Resmed Inc (RMD) — Q3 2019 Earnings Call Transcript

Great. Thank you, Julie. Good afternoon and good morning everyone. Thanks for joining us, and welcome to ResMed's third quarter fiscal year 2019 earnings call. As Julie said, this call is being webcast live and the replay, along with a copy of the earnings press release and our investor presentation, will be available on the Investor Relations section of our corporate website. Joining me on the call today to discuss our quarterly results are Mick Farrell, our CEO; and Brett Sandercock, our CFO. Other members of management will be available during the Q&A portion of the call. During today's call, we will discuss some non-GAAP measures. For a reconciliation of the non-GAAP measures, please see the notes to the financial statements in today's earnings press release. As a reminder, our discussion today may include forward-looking statements, including, but not limited to, expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions; however, actual results may differ. Please refer to our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements. With that, I'd like to now turn the call over to Mick.

Thanks, Amy and thank you to all our shareholders for joining us today as we review results for the third quarter of fiscal year 2019. On today's call, I will discuss our long-term strategy. I will review top level financial results, some business highlights, and a few key milestones from the quarter. Then I'll hand the call over to Brett, who is with me here in Sydney, who will walk you through our financial results in more detail. Before I get into the details, I would like to discuss ResMed's long-term strategy and our goal to include 250 million lives in 2025. Driven by a number of macro changes such as an aging population, the increasing impact of chronic disease, chronic healthcare costs, and a move towards digital transformation in healthcare. We see very exciting opportunities for ResMed. Our goal is to empower people to live healthier lives outside of the hospital. Today, there are numerous pain points in existing care delivery models and in the quality of patient care that ResMed can address. You'll know healthcare costs are growing faster than GDP in many countries. And there aren't enough doctors to treat the people who need to be treated. When you couple that with the difficulty of getting the right care at the right time, delivering that healthcare in a low-cost setting and even further changes in challenges with interoperability, documentation, and clinical data availability, it's a global healthcare system that is in crisis. When solutions in a microeconomic side, with ResMed's global leadership in digital health for sleep apnea or COPD and for outside of the hospital healthcare, we believe that these are problems that ResMed can solve faster and better than our competitors, providing superior value for our customers. With that backdrop, I would like to quickly review our financial results. We achieved another quarter of strong revenue growth. We were up 12% in U.S. dollar terms, and up 15% in constant currency terms. We benefited from a full quarter of revenue contribution from one of our latest acquisitions, MatrixCare. We also drove constant currency growth in both domestic as well as international device styles. Additionally, we had very strong growth in masks and other accessories. Now I will talk some of the new mask orders a little lighter. We delivered operating leverage with Non-GAAP operating profit growth of 15% year-over-year. Non-GAAP diluted earnings per share was a lot about 89 cents. We are proud of the top line and bottom-line performance from the global ResMed team. We expect to continue that success as we maintain fiscal discipline and invest in the long-term growth of the global ResMed business. Now let's turn to a discussion of highlights across our sleep apnea and Respiratory Care businesses. In the devices product category, we delivered a good quarter with year-over-year constant currency growth of 6% globally, supported by 8% growth in the United States, Canada, and Latin America in the category. We also achieved a return to constant currency growth for devices in Europe, Asia, and the rest of the world. As we discussed last quarter, we continue to cycle through strong year-over-year comparisons in both France and Japan, which were a result of the digital health-related reimbursement changes in those countries that drove the acceleration of the vast fleet device upgrades in the last number of quarters. Underlying patient activity in all geographies remains very healthy. The masks and accessories side of our business was robust during Q3 growing globally at 13% in constant currency. In the U.S., Canada, and Latin American geographies, masks markets grew at 13%. And in Europe, Asia, and rest of world geographies, we grew at 12% in constant currency terms in masks. We continue to see excellent traction with the AirFit F20 in the full-size category and the AirFit N20 in the nasal category. Our recent mask launches of the F30, the N30i, and the P30i are all doing very well. Let me provide a little bit of color on each of these innovative products. During October, we launched the AirFit F30. This is an exciting innovation in the minimal contact full-face mask category. In January, we announced broad availability of our first tube-up mask, the AirFit N30, which is in the nasal category. Both of these new masks, the F30 and the N30i contributed to our strong mask growth in Q3. After quarter end, just last month, we announced the launch of the AirFit P30i. This is a new tube-up pillows option that complements our highly successful P10 masks. I have personally worn ResMed's nasal pillows technology for my own sleep apnea care every night for many years. A few years ago, I thought nothing could beat the Swift FX, the pillows technology. I then upgraded a few years ago to the P10. I’m now looking forward to personally upgrading to the P30i, which offers freedom of movement and the ability to enjoy better sleep. We believe that many other type sleep apnea patients, not just the CEO, will have the same excitement after experiencing