瑞思邁 (RMD) 2017 Q3 法說會逐字稿

Welcome to the Q3 Fiscal Year 2017 ResMed Inc.

Earnings Conference Call.

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

(Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Agnes Lee, Vice President, Investor Relations and Corporate Communications.

Agnes, you may begin.

Thank you, Mariama, 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 review 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 joining us today as we review financial results for the third quarter of fiscal year 2017.

We achieved solid double-digit global revenue growth again this quarter, led by sales from software-as-a-service businesses as well as our new mask products.

For the call today, I will review top-level financial results.

I will then outline regional highlights from the business and discuss a few key announcements this quarter.

Finally, I will hand the call over to Brett, who will walk you through our financial results in more detail.

Let me start out with some timely news.

Earlier this week, we announced the much-anticipated launch of the world's smallest CPAP, the ResMed AirMini.

The AirMini is a CPAP solution that is literally small enough to fit inside your pocket.

This innovation opens up new channels of cash payment for our homecare provider customers and delivers amazing, compact, quiet, therapeutic comfort to patients.

As a CPAP user myself, I have been using a ResMed AirMini prototype in AutoSet mode for the last year or so, and it has changed my quality of life as I travel throughout many of the 100 countries where we sell our products and services.

I can't wait for this technology to become available to millions of sleep apnea sufferers around the world as we launch the world's smallest CPAP.

I'll talk more about this amazing solution later in the call.

On the connected care and digital health front, we launched a number of ongoing upgrades of our Brightree and AirView software solutions.

Our software-as-a-service revenue continues to grow rapidly.

Throughout Q3, we have had strong demand for our new range of AirFit masks, including the AirFit N20 in the nasal category and the AirFit F20 in the full-face mask category.

We have ramped up manufacturing for these products throughout the quarter, and despite continued strong demand, we remain on track to have supply ahead of demand during our current quarter fiscal Q4.

At the bottom line, in terms of non-GAAP net operating profit, we grew at 13% on a year-on-year basis.

Our diluted EPS was $0.71 on a non-GAAP basis.

We continue to balance revenue growth and gross margin improvements as well as ensuring appropriate investments in research and development as well as SG&A so that we can maximize the success of multiple product launches across global markets.

Now let me drill down on some regional highlights.

The Americas region produced double-digit revenue growth.

These results were fueled by SaaS revenue from Brightree as well as solid growth in masks.

Device revenue growth this quarter was consistent with the market, and overall patient volume growth is steady.

The mask and accessories category grew 8% in the quarter in the Americas.

This is up sequentially from Q2, reflecting a strong demand for our new N20 and F20 products.

The 97% to 99% fit range and the comfort of the InfinitySeal of the N20 and F20 are being well received.

There's a long way to go on the ramp of these mask products in the quarter and throughout fiscal year 2018.

Growth in devices in the Americas was in line with the market at 3%.

That was up against a large year-over-year comparable of 15%.

We are maintaining the share we gained during the last 18 to 24 months due to our great devices as well as ongoing homecare provider adoption of AirView solutions and our fast-growing patient engagement app called myAir.

We now have over 3 million patients monitored with 100% cloud-connected medical devices in their homes.

We also have more than 5 million patients in AirView and over 45 million patient accounts in Brightree.

We are liberating data and unlocking value for physicians, providers, patients on a daily basis.

We are proud to lead the digital health revolution in sleep apnea and COPD, but we are even more excited by the value that our customers see and how we are reducing costs for therapy setup and enhancing adherence rates for patients, leading to better outcomes.

Brightree continues to grow strongly and in line with our acquisition model.

This quarter, we launched enhanced features integrating document management capabilities between Brightree and AirView.

We have a robust pipeline of software enhancement projects that will add even more features to help make our customers' workflows more automated and efficient, freeing up cash flow for even better patient care.

We also achieved very good growth of our respiratory care device platforms in the Americas, led by the cloud-connected life support ventilator called Astral.

Let's spend a few minutes now reviewing our EMEA and APAC regions.

Mask and accessories sales for the combined EMEA and APAC regions were up a very strong 12% this quarter, driven by the launch of our N20 and F20 products.

We continue to receive positive feedback in Europe and Asia from patients, physicians, homecare providers regarding both the broad fit range as well as the enhanced comfort of the N20 and F20.

This quarter, we also achieved solid growth in our AirSense 10 range of devices as well as our noninvasive ventilators and Adaptive Servo-Ventilation range in Europe and Asia.

Adoption of AirView by homecare providers and myAir by patients is increasing in Europe as well.

We achieved solid growth of our dental mandibular repositioning device called Narval.

Our philosophy is however you seek treatment for your sleep apnea, ResMed should be there for you.

Let me now take a few minutes to update you on progress against each of the 3 horizons in our 2020 growth strategy, and then I'll hand the call over to Brett.

In the first horizon of growth, which focuses on our core sleep apnea business, we are making significant advances with the smallest, quietest and most comfortable products, enhanced by digital health and connected care solutions.

We launched our new F20 and N20 in the U.S., Europe and many other major markets around the world in the second quarter.

We continue to see exceptionally strong demand for these products that led to demand continuing to outpace supply for some of the SKUs in Q3.

