Resmed Inc (RMD) — Q3 2022 Earnings Call Transcript

Great. Thank you, Kevin. Hi everyone and welcome to ResMed’s third quarter fiscal year 2022 earnings conference call. We appreciate you joining us. This call is being webcast live, and the replay will be available on the Investor Relations section of our corporate website later today, along with a copy of our earnings press release and presentation, which are both available now. With me on the call today are ResMed’s Chief Executive Officer, Mick Farrell; and Chief Financial Officer, Brett Sandercock. During the Q&A portion of our call, Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer; Jim Hollingshead, President-Sleep and Respiratory Care; and David Pendarvis, our Chief Administrative Officer and Global General Counsel. During today's call, we will discuss several non-GAAP measures. For a reconciliation of these non-GAAP measures, please review the supporting schedules in today's earnings release or the appendix of the earnings presentation. As a reminder, our discussion today will include forward-looking statements, including but not limited to, expectations about our future operating and financial performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. You are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements that are made today. I'd like to now turn the conference call over to Mick.

Thanks, Amy, and thank you to all of our shareholders for joining us today as we review results for the third quarter of our fiscal year 2022 ended March 31. Our third quarter results reflect strong performance across our business with double-digit revenue growth in our sleep and respiratory care business, and high single-digit growth in our software as a service segment. Our growth is the direct result of our global team's ability to pivot and drive for results, even as we continue to manage through several external challenges that are impacting our business, including ongoing supply chain disruptions; COVID restrictions in parts of the world, recovering post-COVID Peak patient flow, and unprecedented demand from a competitor recall, which will keep them out of the market at least through the end of the calendar year. The global supply chain environment remains very challenging across multiple industries. I'm very proud of our team growing double digits this quarter year-on-year with an astounding 30% growth this quarter for devices in the U.S., Canada, and Latin America. Even with this incredible growth, the demand in the market was even greater. As with almost all customers in the global components industry, we remain on allocation from our suppliers, particularly for electronic components, with our number one bottleneck being semiconductor chips. This allocation impacts our ability to meet the incredible demand that we see in our marketplace, and we are forced in turn to allocate ResMed products to our customers. We have established guiding principles for allocation, giving priority to the production and delivery of devices to meet the needs of the highest acuity patients first. Additionally, the ongoing challenges of sea freight and air freight due to reduced availability and increased prices are impacting our ability to efficiently get components into and finished goods out of our factories worldwide. We are working closely with our global supply chain partners, doing everything that we can to secure additional supply to further increase production of our devices. This work includes a combination of a number of workstreams: one, shoring up the flow of existing parts from existing suppliers; two, establishing flow of existing parts from new suppliers; three, validating new parts from existing suppliers; four, validating and verifying new parts from new suppliers; and five, reengineering designs to eliminate and/or mitigate the top bottlenecks to achieve greater flow through our supply chain. The most significant example of a project in this fifth line of work is our newly released AirSense 10 Card-to-cloud device. This device eliminates the number one bottleneck of the 3G, 4G comms chip while facilitating secure data upload to our cloud-based software platform called AirView so that providers and physicians can access the data and better manage the patient. We've already begun to offer AirSense 10 Card-to-cloud devices in select markets to some customers, and we will be ramping up from there. With these five lines of work continuing in parallel, we have been able to offset some of the impact of continuing component shortages and decommits to help us better support patients, providers, and physicians. We recognize that this is a very difficult situation