Resmed Inc (RMD) — Q1 2024 Earnings Call Transcript

Great. Thank you, Kevin. Hi, everyone. Good morning and good afternoon. Welcome to ResMed's First Quarter Earnings Call for Fiscal Year 2024. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate website later today along with a copy of the earnings press release and presentation, both of which are available now. On the call today are Chief Executive Officer, Mick Farrell; and Chief Financial Officer, Brett Sandercock. Following our prepared remarks, Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer, to answer any questions you may have. During today's call, we will discuss several non-GAAP measures. We encourage you to review the supporting schedules in today's earnings press release for a reconciliation of the non-GAAP measures to the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ. Please refer to our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'd like to now turn the call over to Mick.

Thanks, Amy, and thank you to all of our shareholders for joining us today. Our first quarter fiscal year 2024 results reflect strong growth across our entire business with double-digit top-line growth. This growth was driven by double-digit global growth in the masks category and double-digit growth in our software as a service business. We also achieved high single-digit global growth in devices even as that category annualizes very high growth in the prior-year period. The flexible and agile work of our supply chain, manufacturing, and distribution teams has enabled us to provide ongoing global availability of our market-leading 100% cloud-connectable flow generator platforms. We have unconstrained supply of our AirSense platforms enabled by excellent volumes of the AirSense 10 platform globally and fast-ramping approvals, launches, and delivery of the best-in-class AirSense 11 platform country by country. During the quarter, we accelerated delivery of the AirSense 11 in Japan, and we launched the AirSense 11 in Australia and New Zealand. We have plenty of runway ahead on our pathway to launch in all of the 140 countries where we sell our solutions. We are very proud to be able to support all global demand for flow generators through a combination of AirSense 10 and AirSense 11 platforms. We remain laser-focused on accelerating the production and delivery of the AirSense 11 platform. We are moving swiftly on that front. Our Masks and Accessories business grew 21% year-over-year among a highly competitive market with all global players on the field in this category. Our commercial teams are doing an amazing job of showing the clinical and economic benefits of the ResMed mask portfolio. Our clinical and commercial teams are also partnering with physicians and provider customers to drive resupply programs directly with patients. The peer-reviewed and published clinical evidence showing that the adoption of a resupply program leads to better patient outcomes is proving itself out in the real world customer by customer. We continue to see strong growth in the US mask business where provider resupply programs can scale, powered by our digital health ecosystem, including AirView for physicians and providers and myAir for patients. For patients around the world, especially in non-reimbursed markets, we are developing, launching, and scaling outreach and subscription programs to help the consumer, who is the ultimate customer, take control of their own health and engage directly in refreshing their mask, tubing, humidifier, and other accessories. This has been a permanent uptick since COVID-19. People care about respiratory health and respiratory hygiene, and they are taking action, and we are supporting them with digital solutions and services to meet their needs. Before I turn to review updates on our key strategic priorities, I'd like to spend a little time discussing actions we've taken to accelerate profitable growth across ResMed and to power our long-term success. We've taken immediate steps to ensure we're prioritizing the right things to drive profitable growth and our leadership teams have carefully reviewed opportunities to improve our performance. We have stopped some projects that were not working out as well as we thought. We've increased investment in areas that we believe will be pivotal to long-term success, such as our digital health tech investments as well as focused hardware and software development. Creating the smallest, the quietest, the most comfortable, the most connected, and the most intelligent healthcare solutions in the market. These changes have impacted some of our teams. This week, we have taken actions that resulted in a reduction of our global workforce by 5%. Decisions like this that impact people are never easy. However, we know that we are doing the right thing, and we're doing the right thing to accelerate our growth and to refocus on our long-term mission. I feel more strongly than ever that we are well positioned with an incredibly long runway of profitable growth and value creation for all of our stakeholders as we move forward. Let's now turn to a discussion of our three key strategic priorities: number one, to grow and differentiate our core Sleep Apnea and Respiratory Care business; number two, to design, develop, and deliver market-leading medical technology as well as digital health solutions that can be scaled globally; and number three, to create, innovate, and grow the world's best software solutions for care delivered outside the hospital, a field that we call residential medicine. There are over 2 billion people worldwide suffering from sleep apnea, chronic obstructive pulmonary disease, respiratory insufficiency due to neuromuscular disease, and insomnia. There are millions more that we can support as they navigate the complex outside hospital healthcare system. We believe that healthcare should be delivered in the lowest cost, lowest acuity, and highest comfort location possible. Very often, that is a patient's own home. We have a massive opportunity ahead of us to help hundreds of millions of people worldwide. Our end markets remain incredibly underpenetrated with many opportunities to add value, reduce friction, lower costs, and improve patient outcomes. Now that we've been able to comfortably support overall global market demand for sleep devices for the last few quarters, we're ramping up our demand generation initiatives. We're investing in marketing efforts to raise awareness and patient engagement across specific global markets. We are leveraging traditional healthcare channels as well as investing in cost-effective direct-to-consumer demand generation campaigns to help what we call sleep concern consumers, find their way into the screening, diagnostic, treatment, and management pathway. We will act as a digital concierge to guide patients on that journey. In terms of analyzing the results of these efforts to date and ongoing, we are tracking new patient starts in our physician and provider based ecosystem, which now has more than 22.5 million patients, as well as the new user starts in myAir where patients themselves choose to participate in their personalized healthcare journey to better breathing and better sleep. Patient flow into the funnel is at an all-time high. We are