Consistent with what we predicted 90 days ago on this call, we expect our supply to catch up with and get ahead of demand during the current quarter fiscal Q4 2017.

As I briefly discussed earlier, we announced the launch of the ResMed AirMini this week.

ResMed AirMini, once again, is the world's smallest CPAP.

And yes, it's also an APAP with availability of our proprietary AutoSet algorithm.

And yes, it also has built-in humidification with no water that needs to be added each night.

In addition, there is an AirMini app that can be used with your iOS or Android smartphone so that patients can continue to stay engaged with their therapy even when they are on the road.

You can check out details in our newsroom at newsroom.resmed.com.

The key summary statement is we have created the world's smallest and most portable CPAP that literally fits in your coat pocket.

One of the biggest requests for portable CPAP devices is the need for humidification.

We have created humidification technology that's integrated into the mask tubing that we call HumidX.

This amazing innovation requires no water to be added and provides patients with the humidification and comfort they have learned to expect from ResMed.

Our well-established AirSense 10 device range is still the best device for at-home use.

Our brand-new AirMini just adds to that as the best device for use on the road.

We have been conducting controlled product launches in select countries, and the feedback from patients and providers on the AirMini has been excellent.

We also showed the ResMed AirMini to physicians at the Sleep and Breathing conference in Marseille, France.

The doctors that saw the product there are very excited to add this to their portfolio of sleep apnea solutions for their patients.

We will provide more details as we launch the ResMed AirMini over the coming quarter and throughout fiscal year 2018.

We continue to lead in the field of connected care, one of the key foundations of our growth strategy.

In February, the European research firm, Berg Insight, released their annual mobile health or mHealth and Home Monitoring report.

This report named ResMed as a key global leader in remote patient monitoring with over 2 million devices connected.

We just announced that we are actually well beyond 3 million devices that are 100% cloud-connected.

As the world's leading tech-driven medical device company, we now have more than 1 billion nights of sleep data.

Our digital health apps have been clinically proven to improve patient adherence, and our software has demonstrated that it lowers the cost of therapy setup.

We are developing and enhancing advanced cloud-based algorithms literally every day to convert big data into actionable information.

The goal is clear.

We want to lower costs of the health care system and provide better care and better outcome for patients.

We are looking at partnerships with other players in digital health to enhance value across disease states, from sleep apnea and COPD to other important chronic diseases.

Watch this space.

On the clinical front, ResMed sponsored a research study that was presented at the Sleep and Breathing conference that I mentioned in Marseille.

This new study showed that switching patients with treatment-emergent central sleep apnea from CPAP to ResMed's Adaptive Servo-Ventilation or ASV technology significantly improves adherence.

This is the largest analysis of patients with treatment-emergent central sleep apnea.

The deidentified aggregated data included over 200,000 patients and leveraged our connected care and digital health platforms to run the analyses.

In short, the study showed that adherence rates were increased, with a relative improvement in adherence of 22%.

These patients also used their ASV therapy longer and had significantly fewer apneas during sleep compared to the control group.

This study highlights the need to continuously monitor central sleep apnea and to consider therapeutic options like ASV based on each patient's disease severity.

Moving to the second horizon of the ResMed 2020 growth strategy.

We are in the early stages of driving our connected care strategy in COPD, and we are making good progress.

We have a spectrum of cloud-connected respiratory care products across our portfolio, including cloud-connected noninvasive ventilators in the AirCurve range, cloud-connected life support ventilators such as Astral.

We also have projects on the books for cloud-connected portable oxygen concentrators.

With over 200 million patients suffering from COPD and with the disease state being the #3 cause of death and the #2 cause for rehospitalization in the Western world, we are intently focused on testing and driving models that both lower cost and improve outcomes for COPD, neuromuscular disease, Duchenne muscular dystrophy and beyond.

Our third horizon of growth encompasses a portfolio of opportunities, including sleep health and wellness, chronic disease management as well as clinical adjacencies, including heart failure with preserved ejection fraction.

This quarter, the CAT-HF study was published in the Journal of American College of Cardiology.

This is the first study to show that addressing sleep apnea with ResMed's ASV therapy may improve cardiovascular outcomes for people with preserved ejection fraction heart failure.

The overall CAT-HF study results were neutral, with a prespecified subgroup analysis showing a statistically significant improvement in the primary endpoint for patients with preserved ejection fraction heart failure who also have sleep apnea.

Currently, there are no level of evidence 1A guideline recommended therapies specific for patients with preserved ejection fraction heart failure, which accounts for half of all people living with chronic heart failure.

We believe that having the CAT-HF study published in a major cardiovascular clinical journal is the start of a journey that may prove that ASV therapy can help patients with preserved ejection fraction heart failure.

Another key area of horizon 3 growth is our work in chronic disease management algorithms, including population health models, care coordination and software-as-a-service models for home health, home nursing and hospice.

This is an exciting area for us as we look for ongoing growth of our SaaS portfolio offerings.

Let me close with this.

We are incredibly excited about the ongoing launch of our new N20 and F20 mask technologies and our pipeline of products in 2017, including, of course, the new ResMed AirMini.

