瑞思邁 (RMD) 2016 Q3 法說會逐字稿

Welcome to the Q3 FY16 ResMed Inc.

earnings conference call.

My name is Andrew, and I will be your operator for today's call.

(Operator Instructions)

Please note that the conference is being recorded.

I will now turn the call over to Agnes Lee, Senior Director of Investor Relations.

Agnes, you may begin.

Thank you Andrew, and thank you for attending ResMed's live webcast.

Joining me on the call today are Mick Farrell, our CEO and Brett Sandercock, our CFO.

Other members of the management team will also be available during the Q&A portion of the call.

If you have not a chance to review the earnings release, it can be found on our website at investors.

ResMed.com.

I want to remind our listeners that our discussion today may include forward-looking statements, including, but not limited to, statements about future expectations, plans and prospects for the Company, corporate strategy and performance.

We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated.

Important factors which could cause actual results to differ materially from those in the forward-looking statements are detailed in filings made by ResMed with the SEC.

I will now hand the call over to Mick Farrell.

Thanks Agnes, and thank you to all of our shareholders for joining us today, as we summarize our results for the third quarter of FY16.

We delivered solid global growth this quarter led by strong double-digit growth in the Americas region.

We made progress in our respiratory care strategy by closing our acquisition of Inova Labs in the quarter.

We also made significant progress executing on our connected care strategy by closing our acquisition of Brightree on April 4. For the call today I'll first review our top and bottom-line results.

I will then outline some regional highlights from our business and finally, I will review our ResMed 2020 growth strategy.

After that I will hand the call over to Brett to walk you through our financials in greater detail.

We have seen strong ongoing success with our global leadership in connected care.

For the seventh quarter in a row, our global team achieved market beating top line revenue growth.

We exhibited continued strength in the Americas region with robust double-digit growth at 12% year -on- year.

These results were fueled by the ongoing success of Air Solutions, our cloud based connected care software platform, as well as, the AirSense10 and AirCurve 10 medical device platforms.

We achieved steady growth in our combined EMEA and APAC regions despite the headwinds from the macroeconomic conditions in Europe.

At the bottom line our diluted earnings per share was $0.68 on a non-GAAP basis which represents 5% year-on- year growth.

We continued to balance solid revenue growth with ongoing investments in RMD innovation in our global focus on operating excellence.

This quarter we gained operating leverage in SG&A, keeping its growth well below our top line revenue growth.

We are investing for the future, maintaining R&D spend at 67% of our top line revenue.

These R&D investments are focused on enhancing our growing portfolio of sleep apnea, COPD, and connected care solutions.

Now for some regional highlights.

In the Americas region we had strong sales performance in Q3, with our commercial team in that region driving 12% growth against very tough year-on- year comparables.

Flow generated growth was 15% in the Americas, reflecting the ongoing success of our of our AirSense 10, our AirCurve 10 platforms but all powered for our cloud -based, air solution software and including the U-Sleep and myAir apps.

The mask and accessories category also grew very well, we have achieved double-digit growth for the last three quarters in this category with 10% growth in the Americas for Q3 in masks and accessories.

We continue to expect solid mask and accessories growth as we move forward.

We grew our combined EMEA and a APAC group at 3% on a constant currency basis in the third quarter.

We saw solid growth and sleep apnea platforms and our respiratory care offerings in the region.

It is important to note that the ASV growth headwind from the SERVE-HF announcement in 2015 was significant on a year on year basis in Q3.

The study's announcement anniversary is May 13, 2016, so we will pass that date in just a few weeks here.

After which, those headwinds will begin to subside.

ASV growth will remain an issue in Q4 with the largest impact on the EMEA and APAC region.

We continue to see opportunities for ASV in central sleep apnea, especially in those patients with complex sleep apnea, with pain management medication and post traumatic stress disorder, or PTSD.

These all provide a basis for very good growth in ASV for 2017 and beyond.

Now I would like to provide an update on our ResMed 2020 strategy.

We're making good progress with all three foundations that allow us to drive our strategy.

As a reminder, these three foundations are, one, our global leadership in healthcare informatics, two, our investment and expansion in high-growth geographic markets, and three, the strong focus on best in class talent development as well as global operating excellence.

We continue to make great progress with our global leadership in healthcare informatics.

This is truly a core competence for ResMed team and a source of sustainable competitive advantage.

With the close of the Brightree acquisition we're continuing to invest in cloud-based computing solutions.

These solutions help make our customers more efficient and help them free up cash flow to invest in even better patient care.

With well over 1 million cloud connected medical devices sending data every morning to the cloud, we are the world's leading tech-driven medical device company.

With the addition of the Brightree suite of software solutions we're building an end to end solutions offering that provides value for HME, physicians, payers, and for patients.

With our channel partners we are improving operational efficiency, eliminating waste, increasing medical device adherence, and improving patient outcomes.

We intend to grow our connected care solutions into COPD, as well as other chronic applications as we continue to execute on our ResMed 2020 strategy.

Our second foundation is our investment and expansion in high-growth geographies.

Our investment in China with Curative is an example of this strategy in action.

Curative is strategically aligned in integrating well with our ResMed China business.

Curative has very high quality products that are developed in China, made in China, and sold in China.

Curative opens up channels that just are not available for foreign made products.

We are now leveraging the distribution capabilities of both organizations.

We will continue to invest and expand our presence in China and other global high-growth markets including, Southeast Asia, India, Brazil, and Eastern Europe.