well above the rates that we saw pre-COVID in 2019 across all geographies, triple digits across the board. The bottom line is that we are driving strong growth of patients into the funnel. We believe the work that's being done in the pharmaceutical industry right now with obesity drugs will be a net positive for patient flow and growth in sleep apnea, COPD and for ResMed overall. In terms of existing patients in our installed base, we are actively tracking a cohort of many thousands of patients on these medications and we are not seeing any significant change in the PAP adherence rates nor any reduced participation in resupply programs versus control groups. These data indicate that there is a group of patients on combined therapies in a stable state. In terms of new patients activated into the funnel, we are seeing the number of new patients activated into the healthcare funnel picking up. We see patient flow is not only strong but increasing. We believe in treating the whole person here at ResMed, including a combination of cardiovascular exercise, diet and nutrition, as well as good sleep and breathing. That combination was called the Triumvirate of Health by Professor Bill Dement from Stanford, may he rest in peace. And we think a combination of these three elements will result in the best outcomes for patients. It is quite possible that this new class of drugs may become as large or even larger than the cholesterol class or the blood pressure treatment class of pharmaceuticals. If this is the case, we will see a whole new population of patients activated with their primary care providers that we may never have seen in the healthcare system. If this comes to pass, we may see benefits for the entire health system and for the people being treated themselves and for ResMed as more and more people are evaluated and screened for sleep apnea, respiratory insufficiency, and other key chronic conditions as part of their primary care evaluations. Our data are showing an all-time high of patient flow and that supports this thesis. Stepping back and looking at the science in the field of respiratory medicine, we have created a forward-looking epidemiology model for our core market sleep apnea, spanning over two to three decades into the future. We have assumed an aggressive case for high market penetration of this new class of pharmaceuticals. We will publish the epidemiology model in our investor deck straight after this call. The model starts using a baseline of the global prevalence of sleep apnea, which was 936 million people in 2015. This is based on peer-reviewed and published data from the Journal Lancet in 2019. Our epidemiology model grows with conservative population and aging assumptions to a prevalence of around 1.4 billion people suffering from sleep apnea in 2050. We then overlaid an aggressive assumption for the adoption of this new pharmaceutical class globally. We assumed some of the highest penetration rates that we have seen reported by analysts in the industry. With this aggressive and sustained adoption of the new drug class, we forecast that the global prevalence of sleep apnea will still be around 1.2 billion people in 2050. Now in terms of the market penetration of our PAP therapy into this population, we have assumed market growth from our 22.5 million patients with PAP therapy here at the end of calendar year 2023 using steady state market growth rates that we saw in the years leading up to 2019, that is mid single-digit growth for devices and high single-digit growth for masks. With these growth rates, we reached around 109 million patients on our PAP therapy by 2050. That leaves 1.1 billion people remaining in the addressable market in 2050, over and above those already on our PAP treatment. We will continue to update our epidemiology model with all the new data as they arise. However, the bottom line is that there remains a huge number of people needing our sleep apnea treatment solutions today and for the next two to three decades and beyond. While we're proud that we have peer-reviewed and published data showing that we can achieve over 87% adherence of patients to our PAP technology, combining our best-in-class med tech hardware with our digital health solutions AirView and myAir, that still means 10% of our patients on an annual basis will need alternatives. We are investing in those alternative therapies, and we are actively working to direct patients who do not adhere to pack that 10%-plus to second line therapies, such as dental devices, where we have invested and scaled the market-leading 3D printed dental device for sleep apnea in Europe called Narval. In addition, we have investments in other second line therapies, including pharmaceuticals and hypoglossal nerve stem technology. We want every patient who suffers at night to find a path to good breathing and good sleep, and it looks like there's 1 billion of them we need to help. We start with the highest efficacy and lowest cost therapy, which is PAP technology, where we have very high adherence rates and the best outcomes for patients and we go from there. Given this incredible multiple decades-long runway of growth and as part of our ongoing efforts to improve and streamline that end-to-end patient pathway and to make it easier for sleep physicians and sleep labs to diagnose and manage these patients, we're excited about our Somnoware acquisition that we closed during the last quarter. Somnoware is software for pulmonary and really all sleep physicians. It complements our current portfolio of software offerings for physicians, home care providers, and patients, including AirView, Brightree, and myAir, respectively. The goal is to ultimately drive greater efficiency and better patient care by helping physicians to take best-in-class care of their patients with increased efficiency and a better overall experience for the doctor and the patient. We're making progress across several digital health technology initiatives to drive the value proposition of our cloud connected devices even higher. We are investing in several artificial intelligence-driven data products and capabilities in our Air Solutions ecosystem. This quarter, we started rolling out a digital product in our US market called Compliance Coach. Compliance Coach is built for home care providers to help them efficiently focus efforts and prioritize outreach to increase patient compliance and ultimately to drive better patient outcomes by helping them meet and beat 90-day adherence goals. The application utilizes ResMed's many billions of nights of de-identified sleep and respiratory care data in the cloud to predict the likelihood that a patient will be adherent to therapy or not. The AI product then advises and coaches the home care provider to best identify the patients who may struggle and to meet compliance requirements where they can so they can prioritize their interventions and outreach to the best probabilities to support patient success. It's early in our rollout program of Compliance Coach. However, customers using the product are excited and engaged and are starting to see results. Watch this space for many more ways that we can work with all of our customers to unlock value from incredible depth of de-identified data using tech like AI