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Resmed Inc
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Welcome to the First Quarter Fiscal Year 2019 ResMed, Inc., Earnings Conference Call. My name is Chris, and I'll be your conference operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I'll now turn the call over to Amy Wakeham, Vice President, Investor Relations and Corporate Communications. You may begin.
Great. Thank you, Chris. Good afternoon and good morning, everyone. Thanks for joining us and welcome to ResMed's first quarter fiscal year 2019 earnings call. As Chris said, this call is being webcast live and the replay along with a copy of the press release and our updated Investor Presentation will be available on the Investor Relations section of our corporate website.
I'd like to highlight that we have made a few enhancements to our press release this quarter. We've summarized key information to make it easier to locate and analyze. We have provided some additional commentary regarding our results and we've included supplemental revenue information, which had previously been posted separately to our website. We hope these changes are helpful as you analyze our results. We're always looking to improve our disclosure and welcome any feedback you may have.
Joining me on the call today to discuss our quarterly results are Mick Farrell, our CEO; and Brett Sandercock, our CFO. Other members of management will be available during the Q&A portion of the call following our prepared remarks.
During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please see the notes to the financial statements in today's earnings release. As a reminder, our discussion today may include forward-looking statements, including, but not limited to, expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions; however, our actual results may differ. Please refer to our SEC filings for a discussion of the risk factors that could cause actual results to differ materially from any forward-looking statements.
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, as we review results for the first quarter of fiscal year 2019. On today's call, I will review top level financial results, some business highlights and a few key announcements from the quarter. Then, I'll hand the call over to Brett, who will walk you through our financial results in more detail.
So, first, the top level financial results, we started the new fiscal year right where we left off the old one with another quarter of strong and balanced performance across our portfolio. My personal thanks go out to our global team. It is the hard work and dedication of more than 6,000 ResMedians that has allowed us to continue to deliver these strong results.
Global revenue grew by double digits, 12% headline and 13% on a constant currency basis. Our ongoing focus on business efficiencies as well as tech investments has resulted in continued bottom line improvements, with non-GAAP net income improving 23% year-over-year. These efforts at the top line and the bottom line resulted in non-GAAP diluted earnings per share of $0.81. So that is 23% growth in Q1 EPS versus this time last year.
So now some business highlights across our global fleet and our global respiratory care business. So, turning to a discussion about business operations, let's start with these core businesses. We are the world's leading connected health and digital health technology company with well over 8 million patients supported by our cloud-based patient management system called AirView and well over 6 million patients with 100% cloud connectable devices that are available for remote daily monitoring. Over the past 12 months, we have improved their lives by delivering physical products to over 14 million people, delivering products to treat their sleep apnea and/or their chronic obstructive pulmonary disease. And we are well on our way to achieving our long-term goal of changing 20 million lives by 2020.
Our digital health technology is turning big data into actionable insights for patients, physicians, homecare providers and beyond. We now have over 3 billion nights of medical sleep and medical COPD data in the cloud and the growth is exponential. Everything we do supports our ambition to help the more than 936 million people worldwide, who suffocate every night with sleep apnea and the over 400 million people worldwide, who suffer from lung disease. As we seek to treat their chronic diseases and help them, really importantly stay out of hospital, with a high quality of life in their own home.
Our efforts to improve market access by communicating the clinical and economic efficacy of our solutions with payors, payor providers and governments are achieving results in geographies around the world. There have been significant changes over the past 12 to 18 months in digital health reimbursement in the United States, in France, and in Japan. This is not random and this is just the beginning. Based on the smaller, quieter and more comfortable technology, within our AirSense 10 and AirCurve 10 platforms and the digital health and connected health solutions of our cloud based Air Solutions platform, we continue to take share with device sales that remain very strong.
Last quarter, we discussed the proposed rule issued by CMS regarding changes to logistics and pricing methodologies under the competitive bidding program in the U.S. We expect the final rule to come out sometime in early to mid-November. Based on our assessment of what is happening in Washington D.C., our key takeaway points remain the same. One, we believe the changes overall will be a net positive for patients, the home care provider industry, and for ResMed. And two, we are pleased that CMS is sincerely listening to industry advocates and seems to be responding to our concerns and the concerns that we have for patients and the community.
On the devices side of our business, we delivered another solid quarter with year over year global constant currency growth of 14% powered by strong growth of 20% in Europe, Asia and the rest of world, and solid 9% growth in the United States, Canada and Latin America geographies. During August, we introduced an upgrade to our Astral life support ventilator platform and have seen good adoption since the launch of that Astral platform. This is now added and compounded to the digital health powered growth of the AirSense 10 and AirCurve 10 devices. The controlled product launch of our Mobi portable oxygen concentrator is going very well and we expect to move to a full product launch next quarter as we lock down our go to market model. We are working in full partnership with our HME customers to grow this category.
We think that's the best strategy and the one that helps not only home care providers but most importantly the patients. We continue to build device – our market share as healthcare providers and physicians around the world are choosing ResMed devices not just for their intrinsic designed in quality but also for the sustainable value proposition of the digital health solutions we offer as part of our ecosystem.
These solutions are literally upgraded every few weeks as new versions of AirView, myAir, the Brightree platform and HEALTHCAREfirst cloud-based software are released. We will continue to evolve and enhance our solutions to meet ongoing patient, physician, payor, and home care provider needs. We believe this will continue to drive future ResMed success.