the P30i. All these recent mask launches are important additions as we expand our mask portfolio to offer even more options to physicians and home care providers and ultimately for the varying needs of the ultimate customer - a person who suffocates every night. We remain focused on driving innovation to meet underserved customer needs. We have an exciting product pipeline. We are the industry leader in digital health technology. We announced supporting well over 10 million patients with AirView, our trial-based patient management system and more than 9 million 100% cloud-connectable ResMed devices in the market. Over the past 12 months, we've improved the lives of nearly 15 million people by delivering sleep apnea and COPD devices and full mask systems. Our industry is changing; the AirSense 10 device platform and the Air Solutions cloud-based software ecosystem are still seeing strong adoption. Our device market share continues to grow as healthcare providers and patients choose and physicians prescribe ResMed solutions. Our digital health technology solutions have been proven to improve both business efficiencies and patient outcomes. We are clearly the market leader, but we will never stop innovating in this space. The success of our connected health devices is producing an incredible data engine. We now have over 4 billion nights of medical sleep apnea and COPD data in the cloud. This is twice as many nights as we had just a year ago. We're truly driving exponential digital health growth. Using advanced analytics, we are turning this clinical big data into clinical actionable insights. We are focused on developing solutions to get the right healthcare to the right patient, at the right time, and always more cost-effectively for all our customers. Everything we do supports our ambition to help more than 936 million people worldwide who suffocate every night with sleep apnea and the nearly 400 million people worldwide who suffer from chronic obstructive pulmonary disease. As we expand our digital health platforms, one of our goals has been to take the success we've had with myAir and AirView in sleep apnea and replicate that within our respiratory care business vertical. Many patients with COPD and other respiratory conditions aren't getting the treatment that they need until it's too late. There are some frequent fliers at the hospital. We believe that technology combined with the medical equipment used to treat patients can add substantial value to improve both clinical outcomes and the patient experience. Digital end-to-end solutions, connectivity, and making information available to that ultimate customer, on their own smartphones and supporting patients through their disease progression can make a huge difference. Through digital health technology, we are guiding patients so they can benefit from the best therapy before it's too late. We've made good progress with cloud-connectable AirCurve devices for noninvasive ventilation and with Astral devices that have cloud-connectable options for life-support ventilation. Noninvasive ventilation and life-support ventilation solutions are vital for stage III and stage IV COPD patients. Those were the insights of this dreadful disease. To meaningfully drive improved patient and clinical outcomes, our strategy and products expanded to take a more holistic, longer-term view of the COPD patient's journey and to offer solutions for therapy and support through earlier stages of COPD. This way, we can be there for the COPD patient from stage I all the way through to stage IV of their disease. In early January, we moved Mobi, our premier portable oxygen concentrator, to a full product launch. Mobi best meets the needs of users and offers them the opportunity to be mobile and enjoy healthy, active lives outside their homes. Early results have met our expectations. We are about to commence sales of Mobi through our German team. In the U.S., we are working in partnership with our HME customers to grow this category, the healthcare system reimbursed patients and to use portable oxygen in situations where a portable solution benefits the patient most. We also continue to test, pilot, and refine other potential go-to-market models with the ultimate goal to ensure that patients have the most efficient mask to a portable oxygen solution. We expect the POC category to grow, given very strong patient demand. We also expect that revenue will grow its share within the POC category. I want to be clear that it will take a while for POC to be materially mixed with our core sleep apnea and ventilation device businesses. So it's a long road ahead. During the quarter, we added another significant element to our vision for longitudinal solutions in Respiratory Care when we closed the previously announced acquisition of Propeller Health in January. Propeller's digital health solutions help people and their doctors better manage COPD and asthma. We hope that this new addition rounds out ResMed's portfolio to treat COPD patients through all stages of their disease as I mentioned earlier. But that was sophisticated digital health platform leverages small sensors that are attached to the pharmaceuticals and inhalers, along with a sophisticated cloud-based mobile application that automatically tracks medication use and provides personal feedback, coaching, and insights to the individual, much like our sleep apnea patient engagement system. Propeller's clinically validated solutions have demonstrated incredible outcomes including a 58% improvement in pharmaceutical adherence, a 48% increase in symptom-free days, and a 53% reduction in emergency room visits. These are truly impressive pilot results and we cannot wait to scale them. In the same way we scaled our digital medical device ecosystem in sleep apnea and COPD to now 4 billion nights of medical data. Propeller is operating as a standalone entity with its dynamic and innovative management team doing quite well in San Francisco. We are working with the Propeller CEO, David Van Sickle, and his team to continue their momentum towards commercial scale with pharmaceutical customers as well as health insurance customers. We had a board