and ML for the ultimate benefit of physicians, providers, and patients. Let me discuss the forward pathway stemming from our joint venture with Verily right now that was called Primasun. Based on a mutual agreement between ResMed and Verily, we've made the decision to unwind the joint venture's day-to-day operations. We expect this to be complete by the end of the current quarter. Over the past years of this partnership, we've learned how to leverage technology to better identify, engage, diagnose, and manage sleep concern consumers in our US market. We expect to take ownership of key assets of the Primasun developed model so that we can build on the investment and the learnings and ultimately accelerate our ongoing demand generation efforts with sleep apnea patients across ResMed. It is exciting to take the learning from demand generation work in one project and in one country and to now look to apply that on a global scale across the 140 countries where we provide solutions. Our growing Respiratory Care business continues to be supported by the increased adoption of both noninvasive and life support ventilator solutions. In terms of next-gen respiratory care therapies, we continue to invest in clinical and economic trials for high-flow therapy, that we call HFT, with the goal of cost-effectively treating COPD in the home. We continue to generate strong clinical evidence and economic outcomes that we believe will support broader adoption of these technology innovations for treating lung disease in the home. We believe this has the potential for future growth for ResMed over the medium to long-term. We remain focused on addressing COPD as one of the top three chronic diseases for hospitalization and the number one cause of rehospitalization. The prevalence of respiratory insufficiency due to COPD as well as neuromuscular disease continues to increase, and we are focusing and developing and plan to offer low-cost, high-quality solutions to address this healthcare epidemic. Our SaaS business had another great quarter with year-over-year growth of 32%. SaaS business growth was powered by another full quarter contribution from our fast-growing MEDIFOX DAN business in Germany, as well as high single-digit organic growth across our Brightree and MatrixCare brands in the US market. The sustained high single-digit organic growth in our SaaS business is driven by strength in the HME segment and stability as well as increased tech adoption by customers in the facilities segment. We see a pathway to stable double-digit organic growth across the SaaS business, as well as increased net operating profit performance from this part of our business. The ongoing synergies between our digital health solutions in SaaS and our core business remain strong, and we continue to leverage that through combined management of cloud compute, cybersecurity, interoperability, tech development, as well as customer-facing synergies, including patient resupply technology in our core business. During the quarter, we appointed Greg Timmons as the new General Manager of our Brightree business. I'm excited to support Greg and Bobby to continue to drive growth in our home medical equipment providers and to help our customers across the US market. This quarter, I traveled to Hildesheim, Germany to meet in person with the entire team from our MEDIFOX DAN business. The growth in tech solutions for ambulant home nursing as well as stationary nursing home businesses is very strong in Germany with an aging population in that country and a government that is driving care to be more home-based through their policies and more digital through their policies. We see a long runway for growth with our MEDIFOX DAN team and across our global software as a service business. Our SaaS business remains an integral part of ResMed's growth strategy. This business complements the market-leading software and device solutions we have in our respiratory medicine business. We are well positioned as the leading global strategic provider of SaaS solutions for residential medicine globally, and we have created differentiated value for customers and will drive long-term sustainable growth for our shareholders. Before we get into a detailed update on our financials, let me say this here at ResMed. We are transforming respiratory medicine and residential medicine at scale. We are leading the market in digital health technology across our markets. As we continue to scale and drive efficiencies in our operations, we will leverage appropriate pricing and cost reductions to drive profitable growth. We're focused on driving top-line revenue and tight cost discipline as well as increased efficiencies so that we can accelerate profitability, delivering value for all of our stakeholders and especially the 2 billion patients plus worldwide who need our help. As we move through fiscal year 2024, I'm confident on laser focus that we will continue to see improvements in our gross margin with GM leverage programs focused on five key areas. Number one, to drive the launch of AirSense 11 into new global markets and to increase the availability of AirSense 11 ultimately in all the country markets that we serve. Number two, to drive ongoing strong mask growth with a combination of resupply programs, subscription programs, and new product launches, and you can see that's working this quarter. Number three, to increase software solutions growth, moving from high single-digit organic growth to double-digit organic growth with increased net operating profit leverage in that segment. Number four, to move the higher-cost components and freight costs that we've seen through our legacy through our P&L, turning what was a supply chain crisis headwind into a steady tailwind as we move through fiscal year 2024. And number five, to implement cost reduction actions in non-core areas of our business to free up cash and to accelerate investments in market-leading medtech and digital health solutions. So in terms of Digital Health Investments and Solutions, we now have over 16 billion nights of de-identified medical data in the cloud and over 22.5 million 100% cloud-connectable medical devices sold in more than 140 countries worldwide. We continue to lead the industry in digital health technology and we don't plan to stop anytime soon. There is so much opportunity ahead of us. ResMed's mission and key goal remain crystal clear to improve 250 million lives through better residential healthcare in 2025. This patient-centric mission drives and motivates ResMed-ians every day. During the last 12 months, we have improved over 165 million lives with the delivery of a medical device directly to a patient, a complete mask system to a patient or a digital health software solution, helping each person to sleep better, to breathe better, and to live high quality lives with best-in-class healthcare delivered right where they live. I'm very excited about the opportunities in front of us. In closing, I want to express my sincere gratitude to the 10,000 ResMed-ians for their perseverance, their hard work, their dedication, both today and every day. Thank you. With that, I'll hand the call over to Brett in Sydney. And after Brett's remarks, we will open up for Q&A from the entire group. Brett, over to you.

