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#Thanks, <UNK>.
Good afternoon, and thank you for joining our fourth quarter 2017 conference call.
Looking at the fourth quarter of 2017, I'm very proud to say we generated strong total revenue of $63.8 million, reflecting record results in our domestic direct-to-consumer sales channel and great results in our domestic business-to-business sales channel.
As we've seen in prior quarters, the expected decline in rental revenue, which represented less than 10% of total revenue in the quarter, was more than offset by the increases in revenue from our sales channels.
Our record direct-to-consumer sales of $24.5 million in the fourth quarter of 2017 exceeded our expectations, as we steadily added new inside sales representatives, with most located in our new Cleveland facility.
Our direct-to-consumer sales team consisted of 263 inside sales reps as of December 31, 2017, which represented an increase of 86 reps over our 2016 year-end total of 177.
Our strategy is to steadily hire additional sales representatives throughout 2018 and continue to invest in marketing activities to increase consumer awareness as we believe this is still our most effective means to drive growth of direct-to-consumer sales.
As we've done in the past, we also plan to execute a direct-to-consumer pricing trial in 2018 to ensure our products are optimally priced.
Fourth quarter domestic business-to-business sales of $21.9 million also exceeded our expectations with growth in this channel primarily driven by purchases from our private label partner and traditional home medical equipment providers.
We continued to see traditional HME providers turn to portable oxygen concentrators to lower their operating costs in the face of insurance reimbursement reductions, and they are turning to Inogen as the leader in the space.
While off its mid-teens growth trajectory through the first 3 quarters of 2017, international sales in the fourth quarter were flat over the same period last year, primarily due to strong third quarter 2017 results and a lack of any major European tenders awarded to our provider partners in 2017, which limited growth in the fourth quarter.
Lastly, the fourth quarter of 2016 included sizable unit orders from South Korea that didn't repeat in the fourth quarter of 2017, creating a difficult comparable.
As we have communicated in the past, business-to-business sales, especially international, can be lumpy quarter-to-quarter.
That said, our outlook for European sales in 2018 remains optimistic as we expect tender activity increase and our partners to continue to adopt portable oxygen concentrators as a patient preferred product offering a low total cost of ownership.
We believe we remain the preferred provider of portable oxygen concentrators in Europe, and we expect to see a large long-term opportunity ahead as that market transitions from tank and liquid oxygen systems to nondelivery solutions.
In support of our European customers, we began production of our Inogen One G3 concentrators in the fourth quarter of 2017 using a contract manufacturer, Foxconn, located in the Czech Republic.
In 2018, we expect Foxconn to produce the vast majority of the Inogen One G3 concentrators required to support our European demand, and we are very pleased with their productivity, cost, service and quality at this stage.
We expect to maintain our assembly operations for our Inogen One concentrators and Inogen At Home concentrators at our facility in Richardson, Texas and continue compressor and sieve bed column assembly at our facility in Goleta, California.
The Foxconn production will allow us to expand our manufacturing capacity and redirect our U.S. manufacturing activities to focus on growth domestically and on our latest product, the Inogen One G4.
While still early in our relationship with Foxconn, we are already delivering improved service levels and lower costs.
Turning to reimbursement updates.
In December 2017, CMS released its 2018 Medicare fee schedule that went into effect on January 1, 2018.
When comparing 2018 and 2017 rates for the top 25 HME items, the only item that saw a change was stationary concentrators, built under HCPCS code E1390.
For suppliers in both rural and other non-bid areas, the indicated decrease for E1390 in 2018 will be, on average, 1.2% compared to 2017 rates.
As a reminder, this does not impact pricing in the competitive bidding areas, and there's an adjustment that CMS has instituted due to increased utilization of portable oxygen concentrators and applying a budget neutrality provision to the stationary oxygen concentrator rate.
The rate change will also impact our rental revenue in these areas since POCs are dual coded to include billing code E1390.
