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Inogen Inc (NASDAQ:INGN)
Q1 2019 Earnings Call
May. 7, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Inogen 2019 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Matt Bacso, Investor Relations Manager. Please go ahead.

Matt Bacso -- Investor Relations Manager

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 first quarter of 2019. This earnings release in Inogen's and 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, sales personnel strategy changes, rental strategy changes and the timing of an impact of such changes, hiring expectations, expectations for all sales channels, including international tender activity, marketing expectations, the rollout of Inogen One G5, expectations regarding the impact of Chinese tariffs, competitive bidding, HME strategy and expectations and financial guidance for 2019. 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 maybe required by law. We have posted historical financial statements in our first quarter investor -- and our first quarter investor presentation in the Investor Relations section of the Company's website. Please refer to these files for more detailed information.

During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with US 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 between US 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?

Scott Wilkinson -- President, Chief Executive Officer and Director

Thanks, Matt. Good afternoon and thank you for joining our first quarter 2019 conference call.

Looking at the first quarter of 2019, we generated total revenue of $90.2 million, reflecting growth of 14.1% over the first quarter of 2018. Direct-to-consumer sales of $39 million in the first quarter of 2019 increased 35.9% over the first quarter of 2018, primarily due to increased sales representative headcount and associated consumer advertising. However, the sales reps we hired in the second half of 2018 on average took longer to come up to productivity curve than our historical target and were not at their full potential in the first quarter.

Moving forward, we plan to slow down the addition of new sales representative hires and focus on improving the productivity of our sales team. Over the last two quarters, we have also piloted a separate rental team that will focus exclusively on new rental additions to drive overall sales productivity and we plan to roll this out across our entire group in the coming quarters. As we've continued to grow our sales staff and the associated number of required leads has grown, we have seen the cost per generated lead trend higher than historical averages. We believe we will see increased productivity of our sales reps throughout 2019, which should reduce our overall cost per sale despite expected increased marketing spend.

First quarter 2019 domestic business-to-business sales of $26.1 million decreased 7% from the first quarter of 2018, primarily due to a decline in sales to our private label partner. These sales declined to our partner due to one large national homecare provider who significantly reduced orders in the first quarter of 2019 as compared to the same period in 2018. Specifically, this provider that we discussed in our last earnings call accounted for revenue of $700,000 in the first quarter of 2019, down from $9.3 million in the first quarter of 2018. Excluding this provider, we continue to see strong demand from traditional HME customers. We expect domestic business-to-business sales in the remainder of 2019 to be negatively impacted by significantly lower order activity from this provider, which slowed their purchases beginning in September of 2018.

Due to the ongoing restructure challenges some HME provider space, we continue to look for ways to partner with providers to drive POC adoption. We do plan to slightly change our rental intake criteria to accept more new rental patient additions to increase access to patients who otherwise could not obtain a POC from their current homecare provider. Since renal reimbursement, revenue is recognized monthly compared to the mostly immediate revenue recognition of direct-to-consumer sales, we don't expect a meaningful rental revenue benefit from increasing new rental setups until next year and beyond. While we expect rental revenue to take time to ramp, we believe we can improve our close rate and lead usage by slightly altering our intake criteria for rental patients. Historically, our remaining billable months threshold was high, which limited the number of patients we accepted through Medicare. Going forward, we plan to lower this threshold to improve sales representative productivity and lead usage. In changing our rental intake criteria, our guidance assumes an adverse impact on near-term sales revenue in the US, but we believe it will lead to increased conversion rates and increased POC adoption.

First quarter of 2019 rental revenue of $5.4 million decreased 1.5% compared to the first quarter of 2018, primarily due to an 11.5% decrease of patients on service, partially offset by higher rental revenue per patient. We had approximately 26,200 patients on service as of the end of the first quarter of 2019. And while we expect it will take some time to change the intake criteria and scale the separate rental team, we do expect the rental patient count to start increasing in the back half of 2019.

First quarter of 2019 international business-to-business sales were strong at $19.8 million, representing as reported growth of 17.1% and 22.3% on a constant currency basis. Despite no meaningful tender activity in the quarter, underlying European demand trends remained healthy. We still expect European tenders in 2019, although we do not include any revenue associated with these potential tenders in guidance. We also saw strong growth in Canada, Australia and South America, although these markets are much smaller than the European market.

Moving to product development, we are proud to say that we officially launched the Inogen One G5 in our direct-to-consumer channel in April. At only 4.7 pounds and 6 flow settings, the Inogen One G5 represents a step forward in innovation as we believe it is the highest oxygen output per pound of weight of any portable auction concentrator currently available in the United States. With 1,260 milliliters of oxygen production capacity per minute and Inogen's standard intelligent delivery technology, the Inogen One G5 was designed to meet the clinical needs of approximately 95% of the ambulatory long-term oxygen therapy patients who contact us. Other patient preferred features include a long battery life of up to 13 hours with the optional double battery, access to Inogen Connect, a large LCD screen and very quiet operation.

Given these favorable product features and limited manufacturing capacity at launch, we initially priced the Inogen One G5 at a premium relative to the Inogen One G3 and G4 systems. We plan to reduce retail pricing to parity with the other Inogen One products, once manufacturing can support the volume demand. Once volume is increased and pricing has been optimized, we still expect the Inogen One G5 to obsolete the Inogen One G3 over the intermediate term in all sales channels. We expect to rollout the Inogen One G5 to the domestic business-to-business channel over the summer and then to the international business-to-business channel by the end of the year, pending standard regulatory clearances in each market.

