Q4 2022 Resmed Inc Earnings Call
Hello, and welcome to the Q4 fiscal year 2020 to resume earnings conference call. My name is Kevin and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session. Please note that this conference is being recorded I will now turn the call over to Amy Wakeham, Vice President of Investor.
Our relations and corporate Communications, Amy you may begin.
Great. Thank you, Kevin and hi, everyone and welcome to resume the fourth quarter of fiscal year 2022 earnings Conference call. We thank you for joining US. This call is being webcast live and a replay will be available on the Investor Relations section of our corporate website later today, along with a copy of our earnings release and the presentation both of which are available.
Now joining me on the call today are our Chief Executive Officer mixed barrel and Chief Financial Officer, Brett Sandra Cock. Following our prepared remarks, we will host a Q&A session and making Brett will be joined by Rob Douglas President and Chief operating Officer, and David Pendarvis, Chief administrative officer, and Global General Counsel.
During today's call, we will discuss several non-GAAP measures for a reconciliation of the non-GAAP measures. Please review the supporting schedules in today's earnings press release.
And as a reminder, our discussion today will include forward looking statements, including but not limited to expectations about our future operating and financial performance.
We believe these statements are based on reasonable assumptions. However, our actual results may differ 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'll now go ahead and turn the call over to Nick Thanks.
Amy and thank you all for joining US today as we review the results for the fourth quarter of our fiscal year 2022 ended June 30th.
On today's call I will provide a brief high level overview of our financial results. I'll, then review progress towards al resume in 2025 strategic goals and then discuss our actions to navigate through ongoing industry and supply chain challenges. Brent will then join the call to review our financial results.
In more detail, okay, let's jump right in.
Our fourth quarter results reflect strong performance across our business with high single digit revenue growth in both our sleep and respiratory care business segment as well as in our software as a service business segment.
Our ongoing growth reflects our global teams relentless focus to solve very complex supply chain problems and find alternate design and engineering solutions to address the incredible industry challenges that we've faced over the past year and beyond.
The global supply chain environment remains very much in flux across multiple industries. We are starting to see indications that the macro environment is improving particularly semiconductor availability. However, we're mindful that even as macro trends start to improve we still need our <unk>.
Fly or partners to prioritize med tech component needs.
Other non life sustaining industries.
Demand in the market remains very strong we've been able to mitigate some of the electronic component bottlenecks with the launch of our redesigned card to cloud <unk> 10 devices introduced to the market mid wide through our fourth quarter as.
As you can imagine clearing one bottleneck simply brings the next rate limiting step to the forefront. Our team is actively working to create as many bottlenecks as they can as quickly as possible.
On the positive and you saw the redesign reengineering and launch of the card to cloud device.
Greatly improved our ability to meet the incredible demand that we see in the market place.
During the last month of the quarter. During June we were able to allocate more products to our customers than in recent months and in recent quarters, we're not out of the woods, yet, but the compass is pointing to true north and we are on top of it.
Throughout this crisis of demand and supply our established resumes guiding principles remain the same that is that we will give priority to the production and delivery of devices to meet the needs of the highest acuity patients first.
As we discussed last quarter, we are still facing a challenging freight environment. The key challenges of sea freight and air freight due to reduced availability and elevated process. These forces are impacting our ability to efficiently get components into our factories and then to get the finished goods out of those factories and shipped to warehouses and ultimately to customer.
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We continue to do everything that we can to secure additional supply to ultimately further increased production of our devices as highlighted on previous calls. This includes a combination of five concurrent work streams and supply chain.
One we are locking in the flow of our existing parts from existing suppliers too we are establishing flow of existing parts from new suppliers three.
Three we're validating and verifying new parts from existing suppliers and four were validating and verifying new parts from new suppliers and then finally five we're reengineering designs to mitigate the major supply bottlenecks.
In summary, we're making good progress with these five lines of work and we've been able to offset some of the impacts of the component shortages to best support patients providers physicians and beyond.
In addition to the successful launch of our redesigned card to cloud device last quarter. We also continued to support our customers with our market leading mask portfolio. The supply. Despite the challenges we faced with reduced new patient setups due to a competitor recall, we continue to see strong uptake of our mask solutions.
<unk> as our customers want the smallest the quietest the most comfortable the easiest to fit in the most highly patient righted masks in the market and those come from regiment.
Peer reviewed and published studies have clearly shown that patients that are on a resupply program are much more likely to remain on sleep apnea treatment adherence for the long term than those that aren't on our resupply program.
Our homecare provider customers not only want to put new patients on therapy, they want to keep those new patients and all of their existing patients on therapy over the long term and the ultimate goal. There is to improve patient outcomes to lower total health care system costs as well as to drive their own recurring revenue streams.
We recognize that this demand outstripping supply situation remains a very difficult temporary state for all customers, including physicians home medical equipment providers payers and healthcare systems as well as the most important customer of all the patients.
We continue to work across the industry to be the best partner and the best solutions provider for all customers, we expect demand to be greater than supply for at least 12 more months driven by the recall of one of our competitors primarily the net result is that every device that we hear it resumes Mike during these next 12 months.
We will sell as it leaves the production line to our warehouse and is shipped to a customer we.
We're looking at every angle to maximize supply and address this incredible demand. These next 12 months as a company. We are learning every day and as an industry, we will get through this challenge stronger than ever.
Our goal is to ensure that every person gets the care that they need where they need it when they need it and we won't stop until we achieve that goal.
Let's now briefly review the Covid related market impacts on our industry.
Most of the 140 countries that we operate in are now above 100% of pre COVID-19 levels of patient, Florida. It.
It is noted that in some regions in some countries, we see ongoing surges of newco the variance with some select government's continuing to imposed COVID-19 restrictions in.