We believe that the rate change will put additional pressure on HME providers to continue to convert to nondelivery solutions as the additional rate cut applies to all Medicare patients in these areas who receive stationary oxygen concentrators.
With regards to the interim final rule, we still await a decision.
As a reminder, if approved, the interim final rule would provide retroactive relief to noncompetitive bid areas from August 1, 2017 to December 31, 2017, while also extending for 2018.
Independent of the interim final rule, there's also a bill in the House of Representatives, Bill H.
R.
4229, titled the Protecting HOME Access Act of 2017, which would provide retroactive relief to noncompetitive bid areas from January 1, 2017 to December 31, 2017, and extend through 2018.
This bill has bipartisan support with 122 cosponsors.
There is no known timeline for voting on this bill.
On the topic of competitive bidding around 2019, we have nothing new to report and await information from CMS on the next round of competitive bidding.
That said, on February 12, President Trump sent Congress a 2019 budget proposal that included language on competitive bidding.
Specifically, the proposal eliminates the requirement under the competitive bidding program that CMS pay a single payment amount based on the medium bid price, instead paying winning suppliers at their own bid amounts.
Additionally, this proposal expands competitive bidding to all areas of the country, including rural areas, which will be based on competition in those areas rather than competition in urban areas.
The specific proposal is estimated to save the government $6.5 billion over 10 years.
Even though this is only a proposal, we believe it provides context into this administration's view on competitive bidding.
While it is still unclear if these provisions will be included in the final 2019 budget, or if it will impact the pending competitive bidding around 2019, we still believe significant reductions in oxygen reimbursement rates will continue to drive providers to nondelivery solutions like portable oxygen concentrators.
Finally, we wanted to provide an update on the legal proceedings with CAIRE.
As a reminder, CAIRE filed a lawsuit against Inogen in September 2016 alleging infringement on one patent.
We're happy to announce Inogen recently settled out of court with CAIRE for an all-in value of $1 million.
The agreed upon settlement amount was paid in full to CAIRE in the first quarter of 2018 and covers both alleged past damages and future rights to be free from all litigation with respect to the patent in suit.
Although we maintain we committed no wrongdoing, we believe a timely settlement agreement was in the best interest of the company and our shareholders to remove the uncertainty, expense and distraction of a prolonged litigation.
As a POC market and technology leader, we plan to defend our patent portfolio and invest in R&D to maintain our position in the market with patient-preferred oxygen products.
Looking ahead, I'm really proud of our Inogen associates and our progress this quarter, especially during a time when we ramped up a new European contract manufacturer and significantly expanded our direct-to-consumer sales team.
While we've been engaged in these exciting initiatives to fuel future growth, we've also maintained our current growth momentum, especially in the domestic direct-to-consumer and business-to-business sales channels.
And I am very pleased with the increased adoption in these markets with our best-in-class and patient-preferred products.
Looking at 2018, we're increasing our full year revenue guidance range from $295 million to $305 million to $298 million to $308 million, and expect to continue to invest heavily in our sales force, marketing efforts and operations in order to drive POC adoption worldwide.
With that, I will now turn the call over to our CFO, Ali <UNK>.
Ali.
Thanks, <UNK>, and good afternoon, everyone.
During my prepared remarks, I will review our fourth quarter of 2017 financial performance and then provide details on our updated 2018 guidance.
As <UNK> noted, total revenue for the fourth quarter of 2017 was $63.8 million, representing 25.4% growth over the fourth quarter of 2016.
Looking at each of our revenue streams and turning first to our sales revenue.
Total sales revenue of $58.4 million represented 91.5% of total revenue in the fourth quarter of 2017 and reflected 37% growth over the same quarter of the prior year.
Total units sold increased to 34,000 in Q4 2017, up 45.9% from 23,300 in, Q4 2016.