We continue to pioneer connected care with enhanced solutions that lower cost for providers and improve outcomes for patients.

We are leading the industry, driving consumer awareness of sleep apnea and COPD so that undiagnosed consumers go to see their doctors and health care providers.

We continue to bring our strategy into action for the benefit of physicians, providers, payers and, most importantly, to improve the lives of tens of millions of sleep apnea and COPD patients around the world.

With that, I'll turn the call over to Brett for his remarks, and then we will go to Q&A.

Over to you, Brett.

Right.

Thanks, Mick.

In my remarks today, I will provide an overview of our results for the third quarter fiscal year 2017.

As Mick noted, we had a solid quarter.

Revenue for the March quarter was $514.2 million, an increase of 13% over the prior year quarter, or in constant currency terms, revenue increased by 14%.

Excluding acquisitions and in constant currency terms, organic revenue increased by 6% over the prior year quarter.

Taking a closer look at our geographic distribution and excluding revenue from our Brightree acquisition, our sales in the Americas were $297.1 million, an increase of 5% over the prior year quarter.

Sales in combined EMEA and Asia-Pacific totaled $182.1 million, an increase of 6% over the prior year quarter.

In constant currency terms, sales in combined EMEA and Asia-Pacific increased by 9% over the prior year quarter.

Breaking out revenue between product segments.

Americas device sales were $158.4 million, an increase of 3% over the prior year quarter.

Masks and other sales were $138.7 million, an increase of 8% over the prior year quarter.

The revenue in combined EMEA and Asia-Pacific, device sales were $122.7 million, an increase of 5% over the prior year quarter or, in constant currency terms, an increase of 8%.

Masks and other sales were $59.4 million, an increase of 8% over the prior year quarter or, again, in constant currency terms, an increase of 12%.

Globally, in constant currency terms, device sales increased by 5%, while masks and other increased by 9% over the prior year quarter.

Brightree revenue for the third quarter was $35 million, with growth on prior year comparable basis continuing to track in the low double digits.

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 restructuring expenses.

In the prior year comparable, they exclude amortization of acquired intangibles and acquisition-related expenses.

We have provided a full reconciliation of the non-GAAP to GAAP numbers in our third quarter earnings press release.

Our gross margin for the March quarter was 58.3%.

On a year-over-year basis, our gross margin increased by 100 basis points, reflecting manufacturing and procurement efficiencies and the favorable impact from our Brightree acquisition, partially offset by typical declines in average selling prices and unfavorable currency movements.

Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin in Q4 to be broadly consistent with our Q3 gross margin.

Moving on to operating expenses.

Our SG&A expenses for the quarter were $137.9 million, an increase of 16% over the prior year quarter.

In constant currency terms, SG&A expenses also increased by 16%.

Excluding the impact from acquisitions and in constant currency terms, our SG&A expenses increased by 9%.

SG&A expenses as a percentage of revenue were 26.8% compared to the 26.3% that we reported last year.

Looking forward and subject to currency movements, we've updated our guidance on SG&A as a percentage of revenue and expect it to be in the range of 26% to 27% for Q4 FY '17.

R&D expenses for the quarter were $35.1 million, an increase of 25% over the prior year quarter or on a constant-currency basis, an increase of 21%.

This 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 in constant currency terms increased by 5% over the prior year.

R&D expenses as a percentage of revenue were 6.8% compared to the year-ago figure of 6.2%.

Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% for Q4 FY '17.

Amortization of acquired intangibles was $11.4 million for the quarter, an increase of $6.8 million over the prior year, reflecting the additional amortization associated with our recent acquisitions.

Stock-based compensation expense for the quarter was $11.5 million.

Non-GAAP operating profit for the quarter was $126.7 million, an increase of 13% over the prior year quarter, while non-GAAP net income for the quarter was $100.7 million, an increase of 3% over the prior year quarter.

Non-GAAP diluted earnings per share for the quarter was $0.71, an increase of 3% over the prior year quarter, while GAAP diluted earnings per share for the quarter was $0.62.

Note that our prior year earnings per share comparable was restated as a result of our adoption of accounting standard ASU 2016-09, whereby we recorded a tax benefit of $2.3 million in Q3 FY 2016.

In the current quarter, under this standard, we recorded a tax benefit of $1.4 million.

Additionally, foreign exchange movements negatively impacted third quarter earnings by $0.01 per share, reflecting unfavorable impacts from the weaker euro and stronger Australian dollar relative to the U.S. dollar.

On a non-GAAP basis, our effective tax rate for the quarter was 20.9%.

And looking forward, we estimate our effective tax rate for Q4 FY '17 will be in the range of 21% to 22%.

During the quarter, we recognized restructuring expenses of $7.9 million associated with the closure of our Paris manufacturing facility.

Cash flow from operations was $67.6 million for the quarter.

This reflects strong underlying earnings, offset, to some extent, by an increase in net working capital balances during the quarter, in particular, an increase in accounts receivable and reduction in accounts payable associated with the timing of credit of payments this quarter.

It also included the payment of contingent consideration associated with our Curative acquisition and the payment of the BMC/3B litigation settlement.

Note these items were accrued in our previous Q2 results.