In these areas patient flow remains below pre COVID-19 levels, but.
But across the board, we are seeing ongoing adoption of digital health solutions for screening for diagnosis and for remote patient setup and monitoring as well as well established covered cleaning protocols at sleep labs and physician offices.
These trends continue to minimize the impact of new variance and diminish the absolute impact of Covid on our industry over time.
Let's now step back a little and review resumes top three strategic priorities number one to grow and differentiate our core sleep apnea and respiratory care businesses number two to design develop and deliver world, leading medical devices as well as digital health solutions that can be scaled globally.
And number three to innovate and grow the world's best software solutions to care that is delivered outside the hospital and especially in the home.
The launch of our next generation device platform called the essence 11 continues to go very well it remains somewhat difficult to differentiate the success of the launch from previous generations with the incredibly high demand we're seeing around the world every air 11, we Mike is sold.
<unk> as it leaves the manufacturing floor. However, when we drill into patient feedback data, we see that patients are very excited about the platform, including the air 11 device itself.
And the my software solutions surrounding it during the fourth quarter, we introduced the <unk> 11 entered into several new countries outside the United States, where we first launched the platform, including France, Switzerland and across the Nordic countries of Northern Europe , We look forward to further expansion into additional country.
Fees as we progress through our fiscal year 2023.
One area that we are closely watching is patient adoption of digital health solutions and to that point adoption rates of the.
App by new patient setup on therapy with the essence 11 continued to be more than double that of the <unk> 10.
This is because the essence 11 platform is designed to enable and encourage patients to engage directly with their own health care. The bottom line is that people want personal care they want their own data on their own app on their own funds and they love the coaching and personal engagement of our ecosystem. They are voting with their.
Digital presence and repeat usage of the app is stronger than ever.
More patients on <unk> means more patients are fully engaging with resumes software technology. This has led us to now passing over 12 billion nights of sleep apnea and respiratory care medical data in the cloud.
Our software solutions, including my Air and Air view of delivering a better patient experience better efficiencies for homecare providers and physicians and most importantly, greater long term adherence to therapy for the patient.
Another key aspect of our long term growth strategy is driving awareness and increasing the flow of patients through the top of the sleep apnea diagnosis funnel.
COVID-19 has advanced awareness adoption and acceptance of digital health for our industry. This is specifically seen any increased usage of hunt based sleep apnea tests.
Although new patient demand Gen is clearly not a top priority in the immediate term given the current supply demand imbalance, we are maintaining our focus in this area and our long term investments.
So that we are ready when conditions improve and we can pivot and fire up our portfolio of demand Gen models, and thereby ensure sustainable long term pipelines of new patients for our industry.
With over 1 billion people suffocating every night with sleep apnea worldwide. We see this work as an opportunity, but also an obligation as the market later in the sale.
We are innovating with healthcare system partners and all of our customers to create an even more efficient and effective approach to sleep apnea patient identification.
Screening diagnosis treatment and management, we will continue to invest in technology that enables and end to end seamless digital experience for patients and their caregivers.
As we consider opportunities to address the water sleep market, we are investing in opportunities to address another major sleep disorder epidemic.
<unk> of insomnia.
Insomnia has been shown in clinical research to occur.
In combination with sleep apnea, and that's a deadly combination.
This medical need and this medical opportunity just last week, we announced the acquisition of a company called Memento. This is a German and Swiss digital health startup that develops and sells digital medical products in the field of sleep medicine and beyond.
Momento offers the first and so far the only permanently listed digital health application in the field of sleep medicine that is reimbursed by the statutory insurance in Germany.
The acronym for these German digital health apps is D D I G.
This acquisition furthers, our efforts to diversify and accelerate growth of our <unk> business in Germany, and the potential opportunity with digger to expanse expand this offering into other markets around Europe and around the world. There is an unmet need in diagnosing and treating people with sleep problems such as sleep.
<unk> and insomnia, the two biggest sleep problems on the planet and especially when there is an overlap of these chronic conditions. This acquisition of memento broadens our focus in this vertical from a sleep apnea therapy company to a true sleep therapy company more to come as we pursue growth in this exciting space in Germany.
And beyond.
Growth trends in the global sleep apnea market or in a state of flux in the short term given the market supply demand dynamics that we've talked about and the recall from one of our competitors.
Long term, we estimate the underlying growth trends in the global sleep apnea market to be very strong in the mid single digit range for devices in the high single digit range for masks.
As always our goal is to drive market demand and to meet or beat market growth through.
Generation of new patients and styles of our market, leading therapy solutions and the introduction of new innovations and alternative treatment pathways that enable us to address even more patients with undiagnosed sleep apnea.
Current industry dynamics indicate that we have a multiyear opportunity to drive even greater ongoing acceptance and adoption of our solutions to further solidify our market leadership position.
I've challenged our global resume team to strive for even stronger growth in the coming months and quarters and the fiscal year and beyond I'm, telling them to go get the share to go lock in that share with digital health with value that speaks for itself with lower costs better outcomes for patients and increased efficiencies for the health care system.
Turning to a discussion of our respiratory care business I want to focus on our strategy to better serve the 380 million people worldwide with chronic obstructive pulmonary disease or COPD with many others with neuromuscular diseases in respiratory insufficiency, and the 330 million patients that suffer from asthma.
Worldwide. Our goal is to reach hundreds of millions of patients without respiratory care solutions, including noninvasive ventilation as well as life support ventilation as well as new therapeutic areas such as our cloud connected pharmaceutical delivery solutions from our propeller team and high flow.
Therapy offerings that we are conducting clinical trials on right now, including our product platform called Loomis H F T.