Direct-to-consumer sales for the fourth quarter of 2017 were a record $24.5 million, representing 57.5% growth over the fourth quarter of 2016, primarily due to increased sales representative headcount, increased marketing expenditures and increased productivity.
Domestic business-to-business sales of $21.9 million in Q4 2017 reflected 46.1% growth over Q4 2016, with strong demand from our private label partner and traditional HME providers.
International business-to-business sales of $12 million in Q4 2017 declined 0.8% from Q4 2016.
While off its mid-teens growth trajectory seen in the first 3 quarters of 2017, international sales were flat compared to the same period in the prior year, primarily due to strong third quarter 2017 results and a lack of any major European tenders awarded to our provider partners in 2017, which limited growth opportunities in the fourth quarter.
Lastly, the fourth quarter of 2016 included a large South Korean order that did not repeat in the fourth quarter of 2017, creating a difficult comparable.
Sales in Europe represented 84.3% of international sales in the fourth quarter of 2017, up from 83.3% in the fourth quarter of 2016.
With robust business-to-business sales again in the fourth quarter of 2017, average business-to-business selling prices declined over the same period in the prior year, primarily due to the shift in sales towards traditional home medical equipment providers and private label sales and additional discounts associated with the increased sales volumes worldwide.
Rental revenue represented 8.5% of total revenue in the fourth quarter of 2017 versus 16.2% in the fourth quarter of 2016.
Rental revenue in the fourth quarter of 2017 was $5.4 million compared to $8.2 million in the fourth quarter of 2016, representing a decline of 34.1% from the same period in the prior year.
We saw the expected decline of rental revenue from the comparative period, primarily due to the $2 million rental benefit in the fourth quarter of 2016 associated with the 21st Century Cures Act, which increased reimbursement rates retrospectively for some Medicare beneficiaries.
Turning to gross margin.
For the fourth quarter of 2017, total gross margin was 48.2% compared to 48.5% in the fourth quarter of 2016.
The decrease in total gross margin was primarily due to the $2 million Cures Act benefit recorded in the fourth quarter of 2016, which contributed 2.1% to total gross margin in the fourth quarter of 2016.
Our sales gross margin improved to 50.5% in the fourth quarter of 2017 versus 49.9% in the fourth quarter of 2016.
The sales gross margin percentage improvement was primarily associated with increased mix towards direct-to-consumer sales and lower cost of goods sold per unit, mostly due to lower material costs, partially offset by declining average selling prices.
Rental gross margin was 23.2% in the fourth quarter of 2017 versus 41.4% in the fourth quarter of 2016.
The decrease in rental gross margin was primarily due to the $2 million Cures Act benefit recorded in the fourth quarter of 2016, which contributed 19.2% to rental gross margin in the fourth quarter of 2016.
As for operating expense, total operating expense increased to $25.6 million in the fourth quarter of 2017 or 40.1% of revenue versus $18.5 million or 36.4% of revenue in the fourth quarter of 2016.
Research and development expense was $1.4 million in the fourth quarter of 2017 compared to $1.2 million recorded in the fourth quarter of 2016, primarily due to increased product development expenses.
Sales and marketing expense increased to $15.2 million in the fourth quarter of 2017 versus $9.3 million in the comparative period in 2016, primarily due to higher advertising expense and sales force personnel-related expenses as we hired the majority of the full year 2017 net sales rep additions after opening the Cleveland facility in August of 2017.
In the fourth quarter of 2017, we spent $4.4 million in marketing and advertising as compared to $1.7 million in Q4 2016.
General and administrative expense increased to $9 million in the fourth quarter of 2017 versus $8 million in the fourth quarter of 2016, primarily due to increased personnel-related expenses.
While we've reported $100,000 patent litigation settlement expenses associated with the CAIRE litigation settlement in the fourth quarter of 2017, we spent less on total legal expense when compared to our original forecast, given the timing and that amount of settlement with CAIRE.
The remaining $900,000 is expected to be amortized over the next 5 years.