for all of our customers, including physicians who feel the pressure from their patients, home medical equipment providers who see this every day in their businesses, but also payers and entire healthcare systems and especially the most important customer, the patient themselves. We are partnering across the industry to be the solutions provider to these problems. We expect a significant backlog of patients diagnosed and coming through the system to be present for at least the next 12 to 18 months with incredible associated demand. We are working to address this demand with these portfolios of supply projects and beyond, and we will get through this time stronger than ever as an industry and as a company. Our number one priority will always be patients, doing our best to help those who suffer from sleep apnea, chronic obstructive pulmonary disease, asthma, and other key chronic respiratory insufficiency diseases, as well as those who benefit from our out-of-the-hospital care software as a service solutions. Our goal is to ensure that every person gets the care that they need, where they need it, and when they need it. Let's now briefly discuss the other broad market conditions in our industry. We continue to see steady ongoing recovery of patient flow and demand through the diagnostic channel across the countries that we operate in. In fact, many countries are above 100% of pre-COVID levels of patient flow. However, ongoing surges, variants, and government restrictions continue to impact a few countries which will remain below pre-COVID diagnostic levels. China is a case in point right now with severe shutdowns in Shanghai and beyond. But across our portfolio, our global portfolio, we're in 140 countries that we serve, I expect that these metrics will steadily improve to pre-COVID patient levels and beyond. As vaccines and boosters roll out globally, and people remain focused on their personal respiratory health and hygiene, that's been a big learning through COVID. With the adoption of digital health solutions for screening, diagnosis, and remote patient setup and monitoring, as well as established COVID cleaning protocols in sleep labs and other facilities, I expect the impact of new variants to diminish in absolute impact each and every time. Let me now update you on our top three strategic priorities. Number one, to grow and differentiate our core sleep apnea, chronic obstructive pulmonary disease, and asthma businesses. Number two, to design, develop, and deliver world-leading medical devices and digital health solutions that can be scaled globally. And number three, to innovate and grow the world's best software solutions for care that is delivered outside the hospital where people live, especially in the home. The U.S. launch of our next-generation device platform called AirSense 11 continues to go very well. Although it is challenging to differentiate between ongoing positive customer sentiment and feedback from the incredibly high demand in the U.S. market and beyond. The AirSense 11 has provided much-needed additional product supply as we face all-time high demand for ResMed devices, and it couldn't have launched at a better time for that purpose to help us mitigate ongoing component shortages. We will introduce the AirSense 11 into additional countries in the fourth quarter that we're in right now here at fiscal year 2022 and throughout fiscal 2023. In parallel, we will continue to sell our globally available market-leading platform, the AirSense 10, which is second in customer preference only to the AirSense 11, including the new Card-to-cloud AirSense 10 as we seek to maximize the total volume of CPAP, APAP, and bi-level devices available for all of our customers. With our digital health technology ecosystem, we are engaging patients in their therapy in a digitally native environment like never before in the industry. We are also making it easier and more efficient for our home medical equipment and home care provider customers to manage their patient populations using our full suite of software solutions, including myAir for patients, AirView for physicians and providers, and Brightree for HME providers. When customers use these digital health technology solutions, they experience increased efficiencies, lower costs, and together with us, we achieve improved outcomes for patients and their physicians. With the latest technology built into the AirSense 11 platform, we are driving higher adoption rates of the myAir app by patients higher than ever before. Right now, we are seeing more than double the myAir adoption rate as patients engage directly in their healthcare. People want personal care. They