Demand for our core noninvasive ventilation and life support ventilation solutions for COPD neuromuscular disease and beyond remains solid throughout the quarter.
Ventilation solution demand was supported by the continued success adoption and scaling of our <unk> software platform by customers as they experience the benefits of remote monitoring to better manage the ventilated patient populations through remote access to clinical data as well as customizable physician.
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Let me now review our software as a service business for outside hospital care.
SaaS business achieved another quarter of high single digit growth year on year across our portfolio of verticals, including home medical equipment as well as facilities based and home based care settings.
Our SaaS customers recognize the need for technology solutions to solve their challenges with efficiency and scale and our software services and solutions help them achieve bus.
The continued growth of home based care is providing tayo wins for HMA solutions as well as heightened health solutions, we continue to grow with our customers as they increase their utilization of our software in our data solutions to improve and optimize their business efficiencies and their patient care, including <unk>.
<unk> and snap resupply offerings.
As businesses continue to open up we've been able to visit customers more and more in person as well as attend trade shows.
Host conferences, where the interest in our broad tree matrix care health care first and Sardis offerings remained very strong.
Earlier this week I personally attended the inspire 2022 conference in Austin, Texas. This is matrix case annual customer summit and it was in person for the first time since 2019, I had the pleasure and the opportunity of presenting and engaging in person with over 600 customers and partners.
From home health skilled nursing senior living private Judy Homecare life planned communities verticals and beyond the passion for caring for each patient that was involved in every conversation I had this week the openness the sharing and the ability for us as a community to move patients to lower cost lower acuity and <unk>.
Higher quality outcome cares that was settings was palpable.
At <unk> 2022, I came away from that conference, even more energized and excited about the opportunities that we have to support customers across the care settings, with our digital health and our software solutions.
Ultimate goal is that customers of our <unk> and matrix <unk> branded solutions can provide dedicated for the people that <unk>.
Given the passion of our customers and the service levels that we're providing and the product pipeline that was discussed at this conference I expect we'll continue to not only take share from our competitors across the portfolio, but even drive growth with more tech solutions being adopted by customers across care settings.
The COVID-19 pandemic has been and remains challenging for facility based verticals in our SaaS business, particularly skilled nursing and to a lesser extent hospice, where patient census rights below remain below pre pandemic levels as COVID-19 restrictions continue to ease and our customers improve their line of sight to better conditions and better claim.
We are seeing pent up demand for technology investments in these facility based areas. This provides opportunities for us to sell more services and more tech solutions to existing customers as well as to increase our new customer pipeline.
One matrix K customer at inspire 2020 to grab me at the conference and he described what he called a rocket ship acceleration of demand at skilled nursing for Tech solutions for those skilled nursing customers. This is a really welcome sign for sustainable growth across SaaS portfolio.
So as we look at our portfolio of solutions across care settings, We expect our SaaS group revenue to maintain high single digit growth throughout fiscal year 2023.
As always our goal is to meet or beat market growth rates, and we will continue to invest and innovate to grow the market and take share our growth in SaaS will come through organic and inorganic growth.
We've long talked about <unk> to expand our SaaS offerings internationally, if and when we found the right opportunity for regimen.
In early June we announced the acquisition of <unk>, the leading provider of end to end software solutions for home health and fitness home providers in Germany.
We've been closely watching the evolution of the German digital health system and the associated outside hospital healthcare system for many years and we've actually been closely watching <unk> for a number of years. This is our first investment in a pure play SaaS business in Europe , and it's a great opportunity to expand our reach in this business globally.
We starting in Germany as it is not only a market where we're vertically integrated in our core business of sleep and respiratory care. It's also one of our largest markets globally in a country, where the government is investing in digital health reimbursement.
We're excited about the opportunity to accelerate innovation and recurring revenue business models through this acquisition in Germany.
As we discussed on the acquisition call that we had in June many Fox Don will be immediately to accretive to resume at close progress towards closing. This acquisition is moving ahead as expected we remain on track to close by the end of December 2022 in our fiscal 2023 second quarter.
We are the leading strategic provider of SaaS solutions for outside hospital care globally, and we provide mission critical software across a broad set very attractive markets. We are well positioned and we have created differentiated value for our customers and for resonate with our SaaS business.
I'm excited about the future of SaaS business, and Bobby just scholl and the excitement that he had on inspire 2022 with the crowd for both metrics care and <unk> was an inspiration familiar is the CEO of the parent company, but also for the whole team. There. It's an important part of <unk> future growth and I see a lot of opportunities to invest in lower cost lower acuity settings of care.
We believe that this is the future of healthcare delivery, and that's where <unk> competes and that's where <unk> wins to.
To bring it altogether, our strategic focus remains on personal care that is patient centric physician centric and provider centric. This triple pronged approach combined with our unique resume culture means that we are very well positioned to continue winning in the vastly underserved medical markets have sleep apnea COPD neuromuscular disease.
These asthma insomnia and beyond.
We are transforming outside hospital care at scale with leading the market in digital health technology with over 12 billion nights of medical data in the cloud and nearly 18 million cloud connected medical devices on People's bedside tables, and 140 countries worldwide. We are unlocking value by using de identified data to help patients.
Providers physicians tires and into our health care systems, we have invested in the cyber security the privacy the cloud ops the data analytics to AI ml capabilities to do this at scale unmatched by any competitor and we are increasing our investments and our lead each and every day.
Our two key global customer facing software products, <unk> and my error I, 100% in the cloud how.
<unk> losses above cloud connected and cloud enabled making resumes itself a market leading cloud connected and cloud enabled digital health company, our mission and goal to improve 250 million lives through better health care in 2025 drives and motivates raise millions every day, we made excellent.