In the fourth quarter of 2017, our provision for income taxes totaled $6.4 million, representing an effective tax rate of 110.5%.
In the fourth quarter of 2016, our provision for income taxes totaled $0.6 million, representing an effective tax rate of 9.8%.
The increase in effective tax rate was primarily due to the $7.6 million noncash income tax provision expense associated with the revaluation of the deferred tax asset.
Our effective tax rate in the fourth quarter of 2017 also included a $3.5 million decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation compared to $1.7 million in the fourth quarter of 2016.
Excluding both the deferred tax asset revaluation expense and the stock-based compensation benefit, our non-GAAP effective tax rate in the fourth quarter of 2017 was 40% compared to 39.7% in the fourth quarter of 2016.
In the fourth quarter of 2017, we reported a net loss of $0.6 million compared to net income of $5.3 million in the fourth quarter of 2016.
Our reported net loss in the quarter was primarily due to the $7.6 million expense associated with the revaluation of our deferred tax asset.
Loss per diluted common share was negative $0.03 in the fourth quarter of 2017 versus positive $0.25 in the fourth quarter of 2016, a decrease of 112%.
Excluding the $7.6 million noncash deferred tax asset revaluation expense, we delivered non-GAAP net income of $7 million in the fourth quarter of 2017, which represented a 10.9% return on revenue.
Non-GAAP net income increased 32.5% in the fourth quarter of 2017 versus the fourth quarter of 2016, where non-GAAP net income was $5.3 million or a 10.3% return on revenue.
Adjusted EBITDA in the fourth quarter of 2017 was $11.6 million, which represented an 18.1% return on revenue.
Adjusted EBITDA increased 5.8% in the fourth quarter of 2017 versus the fourth quarter of 2016, where adjusted EBITDA was $10.9 million or a 21.5% return on revenue.
Cash, cash equivalents and marketable securities were $173.9 million, an increase of $10.9 million compared to $163.1 million as of September 30, 2017.
Turning to guidance.
We are increasing our full year 2018 guidance range for total revenue from $295 million to $305 million to $298 million to $308 million, representing growth of 19.5% to 23.5% versus 2017 full year results.
We expect direct-to-consumer sales to be our fastest-growing channel, domestic business-to-business sales to have a significant growth rate and international business-to-business sales to have a modest growth rate, where the strategy will still be focused on the European market.
We expect rental revenue to be relatively flat, meaning plus or minus 5% in 2018 compared to 2017, due to our continued focus on sales versus rentals.
As stated previously, the only known changes to Medicare reimbursement rates in 2018 are roughly 1.2% decline in monthly stationary rates in noncompetitive bidding areas due to the fee schedule adjustment.
Given changes to the U.S. corporate tax code, we are increasing our full year 2018 GAAP net income and non-GAAP net income guidance range to $36 million to $39 million, up from $31 million to $35 million, representing growth of 71.4% to 85.7% compared to 2017 GAAP net income of $21 million and growth of 26% to 36.5% compared to 2017 non-GAAP net income of $28.6 million.
We are maintaining a guidance range for full year 2018 adjusted EBITDA of $60 million to $64 million, representing growth of 18% to 25.9% versus 2017 full year results.
We estimate that the decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation will lead to a decrease in provision for income taxes of approximately $8 million in 2018 based on forecasted stock activity, which would lower our effective tax rate as compared to the U.S. statutory rate.
Excluding the $8 million decrease in provision for income taxes expected in 2018, we expect an effective tax rate of approximately 25%, down from our previous estimate of 37% due to changes in the U.S. corporate tax code.
We expect our effective tax rate, including stock compensation deductions, to vary quarter-to-quarter depending on the amount of pretax net income and on the timing and size of stock option exercises.
Lastly, we're not impacted by the reinstatement of the U.S. medical device excise tax given our retail exception.