On the topic of competitive bidding Round 2021, we expect the bidding process to begin in July 2019. It has been announced that oxygen equipment and supplies will be suffered from CPAP equipment and supplies and respiratory assist devices, which we had expected. All of the other previously announced changes to the competitive bidding program appear to be incorporated, including lead item pricing, surety bond requirements and setting the bid amounts at the maximum bid amount instead of the median bid amount. The program has been structured to have the auction lead item, the HCPCS code E1390, which is the billing code for stationary oxygen. While the other oxygen codes are established by applying a factor by the ratio of that code to E1390 based on the 2015 Medicare fee schedule. However, due to the lead item pricing methodology being dependent on the 2015 standard Medicare fee schedule, portable add-on code reimbursement rates would be reduced even if E1390 reimbursement rates do not change.

We do plan on bidding in 129 out of the 130 regions covered under the program, although we cannot discuss our pricing strategy publicly. We don't expect winners or new pricing to be announced until 2020 based on the timing of these announcements in prior rounds. As a reminder, in the last round of competitive bidding, we won 103 of the 130 regions. So we have access to most regions covered under the Medicare competitive bidding program. Lastly, as a reminder, excluding annual inflation and budget-neutrality adjustments, the 2021 competitive bidding round pricing is expected to be in effect for three years.

Looking at 2019, we are reducing full year 2019 total revenue guidance to $405 million to $415 million down from $430 million to $440 million, representing growth of 13.1% to 15.9% versus 2018 full year results. This revenue range takes into account the difficult growth comparisons we face in the domestic business-to-business channel, the restructuring challenges some HME providers are facing, the decreased planned direct-to-consumer hiring as well as our plan to increase rental setups. We plan to increase rentals in a balanced fashion to not alienate the great relationships we've already created with our homecare provider customers across the United States. For those providers who are adopting Inogen technology and converting their businesses, we plan to continue to support them to help fulfill that mission and we will continue to drive patient awareness. We believe that the market for POCs remains underpenetrated and we continue to see significant demand for our product, given the number of leads we are able to generate on a monthly basis.

To prevent us from being beholden to the providers' ability to adopt POCs, we plan to take full advantage of our unique vertically integrated business model to increase access of our technology through our rental platform. We believe that patient demand is still very high for portable oxygen concentrators and it is our mission to fill this need through our homecare provider partners or from Inogen through a purchase or an insurance rental.

With that, I will now turn the call over to our CFO, Ali Bauerlein. Ali?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Thanks, Scott, and good afternoon, everyone. During my prepared remarks, I will review our first quarter of 2019 financial performance and then provide more details on our updated 2019 guidance. As Scott noted, total revenue for the first quarter of 2019 was $90.2 million, representing 14.1% growth over the first quarter of 2018.

Turning to gross margin. For the first quarter of 2019, total gross margin was 49.2% compared to 47.7% in the first quarter of 2018. Our sales gross margin was 50.4% in the first quarter of 2019 versus 49.8% in the first quarter of 2018. The sales gross margin increase was primarily due to a favorable mix shift toward higher gross margin direct-to-consumer sales versus business-to-business sales and a reduction in cost of goods sold per unit compared to Q1 2018. The favorable mix was partially offset by lower average selling prices in both the international business-to-business and direct-to-consumer channels, while domestic business-to-business average selling prices were flat. Rental gross margin was 30.8% in the first quarter of 2019 versus 20% in the first quarter of 2018. The increase in rental gross margin was primarily due to increased rental revenue per patient on service and lower depreciation expense.

As for operating expense, total operating expense increased to $39.6 million in the first quarter of 2019 or 43.8% of revenue versus $29 million or 36.7% of revenue in the first quarter of 2018. Research and development expense increased to $1.7 million in the first quarter of 2019 compared to $1.4 million recorded in the first quarter of 2018, primarily due to increased product development expenses. Sales and marketing expense increased to $28.2 million in the first quarter of 2019 versus $18 million in the comparative period in 2018, primarily due to increased advertising expenditures and increased personnel related expenses primarily at our Cleveland facility. In the first quarter of 2019, we spent $10.2 million in advertising as compared to $4.8 million in Q1 2018. We saw improved efficiency on a sequential basis in advertising expenditures as a percent of direct-to-consumer sales at 26.2% in Q1 2019 versus 29.4% in Q4 2018.

General and administrative expense increased to $9.7 million in the first quarter of 2019 versus $9.6 million in the first quarter of 2018, primarily due to increased personnel related expenses and partially offset by decreased bad debt expense resulting from the adoption of ASU 2018-19 that requires reclassification of rental bad debt expense to be charged to rental revenue.

Operating income for the first quarter of 2019 was $4.9 million, which represented a 5.4% return on revenue. Operating income declined 44.2% in the first quarter of 2019 versus the first quarter of 2018, where operating income was $8.7 million or an 11% return on revenue. The reduction in first quarter 2019 operating margin compared to first quarter of 2018 was primarily due to higher sales and marketing expense.