Progress towards that inspiring goal. This last fiscal year 2022, we changed nearly 141 million lives. These last 12 months with our devices and mask systems, our software solutions, helping people sleep better breathe better and live high quality lives with outside hospital care before I.
Hand, the call over to Brett for his remarks, I want to once again express my sincere gratitude and thanks to more than 8000 raise medians, helping their customers in 140 countries Youll perseverance hard work and dedication has been impactful. Thank you with that I'll hand, the call over to Brett in Sydney, and then we'll open up for Q&A Brett.
Over to you.
Great. Thanks, Nick.
My remarks today I will provide an overview of our results for the fourth quarter of fiscal year 2022.
Unless noted all comparisons out of the prior year quarter.
We had solid financial performance in Q4, despite the headwinds we face due to significant ongoing supply chain constraints and a challenging freight environment.
Group revenue for the June quarter was $915 million, an increase of 4%.
In constant currency terms revenue increased by 2%.
Revenue growth reflects increased demand for our suite products across our portfolio and increase the vos demand generated by our competitors ongoing product recall.
We did not drive incremental revenue from COVID-19 related demand during the June quarter, compared with $20 million in the prior year quarter.
Looking forward, we expect negligible revenue from COVID-19 related demand.
Excluding the impact of COVID-19 related demand in the prior year revenue increased by 10% on a constant currency basis.
Yeah.
In relation to the impact of our competitors' recall, we estimate that we generated incremental loss revenue.
In the range of $60 million to $70 million in the June quarter.
This is consistent with the estimated 60 to 70 million incremental loss revenue in the prior year quarter.
For fiscal year 'twenty. Two this brings the total estimated incremental revenue in the range of 230 million to $250 million associated with our competitors' recall.
Yeah.
While we continue to experience ongoing challenges in securing sufficient production components to meet market demand.
We are now seeing a stable to improving supply chain environment.
<unk> given us more confidence around our expectation of increasing the loss production in fiscal year 'twenty three relative to fiscal year 'twenty two.
Looking at geographic revenue distribution and excluding revenue from our software as a service business sales in U S, Canada, and Latin America countries increased by 12%.
In Europe Asia, and other markets increased by 1% in constant currency terms.
But product segment globally in constant currency terms device sales increased by 6%, while masks and other sales increased by 11%.
Breaking it down by regional areas device sales in the U S, Canada, and Latin America increased by 11% as we benefited from incremental revenue due to our competitors' recall.
Masks and other sales increased by 13%, reflecting solid rates of cloud revenue and achieved despite the challenging deepwater supply environment, which continues to limit new patient setups.
In Europe Asia, and other markets <unk> decreased by 2% in constant currency terms.
Excluding the impact of COVID-19 related sales in the prior year increased by 7% in constant currency terms.
Masks and other styles in Europe Asia, and other markets increased by 7% in constant currency terms or excluding COVID-19 related sales in the prior year increased by 9% in constant currency terms.
Software as a service revenue increased by 8% in the June quarter we.
We saw a strong performance from HMA segment as customers continue continued to utilize our SaaS solutions to streamline and more efficiently run their businesses and we are seeing stability in the skilled nursing care segment. Despite the continuing challenges of COVID-19.
During the rest of my commentary today I'll be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press release.
Gross margin increased by 50 basis points to 57, 8% in the June quarter, Inc.
The increase is predominantly attributable to improvement in average selling prices and a positive product mix, partially offset by higher freight component and manufacturing costs negative geographic mix and unfavorable foreign currency movements.
Moving onto operating expenses, we are seeing a more normalized expenditure profile as COVID-19 impacts subside compared to the low comparable growth rate, we experienced in Q4 last year.
SG&A expenses for the fourth quarter increased by 6% on constant currency terms increased by 11%.
The increase was predominantly attributable to increases in employee related costs and expenses.
SG&A expense as a percentage of revenue at 21, 1% remained broadly consistent with a 27% we recorded in the prior year period.
Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% during fiscal year 2003.
R&D expenses for the quarter increased by seven 1% or in constant currency terms increased by 11%.
<unk> expenses as a percentage of revenue was 7% compared to six 8% in the prior year quarter.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% in fiscal year 'twenty three.
Operating profit for the quarter increased by 4% underpinned by strong revenue growth, partially offset by higher operating expenses.
Our effective tax rate for the June quarter was 17, 6% compared to the prior year quarter of 21, 5%.
Looking forward, we estimate our effective tax rate for fiscal year 'twenty three will be in the range of 19% to 21%.
Our net income for the quarter increased by 10% diluted earnings per share for the quarter also increased by 10%.
Cash flow from operations for the quarter was $79 million, reflecting solid underlying earnings offset by higher levels of working capital.
Capital expenditures for the quarter was 29 million depreciation and amortization for the quarter totaled $37 million.
Yeah.
During the quarter, we paid dividends to shareholders totaling $61 million.
We recorded equity losses of $2 5 million in our income statement in the June quarter associated with the <unk> joint venture with Verily.
We expect to record equity losses of approximately 3 million per quarter in fiscal year 'twenty three associated with the joint venture operation.
We ended the fourth quarter with a cash balance of 274 million at June 30, we had $780 million in gross debt and $500 million.
<unk>.
A bit levels remain modest at June 30, we had approximately $1 $4 billion available for drawdown under our revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declared a quarterly dividend of 44 per share representing an increase of 5% over the previous quarterly dividend and reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provides flexibility in how we allocate capital.
We recently announced the many folks acquisition and expect to close this transaction before the end of the calendar year pending regulatory clearances.