We also expect net positive cash flow for 2018 with no additional equity capital required to meet our current operating plan.
With that, <UNK> and I will be happy to take your questions.
Yes, Robbie, this is <UNK>, I'll take that one to start.
And if Ali wants to add something, she'll dive right in.
But you're right, we did hire a little more heavily once we had the Cleveland office opened than we have done in the past.
It's been a good market for us.
As you might imagine, we are new to a community.
There's a lot of excitement.
And then the early going, it's a little easier to hire.
We saw the same thing when we opened the Texas facility.
Our traditional approach is that we want to hire in as linear fashion as possible.
So that's still our approach, but we were kind of the beneficiary of the new office.
As Ali mentioned in her comments, more than half of the folks that we had hired throughout the year were hired in the Cleveland office in the last 4 months of the year.
So it was a little back end loaded.
As far as how that stacks up to drive growth, it's 4 to 6 months for a sales rep ---+ an inside sales rep to get to what we call steady state or kind of their end of curve.
Now they will contribute some before that.
They ---+ basically, we see contributions in month 2 and 3, but end of curve is 4 to 6 months.
So we feel like we're in a good spot, and that's reflected in our guidance this year.
So it has closely correlated with, over time, the sales growth in that direct-to-consumer sales channel.
So we would expect that as we've added this additional sales capacity outside of that first 4- to 6-month investment that you have for new hires, that you will see that growth on the direct-to-consumer side associated with us increasing that sales capacity.
Because as you know, our limit to growth in creating additional consumer awareness is really tied to how much sales capacity we have.
So as we add that additional sales capacity, we spend more in marketing to drive more leads to fill that sales capacity.
And that's our plan going forward as well.
And we do plan to continue to add reps going into 2018 as well as we still think we're a long way from full saturation on the direct-to-consumer sales side of the business.
Yes, Robbie, I'll handle that one as well.
I mean, you're right in the past as we've kind of, all of the providers and Inogen included, has taken a hit on competitive bidding with the rate reductions.
We've had to grow through that in our other channels, and we've done a pretty good job with that.
This year, as Ali said, there are no significant rate reductions, so we don't have the headwinds this year that we've had in the past.
But there will be competitive bidding rounds in the future.
Still don't have clarity on it, but we'll see rate reductions as we go forward.
So it'll continue to be challenged.
As you know, we've deemphasized that, but we haven't given up on it or set it aside.
What it does from a strategic standpoint, is it opens up access to our product to patients, because there are still some patients that do want to use their benefit, and we don't want to completely screen them out.
It does set us up to continue to walk in the other providers' footsteps, so we'd better understand their business.
And I think that we become a better resource to help them through navigation of conversion to a nondelivery model.
It sets us up to build partnerships for those that want to work with us because of our expertise.
And if you think about it, if you go way out into the future and we talk about a conversion to POCs, which we believe will happen, although it's going to take ---+ we've always quoted that 7 to 10 years, if everybody is able to get a POC from their traditional home care provider for 10 years out, it will be more difficult to sell somebody a POC from a retail standpoint.
So we do see rental as still our long-term future, at least in oxygen therapy.
Now what that does is that sets up ---+ once we hit a conversion point with POCs, then we'll need to backfill with other disruptive products that we can leverage the expertise of that sales force and still drive growth.
But long term, we still see rental as an important strategic opportunity for the company.
But you're right, in the short term, it's probably ---+ it hasn't been a positive contributor other than the knowledge and the partnerships that we've been able to forge.
Yes, that's a good question, Margaret.
I mean, our share gain is clearly coming from other competitors.
Now our overall growth is coming from market growth as well as share gain.
But if you look at ---+ and you said that correctly, we estimate that we've moved from low 40s to about 50% over the last couple of years.
That's gain and share from other POC manufacturers.
Yes, and just to add to that.
I think that we've also had a great partnership with our private label partner and creating relationships with DMEs of all sizes and really showing the benefits of nondelivery.
