瑞思邁 (RMD) 2017 Q1 法說會逐字稿

Welcome to the Q1 FY17 ResMed Inc. earnings conference call. My name is Maryama, and I will be your operator for today's call.

(Operator Instructions)

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

Thank you, Maryama, 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 had a chance to view the earnings release, it can be found on our website at investor.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, integration of acquisitions, 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, who are joining us today as we summarize our results for the first quarter of FY 2017. We achieved solid double-digit global revenue growth this quarter, led by sales from Brightree, and strong growth in our device platform categories.

For the call today, I'll review high-level financial results, outline regional highlights, and then discuss progress towards our ResMed 2020 strategic goals. Then, I'll hand it over to Brett who will walk you through financial results in more detail.

We continued to see the benefits of our leadership in connected care. The ongoing value proposition of the Air Solutions software resulted in strong growth for device platforms in both sleep and ventilation. Brightree's value to providers also led to recurring software as a service revenue from that part of our business.

At the bottom line, in terms of non-GAAP net operating profit, we grew at 11% on a year-on-year basis in Q1. Including financing costs, our diluted earnings per share was $0.62 on a non-GAAP basis, which represents 5% year-on-year growth. We continue to balance revenue growth, gross margin improvements, as well as ongoing investments in both R&D, as well as SG&A, as we prepare for upcoming product launches across our global market.

Now for some regional highlights. The Americas region produced double-digit revenue growth. These results were fueled by software-as-a-service revenue from Brightree and 10% growth in that region in devices. Device growth was up against a robust 40% year-over-year comparable.

The mask and accessory category in the Americas was flat in the quarter. We are very confident that we will drive strong growth, with mask technology that we are launching this quarter. Just yesterday, we started selling our brand new AirFit F20 product into our European market, and we will launch another mask technology imminently in Europe.

We tested both of these technologies with customers during the quarter, and they were very well received in market trials with physicians, providers, and with patients. We plan to launch these new technologies into the Americas market during the current quarter. We are incredibly excited about these new products.

In the Americas region, growth in devices was driven by the ongoing strength of the AirSense 10 and AirCurve 10 systems, powered by the cloud-based Air Solutions software platform, including "AirView", "U-Sleep" and "myAir" offerings. In addition, we also saw solid performance in our respiratory care device platforms, with the launch of cloud connected Astral ventilation systems.

We achieved good growth in our combined EMEA and APAC regions, with balanced contributions from both devices and mask categories. We are now on a solid positive growth trajectory in ASV therapy in the region. We are seeing good growth in patient groups, including central sleep apnea, complex sleep apnea, and pain management. We will see mask and accessories growth accelerate as we move forward with current and very near future product launches in the category, as well as ongoing resupply partnerships throughout FY 2017.

We will show some of our new mask technologies to physicians and providers in the US next week at Medtrade. Patient, physician and provider feedback from controlled product launches have been excellent, and we know these masks will be very well received as they transition to full market launch.

Let me now provide an update on our ResMed 2020 growth strategy. We continue to lead the field of connected care, one of the key foundations of our growth strategy. We have high-quality software-as-a-service revenue from Brightree that continues to grow strongly. We are on track with our work to integrate Brightree software functionality, with our core Air Solutions platform.

We continue to invest in a portfolio of cloud-based computing solutions that help HME customers become even more efficient, and help them free up cash flow that can be reinvested to drive even better patient care. Connected care solutions are improving operating efficiency, eliminating waste, increasing therapy adherence, and improving patient outcomes.

We are growing our connected care solutions in COPD, as well as linking our technology to include other chronic care applications. This technology is a valuable asset that we will continue to leverage and provide insight to channel partners. This foundation of connected care is an integral part of our long-term strategic plan.

Let me now take a few minutes to update you on the progress against each of the three horizons in our 2020 growth strategy, and then I will hand it over to Brett. In our first horizon of growth, which focuses on our core sleep apnea business, we have achieved sustained year-on-year growth since the launch of the Air Solutions platform more than eight quarters ago. We were a sponsor at the Annual Meeting of AdvaMed, the Advanced Medical Technology Association, that was held last week in Minneapolis.

One of the main themes at AdvaMed 2016 was the importance of digital health, and the convergence of technology from data analytics, to connectivity, to patient engagement. This represents a significant shift from two to three years ago. I was on a panel titled "Unlocking the Transformative Potential of the Internet of Things", with colleagues from Deloitte and Medtronic, one of the other med tech leaders in this area of connected care.

While many companies are talking about digital health and connected care strategies, just a few of us are leading the way to value. We now have well over 2 million 100% cloud connected medical devices sitting on patient's bedside tables, liberating data every day. We turn "big data" into "actionable information", which can unlock value for the patient, the provider, the physician, and the payer.

