Q2 2023 Resmed Inc Earnings Call
Hello, and welcome to the resumes second quarter fiscal year 2023 earnings call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Amy Wakeham Vice President.
Investor Relations and corporate Communications Amy. Please go ahead.
Great. Thank you, Kevin Hi, everyone happy new year and welcome to resume in the second quarter of fiscal year 2023 earnings call. Thanks for joining US. This call is being webcast live and the replay will be available on the Investor Relations section of our corporate website later today, along with a copy of the earnings press release.
The presentation, both of which are available now.
Joining me on the call today are Chief Executive Officer, and Chairman, Mick Farrell, and Chief Financial Officer, Brett Sundar talk Mick will provide a brief high level overview of our financial results review, our progress towards resin, that's 2025 strategic goals and discuss our progress as we continue to navigate the ongoing macro industry.
Our supply chain challenges Brent will then review our financial results in more detail and we'll move then move into the Q&A portion of our call during the Q&A session, 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 do believe these statements are based on reasonable assumptions. However, our actual results may differ. Please review our SEC filings for a complete discussion of the risk factors that could affect our actual results to differ materially from any forward looking statements made today I'd like to now turn the call over to Nick.
Thanks, Amy and Kevin and thank you to all of our stakeholders for joining US today as we review results for the December quarter, and second quarter of fiscal year 2023.
Financial results reflect solid performance across our entire business once again, driven by strong sales growth in the Americas region. As we were able to significantly increase both production and delivery of flow generator devices, we're seeing ongoing high demand for our sleep and respiratory care devices worldwide.
And we're making steady progress working with our suppliers to continue to increase our production to ultimately meet the needs of all customers and especially patients.
Our mask sales growth was strong across the globe, reflecting a post COVID-19 pandemic awareness of the importance and need for respiratory hygiene and respiratory health risk.
Resupply programs in the U S continued to drive solid ongoing sustained market mask growth catalyze somewhat by the end of calendar year deductible momentum in the U S geography.
Mask styles across Europe , Asia, and the rest of World also improved driven by increased new patient setups as connected device supply increased.
Our teams worked incredibly hard to achieve these extraordinary numbers in the face of an ongoing industry supply chain constraint market we.
We see the supply environment, improving every week every month and every quarter and our access to the specific electronic components. We need has increased we are confident in our ability to fulfill all customer demand before the end of calendar year 2023, and we expect to see steady.
Ongoing incremental device revenue growth in the third and fourth quarters of our fiscal year 2023.
Customer acceptance of our re engineered essence 10 card to cloud device remained strong during the second quarter, particularly in the United States geography.
As we increase the volume of fully connected essence, 10, and fully connected essence 11 devices over the next few quarters, we will be able to phase out the <unk> 10 card to cloud device and refocus on our strategy, which is based around the growth of 100% cloud connected devices across the globe.
Outside the U S. We have not seen the same adoption rates of that essence 10 card to cloud device. However, there have been pockets of success in some geographies and we see a strong growth path going forward as we ramp up our fully connected essence 10, and a fully connected essence 11 products.
And as we achieved regulatory clearance of the lesser platform market by market.
To that point, we introduced our newest product the essence 11 platform into the Japanese market during December and we look forward to continuing to support doctors and patients in Japan with our world, leading 100% cloud connected medical devices in our cloud based software technology.
Our number one priority across all of our markets will always be patients doing our best to help those who need treatment for sleep apnea, COPD respiratory insufficiency, Judah neuromuscular disease asthma, and all those who need access to out of hospital health care. Our goal is to ensure that patients get the.
Care that they need where they need it and when they need us.
Let's now briefly review updates on <unk> 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 market, leading medical devices as well as digital health solutions that can be scaled globally number.
Three to innovate and grow the world's best software solutions for care delivered outside the hospital and especially in a patients on home.
The launch and acceptance of our essence 11 device platform continues to go very well patient feedback remains very positive and we continue to see strong adoption of our my patient App in fact adoption rates are at more than double the adoption rate of my error with the essence.
10 platform at about 55% of all patients getting their data every day on their main app.
Increasing production and delivery of the essence 11 platform remains a top priority for out resume gains around the globe and we will continue to achieve better results and stronger market penetration each quarter.
Earlier. This month, we were able to take our essence 10 fully connected device off allocation in the U S. Market. This is a very exciting development for our commercial team here in the Americas and for all of our customers.
We look forward to continuing to expand the supply of fully connected essence, Tien and fully connected essence 11 devices. So that supply can become unconstrained in all countries, but we will progress.
Throughout fiscal 'twenty three on this endeavor and.
An important aspect of our resume in 2025 strategy is to reach hundreds of millions of patients without respiratory care solutions, including noninvasive ventilation and life support ventilation as well as newer therapeutic areas such as cloud connected pharmaceutical delivery solutions and home based high flow therapy solutions.
We are continuing to drive growth and adoption of our ventilator devices around the world and we saw good uptake of both our life support and our non life support ventilator platforms during the quarter.
There is also ongoing adoption of propel us monitoring system.
Digital therapeutic platform is now integrated with the two leading U S. Electronic health record systems Epic and Cerner. This digital health integration makes it easier for doctors and health care workers to onboard people to the propeller platform.
It's still early days for this technology, however, combined with our investments in home based high flow therapy for treatment of COPD in the home. We see this technology combination as an important clinical addition for trading lung disease and an integral part an important part of our 2025.
Strategy.
Turning to our software as a service offerings for outside hospital care, our SaaS business grew 18% year over year.
This extraordinary growth includes sustained high single digit organic growth of our U S based SaaS business at around 7% and is accelerated by the addition of approximately six weeks of many folks Don revenue.