The masks and accessories side of our business grew 10% in constant currency globally during the quarter, led by a very strong demand in the U.S., Canada and Latin America geographies which grew at 11% on a constant currency basis. We are seeing continued good traction with our AirFit F20 on the full face side and our AirFit N20 on the nasal side across all geographies.
During the quarter, we launched our brand new AirFit F30, an amazing innovation in the minimal-contact full face mask category. It's our first play in this category of product. With the F30, we have expanded our mask portfolio to offer even more options for home care providers and ultimately for the very needs of individual patients. By keeping our innovation laser-focused on under-met and unmet customer needs, we will achieve continued growth of ResMed masks throughout fiscal year 2019 and beyond.
So, let's now turn to a discussion of our Software as a Service global business. This business continues its trajectory of growth with revenue up 25% year-on-year driven by continued expansion of Brightree, but also incremental contribution from the acquisition of HEALTHCAREfirst, which closed early in Q1.
We are revolutionizing healthcare delivery through a smart connected ecosystem that provides superior outcomes for patients and for homecare providers. We have been working on some pretty important enhancements of our out-of-hospital medical software business over the last few years.
Let me cover some recent highlights in the last few quarters. We recently commenced a controlled launch of our Brightree Advanced Analytics platform. This data analytics platform leverages advanced analytics technology and filtering capabilities to offer a scalable data solution for homecare providers. We help customers better manage their business from an aggregate perspective and also provide the ability to easily drill down into the details to drive business efficiency. Ultimately, this will free up cash flow and clinician time, which will lead to better patient care.
We also recently introduced two new apps for customers. First, the BrightreeCARE app for home health and hospice aides, as well as the Patient Hub app, which is designed for home medical equipment providers. The BrightreeCARE app enables home health and hospice aides to easily document their visits in the home on their own smart device without having to carry additional equipment. This provides mobility, flexibility and efficiency to our customers. We think it's going to help drive home health and hospice market share growth for our Brightree franchise.
Patient Hub is a patient engagement app that automates and simplifies how HME providers connect with their patients into one secure platform. This effectively eliminates the need for multiple Web portals and sign-ons and consolidates all patient interactions including appointment reminders, insurance updates, order placement, and delivery status. By improving ease of engagement and automation, the Patient Hub app empowers care providers, frees up resources and creates opportunities to accelerate cash flow for our HME customers.
We will continue to invest in these and other technologies to expand our Software-as-a Service portfolio offering. There will be strong ongoing organic growth as well as opportunities for acquisition-driven growth within the United States and also certain geographies that we're looking at in Europe and in Asia.
Now let's discuss the progress we have made executing on our global business excellence initiatives across the organization. We have delivered yet another quarter of double-digit net operating profit improvement. That's the fifth quarter in a row. We are pleased to again drive operating leverage to improve the bottom line of our business.
Non-GAAP income from operations improved 26% in the quarter, combining solid revenue growth and stable gross margin with disciplined investment in SG&A, which grew by just 4% in constant currency in the quarter and research and development investments, which grew at 8% in constant currency during the quarter. I want to reemphasize that our business excellence initiatives are about the long term, working more efficiently, leveraging new tech tools, improving global processes, and working smarter. We are taking a disciplined and thoughtful approach and we will continue to invest in R&D for our business and deliver strong organic growth and operating leverage. We have proven that these two value growth engines, organic growth and operating leverage, are not mutually exclusive.
Before I turn the call over to Brett, let me close with this. We have had a great start to the new fiscal year and we are well-positioned to grow throughout FY 2019 and beyond. The continued success of our current mask and device portfolio along with the solid pipeline of new products and enhanced connected health solutions for sleep apnea, COPD and out of hospital medical software markets give us confidence in ongoing momentum as we move throughout the year.
We have positioned the company for the long-term, driving top- and bottom-line growth into 2020 and beyond as we execute on our strategy to continue to lead the med tech field in digital health to create value with connected health and to achieve what we call our Triple Aim, which is: one, to slow chronic disease progression; two, to reduce overall healthcare system costs; and three, most importantly to improve the outcomes and quality of life for the ultimate customer in our industry, our patients.
With that, I'll turn the call over to Brett in Sydney for his remarks. And then, we will go to Q&A. Brett?
Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2019. As Mick noted, we had a strong quarter. Group revenue for the September quarter was $588.3 million, an increase of 12% over the prior year quarter, or in constant currency terms revenue increased by 13%.
Taking a closer look at our geographic distribution and excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada and Latin American countries were $326.4 million, an increase of 10% over the prior year quarter. Sales in Europe, Asia and other markets totaled $214.4 million, an increase of 13% over the prior year quarter. In constant currency terms, sales in combined Europe, Asia and other markets increased by 16% over the prior year quarter.
Breaking out revenue between product segments, U.S., Canada and Latin America device sales were $172.4 million, an increase of 9% over the prior year quarter. Masks and other sales were $154 million, an increase of 11% over the prior year quarter. For revenue in Europe, Asia and other markets, device sales were $151.7 million, an increase of 18% over the prior year quarter, or in constant currency terms, an increase of 20%.
Masks and other sales were $62.7 million, an increase of 3% over the prior year quarter, or in constant currency terms, an increase of 6%. Globally, in constant currency terms, device sales increased by 14%, while masks and other sales increased by 10% over the prior year quarter. Software-as-a-Service revenue for the first quarter was $47.5 million, an increase of 25% over the prior year quarter. This includes the contribution from our HEALTHCAREfirst acquisition that closed on July 6.