We're helping to reduce costs for providers, and improve outcomes for patients. With our expertise in sleep and respiratory medicine, we are also taking the lead with digital patient engagement tools that drive therapy adherence. Since we launched Air Solutions, we have been actively involved in clinical studies that show increased patient adherence and customer efficiencies, as well as demonstrate the value of our Air Solutions platform.

Technologies like AirView and U-Sleep improve patient adherence from baselines of 50% to 60% adherence all the way up to 80% adherence and above. These are game changing capabilities. We just announced the results from the world's largest study on sleep apnea and connected care, using our myAir technology. The study included over 128,000 patients.

These data will be presented at the Chest Medical Meeting tomorrow in Los Angeles, and without stealing too much thunder from the investigators, at the highest level, these online self-monitoring tools engage patients and improve adherence to therapy. In the myAir study, we showed an absolute increase in adherence of approximately 17 percentage points.

This represents a relative increase in adherence of over 24%. This adherence study was executed in our core sleep apnea market, but we know that these technologies and capabilities can be applied to our ventilation and to our portable oxygen concentrator technologies, for use in patients with COPD, neuromuscular disease, and other chronic diseases.

During the quarter, we enhanced myAir with the launch of a new smart phone app, which has been very well-received by patients. We now have well over 1,000 patients each day signing up for the myAir app. Patients love getting a daily myAir score for their sleep, learning about the quality of their sleep, and learning about the quality of their breathing at night.

Patients like to engage with their sleep health as much or more than their exercise health and their nutrition health. Our view is that these are three equal parts, for good overall preventative healthcare.

Moving on to the second horizon of our ResMed 2020 growth strategy, this quarter we announced positive results from a randomized controlled trial in the field of home oxygen therapy, and home mechanical ventilation. The acronym for this trial is HOT HMV. The data from this study were presented in September at the European Respiratory Society Congress in London.

In HOT HMV, patients who received non-invasive ventilation, in addition to home oxygen therapy had an astounding 51% decreased risk of rehospitalization or death in the first year, compared to patients who received oxygen therapy alone. Additionally, the patients who received at home NIV and oxygen experienced an average of 4.3 months without a hospital admission or death, compared to 1.4 months for those on oxygen alone.

The reduction in mortality speaks for itself, for caregivers and loved ones. The extra almost 90 days without hospitalization also speaks to government payers and to private payers.

In the US market, hospitals face a Medicare payment penalty if COPD patients are readmitted to a hospital within 30 days for any reason. A future where NIV and portable oxygen concentrators are standard of care to reduce mortality and reduce hospitalizations in COPD patients upon discharge is well within our second horizon view.

Turning to progress in our respiratory care product portfolio more broadly, we launched cloud connected conductivity for the Astral platform. We continue to enhance Air Solutions to provide more value for Astral, so that it can provide value for COPD, and neuromuscular disease patients, and beyond. We are on track with the Inova acquisition integration process, and we're leveraging our quality systems and product development expertise to further improve the Activox portable oxygen concentrator, or POC, platform.

We expect to make good progress in the global rollout of Activox over the following 90 days and beyond. We have significant opportunities to grow POC revenue by selling through our global market channels throughout FY 2017.

COPD, as a reminder, is the number-three cause of death in the Western world, and it is the number-two cause of rehospitalization. We know that our spectrum of cloud-connected respiratory care products across our portfolio will play a big role in reducing costs for providers, and improving outcomes to millions of patients with this debilitating disease.

Our third horizon of growth includes a portfolio of long-term opportunities, including sleep health and wellness, atrial fibrillation, heart failure with preserved ejection fraction, and the broader field of chronic disease management. In the area of sleep health and wellness, we announced a sleep awareness partnership with The Dr. Oz Show through the use of the S+ by ResMed device. The S+ is the world's first non-wearable sleep device and smartphone app, designed to help people track, better understand, and improve their sleep.

Dr. Oz dedicated an entire show to the field of sleep wellness, with guests including Dr. Michael Breus, a Board certified sleep specialist, and Arianna Huffington, the co-Founder of the Huffington Post, who has written broadly about the importance of sleep health. The sleep awareness campaign involves selling thousands of S+ devices, and tracking anonymous sleep data to create a database with over one 1 million nights of sleep. Dr. Oz plans to calculate what he calls America's overall sleep score, and to announce the results at the Consumer Electronics Show, or CES, in Las Vegas, early in 2017.

For ResMed this is about driving importance of sleep health, and helping consumers realize that they need to go see their doctor if they have any risky breathing or shortness of breath. These and other signs and symptoms of sleep apnea and COPD impact overall sleep health, and overall health. This will be a critical part of the overall sleep awareness work.

Moving from sleep awareness to hard clinical data, we presented positive results from the CAT-HF trial this quarter. The randomized clinical trial results were presented at the Heart Failure Society of America annual conference in Florida last month, by the cardiologist and electro-physiologist, Dr. Jonathan Piccini.

