Q4 2023 Resmed Inc Earnings Call
Hello, and welcome to resume its a fourth quarter fiscal year 2023 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. You May press star one at any time and treat placed in the question queue would you ask you.
You ask one question and one follow up then return to the queue.
As a reminder, this conference is being recorded.
Now my pleasure to turn the call over to Amy Wakeham, Chief Communications and Investor Relations Officer. Please go ahead Amy.
Great. Thank you so much Kevin hi, everyone and welcome to resonates fourth quarter fiscal year 2023 earnings call.
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 the earnings press release and the presentation both of which are available now.
On the call today are chief Executive Officer of mixed Farrell, and Chief Financial Officer, Brett Sandra Cock following our prepared remarks, making Brett will be joined by Rob Douglas, Our President and Chief operating officer, and Lucille blades, President of our sleep and respiratory care business for the Q&A portion of the call during.
During today's call we will discuss several non-GAAP measures. Please review the supporting schedules in today's earnings press release for a reconciliation of the non-GAAP measures to our GAAP reported numbers.
Our discussion today will also include forward looking statements, including but not limited to expectations about our future financial and operating performance. We believe these statements are based on reasonable assumptions. However, our actual results could differ please review our SEC filings for a complete discussion of the risk factors that could cause our app.
So our 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 thank you to all our shareholders for joining US today as we review the results of our June quarter, the last quarter of our fiscal year 2023.
Our results reflect incredible growth across our entire business with double digit growth in our devices mosques and software businesses and.
On constrained availability of our market, leading cloud connected flow generator platforms has enabled us to continue to offer access to 100% cloud connector bolt essence 10 flow generator devices in all of our major global markets and beyond in parallel we are ramping up and improving the availability.
All of our best in class essence, 11 platform, which will gain further geographic regulatory approvals throughout the fiscal year and steadily increasing supply also throughout the fiscal year 2024 and beyond.
Although challenges within the post COVID-19 supply chain haven't completely being mitigated yet we expect ongoing steady improvement in component and in product supply in the quarters ahead, using a combination of <unk> and he has since 11 platforms. While we remain focused on scaling production and global availability.
<unk> of the essence 11 platform, where you remain on allocation for the <unk> 11 platform for the next few quarters.
But I want to be clear on this point with combined availability of the unconstrained 10 platform. We have enough devices to meet all of the customer needs that we see in major markets and globally with the powerful combination of the Aten and the air 11 platforms. We have the two best device platforms on the market.
Our strong double digit 23% year over year growth in the devices category demonstrates that customers are choosing regimen and we are delivering.
Our masks and accessories business also performed at a very strong 18% growth in constant currency. This quarter patient demand continues to drive increased adoption and utilization of our mask resupply programs augmenting a steady cadence of new patient setups, we continue to see strong growth in both the U S business.
We provide a resupply programs have augmented growth and in our markets outside the U S, where our consumer outreach and subscription programs are also driving mask replenishment directly with those end use of patients.
Our teams continued to work incredibly hard to achieve these strong growth results amid a challenging industry environment, where component costs and freight costs are still working their way through our inventory post the supply chain crosses.
I am proud of the work that 10000 raise millions of put in every week every month every quarter to live to deliver these incredible results for the business for our customers for our shareholders and ultimately for our most important customer Ah patients.
Let's now briefly review updates on the top three strategic.
Priorities for our company.
Number one to grow and differentiate our core sleep apnea and respiratory care business number two to design develop and deliver market, leading medical devices as well as digital health solutions that can be scaled globally and number three to create innovate and grow the world's best software solutions for care delivered out.
<unk> the hospital.
I feel that we call residential medicine.
In terms of our patient facing digital health platforms adoption continues to go very well the feedback we hear from patients and health care professionals remains very positive.
We are seeing strong adoption of the my patient app by folks using essence, 11th in fact, it is more than double the adoption rate that we saw with our <unk> 10 platform with many many millions of patients signing up and engaging daily on my App to view their own sleep data on their own fun and to review there.
One therapy data.
This is important as engagement with a digital health platform like Maya is directly linked to higher adherence to therapy in patients and higher adherence to therapy is directly related to better patient outcomes to increased resupply and to better economics for the payer and the health care provider with lower.
Overall health care costs.
Last month, we announced and closed the acquisition of some nowhere. Some nowhere is a U S based leader in sleep and respiratory care diagnostics software and physician management software.
As part of our ongoing efforts to improve and streamline the end to end pathway for patients and make it easier for sleep labs, and physicians and their practices to diagnose and manage patients. We're excited about this acquisition that complements our current ecosystem of software solutions, including air view for providers and physicians.
<unk> and broad tree for homecare providers.
Ecosystem, together will drive greater efficiency and better patient care by accelerating the pathway in the therapy and with a better overall customer experience.
We're also excited about our progress across several digital health technology initiatives to further increase the value proposition for our connected health care ecosystem.
Over the next several quarters, we plan to introduce several artificial intelligence driven data products and capabilities on both the physician and provider facing every platform as well as the patient facing my App.
Early testing of these AI driven data products is very positive in both of these customer groups and we will refine to the optimal digital design and then we will launch and then we will scale these products around the world.
These AI driven data products provide personalized suggestions to increased therapy adherence and to ultimately improve patient outcomes as well as patient physician and provider experience.
We will continue to invest in the world's largest digital health care ecosystem that we have with over 15 5 billion nights of medical data in the cloud as we continue to unlock value from those data to benefit physicians providers payers and patients.
We saw strong growth in our respiratory care business in the quarter through ongoing adoption of our noninvasive ventilators as well as our life support ventilator solutions.