In the first quarter of 2019, we reported an income tax expense of $0.8 million compared to $1.1 million income tax benefit in the first quarter of 2018. Our income tax expense in the first quarter of 2019 included a $0.6 million decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation compared to a $3.3 million decrease in the first quarter of 2018. Excluding the stock-based compensation benefit, our non-GAAP effective tax rate was 23.1% in the first quarter of 2019 versus 22.5% in the first quarter of 2018. In the first quarter of 2019, we reported GAAP net income of $5.3 million compared to GAAP net income of $10.8 million in the first quarter of 2018. Earnings per diluted common share was $0.24 in the first quarter of 2019 versus $0.48 in the first quarter of 2018.

Now, turning to guidance, as Scott mentioned, we are reducing full year 2019 total revenue guidance to $405 million to $415 million, down from $430 million to $440 million, representing growth of 13.1% to 15.9% versus 2018 full year results. We still expect direct-to-consumer sales to be our fastest growing channel. We expect we will be slowing the pace of hiring in 2019 and primarily focusing on sales representative productivity. We continue to expect international business-to-business sales to have a solid growth rate, but now expect domestic business-to-business sales to have a slightly negative growth rate. Given the difficult growth comparisons we faced in the domestic business-to-business channel, the restructuring challenges of some providers and our rental plan, we expect negative growth in the domestic business-to-business channel in Q2 2019 compared to Q2 2018 with modest growth in the back half of 2019 compared to the back half of 2018. Despite planned increased net new rental additions, we continue to expect rental revenue to grow modestly in 2019.

We are reducing our full year 2019 GAAP net income guidance range to $36 million to $38 million, down from $40 million to $44 million compared to 2018 GAAP net income of $51.8 million. This decrease in GAAP net income guidance range is primarily due to the estimated reduction in revenue and a decrease in estimated benefit in provision for income taxes related to excess tax benefits recognized from stock-based compensation from $4 million to $1 million due to our current stock price and fewer expected option exercises in 2019. When excluding the benefit from an estimated $1 million decrease in provision for income taxes expected in 2019 from stock-based compensation deductions, we still expect a non-GAAP effective tax rate of approximately 24% in 2019.

Assumed in guidance is the tariffs associated with imported Chinese materials and products stay at a cost of 10% for full year 2019. If these tariffs are increased from 10% to 25%, we estimate the additional cost to meet approximately $400,000 per quarter at the revenue guidance range listed. Going forward, we plan to continue to monitor any new tariff proposals and economic policy changes and take the necessary steps to protect our financial interest and reduce our standard material cost risks.

We are also reducing our full year 2019 operating income guidance range to $42 million to $44 million, down from $46 million to $50 million, representing growth of 10.8% to 16.1% versus 2018 full year results. And we're also reducing our full year 2019 adjusted EBITDA guidance range to $66 million to $68 million, down from $67 million to $71 million, representing growth of 7.7% to 11% versus 2018 full year results. We still expect net positive cash flow in 2019, with no additional capital required to meet our current operating plan in-spite of the additional investment in rental assets. However, we expect lower cash flow than in 2019 as we increase rental investments and expect lower cash provided by stock option exercises.

With that, Scott and I will be happy to take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Margaret Kaczor of William Blair. Please go ahead.

Margaret Kaczor -- William Blair -- Analyst

Hey. Good afternoon, guys. Thanks for taking the question. Maybe to start, you can walk us through why you think now is the right time to change that rental intake criteria you described earlier, as it seems that underlying growth outside of that one large provider was still up over 30% based on our rough math. It seems relatively good, so maybe walk us through that. And then, if not for that change in intake criteria, would that growth of over 30% continue or is something else changed in the market as you guys look at it?

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah, Margaret, it's a good question. This is Scott. I'll take that one. And you're right. We -- if you peel back the purchases from the national provider that slowed down their purchases, the rest of the domestic B2B channel is growing nicely in the mid 30s and we're very pleased with that. But when we assess the overall situation, there is a couple things that really go into this. One, you do have the slowdown of the larger player and they do represent a fair piece of the market. Now, while the rest of the channel is growing nicely, they just aren't able to completely absorb all the demand that the other provider that was taking. So there is an access issue and frankly, I'll call it an opportunity, if you want to look at it that way, that's certainly the way we're looking at it.

Now, it's also coupled that with some other comments that I made that we've increased our advertising spend, but we just aren't satisfied yet with the productivity of our sales team. So we've got some opportunities there to improve that productivity. We already are paying for literally tens of thousands of leads every month. And when you're focused primarily on retail sales, you're leaving a lot of money on that three by not taking in more rentals. So when we couple our goals to improve our sales team productivity, also to address the issues in the market regarding access, the result of that in our assessment was us relaxing our intake criteria and taking on some more rentals, satisfied both of those issues or, I guess, all three of those issues, if you will. So that's how we've landed at that point of we're going to accept some more rentals, drive productivity in the sales team, harvest more of the ways that we have already paid for, we don't have to increase our marketing spend to have access to those leads, we just have to use them and then create better access for the patients, which is consistent with our mission and vision.

Margaret Kaczor -- William Blair -- Analyst

Okay. So just to follow up on that intake criteria then, it sounds like the changes you're making are maybe more minor, obviously, can go a lot more aggressive on that, but what are the steps you're looking for to push this out into the field? Are you looking at improvements in close rates, what other metrics are you looking at? And how should we look at that long-term profitability within rental, given the lower gross margin profile of rentals today?