Great. Thanks, Mick. In my remarks today, I'll provide an overview of our results for the first quarter of fiscal year 2024. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q1. Group revenue for the September quarter was $1.1 billion, an increase of 16%. In constant currency terms, revenue increased by 15%. Revenue growth reflected the ongoing combined availability of AirSense 10 and AirSense 11 sleep devices to support solid underlying global demand as well as strong growth across our mask product portfolio. Year-on-year movements in foreign currencies positively impacted revenue by approximately $10 million in the September quarter. Looking at our geographic revenue distribution and excluding revenue from our software as a service business, sales in US, Canada, and Latin America countries increased by 10%. In constant currency terms, sales in Europe, Asia, and other markets increased by 18%. Globally, in constant currency terms, device sales increased by 8%, while masks and other sales increased by 21%. Breaking it down by regional areas, device sales in the US, Canada, and Latin America increased by 2%, which reflects the fact that we are cycling a particularly higher prior year comparable that was driven by sales of our card-to-cloud devices. Masks and other sales increased by 23%, reflecting growth in resupply and new patient setups. In Europe, Asia, and other markets, device sales increased by 20% in constant currency terms, again, reflecting strong demand and significantly improved availability of cloud-connected devices. Software as a service revenue increased by 32% in the September quarter, reflecting the contribution from our MEDIFOX DAN acquisition and continued strong performance from our HME vertical. Excluding our MEDIFOX DAN acquisition, SaaS revenue grew by 7% in the September quarter. MEDIFOX DAN contributed revenue of $25.7 million for the September quarter, consistent with our expectations at the time of the acquisition. Note, we will anniversary this acquisition in Q2 FY24, so our headline SaaS growth rate will moderate in Q2. Turning to my commentary today, I will be referring to non-GAAP numbers where we’ve provided a full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release. Gross margin declined by 160 basis points to 56% in the September quarter. The decrease primarily reflects an increase in component and manufacturing costs, partially offset by favorable product mix due to the increase in mask growth relative to device growth and favorable foreign currency movements. Sequential gross margin improved by 20 basis points, driven primarily by favorable product mix. Moving on to operating expenses. SG&A expenses for the first quarter increased by 15% or in constant currency terms increased by 14%. The increase was predominantly attributable to increases in employee-related costs as well as the incremental SG&A expense associated with the MEDIFOX DAN that we acquired in November 2022. SG&A expenses as a percentage of revenue was 20.2% compared to 20.3% 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 18% to 20% for fiscal year '24. This guidance also reflects the impact of restructuring we initiated earlier this week, and we estimate this will result in a reduction in our workforce of approximately 5%. We expect to complete the restructure during our second quarter of fiscal year '24. R&D expenses for the quarter increased by 20% or in constant currency terms increased by 21%. The R&D expenses as a percentage of revenue was 6.9% compared to the 6.6% in the prior year period. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year '24. Operating profit for the quarter increased by 10%, underpinned by strong revenue growth, partially offset by a lower gross margin. Our net interest expense for the quarter was $15 million, and we expect interest expense to be in the range of $12 million to $14 million per quarter over the balance of fiscal year '24. Our effective tax rate for the September quarter was 20.1%, broadly consistent with the prior year quarter. Looking forward, we estimate our effective tax rate for fiscal year '24 will be in the range of 19% to 21%. Our net income for the September quarter increased by 9%, and non-GAAP diluted earnings per share of $1.64 also increased by 9%. During the quarter, we recorded a provision of $8 million associated with the expected cost of the recently announced Astral field safety notification. We also recorded acquisition-related expenses of $0.5 million during the quarter. These both have been treated as non-GAAP items in our Q1 financial results. We recorded losses of $4.5 million in our September quarter associated with the Primasun joint venture with Verily. As Mick discussed, the joint venture will be winding down operations and we will incur no further losses going forward in relation to Primasun. Cash flow from operations for the quarter was $286 million, reflecting solid underlying earnings and stable working capital balances. Capital expenditure for the quarter was $30 million and depreciation and amortization for the quarter totaled $45 million. We ended the first quarter with a cash balance of $209 million, and at September 30, we had $1.4 billion in gross debt and $1.2 billion in net debt. During the quarter, we reduced our debt by $80 million. At September 30, we had approximately $825 million available for drawdown under our revolver facility, and we continue to maintain a solid liquidity position. During the quarter, we also closed our previously announced Somnoware acquisition, a company that provides an upstream diagnostic management platform that is complementary to our current AirView and Brightree solutions. Our Board of Directors today declared a quarterly dividend of $0.48 per share. As part of our capital management activities, we plan to resume our previously authorized share buyback program starting in our second quarter. We expect to purchase shares to the value of approximately $50 million per quarter. This will more than offset any dilution from the issue of employee equity during the year. Finally, concurrent with our capital management activities, we plan to continue to reinvest in growth through R&D and expect to deploy further capital for tuck-in acquisitions. And with that, I will hand the call back to Amy.