We're still in the early stages of market development with some of our newer to market technologies in this category, including home based high flow therapy that we call <unk> F. T for treating chronic obstructive pulmonary disease or COPD in the home, we continue to generate clinical evidence and economic outcomes.
To support broader adoption of these technology innovations for trading lung disease in the home.
We're encouraged by the clinical results, we've seen with our <unk> ft trial, so far and we continue to remain very focused on addressing COPD is one of the top diseases globally for hospitalization and the number one cause of re hospitalization in the U S geography.
The prevalence of respiratory insufficiency due to COPD as well as respiratory insufficiency, Judah neuromuscular disease continues to increase and we are focused on having low cost high quality solutions to address these health epidemic.
Our SaaS business had another great quarter with year over year growth of 34%.
Our SaaS business growth was supported by another full quarter contribution from our fast growing many Fox Dan business as well as solid organic growth of 8% across our broad <unk> and matrix care portfolio of SaaS businesses.
We're pleased to see sustained high single digit growth in our SaaS business on an organic basis, driven by the ongoing strength in the HMA in infusion segment and more stability in the facilities segment as patient flows have now rebounded post COVID-19.
I'm very impressed by the leadership of our most recent SaaS portfolio addition, maybe Fox, Don which is on track and meeting or beating our expectations I'll be visiting personally with the team and he'll dish on Germany. This quarter to discuss the growth face to face with the digital health innovate as they are and Hilda Sean who were changing.
<unk> care and taking care of people in the lowest cost lowest acuity and highest quality of life setting, which is very often the heart. We believe this is the future of health care, and that's where we're investing and Thats where were winning.
Our customers continue to see the value of adopting technologies to improve and optimize business efficiencies and personalized care and we deliver the best software solutions to help customers do just that.
There is pent up demand for technology investments in residential medicine verticals, particularly as staffing shortages continue to impact the industry, particularly in nursing, but across the clinician and provider groups. This presents opportunities for resumes SaaS solutions to streamline operations and create workflow efficiencies so our customers stop.
We can focus on providing personal care.
It's up to us to deliver for our customers and drive growth I have confidence that our SaaS business can accelerate from these high single digits on an organic basis to double digit growth on an organic basis in the mid to long term.
Our SaaS business remains an integral part of <unk> group growth strategy. This business complements the market, leading software and device solutions that we have in our core sleep apnea and respiratory care businesses. As an important example brought tree resupply program continues to demonstrate strong synergies between SaaS and our core business.
Providing resupply for patients with sleep apnea, COPD neuromuscular disease and beyond the output of this work can be seen in a very healthy 19% growth in mass revenues in the U S geography this quarter.
Ultimately this work results in better outcomes for the patient the physician the provider and the pilot with lower overall health care costs, we are well positioned as the leading global strategic provider of SaaS solutions for residential medicine globally, and we've created differentiated value for our customers as well as long term sustainable growth for all stakeholders.
Hewitt resume we are transforming respiratory medicine and residential medicine at scale, leading the market in digital health technology across our businesses as we continue to scale and drive efficiencies in our operations in this post Covid world, we continue to leverage appropriate pricing and cost reductions to drive accelerated growth in our bottom line.
We are focused on driving top line revenue and maintaining tight discipline and increasing efficiencies. So that we can lower costs and ultimately so that we can accelerate our impact and our bottom line profitability delivering even further value for all of our shareholders.
As we move through fiscal year, 2024, I see improvements in our business margins with geography mix with product mix and specifically with strong bi level and noninvasive ventilator growth with strong mask growth and with increased software solutions growth. All of these business lines are margin accretive to our group.
<unk>.
I also see that the higher inventory costs and freight costs that we've seen through the supply chain crosses continue to work their way through our solid products and as we progress through the fiscal year. We will continue to drive the transition to essence, 11, and we will gain regulatory approvals and we will scale production.
All of these factors above lead to Tayo wins for the gross margin and the net margin of our business as we move through the fiscal year.
I can tell you we are working furiously to drive all of the above elements with our global teams.
We now have over $15 5 billion nuts of medical data in the cloud as I said earlier and those data come from of a 21 5 million, 100% cloud connected medical devices on bedside tables in 140 countries worldwide. We continue to lead the industry in digital health and.
We don't plan to stop anytime soon because there's so much opportunity ahead of US 7% of our revenues go straight into R&D to power, our hardware and our data innovation engines resumes mission and key goal remains crystal clear, we will improve 250 million lives through better residential healthcare in 2000.
<unk> 25, this patient centric mission drives and motivates, whereas medians everyday we made excellent progress towards that inspiring goal over the last 90 days and during the trailing 12 months, we have improved over 160 million lives with the delivery of a complete device platform to a patient or a complete mask system to inflation or a.
Digital health software solution that is helping each person to sleep better to breathe better until we have a high quality of life with health care delivered right where they live.
As we start fiscal year 2024 here I'm very excited about the opportunities in front of US we just had our SaaS.
Earlier, this week and I'll be attending the country market group CMG group for our North American team in the coming weeks and south meetings are happening around the world. We're on a good trajectory we have an exciting pipeline in closing I want to express my sincere gratitude to the more than 10000 raise medicines for their perseverance their hard work and their dedication.
But today and every day with that I'll hand, the call over to Brett in Sydney, and then we'll move and open up for Q&A for the group Brett over to you.
Okay.
Alright, Thanks Mick.
In my remarks today I'll provide an overview of our results for the fourth quarter of fiscal year 2023, unless noted all comparisons out of the prior year quarter.
We had strong financial performance in Q4 revenue for the June quarter was 112 billion, an increase of 23% on a headline basis and in constant currency terms revs.