Going forward, we plan to continue to reinvest in growth through R&D and also expect to continue to deploy capital for tuck in acquisitions, such as the recently announced acquisition of Memento, Jim and pioneer in health Tech startup that develops and distributes digital medical products in the field of sleep medicine annualized areas.
And with that I will hand, the call back to Amy.
Okay.
Great. Thanks, Brad and thanks, Nick Kevin I'll now turn the call over to you to provide infections and manage the Q&A portion of the call.
Certainly we will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
As a reminder, we ask you please limit yourself to one question. If you have another question Youre welcome to hop back into the queue. Once again Thats star one to be placed in the question queue and please ask one question and return to the queue. Our first question today is coming from Craig Wong Pan from Royal Bank of Canada. Your line is now live.
Hi, everyone.
Nick you mentioned at the start that you were seeing some improvement in the global supply chain I just wanted to understand the details around what you meant by that improvement and when that could start to see.
Improvements to your manufacturing volumes.
Yes, thanks for the question Craig and.
What we've seen over the last 234 quarters was a really deteriorating supply situation, where we were getting decommit a word I'd never heard of and supply chain, including my time at BHP and other companies that just you'd never heard of that sort of supply even in commodity industries and to get it in specialty industries was so unusual what.
The thing is that sort of noise is starting to go away and in what I'd say is it's a <unk>.
Stable to improving components supply environment, and Thats, what were seeing but I don't know Rob if you want to provide any further color on the on the supply chain and how they're wanting for the details on how we're seeing a supply that's stable to improving on components.
Sure Yes.
Craig one of the.
The sort of fundamental things of supply chain management is ongoing risk management, and having the ability to foresee problems and to react through all of that and then you also manage their inventories and that type of thing.
Yes.
Okay.
Recent months put in place a lot of a lot of forward orders.
Working a lot on on relationships.
Our relationships with key suppliers, we suspect it sort of.
So the global demand on the suppliers is moderating.
A little bit and then mix is that.
It means that they are sticking with our commitments at a higher level than what we had seen recently.
Problems still has a comment as Mick said earlier there are other bottlenecks once we close one bottleneck we'd have to go and work on the mix.
But overall I'd say, we're feeling better about the forward outlook and we have and we've got a little more clarity it's not perfect.
There still will be challenges and undoubtedly unexpected things that we will have to manage through.
But the net of it all is is that we should see our volumes continue to increase from here.
Thank you. Our next question is coming from Chris Cooper from Goldman Sachs. Your line is now live.
Thanks for taking the question so.
I noticed Nick and threatened specific guidance from the recall tailwind in fiscal 'twenty, three obviously I understand the prudence, but I guess just given the importance of the debate, perhaps you could just share your latest thoughts on how you see that dynamic playing out this year.
Hi.
Yes, Thanks for the question, Chris and it's a really good one.
As you know we've annualized the impact of that competitor recall and for US now as I said in my prepared remarks for the next 12 months I do not believe there will be really in the new patient market given the consent decree work they've got to do the remediation work they got to do in.
Responding to that 483, and the observations and so what that means for us is basically <unk>.
Demand that is incredible for these next 12 months and that every device, we make will be solved as it comes through the manufacturing line and so the right limiting step on that as Rob said will be a bunch of bottlenecks that we'll work our way through and it's like a game of whack a mole. We just keep trying to problem solve it fund the next problem solve it and resume is exceptional at that continuous improvement process.
Our supply chain teams and manufacturing teams and distribution teams have been heroic in the vein of Liza crosses in 2020, and then the supply chain crosses a 'twenty one 'twenty two and so that gives us confidence to say sequentially every quarter through fiscal 'twenty three we're going to see those volumes improve and we've got line of sight to that and we've got interactions with suppliers on that and we think it's going to.
Go up every quarter I Didnt look at this as incremental or temporal taking of share now. This is permanent share taking we're going to go and we're going to get the share we're going to lock it in with digital health solutions. When somebody uses something that lowers the labor costs by 50% that improves the adherence right of the end customer the patient to 87% nine out of 10.
Since getting adhere in a dynamic and beyond.
That's where that's where we can lock it in.
That's sort of some extra California, Chris but great question.
Thank you. Our next question next question is coming from Sean <unk> from Morgan Stanley . Your line is now live.
Thank you good morning, Mick Hope you well.
Question is around the cub to cloud devices.
Is there anything that you note with respect to the compliance rates or re supply potential.
With cloud to cloud versus direct cloud connectivity and is there a view that maybe you get patients that are uncapped hub to cloud devices back to the fully charged <unk> 11 at some point.
Thanks, Sean and yes, I am well surviving a hot northern hemisphere summer here, but and well.
Two question Carter Cloud <unk> 10 is is really new I mean, we just really launched it mid way through and really in the month of June in the quarter. So it's early days on that but we've got a lot of experience with cloud to cloud I mean think about the site.
And then the <unk> nine with its little SD chip in the back of the ethanol and the product when I was running the sleep business, we launched that back in <unk>.
Nine and 10, and so we have a lot of experience with cloud to cloud and it's primarily the coffee club primarily volume has been in the U S and that's where we had a very strong digital health system and engagement with our <unk> partners and a coffee cloud environment. So we don't have sort of an adherence exact numbers delta between.
<unk> C to C versus <unk> 11, I think it will be higher the adherence on the essence 11, just because we're getting double the rate of Meyer uptake in that digital health engagement drives higher adherence and I can tell you as soon as we get clearance on line of sight to those comms chips picking up supply will move everybody to a since 11 as soon as we have probably we.
Go back and retrofit the groups that are there just because people when they get a therapy. They are happy and the data we will go to the cloud I just want to go to the cloud every day it'll go when the SD card is uploaded on day, 30, 60, or 90 and when they see the homecare provider in the physician and so they are not loss patients not loss data, there's still part of the ecosystem just not quite as efficient as it could be.