Capital expenditure for the quarter was $14.6 million, while depreciation and amortization for the March quarter totaled $28.5 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 are still expecting to recommence the buyback sometime in fiscal year 2018.

At March 31, we had $1.17 billion in gross debt and $341 million in net debt.

Our balance sheet remains strong with modest debt levels.

At March 31, total assets were $3.4 billion and net equity was $1.85 billion.

And with that, I will hand the call back to Agnes.

Thanks, Brett.

We will now turn to Q&A.

(Operator Instructions) Mariama, we are now ready for the Q&A portion of the call.

(Operator Instructions) Joanne Wuensch from BMO Capital Markets is online with a question.

This is Matt Henriksson in for Joanne.

Our first question is with regards to the current environment for the CPAP treatment adherence, is there any commentary that you could give on the overall market, both at a patient level and just general trends?

Thanks for the question, Matt.

With regard to adherence of patients on therapy, there's been many changes over the years traditionally in the peer-reviewed published press in the '80s, '90s and early 2000s.

Adherence rates in the 50% to 60% were published in the literature, particularly with our connected care and digital health solutions, particularly AirView and most recently, myAir patient engagement apps.

We have now peer-reviewed and published clinical data showing up to 87% adherence when patients are using some of our digitally enhanced cloud-connected devices and engagement apps such as myAir.

So there's really a revolution in patient adherence happening through connected care and digital health to get to those 80%, close to 90% adherence rates, and it changes the game.

It's better for patients.

It's better for their doctors.

It's better for the health care system because the patients who use therapy are less frequent flyers into hospitals, so we think it's good for the overall system.

Okay, that's great.

And then just kind of general trends in the market.

How are you seeing the market growth rates?

So Matt, we see the global respiratory medical industry growing in the mid- to high single-digits, with masks growing at the high end of that and devices growing at the low end of that.

And that's where we see it broadly, globally and maybe slightly ahead of that in the U.S. or slightly behind that in Europe, depending on some seasonal and economic factors.

But those are the general growth rates, in the sort of mid- to high single-digits.

Steve Wheen from Evans & Partners is online with a question.

I was wondering if you could comment, Brett, just on the gross margin and the various components that are contributing to that.

I guess I'm a little surprised with the guidance for fourth quarter, that it is going to be stable on third just because you are getting the benefit of that mix shift.

So what you're anticipating might be coming through to dilute some of that.

Yes, I mean, Steve, we're still -- I mean, as Mick said, we expect to kind of be back ordered or basically our supply running ahead of demand, and we've got capacity there, so that sort of comes through in Q4.

But then I think there will be some ramp-up phase within the market.

The other thing, I think in the Q4, we'll still be facing some headwinds in things like airfreight and so on, where we've really been -- we'd sort of scramble to catch up and fill the [train] a bit.

But that will probably -- that will tend to moderate a bit into Q4 as well.

Just some of those factors, I think, that we said looking at the short term, we're kind of comfortable where we are.

Clearly, we're looking at mask trajectory to the extent you get outperformance in mask growth in a relative sense, and certainly, that would support improvement in gross margins.

But we're taking more of a short-term view on just on the current guidance on that given a couple of headwinds around things such as airfreight that we'll have to deal with, I think, through the quarter.

But then expect that we get -- we see that mask growth, and certainly, that will be supportive of the gross margin going forward.

Yes.

So the airfreight cost is going to be enough to offset, even in today's quarter result, the mix shift should have been more favorable, I guess.

So is there any other cost other than freight (inaudible)?

Yes, I mean, I'll think through -- yes, just got to think through a little bit.

We've got -- certainly, we've seen a big stabilization in product mix compared to what we've seen.

With some of the big mix shift before previously, don't forget we had device growth, which was huge, right?

So we might have had spreads in those growth rates of 20% or 30%, so that really did exaggerate the impact on product mix.

So you'll certainly see some benefits through product mix, but you'd need to see quite differentiated growth rates to see sort of massive movements, I guess, in that product mix.

So it will certainly be positive, but you just -- we have to look at the relative growth rates that we get through FY18 as we kind of ramp through the new product range and then kind of form a better view after we see kind of true trajectory, I think, on the new masks.

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

Just want to clarify that you are in fact backordering to the fourth quarter, and just another question on the masks, just when we might expect to see a 20 series nasal pillow mask?

Thanks for the question, Andrew.

Yes, we were on back order in a number of the SKUs throughout Q3.

As we predicted 90 days ago, we said we would be throughout Q3 and would -- getting supply ahead of demand in Q4, and we're reiterating that model.

We -- still we're on back order on some of the SKUs at the end of Q3, but we are well on-track with the factories ramping up their manufacturing to get supply ahead of demand in this current quarter we are in Q4.

As Brett said, that comes with the cost of some airfreight but we think getting patients this technology needs to happen and we're willing to invest in the temporary airfreight cost to make sure that happens and we can get off the back order this quarter and get ahead, get our supply ahead and get the supply chain catching up and look for the benefits from that throughout 2018.

To your second question, with regards to future products, we don't talk about products that are not yet released nor the timing of those.

I'm very happy to talk about the product we released.

We talked about launching this week the ResMed AirMini, but we won't talk about product pipeline, products that are not yet released.

Sure.