Revenue growth reflected the ongoing combined availability of cloud connected entertained and AT&T 11, slightly voices to support strong underlying global demand as well as solid growth across our broader product portfolio.
Year on year movements in foreign currencies negatively impacted revenue by approximately $3 million in the June quarter.
Looking at our geographic revenue distribution, excluding revenue from our software as a service business.
In U S, Canada, and Latin America countries increased by 25% in <unk>.
Instant currency terms sales in Europe , Asia, and other markets increased by 14%.
Globally in constant currency terms device sales increased by 24%, while masks and other sales increased by 18%.
Breaking it down by a regional areas device sales in the U S, Canada, and Latin America increased by 30% as we benefited from strong demand and as previously mentioned our continued ability to fully supply the market with combined availability of Ias <unk>.
11 cloud connected devices.
Masks and other sales increased by 19%, reflecting growth in ready supply and new patient setups.
In Europe Asia, and other markets device sales increased by 15% in constant currency terms again, reflecting strong demand and improving availability of cloud connected devices.
Masks and other sales increased by 14% in constant currency terms, reflecting increased patient setups.
Software as a service revenue increased by 34% in the June quarter, reflecting the contribution from our many folks that acquisition and continued strong performance from our high <unk> vertical.
Excluding that many folks Dan acquisition SaaS revenue grew by 8% in the June quarter.
Many folks bank contributed revenue of $27 3 million for the June quarter, consistent with our expectations at the time of the acquisition.
During the rest of my commentary today I will refer to non-GAAP numbers. We have provided a full reconciliation of non-GAAP to GAAP numbers fourth quarter earnings press release.
Gross margin declined by 200 points to 55, 8% in the June quarter.
The decrease primarily reflects component cost increases warrant gain manufacturing related cost increases and product mix shifts due to the significant increase in sleep device styles, absolutely offset by increases in average selling prices.
On a sequential basis unfavorable foreign currency movements accounted for 30 basis points decline in our gross margin.
And we saw a level of an expected product mix benefit as we continue continue to see strong growth in sleep devices in the U S market.
Moving onto operating expenses SG&A expenses for the fourth quarter increased by 25% or in constant currency terms increased by 26%.
The increase was predominantly attributable to increases in employee related costs marketing and travel expenses.
As well as the incremental SG&A expenses associated with many folks Dan that we acquired in November 2022.
SG&A expenses as a percentage of revenue was 21, 5% compared to 21, 1% 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 'twenty four.
R&D expenses for the quarter increased by 21% in constant currency terms increased by 23%.
R&D expenses as a percentage of revenue was 7% consistent with 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% during fiscal year 'twenty four.
Operating profit for the quarter increased by 13% underpinned by strong revenue growth, partially offset by a lower gross margin.
Following the acquisition of many folks then our net interest expense for the quarter is $15 million and we expect interest expense to be a similar amount per quarter in the first half of fiscal year 'twenty four.
Our effective tax rate for the June quarter was 18, 3% compared to the prior year quarter right up 17, 6%.
Looking forward, we estimate our effective tax rate for the fiscal year 24 will be in the range of 19% to 21%.
Our net income for the June quarter increased by 7% and non-GAAP diluted earnings per share also increased by 7%.
During the quarter, we incurred $1 8 million in acquisition expenses associated with our <unk> acquisition and.
And we recognized restructuring costs of $9 2 million associated with the closure of the ARIA lymphedema business and workforce rationalization in our chairman SaaS business verticals.
We also recognized a gain of $22 million within other income in relation to a business interruption insurance claim.
These are all being treated as non-GAAP items in our Q4 financial results.
Cash flow from operations for the quarter was $237 million, reflecting solid underlying earnings partially offset by a modest increase in working capital.
Capital expenditure for the quarter was $34 million depreciation and amortization for the quarter totaled $47 million.
We ended the fourth quarter with a cash balance of 228 million at June 30, we had $1 4 billion in gross debt.
$1 2 billion in net debt, which mainly reflects the funding of that many folks span acquisition.
During the quarter, we reduced our debt by 145 million at June 30, we had approximately 745 million available for drawdown under our revolver facility and we continue to maintain a solid liquidity position.
Our board of directors today declared a quarterly dividend of <unk> 48 per share representing an increase of 9% over our previous quarterly dividend and reflecting the board's confidence in our operating performance.
Going forward, we plan to continue to reinvest in growth through R&D and expect to deploy further capital for tuck in acquisitions, such as our recently announced acquisition of some the way a company that provides an upstream diagnostic management platform that is complementary to our current interview ambulatory solutions.
And with that I will hand, the call back to Amy.
Great. Thank you Brad and thank you Mick Kevin I'd like to go ahead and turn the call back over to you to provide the instructions and run the Q&A portion of our call.
Certainly we will now be conducting.
A question and answer session. As a reminder, we ask that you. Please ask one question and one follow up if you'd like to be placed in the question queue. Please press star one on your telephone keypad a.
A confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from a Q1 moment. Please while we pull for questions. Our first question today is coming from Matthew <unk> from Keybanc capital markets. Your line is now live.
Hey, good afternoon, and thank you for taking the questions.
Mick.
With the devices number sort of steady sequentially around $600 million Mark is this where the number would what kind of base out. If you are supplying the majority of the market and kind of from here are we looking at just a 600 million and then add on some percent.
<unk> of what the underlying sleep market is kind of growing that.
Yes, Thanks for the question Matthew and it's a good one.
Hard to predict because there are so many factors involved.