As we close that acquisition and welcome that German team into the resume family of SaaS solutions, just over mid way through the December quarter.
We continue to grow with outside hospital care customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care.
As the post Covid patient census continues to improve in our facilities verticals. We are seeing pent up demand for technology investments that continue to come to the market.
Our <unk> SaaS business under the broad tree brand continues to grow at a very rapid rapid pace and.
And we welcome <unk> solutions for our HMA customers across the U S market.
As I just mentioned during the quarter, we received final regulatory approval and closed our acquisition of many folks down the leading provider of end to end software solutions for nursing homes and home health customers in Germany.
We're now focused on integrating and growing this business as we accelerate SaaS innovation and SaaS growth in Germany and beyond.
I have met in person with many of the key leaders of the <unk> team and I can tell you I'm excited about the cultural fit the technology focus the sharing and learning opportunities that they bring and we bring to our global SaaS team.
This is our first investment in and outside hospital software business beyond the U S market, but I can tell you. The global SaaS team is very much in sync and they have come out of the great strongly not just in the revenue growth I just talked about but also in the soft side team collaboration transparency beyond.
We look forward to updating you as we achieve key milestones in that business over the quarters and years ahead, our team is ready to deliver.
Our SaaS business is an important part of <unk> future growth and complements the incredibly strong software and device solutions that we have in our core sleep apnea and respiratory care businesses. One Great example of the synergies between our SaaS business in our core business is the success of the <unk> resupply program brought <unk> resupply automates the.
Tire process from contacting the patient interacting with the insurance company on coverage and interacting directly with the patient on co pays as well as managing the logistics and distribution process.
The ultimate goal is to keep.
CPAP iPad bi-level therapy user replenished with the supplies that they need to enable a better and longer lasting therapy experience. We have published clinical data that showed that a patient on a resupply program has higher adherence to therapy and we also have peer reviewed published data in chest, showing what's called the Alaska study.
That there was a 13, 9% reduction in mortality for patients who are adherent to CPAP versus control. These are incredible data and they lead to these synergies not just being a good revenue opportunity, but bring an incredible cost saving opportunity for the health care system and life saving opportunity for the patients involved.
We will continue to identify and capitalize on synergy opportunities as we move forward, we are well positioned as the leading global strategic broader provider of SaaS solutions for out of hospital care globally, and we have created a differentiated value for customers and long term sustainable growth for our stakeholders.
We are transforming out of hospital health care at scale, leading the market in digital health technology across our business. We now have $13 5 billion nuts of medical data in the cloud and over 19 million, 100% cloud connected medical devices on <unk>.
Side tables in 140 countries worldwide, we are liberating data to the cloud every day and unlocking value for patients providers physicians payors and in health care systems and communities.
We are leading the industry.
But I see this as just the start of the digital health Marathon and I can tell you we love the rice.
As the overlap between digital health and consumer Tech Industries continues it is important to note that resumes Chief Medical Officer, Dr. Carlos Nunez was recently named chair of the board of the Health Division of the consumer Technology Association or <unk> and the Health Division is the fastest growing division within Cts.
The Health Division focuses on consumer based technology enabled health solutions to deliver better health outcomes for patients and reduce overall healthcare costs for the health care system there.
Their mission is fully aligned with our resume mission and I'm delighted to see Carlos be recognized for his leadership and the sessions that he chaired at CES.
<unk> a couple of weeks ago showed that resonates thought leadership and Carlos assault leadership is helping to craft the future of digital health and bring it to consumers as we have done over the past decade.
We're excited about the why is Carlos and <unk> Health Division can help continue to shape, our industry for the future lowering costs and improving outcomes and engaging consumers in their own health care.
Resumes mission and clear goal is to improve 250 million lives through better health care in 2025.
This patient centric mission drives and motivates raise millions every day, we made excellent progress towards that inspiring goal over the last period.
During the last 12 months, we improved over 149 million lives with delivery all the device platform to a patient a full mask system to a patient or a digital health software solution.
Helping people to sleep better to breathe better until they've higher quality logs with health care delivered right, where they live and mostly in their own home.
I close I want to once again express my sincere gratitude to more than 10000 beds medians now for their perseverance hard work and dedication both today and everyday. Thank you with that I'll hand, the call over to Brett in Sydney, and then we will move and open up for Q&A from the group Brett over to you.
Alright, Thanks, Mike.
Today, I will provide an overview of our results for the second quarter of fiscal year 2023, unless noted all comparisons are to the prior year quarter.
We had strong financial performance in Q2.
<unk> was 1.03 billion, an increase of 16% in constant currency terms revenue increased by 20%.
Revenue growth reflected increased demand for our sleep products across our portfolio and ongoing increased demand generated by our competitors product in April .
Year on year movements in foreign currencies in particular, the weaker euro negatively impacted revenue by approximately $36 million this quarter.
As mentioned, we closed the many folks down acquisition on November 21, 2022, and accordingly, we have recognized maybe focused on revenue of $10 7 million in Q2 FY2023 result from these tight.
While we continue to experience ongoing challenges in securing sufficient electronic components to meet market demand, we are announcing a more predictable and improving supply chain environment.
We expect to continue to deliver sequentially higher quarterly divorce revenue through the balance of fiscal year 'twenty three.
Looking at geographic distribution and excluding revenue from our software as a service business sales in U S, Canada, and Latin America countries increased by 26%.
In Europe Asia, and other markets increased by 8% in constant currency terms.
Our product segment globally in constant currency terms device sales increased by 25% while masked in August sales increased by 13%.