And just my quick follow-up just on -- with the U.S. tax reform announcement, just any thoughts around repatriation capital?

Well, I maybe have a first answer to that and hand over to Brett.

Well, look, we think it's good for business.

If we design a product in Sydney, Australia and manufacture it in Singapore and sell it in France, we don't think we should be -- have extra tax on that money if we want to reinvest it in the United States.

And so we think some of the opportunities to allow companies to invest some of their cash in the U.S. is a good policy potential.

Obviously, you've got to see that it can get through Congress and actually become law.

But if there are some areas of tax relief for us to reinvest funds into, say, our Atlanta manufacturing facility or our Los Angeles, California motor design and manufacturing facilities and beyond that, our software engineering capabilities in San Diego and Atlanta, Halifax, we would absolutely consider bringing more funds into the U.S. and North America.

Brett, anything to add on that?

No, I think it's a good summary, Mick.

I'll just say that I think, yes, and we think that in principle, we'd be pretty happy with the repatriation tax.

But I think the key would be what sort of rate they attach to that repatriation tax, which is probably a lot of negotiations then to what they come up with.

But I think in principle, we think it is good.

It could be an opportunity for us but, of course, we just have to wait for kind of the detail before I get too excited, I think, at this stage.

Margaret Kaczor from William Blair is online with a question.

Maybe the first one for Mick, please.

Can you talk through the drivers of your -- of overall domestic device market growth or demand?

How that might vary from quarter-to-quarter based on product launches?

And maybe as you look out, what can ResMed do to bring that domestic device market growth into the mid or high single digits and over what time frame that can happen?

Thanks, Margaret.

Yes, as you saw in the quarter, our Americas device growth was 3%.

Masks was stronger at 8-plus percent.

And overall growth, excluding Brightree was at 5%, so well in that sort of mid- to high single digits in the overall category.

Look, what are the catalysts for moving those numbers up?

There's many.

We're doing a lot of sleep wellness and sleep awareness work with Pegasus Capital and Dr. Oz, and you're going to see a number of sleep awareness promotions through our SleepScore Labs investment with those folks, and a lot of getting out to the 40 million people who are suffering every night and snoring and not getting diagnosed as opposed to the much smaller than that, 5 million, 6 million, 7 million, 8 million who are already on therapy in the U.S. And we will not just be doing that in this country, we'll be doing it globally on sleep awareness and sleep wellness.

The other way that we are looking to drive device growth is obviously by moving our noninvasive ventilators and life-support ventilators.

The whole connected care revolution that happened in sleep apnea will happen in COPD, a much more severe disease state, and that will allow us to bring some high-margin device growth in life support vents and noninvasive vents.

Those are some upside in both of those areas.

And the third and final area, I'd say, is taking this idea of this travel CPAP niche and making it a little more mainstream.

I think bringing ResMed's technology to something that's the size of the water bottle in front of me, and you can have a look at the videos, we've now released the size of this product.

I mean, it's about 5 inches by 3 inches by 2 inches.

I think having the world's smallest travel CPAP with ResMed's technology and no water-added humidification and ResMed's order set capability will grow that relatively small niche now to be significantly larger and allow ResMed to really drive that category.

So those 3 things are potential catalysts for us to drive up that device number.

And I got to tell you, we plan to do it.

And in terms of the timeframe, I think, was the tail end of the question.

Yes, so, look, all those things are going on in parallel and have different time frames.

The sleep awareness is an ongoing one that we're planning over a long-term period.

The connected care into COPD, again, is a long-term.

We call it Horizon 2, Horizon 3 strategy, but it's incredibly a strong, long benefit.

Reasonably quickly, we'll start to see how well the travel CPAP niche grows.

And it's starting from a very low base of what's out there already, but we're really excited to play in all 3 of those.

And just as a follow up maybe to the overall company growth, can you give us an idea of what the organic Brightree growth was in this quarter?

And maybe provide some context about what maybe you've been surprised by about Brightree in the last few months in terms of leverage points, owning the business and really, its ability to drive stronger overall company revenue growth into that high single-digit range?

Yes, sure.

Brett, do you want to break out the numbers as for the U.S. with and without Brightree and what Brightree's growth was?

And then I'll go into some of the more strategic elements of how we're leveraging that.

Sure.

Yes, I -- we mentioned on, I think, and that was on the -- really, on the Brightree revenue, the third quarter revenue for Brightree was $35 million and tracking quite nicely.

And that's tracking low double-digit growth for the Brightree business this quarter.

And that took, in essence, our Americas growth without Brightree at 5% to Americas growth with Brightree in the double-digits, a really strong 18% top line growth there in the Americas with Brightree.

How we're looking at that strategically, I mean, obviously, we have full separation of the commercial teams on go-to-market on the sales teams on Brightree versus ResMed.

But as we look at the broader market, having a SaaS capability to map workflows, reduce the costs of document management, inventory management, physician and prescription management and helping even with revenue cycle management for our customers, has really been an advantage for ResMed, an advantage for the customers, the homecare customers that are partnered with us, in allowing efficiencies and freeing up cash flow that they can invest in better patient care.