That are going on in the market right now, but yes as you said a very very solid so number of $602 million in global devices in the quarter and 30% growth in U S. Canada, Latin America, 15% growth in Europe , Asia and rest of world.
We're seeing as strong sort of mid single digits level of patient flow into the channel. We're seeing in addition to that like in terms of new patients. We're seeing in addition to that resupply of patients at that five year point for most U S reimbursement in various points in the 139 countries where people make their own decisions.
Or insurance has other.
The other criteria to drive that so it is new patient setups resupply setups and is of course, the impact of a competitor recall, which is.
Was supposed to be over in June 30, and now has no definitive diets and so as we look to that with all those unknown factors. It's very hard for me to say Matthew that its just stop and steady growth from here it might be stronger growth from here and that makes it hard to predict gross margins because as we grow those CPAP in APAC.
Numbers, so well in the U S geography, it's incredible great revenue and cloud connected and links with the patient life, but it is a lower gross margin than our group and so it's great gross profit dollars, but has an impact on our gross margin as you saw that steady apart from FX moving it down 30 basis points. So a complex equation, but I would say it's at minimum.
It stays where it is and grows with the market, but it could potentially grow above that as we continue to take share and solidify that share through our digital ecosystem. Thanks for the question Matthew.
Thank you. Our next question today is coming from mortgages or from William Blair. Your line is now live.
Hey, good afternoon, and good morning, everyone I wanted to just follow up first.
The competitive dynamic to the extent that youll see anything maybe into the marketplace. So whether your key competitors coming back either.
Approaching or.
Maybe hiring processes marketing campaigns anything that maybe they're gearing up for that Youre seeing.
Or is demand relatively similar to what you've seen in the past no real change. Thank you.
Yes, Thanks, Margaret and welcome back.
I think.
It's difficult to predict exactly where they're at from those sort of the early emerging signs as you Sai.
Look we have regional competitors in Europe that we are fighting with every day then we have regional competitors in Asia that were fighting with everyday and regional competitors in the Americas that were fighting with every day.
When when Philips comes back at the start of position number four if you lock in new patient setups. We are they are back and we are competing with them in some countries in Europe like in spine. They never went away because they never had a fund devices. So they've been there the whole time through this recall and we've been.
Leading them handsomely there.
As other markets in Europe , where they have started to come back.
We're competing and winning and maintaining share and growing share I think the reputation hit and the time to market is going to be a very slow progress for them country by country, whether or not they get a consent decree and the largest geography and so we look at it going forward and say look do we have enough supply to take care of all the market demands between us and the other regional play.
And we finally got there where I can say that this quarter that were there and we can take care of it. So it's almost irrelevant to us how and when in terms of what that looks like because we're able to take care of all the market growth. So for us it sort of takes away that uncertainty and allows us to push forward, but yeah, we're competing head to head with them in many countries in Asia and some countries in Europe .
And it's it's like it was in 2019, where al smaller quieter more comfortable more connected and more digital solutions are taking share and holding share and.
It's an ongoing competitive game and as I said, we're launching some of these AI driven products on top of this ecosystem. That's an exponential gain when you think about digital and we're well ahead, we've had two or three years either sprint ahead, we were head before that and I think it's a long term game won't get we'll keep productively paranoid, but we are improving outcomes, we're lowering costs.
And the physicians like the workflow efficiencies and patients like the increased adherence and pilots like the fact that there is an ROI and lowering total health care costs.
Oh.
Alright, Thank you guys.
Thank you. Your next question is coming from Anthony Petrone from Mizuho Group. Your line is now live.
Great. Thank you congrats on a strong topline here share gains maybe two part question. Nick one would be just on the amount of resupply that's now coming in as it relates to the share gains that you've seen over the past two years is the resupply number we're seeing now where we actually started in the <unk>.
C consumables come off of the new sockets that you gained so that would be question. One and then question. Two there is obviously the debate out there on <unk> ones, maybe from the perspective of <unk>, how do you see the GOP one phenomenon playing out in the sleep space, specifically do you expect to gain more pace.
<unk>.
From <unk> versus may be certain patients that would fall out of the funnel. Thanks again.
Yes, Thanks, Anthony and welcome back to Youtube to resume following us.
I'll take both of your question you follow up in order so firstly on resupply.
As you know you've been following us for a number of years, it's not.
<unk> you can use our mask on all these devices and you can use album asks on our devices. The way that we've won market share and nobody has been on a major in terms of not being able to sell recall out there on this and so we've had head to head in competition with all the top five players in mosques.
Last three years and we've gotten really good share with that so I think it's just the the smallest the quietest the most comfortable the minimum size.
<unk> the ones that have full freedom and the ones that have the ability to fund.
<unk> business side flavors to provide that capability and so that's how we've gained share in the mask side and maintain that share.
So.
There is a better together in that when you have in essence 10 are in essence 11, the <unk> data are more accurate.
<unk> ability of and IHI calculation or linked calculation a more accurate. So we certainly push that angle and we do get some extra share through the device, but it's not as material as the fact that the mosques themselves are just excellent, which I think speaks to the sustainability. There. So that's strong resupply as you said, 19% growth in the U S 14.
Percent growth in Europe , Asia, and beyond where we don't have that sort of automated re supply that we have we brought tree risk.
<unk> solutions in the U S. That's been from hard work from our teams in Asia, Latin America, and Europe on patient outreach subscription programs and connecting directly to that end user.
Post Covid people care about respiratory health respiratory hygiene, and taking care of themselves outside the hospital and we've been able to leverage that trend in the consumer side as well. So I think it is sustainable and I don't think although it may be catalyzed somewhat by our increased device sure I think our market share is.