want their own data on their own app on their own phone. They appreciate the coaching and personal engagement of our digital ecosystem. This means more patients are signing up for myAir every day and fully engaging with ResMed’s software technology, helping us to now surpass over 11.5 billion nights of respiratory medical data in the cloud. Ultimately, these software solutions, leveraging big data deliver a better patient experience. They create better efficiencies for home care providers, and most importantly, they contribute to greater long-term adherence to therapy by patients. Let me spend just a couple of minutes outlining some real-world evidence showing that greater therapy adherence leads to lower hospitalizations, lower mortality, and better clinical outcomes through the mitigation of chronic disease. We are demonstrating better patient outcomes and lowering costs for the healthcare system at a scale not seen before in the industry. These are critical components of the ResMed 2025 strategy. The latest example is a study published in the landmark American Journal of Respiratory and Critical Care Medicine Journal, also known in the industry as the Blue Journal. This article demonstrates that patients with obstructive sleep apnea and chronic obstructive pulmonary disease who were adherent to CPAP therapy versus non-adherence to CPAP therapy showed significant year one and year two reduction of clinical use by over 30% and reduction of inpatient hospitalizations by nearly 50%. It showed a 20% reduction in year one and year two total healthcare resource costs, which included a 25% reduction in emergency room costs and a 52% reduction in inpatient hospitalizations. These are important metrics for the whole healthcare system. Another key aspect of our long-term growth strategy is driving awareness and increasing the flow of patients through the top of the sleep apnea diagnostic funnel. COVID-19 has advanced awareness, adoption, and acceptance of digital health and respiratory health, including telehealth tools, specifically home-based sleep apnea tests. Although driving demand generation is not a priority in the immediate term, given the supply shortage and significant demand we're facing, we are maintaining our long-term focus and investments in this diagnostic channel so that we are prepared when conditions improve to ensure sustainable, long-term pipelines of new patients coming through the channel. With 1.6 billion people worldwide suffering from sleep apnea, COPD, and asthma, it is also our duty to do this. We are innovating with partners and our customers to create even more efficient and effective approaches to sleep apnea patient identification, screening, diagnostics, treatment, and management. We will continue to invest in technology that enables what we call an end-to-end seamless digital experience for patients. One example we recently rolled out is the next generation of our remote mask selector tool that makes mask selection and sizing easier and more effective by creating personalized mask recommendations based on a patient's health, sleep attributes, and their own facial measurements. Choosing the right mask is challenging to do remotely. But getting the right mask fit is crucial to patient comfort and long-term adherence. The technology, MaskSelector, is a web-based tool that solves this problem by prompting the patient to answer a few simple questions and follow a few easy steps with their camera-enabled smartphone to capture a digital facial scan. Based on the answers and the digital facial measurements, MaskSelector provides a recommended mask and sizing. Whether a patient is being set up at home remotely or preparing for a face-to-face interaction with a respiratory therapist and clinical staff at a provider's office, MaskSelector helps the patient quickly select the right mask for their unique needs. Turning to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million patients with COPD worldwide and the 330 million patients who suffer from asthma worldwide. Our goal is to reach many hundreds of millions of patients with our respiratory care solutions, including non-invasive ventilation and life support ventilation, as well as newer therapeutic areas such as our cloud-connected pharmaceutical delivery solutions from our Propeller technology and the high flow therapy offerings, such as our product platform called Lumis HFT. Demand for our core, non-invasive ventilation and life support ventilation solutions for COPD and other respiratory insufficiency patients remains strong throughout the quarter, especially in markets outside the U.S. where providers shifted focus to supporting the