But we also have that the strong consumer demand.
And as we've been ramping up our inside sales team by 50%, or almost 50% in the last year, that really has allowed us to invest more in consumer awareness.
So you have both sides, both the consumers being more and more aware of POCs and demanding an Inogen POC and then you also have providers who are working with both us and our private label partner to figure out how to convert their business.
And that marriage has really worked well in driving overall market penetration for us with what we see as the best-in-class product on the market.
Yes, so I'll take that one.
Really, what we're assuming is continued adoption from the HME community at the levels that we've been seeing.
So we aren't assuming a major acceleration of POC adoption.
While we've said over time, we do expect that to accelerate and it has to in order to reach full penetration in 7 to 10 years inherent in guidance is us continuing to incrementally that 100 million to 150-basis-point increase in penetration of POCs of the category.
And we're not assuming any material change in our market share penetration or percent at that 50% or so level.
As we've said in the past, when we look at our guidance, particularly on the B2B side, we want to make sure that we don't get out ahead of the market conversion.
And while we very passionately believe where the market will get to, we also know that there's a lot of challenges for providers to get from where they are today with a tank-based system and to actually implement a nondelivery system.
So inherent in guidance just as it's been for the many years that we've been public now, we don't want to get out ahead of that market conversion.
And so we're more cautious on the B2B side.
Although as you said, we still do expect solid growth just because it does seem like there are many players where the conversion has started to nondelivery base system.
When we said that our short-term focus will continue to be on Europe, it's still the largest market today outside the United States, we did a couple of things last year to improve our position in Europe.
One is we bought one of our key distributors, if you recall back in May, MedSupport Systems.
That was something to really shore up, frankly, our support and service of the customers that we already have.
As these customers continued to scale their business with POCs and it became a bigger part of their budget, their expectations for service also continued to increase.
So we said, all right, we're going to ---+ one way or another, we're going to set up shop on European soil so that we can do the repairs there that people can call, talk to people in their own language, in their own time zone, and we executed that through that acquisition.
And I will tell you that our key direct customers are very pleased with that.
They have expressed appreciation.
I think that's one of the things that keeps us in the preferred provider position for the key big customers in Europe.
Later in the year, we started our contract manufacturing partnership with Foxconn.
So that cuts the lead time from a shipment basis.
It also gives us an opportunity to drive down some costs.
It's a relatively small amount, but we avoid considerable shipping expense, shipping across the pond and the Europeans are grateful for the shorter lead time.
So again, we've improved our competitive and service position there.
And that's the focus short term.
If you look, way out long term, and I mean way out like a 10-year horizon, then China.
We said China should be theoretically a huge market.
You've got a large population, a large percentage of smokers and poor quality issues, so as that country continues to develop, usually health care systems will improve as countries develop.
Today, there's no reimbursement for portable oxygen therapy in China.
But long term, we expect that, that would be established.
In the short term, there could be a retail opportunity.
So we are, right now, working on registration for China, but that is a long-term growth opportunity.
That's not something that's going to change our growth trajectory over the next couple of years.
So it's a longer-term play.
So hopefully that answers your question of kind of the short-term versus long-term focus.
Do you want to do this pricing.
Yes.
And then I'll talk ResMed.
Sure.
So starting with the pricing side, as we've seen over the last couple of years, we do expect average selling prices to decline over time, particularly in the B2B side of the business.
As we see volumes increase, this is a price-sensitive industry and with the competitive bidding pricing continuing reimbursement pressures, we expect that to translate into manufacturing pricing pressure as well.
That is already built into guidance that we would expect that to continue.
And when we look at competitive approaches, price is a very common point for us to compete on.
And we have been able to maintain a small premium versus the competition because our product is perceived to be of higher value both from patient preference side as well as a reliability standpoint.
So we would expect to be able to maintain that going into 2018, but we have continued to build ASP pressure into our model and into our guidance.