Great. Thank you, Brett, and thank you, Mick. Kevin, let's go ahead and turn the call back over to you to remind participants about instructions for the Q&A portion of the call.

Mick, I'd just like to press a bit more on some of the comments around the market to 2050. Just interested in your thoughts around GLP-1s as potentially being complementary to CPAP as opposed to being a substitution for. And maybe just giving some thoughts around the upcoming clinical trials and how that could influence that will take going forward?

I'm pleased that we have spent the last 90 days analyzing this as a leader in respiratory medicine and sleep apnea. We're very familiar with the prevalence numbers. The baseline of 936 million patients from 2015, which is projected to grow to 1.4 billion by 2050, seems quite conservative considering the growth of populations and aging demographics in lower-growth regions. This indicates that there will be 1.4 billion potential patients available, not accounting for any effects from GLP-1 class drugs. We conducted a thorough analysis, considering all current and some future indications, to determine the potential impact on worldwide sleep apnea prevalence. We assumed aggressive penetration and a sustained adherence rate between 80% to 100% for these drugs, even though current market rates are lower. This aggressive approach indicated that we could see about 1.2 billion patients by 2050. We'll continue to monitor updates from the pharmaceutical industry, especially regarding the active GLP-1 class, while maintaining our high penetration analysis. Our continued assessment and quarterly updates to our epidemiology model show a significant opportunity, with 1.1 billion patients exceeding our current penetration at high growth rates over the coming decades. Regarding the use of concomitant therapy, in the past two years since these treatments have been available for diabetes and obesity, it is still early, but we are tracking thousands of patients on GLP-1s and PAP. We are observing stable adherence and resupply rates, with no significant changes at the aggregate level. More patients are entering our pipeline due to our awareness and demand generation efforts, along with other alternative therapies bringing patients into the system. We believe individuals who are moderately obese often avoid the healthcare system; however, we see that these therapies are bringing more patients in, leading to a robust influx of new patients. Our data indicates that adherence and resupply rates remain steady among existing patients, and we are experiencing all-time highs in new patient arrivals. We will continue to monitor these trends for the next several decades, and we still anticipate hundreds of millions to a billion patients based on likely penetration in our disease state and beyond. Thank you for your question, David, and I look forward to further discussions.

If I could stick on the same topic. Mick, could I get you to talk a little bit to the 22.5 million patients that you've got on myAir? It would be really good to understand how they sort of fit into the categories of mild, moderate, and severe sleep apnea. Because as much as you've given us some very big numbers, we're fully aware that about half of those patients are in the mild category. And it's unclear to me that many of those patients are currently seeking treatment or will seek treatment in future. So if you could just help us with what you can see in the data and so we can make an assessment as well, please.