most severe and highest acuity patients. This demand and the work of providers align with ResMed's guiding principles of our allocation process, specifically to give the highest priority to manufacturing life support ventilation. As I speak, we are not component-constrained on our life support ventilator called Astral. Let me now review our software as a service business for out-of-hospital care. During the quarter, our SaaS business achieved high single-digit growth year-on-year across our portfolio of SaaS markets, including home medical equipment, as well as facilities-based and home-based care settings. Our SaaS customers recognize the need for technology solutions to solve their challenges with efficiency and scale, and our software services and solutions help them achieve both. The continued growth of home-based care is providing tailwinds for our home medical equipment and home health products, and we continue to grow with our customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care, including our landmark Brightree and SNAP ReSupply products. As businesses continue to open up, we've been able to visit customers in person, as well as to attend SaaS trade shows where interest in our Brightree, MatrixCare, and Citus offerings, to name a few, remain very strong. We have a very solid pipeline in SaaS. The COVID-19 pandemic has been and remains challenging for some verticals in our SaaS business, particularly skilled nursing facilities, where headwinds have kept patient census rates below pre-pandemic levels. But as COVID restrictions continue to ease and our customers improve their line of sight to better conditions, we expect to see pent-up demand for technology investments, which provide opportunities for us to sell more services and more solutions to existing customers, as well as to increase our new customer pipeline. As we look at our portfolio of solutions across care settings, we expect our SaaS group revenue growth to maintain high single-digit growth as we exit this fiscal year, and well into the next fiscal year and beyond. As always, our goal is to meet or beat that market growth rate as we continue to innovate, and we expect to grow the market and take market share. We are the leading, strategic provider of SaaS solutions for outside hospital care. And we provide mission-critical software across a broad range of very attractive vertical markets. We are well positioned and we have created differentiated value for customers and for ResMed with our SaaS businesses. I'm excited about the future of our SaaS business. It's an important part of ResMed's future growth and I see a lot of opportunities to innovate in lower-cost, lower-acuity settings of care. It's the future of healthcare delivery with strong organic and inorganic growth ahead for ResMed. Our focus is on personal care that is patient-centric, physician-centric, and provider-centric. This approach combined with our unique ResMed culture means that we are positioned to continue winning in the vastly underserved medical markets of sleep apnea, chronic obstructive pulmonary disease, asthma, and beyond. We are transforming out-of-hospital healthcare at scale, leading the market in digital health technology. As I said earlier, we have over 11.5 billion nights of medical data in the cloud. And we have over 17 million cloud-connectable medical devices on bedside tables in 140 countries worldwide. We are unlocking value by using de-identified data to help patients directly, but also to help providers, physicians, payers, and entire healthcare systems. We have invested in cybersecurity, privacy, cloud operations, as well as data analytics, including artificial intelligence and machine learning capabilities to do this at a scale unmatched by our competitors. And we are increasing our lead each and every day. Our two key software customer-facing products, AirView and myAir, are now 100% managed in the cloud. So not only are our devices cloud-connected and our software cloud-enabled, we here at ResMed as a company are cloud-connected and cloud-enabled. In fact, we are a leading digital health company globally. Our mission and goal to improve 250 million lives through better healthcare in 2025 drives and motivates me and ResMedians around the world every day. We made excellent progress towards that inspiring goal during the last quarter. Before I hand the call over to Brett for his remarks, I want to again express my sincere gratitude to the more than 8,000 ResMedians worldwide for their perseverance, hard work, and dedication during these ongoing and unprecedented times. Thank you for all that you do. With that, I will hand the call over to Brett.