Dr. Piccini's analysis showed a reduction in atrial fibrillation burden for heart failure patients who used ResMed's adaptive server ventilation, or ASV, therapy to treat their sleep disorder breathing. This is the first study to show that addressing sleep disorder breathing with ASV may improve cardiovascular outcomes for patients with atrial fibrillation and heart failure, with preserved ejection fraction.

This is a large population of heart failure patients, for which there is no class 1A guideline therapy. Researchers are finalizing the manuscripts for full publication of the CAT-HF study. We are excited about the patient outcome data, and the potential opportunities to save hospitalization costs for the healthcare system globally.

Let me close with this: We are incredibly excited about the ongoing launch of our new mask technologies globally. We continue to lead in connected care, with enhanced solutions that lower costs for providers, and improve outcomes for patients.

Customers are voting for this technology, by signing up for our patient engagement apps, and by voting with their wallets. We are also leading the industry, driving consumer awareness of sleep, so that undiagnosed consumers go to see their doctors and healthcare providers for diagnosis and for treatment. We look forward to executing on our strategies to benefit physicians, providers, payers, and most importantly, to improve the lives of tens of millions of undiagnosed sleep apnea and COPD patients around the world, as we move forward.

With that, I'll hand the call over to Brett for more comments. Over to you, Brett.

Thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter of FY17, with more detailed commentary around revenue, given our recent acquisitions our last fiscal year. As Mick noted, we had a solid start to the year. Group revenue for the September quarter was $465.4 million, an increase of 13% over the prior-year quarter. In constant currency terms, revenue also increased by 13%.

Excluding the acquisition of Brightree, revenue increased by 5% over the prior-year quarter. Excluding all acquisitions, organic revenue increased by 3% over the prior-year quarter. Taking a closer look at a geographic level, and excluding revenue from our Brightree acquisition, our sales in the Americas were $267.9 million, an increase of 5% over the prior-year quarter. Sales in combined EMEA and Asia-Pacific totaled $164.5 million an increase of 4% over the prior-year quarter. In constant currency terms, sales in combined EMEA and Asia-Pacific increased by 5% over the prior-year quarter.

Breaking out revenue between product segments, Americas device sales were $145.6 million, an increase of 10% over the prior-year quarter. Masks and other sales were $122.3 million, consistent with the prior-year quarter. For revenue in combined EMEA and Asia-Pacific, device sales were $113.6 million, an increase of 6% over the prior-year quarter, and in constant currency terms, also increased 6%. Masks and other sales were $50.9 million, an increase of 2% over the prior-year quarter, and in constant currency terms, an increase of 4%.

Globally in constant currency terms, device sales increased by 8%, while masks and other increased by 1% over the prior-year quarter. Brightree revenue for the first quarter was $33.1 million. During the rest of my commentary today, I will be referring to non-GAAP numbers, the non-GAAP measures adjust for the impact of amortization of acquired intangibles and one-time expense associated with a field safety notification. In the prior-year comparable they exclude the amortization of acquired intangibles.

We have provided a full reconciliation of the non-GAAP to GAAP numbers in our first-quarter earnings press release. Our non-GAAP gross margins for the September quarter was 58.9%. On a year-over-year basis, our gross margin increased by 90 basis points, reflecting manufacturing and procurement efficiencies, and the favorable impact from our Brightree acquisition, partially offset by an unfavorable but moderating product mix and typical declines in average selling prices.

On a sequential basis, our gross margin increased by 70 basis points, largely attributable to manufacturing and procurement efficiencies. Assuming current exchange rates and likely trends in product and geographic mix, we are narrowing our guidance range, and expect gross margins to be in the range of 58% to 60% for FY17.

Moving on to operating expenses, our SG&A expenses for the quarter were $128.9 million, an increase of 16% over the prior-year quarter. In constant currency terms, SG&A expenses increased by 15%.

Excluding the impact from acquisitions, our SG&A expenses increased by 6% in constant currency terms. SG&A expense as a percentage of revenue were 27.7%, compared to 27% that we reported last year. Looking forward and subject currency movements, we expect SG&A as a percentage of revenue to be in the range of 27% to 28% for FY17.

R&D expenses for the quarter were $34.4 million, an increase of 27% over the prior-year quarter, or on a constant currency basis, an increase of 21%. This increase largely reflects the impact of our recent acquisitions, and incremental investments across our R&D portfolio. Excluding the impact from acquisitions, our R&D expenses increased by 8% in constant currency terms.

R&D expenses as a percentage of revenue were 7.4%, compared to the year-ago figure of 6.6%. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for FY17.

Amortization of acquired intangibles was $11.7 million for the quarter, an increase of $9.4 million over the prior year, reflecting the additional amortization associated with our recent acquisitions. Stock-based compensation expense for the quarter was $12 million.

Non-GAAP operating profit for the quarter was $111 million, an increase of 11% over the prior-year quarter. Non-GAAP net income for the quarter was $87.7 million, an increase of 4% over the prior-year quarter.