In each geography the value we deliver is to improve patient quality of life, to improve objective patient outcomes and to reduce national healthcare costs in key chronic diseases.

Our third foundation is operating excellence with a focus on developing the best in class talent and leveraging our market-leading scale.

We hire and develop the best talent in the industry, period.

The leadership team that Rob and I have assembled is a key part of our competitive advantage in the marketplace.

On the operational front, we continue to create efficiencies that allow us to free up cash to reinvest in key innovative R&D programs and also to better unlock value from our acquisitions.

We are committed to continue growing operating profit, insuring that we had headroom to reinvest in the business and continue to drive profitable growth.

These strong foundations are critical to allow us to achieve our ResMed 2020 growth goals.

Before handing over to Brett, I would like to take a few minutes to update you on some key milestones of progress against our three horizons growth strategy.

In our first horizon of growth, which focuses on our core sleep apnea business, we have seen strong sustained growth these last seven quarters.

18 months after the launch of the AirSense 10, the AirCurve10 and our Air Solutions platform, we have truly changed the basis of competition in our core market from smaller, quieter and more comfortable devices to smaller, quieter, more comfortable devices, but also more connected solutions.

While many companies are talking about connected care and talking about digital health, we have executed in connected care and we lead the market with well over 1 million,100% cloud connected medical devices sending data to the cloud every morning.

We are liberating data that we turn into actionable information for patients, for physicians, for providers and even for payers.

With the cloud-based software solution are able to add enhancements every couple of weeks, every couple of months, to improve the efficiency of our customers and provide benefits to the whole value chain and especially patients.

We continue to integrate to EMR and HER systems through the ResMed data exchange.

And we recently added functionality within AirView, U-Sleep, and our newest ResMed mask text coaching program that provides daily coaching texts for patients, especially those who are brand new to therapy.

With the Brightree acquisition we have augmented the Air Solutions platform with an even stronger end-to-end value proposition for our customers.

On the market access front, there was a study published on the results of the first large-scale employer program to screen, diagnose, and monitor OSA treatment adherence in the US trucking industry.

The study concluded that drivers who were diagnosed and were adherent to our site therapy had reduced accident risks, similar to the control group.

However, drivers who had not adherent to our site therapy had a five fold, that is a five fold greater preventable crash risk.

There is clearly a long road to fully develop regulations in this transportation sector and we have been working on this for a number of years, however, this type of clinical evidence of the risks to human life in major cost from the transportation sector are very important steps in the progress.

In addition, this quarter the largest study in the history of sleep apnea was published by the European Respiratory Society.

The study looked at the effect of gender and age on a comorbidity burden of obstructive sleep apnea across a group of 1.7 million patients.

The study concluded that type II diabetes, stroke, hypertension, congestive heart failure, arrhythmia, and depression were all more prevalent in patients with OSA when compared to the control group, regardless of gender.

Bottom line, these data is reiterate that sleep apnea remains a huge public health problem and that women are significantly at risk, not just the stereotypical men.

In a key milestone of progress against the second horizon of our ResMed 2020 growth strategy we closed the acquisition of Inova Labs early in the quarter.

With this acquisition we have expanded the COPD offering to include portable oxygen concentrators, or POC.

POCs enable patient mobility.

The fits very well with the key value proposition of our life support ventilation platform, Astral.

They both give increased mobility and freedom back to the COPD patient.

We have started the integration progress at Inova and we are excited to add these products into our respiratory care portfolio.

We have opportunities to grow revenue by filling POCs through our global market channels, and we will prioritize the 100 countries that we sell into to maximize physicians, provider and patient value.

We will also be able to bring our global operational and technological capability to create true economies of scale in supply chain management, manufacturing, and in logistics.

We will create mix generation NOVA products that not only take quality to the next level for the platform, but that also leverage our health care informatics leadership.

The strategy is to create connected care solutions for COPD with POCs, life support ventilation, and noninvasive ventilation.

Given that we have already created connected care solutions for sleep apnea, we know that we can execute to this plan.

Midway through the quarter a study was published on overlap syndrome, which as a reminder, is a cohort of patients who suffer from both sleep apnea and COPD.

The study showed that early diagnosis and adherent treatment of sleep apnea in patients admitted with acute COPD exacerbation both reduces hospital re-admissions and reduces emergency room visit over a period of six months.

The study also projected that these benefits with persist over 12 months.

This is great news for patients, hospitals, physicians, and payers, the new reimbursement models everyone in the value chain, including hospitals, wants to keep COPD patients out of hospitals and in the home and happy.

Our ResMed products and solutions will be a key part of this.

Our third horizon of growth includes a robust portfolio of opportunities in new markets including atrial fibrillation, heart failure with preserved ejection fraction, asthma, and also sleep health and wellness.

We expect to have some exciting clinical data on our third horizon of growth next quarter.

I do not want to steal the thunder from the researchers, so for now I will just say watch this space.

Returning back to our financial results for the quarter we've been able to put our balance sheet to work with the completion of the Inova Labs acquisition and just a few weeks ago the Brightree acquisition.

We have continued our dividend program and for now we have held back our share repurchase program.

We believe this approach is prudent given that we have taken on an additional $725 million worth of debt to fund our acquisition of Brightree.

It is important to note that we may resume the share buyback program without prior notice in the near future as conditions warrant.