Breaking it down by regional areas device sales in the U S, Canada, and Latin America increased by 41% as we benefited from incremental revenue derived from the introduction of the cloud to cloud the loss and improving availability of connected devices.
Mosques in August miles increased by 11%, reflecting solid ready supply revenue.
In Europe Asia, and other markets device sales increased by 5% in constant currency terms, reflecting the ongoing supply constraints and in those markets for connected devices.
Masking all the styles in Europe Asia, and other markets increased by 14% in constant currency terms.
Software as a service revenue, including revenue from me I'm really focused on acquisition increased by 18% in the December quarter, driven by continued strong performance from our hygiene make vertical.
On an organic basis SaaS revenue grew by 7% in the same quarter.
During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter earnings press release.
Gross margin declined by 80 basis points to 56, 8% in the December quarter.
This is predominantly attributable to product mix shifts due to increased flow generators styles as well as unfavorable foreign currency movements, partially offset by increases in average selling prices.
Moving onto operating expenses SG&A expenses for the second quarter increased by 14% in constant currency terms increased by 20%.
The increase was predominantly attributable to increases in employee related costs additional expenses related to our acquisitions and travel and entertainment expenses.
SG&A expense as a percentage of revenue was 25% compared to the 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% for the balance of fiscal year 'twenty three.
R&D expenses for the quarter increased by 4% were in constant currency terms increased by 15%.
R&D expenses as a percentage of revenue was six 8% compared to 7% 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% for the balance of fiscal year 'twenty three.
Operating profit for the quarter increased by 14% underpinned by strong revenue growth, partially offset by lower gross margin.
Our effective tax rate for the December quarter was 18, 3% compared to the prior year quarter rights or 15, 6%.
Looking forward, we estimate our effective tax rate for fiscal year 'twenty three will be in the range of 19% to 21%.
Net income for the December quarter increased by 13% and non-GAAP diluted earnings per share also increased by 13%.
Cash flow from operations for the quarter was 129 million, reflecting solid underlying earnings partially offset by higher levels of working capital.
Capital expenditure for the quarter was $27 million depreciation and amortization for the quarter totaled $38 million.
We recorded equity losses of $3 1 million in our income statement in the December quarter associated with the Premier joint venture with Verily.
We expect to record equity losses of approximately 3 million per quarter through the balance of fiscal year 'twenty three associated with the joint venture operation.
On November 21, 2022, we completed our acquisition of maybe folks down for consideration of $997 million and this was funded through a drawdown on our existing revolver credit facility.
During the quarter, we recorded acquisition related expenses of $8 4 million associated with the many folks down acquisition.
The acquisition was EPS neutral on a non-GAAP basis in Q2, when we expect the acquisition to be mildly accretive to EPS on a non-GAAP basis in the second half of FY 'twenty right.
We ended the second quarter with a cash balance of $253 million at December 31, we had $1 8 billion in gross debt and $1 5 billion.
Reflecting the funding remedy focused on acquisition.
At December 31, we had approximately 319 million available for drawdown under our revolver facility and we continue to maintain a solid liquidity position.
Following the acquisition of many folks Don and net interest expense is expected to increase to approximately 15 million per quarter for the second half of fiscal year, 'twenty, three reflecting our increased debt position.
Our board of directors today declared a quarterly dividend of <unk> 44 per share.
Going forward, we plan to continue to reinvest and grow through R&D and also expect to continue to fund that future tuck in acquisitions.
And with that I'll hand, the call back to Amy.
Great. Thanks, Brad and thanks, Nick Kevin I'd like to now turn the call back over to you to provide the instructions and then ran the Q&A portion of our call.
Certainly we would now be conducting a question and answer session and people like to be placed in the question queue. Please press star one at this time a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to move to your question from the Q1 moment. Please while we pull for questions. Our first question is coming from Chris Cooper from Goldman Sachs. Your line is now live.
Thanks, Good morning, good afternoon.
Good to hear the fully connected us instead of us now of allocation.
And I ask what happens with the CTC CTC.
Effectively now I presume surplus to requirements and are there any sort of impact some pricing or inventory valuation, we need to think about in the second half.
Thanks for the question, Chris and it's a good one obviously, we're thrilled to have this 10 fully connected now unconstrained in the U S geography.
As you know we operate in 140 countries worldwide.
Since Tim Coffey cloud inventory, we're working our way through that and it actually is moving very quickly.
This way that we've got the number one device in the market, which is the essence 11 fully connected.
In terms of customer ratings. We also have the number two device in the market, which is the essence 10 fully connected but then we have the number three device the third best of us in the market, which is the essence 10 card to cloud I believe thats better than the tier 234 competitors that are in the market and so we've got the number one two and three device there and we're selling them and.
Different customers want different things and certainly the essence 11 fully connected is at a price premium, but we will start to see I think us work through all of our inventory the excess patient demand is still there globally and I think we will be there for a period of time, even after one of our competitors. It looks like they may come back into the market.
Sometimes this calendar year, so that we can get our mask attachment rates onto them, but yes, Chris we expect to work through all of that essence, thank God the cloud inventory good question.
Thank you. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Mick can you hear me all right.
Gucci lab and pleased Suraj congrats on a great quarter, Hey, Mike maybe I am just trying to thread the needle here, but love to get some extra color.
Heard you see by 2025 250 million lives.
That's the plan.
If I use <unk>.
<unk> currently, let's say $150 million just rounding it off.
70% almost jump in patients covered lives covered by CPAP.
How should we think about the implied guide am I jumping the gun here or are you sort of telegraphing youll should be in a position for the next three years delivered about 17, 18% CAGR. Thank you.
<unk>, it's a great question and how we measure the lives changed is a pretty simple formula includes the CPAP ipads by level devices, but it also includes full mask systems, which.