Excluding HEALTHCAREfirst, Software-as-a-Service revenue grew in the high single digits. As you heard from Mick earlier, we've recently introduced several new SaaS offerings and expect future growth opportunities over the coming quarters and fiscal years based on our expanded platforms and our ongoing innovations.
During the rest of my commentary today, I'll be referring to non-GAAP numbers. The non-GAAP measures adjust for the impact of amortization of acquired intangibles and tax-related expenses associated with U.S. tax reforms. The prior year comparable excludes amortization of acquired intangibles. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release.
Our gross margin for the September quarter was 58.3% compared with 58.4% during the same quarter in the prior year. Our margin was essentially consistent with prior year and reflects typical declines in average selling prices, largely offset by manufacturing and procurement efficiencies. On a sequential basis, our gross margin improved by 20 basis points over Q4 FY 2018. Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for fiscal year 2019 to be broadly consistent with our Q1 FY 2019 gross margin.
Moving on to operating expenses, our SG&A expenses for the quarter were $147.3 million, an increase of 2% over the prior year quarter. In constant currency terms, SG&A expenses increased by 4%. SG&A expenses as a percentage of revenue improved to 25% compared to the 27.5% that we reported in the prior year quarter. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be within the range of 24% to 25% for fiscal year 2019.
R&D expenses for the quarter was $38.8 million, an increase of 4% over the prior year quarter, or on a constant currency basis an increase of 8%. This increase reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue were 6.6% as compared with 7.1% in the prior year. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be within the range of 6% to 7% for fiscal year 2019.
Amortization of the acquired intangibles was $12.9 million for the quarter, an increase of 9% over the prior year quarter. Stock-based compensation expense for the quarter was $12.5 million. Non-GAAP operating profit for the quarter was $157 million, an increase of 26% over the prior year quarter; while non-GAAP net income for the quarter was $116.3 million, an increase of 23% over the prior year quarter.
Non-GAAP diluted earnings per share for the quarter were $0.81, an increase of 23% over the prior year quarter, while GAAP diluted earnings per share for the quarter was $0.73. Foreign exchange movements negatively impacted first quarter earnings by $0.01 per share, reflecting the unfavorable impact from the weaker euro relative to the U.S. dollar, which were partially offset by the weaker Australian dollar relative to the U.S. dollar.
On a GAAP basis, our effective tax rates for the September quarter was 23.9%; while on a non-GAAP basis, our effective tax rate for the quarter was 23.4%. We continue to estimate that our fiscal year 2019 effective tax rate will be in the range of 22% to 24%.
Cash flow from operations during the first quarter was $48.1 million. This included tax payments of $125 million in the current quarter, compared to $30.2 million in the same period of the prior year. Excluding the tax payments, our cash flow from operations was $173.1 million, reflecting strong underlying earnings and improved working capital management. Capital expenditure for the quarter was $13 million. Depreciation and amortization for the September quarter totaled $30.4 million. And during the quarter, we paid dividends of $52.8 million.
Our board of directors today declared a quarterly dividend of $0.37 per share, and we continued our share buyback during the September quarter and repurchased 200,000 shares for consideration of $22.8 million.
During the quarter, we also completed the acquisition of HEALTHCAREfirst, for cash consideration of $126.3 million. With respect to our recently announced joint venture with Verily, we have now received all required regulatory approvals and expect to commence operations during our second quarter. We will provide an update of the likely operating costs associated with the JV in our second quarter earnings call. At September 30, we have $530 million in gross debt and $299 million in net debt. Our balance sheet remained strong with modest debt levels. At September 30, total assets were $3.1 billion and net equity was $1.9 billion.
And with that, I will hand the call back to Amy.
Great. Thanks, Brett. Let's now turn to the Q&A portion. I'd like to remind everyone to limit yourself to one question. If you do have additional questions, please feel free to hop back into the queue. Chris, we're now ready to go ahead and start the Q&A portion of the call.
Thank you. We will now begin the question-and-answer session. Chris Cooper with Goldman Sachs is online with a question.
Hi. Good morning, good afternoon. I'll state my one question. Just on European masks please, I think the 6% number that we saw was just a little bit larger than we've seen lately, and I appreciate you have potentially a pretty strong comp. I'll be just curious to hear if you could talk to some of the drivers around what's driven that number and specifically as well, I'll be curious to hear if you could comment on what sort of impact you've seen in terms of share from your competitors' full face mask that was launched, I guess, back in April now. Thank you.
Yeah, thanks for the question, Chris. And yeah, we're really quite proud of the global and constant currency growth, the 10% on masks, 11% in U.S. and Canada, 6% in Europe, Asia and others is maybe just around sort of the market growth range. I think our comp was around the sort of 10%, 15% from a year ago quarter. And so as you noted there was a very, very strong comp there.
Look, we've just launched new masks into this marketplace. The QuietAir technology was launched just maybe six plus months ago. The F30 is only just hitting global markets at this point. And so, Europe tends to take longer for technologies to permeate through the different countries and each different countries have different reimbursement models. It's not the United States of Europe. So, we have to work through sort of the 26 models of reimbursement and how masks are provided there.
I do think there's opportunity to drive more resupply of masks throughout many of our European countries, and so there's systemic and digital health driven methodologies that we can use to drive the whole market number up there. But if you're asking if I'd like to see 6% be closer to 10%, the answer is absolutely. Do I think it's a good quarter from our European team with 20% growth on devices and 6% growth on masks? Absolutely. But I know there's room for improvement there, and we'll certainly be working with Tim Hoyes and (00:26:04) the global team and the Western European, Northern European and Eastern European leaders to make sure that we can move that number up as we move forward throughout FY 2019 and beyond.