Net income for the quarter was $76.1 million. Non-GAAP diluted earnings per share for the quarter was $0.62, an increase of 5% over the prior-year quarter, while diluted earnings per share for the quarter were $0.54. Overall foreign exchange movements negatively impacted first-quarter earnings by $0.01 per share, reflecting the unfavorable impact from the weaker British pound and stronger Australian dollar, relative to the US dollar.

On a non-GAAP basis our effective tax rate for the quarter was 20.1%. Looking forward, we estimate our effective tax rate for FY17 will be in the range of 20% to 22%. During the quarter, we initiated a field safety notification regarding potential degraded battery performance in our Astral device. Under the notification, we will replace all the batteries in our Astral devices.

In our Q1 GAAP results, we have recognized a charge of $5.1 million for the expected costs associated with this action. Cash flow from operations was $86.2 million for the quarter. This reflects strong underlying earnings, offset to some extent by an increase in net working capital balances during the quarter.

Capital expenditure for the quarter was $14.6 million. Depreciation and amortization for the September quarter totaled $27.8 million.

Our Board of Directors today declared a quarterly dividend of $0.33 per share, an increase of 10% over our prior-year quarterly dividend. As previously announced, we have temporarily suspended our share repurchase program due to recent acquisitions. At present, we expect to recommence the buyback in FY18.

At September 30, we had approximately $1.2 billion in gross debt and $391 million in net debt. Our balance sheet means strong, with modest debt levels. At September 30, total assets were $3.3 billion, and net equity was $1.8 billion. And with that, I'll hand the call back to Agnes.

Thanks, Brett.

(Caller Instructions)

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

(Operator Instructions)

Steve Wheen from Evans and Partners, your line is open.

I just wanted to ask about the Brightree revenue growth. Just wondering, in the quarter, whether or not you've seen any pushback from DMEs, with regard to ResMed owning that particular software.

Thanks for the question, Steve. No, we haven't seen customers moving out of the Brightree system since ResMed acquired, or announced the acquisition in February, or closed the acquisition in April, or has formally moved forward from then.

So, we have had a good eight months of customers being aware of this, and what we've seen is customers love the value that's being provided, and they actually, I think, the customers I've spoken to love the fact that there's a multi-billion-dollar public Company that's going to make sure they invest cash in this business for the long run, which is investing in the infrastructure and extracting value for our HME provider customers, and adding even more value as we integrate some of the functionality from Brightree, as we said in some of the prepared remarks, between Brightree and our broader Air Solutions platform across sleep apnea and COPD.

Is the gross margin on that revenue similar to what was reported when you gave the historical Brightree when it was acquired?

Brett, do you want to drill down into some of those GM implications pre and post acquisition for Steve?

Yes, Steve, this is Brett. That's pretty consistent with when we filed the 8-K, for example, on profitability ratios, and obviously Brightree contributes to our gross margin there as well. I should say, we've got -- it's consistent with our expectations. We're very pleased with how we're progressing and how Brightree is progressing, so I think that's good business there, and it's definitely meeting our expectations.

Thanks very much.

Ben Andrew with William Blair.

Mick or maybe Brett, could you talk about the flat M&A, or mask and accessory growth in the quarter? What are the inputs to that? Was it perhaps some people holding out purchases typical at the end of the quarter in front of the new product launch, because you've been pretty vocal about having stuff coming. And then my follow-up is, within the 10% device growth, can you give us some flavor about the product mix, and what the bigger drivers were within that, across the range?

Yes, first, the EMEA and APAC masks and accessories growth was 4%. Americas was flat. Obviously, we showed these new technologies at the European Respiratory Society Congress in September, and as you noted, Ben, we've been pretty public about that, and so it had been out in the public forum. There may have been some impact on Americas customers knowing that new products will be coming to market soon, in terms of their purchases during the September quarter.

But look, the way that we look at it is, we've got some excellent first results here in our controlled product launches on this product, the F20. It's an excellent full-face mask that we think is going to be incredibly successful, as we have tested it out there. And certainly, there were some customers testing it in the Americas and some customers testing it in Europe, and we did show it at the conference there in European Respiratory Society.

But we do expect very significant growth for this throughout FY17, and we will launch the product, as I said, we launched it yesterday in Europe. We will launch it, another technology into Europe, and both technologies we plan to launch into the US this quarter. So, I do think the future looks pretty exciting on that front.

To the devices, breaking out the 10% year-on-year growth in devices, in the Americas, we don't typically break it out precisely between how much was ventilation, and how much of the growth was sleep. But we talk about the sleep apnea market generally growing, in that mid to high single digit number, and devices growing at the mid-single digits, and masks growing at the high single digits. So you can look at that 10%, and say well, if it's mid-single digits on the sleep flow generators, than there is some incremental growth from the ventilation and the portable oxygen concentrators on top of that.

