瑞思邁 (RMD) 2018 Q1 法說會逐字稿

Welcome to the Q1 Fiscal Year 2018 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 can cause actual results to differ materially from those in the forward-looking statements are detailed in filings made by ResMed with the Securities and Exchange Commission.

I will now hand the call over to Mick Farrell.

Thanks, Agnes, and thank you to all of our shareholders that are joining us today as we review financial results for the first quarter of fiscal year 2018.

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

I will then cover some business highlights and discuss some key announcements this quarter.

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

We are very grateful to our global team for a very strong performance this quarter.

We achieved double-digit global revenue growth, led by sales of our software solutions, our mask systems and our sleep apnea devices.

At the bottom line, we grew operating profit 12%, and our diluted earnings per share was $0.66 on a non-GAAP basis.

We are proud of this solid top and bottom line performance from our global ResMed team.

Brightree's growth continues to be strong at 15% year-on-year, inclusive of tuck-in acquisitions.

We are making great progress as we expand our connected care offerings for all of our customers, creating efficiencies and improving patient outcomes.

Now let me cover some geographic business highlights.

The U.S., Canada and Latin America teams achieved solid revenue growth at 11%.

These results were fueled by strong growth in devices and masks as well as continued double-digit software sales growth.

Sleep apnea patient volume continues to grow steadily.

Growth in devices in these countries was 8% for the quarter.

It has been over 3 years since we launched AirSense 10 and Air Solutions cloud-based software, and we continue to grow our device market share, as home care providers and physicians find ongoing sustainable value from our connected care solutions.

The mask and accessories category grew 13% in the U.S., Canada and Latin America countries this quarter.

We have seen good demand across all mask categories.

The AirFit N20 and the AirFit F20 masks are performing well, and we are able to fully supply the fast-growing demand for these products.

Our brand-new AirTouch F20 is in its very early days and has high patient comfort ratings right out of the gate.

Device sales in the combined European and Asian countries were up a very strong 9% this quarter on a constant currency basis.

ResMed France achieved very strong device growth, catalyzed by the announcement of increased reimbursement for tele-monitored sleep devices relative to non-cloud-connected devices.

We expect to continue our connected care value creation for our customers across Europe and Asia Pacific as we expand digital health and connected care globally.

Across Europe and Asia, our teams achieved strong mask growth of 15% this quarter.

We expect ongoing growth based on continued adoption of our recent mask technology and positive customer feedback across the spectrum: patients, physicians and home care providers.

I'll now take a few minutes to update you on our Three Horizon 2020 growth strategy, and then I'll hand the call over to Brett.

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

We now have over 6 million patients monitored with AirView software and over 4 million patients monitored with 100% cloud-connected medical devices on their bedside tables.

In addition, we are seeing over 1,300 new patients sign up for the myAir patient engagement app every single day.

It turns out consumers love seeing their own data.

We are expanding globally with our connected care solutions, translating the value creation that we have brought to our customers in the U.S. over to France and across Europe and beyond.

In September, we featured our recently launched travel CPAP solution, the ResMed AirMini, at the European Respiratory Society conference in Milan.

There continues to be demand and interest for a category of small, travel-friendly, second-use CPAP devices that patients are willing to buy with their own cash.

We are focused on growing this category all around the world, with particular success in existing cash-pay markets, such as Australia, New Zealand, Singapore, Canada and the U.K.

This quarter, ResMed and Brightree launched another integration solution.

Together, we provide a seamless solution for all home care providers through automated resupply enrollment for patients managed by both Brightree Connect and AirView software.

With this enhancement, AirView automatically alerts Brightree Connect once the patient has achieved compliance criteria, so that the patient can be automatically enrolled into the Brightree Connect resupply program.

This feature helps our home care customers to ensure that every sleep apnea patient is getting the supplies that they need in order to have the best possible therapy experience, while saving the customer labor costs through software automation.

This enhancement is the latest in a growing list of time-saving features for our customers that maximize both patient benefits as well as home care provider benefits.

Brightree also launched ConnectPRO at the Medtrade industry conference just earlier this week.

ConnectPRO is a comprehensive solution that combines all technology services and data analytics that are necessary for our home care customers to efficiently manage resupply workflows and to improve patients' resupply engagement.