Let me close with this, we're the global leaders in sleep apnea and respiratory medicine, not just in market share, but more importantly, with game changing innovation in both products and solutions for the future of connected care.

We remain excited as we build the road ahead for our industry, our partners, and most importantly, for patients around the world.

With that I will turn the call over to Brett for more a detailed review of our Q3 financials.

Brett?

Great, thanks, Mick.

Revenue for the March quarter was $453.9 million, an increase of 7% over the prior-year quarter when constant currency terms revenue increased by 9%.

Movements in exchange rates, predominately a weaker euro relative to the US dollar, negatively impacted revenue by approximately $6.3 million in the third quarter.

At a geographic level, overall sales in the Americas were $282.2 million, an increase of 12% over the prior-year quarter.

Sales in combined EMEA in Asia-Pacific totaled $171.7 million, consistent with the prior-year quarter.

In constant currency terms, sales in combined EMEA and Asia-Pacific increased by 3% over the prior-year quarter.

Breaking out revenue between product segments.

Americas device sales were $153.2 million, an increase of 15% over the prior-year quarter.

Masks and other sales were $129 million, an increase of 10% over prior year quarter.

As a reminder, our Inova sales are included with flow generated under the Device Revenue category.

The revenue in combined EMEA and Asia-Pacific device sales were $116.7 million, an increase of 1% over the prior year, in constant currency terms an increase of 3%.

Masks and other sales were $55 million, a decrease of 1% over the prior-year quarter or in constant currency terms, an increase of 3%.

Globally in constant currency terms, device sales increased by 10% while masks and other increased by 7% over the prior-year quarter.

During the quarter, we incurred acquisition-related expenses of $3.6 million associated with the Inova labs and Brightree acquisitions.

During the rest of my commentary today I will refer to non-GAAP numbers.

The non-GAAP measures exclude the impact of the acquisition-related expenses, as well as amortization of acquired intangibles, both in the current year and last year.

We reconciled the non-GAAP to GAAP numbers in our third quarter press release.

Gross margins for the March quarter was 57.3%.

On a year-over-year basis our gross margin contracted by 220 basis points, reflecting the impact of changes in product mix, declines in average sales products and changes in geographic mix partially offset by (inaudible) net currency movements.

We estimate the recent Brightree acquisition will have a positive impact with 17 basis points to 100 basis points in our gross margin.

And with this impact combined with current exchange rates and likely changing product and geographic mix, we expect gross margin to continue to be in the range of 57% to 60% for the fourth quarter of FY16.

Moving on to operating expenses.

Our SG&A expenses for the quarter were $119.4 million, an increase of 3% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 5%.

SG&A expenses as a percentage of revenue improved to 26.3% compared to the year ago figure of 27.5%.

Looking forward in subject currency movements we expect that SG&A as a percentage of revenue to be in the range of 26 % to 27% for the fourth quarter of FY16.

R&D expenses for the quarter were $28.1 million, an, increase of 4% over the prior-year quarter and on a constant currency basis an increase of 11%.

This increase largely reflects incremental investments across our R&D portfolios.

R&D expenses as a percentage of revenue were 6.2% compared to the year ago figure of 6.4%.

Looking forward and subject to currency movements, we expect R&D expenses of as a percentage of revenue to be in the range of 6% to 7% for the fourth quarter of FY16.

Amortization of acquired intangibles was $4.6 million for the quarter.

The increase over the prior-year amortization expense of $2.2 million reflects the additional amortization associated with our recent acquisitions.

Stock-based compensation expense for the quarter was $10.9 million.

Our non-GAAP effective tax rate for the quarter was 18.5% compared to 20.5% in the prior-year quarter.

Looking forward to we estimate our effective tax rate for the fourth quarter FY16 will be in the vicinity of 20%

Non-GAAP operating profits for the quarter was $112.4 million, an increase of 4% over the prior-year quarter.

Non-GAAP net income for the quarter was $95.4 million, an increase of 3% over the prior-year order.

Net income for the quarter was $88.5 million.

Non-GAAP diluted earnings per share for the quarter were $0.68, an increase of 5% over the prior-year quarter while diluted earnings per share for the quarter were $0.63.

Overall, foreign exchange movements positively impacted third-quarter earnings by approximately $0.04 per share, reflecting the favorable impact from the weaker Australian dollar, partially offset by the weaker euro.

Cash flow from operations was $122.1 million for the quarter.

This reflects strong underlying earnings and an improvement in network and capital balances.

Capital expenditure for the quarter was $13.2 million while depreciation and amortization for the March quarter totaled $19.9 million.

Our Board of Directors today declared a quarterly dividend of $0.30 per share.

As previously announced, we have temporarily suspended our share repurchase program due to recent acquisitions.

Consequently, we did not repurchase any shares during the March quarter, however we may at any time elect to reinitiate the share repurchase program.

At the end of March we had approximately 13.6 million shares remaining under our authorized share repurchase program.

During the quarter, we completed the acquisition of Inova Labs effective January 29.

The acquisition was funded by drawing on our existing credit facility.

Additionally, this month that we announced the close of the Brightree acquisition effective April 4. Brightree will be included in our consolidated results in the fourth quarter of FY16.

The $800 million acquisition was funded by utilizing $75 million in existing cash, establishing the $300 million term loan and drawing down funds from our revolving credit facility.

Note we have also increased our revolving credit facility from $700 million to $1 billion.

At the close of the Brightree acquisition, we of approximately $1.2 billion in gross debt and $500 million in net debt.