On it's an extraordinary due to the intrinsic products the second question.
<unk>, yes.
A lot of moving parts. So I was just reading in the press.
<unk> today is that many U S employers banning.
Coverage, all GOP ones due to cost European governments have all said no from the government insurance side.
These things are incredibly expensive about 1000 wells anywhere from 800 to $200 thousand dollars a month.
So I think there are three factors that will mitigate <unk> in the space. One is cost to is adherence and three side effects. It will take them really quickly in order. If you look at cost take a 40 year old person, who is on therapy full time for 40 years.
40 times 12 times, a $1000 was $480000 lifetime cost of that patient on the <unk> one from 40 to IV locked on cost if you take that same patients.
CPAP right first year, maybe $1000 and then 39 years of let's take a really strong case, where you get full marks a year and they're all full facemasks. That's about 13 13, $5000. So 35 times more expensive to go with the GOP. One it's just like what's the ROI. So that's cost on adherence the.
Data out there about 33% adherence at one year through the clinical trials on GOP ones. That's incredibly low we get we get 87% adherence 90 days when we hold it pretty strong there. So I think adherence is a big deal and third its side effects.
Thyroid pancreas kidney.
Cancer, These major side effects and mono ones like nausea constipation in pine.
Biggest side effect, President Biden had a little Mark <unk> on his face and he was asked about news from CPAP.
I think it's a long road to play out here I think it's frankly, good marketing around the area of obesity and it can drive patients into the funnel, but I don't think its going to be a major impact on patients because we got $936 million of them worldwide and we need them to get into the funnel if they come in the funnel because they try to Peel and it didn't work that's good for us too.
Thank you as a reminder, that star one to be placed in the question queue and in the interest of time. We ask you. Please ask one question that return to the queue. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.
Hi, This is seamus on for Suraj.
We saw.
Gross margin stepped down a little bit I know you said there was some reasoning for it but I just looking forward kind of in the future and maybe you can walk us through the temporary more structurally permanent changes, we should think through as far as GM outlook is concerned.
Yes. Thanks for the question and you look at it it's a good one.
Lots of factors going on gross margin actually the major one.
Sequentially on the 30 basis points was foreign exchange and that was on inventory as it flowed through our funnel as we saw does the bedside, perhaps we had FX that would impact them six to nine months ago that they're flowing through inventory that we saw during the June quarter that was the headwind of 30 basis points from from.
Q3 to Q4.
Look I think there's so many moving parts, but when you add it up and you look at geography mix and the upside opportunity for us to grow our business in Europe , Asia, particularly Japan, which has some has some chance for acceleration of the coming years product mix I mentioned in the prep remarks, particularly on bi level and our noninvasive.
Ventilate abroad, So think <unk> STI.
<unk>.
Our increase in our mask side, particularly the full face, but any of the mosques all of those gross margin accretive to our group and I see I see.
Unity is for strong growth in all of those categories and also our software solutions have.
Gross margin accretive capabilities and as we go on an organic basis from single digits to high single digits to low doubles on the software SaaS side of the business I think that's margin accretive so I feel good about that.
I also know that we're working through the sort of higher inventory costs that we had in that supply chain process, we had to spend more on chips parts and pieces in those contracts and get a more expensive components for the cloud connected chip and beyond and those freight costs that we invested in and everyone's talking all the news the freight cost today and you should take away your surcharge will now.
Actually the freight cost that we paid six nine months ago are working their way through our gross margin as you saw in the June quarter and that will go on for some time, but that's going to continue to go down over time and as that does go through a cell products is going to be some tailwind for gross margin and the final one really important one is we're going to drive essence.
It's the best in the World product is better than the second best product in the World, which is the <unk> 10, and it gives us a chance as we gain regulatory approvals and we scale that production to improve that gross margins there as well. So all of those are <unk> for gross and net margin of the business as we move through the fiscal year.
Hard to predict and that one of the main factors is how do we accelerate in the U S and particularly in CPAP iPad I will never turn down a patient if there's demand for a patient and they want to see Bev and iPad I'm not going to reverse engineer and we know how to do it we could reverse engineering gross margin up 30 to 50 basis points by slowing down sales of product, we're not going to do that when a pie.
It needs care, we're going to take care of them, even if it's a slightly lower gross margin and by the way. It is really good gross profit dollars when we get to take that cash flow as you saw really strong cash flow in the quarter and reinvested in R&D. So we're working on all of the above furiously and we're going to get success as we go over the next 123 and four quarters.
Okay.
Thank you. Your next question is coming from Laura Sutcliffe from UBS. Your line is now live.
Hello, Thank you.
Just wondering if you could talk about how you're positioned to increase your mask supply in the event that the consent decree the competition impact.
Our ability to provide <unk> for example, if they end up constrained.
<unk> level.
Yes look we have run all sorts of scenario analyses around around that.
I think one of the differences if you think in terms of <unk> ability to to work with suppliers in the core device side, where in terms of chipsets the whole med tech sector as a group I serve on the board of advocate and we we're advocating for more semiconductor chips for the whole industry. When we were going to Intel.
Ti and all these companies and sort of begging for semiconductor chips 12, 18 months ago. All together, we were less than 1% of the supply of chips and it was very difficult. We did get some and as you saw we did have to pay a little more but we were able to get those contracts with all the other players and get long term contracts and get that supply in the field of medical grew.
<unk> Silicon rubber we are one of the top users in the world for this.
We sell tens of millions of Moffat products per year, and we are an incredibly large part of that supply chain. So if.
If a competitor was not able to sell marks their demand for that LSI would go down and those those will similar suppliers would then want to keep their factories operating will be looking for other supplies and we would.