Thanks for your question, David. When examining the epidemiology data, we notice a number of variations in AHI. However, what's missing in the market is a breakdown focusing on symptoms and how patients are feeling. We're analyzing patients with AHIs ranging from 5 to 15, 15 to 30, and 30 and above, along with their concurrent therapies. We'll be peer-reviewing and presenting this data at upcoming conferences in 2024 to highlight these differences. Overall, we’re not observing changes in adherence rates. Even in the mild to moderate groups, there haven’t been significant variations in adherence or new patient inflow. While AHI is an important measure of the number of breathing interruptions per hour, it's essential to contextualize it for patients. For example, an AHI of 14, which is considered mild, means a patient experiences suffocation every four minutes during sleep. This may still feel severe to a patient, even if categorized as mild by a doctor. We're monitoring this closely, analyzing it by AHI, symptoms, craniofacial measurements, and other factors affecting sleep apnea prevalence, especially issues like hypopneas, which tend to be more common in women and contribute to worse daytime sleepiness and other health conditions not related to weight. We recognize that over the coming years, weight loss medications will have an impact; however, it may be marginal rather than the dramatic effect the market might expect based on recent stock movements. Our clinical data, both current and historical, comes from the world's largest database encompassing 21.5 million patients and highlights that we are not seeing shifts in the mild, moderate, and severe categories. We’ll continue to update this data every quarter and refine our severity splits. We published our epidemiology model this quarter and will keep providing updates and publishing results as appropriate, similar to the Lancet article that introduced this model. Additionally, we'll ensure that ongoing research is made available in peer-reviewed journals.

I was going to ask some questions about the results rather than GLP-1 drugs, if that's okay?

Dan, that would be delightful.

Could you please walk us through the factors affecting gross margin for the remainder of FY24, specifically regarding any market pricing increases and changes in product mix?

As we look forward on GM, I mean, Mick mentioned it in his remarks as well. But if you look at it in terms of GM, we do feel that we're going to see improvements in our gross margin over FY24. And those tailwinds are really going to be around improved product mix, manufacturing improvements, and efficiencies that we think we can drive. Freight cost reductions are still making their way through inventory and some of that will manifest in FY24. We're seeing stabilized component costs now, that was a headwind even for this quarter but we're cycling, largely cycling that, particularly in the second half FY '24. And then we have, obviously, the AS10 to AS11 transition that will be progressive over FY24 as well and then your point mentioning a little bit around pricing as well. So a combination of those factors will give us confidence, I think, in the gross margin through FY24.

Sorry come back to it, guys, but I think it is an important topic. So just on the patient data mix that you're tracking CPAP patients also in GLP-1s. Can you just update us on how many patients you're tracking there, and when you intend on publishing that? I know Rob foreshadowed last month that you would be sort of releasing that data? Would it make sense to do that before, or do you think maybe after the major study that's going to read out next year? And just any high-level thoughts you have on the outcome of that study would be helpful at this stage.

There will be ongoing longitudinal studies that will be published in peer-reviewed journals, as we recognize the urgency of the issue. In the past 90 days, the market has reacted with an assumption of a 30% to 40% reduction in immediate total addressable market. This market cap change correlates with all historical scientific evidence we've analyzed. We have thousands of patients in our GLP-1 plus PAP database and 17,000 patients tracking post-bariatric surgery who are on PAP therapy, showing over 50% weight loss in that group. We are observing significant weight loss in various GLP-1 types, with reductions ranging from 10% to 50%. We will continue to publish data across these cohorts in peer-reviewed and clinical publications. While we provide epidemiological data, some will not be submitted for peer review; we aim to differentiate between data for clinical insights and that for investor relations. The aggregate data show no changes regardless of GLP-1 class or adherence groups. We'll find the right balance between short to medium-term information and data for longitudinal studies to present the insights effectively. Each quarter, we will highlight the strong growth in our devices and masks, particularly mask resupply rates, which are unaffected by any recalls or drug therapies. If patients are not on therapy, they won't order masks, and we are witnessing robust resupply. Additionally, our Air Solutions ecosystem continues to expand, with record new patient numbers and engagement through myAir, driven by the digital advancements of AirSense 11. We are seeing significant patient flow and adherence rates and will keep publishing relevant data quarterly, along with updates to the epidemiology model.

Just on your Americas mask growth, could you provide some more details on where that additional growth in resupply has been coming from, and how long do you think you can sustain that strong year-on-year growth in mask revenues?