The sort of linear growth if you like of the devices and some slot exponential growth of the mask systems because of replenishment rights and repeat customers coming back but it also includes patients lives touched through digital health, so whether it's a <unk> patient who gets access to the device or other HMA equipment, whether it's a patient in.
In COPD medicines that gets an app that reminds them to take the medicine on a propeller or a patient that has a lot support ventilator that gets a digital health reminded to get replenishment and so you will.
Bonnie all those impacts on the life and the way I look at it. These are life has changed as much by a brand new device arriving in their house as it is by an app that helps them take a medicine that keeps them out of hospital. So that's how we sort of look at large change, yes $150 million calendar year 2023, you've got it right and then you've got the math the mathematics there is.
The CAGR is 17, 5% volume growth of the lives that we touch over the next three gallons is through 2025, and we're going to do that we're going to get more and more patients on CPAP site that spot levels more and more on resupply mask systems, and then more and more on our digital health platforms and we've got a lofty goal and is a stretch goal, but we believe we can get there in <unk>.
250 million lives by 2025, Thanks Suraj great question.
Thank you. Your next question is coming from Matthew <unk> from Keybanc capital markets. Your line is now live.
Hey, good afternoon.
Just a quick question.
The gross margin.
Just how has the productivity of manufacturing and shipping improved over the last few months are you guys still working through like high cost inventory, how much spot buying is there and it's sort of that.
The decrease in gross margins year slight decrease in gross margin, mainly on the mix of devices versus.
Masks and accessories.
Yes, Matt I'll start and then I'll hand to Rob Douglas, our President and Chief operating officer to cover.
In detail, but just at the start yes, there was a sequential decrease in gross margin one way that I could have avoided that is till the team does sell all those see perhaps an eyepatch pivoted to create right because it was great gross profit dollars to the business and it was great to change a patient's life by new device, but I Couldnt get <unk> 70, 80 basis points up by <unk>.
Saying slowdown the CPAP and <unk> of course, we didn't do that the right thing as the humanitarian aspect to get those devices that we pivoted our supply chain re engineered and redesigned to get them to market and you saw extraordinary growth 41% growth in our U S. Based device market now that's not our highest gross margin is dilutive to GM percentage, but its contribute.
The tree and positive to gross profit dollars and so it's good for patients and it's good for our cycles. So that's what we did but Rob yeah. That's some really good question first of all the debt that is.
Thanks for the question, there's lots of factors in that gross margin and you're asking specifically about productivity.
Productivity improvements, we've done a whole lot of work around volume improvements and really driving volume in all of our discussions with suppliers and increasing volume and reliability of delivery.
Abnormal settings and normal World is we have a long term outlook volume commitments and we're looking at optimization and pricing improvements and things like that those activities are pretty well paid on hold while we've been doing these.
This sort of real scramble to drive volumes thrice a similar situation. Although we are seeing sites, probably going to improve faster than some of these other costs that were in there, but totally in terms of our supply chain culture, absolutely, we'll be aiming to go back to have continuous improvement situation.
We have.
Really strong volume leverage guide and we continue to drive the volumes in a systematic way and we use that to drive productivity and drive cost out of the system.
Thank you. Our next question is coming from Steve Wheen from Georgia. Your line is now live.
Yes.
Thanks.
Mike.
I just wanted to follow up on that gross margin question.
In the previous quarter.
And I think as Brent was talking to.
The efficiencies that.
But that youre achieving through doing more volume.
And the margin benefit from that efficiency was sitting in your inventory balance.
And that's obviously been building and spilt again this quarter I'm. Just interested is is that still the case that when that inventory comes off the balance sheet, we should automatically start to see the efficiency gains that you've been able to achieve to date.
Yes, Ross do you want to have.
Got that question.
Yes, it will make thanks, so Steve yes, I mean that.
What we're doing.
Robot, particularly really at the moment, we're optimizing for delivery rather than efficiency and we've got things like we're running the three platforms at the moment so on really focused on delivering.
Your bosses to patients so that's having an impact.
Big one as we work through inventory or to wash through is the freight costs. So we're seeing some reduction in freight costs, but that has not manifested in our P&L yet that's more of a Q3 Q4. So there will be some some benefit it stops the walk through into into Q3 and Q4 that we're not seeing it that is currently still in inventory.
But on the efficiency side would really we will get paid but we're optimizing on delivery for the moment, but I think as we work through the fiscal we'll be in a much better position to drive on efficiency measures.
And I'll just pile on there that I look at <unk> guidance not conservative guidance is that.
Our gross margin will be sort of steady as we go forward I look on this and say I think there's some upside as we start to see mask rates start to improve we saw 13% constant currency growth in masks during the quarter I think.
<unk> said, the fright cost to wash through the inventory and we're getting great scale from the biggest respiratory medical manufacturing plant in the planet. They are in Singapore and the efficiencies we've got her.
Well above any competitor and we're doing really well on that and I think that will come through and then in addition to that Youll get some some upside for medical cost down which is accretive to revenue gross margin and EPS as Brett said throughout fiscal <unk> and beyond so that'd be my guidance, there as well Steve Thanks for the question.
Thank you next question is coming from David Bailey from Macquarie. Your line is now live.
Yeah. Thanks, very much morning, making great just a quick question on new patient growth.
The U S and rest of world.
And then some comments on what you think it means for our industry the vast growth through fiscal 'twenty, three and 'twenty four relative to historical growth rates.
David Thats, a great question and actually the answer we could take the whole rest of the Q&A session to go through it because it's what we do is trying to reach out to the 936 million people in our core market, but suffocate every night with sleep apnea around the world and.