(00:26:17)
...just to clarify, I mean, it's more of a – the fact that the market growth exceeds beyond that level, you're not seeing yourself lose any momentum to your new competitors?
Yeah. I don't think we're losing share in the European marketplace. I think there's opportunities to grow that market growth number, but I don't think we're losing share at that point, but I think we should be taking share with the F30 and the QuietAir technology. And so I'd like to see that number push closer to the double digits, Chris.
Okay. Thank you.
Thanks for your question.
Your next question comes from Craig Wong Pan with Deutsche Bank. Your line is open.
Hi. Just wanted to ask about your rest of world device growth, I mean, that was quite strong. Could you just talk to what are the main drivers behind that?
Yeah, Craig, good question. So that's the 20% Europe, Asia and other markets growth. Yeah, incredibly strong. We did see continued benefits in countries like France as we see the digital health technology and reimbursement changes that have happened there and there's a good strong tail to that upgrade, if you like, from non-cloud connectable to cloud connectable devices across France. But I'm going to tell you across the other 25 countries in Europe and across many of the countries in Asia, we saw just a really strong quarter in our device business. It's powered by the digital health technology. As I talked about in the prepared remarks, you've seen actual reimbursement changes in the U.S. and in France and in Japan and certainly they're providing some power behind the growth, but in many other countries where reimbursement hasn't yet caught up to the technology, the technology itself is lowering the setup cost of our therapy by 50% and improving the adherence rate from industry standard, 50%, 60% like pharmaceutical medicines up to 80%, 87% in some of the published data that we have out there. So that's the real power behind it, and we think there's a lot of legs to it.
Certainly, some elements like the upgrade from non-cloud connectable to connectable has a time limit to it, but the digital health tail of lowering costs and improving adherence, which improves outcomes, we think has a much longer runway, and so we're excited about that opportunity to continue our Europe, Asia and global growth in devices.
Okay. Sorry, can I just clarify on France, I thought last quarter you were mentioning that that sort of benefit from digital health devices was easing off, but it sounds like that's kind of ramped up again, would that be correct?
No, it hasn't ramped up again. It just hasn't eased off as quickly and you know I think that – as I said I think that tail is longer than we had thought 90 days ago and probably has a little bit more to run in it and – but it's not just that one country, right, there's 199 others outside of the U.S. and France that we sell into. And I think the point I'm trying to make is it's – many of the others starting to power up around digital health not just on reimbursement driven ones like that country like France, but on the – just the core economic and efficacy value prop that we get from the digital health technology that we have now in the AirSense 10 and on the AirCurve 10 and in some of the ventilation platforms as well.
Great. Thanks.
Thanks, Craig.
Your next question comes from Joanne Wuensch with BMO Securities. Your line is open.
Yes, hi. This is Matt Henriksson in for Joanne. With – related to Brightree, the high-single-digits organic growth rate, it's kind of a slowdown from what you guys were reporting in fiscal 2018? Is that kind of a one quarter blip or is the high-single-digit growth rate kind of a go-forward rate?
Yeah. Thanks, Matt, and that's a really good question. As you noted, yeah, high-single-digits from Brightree but 25% from Brightree plus HEALTHCAREfirst and the other SaaS platforms. Look, it's the first quarter that we were integrating HEALTHCAREfirst. And so we have a team in home health and hospice at Brightree working on integration of those two platforms and in the core HME platform at Brightree. Our team was just at Medtrade this quarter and they've launched, as I mentioned in the prepared remarks, brand new apps and some other value props that I think can help add not only more users, but more value per user opportunities as we go throughout fiscal 2019.
So do I think that high-single-digits can go back to low-double-digits on the core Brightree? Absolutely. And there's probably three reasons for that. One, as I talked about in competitive bidding we're seeing that landscape really settle out so that people can focus on efficiency versus sort of some of the other aspects of declining reimbursement over the last seven years.
Two, with all the changes over the last seven years in the HME industry, there's just a need for more and more efficiencies. And three, as I mentioned, some of these new solutions we're bringing into play. So, for those three reasons, I'm very confident that we can start to get that double-digit growth out of the core Brightree platform, while also integrating HEALTHCAREfirst and tying our home health and hospice value props together as we grow in the HME industry.
Thank you for the color.
Thanks, Matt.
Your next question comes from Sean Laaman with Morgan Stanley. Your line is open.
Good morning and thank you for taking my questions. Mick, you mentioned that the Mobi will go into a full product release this quarter. I don't know if you're able to give us some flavor or detail around what your strategy is there and maybe some feedback from the customer base to see what they want to see from such a product.
Yeah, Sean, just to clarify, I said next quarter. So, we're going to go to full product launch during our Q3, which is our January to March quarter.
Got it.
But Rob Douglas is here. Rob, do you want to give a little more clarity on to Mobi and our go-to-market model?
Sure. Sure, Sean. We've been experimenting with our controlled product launch throughout the year. It's been slow and steady progress. The customers using it and we've selected them carefully, really liked the product and it's working well. We're seeing really good field performance from it, and we're very happy with it. Mick and I both have been in the factory in Singapore seeing it being built, and we're very, very proud of the systems that we've got there and we think we've got an extremely high quality product.
As we've said many times, our go-to-market strategy really involves supporting our HME provider customers to access patients and to get this treatment on the patients in the most effective way and those are really the things we've been looking at closely in the preps for the full launch. And as Mick said, we're well on hand with preparations for full launch starting in the next quarter, in Q3.