Great. Thank you. If you'll allow me, I'll just ask about Activox, and how we might size the O-US opportunity as you launch that over FY17, because that's the first you talked about that rolling out more broadly. Thanks.

Absolutely. Ben, we'll give an update next quarter as we really start to roll that out. The point I was making on this call is that we've now got the quality to a level that we like, and that we are launching it now not only to the US, but our global sales forces over the coming quarter. And as you know, the sale cycle on POCs is an S-curve, and you start to ramp that up this quarter, but we'll give an update in 90 days as to the progress on that. Thanks for the questions, Ben.

Thanks.

Will Dunlop from Merrill Lynch.

Firstly, I wanted to ask you about SG&A growth accelerated this quarter. I'm wondering whether that's related to the upcoming product launches, or if there's something else in there. If you could talk to that, that would be great. Thanks.

There are two factors involved in SG&A. One is the absorption of some of the acquisitions we've made, and that has contributed to the SG&A. And in addition to that, as you noted, we're launching two new masks in Europe, and we plan to launch them in the Americas. And these things that we prepare for, we've done them many times, but you do prepare for them in terms of the marketing promotional and capabilities, and so on. So, those two factors of the acquisitions and the preparations for new product launches were both factors in the SG&A.

Thanks. Then on gross margin, despite what seems to be quite a negative product mix effect in the US, you still posted very strong non-GAAP gross margin relative to the last few quarters. Can you talk to the pricing environment in the US, and whether you are seeing pressure to cut prices? And whether you think you will as a result of Medicare funding costs that went live in July? Thanks.

I'll take the second part of that, and I'll hand it to Brett for the first part of that and the broader GM review, and what's going on there. With regard to pricing, we haven't seen anything out of the ordinary in pricing. There's obviously -- we don't break it out in detail here, but what I'd say is we've seen what we've seen traditionally in year-on-year price deltas. In our US and other markets.

Throughout the whole CB process, it's been very visual and open, as to what the new prices will be, and we've been working with our customers as soon as prices were announced six months ago, not as they start to go into play during this July-August-September quarter. So, pretty steady as she goes, in terms of historic price deltas there. Brett, do you want to provide a little more color for Will with regard to what's happening there with GM?

Sure. So even though the product mix continued to be unfavorable for us, it's certainly moderating. That headwind has definitely moderated in this quarter, which is good. The other thing, also ASVs, which is a pretty big headwind, our ASVs returned to a growth trajectory, and that's helping us on the product mix piece of this. It's not a headwind now.

The biggest component there, I think, has been driving through on the margins being manufacturing and procurement, and really getting some traction on those cost-out programs. We've been running all the time, but it's becoming more evident because of that product mix moderating. So, that's working through. As you know, the first 12 months, we couldn't really work on it. We were concentrating or focusing on just meeting demand. But as we have worked through the last 12 months, we've been really able to ratchet up that program, and the team has done a great job working through on the various cost-out programs, particularly for the platforms. And that's definitely now flowing through on the gross margin. I guess the other one, obviously, the Brightree acquisition is a meaningful contributor, as well. Some of these headwinds are perhaps turning into tailwinds, so we are seeing that come through on the gross margin.

Thank you.

David Low with JPMorgan.

If we could return to Brightree, I'm just wondering if you could talk to the level of growth you've seen, given we don't have much of the way of historics. And perhaps some sense as to what integration benefits, or what the opportunity feels like it could be now that you've owned it for eight months?

The Brightree growth in that low to mid teens, low teens area. Good solid double-digit growth. It's 80% to 90% plus recurring revenue there, David, so the Brightree business is a very solid and strong recurring revenue business. It's providing incredible value to providers, automating the process flows for inventory management, clinical informatics management, revenue cycle management, in terms of ensuring payment, and also even managing physician scripts.

So, when you think about the synergistic value, if you'd like, between a customer who's operating on ResMed's Air Solutions for patient engagement through myAir and physician engagement through AirView, and now HME engagement through Brightree, there are many of those workflows that you can look to if you are removing costs from the front end of patient engagement and the back end of inventory management, that there can be synergies in saving those costs for the HME provider.

So, we're working with all our customers who use both Air Solutions, Brightree, and particularly those who use both, to really help them garner those savings in their own operating costs, to improve their own P&L, and free up more of their own cash flow, to then reinvest in better patient care and drive adherence rates up, of the likes of what we have seen in the myAir study and the U-Sleep study, where we were able to achieve 80%-plus adherence rates. That is a win for the patient obviously, but it's also a win for the physician getting the patient on therapy, and to the provider, in terms of keeping that sleep apnea patient on good therapy and ongoing resupply.

All right, thanks. And if I could change topics a little bit, you talked about the connected devices, and I think more than 2 million connected with Air Solutions now. Just making sure that I understand -- this is AirSense, AirCurve products. Are the vast majority of those device that you've sold effectively connected devices now?