Our connected care strategy is also having a positive impact on the clinical front with ongoing publication of studies.

The American Journal of Respiratory and Critical Care Medicine, known more simply as the Blue Journal, published a study run jointly by ResMed and Kaiser Permanente, which reported that remote monitoring improved patient adherence to sleep apnea therapy.

The key takeaway from the study was that telemonitoring of sleep apnea patients with ResMed's algorithms resulted in an increase of therapy adherence of 22% to 37%.

This is statistically significant and also clinically significant data.

We look forward to more publications using ResMed's database of de-identified aggregated data.

We are transforming big data of more than 1 billion nights of sleep metrics into actionable information that can improve clinical outcomes.

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

Our cloud-connected noninvasive ventilators and life support ventilators continue to grow globally, and we are building our connected care strategy for COPD.

We relaunched our portable oxygen concentrator called Activox with improved quality and performance at our U.S., Canada and Latin America sales conference during the quarter.

We expect steady growth of Activox throughout the year and beyond.

Watch this space for future enhancements of our connected COPD offering.

We are driving awareness of key clinical studies that have shown improvements in COPD mortality and reductions in COPD hospitalizations, such as our home oxygen therapy, home mechanical ventilation study called HOT-HMV.

Our market access teams are working to change the standard of care for COPD in key countries around the world to drive future growth in noninvasive ventilation, portable oxygen concentrator usage and life support ventilation businesses to serve COPD patients.

Our third horizon of growth encompasses a portfolio of opportunities, including sleep health and wellness, chronic disease management models and out-of-hospital software businesses.

This quarter, Brightree announced the appointment of Robert Dean as General Manager of our home health and hospice business within Brightree.

This continues to be a very exciting area for us, with lots of long-term growth potential.

We are expanding out-of-hospital software offerings as we continue to grow and acquire software-as-a-service businesses for home health, home nursing and other alternative care settings.

We've had a tremendous start to the fiscal year, and we are well-positioned to grow revenue throughout fiscal year 2018 and beyond.

We are encouraged by the success of our new product launches with the AirFit N20, the AirFit F20, the AirTouch F20 and the ResMed AirMini.

We continue to work on a pipeline of new products and enhanced connected care solutions for sleep apnea, COPD and other critical chronic diseases.

We have positioned the company for long-term top and bottom line growth for 2020 as we continue to execute our strategy and action, drive operating excellence and pioneer market-leading connected care solutions.

We have improved over 12 million lives over the last 12 months, and we continue to pursue the Holy Grail of health care: improving patients' quality of life, slowing chronic disease progression and reducing overall health care systems costs.

With that, I will now turn the call over to Brett, our CFO, 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 first quarter of fiscal year 2018.

As Mick noted, we had a strong quarter.

Group revenue for the September quarter was $523.7 million, an increase of 13% over the prior-year quarter.

In constant currency terms, revenue increased by 11%.

Taking a closer look at our geographic distribution, and excluding revenue from Brightree, our sales in the Americas were $296.6 million, an increase of 11% over the prior-year quarter.

Sales in combined EMEA and Asia Pacific totaled $189 million, an increase of 15% over the prior-year quarter.

In constant currency terms, sales in combined EMEA and Asia Pacific increased by 11% over the prior-year quarter.

Breaking out revenue between product segments.

Americas device sales were $157.9 million, an increase of 8% over the prior-year quarter.

Masks and other sales were $138.7 million, an increase of 13% over the prior-year quarter.

The revenue in combined EMEA and Asia Pacific device sales were $128.3 million, an increase of 13% over the prior-year quarter or in constant currency terms an increase of 9%.

Masks and other sales were $60.7 million, an increase of 19% over the prior-year quarter or in constant currency terms an increase of 15%.

Globally, in constant currency terms, device sales increased by 80%, while masks and other increased by 14% over the prior-year quarter.

Brightree revenue for the first quarter was $38.1 million, an increase of 15% over the prior-year quarter.

The Brightree results include 2 small acquisitions we made in our fourth quarter of FY '17.

On an organic basis, Brightree revenue for the quarter grew by 13%.