Post acquisition, our balance sheet remains modestly [good] and very strong.

Total assets are approximately $3.3 billion and net equity is approximately $1.7 billion.

With that, I will hand the call back to Agnes.

Thanks, Brett.

We will now turn to Q&A, and we ask everyone to limit themselves to one question and one follow-up question.

If you have any additional questions after that, please get back into the queue.

Andrew, we are now ready for the Q&A portion of the call.

(Operator Instructions)

Ian Abbott, from Goldman Sachs, is online with a question.

Yes, good morning.

Thank you for taking my questions.

My first question is on the gross margin, it certainly stepped down again this quarter, you did call out the impact of ASV, I am just wondering why that was particularly an impact this quarter given that it would have also been an impact in the prior two quarters?

Thanks, Ian There is a number of factors, as you know, that go into gross margin.

One of the impacts is the ASV, as you talked about.

If you remember 12 months ago in March 2015, there was the American College of Cardiology and there was a lot of very positive press around heart failure with reduced ejection fraction in ASV and we really saw those very high margin ASV products this time a year ago do incredibly well in the March quarter, and so we were annualizing, if you like, a steeper curve on ASV from a year ago and that headwind.

And as I said, the endpoint of that is the announcement, is May 13, 2016 when we annualize that, so there will be six weeks in Q4 with that steep curve as well.

That is one factor.

Another factor impacting gross margin was the outperformance of our America's team, which is lower than group margin but still very positive gross profit dollars, but lower than gross margin.

And the other impact was the outperformance of our flow generator lines, so the AirSense 10 and the AirCurve 10, which are lower than group margins, but very positive products as a platform together in flow generators and those were outperforming the market and outperforming the rest of the business and so had an impact on GM.

Okay.

And then as a follow-up, you also talked about selling -- [every selling prices] and that is always a feature of the industry, but if you could perhaps comment just on what you are seeing there, both in the US and also rest of the world?

Yes, look -- the pricing environment is pretty normal, as you know, Ian, about two years ago we stopped giving the quarterly update on year-on-year ASP adjustments, but it's really back to a pretty normal level, 18 or 20 months ago there was a bit of a step change, but we're back to a pretty normal level on pricing.

Another factor on GM that I didn't talk about was the acquisition of Inova, which again, a great product, portable oxygen concentrators, but closer to flow generator profit margins.

And so there was two months of the three months of the quarter that we had sold Inova, which had an impact on GM as well.

But look -- no, average selling prices are in a pretty stable environment both in the US and in Europe.

Great.

Thank you.

Thanks, Ian.

Matt Taylor from Barclays is on the line with a question.

Hi, thanks for taking the question.

I was wondering if you could help us understand the total impact of the various acquisitions in the quarter and any help with which pieces are going where, I am trying to determine what they contributed versus what you are doing with the AirSense platform?

Yes, that is a good question, Matt.

Thanks.

That will allow us to talk to organic growth and some of the acquisition growth.

As I mentioned just earlier, we had two months of Inova included in the quarter.

We also had a full quarter of Curative, our acquisition in China.

So when you combine the two months of Inova and the three months of Curative, it probably together contributed around 2% to global growth, so our 9% constant currency global growth was 7% organic and 2% acquisition driven.

Those are broad estimates.

Brett, do you want to provide any further color on that?

Is that approximately right?

That's spot on, Mick.

It contributed around 2% to revenue growth this quarter.

And Curative is in both categories outside of the US and Inova is just flow gen?

Brett?

Yes.

Yes.

Okay.

Thanks a lot.

Very helpful.

Thank you, Matt.

Andrew Goodsall from UBS is on the line with a question.

Sure.

Thank you very much.

Could I just burrow down a little more there and understand if we look at the US flow generator growth with device growth 15%, just within that number what was organically acquired with Inova?

Yeah, thank you for the question, Andrew.

We really don't want to sort of because we do give that sort of matrix of detail now within Americas and EMEA and APAC within flow gens and masks.

We do not want to break out the organic versus acquisition debt all the way down the matrix.

I can tell you at a high level that the core growth, if we say the market is growing at mid-to high single digits in the core sleep apnea markets, if you like, we well outperformed that.

But I don't want to break the 15% out, down by basis points, because I think that starts to get us into a level of granularity that we just do not get from our competitors on public conference calls and it does not really help our shareholders in driving long-term value, but I appreciate the question.

Okay.

So if market is 6% to 8% you are tracking above that level on the flow gens?

Yes.

We are significantly above that.

Great.

That's perfect.

Thank you.

Thanks, Andrew.

Margaret Kaczor with William Blair is on the line with a question.

Good afternoon, everyone.

Good morning, Brett.

The first question maybe is on the US side, obviously, we've seen some good durable strength.

You just talked about it, but you are facing a tougher comp as we go into the next few quarters.

So, do you envision being able to keep up that double-digit range and just talk about the overall durability of that business?

Thank you.

Yes, good question Margaret.

We don't want to go into too much.

We do not give guidance.

We don't want to go into too much detail, but at a very high level, we think the Air Solutions platform and what it has created, the ecosystem it has created, is providing such value for our customers and not just the HME customers, but also for patients.

We have 900 patients every day signing up to a patient application called myAir.

So the value for the ecosystem is just so strong that we see that demand continuing.

But, we are realistic, we know there are some big comps, particularly on flow generators and particularly in the Americas for Q4 and Q1.