Yes. Since we launched the AirSense 10 and AirCurve 10 lines, every single sleep apnea non-invasive ventilation device that we've sold has communications capabilities in it. And so we have more than 2 million of them -- well over 2 million of them sending data to the cloud every day, so that if it's sent at 6:30 in the morning, we call it the halo, hour after last off. By 7:30 in the morning, those data are available for the patient, that they can review on myAir, for the doctor if they go see them at an 8:00 appointment on AirView and even for the Government of Finland, or United, or Blue Cross-Blue Shield into the population health management, into their systems that very day.

Thanks very much.

Joanne Wuensch with BMO Capital Markets.

This is Matt Henriksson in for Joanne. Our questions first are for R&D, and we're looking to see whether or not this increase in guidance is a short term related to acquisitions and integration, or if this is more of a longer-term strategy? And then my follow-up question is, with regards to the Curative acquisition, we're at the one-year mark. Is there any observations that you've made that were different from your initial expectations? Thank you very much.

Thanks for the questions, Matt. And both of those, actually, over to Rob Douglas, our President and COO.

Thanks, Matt. The R&D increase largely has been around bringing the acquisitions in, and the engineering work that we want to do, to make sure quality is right and really synchronizing the roadmaps and making sure everything's on track. We're committed to innovating in our industry, and we see the R&D program continuing apace. We've got a lot more things on our roadmap than what we can actually do, and a lot more plans and ideas, and anything we can invest sensibly into the R&D program, we will.

Onto your other question regarding Curative, you're asking about any differences from how the early integration program went. We were really encouraged with Curative and its position in the Chinese market. The whole Chinese economy has had some interesting developments and changes, and things going on like anti-corruption trials and stuff like that have made the market continue to be interesting.

We still see a huge opportunity there, just in terms of the number of untreated patients. Both in obstructive sleep apnea, and also in the number of untreated COPD patients, in the standard of care there. We're making great progress on the integration program.

We're very happy with the role of a few key players that we've got in China at the moment. We've got Justin Leong, who is heading up our Asia growth markets group, and Jason Sun, who has remained as the CEO of the Curative subsidiary. Together, they are bringing together the team of Curative and ResMed, and we're the major player in treating sleep disorder breathing and long-term ventilation in China, and we've got lots of good plans to further develop that.

Andrew Goodsall from UBS.

Just wanted to know if you've got any early feedback on the launch of the new 20 series masks, just from the market testing that you are doing? Just a follow-up question. To what extent does your outlook or your upgraded gross margin consider that new mask launch?

Thanks for the questions, Andrew. Clearly, we've got some really good early data from the control product launches of F20 in Europe, and in the US markets in these controlled product launches, where we've had customers looking at the product, and putting it on patients, seeing how the set-up goes for a provider, and working with physicians so that they can see the change of care. The F20 is a fabulous full face mask, one of the best I've seen that ResMed has produced. And I think, as you look over the next number of quarters, this thing is going to be a real winner for us.

To your second part about upgrading our gross margin guidance, I'll let Brett go into that in more detail, but at a high level, yes, there's a combination of ASV, as Brett said earlier -- ASV has turned from a headwind now to tailwind. Mask growth is at its nadir here, as we transition from two-year-old mask product to brand-new mask product, and both of those tailwinds, in terms of positive GM contributions. Brett, any further color on that for GM?

We try to look at that and try to factor that in. As you know, on gross margins, it's always hard to predict, because you've got ASP movements, FX, product mix, geographic mix, what we do in manufacturing procurement, what happens with how the acquisitions scale, so we put all that in.

I guess we are getting more confident in the range there on the margin. Certainly, we saw some really good improvements on the margin in Q1. Clearly we look to build on those.

In terms of product mix, to the extent, though, that the mask growth accelerates, and we think these masks will be successful, and we do think we'll get share back with these masks, and clearly that's going to be supportive of the gross margin. And then it depends on relative mix of devices versus masks and so on. Certainly the expectation is those new masks will be supportive of the gross margin. You'd have to think that.

Perfect. Thank you.

Matthew O'Brien from Piper Jaffray.

To follow up on the mask commentary, given that you have rolled that out internationally, and we are going to see it next week at MedTrade, could you talk a little bit what are some of the unique or differentiating points that you see in the masks, as far as what you've been selling, and how should we think about things from a cannibalization and pricing perspective? Is this environment one where you can ask for some uplift in pricing versus what you are charging right now?

Thanks for the question, Matt. I'll take the second part, and hand the first part to Rob, to talk about some of the features of the F20. Yes, with regard to pricing, we work very carefully with our customers in each of the 100 countries we are selling to, and each market we launch into.

This is some very innovative technology in these multiple mask technologies that we're bringing to market, and we are certainly working with customers to understand that value, and ensure the price appropriately in line with that value. So, I see it rolling in, as we traditionally have, with our mask launches at appropriate pricing, that takes account of the value but also takes account of the realistic nature of the markets in which we are selling in the healthcare world. Rob, do you want to take the second part? Or the first part?