Right. Thanks, Rob. And maybe just a quick one for Brett, just to check looking at the balance sheet that stepped down in tax payable, so the issue on cash flow from ops is now in the rear vision mirror, is that correct?
Yeah, that paid the payable on the balance sheet, we essentially paid that or a lot of that through this quarter, Sean. You saw that come through the cash flow.
Great. Thanks, Brett, and that's all I have.
Okay.
Thank you, Mick.
Thanks, Sean.
Your next question is from Margaret Kaczor with William Blair. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question. The one thing that we're happened to notice since the last few years, your increase in SG&A as a percentage of total sales the fourth quarter relative to the fourth tends to go up, and this is kind of relatively flat, maybe down a little bit. So, can you walk us through any potential changes this quarter outside of ResMed 3.0? And then as we look forward is 4% growth in dollars currency neutral the right number, or will that change given the recent top-line growth that you've seen of 13%?
Yeah, Margaret, thanks for the question. Yeah, that allows us to talk about the business excellence and the operating excellence programs that we've been putting into place. And clearly, yeah, as you saw in Q1 with the 4% growth in SG&A year-on-year, we really are focused on making sure we don't just work harder, but we work smarter and we have better global processes.
We take some of the amazing sort of tech-driven healthcare and tech-driven solutions that we've given to our customers and apply them internally. And so we're looking at tech-driven solutions in systems and softwares within our company to allow us to throw process and technology at a problem not just say we need to hire 20 more people to solve that problem. And so I think our team has got very sophisticated on this and we had some great results.
As you know, we don't give detailed quarter-to-quarter guidance on exactly what we're going to do in terms of year-on-year growth. But we're going to keep that SG&A as a percentage of revenue in the bounds that Brett said in his prepared remarks. And I'd love to do better than that, but that's the sort of guidance that we're going to give and stick to. What we saw in this quarter was excellent performance from our team. We've got 6,000 people selling in 120 countries and selling a lot more and selling a lot smarter, and I love the results and we want to do more of the above.
And just as a quick follow-up to one your other comments, Mick, you had mentioned M&A within the SaaS ex-U.S. and Europe and Asia is kind of geographic targets perhaps. So maybe you can describe kind of what attributes you guys are looking for and should we assume that those targets are going to be focused on your largest geographies or maybe smaller that are good fits that you can expand into other geographies? Thanks.
Yeah, thanks, Margaret, that's a good follow-up. It allows us to talk about the M&A strategy in that global SaaS business. So you know as you heard, Margaret, and many others on our Investor Day where we had a drill-down from Raj Sodhi, who's the global President of our SaaS business. He's the global President of our SaaS business and a lot of the focus has been on Brightree, which is U.S. focused and HEALTHCAREfirst, which is U.S. focused. We do sell in 120 other countries and we're clearly looking for opportunities outside there.
I'm not going to signal because it's a competitive market exactly what geographies and what sectors we're looking at outside. I do just want to let our investor base know that we are looking at that opportunity. And we are also looking within the United States. Look, as you saw in the quarter incredible organic growth, right. I mean, 25% across just Brightree and HEALTHCAREfirst and all the tuck-ins we've put in there, we think that opportunity is there within the U.S.; and for ResMed, we think we have the right to be the world's leading provider of out-of-hospital medical software. We've done it in HME. We're doing it really well in home health and hospice verticals, and there are other verticals in the out-of-hospital care sector that we think can help within the U.S. geography and beyond.
So, Margaret, without getting really specific, that's what I was talking to, and as we look at M&A, it's got to meet three criteria: Number one, it's got to fit our global strategy; two, it's got to make sense on the numbers and fit our financial strategy; and three, it's got to be a strong cultural fit. It has to be a fit between us and the management team and that we're going to work together and work better together and provide some growth to each other and sharing across the platform. So that's how we look at M&A. Thanks for the questions, Margaret.
Your next question comes from Lyanne Harrison with Bank of America Merrill Lynch. Your line is open.
Lyanne, if you're speaking, you're on mute. Okay, Chris. Let's go to the next question.
Hello.
(00:38:52)
Oh, no, here's Lyanne.
Oh, here we go. Sorry about that. I'm just – I have a question around your operating leverage and with your gross margins for this quarter. Can you shed some light in terms of what sort of operating leverage mechanisms were in place to help counter your ASP reductions?
Yeah, absolutely. I'll hand that – it's a good question, Lyanne. I'll hand that question to Brett Sandercock, our CFO.
Okay.
Great. Thanks, Mick. Yeah, Lyanne. We've got, I mean it's probably where – we've got quite a large program in place, I guess, which is kind of cost out programs or initiatives around efficiencies and improvements in processes, improvements in procurement or logistics, which basically we look at, I mean, we look at it well over time, but on a monthly basis and pretty formalized in terms of making sure we have a good pipeline of opportunities that we've always got.
And then, looking and seeing and make sure that we're executing on those pipeline of opportunities as well. So quite sophisticated in what we do to make sure that we can operate it efficiently as we can. And clearly, if we can do that, that supports the gross margin and offsets as you can see this quarter, essentially offsets some typical ASP decline. So, that can be around a lot, I mean it can be around improvements to production, routing and selling that would improve, for example, recoveries that we make on the back of growing volumes or it could be around procurement and working even more closely nowadays with suppliers to make sure we can get the products not just as cheaply as we can but kind of as smart as we can in terms of the components and kind of what they can offer us and we try to build that into our prices as well.