But we have a strong value proposition on that.

Jim, our President of the Americas, do want to give any further color on that?

Sure.

Thank you for the question, Margaret.

We are seeing very robust growth in the flow gen platforms because of the solutions adoption.

So the AirSense and AirCurve 10 platforms are both superior products to anything on the market just as a flow generator to begin with, but we are seeing a lot of uptake of our solutions across many of our customers and we think that is driving the persistent growth.

We feel very confident in that.

Okay great.

To keep pushing on a that little bit, but how is the sales process maybe changed with your acquisition of Brightree?

I know it's early days, but are you seeing your sales guys go into these accounts and sell Brightree, Inova and sleep apnea in one transaction, and how should we expect that go-to-market strategy to change in year one, two, and so on?

Thank you.

Thank you, Margaret.

There are a lot of aspects to that question.

I will let Jim provide a little more color if it makes sense on the go-to-market, but at a high level, what we are doing with the Inova acquisition, which we had two months, as we said, of close of that in the quarter, is we are working very carefully with our territory managers and our region managers and some specialists from the Inova team on portable oxygen concentrators.

In a similar way that we have specialists on ventilation and other respiratory care products, we will have specialist sales force on portable oxygen concentrators.

But the full portfolio is available to our whole sales team.

And so what we really like to provide is a portfolio of solutions to our customers.

There are different selling methodologies in selling cloud-based software that requires an infrastructure investment up front and signing long-term contracts, such as a Brightree interaction, versus providing, say, faster turnaround items such as patient interface systems and masks.

However, we have a good portfolio of people in our sales force that can do both the transactional and the long-term strategic sales as part of that.

Jim, do want to provide any further color on the go-to-market for Brightree and Inova?

I'll comment.

It may not be further color.

I will just say it is work in progress.

We're a little further along with the planning for Inova labs and how we integrate that.

Brightree will continue to be a separate subsidiary.

But, you can imagine, we really just closed both of those acquisitions so we are working on that plan right now.

Thank you.

Thank you, Margaret.

Will Dunlop, from Merrill Lynch is on the line with a question.

Thanks, good morning.

Given this contribution of acquisition to sales, you were able to get a contribution to profit or EBIT?

Thanks for the question.

We really do not want to drill down through the whole P&L with regard to that.

We will have an SEC document that we will provide before the end of the fiscal year, so this quarter, that will outline the Brightree business in quite some detail so you'll see that in the coming months, but we really do not want to get into a quarterly reporting where we break down all the way through the P&L for these three acquisitions.

But we are happy to provide that color at the top line that it is around 2% of global growth, so 9% total growth, 7% organic and 2% acquisition driven.

Okay, thank you.

Are you able to give some color around what your US customers are asking for in terms of price, given that we are heading into the implementation of round two [rebate] and full round three price reduction as of 1 July?

Yes, I'll hand to Jim Hollingshead who is closest to the US business line.

Yes, we have been having those conversations for months with customers.

I think this year is a little different from FY14 when CB2 hit the first time.

So the vast majority of our customers have anticipated what is coming and we have been having pricing conversations with them for months.

So, this does hit their business and we are continuing to have the normal pricing conversations in that context.

Thank you.

Thank you, Will.

Mike Matson from Needham & Company is on line with a question.

Thank you for taking my questions.

I guess I just wanted to ask about Brightree.

I know that there has been concern amongst the HME customer base around the data that you have access to through their cloud-based system.

So I was just wondering, one, do you think that is a risk that might alienate some of those customers and then they might choose to move to a different software provider?

And, two, is there a way that you can try to wall off that data and convince them that you are not going to use that to try to help your flow generator and masks sales?

Thank you for the question, Mike.

The Brightree acquisition is really, when you think about it, the huge investment that ResMed made, around 10% of our market cap, we invested $800 million in our HME customers.

In software that is purely focused on having cloud-based software applications that take laborious tasks like revenue cycle management, like inventory management, like clinical protocol management and physician signature management and automate those.

So, we think that instead of being owned by a venture capital firm, being owned by a player who has a long-term 27 year history in this industry and plans to invest for the next 27 years in providing home medical equipment, that it's a really positive sign for our customers, that it has got strong financial backing and someone who really carries about it.

We are excited about the hospice.

And we're excited about home health because those other new channels that the Brightree acquisition brings have a lot of sleep disorder breathing and a lot of COPD and neuromuscular disease patients that we can roll back into our HME customers.

But look I have to tell you, I haven't been in as many conversation with Jim, but I have over these last 2.5-plus months since we announced this acquisition been in a number of dinners and conversations with customers where I express what our goals are and what our plans are with Brightree and how we are going to invest to not only improve good quality to great quality, but ensure that we have even more efficiencies for them as a whole channel.

And that our investment is to make sure more and more sleep apnea patients are able to be served by them, has been received very positively.

Jim, do want to talk a little more to the specifics of Mike's questions?

Sure.

It's a great question.

And we have had that question from customers.

I'll just say as a blanket statement to start, we are absolutely committed to putting in place appropriate protection for our customers business-sensitive information.

It is very important to us that we do that.

That is how we work with our customers in general and that is how we are as a Company, and so we are completely committed to that.

If I go broader and just say that the reaction of customers in the market, it has been more than two months since we announced that acquisition, and generally speaking, I think that the response from our customers has been very positive.

I think you can see in the Q3 results that, if anything, it has impacted the business positively.