Great, thanks, Mick. I'll provide an overview of our results of the third quarter of fiscal year 2022. Unless noted, all comparisons are out of the prior year quarter. We had solid financial performance in Q3 despite the headwinds we faced as a result of significant ongoing supply chain constraints and a challenging freight environment. Group revenue for the March quarter was $865 million, an increase of 12%. In constant currency terms revenue increased by 14%. Revenue growth reflects increased demand for our sleep and respiratory care products across our portfolio driven by recovering market conditions and by increased device demand in response to the ongoing product recall by one of our competitors. In the March quarter, we recorded immaterial incremental revenue from COVID-19 related demand consistent with the prior year quarter. Looking forward, we expect negligible revenue from COVID-19 related demand. In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $35 million to $45 million in the March quarter. For the first three quarters of FY 22, this reflects incremental revenue in the range of $170 million to $190 million. We continue to experience challenges in securing sufficient components, and this has hampered our ability to materially increase our supply of devices. We expect our fiscal fourth quarter to remain supply constrained and similar to our recent fiscal quarters, therefore limiting incremental revenue during the fourth quarter. We now expect a total incremental device revenue opportunity for fiscal year 2022 will fall somewhere between $200 million and $250 million. Looking at our geographic revenue distribution, and excluding revenue from our software as a service business, sales in U.S., Canada, and Latin America increased by 18%. Sales in Europe, Asia, and other markets increased by 11% in constant currency terms. Of that segment, globally in constant current terms, device sales increased by 21%, while masks and other sales increased by 9%. Breaking it down by regional areas, device sales in the U.S., Canada, and Latin America increased by 30%, as we've benefited from incremental revenue due to a competitor's recall and favorable product mix as we sold an increased proportion of higher acuity devices. This is consistent with our guiding principles for product allocation, namely that we are giving priority to the production and delivery of our devices to meet the needs of the high acuity patients first. Masks and other sales in the U.S., Canada, and Latin America increased by 7%, reflecting solid resupply revenue achieved despite the challenging device supply environment, which continues to limit new patient setups. In Europe, Asia, and other markets, device sales increased by 10% in constant currency terms. Mask and other sales in Europe, Asia, and other markets increased by 13% in constant currency terms. Software-as-a-service revenue increased by 8% in the March quarter. We saw strong performance out of the HME segment as customers continue to utilize our SaaS solutions to streamline and more efficiently run their businesses. And we are seeing some stability in the skilled nursing care segment as it continues to emerge from the challenges of the COVID-19 pandemic. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our third quarter earnings press release. Our non-GAAP gross margin declined by 150 basis points to 58.1% in the March quarter. The decrease is predominantly attributable to higher freight, component, and manufacturing costs, partially offset by a positive product mix due to strong growth in our higher acuity devices and improvement in average selling prices following the introduction of the device surcharge. Moving on to operating expenses. We are seeing a more normalized expenditure profile as COVID-19 impacts subside compared to the low comparable and negative price rates we experienced in Q3 last year. SG&A expenses for the third quarter increased by 14%, or in constant currency terms increased by 17%. The increase was attributed to an increase in employee-related expenses. SG&A expenses as a percentage of revenue at 21% remained broadly consistent with the 20.9% we reported in the prior year period. Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the balance of FY 22. R&D expenses for the quarter increased by 19%, or in constant currency terms increased by 22%. R&D expenses as a percentage of revenue were 7.7% compared to 7.3% in the prior-year quarter. We continue to make significant investments in innovation because we believe our long-term commitment to technology, product, and solutions development will deliver sustained competitive advantage. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the second half of FY 2022. Our non-GAAP operating profit for the quarter increased by 5%, underpinned by strong revenue growth, partially offset by the contraction of our gross margin and higher operating expenses. On a non-GAAP basis, our effective tax rate for the March quarter was 21.1%, compared to the prior year quarter non-GAAP tax rate of 19.4%. Looking forward, we estimate our non-GAAP effective tax rates for the full fiscal year 22 will be in the range of 19% to 20%. Our non-GAAP net income for the quarter increased by 2%, and our non-GAAP diluted earnings per share for the quarter also increased by 2%. Cash flow from operations for the quarter was $117 million, reflecting robust underlying earnings partially offset by higher levels of working capital. Capital expenditure for the quarter was $48 million. Depreciation and amortization for the quarter totaled $42 million. During the quarter, we paid dividends to shareholders totaling $61 million. We recorded equity losses of $2.6 million in our income statement in the March quarter associated with the premise on a joint venture with Verily. We expect to record equity losses of approximately $2 million to $3 million per quarter for the balance of fiscal year 22 and into FY 23 associated with that joint venture operation. We ended the third quarter with a cash balance of $202 million. At March 31, we had $681 million in gross debt, and $479 million in net debt. Our debt levels remain modest. And at March 31, we had approximately $1.6 billion available for drawdown under our existing revolver facility. In summary, our liquidity position remains strong. Our board of directors today declared a quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance. Our solid cash flow and low leverage provides flexibility in how we allocate capital. Going forward, we plan to continue to invest for growth through R&D. We also expect to continue to deploy capital for tuck-in acquisitions. And with that, I'll hand the call back to Amy.