Running the game theory in the analysis of where we go and how we go to ramp that production up so it would be a good problem to have for the business I think it would be a bad problem to have for patients but.
I think the probability of that is relatively low, but if it does happen we're ready, but Rob do you have any thoughts on that Rob Douglas, our president and COO.
Just one other monarch comment on that and we've said this before because of the relatively low capex.
Supply chain and the equipment that we need we generally run with.
Quite a lot of capacity.
<unk> ability to rapidly increase volumes as needed is really strong.
Thanks for the question.
Thank you next question is coming from Sean woman from Morgan Stanley . Your line is now live.
Good afternoon Hope you will.
I'm wondering if you could characterize for us some some of the Prost dynamics smarter being present during the quarter.
Yes. Thanks, Thanks for the question Sean.
Yeah.
Simple question very complex answer.
Across the 140 countries and all the dynamics I think one thing that I'm comfortable to say, though on this is that if you look over the last four quarters. Our commercial teams have done an incredible job of partnering up with our customers to say look inflation is up costs are up.
How do we share some of the pie. If you lock of these increased costs and we were able to increase some prices on some mask systems and components and some devices, where we could it's tough because customers often don't get much relief from the pie as they did in the Medicare side in the U S market, where there was an inflation adjustment up.
Around 5% January one.
So that was a benefit for our providers and so we can share some of the pain. There in terms of increased pricing, but we've also had some surcharges on our products in terms of fright.
And although as I said in the prep remarks, we've seen all the news media that freight costs are rolled down well, yes. Okay. They are on the spot price, but 12 months ago or nine months ago as that works through our inventory of that Pie chart is still there and its still impacting our costs and inflation, although coming down is still high but I think our commercial teams have done a really good.
Job of partnering up with our customers walking them through the situation and the reality that costs are up inflation's up right.
Inventory costs throughout we need to work on an appropriate pricing to make that happen and we've had some appreciation in average selling price over these last 12 months and we'll look to do over the next 12 months to do an appropriate pricing with customers on a per customer per contract basis to sort of share some of the pie and the increased costs that are industries and industries having.
But at the same time, we are laser focused on driving that growth and so it's a really strong sort of.
Price elasticity a question of how do we make sure we get that balance right, but.
It's a competitive game some of our competitors are out there, saying the same thing publicly that costs are up and so we need to to move prices appropriately and we're out there working with customers to make sure that we as an industry take care of patients in a sustainable economic way and that involves both quantity price and supply over the long term.
<unk>.
Thank you next question is coming from Lyanne Harrison from Bank of America. Your line is now live.
Good morning, Nick.
That's a good question about outlook.
And to the.
<unk>, you mentioned that youre going to see sequential revenue growth.
In 2023, and we have seen that in February , but what do you compare that key competitor out of the market.
We still expect to grow revenue sequentially first quarter second quarter 'twenty four.
How long do you think you may know that the market.
Yes, so great question, Lyanne, and yes, 12 months ago. When it was pretty clear that we had a strong runway there on the devices side. It was really we were constrained by our own production I was able to very strongly say look I am confident that our supply chain team has got access to this reengineering.
Redesign and redeployment of all key components, particularly electronic components, particularly semiconductors, and we did that and we grew device revenue every quarter throughout fiscal year 2023. As you noted I was really excited with the team on that as we look forward to fiscal year 'twenty four we don't give guidance really.
On the top line rents given some really solid guidance on our SG&A or R&D, our effective tax rate and.
We're looking in those parts of the business is a very controllable.
As I said in some of the earlier questions. We had so many moving factors in overall demand in the market, but look I'm confident because new patients continue to come into the funnel right that's happening across the world and it is not happening randomly would driving demand gen programs driving them in Australia, and New Zealand with a Y can you best.
Campaign, we're driving we're driving them through.
German teams, our India teams social media programs in China things really strong social media demand Gen and so were getting new patients in the funnel and there was a glut of patients who couldnt get.
Replenishment device when the device hit three years or five years or whatever time their insurance allowance.
As a consumer decide that they want to get to the next gen product and I think the essence 11 in all its features.
Engagement with the patient with compliance culture, and its ability to engage with them directly.
On the touch screen has driven some demand as well so all that together make me confident that over the fiscal year, we're going to have strong demand, but as you go from Q4 to Q1, there is a seasonal impact of the northern European and U S markets take some vacations and these have impacts seasonally on the business and so traditionally Q4 to Q1 isn't isn't one.
I'm not giving guidance for it but traditionally that's why it happens we're not we're no longer supply constrained we are back to a demand environment and then there's the factor of that number for competitive probably not coming back during the next 60 days through the end of this 90 day period, but I'm not going to jump in and predict on that all I'm going to say is.
We're out there all day everyday driving demand Jain of new patients in wrap their farming for patients who need to get a replacement device and every day, we are engaging with patients on Maya and reminding them of the importance of the clean hygiene and a new mask an engagement with a digital app. So all of the above gives me very strong confidence so high growth resume throughout the year.
But I'm not going to call on every 90 day basis here, we just don't do that on the top line.
Thank you. Your next question is coming from Chris Cooper from Goldman Sachs. Your line is now live.
Good morning.
Afternoon. Thank you so make an essence 11, you're sort of emphasize its importance for gross margin.
You also said at the start of the call.
You sort of expect this to remain on allocation for few more quarters yet.
This timeframe was probably a bit longer than you'd hoped I just wanted to confirm whether that's entirely a function of supply chain at this point or I guess, whether there's any sort of strategic consideration to manage volumes during such an unusual competitive dynamics.
Yes, Chris Thanks for the question.