The kind of, I guess, quite – it gets more sophisticated in terms of how you're partnering and that's tended to help us in driving out some cost as well and there's no silver bullet. It's a number of programs and a number of opportunities that we have to work on essentially day in and day out. But, I guess, it's almost part of our DNA to make sure we could deliver on those and that's – and we don't hold back. There's not an endpoint, it's just an ongoing process. And so that's basically what the team works on particularly on the operations side.
Yeah. Hey, Brett, also just to add in there Lyanne, we're running really an innovation-driven growth company and we're investing to grow the company, but we've got a really solid base of a lot of existing patients and existing business.
So, a lot of our sort of leverage strategies around improving efficiencies in those core parts of the business, enabling the investments in innovation to really start driving new and more efficient ways to go to market, and then that feeds on itself going that way. But we're really getting leverage by investing appropriately in the growth areas and getting more efficient in the existing areas.
And just to follow-up on that, you mentioned there was an improvement in logistics costs as well. Have you seen your logistic costs increase with the rising fuel cost?
Well I mean I think that might start to manifest, but it's not – I don't – it will be a cost impact for us but I don't think it would be significant for us. I mean, it's certainly there. I don't want to discount it completely but it's not – it wouldn't be like a huge component of costs for us.
Okay, great. Thank you.
Your next question comes from Andrew Goodsall with MST Marquee. Your line is open.
Thanks very much for taking my question. Just on U.S. masks, the 11% was a good number on – a very good number actually on tough comps. Just trying to get a sense whether you're seeing the acceleration of your resupply growth in that number?
Yeah, that's a good question Andrew. I mean certainly, we have seen some good success of the QuietAir technology that has been in there now two and a half quarters and then the brand new launch of the F30 out the gate may have had some impact, but Jim Hollingshead who is the President of our Global Sleep Business might have some commentary as to the resupply.
Yeah, hi, Andrew. There are a couple of things going on in the North America market. The first one is, the mask portfolio, our product mix is performing very well. So the F20 is performing very well, the N20 is performing very well and so our position with new patients is very strong. But resupply is also doing well and what we've seen over the last several quarters is an increasing adoption of automated resupply platforms by HMEs in the market. And so I think we're getting growth on both sides of it, both new patient and resupply.
That's terrific. And just picking up on that question on ASP, I'm guessing that with your GM being flat it's primarily driven by devices up 14%, masks up 10%. Just trying to think, going forward, whether that maybe brings about any change in your GMs for your devices?
Yeah, look certainly the portable oxygen concentrator market is closer to the gross margin profile of the CPAP range versus that you'd find in a full face mask or a Software as a Service solution and so yeah, we think it's fantastic gross profit dollar contribution that we can achieve from the portable oxygen concentrator market that it will be in a lower gross margin percentage dollar. We still think it's a great market to go after because of the 400 million patients worldwide, who suffer from lung disease, how they want to get out of their home and be untethered from that liquid oxygen, POCs provide a great opportunity and ResMed with our experience in digital health and what we can do when we not only give great quality oxygen and portability and reliability in the Mobi, but then also in the future bring our digital health capabilities to bear, we think it's a great market to go after. So, yeah, you'll see both of those, growth in gross profit dollars, some impact on the gross margin percentage, but certainly ResMed investing in a strong strategic area, in a chronic disease that needs our help and we can help keep these patients out of hospital and happily in their home or in the park playing with their grandkids with lung disease and our ResMed Mobi.
Great. So, it's a more absolute growth as opposed to sort of margin leverage through that I guess, through that change in mix.
Great. Thanks (00:45:49).
Yeah.
Correct.
Thank you.
Thanks for your questions, Andrew.
Your next question comes from David Low with JPMorgan. Your line is open.
Thanks very much. Mick, just picking up on your comment about resupply in markets outside the U.S., so just wondering if you could give us some – any metrics at all in terms of where the bigger European markets are at versus the U.S. so we could perhaps get some sense of the opportunity there?
Yeah, David. Look and I know you've followed our stock for many years and so, it's not new news to you that the resupply rate is stronger in the U.S. than in Western Europe and Asia. One thing we're finding as we now are expanding our digital health capability and empowering patients worldwide, now 6 million to 8million patients worldwide with their digital health data is that when patients get control of their data and get control of their healthcare, they demand more things. And one of the things they demand is a clean mask.
And I personally use a device and if you're not changing your mask every three months or worse six months, the thing gets incredibly visually in need of replacement. And I think if you look at the average replacement in the U.S. it's around two masks per year on average in some data that was public on that front. We think it could be more than that. If you empower patients with the ability to access different models to get resupply. We're working on that in Brightree and in ResMed Resupply and Brightree Connect. But we also think for the other 120 countries we do business in, there's an opportunity to empower patients with their data, empower patients with an opportunity to have access to more masks on an annual basis. And I'm looking at Jim Hollingshead here, our President of our Global Sleep Business. I mean, Jim you know resupply outside the U.S. is something we've been looking at for a long period of time. Digital health gives us an opportunity, right?
Digital health certainly drives it and I think patients definitely want clean masks and resupply mask. And by the way, I'll throw – I'll add to that point that recent research shows that when a patient is resupplied, they're more adherent, right. And so, we're seeing more and more evidence for that and I think that that's starting to influence more and more physicians worldwide. But if you think about Europe and resupply, you've got this massive variety of payment models. I mean, we wouldn't have time to go through them all on the call.