It’s a really good question because the mask growth across the group was 21% on a constant currency basis. Europe showed impressive strength with a 15% constant currency growth in a fully competitive market, while the US, Canada, and Latin America experienced a 23% growth. As I mentioned in my prepared remarks about our future outlook, the stable market growth in our sector was mid-single digits for devices and high-single digits for masks. Examining the five-year and three-year CAGR leading up to 2019, prior to COVID, reflects this mid-single-digit growth for devices and high-single-digit growth for masks. If we consider this as the baseline market growth, we then need to explore how ResMed can drive market demand and attract patients. I firmly believe we are seeing more patients entering the system, particularly in primary care, which is encouraging. The current market cap from these companies has reached $1 trillion, and they will leverage this for marketing efforts to attract individuals for innovative treatments. This will naturally lead to patients being assessed for various comorbid conditions commonly associated with obesity, such as sleep apnea, COPD, and cardiovascular diseases. We are closely monitoring this trend. Over the decades we’ve been in business, we have not only accepted market growth rates but aimed to exceed them. The 23% growth we've achieved is remarkable in such a competitive landscape. However, it’s important to note our initiatives around resupply, new product launches, and efforts to draw patients into the system. I believe we can meet or surpass the high-single-digit growth that the market is projected to grow at. Given our strong market share, we benefit greatly from our demand generation initiatives and capture a significant portion of these patients on both the device and mask sides. We see this trend reflected in many of the markets we operate in worldwide. So, it’s a great question.

Mick, really good OpEx control in the quarter. And I think Brett mentioned, if I pick it up correctly, 18% to 20% as a guide on revenue going forward. I'm just wondering if there is more restructuring to be done or if you think you're rightsized at the moment?

As mentioned in the prepared remarks, decisions affecting our workforce are the hardest to make. This week, we implemented a 5% reduction in our global workforce. I view this as part of our restructuring efforts. While I'm considering some adjustments to our operating model, roles, and responsibilities with a focus on becoming more product-led and brand-led, these are not large-scale changes. The anticipated 18% to 20% revenue mentioned is a reflection of the changes we've made and represents a new baseline aimed at achieving strong profitable growth across our business. The landscape has shifted, and although we are already a product-led organization, our brand's global value has increased. We need to document and comprehend that growth and how to engage consumers in non-reimbursed markets. We've invested in our direct-to-consumer markets and are actively driving growth there. In our B2B and B2B2C markets, we are collaborating with healthcare partners and distributors to find the best way to bring patients into our system. Essentially, we're freeing up cash to reinvest in generating demand and bringing patients into the funnel. There is a significant need for our services, and we must find better ways to serve those needs moving forward. To answer your question directly, yes, the restructuring is complete, and we are now concentrating on progressing ahead.

I wanted to focus on the quarter as well. You guys talked about this all-time high patient flow number, which is notable. When you said the channel, I guess, were you referencing those are CPAP prescriptions or folks getting tests? And any color you can give us on how that growth profile compared to recent quarters, and anything kind of on the US device growth this quarter as well?

So look, we have a relatively low share of the diagnostic space in home sleep apnea testing with our ApneaLink Air product. So we are tracking that, those are up. The best data we have is through the Air Solutions System. So we talk about the 22.5 million patients on our Air Solutions platform and almost 7 million patients that we now have on myAir patients directly engaged in. So we watch those starts very closely. We also do have de-identified and objective data from Brightree showing across the whole industry, patients coming into the funnel in sleep apnea but also across other home medical equipment categories. And I can tell you the patients are getting engaged and finding their way into the primary care treatment funnel, specifically in sleep apnea. And we believe it's not short term that this is a sustainable rate of growth for patients coming in and I think it's really exciting to see that. To your question specifically about device growth, yes, so it's 8% globally. I mean I got to say I'm incredibly proud of our Europe, Asia, and rest of world markets growing 20% this quarter year-on-year, that's where we're competing directly with our competitor that was out for their recall. They're back in many countries, in Europe, Asia, and rest of world, and meeting and beating them head-to-head, I think, proves out the thesis that ResMed has the best-in-class products, but services and solutions, not just the hardware but the software and the capability we've been investing in that for a long period of time. This period a year ago, the September quarter 2022, we had just unleashed card to cloud on an unallocated basis, and it took off despite usually what is quite a low growth quarter in September, given that summer here in the US. We had incredible growth last summer with our card to cloud solutions, so we're lapping that growth. I think the team with that device growth of 2% is building on what was an extraordinary uptick from card to cloud. But when we look at the number of patients coming through, the diagnostic funnel and the setups coming into AirView and the setups of the patients coming into myAir, the growth rate of patients is mid-single digits plus and with recap really up there. And so I think that's why I can say that I think it's sustainable for us to meet and beat sort of the pre-COVID 2019 CAGR of mid-single-digit growth for devices, we can meet and beat that throughout demand gen and high single-digit growth in masks. We can definitely meet and beat that through our work and experience and expertise now on resupply, engagement with patients, and the changes that happen during COVID are focused on respiratory health and respiratory hygiene. So I hope that answers your question, Margarette. Thanks to that.

Just a question back on to the gross margin. When we think about fourth quarter's gross margin, it went down largely because of FX and mix, and yet we've got that going in your favor in this quarter. I'm just curious as to really what is holding that gross margin back when you do have such a strong mix geographically with devices in rest of world up but also masks as a category overall up and you've got the FX tailwind as well? And just to clarify, the Astral field safety notice cost is not in the 56% gross margin from what I can work out, if that's correct as well?