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. It's another good question, Margaret. And you are right on target in that this is a subtle shift, it's not a wholesale change in what I would call it a dramatic shift over to rentals, but we are going to relax the criteria upfront. When we talk about that criteria, we've got a minimum number of billable months remaining for a rental patient or an insurance patient that we require to consider bringing them on service and deploying a POC. So we can relax that criteria and it creates more -- a bigger portion of the leads that come in every month become rental candidates. So that's what we'll be doing, but it's not a massive shift, it is a subtle change.

Now in order to execute that, I had mentioned that we have piloted this rental intake team, they are much more efficient going forward because you drive more of the volume through a narrower group of people that are experts in this area as opposed to our wholesale sales team that they may do a rental or two here and there a month and they're just not as proficient at it. So the results of these trials have been very positive to improve our efficiency, but it will take, I'll say, the rest of this year to kind of roll that out and we will scale as we go, but it will be a slow shift, but a steady shift and that should drive efficiency.

Now, you mentioned close rates. Yes, it should, A, improve our close rates with some of the training, rescripting, focusing on leveraging the benefits of the G5 with the sales team, more training for the management that is responsible to help bring the reps up to speed, all of that should improve our close rate. Another thing that we have piloted that is a best practice in other industries is we've actually started letting the better performing reps and better performing reps generally have higher close rates, they can earn more leads. So once you get to a base level of leads then everybody gets the higher close rate people as a higher performer, we can give you more leads. And so if you give a bias of more leads to the higher to the closers, your de facto close rate ultimately improves. So it becomes even better utilization of the marketing spend in the leads.

Now, you mentioned the rental gross margin. Yeah. We've made some great progress in the past year there. We've got a lot of opportunities to continue to improve that and we do need to do that. You got to remember that right now when you look at the gross margin associated with the entire rental pool, there's a pretty substantial number of folks that are in the cap in there that you subsidize. So out of the gate as we start to take on a higher level of newer patients, none of them were in the cap to start. Now, ultimately, they'll hit the cap, but it certainly gives us some runway to continue to focus on driving up our utilization of assets, reducing denials further, optimizing our business and improving that gross margin, which is something that is at the top of our list of things that we need to do if we're going to do more rentals in the future.

Ali, do you have anything to add on that?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

I think mostly you covered it from a rental gross margin side. I do want to note, though, just with the sequential decline in rental gross margin, there were a few drivers of that associated with additional rate cut that was effective January 1st, a 3.9%, but we also had an accounting change associated with the new lease standards, where we needed to move bad debt expense from the G&A expense up to a top line expense. So that does impact gross margin, but it doesn't impact the net margin of the rental business. We also tend to see higher servicing costs in the first quarter of the year versus other quarters of the year. The winter tends to have a higher death rate in the pool as well, you also have insurance changes in that period. So we are very focused on improving the gross margin over time. But as Scott said, what's really great about the rental side is that you don't need to spend more on sales and marketing to drive the interest or the leads associated with that, you can leverage the leads that you're already getting. So on an incremental cost basis, there's very little additional operating expenses, it's just using the operating expenses you already have to drive incremental revenue in the business. But obviously, the rental gross margin is lower than our overall corporate gross margin. We do have multiple initiatives in place to drive improvements in that over time and we do expect to see sequential increases in rental gross margin throughout 2019.

Margaret Kaczor -- William Blair -- Analyst

Just to kind of wrap it up, I guess, if your rental intake criteria changes are going to be minor, it's going to take a little bit of time to input those into your numbers. You guys took a pretty big hit to guidance assuming you will see that impact on the HME side that's adverse. So walk us through why that is the right assumption versus something above or below that, and maybe very bluntly, how confident are you in overall guidance at this point? Thanks.

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Yeah. So I want to highlight that the change in guidance is not just associated with B2B, it's also on the direct-to-consumer side. So remember, when we're talking about this rental shifts, if you have a patient that previously would have bought for cash that you're now -- they're now going to be able to use the rental benefits, you're going to recognize that revenue monthly over time versus the mostly immediate revenue recognition that you have on the D2C side. So that's certainly a component that whatever portion of the sales that you would have driven on these incremental changes that you do lose on the direct-to-consumer immediate revenue recognition. We also have a slowing of the D2C hiring that is a part of that lowering of the guidance range and that's really associated with lower -- slower hiring and focusing on that productivity improvements and making sure that we get the return on the investments that we made last year. We do expect on the B2B side that there is some impact associated with our change in rental intake criteria, but we believe the major challenges for the HME still overall are just restructuring their business. Obviously, this is a large change to guidance and -- but we do still feel good that these numbers that we can achieve these revised numbers and that we have taken into account what we're currently seeing from the market forces across the entire business.

Operator

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

Christian Moore -- JPMorgan -- Analyst

Hi. This is actually Christian on from Rob -- for Robbie. Thanks for taking the questions. One to start out maybe on the DTC side, I think that was more of the unknown issue going into the quarter, it sounds like the incremental return on hires isn't as high as you viewed it toward the end of 2018 when you had a large spur in hiring. Is that just with the market getting too saturated? And how can you drive better rep productivity from here? Just any color on your views of productivity of what changed and that bolus of hiring at the end of 2018 to now leading to the revision in guidance and lower outlook for hiring.