And we're laser focused on it as you saw we delivered very strongly on those new patient setups, 41% growth of devices in U S. Canada, Latin America, and we turned to positive there in Europe Asia and other and what I can tell you is we're really working through that excess patient demand.
Those numbers will tell you, we're working faster through that excess demand in the U S and getting closer to a state where you get a prescription and youll get a device in days or weeks versus months there at the peak of the crisis and I think if you look across the other 140 countries we sell into.
Free countries different we've got to get the regulatory approvals for instance, 11, there we're going to work our way through but we're going step by step on that journey.
And so as I look at this excess patient demand.
The comment there in my Prep remarks, I think we will get to all of our customers demand before the end of this calendar year and that tells you our confidence and increased supply and our ability to meet that need and and we're laser focused on the humanitarian emergency of patients waiting too long for therapy, and we just don't want that few suffer Kate this is a case of life and death.
Got the data to show that we want your path to therapy to be expedited.
And in addition to that the final thing I'll say is that we are looking at out patient demand generation activities that have been on hold these last 18 months and <unk>.
Im looking at our models in Australia, and New Zealand Korea, Japan, Singapore, U K and beyond where we have these omnichannel marketing availability to contact consumers will sleep concerned consumers directly and get them into the funnel and here in the U S. We have direct models and also joint venture there with verily and <unk> that we've done some really good demand gen.
Tests and a number of cities just waiting for me to fly the starting gun for that team and we're getting very close to firing that starting gun. So we'll have a smooth flow.
From excess patient demand to know patient demand generation to continue our growth trajectory.
Thank you. Our next question is coming from Mike Matson from Needham <unk> Company. Your line is now live.
Yes, thanks for taking my question.
I guess, Nick I think you mentioned high flow therapy in your prepared remarks, I just wanted to get an update on kind of where things stand with commercializing that.
Maybe talk about the just the market opportunity there.
Yes look it's a great question Mike.
Yes.
Our long term goals there 2025.
Are those 250 million lives are going to change in 2025 will be patients with neuromuscular diseases or chronic obstructive pulmonary disease and two of those great therapies high flow therapy in the home I want to be very specific it's been used in the hospital during the pandemic, but high flow therapy in the home, we see as a huge opportunity probably 10 times the size of our ventilation.
<unk> market in.
COPD is available for home <unk> T therapy, and then propel up yet early days in the pilots are going well, we're integrated to the to the payer provider.
<unk> systems, which gives us the credibility now to go from pilots to start to scale with some payer providers, particularly in the U S geography, but robin any further details on our work on <unk> and cloud connected and highlights for <unk>.
We're pretty excited about this is to the mall.
Long term project.
As Mick said, we view this as a very large potential market very significantly larger than some of the other respiratory care market.
And we believe with running tests, where we're really focusing on it is complementary with home oxygen therapy.
That is you'll get much better outcomes. If you add this in and working hard on all of the market access and evidence generation programs to do that now most of those program through either <unk> or real world evidence trials. So we're sort of in a limited market release at the moment in specific.
Markets, where we're making these claims.
But as that evidence evolves and we generated and take it to the.
Pieris and standard setting.
<unk>, we see this is going to be a very strong market for us, but it is a multiyear project.
Thank you. Your next question is coming from Craig Wong Pan from RBC. Your line is now live.
Thank you just.
Just a question on the SaaS business, the 7% organic growth that you mentioned I was wondering is much of that was benefiting from price increases or if the price increases you started through the quarter.
I have a bigger benefit to come through in future periods.
Yes, Greg Thanks for the question no that doesn't include a whole lot of price increases in fact, we put price increases on hold during the Covid pandemic and some of our SaaS businesses and so.
We probably are changing to the area of price increases as we go forward. We've gone from pandemic to endemic so that will happen and then flow out over the coming 12 to 24 months.
Im really excited we're looking at that domestic SaaS business and the worst of Covid getting down to low single digits. We moved to mid single digits and then Bobby who is president of that division and his team have really accelerated that organic growth.
Seven 8% last quarter, 7% this quarter and so that high single digits organic growth and actually we see upside from that in the organic.
If you think about it broad tree.
Matrix care and side as health PA, So we see opportunity to move that up and then when you add on maybe folks done and its capabilities I think the bond business. Obviously, the next four quarters, we'll call out the inorganic part and will be double digits on the inorganic of course, but even going forward as we look out towards 2025, we see opportunities for high single digit even low double digit growth.
Across that combined business as we lap the acquisition. So really good growth there price increases will be a part of that going forward, but they weren't historically to answer your question directly.
Thank you next question is coming from Sean woman from Morgan Stanley . Your line is now live.
Good morning, Mick hope you're well.
My question is do you have enough visibility on the component pipeline two at a time when you might be able to provide.
Direct cloud connected devices in those markets that I have an aversion to the comp to cloud.
Yes, Sean I Hope your Sydney morning is going well day after Australia day.
Look the way we're looking at this is we got 140 countries has got a very complex.
Apply logistics program to get the patients.
Minimize the time from prescription to therapy across all those markets, but it's a complex equation.
The good news is we are seeing supply all of those right limited semiconductors for communications. The <unk> chips are starting to see supply come back the microprocessors. The next right limited step off starting to increase and so we're seeing we're seeing a path through this and you saw in the quarter, we were able to deliver incredibly strongly on that.
We're off allocation for the essence turn 100% connected.
I'd Love to tell you we've got a very complex jigsaw puzzle here I'd love to tell you will be off allocation on asn's delivered in all of our markets. It's just not going to happen in the short term, but as we go through this year, we'll update you as we go off allocation and it'll happen market by market geography by geography, Rob did I Miss anything there.