Yes, that's correct, that's excluded as a non-GAAP item from 56%. But if you're talking year-on-year on the gross margin, really the biggest impact coming through was component cost increases that we're still cycling through and working through inventory. So that was the biggest factor. We did see some product mix favorability there, but not enough to offset those component cost increases, for example. That was the biggest impact on the year-on-year reduction in GM.

Mick, you've kind of commented on sustainability of US flow gen growth. I just wanted to ask you, so the growth rate based on revenues this quarter implies about a 17% CAGR going back to 1Q fiscal '20, so the September '19 quarter. So I'm just wondering if you think you can sustain sort of the dollars of flow gen sales that you reported this quarter, or if you think sales are going to step down as we work through the rest of fiscal '24? Just wondering if you can sustain the level of sales in dollar terms?

It's a good question, but it's a complicated answer, because there's so many moving pieces between that baseline you took there for that CAGR number '19 and '20 with the COVID shutdowns, our spin-up on ventilators with 150,000 vents at the start 2020, and then the slowdown and the restart-up of the sleep apnea funnel and the shift that happened through 2020, 2021. And then, of course, the perturbation that made it a perfect storm of a competitor with a recall of 5.5 million devices in '21 through '23 and ongoing. So with all that, I'll just talk to the market growth rate that we saw stable pre-2019, right, of that mid-single-digit growth of devices and high single-digit growth in masks. We think that where we're at now taking our baseline of now we can meet and beat that growth rate, right? And so that definitely doesn't mean going backwards. You can take what we've got now, which is, I believe, a very strong share of the US market and in the 140 countries we're in competition, but it's a good place for us to be. We are looking at from where we are achieving mid-single-digit plus growth in our devices and high single-digit growth on our masks. And no, we don't intend to go backwards at all. In fact, we intend to not only go forward but go forward strongly. And I think what was shown up in the numbers this quarter is our incredibly strong growth. I talked earlier that our incredible growth in devices of 20% in Europe, Asia, and rest of world. We had 15% growth in masks in Europe, Asia, and around the other countries. And so I think what it's shown is that ResMed is going to go head-to-head with full competition out there and be able to meet and beat the competition, because we've got the smallest, quietest, most comfortable, most connected, and the most intelligent health systems, and it's that whole combination of not just the product, but the solution, the service, and how it's embedded in the healthcare system to the patient to the physician that allows us to achieve that. So we're not going backwards, we're going forward, Saul, and we're going to grow at or ahead of market. And in many countries, we're going to drive demand gen to increase the whole aggregate market growth rate and pull more patients into the funnel, because now we've got a greater incentive than ever to do that. Thanks for the question.

One on SaaS, please. So what will drive the SaaS revenue to now grow double digits from high single digits previously?

Thank you for the question, Matthew, and welcome to covering ResMed. Our organic SaaS business saw a healthy growth of 7% this quarter, which aligns with our ongoing growth trend of 7% to 8% within our US franchise, primarily MatrixCare and Brightree. Although we haven't specified the organic growth within the MEDIFOX DAN group, we know it will contribute positively to our overall performance. Additionally, both Brightree and MatrixCare have robust product pipelines that give me confidence in focusing on the high-growth segments of their portfolios while stepping back from lower growth areas in MatrixCare. I believe we can transition our organic growth from high single digits to double digits on a stable basis for our SaaS business. This increase will come from both the growth of MEDIFOX DAN and strong product pipelines already in place. Moreover, we have restructured our SG&A and R&D efforts in our SaaS business this quarter, which should help us achieve better leverage on net operating profit. I anticipate this will bring us closer to the goals of the ResMed group and significantly enhance our long-term earnings per share and return on invested capital. We are very confident in achieving these targets as we progress through fiscal year '24, '25, and beyond in our SaaS business.

Well, thanks, everybody, for attending this call and for the great detailed questions. And thanks, Kevin. Yes. Look, I'll close with this. ResMed is well positioned for ongoing future success and accelerated profitable growth. We're taking actions to prioritize on the right initiatives and we're optimizing costs to fuel our long-term growth. The opportunity in front of us is huge and largely untapped and it's an incredible runway. We see more and more people coming into the healthcare system every quarter and we'll benefit and help them sleep better, breathe better, and live better lives in 140 countries. And we'll keep proving it to you every quarter as we go forward. Thanks to all the 10,000 ResMed-ians, many of whom are also shareholders, for all that you do today and every day. And with that, I'll hand the call back to you, Amy, to close us out.

Great. Thank you, Mick. Thanks, everyone. We appreciate your interest and your time. As always, if you have any additional questions, please don't hesitate to reach out to us directly. This does conclude ResMed's first quarter 2024 conference call. Kevin, you can now end the call.