These masks are really about comfort and seal, and ease of use. Our early testing -- all of our mask development programs are heavily involved with working with patients, and trying ideas, and working through, it's derivative, it keeps going. We believe the F20 and the M20 have really superior seal and that they just don't leak, and that they're more comfortable and easy to use than earlier masks. To your question of cannibalization, the market will fall out as to what are the preferences, and people will have to develop their preferences over time for that. So, that will all take some time to fall out, but we are extremely excited about the response that we've already had on these masks.

What I'd add on there is if there's any cannibalization, there's cannibalization of some of our competitors' positions in full face and nasal. We will not only keep growing the market, as we are with Dr. Oz, and reaching out to get new patients in, but I think we will be taking some good share in these categories, as we launch this amazing new mask technology.

Got it, and as a follow-up, just a little bit more color on the North American generator performance in the quarter -- you had Astral, if that ASV is a tailwind, you are benefiting somewhat from the COPD purchase. Is it fair -- I know you have a difficult comp here in fiscal Q1, but is it fair to say that business is actually down when you exclude those other products or is it still positive?

It was still up. We are not going to break it out in detail, but what I said earlier I'll say again, which is the sleep market is growing mid to high single digits, where the devices are growing at mid single digits, masks scoring at high single digits. We held share in our sleep devices.

Got it. Thank you.

Victor Windeyer from Citi.

I just wanted to understand the mask a little more if I can. The high single digit mask rise, perhaps you could, not in the industry, but perhaps you could break it out, whether you've been more volume growth, and what the cofactors are that are driving that. How long that can continue for.

Thanks for the question. With regard to mask growth, revenues and volume, we don't break out pricing deltas. What we acknowledged in the prep remarks, and I'll say again, we lost some share in masks in the quarter. If masks are growing at high single digits in the US market, and we're growing at 0 or 1, then we losing some share.

We're very confident with the new masks we are launching today -- yesterday in Europe and over this quarter, we plan to launch them again in the US, and beyond in global markets, that we will get back to not only strong market but above market growth, as I alluded to earlier. These are great masks that will move us up there. So, we're seeing good market growth of mid to high single digits in masks and there's always price declines to play in there, so you've got low double-digit growth in volumes of masks in the market, that really hasn't changed from Q4 to Q1. It is more about the product lifecycle of our two-year-old masks and the brand-new ones that are just coming to market.

I'm interesting in understanding the importance of your informatics platforms to driving growth in the mask and supply side, and whether you can get a better part of the share going forward?

Yes, clearly, we have a very large investment in the infrastructure with healthcare informatics and Air Solutions. There's a much more direct relationship between the informatics and the connected care, and the value we provide to the device growth. We've seen that very strong for now eight quarters since the launch of Air Solutions, AirSense 10 and AirCurve 10.

There is a connection to masks, clearly it's often linked, when you think about it, all the way through to resupply programs. We have ResMed Resupply, we have Brightree Connect, and we have a number of offerings in the US market. A number of different offerings for customers in EMEA and APAC, where the go-to-market models that are different.

We are engaging patients better than ever. Patients are signing up to understand things like myAir, and as part of that, we are absolutely contacting patients to let them know when it's time for a new mask, and to push them through the system. And so I do think that -- different markets of the world, there is different ways of doing that.

You are going to see, as you look forward over FY17, FY18, and beyond, a lot more interplay, not only between the informatics and device, informatics and the masks but also informatics and chronic disease management. Keeping these patients out of hospital and providing holistic value to the healthcare system, by what we can do.

Thanks very much.

Saul Hadassin from Credit Suisse.

Maybe just a first question on the Astral, and if you could talk what impact if any that field safety notice had also on sales, and what you're seeing in terms of the take-up of that device, in the non-invasive ventilation category, please?

I'll take the second part, and the first part of it to Rob. Sales of the Astral in terms of its use, it's pretty broad. It's different in every market in the world. In Germany, it's far more used as a life support ventilator and in the life support ventilation side. In the US, it's split between Duchenne Muscular Dystrophy, neuromuscular disease and COPD.

With the changes in reimbursement that have been announced recently, and have been ongoing for a year plus in the COPD side, we've actually been focusing, since we have no entrenched sales in this field, saying to the customers, do you want non-invasive ventilation like an AirCurve 10, S, ST, bi-level type product or do you want Astral? And for which types of patients would you choose this, working with physicians and providers to do that.

So, we're really partnering with our HMEs and with the physicians, to make sure and keeping the whole context of the healthcare economics that are involved, to make sure the right therapy goes on the right patient, and that it's sustainable over time. So that's how we look at NIV, as well as LSV for neuromuscular disease and COPD. As for the field safety notice, Rob?