meeting last month and I’m very encouraged by the progress we are seeing. Earlier this quarter, Propeller announced publicly a partnership with Orion, which is a pharmaceutical company in Finland, and we’re going to connect the Propeller digital health platform to align easily and seamlessly for both asthma and COPD patients. Propeller Health is at the beginning of converting from pilot to scale and commercialization. We will empower the team to grow and to scale, bringing all our skills to the table. The opportunities are vast. There are more than 60 million diagnosed COPD and asthma patients in the United States and major markets in Europe alone. Many of these patients could benefit from Propeller Solutions, and Propeller is the clear leader in digital health for inhaled pharmaceuticals. The evolution we’ve made in our Respiratory Care business, I think, is game-changing. We are now even better positioned to become the global leader in digital health for COPD from stage I and stage II as well as our existing clients in Stage III and Stage IV COPD. We will continue to help physicians, providers, payers, and patients as they manage this important progressive chronic disease. Let's now turn to a quick discussion of our software-as-a-service business. And then I will hand over to Brett. The software-as-a-service portfolio continues its trajectory of excellent growth with revenue up 101% year-on-year on a reported basis, driven by continued expansion of Brightree and Healthcare first along with the first full quarter of contribution from our acquisition of MatrixCare. On a pro forma basis compared to results in Q3 of the results of those businesses before the acquisition, Brightree is growing in the mid to high single-digit range, and MatrixCare is growing at the low double-digit growth range. Overall, we see significant growth opportunities for these fast-growing businesses serving the out-of-hospital healthcare space with a lot of runway ahead. The total addressable market is over $1.5 billion in out-of-hospital SaaS in the United States alone. With our competitive advantages and our leading positions in multiple SaaS verticals, we expect ResMed's SaaS portfolio to move from high single-digit pro forma growth to low double-digit pro forma growth over the medium term and to be sustainable at that rate for the long term. We’ve started the process of integrating some of our SaaS portfolio assets. We recently transferred leadership of our home health and hospice offerings from Brightree and Healthcare to under the MatrixCare management team. That will combine our strength in home health and hospice with private duty and beyond. This move will allow us to accelerate our product innovation and deliver a wide range of features for customers who have businesses across these verticals. It also supports our strategy of driving improved patient outcomes and business efficiencies for customers across all out-of-hospital healthcare settings. As our SaaS portfolio grows, I would like to reiterate the promise we made when we first acquired Brightree back in 2016. We're committed to protecting our customers' business sensitive information. We’ve implemented firewalls to do just that. I founded ResMed 30 years ago. In 1989, the company was founded on the fundamentals of honesty and integrity—doing the right thing forward. That’s what we’ve always done and what we will always continue to do. We have a vision to transform and significantly improve out-of-hospital healthcare. We have a strategy to enable better patient care, improved clinical decision support, and drive interoperability across these healthcare settings. The acquisitions we’ve made in the past year established ResMed as a strategic player who is best positioned to lead this transformation in out-of-hospital healthcare. We now offer software solutions across out-of-hospital healthcare settings, from home medical equipment to home health and hospice to skilled nursing facilities, to senior living, to private duty and beyond. We're connecting capabilities across these platforms for these care settings to help our customers be the most efficient they can be to ultimately better serve people and to keep them out of the hospital and in a lower-cost, higher-quality setting of their choice as they age. And the best place is often their own home. Together with our customers and partners, we are revolutionizing how healthcare is delivered. We are building an ecosystem of integrated digital solutions and services. The ultimate goal is to help aging individuals move seamlessly between these healthcare settings so that they and their loved ones can receive optimal care and a higher quality of life with frictionless moves—wherever they live. In parallel to helping individuals, we will drive superior outcomes for physicians, providers, and payers. We’ve built the portfolio, now it's up to our SaaS team to execute and ultimately deliver on the promise of this strategy. At the highest level, the mission of ResMed in our 2025 strategy is to impact and improve 250 million lives in out-of-hospital healthcare. Our purpose is to empower people to live healthier, happier, and higher quality lives in the comfort of their own homes. Our advantage comes from our focus on tech-driven integrated care from sleep apnea and COPD awareness to diagnosis, to treatment to management, and then to ongoing therapy and healthcare management of chronic disease with digital health solutions. Let me close with this before I hand over to Brett. We’ve delivered a strong quarter. We are well-positioned for continued success throughout the last quarter of FY 2019 and beyond. The continued traction of our diversified mask and device portfolio, along with our expanded lifeline of new products and enhanced digital health solutions for sleep apnea and COPD and out-of-hospital medical software, gives us confidence in our ongoing momentum as we look to the future. We’ve positioned ResMed for the long-term as an innovative global leader in digital health. So we are just getting started. With that, I will turn the call over to Brett for his remarks and then we'll open the ones up for Q&A. So over to you, Brett.

Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the third quarter of fiscal year 2019. As Mick noted, we had a strong quarter. Group revenue for the March quarter was $662.2 million, an increase of 12% over the prior year quarter, or in constant currency terms, revenue increased by 15%. Taking a closer look at geographic distribution and excluding revenue from our Software-as-a-Service business, our U.S., Canada, and Latin American countries had $350 million, an increase of 10% over the prior year quarter. Sales in Europe, Asia, and other markets totaled $232.3 million, a decrease of 1% over the prior year quarter. However, in constant currency terms, sales in combined Europe, Asia, and other markets increased by 6% over the prior year quarter. Breaking out revenue between product segments; U.S., Canada, and Latin America device sales were $191.3 million, an increase of 8% over the prior year quarter. Mask and other sales were $168.7 million, an increase of 13% over the prior year quarter. For revenue in Europe, Asia, and other markets, device sales were $155.2 million, a decrease of 3% over the prior year quarter, but in constant currency terms, there was a 3% increase. Masks and other sales were $77.1 million, an increase of 4% over the prior year quarter or, in constant currency terms, a 12% increase. Globally in constant currency terms, device sales increased by 6%, while masks and other sales increased by 13% over the prior year quarter. Software-as-a-Service revenue for the third quarter was $79.9 million, an increase of 101% over the prior year quarter. This includes revenue from our Brightree, Healthcare first, and MatrixCare businesses. During the rest of my commentary today, I will be referring to non-GAAP numbers. The non-GAAP measures adjust for the impact of amortization of acquired intangibles, and purchase accounting fair value adjustments to MatrixCare preferred revenue, and tax-related expenses associated with U.S. tax reform. The prior year comparable excludes amortization of acquired intangibles, tax-related expenses associated with U.S. tax reform, and restructuring expenses. We’ve provided a full reconciliation of the non-GAAP to GAAP numbers in our third quarter earnings press release. Our gross margin for the March quarter was 59.2%. Excluding the MatrixCare purchase accounting in the third revenue adjustment, our gross margin for the March quarter was 59.3% compared to 58.2% during the same quarter in the prior year and 59.1% in Q2 FY19. Compared to the prior year, our adjusted gross margin increased by 110 basis points, predominantly attributable to manufacturing and procurement efficiencies. The MatrixCare acquisition and favorable product mix were partially offset by typical declines in average selling prices. Excluding the deferred revenue fair value adjustment, the MatrixCare acquisition was accretive to our gross margin by approximately 50 basis points. Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for the remainder of fiscal year 2019 to be broadly consistent with our Q3 FY gross margin. Moving on to operating expenses. Our SG&A expenses for the third quarter were $164.5 million, an increase of 11% over the prior year quarter. In constant currency terms, SG&A expenses increased by 17%. Excluding acquisitions, SG&A expenses increased by 6% on a constant currency basis. SG&A expenses as a percentage of revenue improved to 24.8% compared to the 25% that we reported in the prior year quarter. Looking forward and subject to currency movements, and taking into account our recent acquisitions, we expect SG&A as a percentage of revenue to be broadly in the range of 25% to the balance of fiscal year 2019. R&D expenses for the quarter were $47.6 million, an increase of $0.27 over the prior year quarter, or, in constant currency terms, an increase of 32%. Excluding acquisitions, R&D expenses increased by 6%, reflecting the incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue was 7.2% compared with 6.3% in the prior year. Looking forward, subject to currency movements, and considering our recent acquisitions, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of fiscal year 2019. Amortization of acquired intangibles was $22.8 million for the quarter, an increase of 95% over the prior year quarter, reflecting the impact from our recent acquisitions. Stock-based compensation expense in the quarter was $12.8 million. Non-GAAP operating profit for the quarter was $192 million, an increase of 15% over the prior year quarter. Non-GAAP net income for the quarter was $128.1 million, a decrease of 3% over the prior year quarter. Non-GAAP diluted earnings per share for the quarter were $0.89, a decrease of 3% over the prior year quarter, while GAAP diluted earnings per share for the quarter were $0.73. Foreign exchange movements positively impacted third quarter earnings by $0.01 per share, reflecting the favorable impacts from the weaker Australian dollar relative to the U.S. dollar, which were partially offset by the weaker Euro. On a GAAP basis, our effective tax rate for the March quarter was 23.6%. On a non-GAAP basis, our effective tax rate for the quarter was 21.4%. We estimate that our effective tax rate for fiscal year 2019 will be in the range of 21% to 23%. Cash flow from operations for the third quarter was $139.6 million, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $15.1 million. Depreciation and amortization for the March quarter totaled $41.8 million. During the quarter, we paid dividends of $53 million. On January 7, 2019, we closed on our previously announced acquisition of Propeller Health for consideration of $225 million net of cash acquired and that assumes a joint venture with Verily continued operations during the quarter, and we recorded equity losses of $6 million in our income statement in the March quarter associated with the joint venture. We expect to record approximately $7 million of equity losses each quarter for the balance of fiscal year 2019, and also in fiscal year 2020 associated with the joint venture operations. Given the recent acquisition activity and interest rate movements, I would like to update you on our expected net interest expense. Our net interest expense in Q3 FY19 was $12 million, and going forward, we expect to record quarterly net interest expense in the range of $12 million. Our Board of Directors today declared a quarterly dividend of $0.37 per share. At March 31, we have $1.3 billion in gross debt and $1.2 billion in net debt. Our balance sheet remains strong with modest debt levels. At March 31, total assets were $4.1 billion and net equity was $2 billion. Finally, in summary, our top line revenue was strong this quarter with growth across all major categories. Gross margin is improving, supported by the contribution from recent acquisitions and our ongoing efforts to drive operational efficiencies as well as favorable product mix. Our operating costs remain well-controlled even as we observed the impact of acquisitions. As a result, we are continuing to drive operating leverage with Q3 non-GAAP operating profit up 15% year-on-year. We're focused on driving solid operating results while ensuring we continue to invest in our strategic long-term opportunities. And with that, I will hand the call back to Amy.