So we're going to get back to iOS, 11, and really ramping that as fast as possible, but given the supply demand crisis I was amazed and thrilled that our team was able to pivot in June get there and we're going to be able to do that through September and December quarters here as well.
And beyond that thanks for your question Sean.
Thank you. Your next question is coming from Margaret <unk> from William Blair. Your line is now live.
Hey, guys. This is Maggie on for Margaret today, Thanks for taking our question.
I wanted to ask one on resupply.
The trend Youre seeing this quarter and if you are continuing.
The incremental and permanent share gains within that market. Thank you.
Yes. Thanks, Maggie Great question allows us to talk about masks.
Despite that competitor not being that the new patient setups, where we had a lot of adoption of resident marks on their platform as well as ours and they're just not in the market. We saw nice growth rates at 11% constant currency globally, we saw 13% constant currency growth in the quarter on masks in the U S and we saw a pretty strong 7% comps.
Currency growth of masks in Europe Middle East and.
In other markets and so I actually think that.
The team and all the work we've done with <unk> and snap right supply in the U S and all the work of our European and Middle East teams in our Asia teams have done around engaging patients digitally through either Maya or other marketing and adherence programs have performed really well and despite the headwind of lower new patient setups, we're achieving.
At or above market growth rates and to the second part of your question. Yes, I do think we're taking share across categories and I think with creating new categories by some of our innovations in the different types of comfort and design of the masks. The minimalist masks the fund comfort marks the other head masks and so creating these.
Segment is taking share in those and being able to lock in that share because when a patient gets happy on their mask lock I am with my if it <unk> they tend to stick with it for life and it's a great thing for us to be able to do on that so really excited about it and I look forward to more mask innovation coming out and more share taking and locking it in.
Todd.
Thank you. Your next question is coming from Matthew <unk> from Keybanc. Your line is now live.
Hey, Thank you for taking the questions.
Okay, I guess, just I wanted to ask a question on the gross margins.
Do you have a sense of kind of what the supply issues FX retrofitting all of this.
Is having on your productivity and gross margins in FY 'twenty two.
That's a great question, Matthew I'm going to hand that to Brett any color on the GM therefore for Matthew.
Yes Matthew.
It is because we're just trying to maximize for these losses out the door with the components that we have.
So as you think through that in terms of manufacturing optimization.
We've really struggled with that so I do think as we get.
Further through data and some of it some of these supply issues of buys and I think we do have some opportunities there on some manufacturing thinking around manufacturing recoveries to significantly improve from where we are so I do think that's an opportunity for us it's not immediate but if you look through medium term.
The opportunity for us to optimize there.
Thank you. Our next question is coming from Steve Wheen from Jordan. Your line is now live.
Yeah. Thanks, Mig thanks, Brett.
You can hear me.
Yes got you loud and clear.
Yes, Greg.
Also just on the.
Gross margin so Brett.
We are seeing in site costs spot crosses.
For shipping and for <unk> coming down by about 30% at the mind that from its peak in March.
When we might start to see that appearing in the gross margin initiatives any.
Changes.
With regards to semiconductor chip crossing that is worth calling out.
More recently.
Yes, Steve it's Brett.
Yes.
You sort of seeing some of that or youre seeing some late fright cost definitely moderate some some cost reductions, but certainly not not manifested now numbers at the environment. I think we will get I think we'll get some of that benefit I would say now second half, where we'll probably see some of that coming through but at this stage of the cycle because not only our margin at the moment.
But we do have some potential on Friday.
In the second half both on rights.
Also we will skew.
We will start putting a little more on safe side as we get through the back of the year as well and that will certainly help us on our overall freight cost so.
Again kind of that environment, where you're seeing some moderation or stabilization and then I'm seeing as we get through fiscal year 'twenty three assume some opportunities could be it manufacturing.
On the freight side as well, but we're not seeing that just yet.
On this.
Thank you. Your next question is coming from David low from Jpmorgan. Your line is now live.
Okay.
Thanks, very much maybe just continuing on the cost around gross margins can I get.
You get to talk about the impact of inflation and what you're seeing on cost and what you expect or what we should be looking out for in terms of margins and the impact it.
Yeah. Thanks, Doug I mean, we have seen.
We think component and flashing component cost increases, we've certainly seen that.
Electronic components, we've talked we clearly talked about the frightening the increases we have seen there.
So that's all been built finished lots of our cost base at the moment going forward I think we'll still see some of those increases, but I think that's manageable.
And then what we've done as you know we've done a little bit.
<unk> customers as well to help offset some of that so we put through the <unk>.
<unk> surcharge for example.
We are also planning some modest price increases.
July one as well so some of it is kind of offset some of that.
But I would say yeah, we saw it we saw that.
Is it accelerating.
<unk> seen some cost and component increases coming through and probably I would expect to see that probably for the next little while.
But it's not we're not seeing any acceleration in that which I think is good.
So I think that there's some offsets there on the gross margin headwinds on components I guess.
Some title wind on Ias peso will benefit our margin going forward.
Thank you. Our next question is coming from Gretel <unk> from Credit Suisse. Your line is now live.
Thanks, very much so just moving back to revenue how much revenue did take heart class contributed in the fourth quarter and then I guess going forward do you expect it to be meaningful in FY 'twenty right.
Yes, thanks for the question Gretel, and it's a really good one.
For competitive reasons don't want to go into too much detail around it other than the Si that pivot of the team during the quarter was was incredible to redesign reengineer re qualify validate and verify device.
With a new model of cloud to cloud and get it to market and get it into customers' hands in June was fantastic. So all credit to the team it was material to our growth in the quarter and it will be material to our growth.