We also continue to expect to be able to take costs out.
As we continue to add volume here, we expect to be able to leverage that into lower materials and labor costs and to offset that ASP pressure.
Yes, on the ResMed Mobi, we still don't know anything about their specifications.
So we're just as anxious as all of you to understand the product better.
It's hard to comment on how it's going to compete until you can actually lock down the specs and get one in our hands, so we're not there yet.
What we do is any time there's a new product launch by anybody, whether it's ResMed or any other competitor, we go out and buy a few of those and test them, and we'll do that this time around.
I think whether it's ResMed or one of the other players, I mean, we expect people are going to continue to launch new products, and we're going to do that as well.
We are hard at work on our G5, and we haven't really said much about it.
And I don't really plan to tell you much about it today other than that development of the product started about the day after we launched G4, because product innovation and staying at the forefront of patient preference is key to our success.
It's what's put us in the driver's seat now and we believe that's what we will keep us there.
I will say, though, for ResMed, they're a great blue-chip company.
I think they continue to add credibility to our thinking that the future in oxygen therapy is POCs and they could actually, with a decent product, could help convert the market at a faster rate and that could benefit us as well as the market leader.
Right now the real opportunity is in converting tanks to POCs, not in going out and converting one POC to another.
Now we get down to the end of the road and the market is converted, then that dynamic changes.
But for the foreseeable future, tanks are who we really see as our primary competition as well as opportunity for growth.
Yes.
It's a good question, <UNK>.
Let me answer it first in the context of oxygen therapy, because I think in the big picture, it's a little different.
But if you look at just oxygen therapy, as we said, when we get to a market conversion point where the providers are all using POCs, we think that our retail POC business would be, I'll call it, less robust.
Right now, there's a lot of opportunity as there's so many patients that are dragging tanks around.
It's frankly relatively easy to sell somebody a unit if they have the money, because it's hard to put a price on freedom.
But that will change over time when they're all holding POCs from their current provider.
So it will swing from an oxygen therapy standpoint, rental can play a more prominent role in the future.
And certainly, again, in the context of oxygen therapy, the providers would play a bigger role.
Now in our overall business, what that means is we've built and are continuing to build this outstanding sales force that is very adept.
It's selling products to patients that have unique needs.
So we've got a backfill product with more unique solutions, so that we can continue to have a strong retail sales component to our business.
But that won't be necessarily in portable oxygen concentrators.
It may not even be necessarily in respiratory, but it does need to be unique and disruptive products that offer unique solutions to people, products that we can use to serve in people's homes.
We're not an acute care focused company today.
Products that we can easily deliver using our delivery partners, which are FedEx and UPS. A unique solution that takes a flatbed truck to deliver, probably doesn't fit our model.
So I think it will change with respect to oxygen, but what that does is it frees up sales time for us to have other disruptive products.
And we're looking at that all the time.
I think we're in a great spot when you look at our balance sheet to either form partnerships or make acquisitions to add those products.
But right now, I will say, as I've said over the last year, 1.5 years, we're very careful about that because there is a delicate balance between opportunity and distraction.
And so while I painted a picture of what the future will look like in 10 years, that's not where we are today.
The opportunity today is still using our sales team to convert oxygen patients, so that's what we're focused on.
Yes.
It's multiyear ---+ before, we think that our growth through POCs starts to slow down.
Right.
We still expect to be a long-term high-growth company.
And the oxygen therapy market is a very large and growing market.
So for the foreseeable future, we see POCs as being the primary market opportunity for us.
And if we added something, it would be more opportunistic in nature if the right thing came along at the right time.
And just getting back to your first question on the margin side, <UNK>, as the mix in the business changes, it could impact the difference between gross profit and operating margins.
But on a net basis, the B2B side and the direct-to-consumer business are very similar operating margin profiles.