Great. Thanks, Brett. Thanks, Mick. We will now turn the call to the Q&A portion. I'd like to remind everyone to please limit yourself to one question, and if you do have additional questions, you’re free to return to the call queue. Julie, we're now ready to start the Q&A section.

Yes, great. Hello. Can you hear me?

Sean, you might be on mute.

Yes, sure. Yes. Okay. Mick -- well, hope you’re all well everybody. On the rest of world masks, so strong number there. Were you able to talk about or give us some granularity around your experience for the upgraded devices in France and Japan and sort of how much runway there is on the benefit on that resupply side of the equation?

Yes, it's a good question in terms of -- allow me to talk about France and Japan, what we’ve done there. Look, clearly global revenue growth in masks was exceptional in the quarter, 13% constant currency globally, 13% in the U.S., Canada, and Latin America and 12% across Europe, Asia, and the rest of the world in constant currency terms. So we’ve had probably 4 to 5 plus quarters of upgrades in France and similarly in Japan. And as we said in the prepared remarks and as we said last quarter and the last number of quarters, we are going to be facing a headwind of the device sales in both France and Japan, although we're now through to get a modest positive on the rest of the world devices this quarter. But it allows us through that upgrade of digital health assets in both France and Japan to now start interacting with patients and driving patient behavior through apps like myAir and with physicians through solutions like AirView and the whole Air Solutions portfolio. And so we believe there's long-term sustainable mask growth that we can achieve in both France and Japan that should help continue to grow our share, which is quite high already in those geographies. But look, we are not done with it. We -- obviously, in the last five years, brought digital health in the United States and now to France and Japan with 120 other countries worldwide that we now need to start that opportunity on. But yes, it's certainly great growth in masks in the quarter off the back of digital health, but also off the back of some great mask launches.

Sure. Thanks, Mick. And just one follow-up. A lot of activity there with the integration of the software platforms. Just wondering though qualitatively or quantitatively if you could give us some description on some of the financial benefits of those, that integration process that we might see?

Yes. Sean, look we always think about that driving investment in digital health technology, and it drives such good growth of the core sleep apnea and Respiratory Care devices. And as I’ve mentioned just now, also growth of the core masks and accessories. We have a lot of internal models. I’m not prepared to share how those internal models of digital health technology are catalyzing growth of those areas. What I’m prepared to talk about is our public segmentation of the SaaS business which is powered by the same digital health technology capability. And that part of that portfolio grew by 101% including acquisitions. But as I said, on a pro forma basis, it was growing at high single-digit range and we think over time we can optimize that digital health tech and that SaaS portfolio to grow in the low double-digit on a sustainable basis as we look at multiple years towards that 2025 strategy. We think that’s a big part of it. Thanks for your question, Sean.

Yes, thank you, Mick.

Hi. Thanks very much. So just on rest of world devices, would you be able to give a little bit more about the breakout in terms of the performance of Japan and France in the third quarter? And then just in terms of the other rest of world countries, were there any other surprises in results?

Yes, thanks for the question, Gretel. Look, we don’t usually breakout a lot of information when we talk about the different categories, but I’m happy to put some color on the Europe, Asia, and rest of world countries. Look, as I mentioned in the prepared remarks, it was a great expansion in France and Japan these last number of quarters. But that great expansion and extraordinarily high share that we’ve achieved there now means that you're going to see some slowdown in both [indiscernible] after they've already been upgraded on the device side. Look, yes, as we saw the total Europe, Asia, rest of world growth was in that sort of modest positive on the constant currency and slightly negative on the headline number, the U.S. dollars given currency movements. Look, we expect that part - that aggregate portfolio to grow in that type of rate as we move forward. There will be some lumpiness up and down over time, but the device side of that portfolio is looking at a little up and down in Europe, Asia, and the rest of the world over the next number of quarters as I think we addressed last quarter, and most of the sell-side analysts have put in there. But as we move forward and we start to lap those fleet upgrades, we'll get back to what we are doing, which is core patient growth. That is very strong in both France and Japan and throughout the rest of the countries we have there. And that’s what’s the real determinant of long-term growth. How do we get 900 million people suffocating to realize they are suffocating and getting into the system, talk to their doctor and get diagnosed and treated? And that flow needs to be pretty steady in Europe, Asia, and rest of the world. So yes, there will be some lumpiness in device sales here as we left France and Japan, but we will get back to growth. But yes, I’m not going to give detail on China, Germany, and all the other countries until and when there's a digital health upside in one of those countries and then we will become a material element.

Okay. Thank you very much.

Thanks very much. If we could just start with the commentary around the Software-as-a-Service business. Mick, you’re suggesting that the return to low double-digit growth is the medium-term or long-term aspiration. I was just wondering if you would talk a little bit to Brightree versus the long-term postacute care space? Would I be right in assuming that the long-term postacute care growth opportunity is quite a lot larger than Brightree just given how immature it is?