Really been focused on that patient and making sure no. One is left behind as I said in an earlier question and.
Although the essence 11 is better margin for us and it's better innovation and it has a higher engagement on the Meyer App, which drives.
<unk> adherence.
Re supply and everything our view is that if there's a patient available and we have the parts and pieces and the ability to make an essence tan and take care of that demand now while we ramp has since 11, we're going to do it and we're going to take care of that patient by the way. There's some really strong upside for that patient in the alternative is a competitive device, which would not be as small quiet comfortable and connected and so.
They have a much worse experience than the essence team with us with a competitive one so it's better for the patient it is slightly low margin for us, but we get that patient on therapy and there is the better together with resumes that its more likely hopefully that they get a regimen mask and that they use that masked for the rest of their life and so I think there is an overlap there if you like of ultra wisdom and the profit motive to.
Do the right thing on our gross profit cash flow driven environment, and we're not going to manage just to a GM line in sight.
Let's not do that and make those products and so it's less.
I mean, it's strategic in this way that our brand is about patient care. Our brand is about taking care of someone who's suffocating and getting them out of the hospital in doing that and if we have to do with in essence, 10, which is an amazing.
Seven year old platform that we're going to do it if we can do it with the brand new and since 11 platform, we're going to do it and nothing is slowing us down our quality and regulatory teams are going geography by geography to get the essence 11 approved in each of the regulatory environment. So as soon as that is we can start selling the products.
But the ramp up on essence, 11 is probably not as fast as it would be in a market where you had.
All five major competitors competing there.
Because of that excess demand recovering a lot of that with the <unk>. So that's sort of how we're thinking about it patient centric patient demand take care of that patient now get them onto our ecosystem and then ramp as fast as we can essence 11 and were doing that nothing is slowing down the accelerated is firmly pedal to the floor on SNS 11, and so everyone. We Mike we sell but.
It will be on allocation just given the huge demand that we see in the market.
Right now Chris Thanks for the question.
Thank you next question is coming from Dan <unk> from MST. Your line is now law.
Alright, good morning, thanks very much.
You seem to be very confident that gross margin think of it.
We not only my apologies gross margin commentary.
Great.
In recent memory.
Commodity costs and why you did a nice gross margin one of them is Chinese.
Commentary to the results.
Yes. Thanks for the question and I think actually if you go back and look at the all the factors that I talked about 90 days ago talking about today are in addition to the essence 11 ramp that we're putting together the what happened at least 90 days that was Unpredicted was there was more demand what we thought a competitor might be back.
And there was more demand for <unk> and we didn't.
I know the exact number of how we could have slowed down our essence 10 generation to get gross margin to be plus 30 basis points from Q to Q, but we didnt engineered and reverse engineered that why we said there is demand out there lets go take care of those patients that was the unexpected factor. It was U S CPAP and iPad demand and look through the numbers Youll see.
That it was incredibly strong and gross profit generation and cash flow generation incredibly strong during the quarter.
And we did think about it gosh do we do we follow through and saying Oh, we want to get accretive GM 90 day to 90 day point.
Or do we say take care of that patient and we said not we're going to do the right thing we can take care of the patient. So we're thinking about the long term here, but I'm still bullish over this fiscal year for sure.
You never can know what demand is going to look like and where its at and we are not going to not take care of our patients, but as those higher inventory costs work their way through our system. There is opportunity for gross margin gross margin improvement as we go forward.
There's also the impact of if you looked at the SG&A. This time a year ago in the June quarter of 2022 versus 2023, there was still a lot of people in that sort of covered im not travelling I'm not going to see customers I'm not going to do the strategic meetings and the planning meetings. We've opened some of that up as you saw in our SG&A and so that's impacting our net margin as well, we're going to manage those tightly and carefully.
<unk>.
And.
We'll probably have some further vigilance if you like on our SG&A and we wont be pulling back really on R&D I think that the innovation engine has to continue to grow and we're doubling down on II and I think our leadership in digital health, we have to make that happen. So.
Im still bullish throughout the fiscal year of FY 'twenty four.
But we're not going to not take care of a patient if there's excess demand with the ZIP F&I pep to manage one component of the P&L versus taking care of the patients in thinking about the 135 year strategic engagement with the patient with the physician with the provider and doing the right thing for the industry. So that's the sort of factors that have changed in the next 90 days.
I hope actually all of this comes together and we continue to do both right drive the needs of the patient and be able to get to get accretion and now GM and I'm very confident we will do that over the coming 369 12 months.
Thank you next question is coming from David low from Jpmorgan. Your line is now live.
Thanks very much.
Ill comment a little on what you saw in the ex U S market, obviously last quarter, we saw the peak.
So I'm going to let 1000 to China, just wondering if there's any countries you'd call out or any items, we should be aware of place.
Yes, David Thats, a good point.
Didn't really see.
Anything of material context in this quarter in terms of exacerbation of cover that led to.
Hospital buys the loss of book, then lifestyles and so we're back to I would say this.
Steady growth that we see in our neuromuscular disease, COPD and other respiratory insufficiency parts of our business for what support Vince on the noninvasive, Vince and adaptive sort of events and buyer levels were back to a steady market growth and actually we saw strong double digit growth as those post COVID-19 was dying to say the clinics open up <unk>.
Patient flow start to come back Robin any thoughts on ventilators.
Not on ventilators, because just going to comment on masks.
The masks and all these other markets were really strong and really showing underlying strength of the market not affected by recall dynamics or anything like that so really the whole patient diagnostic systems.
Working in order and everything is going strongly.
Thank you. Your next question is coming from Steven Wheen from Jordan. Your line is now live.