Common shown in some of this is driven by regulatory requirements around getting approvals and validation and also.
Several of these markets have different components that they need so they are different validation and engineering projects to do and we just have to sequence that throughout prioritization process as well so.
That's actually true with old product launches.
And the good news is not our first rodeo we've done this launch platforms and 140 countries. Many times before and we are back to al.
Sort of making the titles here. This is what we do all day every day and getting off supply chain constraints over the calendar year will be fantastic for us to be able to then just go back to what we do which is helping people sleep better breathe better and live better lives outside hospital care. Thanks for the question Sean.
Thank you. Your next question is coming from Margaret <unk> from William Blair. Your line is now live.
Hey, good afternoon, guys. Thanks for taking my questions good morning to Bret.
Wanted to follow up on the growth drivers as we think about this and next year because I'm hearing those patient backlog, obviously theres core market demand generation that we will start to pick up and then from our perspective, we look at <unk> as well so how do you layer those together over what time period, how much growth could you handle and then maybe specific to <unk>.
<unk> since we haven't talked that much about them on this call.
They've been in the last two years.
And when should they return to be a better pizza mix itself.
Yes, Thanks, Margaret that's a great question and it's one way of thinking about a lot here and we're thinking about all three prongs that you talked about the first one excess patient demand how do we work through that the U S. We're getting close to really working through it. We've got 140 other countries as to Rob's point is the complex.
<unk> to get the supply chain and delivery at all 140, but we're working through that secondly demand generation, yes, where we have omnichannel and have really established social media presence is an ability to drive demand Gen will be starting to turn those on country by country and then thirdly <unk> to your point the last.
253 years of Covid crosses pandemic crosses competitor recall crisis, we have not turn the knob on repo and in fact, we know our customers have been holding back when their supply chain constrained on contacting patients who reach that three year five year, plus warranty you're ready for a new device on insurance and or patient, making the call. So.
I think all three of those are going to be applied.
50 sites here in the U S and in all 140 countries worldwide.
Do have a scenarios and plans I'm not going to detail them here on this call, but I can tell you that we expect to see steady growth throughout our market and we're going to drive that and we're going to make sure that patients waiting lists are not long were not going to turn the the needles until we're ready to get there and supply I'm just happy we're having this conversation this quarter and it's so much better than.
The last eight quarters that we're talking about demand gen and driving rate, perhaps because that's what we've done for 33 and a half years in the business and it's what we love doing and we're going to do more of it.
Thank you next question today is coming from Matt Taylor from Jefferies. Your line is now live.
I had a follow up on that question I guess I just wanted to understand.
What are your expectations, if and when your competitor does come back come back I mean, presumably there could be some.
I guess impact on flow gens.
Create pressure, but maybe you get some pick up in the math could you characterize how quickly you would expect things to change dynamically in both directions, and then how much juice can you actually get out of the demand creation and resupply.
Sure.
Backfill or you kind of increase growth what are your pilot programs or places, where you've done that telling you about how much of a quantitative pick up again.
Yes. Thanks for the question, Matt I'll start and hand to Rob for further detail because it is it is a really important area for us.
If you think about our competitor has been out of the market for 18 months and who knows we'll find out probably later this week.
Gordon earnings call, maybe they'll tell us whats happened to the consent decree and give us some timing frankly give the market. Some tommy good we've run scenarios that they come back Monday.
On February one.
July one we've also run scenarios that is January one 2024, and actually in all those scenarios resume growth and resume does really well and resume does a really good job of taking care of the unmet patient need. So if they come back early I'd come back Monday, we get a 60% plus or minus attach rate of our math. So we get good GM contribution great patient care in terms of the best markets on the planet.
Going to them and we're able to drive that now that'll be starting from zero percent, new patient share they're going to have to go account by account and they want the funding gets resume that the guide that we fought against the tier two three and four players have come in to fill that part of the equation and they're doing an okay job. So they have to fight against the <unk> and then they have to fight against us the market leader.
I look forward to them coming back actually in terms of the MOSFET business would be really good the scenario, where it's further out it's light of this calendar year or early next calendar year, well beyond where it tied with that too because we are ramping up our supply and we're going to get closer to closer to meet all customer demand in this so frankly, it's not irrelevant, but it's not a big <unk> of our long term strategy all along.
Term business and we've got the scenarios and the little pivots that we need to have more masks or or more demand gen in the different scenarios. So.
I think investors some analysts are thinking more about this.
Worried more worried about this than we are because we thought so much about it and have the scenarios and the playbook ready for all three of those scenarios in 'twenty and beyond.
I look forward to this sort of people, calling a binary I see it as a mild perturbation of ammonia Coliseum that really doesn't change the long term outcomes for resume and our patience has not changed in any of those scenarios, but any further detail for Matt Yeah, Matt. The only other thing I'd add is we sort of think of sort of market quantified in terms of the patient lifetime journey through.
Through this condition terrible condition.
Very serious and the biggest problems awareness and so you start off with how do you become aware of it.
The primary care now to refer you to sleep specialists can that specialist refer you to the home or lab testing and then do you get a referral to a provider who has got the capacity to.
<unk> nicely staff capacity is even a big issue for them and so and then will that provide a look at the long term and keep the resupply programs and our solutions are across all of those but the bottlenecks in all of those parts of the patient lifetime.
Patient journey, if you like.
As I say, we're providing solutions across that and incrementally draws.
Driving improvements across all of those so that provides a really good long term outlook for steady growth in the business as Nick was saying.
Thank you next question is coming from Michael Pollard from Wolfe Research. Your line is now live.