And then tying it to the digital side on the back end, where we run AirView and myAir and are able to drive adherence rates from 50%, 60% to 80%, 90%, there's just huge upsides in terms of the quality that, that homecare provider provides to their customer, the doctor and their customer, the insurance company in terms of keeping those patients out of hospital and happy for the doctors and the payers.

And also for the patients themselves.

And so it's kind of like altruism is linked to the profit motive when you're able to drive adherence up, and we're really excited to be able to do that with our connected care solutions.

Chris Kallos from MorningStar is online with a question.

Just had a question about cardiology.

You mentioned the CAT-HF study and that there's some promising results in the subgroup analysis.

What are the next steps in this area?

And what can we expect on sort of the clinical trial fronts?

Yes, so we're really excited about the CAT-HF analysis on heart failure with preserved ejection fraction.

Obviously, that study was across both HFrEF and HFpEF.

But on the HFpEF side, the heart failure with preserved ejection fraction side, having a statistically significant improvement was very strong and getting published in JACC, we think, is a major accomplishment.

But it's the start of a longer-term journey, as you know, in this space.

We have a number of follow-on clinical analyses that we are going to work on there.

Professor Chris O'Connor, who was working with Duke and now with the Nova Heart Institute in the Washington D.C.-Delaware area is absolutely -- and all the -- not just the primary investigators, but all the investigators that are working on CAT-HF are really excited about follow-on work.

We're looking at other studies in Western Europe where there are some very similar results where ASV can have a very good impact on heart failure with preserved ejection fraction patients.

But these are long-term investments.

They're not, this quarter, next quarter, but over the next year or 2, 3, we think that, that group, which is about half of all heart failure patients, that there's some really good upside in terms of keeping these patients out of hospital with no other pharmacological or device Class 1A guideline therapies.

We think that's just an opportunity that we have to pursue, so we're going to be pursuing that over time.

And we'll give updates on a periodic basis.

Great.

And perhaps could you give a breakout of where ASV now stands in the mix?

Sure.

Well, ASV, we don't break out the category specifically, but I will say the general trend, it has absolutely turned around from the nadir, if you like, from SERVE-HF a quarter or 2 or 3 ago to strong, strong growth and in line with and ahead of some of the growth of the other categories, particularly in Europe.

We're seeing the European team really double down on ASV for treatment-emergent central sleep apnea.

That study that we did on over 200,000 patients, think of that, 200,000 patients in a clinical study using the digital health and connected care.

That brings 2 things to bear.

Not only the use of digital health and connected care for clinical studies that can get published but also a much larger population base that can show ASV can be better than CPAP for treatment of those types of patients in terms of adherence.

So watch this space.

There's more to come on combining digital health and clinical studies and looking at therapies like ASV, life support vent and noninvasive vents.

Will Dunlop from Merrill Lynch is online with a question.

Just on cash flow.

Your DSO and inventory days both jumped up this quarter sequentially.

Just wondering if that's a bit of a blip and you expect that to normalize the end of 4Q?

Yes, hi, Will, it's Brett.

Yes, if I look, December was probably -- if you look at December, it's probably better than normal quarters.

That was -- it's probably -- it was a bit -- well, a pretty good position on receivables.

If I go back year-on-year and look at last year, we're pretty consistent on DSOs, for example, on receivables.

So I think it's more of a, December being particularly good rather than March been particularly bad.

So I think it's okay there.

I think that will normalize in the Q4.

And there's just that few other onetime payments had been made through the quarters, which pushed our cash flow down a bit lower in March than what you'd typically see, but do expect that to normalize into Q4.

Okay.

And just on the Europe's fledgling growth rate of 3%.

I mean, do you think you lost market share in the quarter?

And if so, were there any one-offs or any reasons, any contracts perhaps as a result that led to that?

Thanks for the question, Will.

Actually, we think we held share.

In fact, the incredible growth of share that we've achieved over the last 18 to 24 months since the launch of AirSense 10 and also Air Solutions and the AirView platform.

We took very strong share with strong double-digit growth, but we think the market growth is mid- to high single digits for the whole industry but flow-generated growth is below that mid to high singles and mask growth is at the high end of it.

So we think we held the really strong share that we've gained these last 4 to 6 quarters.

But I'll hand to Jim Hollingshead, who's here, our President of the Americas.

Any further detail with regard to share and holding and growing that?

Thanks, Mick.

No, I mean, I think Mick summed it up really well.

Our market data shows that we held our very strong share position in the market in flow gen, which means that we're -- in the quarter, we grew about in line with market.

Matt Taylor from Barclays is online with a question.

I just wanted to follow up on that flow gen thought.

I mean, you called out a tougher comp but you had a much tougher comp last quarter, it still grew over that with the flow gens.

Was there something new in the market that would have taken that growth rate down?

I mean, I think you still have the best solution.

But just curious why we saw that change in the growth rate?

Yes, thanks, Matt.

Yes, it's really a return to market growth rate there, which again, ResMed, we don't accept market growth rates.

We like to drive ahead of that.

Having 6 to 8 quarters of outpacing the market to have a quarter where you're at pace with the market, I think, is acceptable for a 90-day run.

But we don't want to have that -- there, just that market growth rate forever.