Great. Thanks, Brett. Kevin, I'd like to ask you to come back on the line. I'll turn the call over to you to provide instructions and manage the Q&A portion of the call.

Thanks very much. If I could just start with a question on the guidance from the benefit from the field free call. So it's fallen $100 million short of where you are projecting a year or so ago. Just wondering how you are now thinking about that opportunity set as we move into the new financial year?

Hey, David, yes, it's Mick here. That's a good question. Clearly, as we enter the second half of the year, we are readjusting our FY 22 expectation to be 200 to 250 million. I'll just be very open, very specifically, a contract from 12 months ago with a particular semiconductor supplier had a very significant double-digit de-commit in the last weeks and months, and there's a commitment from 12 months ago that had some very strong supply and it went down double-digits. With that as a headwind into us, all the tailwinds of our work—the five projects—allowed us to sort of take two steps forward and two steps back versus two steps forward and one step back. That didn't allow us to achieve that extra 100 million of incremental revenue that we thought we would achieve here through fiscal 22. Having said that, some of these projects coming to market, such as the Card-to-cloud AirSense 10 device where we eliminate that bottleneck, will allow us to speed up some production to make up some of that difference. And that's allowed us to achieve the 30% year-on-year growth that we saw in devices in U.S., Canada, and Latin America. Look, it's not perfect sailing ahead. When you get de-commits, I'd never heard that word before. You're offering money, very good margins, long-term contracts, and people just can't supply due to force majeure and other aspects coming into play. But I can tell you that all the hard work that our supply chain has been undertaking has allowed us to achieve these results despite that headwind. We're not planning on providing guidance for FY 23 around this. What we're doing is striving for sequential growth every quarter as we go ahead. I think that the supply chain has done an amazing job, and if you look at what we would have achieved—14% growth, constant currency year-on-year—we could have reached 20% or 25% if we had unlimited supply. The de-commits, and changes in the global semiconductor and other electronic components have definitely been headwinds. But I think with all the work we've been doing, we're going to power through this. Our strong ship will navigate the waves ahead, and I think our team has done a great job in ensuring that the supply we will secure throughout this calendar year will present a great opportunity for sequential growth.

Thanks. Good morning, Mick. Just one question on the backlog of patients. You did mention in your prepared remarks. Just trying to see if you can quantify how large the backlog is currently? And how long are patients waiting to get onto treatment? Is there something that ResMed can do to keep these patients engaged? Or is there a risk that they potentially fall out of the system if they don't get into product in a short period of time?

Thanks, Gretel. It's a great question. Yes, as you know, I talked about at least a 12 to 18 months backlog, which in many industries you may see as a fantastic indicator, but these are patients waiting for therapy. To answer your specific question, how long will any individual patient wait? It depends on geography and environment; it might be eight days or eight weeks, depending on the flow of products. But an individual patient isn't told, 'Oh, you've been diagnosed; we’ll take care of you next April.' They might be informed it's going to take four weeks. We are aware that is frustrating for patients, especially when they suffer from conditions that disrupt their sleep. We are closely monitoring this pressure and finding substitutes for therapy. We sell dental devices across Europe with a number one provider. We're not observing a significant shift over to alternatives. Our patients are informed by doctors about expected timelines. I should reiterate, the 12 to 18 month backlog is reflective of industry-wide strain due to our number two player being out of commission until at least the end of this calendar year. While we will certainly step up our efforts, the backlog won’t vanish effortlessly once they resume production. Patients will continue to require diligent monitoring and scheduling as well.

And good morning, all. Thank you for taking my question. Can we just talk a little bit about the device and mask dynamics in both Americas and the rest of the world? Obviously, the Americas had stronger device growth, but much softer mask growth there. Can you share your thoughts around to the extent that's driven by fewer devices in the market as opposed to resupply for masks, and then vice versa for the rest of the world?

Thanks, Lyanne, for the question. Yes, as you mentioned, there was a very strong device growth in the U.S., Canada, and Latin America—30%—along with solid growth at 10% in devices in Europe, Asia, and elsewhere, resulting in a net growth of 21% in constant currency across that sector. In terms of masks, going back to 2019, we talked about mid-single-digit growth for devices and high single-digit growth for masks. I look at our global mask growth rate at 9% in constant currency, given the headwind of new diagnoses and the competitive situation limiting new patient setups. In the U.S., we achieved 7% growth, and we see it as reasonable given new patient starts are down. We are leveraging our resupply capabilities using Brightree and SNAP technology in the U.S. and throughout our operations in Australia, New Zealand, Singapore, and Northern Europe hospitals. I'll also hand over to Jim Hollingshead, our President of the Global Sleep Business, to shed some light on our current positioning and dynamic.

Thanks, Mick. And thanks, Lyanne. It's a great question. The numbers don't clearly convey the underlying dynamics. The volumes and the revenue growth are contingent on which SKUs we can produce based on component availability. In markets where we can produce specific devices (e.g. based on chip availability), we see growth in those specific products. While there's demand for our masks, the reduction in new patients has impacted new device setups due to market under-supply. In every geography, there is strong demand for our devices and masks. However, the dynamic is driven largely by the components supply rather than demand.