Hey, good afternoon, two quick ones, if I can sneak them in.
Is there a vision or strategy to convert card to cloud products to connected solutions over time or is the.
Base case to lead those units that have gone into the market over the last year or so.
And then the second quick one as matter of fact, Don.
The gross margin on that revenue ballpark.
Can you share what that is thank you so much.
Thanks, Mike and shaky sneaking in two questions, but I'll answer both for sure kind of the cloud.
<unk>.
As those devices as well as essence 10 card to cloud devices reached the warranty period or.
Pi allotted period at which a patient can get another device allocated to them, which is usually in the three years or five years normally time horizon and those patients will get the opportunity to upgrade their devices from this incident and cloud to cloud to presumably in essence 11 device.
And.
First 2006 years resumes existence, we had firstly non connected and then Cobb to cloud pager taught technology sort of sneak a knit. It works. It can get you there it's not as optimal it doesn't get that sort of patient engagement on Meyer and all the abilities that we can get to that 87% adherence, but it's John good therapy, it's the smallest quietest and most comfortable therapy.
And with the kind of the cloud are actually mostly sold in U S. HMA customers have done this for years and the data go to the cloud and so the doctor doesn't see much difference because the doctor single the data and <unk> on cloud to cloud and directly connected and so we're actually able to drive really good care with those patients. So it'll be a bolus of patients out of that sort of a 12 month period and.
And we've had I would say some pretty good success in a humanitarian I'd really and showing that regimen is just going to stick to our strategy is going to say, if we need to pivot tactically to take care of patients will do it and we'll take care of them long term, but there will be a bolus of patients I think jumping at the front of recap in a couple of years, who want to get the latest and greatest technology.
<unk> some on consumer pay markets might go quicker. The second question around gross margin, yes look maybe folks Don is accretive to our group gross margin I'm not going to quantify it exactly but that's why I said, you're going to see I think some upside to our GM as we go through the fiscal year, including many folks Don it's accretive to revenue gross margin percentage, but also in dollars.
And our EPS performance.
The fiscal <unk> and beyond thanks for the questions Mike.
Thank you next question is coming from solid Dawson from Joey Capital. Your line is now live.
Good afternoon. Good morning, Thanks for taking my question.
Maybe just a quick one just the U S flow generator growth rate of 41%, obviously very strong just wondering if you can give us any color as to within that how much was volume versus price and also mix.
Yeah. So look it's a great question.
Split out.
Details on price, but I can give some sort of general color and maybe maybe Rob you.
Can you maybe you want to add a little bit onto sold to the color that we can provide.
The competitive dynamics are very talking you look we were very open that we had.
Surcharge that we put.
The start of last year around the freight costs that were incredibly high.
$1 12 euros across all devices and so on.
We will start to actually take that away to get customer by customer and appropriately as we go through the year and as we actually see to Rob's point earlier as we see those costs come through our inventories I don't just come in a spot change. It takes time for the Cogs reduction there to come through.
But in terms of that 41% I can tell you. It was it was materially improved by the essence 10 card to cloud.
And was able to get those devices, there, but our ability I think also.
As we have started this quarter to <unk> 10 fully connected off constraint I think we'll continue to be a nice tailwind for our business there, but Brett I'll hand to you for any any further color we can provide.
To sold to help on his modeling on this.
Thats, Great U S pledge generated growth.
Yeah. Thanks, Nick I mean, the only thing that's always it was really this.
<unk> has a really strong as we go into deepwater viability that weren't striking to the market. So that we can really kind of driving that which is obviously high volume to Boston same site volume levels. For example, so I got that.
Definitely quiet quietly piloting that revenue growth.
Thank you. Your next question is coming from David low from Jpmorgan. Your line is now live.
Thanks, very much just a quick one Mike you talked about being unconstrained supply by the end of the calendar year, and then I think and to Sean's question, you talked about different buckets and regulatory approvals. So the question I've got is really since 11, the unconstrained more quickly in the U S and can you give us any.
So the sense as to when you expect that will be the case.
Yeah. Thanks for the question David.
Yes clearly.
And since 10 fully connected will be unconstrained first just because that platform has been in the market for a long period of time, we've got all the inventory all the capability to drive it and its regulatory approved in virtually every market of 140 around the world and so its just much easier to turn that off constraints and get it moving first but yes to your point.
The smaller quieter more comfortable in the most connected and most clever device is the essence 11, as we get regulatory approvals and we're going country by country on this as we said, we just got Japan during the last quarter and we're going to go country by country on this when we get regulatory approvals and as we get supply starting to improve on those those components.
We can really ramp that up with the oil it's great technology, and really good cost advantages and patient friendly advantages that Scott coaching capabilities in interaction with the patient on the screen, It's interactive and can do some really good over the air upgrades, but also out of their interactions with physicians and its connectivity to Maya 55%.
Almost.
Vast majority of patients that are being offered in almost all of them are saying, yes, I want to see my data every day and get a minus score. So it will go faster and less constrained in those markets, where it has approval I'm not going to predict the exact date, but that will happen because we've got scenarios around that but I think we will start to see that golf constraints before the end of the calendar year, because that's when we're going to be.
<unk> made all of the customer demand, which is which is our goal and with on a fast track to do it this calendar year, Rob what did I Miss there on Davids question. The only other thing Dave it's been really important for us to be able to supply those two platforms. It's been a great thing for us to have sort of a double basically we've got so much extra capability and capacity because we've got two platform months design for the market.
Thank you next question is coming from Danaher from his team Macquarie I'm, sorry, Mark Kaye. Your line is now live.
Hi, good morning, Thanks for taking the question.
It's pretty clear that a lot of the growth coming.