All right.

Thanks.

I just wanted to ask about the international business.

At 3% growth what do you think those markets are growing at?

Do you think you are gaining or losing share in those markets?

And just comment on the Air Solutions.

It's doing really well in the US, but do you think it is as appealing to those international customers?

Yes, good question, Mike.

I will hand to Rob Douglas our President and Chief Operating Officer.

In all of our other countries around the world we view them as a portfolio.

They're all running on different dynamics.

And some are growing strongly at various times and other ones have challenging periods.

Across the board, we are seeing -- we talk about the mid-single market growth, mid-single digits market growth, and we believe that we are very much holding our own in the market growth and going well.

The Air Solutions dynamic is quite different in different countries.

And every country has own major drivers.

Some things are always the same, patients are always interested in their information and anything we can provide to them that helps them use the equipment and stay on using equipment that improves their outcome is useful.

And we're seeing that in all of those markets.

In other markets we have to deal with specific issues.

Specific privacy concerns in Europe.

Language concerns in Japan, for example, and all of those things we have got going well and we are on a -- I guess it's slower than the US, but a very solid implementation plan through all of those countries to roll Air Solutions out.

It's an ongoing program for us.

All right.

Thank you.

Thank you, Mike.

Matt O'Brien from Piper Jaffray.

This is actually JP in for Matt.

Thank you for taking the questions.

I guess I'm just going back to the revenue breakdown between flow generators and masks.

You've been able to grow flow generators faster than masks for the past few quarters and, arguably, tougher comps.

So I am just trying to drill in on the mask side of the business.

Is there anything going on from a competitive dynamic or from a pricing headwind perspective that is making performance there challenging?

Don't judge the outperformance of our flow generators to make our masks look bad.

I mean, the Americas flow generator performance at 16% year on year, as Brett provided on constant currency basis, was just incredible and driven by, as Rob said, a very fast take up of Air Solutions these last 18 months, it is a longer haul for some of those other 99 countries we do business in.

The 10% year on year constant currency growth in masks and accessories, I think, is exceptional.

Certainly, keeping share and probably taking share in some categories.

Now look -- having said that, we are in a competitive game and the competitive game is across the board.

We change the basis of competition in flow generators, which has allowed us to outperform in that category.

Will we and can we continue to change the game and bring increasing and great innovation to our mask platform?

Well, we have been doing it for 27 years and we plan to do it for the next 27 years.

So the answer to that is yes.

We put 7% of our revenues, approximately, into research and development, a very good chunk of that goes into mask innovation, plastic science, anthropometrics, understanding what patients need now and in the future.

I've got to tell you, I am really excited about the pipeline of masks and I think the team did well in that in Q3, but we can always do better.

Sure.

And just to follow-up on the competitive dynamics that you alluded to, what is in the feedback that you've heard or your sales reps have heard on the street from the Phillips (inaudible) generator launch?

You know, I really don't like to throw mud or get involved in a competitor back and forth on these conference calls.

All I'll say is that look -- our device, and it's really our solution, the Air Solutions platform has incredible advantages.

We take great costs out of the system, we provide such value for our customers and customers I use in a broad sense, the customer is the patient, obviously, but it's also the provider, the DME, it's also payers and other folks beyond.

And the value we're able to do by linking up with EMR HER systems in a closed payer provider network or a government run insurance and Western Europe network, or -- the data we're able to provide patients means there's strong demand for our product.

So I do think we have a winning value proposition.

I think it is a very sustainable competitive advantage, but having said that, we believe in productive paranoia and as I was saying earlier, we innovate our cloud-based systems on a regular basis.

There are weekly and monthly upgrades to these to make sure we keep as a finely oiled machine here, and that is our goal in this space.

Look - there is always competition.

We love competition.

What we love doing is really providing value to customers and customers choosing our products and solutions because of that.

Great, thank you.

Thank you JP.

Saul Hadassin, from Credit Suisse, is on line with a question.

Thank you, good morning.

Mick, maybe a question for you.

I think in the past you have talked to a mask lifecycle of around 1.5, maybe 2 years.

I just wanted to check if that is still correct because you are up to two years, I think, since the range of the masks were launched.

I'm just wondering where we are in terms of that launch cycle or should we be expecting some new masks anytime soon?

Thanks.

Thank you for the questions, Saul.

Yes, well I mean I was talking about the healthcare informatics lifecycle of being every couple of months with an upgrade.

Masks systems, it depends on the full face, the nasal, the pillows, and the technologies you are using.

The AirFit range has been incredibly successful.

The P10 mask, which is a nasal pillows mask, which I personally use, is the best mask on the planet for nasal pillows and our F10, for me, is clearly a world leading mask.

On the N10, I think it's a very good mask.

I think look, we can always do better.

Every time we release a product we are looking to do better.

You know, Saul, that we do not go into the specifics of our roadmap, but if you are asking me, are there other exciting mask on the horizon?

Of course there are.

How far is that horizon out?

Well, I cannot go into details on that.

It just doesn't make sense to from a competitive dynamic front given the public nature of this call.

Fair enough.

And if I could just sneak one more in for Brett.

Just regarding operating cash flow.

Another quarter of very strong growth there.

I think for the 9-months it's up almost 40% with essentially flat non-GAAP earnings.

Just wondering what you've changed there in terms of that working capital management that has benefited that line?

Yes, thank you, Saul.

Cash flow has been very strong for the business and has been quite sustained over those three quarters as you noted.