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. Let me backup to probably the first half of '18 is kind of a benchmark. We started to hire at a heavier rate than historical in the first half of the year and things, I'll say, met to even exceeded our expectations. As we continued and actually cranked up hiring to an even higher rate as we went into the third quarter, that's where things didn't meet our expectations. And as I said in the prepared remarks, when we look at productivity of reps, they no longer were matching what we have seen from a historical productivity standpoint. We got a little bit ahead of ourselves on management. I think we've mentioned that on the previous call that we had to shore up our management, but we found that we still need to invest in further training on management, so that there is even better resource for the new reps that we have. If you look at most of the incremental hiring is in our Cleveland facility. That's where we have space, so that's why most of the hiring is there. But the folks are not surrounded by five-year veteran reps there, it's a relatively new facility. So we need to make an even bigger investment in the training and support of those new reps to drive that productivity. As I said, yeah, it's fallen short of our expectations in the second half.

We were a little trumped at going into the first quarter because the first quarter is always seasonally slow, so you kind of want to assess things and you're trying to assess it through what's traditionally a seasonally slow period, but we've come to the conclusion in analyzing rates and looking at the classes and historical curves that we're just not where we should be and where we are convinced that we can be. So it's going to take some time to do that. As you can imagine when you're hiring at a high rate, that does take a lot of your resources just to execute that. We think where we are right now and some of the opportunities that we see, we should redeploy those resources into investing in the team that we have rather than adding more folks to that pool that could potentially continue to be below our expectations from a productivity standpoint. So that's the plan, is we're going to reinvest our resources in the training and other programs. I don't want to share every initiative that we have, as you guys know, there's -- there are some other folks in the space that are also trialing direct-to-consumer initiatives, so we're not going to trot out every detail of every improvement idea or things that we're trialing. But sufficed to say, we see an opportunity to dramatically improve our efficiency going forward if we invest in that way and that's the decision that we made.

Christian Moore -- JPMorgan -- Analyst

Got it. So I guess just taking the fact that DTC is seasonally slow in the first quarter, I still think the number that you guys put up in the quarter is relatively in line with expectations and in line with -- for the first quarters in the past and that the guidance reduction actually implies DTC to decelerate over the course of the year. So what's changing between the results in 1Q and the adjustment to guidance going forward that has gotten incrementally worse?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Yeah. So we're not expecting in guidance that there is a significant slowdown versus the growth rates that we saw in Q1 in the D2C channel. So -- however, we also aren't assuming in guidance that there is a significant acceleration of those growth rates, which is what the models were showing previously. So that's really the difference is that we -- if -- since we are focusing on productivity and not focusing on rep addition, we are instead kind of leveling off that growth rate for this year.

Christian Moore -- JPMorgan -- Analyst

Got it. Thank you.

Operator

Our next question comes from Danielle Antalffy of SVB Leerink. Please go ahead.

Danielle Antalffy -- SVB Leerink -- Analyst

Hey. Good afternoon, guys. Thanks so much for taking the question. Just a follow-up on the D2C business. I'm just curious, if you could give a little bit more color on how this works from a rep productivity perspective and the lease because the reps are at a call center and they're taking incoming calls, like how do you ensure from D2C advertising spend perspective that the leads that are coming in are good leads, like how do you target advertising, I guess, is the first question. And the second question is, where did rep productivity start to take a step down because they weren't able to deliver what could have been good leads, was it that the leads coming in were not good? Can you give a little bit more color there? And I have one follow up.

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. So the way we distribute leads are we've got a computer algorithm that does that. And we measure the close rates and the cost per sale of all of the different lead sources and we have an internal marketing team that's always trying to optimize that. And part of that optimization is you have to keep things fresh. I mean, you can't advertise, run the same ad on the same channel or on the same print periodical over and over, you've got to mix it up and keep it fresh and you're always doing that by measuring your close rates, your results and making the necessary changes. So the team is always doing that. You're always looking for some new outlets to keep things fresh as well. So we've kind of targeted in the past that we'll spend 10% of our media mix, we've said let's try and put that into new ideas or new things to test them out to try and keep things fresh. Again, that's driven by our marketing team.

Now, the leads, they're distributed by our CRM system, so everybody should get the base amount of leads. Everybody gets a mixture of leads from all the sources. So we don't give all the leads from one source to a certain group of reps, that's kind of randomly distributed. Some leads close better than others, some leads cost more than others, the -- where the rubber really meets the road is the cost per sale. As you can imagine, it might be money well spent to pay more for a lead if it has a significantly higher close rate. So we always measure that in terms of a cost per sale. As I mentioned earlier, we are giving the higher performing reps an opportunity to kind of earn more leads. So if you're a higher closer, we can give you more leads than the number of base leads and that should ultimately, when you look at mix, it should enhance our close rate, allow us to better use our media spend.

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Yeah. And just to add on to that, Danielle, before your second question. When we look at productivity, we look at both seasoned reps and reps still coming up the productivity curve. So if it was broad-based, where you saw productivity challenges across the whole sales team, that's when you would assume that there was some either challenge with the leads or competitive forces or something like that. But when it is primarily associated with just where the reps are in their productivity curve coming up the -- to speed, then it's not usually going to be a lead issue or a market issue, it's going to be just training and getting those sales reps performing at the expected close rates.

