to a conscious decision to redirect more of its marketing leads to rental setups.

“Overall, that business did show improvements, and that's good sign,” said Ali Bauerlein, CFO. “We are hesitant just around a potential second wave and any impact on our consumer-facing business, (so) the rental business is a good opportunity for us. These are existing patients converting from tanks to POCs, so it's a great way, in light of COVID-19 challenges, to build that base. While rentals are not as impactful on revenue right out of the gate, they provide a stable revenue stream over time with that patient pool that we can build on.”

Inogen reported domestic business-to-business sales decreased 27.3% to $21.6 million in the second quarter, and direct-to-consumer sales decreased 30.9% to $30.2 million in the quarter.

The company's rental revenues also carried an impressive 53% gross margin in the second quarter of 2020 compared to 30.4% in the same period in 2019, an improvement that was due, in part, to reduced freight costs and a modest reimbursement increase associated with the public health emergency.

“Above 50% is great gross margin,” Bauerlein said. “Our direct-to-consumer gross margin is still our highest gross margin business that we have because of the cash paid there. Long term, we haven't put out a specific rental gross margin target, but we have been actively working on improving gross margin in that business.”

Due to the decreases in DTC and B2B sales, Inogen has been “more careful” about hiring, says Scott Wilkinson, president and CEO.

“We will continue to hire through the rest of the year; we don't want to go down in headcount on the sales force,” he said. “But we're being more selective right now.”

Inogen also cut its marketing spend in the second quarter.

“It is about a 38% decline in marketing spend year-over-year and we saw about a 31% reduction in direct-to-consumer sales,” Bauerlein said. “So we were able to get more leverage on our media spend, despite additional leads going to the rental side of the business. That's something we're proud of - we were able to reduce our cost per lead on a year-over-year basis.”

While it's creating a difficult environment for DTC and B2B sales in the short term, Inogen believes the pandemic will strengthen the case for POCs in the long term.

“There is even more value in a non-delivery and non-touch model,” Wilkinson said. “Once the urgency of today passes, it will help with our conversion rate in the future. Some also theorize that, because this is a respiratory ailment and there could be long-term impacts from COVID-19, more people may need therapy. It's too early to say if that is going to happen, but it could make the pool bigger.”