But what you are seeing is pretty steady resupply in most of those markets. And in some cases patients are getting resupplied because the hospital system has trouble doing it, just has trouble executing on it. And so, you'll – in certain countries, more and more we're providing that kind of service on behalf of the hospital system. I mean, that's a very different model from the U.S. where you've got a fee-for-service resupply that's driving demand. In certain countries in Europe, a hospital system wants to give the patient a mask just administratively can't do it. And so, that's one of the ways we're driving resupply in different European markets.
But, so it would seem that it would be fair to say that the resupply rates across, let's pick the three or four biggest European markets, are significantly lower than the U.S. perhaps only half?
They are low. We haven't gone into sort of the quantitative on that. And I don't think there's been any like external research public that I can talk to on that David. But clearly outside the U.S. the resupply rates are lower. The bottom line is patient demand is there. And as Jim said, even sometimes the channel partner and the patient want to deliver, they just don't know how and haven't got the capability to do it. ResMed has the capability to do it and we've proven that in a number of international markets outside the U.S. And what I was talking to on the answer earlier was that we plan to rev up those capabilities and really help our customers, the patients, and the providers provide better care. And as Jim said, that leads to better adherence and lower cost for the healthcare system.
Great. Thanks for that. Could I just squeeze one other in? Brett, we've worried a little bit about legal costs and that having an impact on the operating leverage. I was wondering if you could just talk to what we – what came through in the quarter past and what we should expect for the year ahead. Thanks.
Yeah. I mean, David, it's been, I guess, our legal cases and so on have been ongoing for a while now. So it's more or less built into the run rate. And, I mean, it can vary around a little bit quarter-to-quarter but I wouldn't expect it – it's sort of built into the run rate, so I wouldn't expect that to significantly spike through the year or anything like that. Leading up to court cases and so on, it can increase a little. But I don't think it would be particularly meaningful in any quarter at least that's what our expectation is at this stage. It's more or less built into the run rate that we've seen over the last year or two.
Yeah. Thank you very much.
Your next question comes from David Stanton with CLSA. Your line is open.
Thanks very much for taking my question. Just in terms of the business acquisition you made in the quarter of $126 million, firstly, I missed the name of it and second, did that lead to any profit contribution for the quarter please? And if so, can you give us some color around that? Thank you.
Yeah, David. The acquisition was HEALTHCAREfirst. So, it's a Software as a Service provider for home health, so home nursing and hospice providers within the U.S. geography, a really exciting business that did contribute in the quarter as we talked about to driving the 25% year-on-year growth in our Software as a Service global business. Brett, do you want to talk a little bit to the other parts of David's question as to impact on profitability during the quarter or not going into too much further detail there?
Yeah, I mean, I can. It's a nice acquisition, but it's not a large one as such. So, it's not – we wouldn't get that granular on that Dave, but we did, I think last call or the call before I think we sort of said that the revenue from that was about $28 million or $29 million something like that. So, that will kind of size it for you. Obviously some profit contributions, but on the size of our business, I guess, kind of quarterly fairly de minimis. But from a portfolio standpoint, our SaaS business, quite exciting space and we're seeing good growth opportunities there. So, we do think that's strong, strategically, just a small contribution initially, but we do think that should give us a nice growth trajectory.
Just to add on to that David, the home health and hospice category or vertical if you like that HEALTHCAREfirst sells into, Brightree also sells into that. So, we've got those two teams integrating and working together to drive, as Brett said, good ongoing organic growth as we look forward in the coming quarters and fiscal years within that home health and hospice vertical which we think is underserved, for this great software and there's a lot of opportunity to grow.
Thank you.
Your next question comes from Saul Hadassin with UBS. Your line is open.
Good morning, good afternoon, Mick. Thanks for taking my question. Mick, just looking at the 14% devices growth, strong growth globally, can you give any color or talk to how the non-invasive ventilation part of your business is going relative to the core sleep, CPAP part of the business?
Yeah. So as you know we don't break out the particular AirCurve 10 versus the AirSense 10 aspect of that and we don't break out the Astral and we just launched the Mobi. But the vast majority of the sales are in the sleep side of the business as you know that's what the company was founded on, it's our core business. I'm really excited by the new software upgrade to Astral and it's really starting to come out of the gate well. But it's not a strong – wasn't a strong material contributor in the quarter. We do think, as we look forward, that the AirCurve 10 and Astral life support ventilator and the Mobi, those three together in our respiratory care vertical will really start to contribute.
And I look forward to the earnings call when I'm breaking them out and going through them in detail because it's material to the global business. But at this point, we don't break them out to that level of detail but I appreciate your question. And yeah, certainly that 14% global number it really – as I said in the prepared remarks, it really talks to the economic value proposition of the digital health. People are choosing our devices and we're taking share even three plus four years out on some of these platforms because the software isn't four years out, it was updated two weeks ago, four weeks ago and it'll be upgraded every month this coming 12 months. So, that's sort of the picture there, Saul, but appreciate your question. Sorry, I can't go into more granular detail for you.
Not after breakout of revenues by device type, but just more interested in whether the growth in the contribution of whatever revenue it was for the non-invasive platform within the space is on par with what you see in sort of the core sleep therapies, is it materially lower, higher just that type of comment.