Yes, thanks very much.
I just wanted to ask Bret about the working capital position again last quarter.
We're thinking that you'd be able to make some inroads into those into the inventory balances that you had.
Such that we might see a bit of more of the related cash, but but obviously inventory stepped up again.
As.
The receivable is that just building more to the demand that you see or could you just put that into a bit more context is watching the quad play out the way you thought.
Yeah harsh David spread the inventory actually came down a little bit sequentially, so that sort of tracking down how we're expecting we expect that inventory balance should decline over the course of FY 'twenty four as well.
Receivables your RASK was up a little bit, but thats really driven driven by the revenues.
I think overall.
Overall net working capital we are in pretty good shape was up a little bit this quarter, but when you look at that we it's really the timing around tax payments this quarter. So we paid.
Higher tax this quarter than we would typically do each quarter. So is that.
If you lost a little bit of negative working capital, but again, that's just a timing element so.
We're expecting pretty robust cash flow generation.
Each of the quarters in FY 'twenty four.
And we'll continue to work hard on the working capital and bringing that down.
A big driver of that will obviously be the inventory and working that down progressing over the fiscal year.
Thank you. Your next question is coming from Mike Matson from Needham <unk> Company. Your line is now live.
Yeah.
Hi, guys. This is Joseph on for Mike.
<unk>.
Could you maybe talk about the new patient and and Repap backlog internationally I guess the way I understand it is fully worked through in the U S. But there is.
Still work to do internationally I don't know if you could.
That's the case and if you can.
Its size that at all.
Yes.
I don't think we've fully worked through the backlog of patients in the U S. In terms of patients who wanted to get whose insurance has got to the five year point, if their Medicare or 345, depending on which private payer they are unknown.
I do think our competitors' actions slowed down that that particularly for ironic competitive device.
And the demand limitation and the physicians, saying look I'm going to take care of new patients. They werent as prime to write prescriptions or to allocate repap. If you like for patients. So I actually think there is some runway still left on repap within the U S geography, and I think thats, even even more so in other markets.
As Rob just noted and as we talked about the engagement with consumers and patients in different geographies is driving market growth and <unk>.
Any quarter, they have 14% revenue growth in masks in Europe Asia rest of world would be incredible and that's not driven by any recall dynamics whatsoever from competitive everybody's green incubating in mosques globally, and so I think that speaks to our ability to hopefully have a sustainable approach to rip out not only in the U S where we have <unk>.
Credibly strong relationships with broad tree and Maya directly to patients directly to providers, but the ecosystems that we're generating in some of our other sort of omnichannel markets around the world. So I think the opportunity for <unk> in the U S is still there this fiscal year and beyond and to make it a rhythm right. So it becomes a steady part of the growth of the devices.
And to drive it I think theres, even more opportunity in the other parts of the world.
Leveraging the work we've done on the mask side to then remind patients and track them when they're at that 345 year time period to pull forward now I want to be there with the appropriate supply some not jumping ahead of ourselves, but we do have the programs and capabilities to do that but I think the demand is there inherently.
Thank you. Our final question today is coming from Saul <unk> from Burton jewelry capital. Your line is now lives.
Yes.
Good morning, Mick and good.
Can I just.
Wondering on mosques, it's been awhile since we've seen some new product coming out from <unk>. Just wondering how much has the recall competitor recall impacted on your ability to continue to focus on new product development and new product launching.
Yes on the mosques or should we expect anything.
In terms of.
A refresh of the mouse portfolio. Thanks.
Yes, so it's a great question and yes, our R&D team.
<unk>, obviously been incredibly focused on our reengineering the resupply in the redesign on our core device platforms, and we're able to do that right. So we're able to get the supply back of it turns as you saw in air Elevens, but yet look.
We had the whole board down in Sydney last quarter, and we were looking through the pipeline of devices and masks and its incredible it's really exciting I don't like to get ahead of my commercial teams and one of them is it the type of with me now.
<unk> made a keep quiet, but I can tell you I'm very excited about the pipeline there will be new innovation you marked from resume as we go through this fiscal year and as a personal user of these products I try every new mask that comes out and this new one which is a great project name that I'm not able to say, but it's a beautiful islands that you can travel to buy button.
I have tried that that moscone is incredible and I can't wait for that to come to the market, but yes look we do we do have marks that are coming in the pipeline that are working their way through regulatory and then of course commercial ramp up to make sure that when we deliberate it's resume quality regimen capability first time fit incredibly adherence and to drive through the channel and so.
Youll see those come through our major markets and then and then globally throughout the fiscal year. So I'm excited about that pipeline. The one that I can't talk about is the digital side, where we've launched <unk> II product and I'm really excited as those get more traction we will talk about how the digital products and <unk> products throughout the year are going to impact and keep out incredibly strong double digit growth that we sold this quarter.
Yes.
Thank you we've 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.
Yes, thanks, Kevin and thanks to all of our stakeholders for joining us this last hour as we talked.
Through our results and we'll talk to you again in 90 days in closing I want to thank the 10000 raise millions many of you our shareholders listened to these calls as well thanks for your dedication and hard work, helping people sleep better breathe better and live better lives and 140 countries. These results of yours incredible double digit growth. Thanks for all that you do I'll hand, the call back to you Amy.
Cause us out.
Thank you, Matt and thanks, everyone. We do appreciate your interest and your time, if you have any additional questions. Please don't hesitate to reach out directly. This does conclude our RESNET fourth quarter 2023 conference call, Kevin I'll turn it back to you to close the call.
Thank you you may now disconnect. We do thank you for your participation today.
Yeah.