Just a small bit of background on it. We'd had a small number of reports of degraded battery performance, and there continues to be no adverse health effects from the degraded performance. There were very clear mitigations for patients around it. We felt it was the right thing to do, to put out the field safety notice, and alert ventilator-dependent patients and their caregivers about the issue, how they should mitigate the risks, and where appropriate, how to arrange for replacement battery.

It's a rolling replacement program. It is proceeding well, and we are communicating closely on an ongoing basis with the customers for this. We have to manage the patient populations very, very carefully, of course, with this type of device. The program is running along to plan at this stage.

Great. Thanks.

Sean Laaman from Morgan Stanley.

Two quick questions, Mick. The first one is the, and I might have missed it, the time to full roll-out of the new mask series. When will it be available to all of your customers? Secondly, I don't know if you could give us a sense of organic growth. I know you split out Brightree nicely for us, but broad organic growth for the rest of the business would be great.

So, I'll take the first part, and I'll give the second part of the question to Brett. The time to the full rollout, one thing, we're obviously very open here on a public conference call, but we don't want to give full indication to our competitors as to the date, the time, and the hour of launch of the F20 in each of the specific country markets.

I've talked broadly to the fact that we've launched in Western Europe yesterday. This is available across major countries in Western Europe already, and that our plan is to launch into the Americas, and the US specifically this quarter. But I don't really want go into any more granularity than that, for competitive reasons on this call, Sean. But I can tell you this thing is going to take off, and it's going to be a very valuable mask as it rolls to each of those countries as we launch it. Brett, do you want to, have a breakdown of the acquisition versus organic growth question?

Sure. We mentioned that earlier, Sean. Organic growth in revenue for us was 3% this quarter.

Great. Thank you. That's all I have. Thank you very much.

Matt Taylor from Barclays.

I appreciate the breakdown of the acquisitions. Can you talk about not just the top line growth, how much did acquisitions contribute to the bottom line this quarter?

Brett?

We've broken down and given more details in terms of revenue, but we haven't gone down line by line, or segmentation out in terms of the acquisition. So, we would prefer to keep it that way.

Okay. And just curious --

I will say -- in the 8-K on Brightree, for example, which is the largest acquisition by far, the ratios are not inconsistent with historical, so that will give you at least a sense of it.

That's helpful. And then I wanted to address, there has been a number of initiatives that have talked about by the government, in terms of being on a watch list with sleep testing, with vents. Is that a risk you see for any of those parts of your business, or do you think this is this normal activity on the part of the government, with regard to some of their investigations?

Matt, I think the government has regularly looked at their spending in all parts of healthcare, whether it is in pharma or different areas of med tech. Clearly, this is something that is important to make sure that the government's money is invested well. There are 40 million to 60 million Americans who suffer from sleep apnea, and we've only got, who are suffocating, we've only got 6 million of them on therapy.

We need to get to the other tens of millions, and it needs to be done appropriately and economically. We are partnering with every government where we do business to make sure that we can appropriately and economically diagnose and treat those patients, and keep them out of the hospital care system, because it's much less expensive to have a patient safely breathing at home, than badly breathing and needing to visit the ICU or CCU.

Thanks for those thoughts.

Chris Kallos from Morningstar.

Sorry to go back to gross margin, but just on the Brightree acquisition, I think previously you have mentioned that would have added between 70 and 100 basis points, and I'm comparing that to the actual results this time around, and I know there are multiple factors here, but can we -- is it possible to get a correlation between what you expect at Brightree and what it actually has added this time around to gross margin?

Yes. This is Brett. The Brightree contributed at the top of that range for this quarter.

So out of the 90 basis points, most of that is Brightree?

No, because there's basically positives and negative, right? So it's going to be, in absolute terms, it's going to be, as I said, on top of that range. We said I think 70 to 100, and it's toward the top of the range in terms of basis point contribution.

But then you have the impacts from ASP declines, you have negative impacts from product mix still flowing through. But we had good contributions, very strong contribution from manufacturing and procurement improvements, and then also Brightree. They are the four big elements that are flying in on the gross margins. So it's a mix situation that you end up with.

So it's tracking as expected more or less?

Yes, absolutely, yes.

And Brett, can I trouble you for the device sales non-US again? I just missed that number.

6% was the EMEA and APAC constant currency growth.

Yes.

Great. That's it for me. Thank you.

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

Thanks a lot, Maryama. In closing I want to thank the now more than 5,000-strong ResMed team from around the world for their commitment to changing the lives of millions of patients with every breath. We remain focused on our long-term goal of improving 20 million lives by 2020, literally by giving a product that helps a patient who was suffocating or couldn't breathe before, breathe afterwards. Thanks for your time today, and we'll talk to you again in 90 days. Agnes?

Thank you again for joining us today. If there is any additional questions, please feel free to contact me. The webcast replay will be available on our website at investor.ResMed.com in about two hours. Maryama, you may now close the call. Thank you.

This concludes ResMed's first quarter of FY17 earnings live webcast. You may disconnect.