Good morning, Mick. Thanks for taking my question. Just a quick one on the guidance you provided for the full year regarding the Philips share gains and that revenue contribution. What do you think is the underlying growth rate of the base business excluding that share gain? In other words, what were you expecting to grow the business by, and how do you come up with the $200 to $250 million figure? What do you expect for the base business considering the supply constraints in the market at the present?

Yes, Saul, thanks for the question. When we looked at those estimates about six months ago—mid-June when the competitor announced their recall—there were sell-side estimates ranging from $50 million of incremental revenue for ResMed to $950 million from some analysts, and we thought that variance was just too broad. We generally prefer to relinquish expectations to the smart teams on both the sell-side and buy-side. The situation is too unpredictable. So we calculated it ourselves to gauge forecasts on parts and components we could procure. We anticipated that supply would limit the revenue potential while growing operational capacity. We started with estimates of $300 million to $350 million in incremental revenue above our forecast growth. We adjusted this to the $200 million to $250 million range. As Brett explained, excluding this incremental reference we believe the underlying growth rate could settle around 10%. We maintain the expectation these patients will return as we scale operations upon supplier advancements.

I just wanted to ask regarding the Astral ventilators. You mentioned that it was not constrained, and I want to gain insight on how this part is performing in a competitive market now that Philips is back in play.

Yes, Dan, thanks for the question. Our guiding principle has been to take care of the most critical patients first. Our supply chain team has ensured we are not supply-constrained on our life support ventilator, the Astral. We're competing head-to-head with Trilogy and Eva. The recall with our competitor has only bolstered our market position. Our brand reputation stands out with the highly reliable technology embedded in the Astral. Jim, would you like to elaborate on the Astral's performance in the U.S. and beyond?

Yes, Mick. Thanks, Dan. The Astral is performing very strongly in the competitive landscape. We've seen a notable increase in market share thanks to various improvements made over the platform in the past couple of years. It’s important to mention that the Astral can connect to an attachable modem, enabling remote patient monitoring via our AirView platform worldwide. We've noted substantial growth in the European markets with that capability.

Good afternoon. Thank you for taking the question. Just going back to the de-commit. Did you get a sense of why your orders from over a year ago were de-committed? And just how did the semiconductor supply chain unlock over the next three to six months? What are they telling you needs to happen incrementally for you to get a steady supply moving forward?

That's a great question. I'll discuss what our supply chain is doing and then I'll hand it over to Rob Douglas to elaborate on the excellent work that Andrew Price and Linda Laidlaw, who lead our supply chain and operations, are undertaking. Since our interaction with semiconductor suppliers started, I've emphasized the importance of the chips they provide in our lifesaving medical devices. I put together a video for investors and employees of one of our significant electronic component suppliers to emphasize how their chips enable respiratory support for patients. The increased demand for electric vehicles, consumer devices, and recent semiconductor shortages have made chip allocation more difficult. We've been working closely with our supply chain partners to highlight how critical our products are to drivers and patients. We’ve already established long-term commitments for supply with our key semiconductor suppliers. Rob, could you elaborate further?

Yes, it is tough. The electronics and semiconductor industry works based on long-term forecasts. Yet they often only have short-term clarity on demand levels, which complicates supply chain management. The electronics industry has always experienced feast or famine conditions. We’ve experienced a greater shortage than normal, largely driven by demand in the automotive space and consumer electronics. Component suppliers face similar limitations regarding their own inputs. Our goal is to differentiate by developing multi-sourcing strategies and providing quotes in advance, so we can secure adequate supply lines. Although it's a challenging environment, we’re managing through it and will continue to do so.

Yes, Rob—our initiative is to remain in a position to take three steps forward whenever there are challenges. We're committed to navigating this landscape incrementally, pushing through to fortify supply and ensure we meet demands without jeopardizing quality.

Thanks very much. Good morning, Mick. I might just follow up on those five areas of work you mentioned: sourcing, validation, and reengineering. I'm curious about the progress and timeline to completion for these projects. Have any produced noticeable benefits so far?

