Inogen Inc. (INGN Quick QuoteINGN - Free Report) reported second-quarter 2016 earnings of 25 cents per share, which surpassed the Zacks Consensus Estimate by 6 cents and improved 47.1% on a year-over-year basis.

The upside was driven by almost 24% growth in revenues, which totaled $54.6 million, slightly ahead of the Zacks Consensus Estimate of $52 million.

Segment Details

Sales revenue surged 40.7% to $45.6 million, while rental revenues decreased 22.8% to $8.9 million.

Business-to-business domestic sales were up 61.3% on a year-over-year basis to $15.9 million, primarily driven by traditional home medical equipment provider purchases and strong private-label sales of the newly launched Inogen One G4 portable oxygen concentrator.

Meanwhile, business-to-business International sales rose roughly 24% to almost $13.1 million, on the back of strong performance in Europe (92.1% of international sales).

Direct-to-consumer domestic sales advanced 38.5% to $16.4 million and direct-to-consumer rental sales soared 22.8% to $8.9 million. Unit sales in the quarter surged 53% on a year-over-year basis to 25100 units. Rental patient population increased 6.3% to 33,600.

Margin Details

Gross margin expanded 80 basis points (bps) on a year-over-year basis to 48.0% in the reported quarter. The upside can be largely attributed to lower material, labor and overhead costs related to the upgraded Inogen One G3 product. Notably, gross margin for sales surged 460 bps on a year-over-year basis.

Adjusted EBITDA rose 42.1% from the year-ago quarter to $13.5 million.

Operating expenses, as a percentage of revenues, dropped 180 bps on a year-over-year basis to 33.3% in the reported quarter. As a percentage of revenues, research & development (R&D) and sales & marketing (S&M) expenses increased 30 bps and 40 bps, respectively. Meanwhile, general & administrative (G&A) expenses declined 250 bps.

As a result of the waning operating expenses, operating margin expanded 260 bps on a year-over-year basis to 14.7%.

Guidance

Inogen upgraded its outlook for full-year 2016. The company now projects revenues in the range of $190 million to $194 million, better than the previous range of $187–$191 million. This represents year-over-year growth of 19.5% to 22.0%.

Inogen continues to expect total revenue headwind from Medicare competitive bidding national rollout of 3.5%–4% in 2016.

The company guided adjusted net income in the range of $12.5 million to $14.5 million, up from the prior band of $12 million to $14 million. This represents growth of 24.8% to 44.8% over 2015.

Management expects direct-to-consumer sales to be Inogen’s fastest growing channel in 2016.

Adjusted EBITDA is expected to be between $37.5 million and $39.5 million, representing an increase of 16.1% to 22.3% over the prior-year quarter.

Our Take

In our view, the major positives for Inogen in the reported quarter are solid domestic and international business-to-business sales, the launch of Inogen One G4, growing unit sales and strong patient demand.

Moreover, the step forward in the oxygen therapy market with Inogen One G4 is expected to enhance the company’s direct-to-consumer sales channel over the long haul.

However, soaring rental revenues is a matter of concern, which might mar the company’s growth prospects in the coming quarters.

Zacks Rank & Key Picks

Inogen carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the medical sector include IDEXX Laboratories Inc. (IDXX Quick QuoteIDXX - Free Report) , Mesa Laboratories Inc. (MLAB Quick QuoteMLAB - Free Report) and Masimo Corp. (MASI Quick QuoteMASI - Free Report) . Notably, all the three stocks sport a Zacks Rank #1 (Strong Buy).

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