Up to and when we get those comps chip supply back to the levels that we need it to meet the incredible demand of the marketplace. So it was material. It was strong not going to quantify it down to the <unk> level of detail here, but.
But it provided great additional growth for us in that last quarter, and we will for the coming quarters I look forward to the point, where I can say we are no longer selling is <unk> 10, cardiac trial because that means that we've got in essence, 11 connectivity and essence 10 connectivity backup to where we need it with that component no longer being a bottleneck for us but that that might be.
369, 12 months out there with this incredible demand we're seeing in the market.
Thank you. Our next question today is coming from Paul Hudson from Baron Joey Capital. Your line is now live.
Thanks.
Good morning, good afternoon.
Maybe just following up on that card to cloud commentary.
Can you just confirm or give us some.
Colors to what happens to those machines. Once you once the cheap alleviation is.
Is completed and you start to get better access to comps chips is the intention to bring those devices back.
And put those chips in or if you bought if you get issued a cloud to cloud device effectively keep that device for the next sort of five years and then <unk>.
At some point in the future.
So it's a really good question I think it will probably be the latter.
Part of your question.
Answer to your question that you guys, which is it will probably be.
When somebody receives the device it becomes a very personal and very intimate part it sits on the bedside table. It gives them the gift of breath, the gift of sleep and the changes they life and and the fact that they may have to take an SD card to the doctor.
Total the HMA provider.
<unk> back and forth.
One stop them from having that personal and intimate relationships.
There will be some very savvy patients, who will see that and want to upgrade and in less than that three year.
Depending on insurance three to five year time horizon, but I think the vast majority of those will remain there permanently and our job will be to provide the right services around air view.
And the engagement that we provide through some of our Voip and we do E mail text and interactions with patients that go well above just the cloud connectivity from the device itself that we've had in place on our air solutions ecosystem for a long time, so I'm very confident we're going to get very high adherence from the Sn 10 cloud the cloud people with the ecosystem we have.
It will be better with their 11th so as soon as those components are back there we will do that but I think there'll be some.
<unk> group of people that will look to upgrade the device before insurance provides that in certain social economic groups in certain countries just to be clear, we are really focusing the cloud right now in the U S.
And that's where we've got a really good ecosystem with homecare providers, who know how to use card rate doesn't get the data to the cloud and get it into <unk> and get it to doctors and engage their patients to drive resupply through other means broad tree snap and Hull Air solutions ecosystem, great question, So, but I think it will be mostly the latter answer to your own question there.
Thank you. Your next question is coming from Danaher from MST Marquee Your line is online.
Hi, good morning, Thanks, Mick you've been quite specific in the past about the streams of engineering efforts to overcome supply chain shortages.
Including this into live in range with possible plus.
<unk> clearly had a big impact, but do you have any update on timing of these other initiatives that will that be a calendar.
22 feature.
Yes, Dennis it's a really good question and we have our chief operating officer on the line here, who is closer to the other four work streams. The fifth one is that reengineering foresee to see and beyond Rob any any color for Dan on all that work, we're doing in the supply chain and the reengineering we're doing too.
The streams of engineering work, we're doing to increase supply out of the fiscal year.
Yes, Dan I mean, one of the one of the key areas. Obviously is in the columns is around getting access to some of the <unk> protocols.
But the thing rolled out and we're seeing them get rolled out.
Pretty nicely in some markets.
Some of our valid I should some of those streams.
Getting access to those types of chips, including we're getting access to early adjourn protocols as well.
We'll be deploying both of those I don't think we can give you granularity over.
And it's not without risk and some of the timing, but what we will be doing as soon as we can deploy and validate and have access to the chip volumes will switch to that as quickly as possible. So it won't actually be a single overnight switch of now all of a sudden everything's fallen to some new protocol is something that will be targeted to markets and specific volumes.
Doing so we work on that.
As I said earlier.
The outlook in terms of the overall demand for these chips from other types of industries, obviously calls and funds.
Maybe looking a little better for us and certainly people are less likely to allocate away from us. So we are expecting to be able to plan or a little more certainty, but we won't be able to sort of publicly give out the exact dates and things like that on those deployments.
Yeah.
Thank you. Our next question is coming from David Bailey from Macquarie. Your line is now live.
Yeah. Thanks.
Everyone.
The question is just around consumables and obviously the accessories that are expecting increase device output.
Fiscal 'twenty three.
Just interested in your thoughts on the impact of that on mask and accessories volume and what that might mean.
Massachusetts is revenues and then also do you think the attachment rightful market share to those incremental revenues would be higher than you might assume.
Yes, Thanks, David It's a really good question and as you saw in the quarter.
11% cc globally, and 13% in U S. In Q4, right, where we are only just starting to ramp up essence 10 cloud to cloud to meet that some of that incremental demand gap.
As we talked about every quarter during fiscal 'twenty, three we plan to see incremental growth in our volume delivery across the portfolio of <unk> 10, <unk> 10 card to cloud and essence 11 comps and as Rob just described although streams that are going to made we're going to have increased volume every quarter sequentially throughout fiscal.
<unk> 23 and to your question, specifically that does mean that mosques in consumables attach attached to those new patients will add on as you know very large double digit percentage of of any quarter's revenue on masks and accessories is resupply and recurring revenue of the installed base.
Of patients and so that installed base has been incredibly strong the engagement of people post COVID-19 in respiratory health respiratory hygiene, and making sure that it clean mask clean humidifier clean shooting, it's just being full front with everyone wearing masks for covenant understanding communicable respiratory diseases like COVID-19.
It makes them think about respiratory health and hygiene. So that's a permanent change we've seen over the last 12 to 24 months in some secular demand on the installed base and then you add to that that sort of low double digit number of new patients coming in which is picking up as supply goes so.