Yes, I think - look, there's runway still ahead, David, in the core Brightree business of home medical equipment. There's just so many efficiencies that we can have it there, but yes, as you know as I’ve said, the quarter mid to high single-digit growth. I don’t think we can get that path, even just a Brightree path to the high single digits and probably not brushing up and touching the low double-digit growth within that Brightree home medical equipment segment, because there are just so many efficiencies to gain. A little bit of market share again, we’ve good market share. But it's more about bringing in modules that take [indiscernible] away from our home medical equipment companies and bring such values that we can then share in some of that value creation. But yes, look, the $1.5 billion addressable market includes many other out-of-hospital verticals. We are already playing in around seven of them and at scale at least, through, like we’re in home health and hospice at scale now. I’m really excited about the Brightree, HEALTHCAREfirst, and MatrixCare assets all being combined. And John Vanguard and his team out there in Minneapolis, I think they’re going to do a great job in that vertical, home health, and hospice. And additionally, that same team working in skilled nursing facilities where we already have a strong position but a lot of runway for growth. I think one of the things that ResMed brings that’s unique is we're a strategic player and we’re going to convert capabilities like cybersecurity, our management of AWS, Azure, and all the cloud-based systems around managing that digital portfolio that we can bring superior value to it. But look, it's really a portfolio; Brightree will be a good part of that growth. MatrixCare will be a good part of that growth and we’re looking to continue to grow as we empower that team.

Great. Thanks very much for that. Just my other question, big picture the growth that we saw from ResMed, like in your traditional sleep business looks very strong across devices and masks. I think we would hesitate to extrapolate that out in the rest of the world as well if you want to pull out the impact in France and Japan. Just would like your thoughts on where the market growth is picking up, or whether you think there is a large or significant contribution from market share gains.

Yes, it's interesting, David. And you’ve followed the same other companies that I did to try and track it. We got some really good market share data in some of those geographies and less good in others. Look, I look at out this quarter we had constant currency growth of devices globally of 6% and we had constant currency growth of masks of 13%. Traditionally, we say and I think it's still true that devices sort of grow in that mid-single digits and masks going at the high single-digits. So that would imply that we took some modest share in devices. Obviously, geographies outside France and Japan we already took the share there. And in masks, I think the N30i, the F30, we didn't even count any of the P30i, but that 13% growth clearly includes some share growth as well. We love the game of innovating smaller, quieter, more comfortable, more connected devices. It's a competitive game that, yes, we are winning more than we’re losing. Thanks for your questions, David.

Thanks.

Good morning and thanks very much for taking my question. Just on Mobi, you haven't called that out separately. If you could characterize any contribution or feedback around the quarter? And also your move to go direct-to-consumer with OEM for Mobi?

Yes, Andrew, thanks for the question. As I said in the prepared remarks, the whole POC category, even if we had a 100% share, we would struggle to be material to our business. We are starting from a very early stage. Mobi, we’re just sort of flipping to a full product launch as we move forward. And as I said, we’re very closely partnering with our home medical equipment provider customers. What we are looking to do is find patients that qualify, and if they qualify for reimbursement versus Medicare or private insurance, we are working with our HME customers to provide that lead, if you like, that person who is in need of a POC and to have them provide great care for that person. Two of our competitors have been - one of them for many years and one for a period of time, experimenting with models that included the genre on that reimbursed business and going direct to the patient. We have stayed away certainly from competing with our customers in the reimbursed business in the United States. It's not our game and we have been planning to do that. In cases where a person wants to buy a device for cash, we are looking into different models, we’ve seen the two competitors do. I think it would be foolish not to take care of the ultimate customers, who are patients, who need it when two other players in the market are doing that. But it's very early days in this. I’m going to say that the opportunities that it is huge for us and we think of it as a longitudinal play across COPD. POC is an interesting part of a big journey for a COPD patient. We want to talk to the patient in stage 1, stage 2 through digital health and inhalers. That’s about 80% plus of the cost of the COPD patient is in the pharmaceutical side. So, Propeller Health is the one that we should be talking about as a material element. I think with POC, noninvasive ventilation, and life support ventilation, we are already in that. And it's exciting, but it's really that long-term play of the patient through digital applications of the hospital to keep them happy, so that their physicians are happy, that the health insurance company is happy, that the caregiver, everyone is happy, and also that our customers are under and the equipment customers can be happy. As a reimbursed patient, we want to take care of them.

Very good. Thank you. And just my follow up, obviously GM, half of that was - you attribute to metrics. The other half, I presume, is predominantly mixed with the higher growth in the U.S?

Yes, hi, Andrew. It's Brett. The - it's probably there's meaningful impact probably from the production efficiencies in Q1 efficiency adjustments that we’re driving for maybe like 30, to add. And then obviously product mix was favorable, and that was a meaningful impact on that as well.

Terrific. Thank you very much.

Thanks for your questions, Andrew.

Hey, good morning. Just a quick one for me. Up on the gross margin, just wondering if you can quantify the impact to currency on gross margin on a year-on-year basis.

Yes, year-on-year was favorable around COPD POC license points. And at a sequentially it was basically pretty negligible.