And I answered a little earlier with Margaret's question of 3 areas that we're looking to through getting more patients into the funnel, through driving device growth in COPD and neuromuscular disease and Duchenne muscular dystrophy for our noninvasive vents, life support vents and POCs.

But then also launching the world's smallest CPAP to drive, really, a cash business through our homecare providers where we have a retail business from our homecare providers to patients to grow a really exciting niche.

65% of sleep apnea sufferers travel more than 4x to 5x a year in the U.S. And right at the moment, half of them don't take their device because it's too big.

I think that whole area is a really exciting one for us to grow.

So look, we don't want to sit back and just accept market growth rates of 3% to 5% or 5% to 7% or 7% to 9% on the various categories.

We want to drive well-ahead of that and we have a lot of strategies to do that.

We've had a great 6- to 8-quarter run of incredible growth based upon our prior strategy of changing the basis of competition from smaller, quieter and more comfortable to smaller, quieter, more comfortable and more connected, and we're not done with that.

And that growth and that share we gained, as you saw in the quarter, is very sustainable because we're able to have customers get very involved in the workflows of AirView and really want to keep it as part of their business.

So we think there is a lot of opportunities to come.

And as I said earlier, watch this space as we continue to grow this market.

And then just one follow-up on the P&L.

I was just hoping maybe Brett could clarify what is in kind of the other income there.

You have $3.5 million.

Can you just parse that out?

Yes, that's predominantly FX, Matt, or FX gains on basically our hedging contracts and so on.

So that rolls through other income.

Matt O'Brien from Piper Jaffray is online with a question.

JP on for Matt.

I wanted to dig into a comment that Brett made earlier about on the pricing side of it.

It seems like maybe the pressure there has picked up a bit.

And I just wanted to dig into it a bit more on the mask, for the generator side?

And is it from competition picking up on pricing?

Or is it just the DME customers maybe feeling a little more of the competitive bidding squeeze rolling out through this year?

Thanks for the question, JP.

I've got to tell you, competitive bidding has been in play for 7 years now, 28 quarters, and there was no new news in the last 90 days and so we've seen relatively stable pricing within the U.S. geography.

And frankly, also in the other 99 countries we do business in, we haven't seen any major changes to pricing.

I'll hand to Jim, any further color within the U.S. market with regard to pricing effects of CB?

Well, competitive bidding and the reimbursement environment has been an ongoing challenge for our customers now for several quarters as I think everybody knows.

But there was nothing unusual in the quarter related to pricing.

We see about the same annual downward pressure on pricing as we've seen in the category for a long time.

Sure.

And then one more for Brett, if I could.

Just on operating cash flows, if you look at it year-to-date, well, I guess for you guys, for the last 9 months, it's down probably 32% from where you were last year.

It looks like you got more getting eaten up in inventory in AR and I'm just trying to figure out why that is, especially now that you have Brightree involved?

Sure.

Yes, I mean, we had -- yes, I mean, last year's cash flow was -- you could compare that to the year before, they're very strong cash flows, and we're working through getting some good improvements in working capital balances.

To get onto this year, I think, on the receivables side, we've seen good revenue growth that has been driving on the receivables and working capital -- working balances around inventories and so on is looking to - really kind of rebuild through with the new -- with a lot of new product launches and so on that had been happening.

So yes, just I think just a sort of a little bit of a building in working capital work out of what was a kind of low base, I guess, the year before.

So not too much there.

The underlying earnings are pretty strong.

That's just a matter of keeping on top of working capital balances, really.

If we do that, we'll draw some of the cash flow so -- good cash flow but acknowledge, it's a little bit lower than where we are last year where we had some very strong cash flows.

Sean Laaman from Morgan Stanley is online with a question.

Just 2 quick ones.

I'm wondering if you could give us some granularity on your oxygen business in the U.S. and how you're progressing towards the - capture of the COPD opportunity?

Thanks, Sean.

I'll hand to Jim Hollingshead to walk through the market development for our POCs in the U.S. market and maybe we can talk a little later about where we're going in Europe with that, but I think for this quarter, lets focus on the U.S.

We think the POC business is off to a solid start in our hands.

We've made some solid improvements for that product line.

There's an ongoing shift away from canister oxygen to other delivery methods, including especially portable methods like POCs, so the demand in the market remains strong.

And we think that there is tremendous upside in that market as we continue to develop the product, make it a ResMed product and bring connectivity to it.

So we're very bullish on the outlook for that business.

Okay.

And on the COPD and vents, yes, any commentary there, Mick?

Yes, look, clearly, COPD is a huge market development opportunity for us globally, 200 million patients worldwide, many of them in some of our high-growth markets.

As we start to grow, particularly our China and India business, COPD will be a major play for that, I think, in those fast-growing markets to avoid some of the sick care system where COPD patients get really sick and then appear at the hospital on a regular basis.

Within many Western European countries that we're working on keeping them out of hospital with our cloud-connected devices, we can reestablish models of out-of-hospital care for those patients.

So in developing markets or in fast-growing markets, like China and India, it's about setting up systems that avoid the current sick care, hospital care system in some of the Western world.

But then within the Western world, it's about looking at things differently, trying to find ways to use connected care to predict when patients may have exacerbations and have, through chronic disease management, physician or nurse practitioner contact with the patient to prevent a hospitalization.