Danielle Antalffy -- SVB Leerink -- Analyst

Okay, got it. And then my second question is around the B2B business. And curious what you're seeing as B2B becomes a bigger piece of the business, as they ramp adoption. Are they redeploying -- just trying to get a sense of the longer-term market opportunity there, are they redeploying devices back into the system once the patient expires? How do we think about how many patients one device can serve that's purchased by DME? Thanks so much.

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. So on the rental side, Danielle, Inogen has done the same thing by the way on our rental business, so do all on the other providers. That asset is owned by the provider and it is redeployed. So they may put a new unit out on a patient, let's say that patient lives for a couple of years. When the patient expires, that provider owns that asset, they'll bring it back in, disinfect it, they'll test it, it might get a new battery with it before it goes out on the next patient and it's redeployed. We look at these assets as a five-year asset. For us, that's how we depreciate the devices, other companies might have their own depreciation schedules whatever they see fit, but we've always referred to these as a five-year asset and it could on one to several patients through the asset life. The key to really driving the most out of an asset for a provider, and again Inogen is in that same bucket, it becomes an asset utilization exercise. You want to keep this thing rented for as many months as possible, realizing that it'll probably be on a patient through the assets like that's in the cap over 60 months, if you were able to keep an asset rented 50 out of 60 months, I think you've got some pretty darn good results. But that's kind of a game that they play. That's not a new game for them, it's the same with stationary concentrators and frankly tanks and everything else, they reuse those assets on people.

Operator

Our next question comes from Mike Matson of Needham and Company. Please go ahead.

Mike Matson -- Needham and Company -- Analyst

Hi, thanks for taking my questions. Just wanted to start with the challenges that some of the HME companies are having, transitioning to the POC model. Have you seen customers that have been able to do that successfully? In other words, is there some kind of a structural issue here that would prevent these companies from being able to completely make the transition or is it just that certain runs are kind of executing in the proper way?

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah, Mike, it's a good question. And let me answer it from two different ends of the spectrum. Maybe first I should answer your overall question. We haven't seen anybody that's fully converted yet. There is -- I mean, Inogen is running a complete remote model, but we didn't have a restructure challenge. We started with a white sheet of paper, and as we've grown our business, we've added assets, but we don't have trucks and drivers out there. But other than ourselves, people are, what I would call, in a transition state, nobody has navigated all the way through that, at least not that we know of. If there's somebody out there, they are a pretty small player that's not on our radar screen.

Now, if you look at the challenges, again, two ends of the spectrum. If you're a larger player, it's a bigger restructure exercise because you de facto have got economies of scale on the delivery side and you've probably got many branches and many trucks and many drivers. And to really make the model work, if you're going to save money and buy POCs, you also need to eliminate the costs associated with delivery. So the challenge is to knockout that delivery infrastructure. We've seen some companies out there that have a good plan. They're executing along the plan. They're not done yet. Seems to be going pretty well. You do have to make some tough decisions on how you're going to reduce that structure, are you going to redeploy it to other areas of your business or are you going to literally let people go and dispose of trucks. That's the -- probably the bigger challenge that the larger players have. They tend to have more or less access to capital, so that they can purchase the assets. It's the restructure that they kind of choke on.

If you go to the other end of the spectrum, the smaller, what we call, mom and pop providers, obviously, they don't usually have many, many branches, they may have a couple of branches, a couple of trucks. So the restructure exercise is not nearly as daunting, but their access to capital is a lot tougher than the big guys. So they tend to be constrained on just the credit of purchasing the assets and -- they've got other issues in their business. Sometimes the driver you want to restructure out might be your brother in law in a mom and pop business. So there's some other nuances there. A little bit different challenges at both ends of the spectrum. It's why we've always said that this is a process, not an event. Nobody can really bite this off in a year or two, it's several years. In our last call, we have said in our view from where we are today, it's at least five more years. We really didn't put a cap on it. So it's going to take a while. It's an exercise. And I think the good news for us when we look at our business as we continue to see strong demand for all the leads that we generate, we know there's demand for POCs out there. Probably our challenge becomes, because we have the best product and there is demand, it becomes a fulfillment exercise of how are you going to get the product in the end users' hands. What role is the current provider is going to play and how can we help them and support them to be their partner. And then in addition, how can we pickup some of the slack and harvest some of the opportunity without trampling on our good customers and partners.

Mike Matson -- Needham and Company -- Analyst

Okay, thanks. And then just back to the rep productivity issue. So can you maybe comment on the productivity of the new Cleveland-based reps versus your kind of legacy or existing reps? I would assume based on what you're saying that the productivity issues were really confined to these new reps and existing reps kind of saw stable productivity levels. So in other words, it's not thinking that will be sort of a sign that's not saturation issue or some other issue, it's really just confined to Cleveland, training and whatnot?

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. I mean, Mike, it's -- you're right in that it's the newer reps, the more we have lesser seasoned support structure to help them along, that's where we need to continue to make investment. And yeah, that's primarily in Cleveland. As far as giving you actual numbers, we don't give that publicly. Again, there are some things I just I don't want to say what's a good number or bad number when other people are trying to work through this curve potentially themselves. All I'll say is they're below our expectations and they're below historical what we've been able to post. Now, you mentioned the term saturation. Our issue isn't a saturation issue, we wouldn't have the tens of thousands of leads that come in every month, if there weren't many, many thousands of people still dragging a tank around that want a POC. So saturation -- our full penetration of the market is not our challenge today.