So that's why we don't necessarily give any gross profit guidance and more focused on making sure that if there is a sales opportunity that we are the market leader in that sales opportunity, and that we capture as many of those as we can and where it shakes out on the P&L between gross margin and operating expenses kind of we'll work out depending on the channel.
And we are looking to continue to grow the top line and also have ---+ show nice profits in the business.
But very similar operating margin profile.
Yes, sure.
So I'll take that one.
The growth rate is basically the same expectations we had when we put out guidance initially.
So at the low and high end of guidance, it was before 20% to 24%, now it's 19.5% to 23.5%.
So to us, that's materially the same.
It's just where the rounding came in.
So still, we expect to see 20-plus percent growth.
And think that we've set ourselves up nicely with the investments that we made on the direct-to-consumer side of the business and then also the success we've seen on the B2B side.
So I wouldn't say that there is any difference in a conservatism level.
However, I also want to say that we still are very early in the year.
And the earlier we are in the year, the more cautious we are just because you haven't yet seen enough of the history.
So while we feel very good about the guidance range and the guidance philosophy that we've used, we use a very bottoms up approach to budgeting and making sure we really understand that potential pluses and minuses to our growth rates.
With direct-to-consumer, we're much more in control of our success there.
So we tend to be able to have greater visibility there than we do on the business-to-business side where we tend to be more cautious in putting out numbers.
And we do think it's important to put out the guidance that is achievable, and we still think that this guidance range is very achievable for us for 2018.
Yes.
So we have said that of the 86 net hires, over half of them were in the Cleveland facility.
So that means at least 43 of them were in the Cleveland facility in the first 4 months of us putting that facility up in place.
And we have said, over time, we want to add about 240 people in that facility, with over half of those being sales reps.
So we have gotten off to a very solid start with putting over 35% of that sales force together.
Now that number may increase depending on how ---+ where we get on the sales capacity side and results.
If there is continued ---+ our ability to hire there, we may look to hire more over time.
But we first need to get through this first 120 or so for us to see ---+ really understand the productivity of that sales force and understand what the additional market capacity is.
But we still feel like there is a lot of room for us to add sales capacity over time.
Sure, I'd be happy to.
Yes, we ---+ one of the things that we've done right out of the gate is we don't assign territories to the inside reps.
We've got leads coming in every day from all over the USA, and they are distributed more or less evenly across the sales force.
So the way we manage the sales team is every rep is going to get x number of new leads every month.
By not assigning territories, it's made it really easy for us to scale, because if you think about it, if we did have more territories, then you've got to rebalance and recut your sales territories really almost every month the way we've scaled the sales team.
So every inside rep, their territory is the USA.
And they're getting leads all month from all over the country.
It makes it easy to scale.
Yes, we do.
So as you saw in the fourth quarter, we did see an increase in advertising expense up to $4.4 million.
And what I do want to highlight there is that when we have a high number of new reps in that pool, when they're in that 4- to 6-month productivity ramp, they actually use more leads.
So investing in more media in that time should be expected when we have a higher percent of new reps in the field.
So the main driver of that was increased sales capacity and the fact that you had such a high proportion of newer reps in the pool in the quarter.
And so given the fact that we are continuing to invest heavily in that team, we do expect the advertising spend to increase going in to 2018, both for the existing sales reps but also the new sales reps.
Yes, I'd like to close with a few comments on our strategy for 2018.
We expect to seek ways to accelerate the global adoption of portable oxygen concentrators.
We are working with providers worldwide to convert to a nondelivery model, increasing our direct-to-consumer investments in the United States and pursuing product registration in new and emerging markets.
At the same time, we are still focused on developing innovative oxygen concentrators to stay at the forefront of patient preference and reducing cost to manufacture our product as we gain additional scale.
We're excited about the future of oxygen therapy and where we see portable oxygen concentrators continuing to grow and becoming the standard of care for ambulatory patients in the next 7 to 10 years.
Thank you for your interest in Inogen.