<unk> didn't really even existing account.
So and we've said staying connected you're talking about luxury possible towards applaud cycle, but we are also seeing some early regulatory approvals for new sites.
Apparently communication chips.
Is there any reason why.
Within the next few months as you've seen.
It's roughly the same timeline between approval and launch.
Yes, just briefly.
Yes, Thanks, Dan and clearly very diligent looking at at FDA and different regulatory approvals around the world.
Side of this is that we.
<unk> card to cloud wasn't reengineer re pivoted device absolutely in the essence 10 fully connected we did re jig the Columbus chip to get one that was less supply chain constraints. So those two are re engineered and back in the line. We didn't reengineer. The essence 11, thats selling right now but of course, there will be variance. This is a long term platform. This platform since 11.
He's going to do CPAP iPad by level.
Sorts of amazing therapy models, if you even look at the work that we're doing on the luminous HFC device that we talked about earlier in the Q&A and during my prep remarks that selling the platform all the essence tenant obviously essence 11 will become the platform of.
Of note for us over the coming years, but we don't go into the details of our future product pipeline. So thanks for the question, but look I can tell you is those three products in the market are number one two and three and as you saw this quarter they are selling well and we expect them to continue to.
Thank you next question is from Lyanne Harrison from Bank of America. Your line is now mine.
Good morning, all I might just come back to that full customer demand question comment by the end of calendar 'twenty three.
Is that in relation to Sydney, Scott. So do you think that Youll.
Demand for the backlog lipetsk as well that we've had.
Yes.
Yes.
Youre getting to some of the complexities behind that.
Look.
Our goal is to get off the supply constraints during the county, and we know we can get there.
Won't get there if we turn on every single knob that we have for demand generation and re.
Generation around the world and so we will be turning those dials, if you like for demand generation and Repap generation through our customers and directly as we get supply improving country by country and so yes, I think we can get to all customer demand. If we do no change faster, but our goal is to take care of not just the patients who are currently in the pipe.
Line, but also the <unk>, 90% in many countries, who are undiagnosed and untreated and so our mission is to do that and it's aligned with altruism, but also a profit motive and the overlap of those is a really powerful tool for us to have sustainable long term growth as we have the last 33 and a half years and so.
Clearly if we turned every dollar to Max we wouldn't be able to get off.
Our constraint this year, we wanted to and ultra Max but we will and we are starting to turn those dials and getting the programs up and running in different cities different states different geographies around the world as we start to get off constraints. So.
One go into further detail than that decided that Leon yes, youre digging in it is more complex than just we get there we get there and then we start turning on the market growth rate as the market leader, which is which is our sort of our duty and obligation and we're going to we're going to do but we're going to grow the market and grow our share and deliver for patients.
Thank you. Our final question today is coming from Steve Wheen, It's a follow up from Jordan. Please go ahead.
Yes. Thanks for taking my question. This question is about the diagnosis rates in the U S. In particular for OSA.
There has been some frustration to the ability to diagnose patients. So I just wonder what you're seeing from <unk>.
During the quarter from an improvement on that front.
<unk> got the diagnosis.
Yes, Steve Thanks.
Thanks for coming to your second question at the end of the queue. It shows that the system works and you can get the second question and it's a good one diagnostics right in the U S.
Obviously impacted at the start of Covid.
With all the labs being shut down and then we saw that big pivot and adoption of home sleep apnea testing and some.
Right.
Models from resume and many other players in the market to help physicians find ways to remotely screen diagnose treat and manage sleep apnea patients as we've come out from pandemic to endemic in the U S. We've definitely seen.
Our data show that is at least 50% of patients are going through <unk> testing and then all the other 50% some of them do <unk> and then just a follow up in a lab for titration and masked fit and so on.
And so.
Really good adoption of Huntsville interesting, yeah, it's sort of related to our demand generation area that demand generation isn't just going out there in social media and advertising and finding that customer acquisition cost in an appropriate place well under lifetime value and getting them into the channel. It's also working with the channel to understand where we have capacity what cities what geography.
Fees that we have and as you know Steve following US closely we purchased the company.
<unk> and the product called not al and I have one sitting on my desk. Here. This thing is the size of my fingertip and it has the ability to have highly sensitive and specific.
Screening and diagnosis of sleep apnea with reimbursement and a geography like the U S and we're actually experimenting in Asia, Latin America and around the world on this and the technologies originally European So hopefully it gets adopted there too.
I Love <unk>, and I love, hopefully about testing happening, where it's small it's quiet, it's convenient and it's cloud connected at similar to our therapeutics and yes. So I think you're going to see that diagnostics right in the U S pick up post pandemic because people learned that telemedicine digital health remote screening remote diagnostics work and we can scale, but it won't just be here in the U S.
We pioneered launched here scaled here, but it's going to it's going to work in many other countries around the world.
I can tell you we're really excited about partnerships with the physicians and the patients themselves to find their path to better sleep better breathing. Thanks for the questions. Thank.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mick for any further or closing comments.
Thanks, Kevin and thank you again to all of our shareholders and stakeholders for joining us on this call.
I'd want to thank once again the opportunity for all 10000, <unk> <unk> many of whom are view also shareholders. Thank you for that thank you also for your dedication hard work, helping people breathe sleep and live better lives and over 140 countries. You delivered these numbers. Thank you for all that you do.
And I'll hand back to you Amy.
Great. Thank you, Mike and thanks, everyone for joining US we appreciate your interest and your time and as always if you have any additional questions or need to follow up. Please don't hesitate to reach out directly. This does conclude resin that second quarter 2023 conference call, Kevin I'll turn it back to you to close things out.
Thank you 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.
Yes.