I know you guys will got models on this David you've got a good model youll start to see that that moskin consumable right pick up it won't be like a step change jumping up but there'll be a sort of second derivative change if you like a little bit of increase in the rate of increase for a while and masks and accessories throughout fiscal year as we get the supply of devices.
Closer and closer to the demand that is out there for these next 12 months.
No.
Why it way ahead of where we can get to but it means every every watch we make we sell.
Thank you. Our next question is coming from Mike Matson from Needham <unk> Company. Your line is now live.
Yes. Thanks.
I was curious.
The card to cloud units are.
Helping your gross margin at all by taking out those.
So their chipsets I mean is that resulting in some savings that.
Having material impact on your margins or is it not really the case. Thanks.
Brett you want to.
And so my question Mike.
Yes, so the cloud the cloud obviously doesn't have had becomes module in it. So there is some siding there.
So it.
It is positive for our margin, but it would really mark just be around the edges. It wouldn't it wouldn't be material.
Thank you. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Good afternoon, everyone Mic ultra win.
A two part question if I could make for the cart to cloud how much of this shift is tactical that how much of this strategic because the market growth you've always reference 5% to 8% growth for the market. Maybe if you can just parse out how the shift long term.
What would help her regiments overall device growth and if I could quickly Brett if I take SG&A in FY, 'twenty, two 8% to 9% year over year.
And that approximates to about 20% to 22% of reps my math is around three $6 billion to $4 billion for FY 'twenty three is that the right way to think about it sorry, gentlemen for squeezing in the second question. Thank you.
Yes, very cheeky suraj, but we'll go at it I'll go briefly the first one and then hand to Brett for the second part of your two part one question.
So the cloud the cloud it is tactical it's based on the fact that.
For a very important thing we have people suffocating out there they get all the way through the health care system screening diagnosed and then get a prescription and then waiting for a device and we said we're not going to have our strategy, which is 100% in connectivity in every device through comms chips get in the way of the patient needs. So it's a tactical pivot based upon the <unk> chips being.
In our REIT limiting bottlenecks or supply that we're going to do the essence 10-C to C. As soon as that supply moves we go straight back to 100% connectivity since 10, and essence 11 devices. So it's tactical temporal and we're going to go back to what we're going to do the best we can for those patients and they're going to get incredible adherence just won't have all the tech of the daily.
Feedback that you get on those devices with air 11, and the double Maya uptake that you get with essence, 11, and Thats why I want everyone to get in essence 11 as soon as we get the components in our supply chain team knows that our customers know that and we're ready to ramp up over the fiscal year, So a tactical shift.
Brett I'll just quickly say on the second part of the question I think our competitive put out some numbers that they think the market is today and in 2025 and I think they underestimated the actual market today and the market in 2025 by 'twenty 530, even 35% I think that we're talking about $2 1 billion device market in 2020.
For me, it's north of 2526 to 7 billion, even more than that in 2025, if we get our demand Gen and drive it and we're going to get the lion's share of that but Brett any thoughts.
Sure Yes.
Given some broad guidance I guess on the SG&A as a percentage of revenue, but I wouldn't get drawn in.
Strict revenue guidance I'll, just reiterate what you said before.
We're expecting an increase in production volumes and that should definitely supports sequential revenue growth through FY 'twenty three.
Thank you. Our final question today is coming from Lyanne Harrison from Bank of America. Your line is now live.
And good morning Walt.
Just hoping you could help us understand the soft device sales in the world a little bit better.
Obviously understanding that you haven't got clad card to cloud push in the United States.
But can you give us a sense of.
The markets like in rest of the world and what you're seeing.
Some competitors other than in that market.
Yeah. Thanks, Lyanne, it's a good question and it's pretty.
Simple the answer in that in Q4 of our fiscal 'twenty, one we had $20 million of Covid related ventilator sales in India, and if we can all remember 12 months ago, but there was a huge surge of Covid variant in India, and we sold $20 million have been allowed us to Delhi, Bangalore and across the country to save lives and it was incredible.
The way, we pivoted and got those $20 million worth of sales out Justin long and his team did a great job of getting them to India. So if you subtract that $20 million of Covid sales out that you actually see a positive growth good positive growth in devices in Europe , Asia, and rest of world and what you're seeing to the broader part of your question is actually in.
Countries, where they don't have these I would say now illogical COVID-19 lockdowns that are happening in a couple of geographies China in a couple of other countries are sticking with these lockdowns were seeing well over 100% rights of patient flow and so.
Incredible demand for our products both on the ventilation side and on the device side back to where we were which is mid single digit device growth.
In the device side and high single digit growth on the masks and accessories and were getting even higher than that as you saw in the numbers because we're driving share with driving demand and we're getting patients out there. So that's what it is but yes, no that Europe Asia rest of World was really just associated with that has been our lifestyles.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to Mick for any further or closing comments.
Thanks, Kevin and thanks, again to all our shareholders for joining us on the call today I'd like to once again take the opportunity to thank all 8000 raise millions many of whom are also shareholders and thank you for your hard work your dedication, helping over 141 million people sleep, better breathe better and live better lives.
Outside the country in over 140 countries worldwide. Thanks for what you do today and every day I look forward to talking with all of our stakeholders here on our earnings call in about 90 days, plus or minus and with that I'll hand over to Amy alright, Thanks, Nick and thanks, everybody. We do appreciate your time and your interest and if you have any additional questions. Please don't hesitate to reach out directly to us.
That's their relations. This does conclude our fourth quarter fiscal year 2022 conference call, Kevin and I will turn it back to you to close things out.
Certainly that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.