Mike Matson -- Needham and Company -- Analyst

Yeah. Okay. I mean, I wasn't looking for numbers, I guess, I just wanted to know if the productivity of the existing reps has been more stable and that this issue was really limited to kind of the newer reps that you had hired more recently.

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. And the answer to that is yeah, it's more a rep -- a newer rep issue/opportunity.

Mike Matson -- Needham and Company -- Analyst

Okay. All right. And then finally just wanted to see if you could comment on the pricing. It sounds like -- I think I heard you say that the DTC channel saw some price declines as well as domestic B2B, which I think is normal, but DTC I thought had been more stable in the past?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Yeah. So, if you recall -- remember, we did a pricing trial last Q2 and then we put 8% pricing decline in place a couple of months after that trial. So we were still lapping the comps in Q1 associated with that pricing trial change.

Mike Matson -- Needham and Company -- Analyst

Okay, got it. Thank you.

Operator

Our next question comes from J.P. McKim of Piper Jaffray. Please go ahead.

J.P. McKim -- Piper Jaffray -- Analyst

Hi, thanks for taking the question. I just wanted to circle back on the DTC because I feel like the B2B softness was well-telegraphed. But it sounds to me like it's not a lead generation issue, it's a lead close issue. And how confident are you in this just you need to train these folks better versus just the leads being weaker than before?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Yeah. So if it would have just been the leads being weaker, as we said earlier, you would have seen that across the whole sales force. Now, obviously, we're still seeing higher lead generation costs just looking at our marketing spend as a percent of the D2C revenue. Now, that's a mix of both having the lower close rate as well as increased marketing spend, but we do believe we can get the D2C or direct-to-consumer sales costs to decline over time really associated with us being able to improve the productivity there. So that's what we're focused on, but we do believe the primary area that we are focused on improving in 2019 is that is the productivity of the sales force and driving incremental sales there. If you would have just had a lead quality issue, again, it would have just been more broad-based across the whole sales team.

J.P. McKim -- Piper Jaffray -- Analyst

Okay, that's helpful. And then one on the rental side. Is there anything around the competitive bidding outlook would help the changes that, Scott, you alluded to that that make you want to make this move more into rentals or is it just purely an access issue? And then just -- can you just give us confidence on -- I mean, it's a tight rope to tiptoe when you -- you don't want to anger any B2B customers and you don't want your sales reps just diverting all of the leads to rentals when you could still sell this unit outright. So how do you -- what's your confidence in that and how do you make sure you've been tiptoeing that properly? Thank you.

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

That's why you have to make the change gradually. You don't want a step change in your criteria. But -- I mean, we do expect this to be important to the long-term strategy anyway and this is just a slight change in criteria now to drive more, which does have some impact on D2C sales in the period and also some potential blow back on the B2B side, but we know that there are access issues to get to patients getting POCs. So we think it's the right time to make that decision. Nothing specifically tied to competitive bidding in our strategy. Obviously, we think that the changes that they're making to the bidding program overall are positive changes that should lead to a better bidding approach than what we've seen in the past, but we won't know the outcome of the bidding or how people will bid until probably sometime mid to late next year. So it will be some time before we really understand what that next round of competitive bidding will look like. But in that case, no matter what happens with rates, we do think POCs are the future and the only way that people will be able to compete in this both reimbursement environment as well as patient preference side will be to convert the mass majority of their volumes to POCs. And as they struggle to do that, we want to make sure we just help patient access as much as possible. But for the partners that we have that are going to drive POC adoption, you're right, we absolutely want to maintain those relationships and work with those providers and make sure we minimize the overlap of our efforts versus their efforts in driving POC conversion.

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. And I think -- let me add to that for just a second. It's -- a lot of the key to success in this is just good communication with your customers. We have similar, if not the same goals. They want to take care of patients. We want to take care of patients. We want to give them a product that's going to give them better freedom than dragging a tank around. And from what we've seen, for the most part, the majority of the HME community wants to do that as well. They're just struggling with how much they can bite off one step at a time. So our goals in helping patients are aligned. When you -- but you got to sit down with them, which we've already had some discussions with some of our key customers before this call today to share with them, look, here's the conundrum we have. We've got thousands of leads coming in every month. These people want POCs, they're qualified for POCs. Somehow, we got to figure out how to service them, either you got to service them or we got to service them, but it doesn't serve anybody to deny these people the benefits of a POC and that's working hand-in-hand with the provider partners to make that happen. But will we play a little bit bigger role going forward on the rental side than we have in the last year or so? Yeah. Is it a wholesale shift that we're just throwing out the provider community and we're going our own way? Absolutely not. That's not the plan at all.

J.P. McKim -- Piper Jaffray -- Analyst

Thank you.

Operator

Our next question comes from Matthew Mishan of KeyBanc. Please go ahead.