On the context of the 50 basis points you referred to earlier; are you probably looking around 10% - 10 basis points organic gross margin expansion year-on-year, excluding currency?

Yes, and actually on currency, it's actually pretty negligible on both actually. If I look at year-on-year, correct that. It's pretty eligible. And really because we still are seeing all these are real types of market conditions.

Okay. Thanks.

Yes.

Thanks. Good morning. Just one question from me. Mick, the U.S. masks growth rate is moving ahead of market growth again. Can you talk to how much of that is resupply growth, an acceleration in resupply as opposed to success on new product launches? I mean, we have the impression that masks redeployed the vast majority of your U.S sales. Could you talk to what you’re seeing in the dynamic between resupply growth versus share shift?

Yes, that’s a great question. We have Jim Hollingshead, the Head of our Global Sleep business on the line. Jim, do you want to talk to as much coverage you can give on U.S growth organic, etcetera?

Yes, sure. Thanks, Mick, and thanks for your question, Saul. I think the answer is both. We are seeing very strong results of resupply and we’ve seen that over the last several quarters as more and more of our HME customers have adopted automated resupply solutions. So that continues to be very strong return results for us and for customers, while the new products have also all gotten off to a terrific start. F30 is out of the gate very strong, N30i has terrific patient preference and is doing very, very well and early results from P30 are also extremely encouraging. So I think we are getting both organic growth and we are taking some share in this space, but we’re also enjoying very good results for resupply.

Thank you.

Good afternoon everybody and thank you for this quarter after last quarter's experience. Anyway, two quick questions. What was the total acquisition revenue impact on the fiscal year third quarter? And then the second question is how do we think about operating leverage in the coming quarters and maybe even for next year? Thank you.

Well, I will jump to the operating leverage, I will hand to Brett to talk about sort of organic versus acquisition-driven growth. But look Joanne as we’ve been - as you and other sell-side analysts have challenged us, that is, one is the ongoing leverage. It's really our challenge to ourselves to ensure that we can achieve ongoing leverage, and I think we’ve had a good performance in the last number of quarters to that end. The operating programs, the business excellence programs, we put in place to drive fabric with the manufacturing team, and the advanced manufacturing teams that I'm here on-site with this week are all doing excellent work in that. Our commercial teams have been looking at how to use digital health technology for social media marketing versus old-school paper and television, really pushing the envelope of how we drive business excellence across all that functions in all our business verticals. It's something that we think is sustainable for the medium to long-term. But it's a game that never stops throughout the game of continuous improvement, and Brett, do you want to have a little discussion about what’s organic versus inorganic growth in the quarter?

Yes, Joanne, are you talking on the SaaS side?

A number of acquisitions in the last 90 to 180 days; MatrixCare, Propeller, etc. Just I'm trying to piece through where all that came from.

Yes, if you look at - on a group basis, if you look at - growth you exclude the acquisitions, we grew at around the 8% mark constant currency. I think a good way to look at it, Joanne, is that masks - the devices and masks and accessories - none of those acquisitions came with us. So if you think of device growth year-on-year constant currency at 6% and masks and accessories growth year-on-year 10%, that gives you an idea of absolute core sleep apnea and Respiratory Care businesses excluding all acquisitions that happened.

Thank you very much.

Hey, good afternoon, folks. Thanks for taking the question. For my question, I want to focus a little bit on Brightree and some of the strategic changes maybe that you guys are trying to make to accelerate revenue there. And part of that is really the number of recent product and program launches that you have. So how should we view the typical sales cycle for some of these new product launches? Is it six months, nine months? And then can you give us a sense of where that revenue growth is going to come from new users versus existing accounts?

Great question, Margaret. I'm going to hand that to Rob Douglas, Chief Operating Officer.

Thanks, Mick. Thanks, Margaret. Brightree is a recurring revenue model. So we compete on booking and that then reflects in recurring revenue in the U.S. So we do have a view of that. And as we talked about, we had headwinds around a little bit of consolidation in the industry. Our approach to that has been really to improve modules on it, and we’re really happy with the way the new Brightree modules are going, including some of the analytics offerings and certainly some of the direct patient engagement offering in Brightree. We’ve got the team really focused on driving those offerings in the market. And then even on a longer-term basis, we've got the team working on additional modules and development. So we are very confident that Brightree growth will continue as it did in this quarter. We saw a decent improvement in that and we are confident that will continue.

Thanks.

My question is just around Propeller. Last quarter you said that was going to be $0.02 to $0.03 dilutive in the third quarter for some time. Can you just confirm that that is the case in this quarter? And just give us an update on the trajectory of that - the losses over the next year or two?

Yes, I can confirm that it was in the $0.02 to $0.03 range for this quarter. I guess for the next little while, next few quarters I think it will be around that sort of level.

That's fine. I mean, like for the whole of FY '20 is that - are we talking about that length of time?

I don’t want to make progress on that sort of long-term predictions like that on Propeller, but I think for the next few quarters it will be around that level.

