INGN
#That's another good question.
The one is really easy.
There's nothing in our results in 2016 attributed to the new CRM system.
While we started the project, a lot of the time and effort that's gone into it has been a planning phase.
It will actually go live in the middle of this year.
There's nothing from that, in fact, if anything, that just kind of curved our focus a little bit, and it's one of the reasons that we did slow down in hiring, because you have the same people focused on planning for that system.
You hit on the other one that's a success, is the G4.
We spent a lot of time in the fourth quarter focusing on improving our scripting, honing that sales process.
One of the successes that came out of that is we drove our mix from about a third to about 50% by the end of the year.
We will continue that focus throughout this year.
If you recall, we said we think our sea level point is at about 60%, 65% penetration, so, we're not there yet, that we made great progress in the fourth quarter.
Why can't it continue in the future.
Well, there's always puts and calls.
We're going to continue to hire this year.
In fact, you noted that we are going to ---+ we're running out of space in Texas, so we have got to open a facility.
That's evidence of our commitment to continue to hire and grow our sales team and drive market penetration.
I think we can continue to get some leverage out of the G4.
Long term, we will get some leverage out of the new CRM system, but in the short term you'll actually take a step back.
If anybody's been through a software conversion, they tend to be a headache.
There's always some bugs that you have to work out, and we expect that will happen.
We've done software upgrades and changes in the past, and you have to fight through some things.
Like any year, there's going to be some puts and calls, and that's all reflected in the guidance that <UNK> had noted.
Just to expand on that a bit, headcount on a year-over-year basis was up less than 10%, but revenue on the direct-to-consumer side was up 40%.
We don't want to imply or have the takeaway be that the difference is productivity.
There was incremental productivity improvements in the D2C team, both from the scripting side, as well as the launch of the G4 product, but that was more incremental in size of productivity increases, and the rest was more around the timing of hires, when they happened, how many fully productive and seasoned reps we had out of the total pool, because that has a dramatic impact on the overall success of the direct-to-consumer organization versus the prior comparative period.
Thank you.
Sure.
Our focus, again, is primarily on direct-to-consumer.
That's where we focus our resources, our growth.
We've been very careful to not over-invest in B2B channels, whether it's domestic or international.
On the South Korean opportunity, that was one that came our way, it took a little bit of investment in time and effort to work with the South Korean team to secure the proper registration and reimbursement for product.
But you have to remember, while it's a nice upside for us in the fourth quarter, South Korea is still a relatively small market.
It's not a market that we would have independently said, let's go after South Korea, that's a great opportunity.
Again, when we're looking at what are we going to go after, set penetration in our own backyard, that's where our resources are.
As these opportunities continue to come our way, and they do, we will continue to assess them and look at what kind of resource do we have to invest to harvest that, and we will take advantage of them, but I don't want to lead you to the idea that we've got a bulletin board here with a bunch of South Korean opportunities that we're going after, because that's not the case.
It's about direct-to-consumer in the USA.
To answer the question a little bit more directly, <UNK>.
It was less than 5% of our international revenues of fourth quarter that came from that South Korea customer.
It still is a small portion of the $12.1 million international bucket in the quarter.
As we said for guidance next year, and kind of how we've always approached guidance, the closer we are to the end consumer, the more visibility we have on what we expect in revenue, in the areas that we are farther from the end consumer, we tend to be more cautious in our guidance.
Inherent in our guidance range is that we expect direct-to-consumer to be our fastest-growing channel.
We also expected that going into 2016, however, what ended up happening was both B2B domestically and internationally grew faster than our direct-to-consumer sales segment.
So, that certainly is something that is just an approach in our guidance, because we are farther from the end consumer.
On the domestic sales side, we do expect, when we say that we expect solid growth there, that really is coming from the traditional HME side, either through our private label partner or through our own direct sales efforts.
The reseller business, the Internet reseller business, has been growing much more modestly than the 69% we saw on the domestic side in the fourth quarter of 2016.
So, that growth we expect will continue to be driven by traditional HME purchases, going into 2017 as well.
What I would say is, we are cautious about how quickly the HME community will adopt.
We certainly see the large market opportunity that eventually POCs should be the standard of care, but how the HME community will get from where we are today to that point, and the timing of that, we still are very cautious on that.
While we've seen a great couple of years now of success of them really trialing POCs, we still feel like we're in the early stages the POC trials, and as a result, we don't want to get out ahead of ourselves in terms of our guidance.
Overall, we see between business-to-business and direct-to-consumer relatively similar operating margins in those businesses.
So, while the business-to-business side has a lower gross margin profile, it has lower operating expenses, as well.
So, where that revenue comes from specifically on an operating margin basis, we're relatively neutral on that from a margin perspective.
You will notice in the fourth quarter, we've continued to make nice progress on our gross profit or gross margin on the sales side of the business that came in at almost 50%, 49.9%.
That's both an increase by increase and mix towards direct-to-consumer, but you also see that we are continuing to lower our cost to goods.
On an average basis year over year, if you take our total sales cost to goods divided by our units sold, we're down about 15%.
So, we have continued to take cost out where we can, based on higher volumes and design improvements that we've been able to implement that helps our overall margins and offset both the pressure we've seen on the average selling price side, as well as the reimbursement pressures that we've seen on the Medicare portion of the business.
It certainly is still pretty early in that launch.
We really started ramping that up towards the end of the third quarter, and then really into the fourth quarter, we didn't give a specific number there, but it is certainly well below 50%.
Within that channel, what's important to remember is that there are a certain number of resellers that sell our product, and while they have seen improved productivity associated with the G4, just like we've seen on our internal side, they are also very much limited by the size of their sales force.
So, their growth rate there follow much more closely to how they're growing their internal teams, and they tend to not grow as quickly as we try and grow, and the overall traditional HMEs are growing at this point.
It's more having to do with their size of budgets of investments and headcount and media expense that drives their success on the direct-to-consumer internet cash buys, just like it does on our side.
We are still seeing that, even into the first quarter of 2017.
In the quarter, excluding Cures, the gross margin would've been approximately 23%, excluding the $2 million benefit from Cures.
We haven't given specific guidance there, but the mass majority of the reimbursement cuts are now behind us.
So, we don't expect to see large additional cuts to reimbursement rates, but you can tell they are already at pretty low rates from where they were a year ago.
So, we do expect that from there we would continue to look for ways to improve our gross margin profile on the rental side of the business, through cost productivity on the rental [states].