David, it's an excellent question. Those five areas of work embody multiple projects within each of them. Just one task involves the validation of new parts from new suppliers, which relies on our R&D team's efforts, regulatory checks, and quality assurances. Our protocol has been strict, particularly with the need for quality and safety. Those five lines of work involve extensive effort, especially when assurance stands paramount. I feel optimistic about the projects. However, I can’t provide specific timelines as each of these areas comes with numerous projects, creating a complex matrix. Rob, do you have some points to add?

Certainly, David! I won’t share specifics about individual projects, but our focus is on multiple protocols and chips. Patient safety and product quality remain our top priorities. We’ve expanded our raw material and component inventories significantly, which will position us better to meet demand. The upcoming months will be critical to our success as we aim for a continuous improvement cycle while securing our components.

Yes, thanks for taking my question! I wanted to ask about this Card-to-cloud device. Can you comment on how it works? I assume the collected data must be uploaded somehow. Will there be any long-term repercussions from having these in the installed base in terms of lost data over time?

Thanks for the question, Mike. I'll hand to Jim to walk through more details. ResMed began exploring digital health solutions in 2002, culminating in our Card-to-cloud technology, which has evolved significantly through the years. The essence of our Card-to-cloud offering is aimed at ensuring patients have access to therapy. The device features SD cards and allows a secure transfer of data to AirView, which streams relevant data in real-time. Although patient data on the SD card can be stored for months, the frequency of upload relies heavily on providers. Jim, you can fill in additional context.

It's early days for the Card-to-cloud device and we are progressively expanding its reach in more regions. Our main focus remains to ensure patients are getting therapy. The Card-to-cloud version of AirSense 10 lacks a cell chip, requiring SD cards to reach the provider for data transfer. We have improved the process to facilitate easier uploads into the cloud. Consequently, patients can still be managed effectively with AirView, enabling the outstanding patient management capabilities we are recognized for in the industry.

Hey, guys, this is Maggie on for Margaret. Thanks for taking our questions. I wanted to ask about the incremental benefit guidance question a little bit differently. Supply constraints are preventing you from fully servicing patients. You’ve reduced your expectations by 100 million. When conditions improve, do you think you'll recover that full 100 million in the next fiscal year, and maybe even more?

Thanks for your question, Maggie. Yes, absolutely! Not only will we benefit from the technology of AirSense Card-to-cloud but through various initiatives in all five project areas, we’ll free up supply over time. Sequential growth will continue throughout this year, capturing demand as patients return to the market. Our incremental revenue opportunities lay in waiting for us, and they can be executed through the growth initiatives we've implemented while anchoring our efforts in patient care.

Good afternoon, everyone. Mick, a lot of questions have been answered, but if we layer a recessionary environment on top of an inflationary one, can you give us guidance on new order flow, patient behavior, and resupply orders? It almost seems inevitable that there's another facet on the horizon.

Thanks, Suraj. Yes, look, inflation is high, and we've been absorbing the cost impacts within various areas. We’re implementing price mitigation strategies. As for potential recessions, we haven’t seen one in a while. I can mention that ResMed is known for its resilience even during the last financial crisis—consumers might forgo luxury goods, but essential therapies remain a priority. We've achieved strong performance during challenging periods in the past and maintain optimistic resilience even under current conditions. We have strategies in place to deal with inflation and addressing potential downturns, so while we are cautious, we're prepared if any challenges arise.

Thank you, Kevin, for managing the call and thanks to all our shareholders for joining us. I want to express my gratitude to the 8,000 ResMedians. Many of you are also shareholders through our ESPP. Thank you for your dedication and hard work helping people breathe better, sleep better, and live better lives outside the hospital in 140 countries. I look forward to talking to you and all our stakeholders here again in 90 days. Thank you, and we can now close the call.

Great. Thanks, Mick. To echo and thank you, everyone. We appreciate your interest and your time. As a reminder, if you have any additional questions, please don't hesitate to reach out to our Investor Relations team directly. This does conclude our third-quarter 2022 conference call. Kevin, I'll turn it back to you to close things out.