The real question, John, is where that goes from down a penny to up a penny is the sales cycle of Propeller. So Propeller, as we said on the prepared remarks, are working with Orion in Finland, sort of niche pharmaceutical company. Its public that the Propeller are working with some very large pharmaceutical companies, and some of them don't want us to talk about; some of them are in the archive. But if anyone of these pilots starts to commercialize, that stuff - and they are comfortable for us talking about that publicly; how customer is, we will update you on that. And this will be very quickly from dilutive to accretive in a heartbeat, but that's obviously the play. It's a medium to long-term play and we are not calling the date, the time, or the hour, or the quarter that, that happens. But that’s what the investments are around, so that’s where it like sort of as we start to get out there, those changes may happen. And so for the short term, things down. For the long-term, incredibly excited for COPD patients to get better Digital Healthcare.

Good morning, gentlemen. I just got another question on your SaaS business. And you mentioned previously about the home health market and Brightree and MatrixCare. Can you actually shed some color on how we should be thinking about the revenue synergies in your SaaS business with Brightree and MatrixCare and also on Healthcarefirst?

Yes, it's a good question. The combination of those businesses, there are a number of factors. I mean, sort of the basic one is that we can combine our digital health capabilities, our cybersecurity, cloud-based management, and management team, and sort of the economies of scale managing across those multiple portfolios. The big upside is that there are a number of customers, maybe many thousands of customers out at hospital healthcare that operate in multiple cities. They have a skilled nursing facility; they also have a hospice, and maybe also a home health. And a lot of the players out there are small and or niche players in - as in terms of our competitors in the SaaS space and they serve one or maybe two of those verticals. I think as ResMed now serves seven verticals, we are able to have frictionless or seamless movement of an aging person from care setting to care setting. That's good for them, it's good for the family, it's good for the healthcare system, it's good for the insurance company, and it's good for the customer. The person who is signing us on a per year or per month basis. And so that’s the real upside. The synergies are on the backside, on the backend of the infrastructure, but there are also incredible synergies for the customer in ResMed being an offering that goes across those. And so we are actually able to have Healthcarefirst allow us to really put it all under one umbrella and bring that value to the customer.

Thank you.

Hi. Thank you for taking my question. Most have been asked, but perhaps if I may just ask one on the growth opportunity in POC since you mentioned that. Just curious if you could share your thoughts, please on how big you believe that our addressable market might be, and also what you see is a current market growth? I know you expect to outperform that through share gains, but if you could just give some sense of how big that market is and how quickly you believe it’s growing right now, that would be helpful for us. Thank you.

Yes, Chris, as I said in the prep remarks, it's going to take a long time for POC to get material versus our other - $2 billion plus franchise, but it is exciting as kind of the top line. Rob, do you want to give a little more data regarding the addressable market?

Sure. We’ve talked about addressable market over the years saying that it's in the $3 million to $4 million range. But it's actually changing a lot because as we’ve talked about, POCs are a disruptive play to other forms of oxygen delivery. But in order for that disruption to really play out, there are a few generations of technology needed. But we could see strong market growth in that market and particularly as we introduce connected solutions and better management of products and better really management of patients. So long-term we see a lot of opportunity in growing that market, but as Mick has said in the short term, it's going to take a long time to be material, particularly given the growth rates of our other businesses. We are happy with our current programs. We are really focusing on learning and the best way to support patients in the market and the best way to use the capabilities of our existing partners throughout in the market.

Got it. Thanks. Just one very quick follow-up. Just on the masks side, if you were to apportion or rank their contribution that you would expect from the F30, the N30i, and the P30i over the next few quarters could you just give us some sense of how big you expect each of them to be relative to one another?

Yes, thanks for the question, Chris. Yes, we don't go into that level of detail around new masks set up versus existing or new mask growth. But what I can tell you in terms of color is we are very excited about the initial performance of the N30i and the F30. They have shot out of the gates beautifully. The P30i wasn’t even in the quarter which launched last month. I’m looking forward to opening the packet and using it myself. And I can't wait to see many, many, many others do the same. But yes, we won't write that out, but I can tell you this growth in the quarter of 13% constant currency in masks and accessories wasn't a one timer. I think we have the ability to continue to grow pretty strongly with this really strong portfolio we have.

Thanks, Julie. And before we close the call, I would like to thank our dedicated 7,000 strong ResMed team in 120 countries for their continued dedication, focus, and commitment to our growth strategy and our operating excellence and business excellence initiatives. You’re the core of what we do and your efforts have enabled us to deliver another quarter of strong revenue growth and solid operating leverage which allows us to reinvest back into the business to drive even further growth and progress our mission. We are focused as a team on our future platform of innovative products and software solutions to improve the outcomes and benefit all of our stakeholders: the ultimate customers, the patients, the physicians, the payers, the home care providers, and governments. Thanks for all your time today. We look forward to talking to you again in 90 days at the end of our fiscal year. Back to Amy to close out.

Thank you again everyone for joining us today. If you do have additional questions, please feel free to reach out to ResMed's IR team directly. As previously mentioned, the webcast replay along with our earnings release and updated Investor Presentation are available now on our investor relations website at investor.resmed.com. Julie, you can now close the call.