Yeah, no. It's on par and in the future has the potential to be well ahead of given the under-met opportunity particularly in portable oxygen concentrators that are digitally powered and I think in the NIV space. I mean you look at the clinical data that we presented over the last number of quarters showing that we can reduce hospitalizations, reduce costs and really improve the lives of these COPD patients. I think NIV is particularly in the U.S. and non-sort of Western European geographies completely underpenetrated versus its opportunity in the COPD space. So, I think there is an opportunity for it to be materially above, but in Q1, it was pretty much in line with the growth across the other businesses.
Thank you.
Thanks Saul.
Your next question comes from Gretel Janu with Credit Suisse. Your line is open.
Thanks very much. So just in rest of world you've had reimbursement changes in France, Japan, South Korea over the last 12 months. Just wondering if you can give us a little bit more color on where you are in terms of discussions for the other reimbursements – like potential reimbursement changes in other rest of world markets, do you anticipate any changes in the next 6 to 12 months?
Yeah, Gretel. It's a great question. And yeah, certainly we saw the digital health changes for doctors in Japan, we saw the digital health changes for home care providers in France and we saw for the first time in the history of the country actual reimbursement for CPAP as a treatment for sleep apnea in South Korea that we talked about last quarter. So, those are all three really good wins.
Our global market access team is incredibly focused on this as we look at the 120 countries we do business in and how to help governments understand that CPAP therapy saves money and improves lives and improves outcomes and quality of lives. And so, we are in all countries – I think if you just take the example of the French reimbursement changes, our French team have been talking for three to five years with the French Ministry for Health (sic) [Ministry for Solidarity and Health] (00:57:41) to show the return on investment of the digital health initiatives. And so, when that reimbursement change came, it wasn't a surprise to us. It was a lot of hard work to get it to that point and change. But predicting when governments will put good policy behind great opportunities to save money and improve the lives of their constituents is a bet that I'm not willing to put out there or predict which country will be next. But I promise, Gretel, that as soon as we see the changes come that we'll report them here on our quarterly call and let you know how it works. Jim, that team works really closely with your global sleep team, any further color on that?
We talked a little bit about this at Investors Day. I think that the global market access team continues to work on multiple fronts to get payors and government entities to see the positive return on finding and treating the sleep apnea patient. But as Mick said earlier, the digital health platform creates value for care providers with or without reimbursement, right. So, we're seeing the growth of the business and the growth of treatment of patients with the digital care platforms of Air Solutions and the AirSense 10 and AirCurve 10 devices because it creates value for the care provider. We're continuing to chase reimbursement wherever we can because we think we have a very strong story to tell about health economics, but the digital care platforms create a lot of value in their own right.
Thanks for your time.
Thanks for your questions, Gretel.
Our last question comes from David Bailey with Macquarie. Your line is open.
Yes, good morning. Thanks for taking my question. Just on the Mobi, just wondering if there's anything you can point to in relation to differentiation relative to other products in the market. Can't – I haven't really been able to see much by way of product specifications. But just wondering if there's anything you can talk to in relation to either weight, battery life, et cetera that would set you apart from the other offerings in the POC space?
Yeah, that's a great question David and a really exciting space. Rob, do you want to go into some of the details of how we're going to show value in those specs, but also the go-to-market?
Sure. Yes, David we haven't really made a lot of publicity to you all around the specs of Mobi, because I actually don't think that's sort of the right way of looking at it. The issue here on these POC devices is really getting the right balance of features that make it the most usable product. So, we've got a really good battery life. We've got a great weight and a really good oxygen output that lets people be mobile and to use a device with confidence.
If you just pick one parameter and say it's stronger in this and stronger in that, it's actually not really getting the point of how we think competition should be operating in this market. So, we've got a great product configuration with a really good optimal trade-off. We think it's the optimal trade-off of the specs. And as we said before, we're really pursuing go-to-market strategy with the support and a way for us to support our HME partners really in countries around the world. And so, I know it's still a watch this space program, but we're really taking a disciplined approach to launching the product.
Yeah, David the only thing I'd add on there is I think partnering with your channel particularly one – we had two decades, three decades of working with our channel in the sleep space to partner with them in the respiratory care space we think is the right strategy.
We don't think some of our competitors are competing with the channel in this space and I just don't think it's a smart strategy. I think you want to partner with a channel and really drive value to that end user patient. The ultimate customer here is the patient. We have to find the best way to get them and our channel has such great ability to reach sleep apnea patients and COPD patients in the past. They've often been the ones to provide liquid oxygen. They should be the ones to provide portable oxygen. And so I think the go-to-market strategy will differentiate us more than others. But David, watch this space, we'll talk to you in 90, in 180, in 360 days about how the Mobi rollout goes and I think we'll start to see that really pick up.
That's great. Thanks.
Yeah. Thanks for your questions, David.
And so we've now reached the hour mark. And look, before we close the call, I want to thank the 6,000 strong ResMed team for their continued dedication, focus and commitment to our growth strategy and our operating excellence initiatives. Our team is the core of what we do and it's helped us deliver another quarter of really strong revenue growth and increased operating leverage. We remain focused on our future pipeline of products, services, and software solutions that change patients' lives and benefit all of our customers, the patients, physicians, payors, home care providers and governments. Thanks for your time and we look forward to talking to you again in 90 days. Over to you, Amy.
Great. Thank you. Thank you again for joining us today. If you do have additional questions, please feel free to contact me directly. As mentioned at the beginning of the call, the webcast replay along with our earnings release and updated Investor Presentation will be available on the Investor Relations section of our website. Chris, you may now go ahead and close the call.
This concludes ResMed's first quarter of fiscal year 2019 earnings live webcast. You may now disconnect.