We think that's a huge opportunity in the long term and something that we're absolutely focused on.

And in the short to medium term, we have home health, hospice and home nursing capabilities within Brightree and beyond in the ecosystem, which we think can be leveraged to help keep those patients out of hospital, too.

So sort of almost 3 phases of COPD growth, one in the fast-growing areas of China, India, Eastern Europe, developing new models; two, doubling down on our chronic disease management and connected care play for COPD; and three, some longer-term models to leverage our out-of-hospital software-as-a-service capabilities.

David Low from JPMorgan is online with a question.

Mick, if I could start with the travel CPAP.

Clearly, it's just being launched in the coming quarter, but could you talk about how big do you think that opportunity could be?

David, I'll start with this and I'll maybe hand off to Jim because the primary -- first market launch will be in the United States, where there's strong demand for this.

ResMed has been in business for 28 years next month, and I've worked at the company for 17 years.

And almost every time I've talked to a patient, they've asked me, when is ResMed coming up with a travel CPAP solution?

I've seen the stuff out there, but it's not what I want.

I want ResMed quality.

And we spent a long time making sure we could miniaturize this right and that we could get humidification technology miniaturized and able to be used on-the-go and we could link it to the world's best masks and ours.

And we've got there.

And I've been personally using this ResMed AirMini for 12 months, and it's changed -- it's totally changed my travel life.

Whether I'm on a plane, in a hotel, wherever I am, I get AutoSet, I get humidification and I get my nasal pillows, my P10 with me.

And so right at the moment, to your question around sizing, it's a small niche.

It's a sub-1% of the device market niche.

We think we can grow it very significant multiples of where it is now, and we think ResMed can have a very strong share in that with the smallest, quietest, most comfortable, best connected, best humidified product in the category.

Having said all that, we're in controlled product launch.

I'm obviously very excited about the opportunity as a patient and a user.

But I'm also excited as a business manager for where this could go.

Jim, any further thoughts about AirMini and how it can grow the category?

Yes, thanks, Mick.

I think it's actually difficult to predict how big the market can be based upon the current market.

We think that the market is underserved.

We know there's pent-up demand.

And Mick referred to this earlier.

There are millions of patients who are on CPAP therapy.

The average CPAP patient, according to our research, takes 4 trips a year, right?

So there's millions of people who are traveling.

Half of them tell us they don't take their CPAP with them because it's too inconvenient, right?

And so that's millions of potential patients who are looking for a solution.

But what they're waiting for is a solution that's a ResMed quality solution.

And we feel very confident in the AirMini offering.

It's not only a terrific small in-your-pocket AutoSet, it comes with our best and latest masks with in-line waterless humidification.

So when you're traveling, you don't have to mess around with water.

You don't have to go worry about finding distilled water and those things that patients have to do.

And it's managed -- it has a simple on-off button, so that it can be managed without anything but an on-off for the patient.

But it also has -- it's also managed and reports that data to an app that is based on our very successful myAir app, and so the patient can look at their own data, can manage their own therapy, et cetera, in that app.

So it's a -- it is a completely next-generation offer from a travel PAP point of view.

And as Mick said, one of the most frequent questions I'm asked is, "When are you guys coming out with a travel PAP?" So we think there's big demand.

It's hard to predict, but we're excited about it.

Great.

And just my other question, just on the masks, the 9% growth was a good outcome given some of the feedback we had about and the commentary from yourselves that they were -- the products are in back order.

Do you have any sense as to what those numbers could have been if you hadn't been on back order?

I mean, how big of a drag was the back order on the growth rate?

Yes, it's really difficult to predict exactly what that 9% could have been if we had, had no back order.

I know it would have been above 9%, so it's 10%-plus.

I don't -- hard to predict exactly what it was because we weren't able to ship those products.

I do think it's a huge opportunity for us as we go into Q4 to get supply ahead of demand.

You never want to be behind, but it's one of -- of all the problems to have, it's probably one of the better ones.

But we don't even want to have that problem so we're going to eliminate that here in Q4.

And then as we go throughout 2018, we'll be completely supply unconstrained and be able to meet every piece of demand for the N20 and F20.

And as I said earlier, we're really excited about the technology InfinitySeal and broad fit range and its capability to get to patients there.

I think we are now at the 60-minute mark, so I'll probably hand back to Agnes or -- okay, I'll just close up, all right.

Thanks.

So in closing, I want to thank the more than 5,000 strong ResMed team as they've been diligently driving execution of the N20 and F20 launches and exciting launch of the ResMed AirMini as well as our future pipeline of innovative products.

Our team continues to demonstrate unwavering commitment to changing the lives of millions of patients.

We remain focused on our long-term goal of improving 20 million lives by 2020.

I want to thank the global ResMed team, and we're really excited about the future innovations and strategies for what we can do with connected care and digital health for 2025 and beyond.

Thank you, and we'll talk to you in 90 days.

I'm going to hand over to Agnes.

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 at investor.resmed.com.

Mariama, you may now close the call.

This concludes ResMed's third quarter of fiscal year 2017 earnings live webcast.

You may disconnect.