So we're really pleased with that.

If you look at -- probably the big one there is probably around inventory where we have managed to reduce that over time.

There's a lot with the AirSense growth being so strong over the period.

I think, now we have had time to stabilize that and adjust somewhat.

So we really started to turn inventory levels, and I think that sort of -- the strong underlying earnings have played a part for sure and then really turning the inventory has underpinned and delivered some stronger cash flow through those quarters.

That's probably been the biggest impact.

Thank you, guys.

Anthony Petrone from Jefferies is on the line with a question.

Great.

Thanks for taking the question.

Just one question on Brightree, and I think you touched on earlier, so forgive me if I'm overlapping here a bit.

But maybe just to expand a little bit on the strategy there.

How long do you think it will take to fully integrate Brightree and what synergies do you expect, particularly in the HME DME channel in the US in terms of just install base on the Brightree side?

Is there an opportunity to upsell Brightree solutions into the existing ResMed install base?

Well, thanks for the question, Anthony.

Clearly, the revenue and EBITDA is an immediate integration.

So we get a nice addition of $113 million growing at strong levels on the top line and north of $43 million of EBITDA growing strong double-digits as well.

So those integrate immediately.

In terms of the operating integration, as Jim said earlier, we'll run Brightree as a subsidiary that has clearly some separation of some data to make sure that our teams perform everything appropriately.

The synergies with customers are that clearly we have customers who purchase our products and will also purchase Brightree solutions, so there will be clear coordination between our sales force.

But, as Jim said, we closed the acquisition on April 4, it is now April 26, we have not fully integrated our go-to-market in the first 22 days, but we do have a 90, 180, 360 plan here and we will be able to provide, probably on this call in the coming four quarters, further and further integrations.

Including, obviously, financial integration starting Q4 with those numbers rolling in, but then the go-to-market integration over the coming four quarters.

Then just one follow-up there and I'll hop back in, but again, should we assume that this is traditional software margin structure where it should be margin accretive overall to the business, or will that take some time to sort of play out?

Yes, Anthony.

It will be immediately gross margin accretive.

I think, Brett, in his prepared remarks talked about 70 to 100 basis points of positive contribution that is likely in Q4 from including of the Brightree financials.

So it is a really good -- immediately accretive on top line and on GM.

Got it.

Thanks.

Victor Windeyer from Citi is on the line with a question.

Thanks very much.

I just wanted to pose it out a bit, trying to get the underlying European growth.

So you mentioned ASV and I think back in the day when the trial -- when the result came out you had $150 million of sales a year.

And I just wanted to see if you could give us any clarity on what the quarter will be year-on-year, whether it's flat sequentially now?

Thank you, Victor, I will hand to Rob to address the European and ASV --.

When we made the announcement last year we sort of gave some indications of what we thought the impact would be.

We were pretty accurate in those predictions and so we roughly stand by those predictions.

The impact has been more significant in Europe where we had an indication for cardiology patients versus in the US where we did not.

Our team is working hard on some of the other applications for ASV.

Mick mentioned them earlier on.

Particularly talking about complex sleep apnea.

You know as well -- if you have patients who are on pain medication.

So we see a lot of opportunities there.

And those market development opportunities are underway, not only emphasize in the US, but also in our other markets around the world, and we should start to see some benefit from those activities showing through.

And as Mick also said earlier, we will anniversary the announcement on the 13th May.

And the impact that we-- the short-term impact that we had after that came on fairly quickly, so we should see development activities even up from there on in.

Okay.

I think at the time you said 25%, maybe that's $30 million to $40 million or something, so $10 million a quarter.

And that's roughly where it comes in?

Victor, we are not going to go into the details of it, but you're right, that is what we said at the time, we said its --ASV is roughly 7% of the revenues and we thought a quarter of that might be at risk.

And roughly on the global numbers, that's roughly in line.

As a Rob said it was a bit ahead of that in Europe and Americas was not as badly affected as Europe.

Thanks for your question, Victor.

(inaudible) level we expected to grow within these applications we can expect that line to grow in the underlying business going forward (inaudible)?

Yes, Victor.

As I said earlier, and Rob just said now, from May 13 we will hit the anniversary of the date of the announcement and from then the activity went pretty quickly as Rob said, so we should expect to ramp to strong positive ASV growth from that date.

But really, as I said in my prepared remarks, FY17 is where we are going to see the benefits of complex sleep apnea, pain management medication, post traumatic stress disorder and also some other applications on CSA that are interesting in the stroke patients and others, so we will see those going forward.

Okay, thank you very much.

Thank you, Victor.

(Operator Instructions)

Chris Kallos from Morningstar is on the line with a question.

Thanks for taking my question.

Just a quick one.

On the gross margin side, the guidance of 57% and 60%, does that include the March accretion from Brightree?

Brett?

Yes, Chris, it's Brett.

Yes it does.

So does that suggest that without Brightree the gross margin would be on the low side?

So the guidance would actually be lower?

I am not sure that you can conclude that, Chris.

At the end of the day we said 57% to 60%.

Obviously, Brightree will have a quite significant positive impact for us going into Q4.

And any -- all the other factors play out on it as well to come up with that guidance range.

I don't think you can form a conclusion either way on what the guidance would have been.

Certainly, Brightree will have a positive impact on that.

Great, And just a quick follow-up, on the reimbursement side, you mentioned on the rebid, are there any other comments you could add to that?