Matthew Mishan -- KeyBanc -- Analyst

Great. And thank you for taking the questions. POCs are typically kind of rented or reimbursed in tandem with stationary oxygen concentrators. I guess, can you guys manufacture and ship your stationary concentrator to receive an adequate return through current reimbursement? And how does it work -- how would it work where somebody else would be reimbursed for maybe a stationary oxygen concentrator and you would be potentially reimbursed for the POC?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Yeah. So to be clear, POCs are dual-coated for both E1390 and E1392 reimbursement. So that means as long as the physician has written a prescription for both stationery and ambulatory oxygen, you can deploy a POC and receive the full reimbursement for both codes. So you do not need to deploy a stationary concentrator. Now, some providers have chosen to continue to deploy a stationary concentrator as well and then it's up to them to decide if they're going to dual-coat and bill a POC for both codes or bill them separately. But the reimbursement, you can't get incremental reimbursement if you deploy a stationary concentrator on top of a POC. So when we bill as a provider, we bill both codes for the POC reimbursement. We do deploy our stationary concentrator as well, but that product is really designed for the retail sales. From a cost perspective, it is higher than the typical stationary concentrators. So it doesn't make it a natural fit for the price sensitive HME community as a product standpoint.

Matthew Mishan -- KeyBanc -- Analyst

And then is 30% of business-to-business sales a good proxy for what that DME -- the problem DME was throughout 2018?

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

So the dollar headwind is -- was the highest in Q1 versus the rest of the year. Q2 was also very high, so similar to Q1 in size, but slightly smaller and then it takes a step down in Q3 and then the easiest comp for us will be Q4 2019. So it does step down throughout the year. And particularly much lower in the back half of 2019 from a comp perspective.

Operator

Our next question comes from Mathew Blackman of Stifel. Please go ahead.

Mathew Blackman -- Stifel -- Analyst

Good afternoon. Thanks for taking the questions. I just want to ask it directly, although your comments about the rep productivity issues being isolated to the newer reps would seem the answer. But Scott, you did bring up competition in DTC and I just want to understand whether you think you're also seeing competitive pressures in that channel?

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. It's nothing that I would say is why we're revising anything. I mean, you always hear somebody has got a new program out there, we haven't really seen any significant new products. I mean, we've been the one that launched a new product recently and so we took the best product and made it better. So we're feeling a very strong position from a competitive standpoint. We haven't seen anything wild on the pricing side. So, no, and I appreciate you asking it directly, Matt, to give us a chance to address that. But no, right now, we're in a stronger position as I think we've been in from a competitive standpoint with the launch of the G5 and then pairing that with the G4 that's a sub-3 pound product.

Mathew Blackman -- Stifel -- Analyst

Okay, I appreciate that. And maybe to end on a more positive note, you did have another really strong international performance. I'm hoping you could talk about how sustainable this type of growth is and more broadly what inning you think Europe is in terms of a runway for growth? And that's all I had. Thanks.

Scott Wilkinson -- President, Chief Executive Officer and Director

Yeah. And thanks for the comment on international. It oftentimes gets lost in the shuffle. If you look at Europe, they don't have the downward pressure on reimbursement. So we don't see this struggle to make the delivery model work, but we also, on the opposite side of that, it seems like in the -- in Europe, people tend to have more bias for a product that is what patients want. Whereas in the US, with the fixed reimbursement, there's a lot of focus on price first. In Europe, it's not quite that dramatic. So we've had some good success in Europe, we've had strong growth over the last 10-, even 12-year period when we first broke into Europe. I think if you look at it year-to-year, we kind of expect it's going to trend about as it's trending. I don't think you're going to see a big change in the adoption unless you see reimbursement changes that drive some change there. It's going to take -- I think it will lag the US in terms of conversion, but we also think in Europe that ultimately the end game is POCs. Again, it just doesn't make sense to deliver tanks when you have a POC that can -- that's patient preferred and is a better cost model.

Now, as you know, we tend to be more conservative on our international guidance because we're even farther away from the customers and we're delighted with the demand that we saw in the first quarter. I -- we continue to think it'll be a great market for us. It's, as I said, an unsung market. And then we're looking at, as we've said in past calls, opportunities in emerging markets for even higher growth when you look at just the sheer population in, say, a market like China, but that's off beyond Europe and we'll probably talk about that a little -- or talk about that in 2020 when we expect to enter China.

Mathew Blackman -- Stifel -- Analyst

Okay, that's all I had. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Wilkinson for any closing remarks.

Scott Wilkinson -- President, Chief Executive Officer and Director

Thank you. Yeah. We believe the market for POCs remains underpenetrated and we believe there's strong patient demand for our products. Given our unique vertically integrated business model to drive patient access, it is our mission to fill this need either through our homecare provider partners or from us directly. Thank you for your time today.

Operator

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

Duration: 62 minutes

Call participants:

Matt Bacso -- Investor Relations Manager

Scott Wilkinson -- President, Chief Executive Officer and Director

Alison Bauerlein -- Founder, Chief Financial Officer and Executive Vice President, Finance

Margaret Kaczor -- William Blair -- Analyst

Christian Moore -- JPMorgan -- Analyst

Danielle Antalffy -- SVB Leerink -- Analyst

Mike Matson -- Needham and Company -- Analyst

J.P. McKim -- Piper Jaffray -- Analyst

Matthew Mishan -- KeyBanc -- Analyst

Mathew Blackman -- Stifel -- Analyst

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