On just the environment for reimbursement right now?

No, there is nothing new in the reimbursement environment globally.

Frankly, everything that has been talked about in the US has been projected -- it is a government run process, so it's usually projected 12, 24, even 36 months in advance, so there's really no news on the reimbursement front.

Okay, thank you.

Margaret Kaczor from William Blair is on the line with a question.

Hi guys.

Thank you for taking the follow-up.

Maybe the first question, a follow-up on -- we know that the ASV has obviously had an impact on the international dynamics, but do you guys have a same store growth number if you do take ASVs out of international?

Good follow-up, Margaret, but we do not want to provide that level of detail.

Rob, I don't know if you can provide any color to help address Margaret's question that we want to share?

No, we really do not want to break that out, Margaret.

Obviously, with the ASV not helping some of the other underlying parts of the business would look better if the ASV was not included in it.

But it's just too commercially sensitive to break all that out.

The one bit of color we can provide is that ASV -- and this is important as it starts to come back in FY17, it is a very margin accretive product.

It's a very margin accretive product.

So as it starts to come back it will really benefit us, and clearly, just hitting the 12 month mark of a headwind that has been a tough 11 months on the GM front as you have seen in the numbers with that as a headwind.

As it starts to turn neutral and then become a tailwind in 2017, it can really help us.

Clearly we are executing on ASV.

We've got some really exciting applications for it and you will hear more from us on this front in the future.

Great.

And then just in terms of gross margins again, Brett, maybe you can give us a little bit more perspective.

You mentioned mix, ASV and geographic mix, should we think about that as 1/3, 1/3, 1/3 or over weight one of those categories?

And then as ASV comes back, is that the primary driver to maybe reverse that trend on gross margins for that core sleep apnea business and over what timeframe should we expect that?

Thank you.

So that seven-part multi-question is a perfect one for Brett.

I'll have a crack at that one.

The most significant one has definitely been product mix.

And that has been the biggest one.

That's multiple really, obviously, ASV is playing out there a little bit, Inova is playing out there as well.

And just a really strong outperformance in flow generators.

So -- with ASV that starts to dissipate certainly through Q4 and then into Q1 so that will certainly help.

And then obviously Brightree comes on board in Q4 as well.

Then as I mentioned earlier, it just depends on trends for product mix and also geographic mix.

So even the really strong outperformance in the Americas, which is positive, does have an impact on gross margin.

Though a number of factors playing out.

Some of those moderate and some of them kind of disappear into FY17, so I think that is good.

The important thing on that European ASV headwind is it does go away.

And if you strip that out, the device number internationally would be better, but that's something to look at.

I think that actually headwind is really detracting from international, and that is definitely something that is going to go away into FY17.

Thank you.

Very helpful.

Thank you, Margaret.

Suraj Kalia from Northland Securities is on the line with a question.

Good afternoon, everyone.

Mick, one question for you and one for Brett.

You gave a pretty good insight into how you are going to be integrating Brightree and how you're going to be helping your customers.

I guess, just let me just belabor that point, specifically Phillips and DeVilbiss customers.

So what is the stickiness, if I could use that word, for Phillips and DeVilbiss staying with Brightree?

In other words, do you all risk losing Phillips and DeVilbiss at some point in the future?

How do you all prevent that because that would be some portion of Brightree's revenues.

Well, the revenues from Brightree come from the customers who are the HME providers.

And HME providers have a portfolio of products that they use.

So our customers, who are the HME providers are buying from ResMed and some of our competitors that you named there.

So my presumption is our customers will continue to want to buy from them and would want them to use the software program that our customers are using.

It is as simple as that.

It is not our decision or our competitors decision.

It's the customers decision.

The customer has to make the right decision in their best economic interests, the longer term interest of, primarily their patients, and growing the business efficiently.

We think that will play out.

We've had two to three months of this being out there and playing out just fine as far as we see it.

We're pretty excited, frankly, two months after the announcement and really only 22 days after the close and we're revving up to move forward.

Fair enough.

And Brett, I know you mentioned 7% organic growth and 2% acquired on a constant currency basis -- and maybe I missed this, but since Curative is primarily all US and Inova is primarily US can you give us the as reported numbers for the quarter?

Thank you for taking my questions.

Yes.

I think Mick referred to it earlier in terms of us getting drawn too much into the detail on that.

I think the overall number was 2%.

Inova would be skewed to devices, obviously, and then Curative is more spread.

So I think that -- I've probably given you enough to have some fair estimates on what the impacts would be through the categories without starting into too much detail on it.

We are now at the one hour mark, so I will turn the call back over to Mick Farrell.

Thank you, Andrew, and in closing I want to welcome the Inova and Brightree teams to global ResMed team.

And to thank the now almost 5,000 strong team here at ResMed from around the world for their commitment to changing lives of millions of patients with every breath.

I'm very proud of what this team has accomplished, not just here in Q3, but beyond in creating the world's leading tech-driven medical device Company.

We remain laser focused on our long-term goal of improving 20 million lives by 2020 by literally giving products and the gift of breath to those folks.

Thank you for your time and we will talk to you again in 90 days.

Thank you, again, for joining us today.

If there are any additional questions, please feel free to contact me.

The webcast replay will be available on our website in about two hours at investors.

ResMed.com.

Andrew, you may now close the call.

This concludes ResMed's third quarter of fiscal year 2016 earnings live webcast.

You may disconnect.