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 in the prior-year comparable, they exclude amortization of acquired intangibles and the Astral battery field safety notification expenses.

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

Now I'll turn to the rest of the P&L.

Our gross margin for the September quarter was 58.4%, lower than our prior year non-GAAP margin, predominantly due to ASP declines.

On a sequential basis, we saw an increase in gross margin, reflecting favorable foreign currency movements and improved product mix from stronger mask sales.

Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for fiscal year 2018 to be broadly consistent with our Q1 FY '18 gross margin.

Moving on to operating expenses.

Our SG&A expenses for the quarter were $143.9 million, an increase of 12% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 10%.

SG&A expenses as a percentage of revenue improved to 27.5% compared to the 27.7% that we reported last year.

Looking forward, and subject to currency movements, we expect SG&A growth rates to moderate over the course of fiscal year 2018.

As a result, we continue to expect SG&A as a percentage of revenue to progressively improve and to be approximately 26% of revenue by the end of the fiscal year.

R&D expenses for the quarter were $37.4 million, an increase of 9% over the prior-year quarter or on a constant currency basis an increase of 6%.

This increase reflects the incremental investments across our R&D portfolio.

R&D expenses as a percentage of revenue were 7.1% compared to 7.4% in the prior-year quarter.

Looking forward, and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% for the balance of fiscal year 2018.

Moving further down the P&L.

Amortization of acquired intangibles was $11.8 million for the quarter, consistent with the prior-year quarter.

Stock-based compensation expense for the quarter was $11.9 million.

Non-GAAP operating profit for the quarter was $124.3 million, an increase of 12% over the prior-year quarter, while non-GAAP net income for the quarter was $94.1 million, an increase of 7% over the prior-year quarter.

Non-GAAP diluted earnings per share for the quarter were $0.66, an increase of 6% over the prior-year quarter, while GAAP diluted earnings per share for the quarter were $0.60.

Additionally, foreign exchange movements positively impacted first quarter earnings by $0.01 per share, reflecting the favorable impacts from a stronger euro, largely offset by a stronger Australian dollar relative to the U.S. dollar.

On a non-GAAP basis, our effective tax rate for the quarter was 21.7%.

Looking forward, we estimate our effective tax rate for fiscal year 2018 will be in the range of 22%.

Cash flow from operations was $94 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital balances.

Capital expenditure for the quarter was $16 million.

Depreciation and amortization for the September quarter totaled $29.6 million.

During the quarter, we paid dividends of $49.7 million and repaid $60 million of our outstanding debt.

Our board of directors today declared a quarterly dividend of $0.35 per share.

And as previously announced, we expect to recommence our share buyback in the second quarter of fiscal year 2018.

As a minimum, the aim of the buyback will be to offset the dilution impact from employee equity grants.

This is estimated to be in the range of 1 million to 1.5 million shares annually.

At September 30, we have $1 billion in gross debt and $208 million in net debt.

Our balance sheet remains strong, with modest debt levels.

At September 30, total assets were $3.5 billion, and net equity was $2 billion.

And with that, I'll 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, BMO Capital Markets, is on line with a question.

Excellent.

I have 2 questions.

The first one has to do with adoption of the ResMed AirMini.

You were talking about adoption in the -- in certain geographies that are more comfortable paying out-of-pocket, and I noticed that United States wasn't on the list.

Can you discuss how -- which regions are more willing to get into using this wonderful product?

And why not the United States?

Sure, Joanne.

I'll start and have a go, and then I might hand to Jim Hollingshead, the president of our sleep business, to talk about how we're expanding our AirMini business.

Firstly, I'm a personal user of the ResMed AirMini and have been for many months.

And I travel all around the world with it and -- just in love with it as my new travel companion.

Literally anywhere I go around the planet, it follows me, so that I get my great sleep apnea care without having to get distilled water at Tokyo at 2:00 in the morning when I land from the direct flight from San Diego.

The adoption of AirMini in countries like Australia, New Zealand, Canada, Singapore and the U.K., where we have established cash pay channels, has been very strong, in fact, far above our early expectations.

Patients are really loving paying out-of-pocket for something that [had] provides such great care.

But I'd say in our business-to-business-to-consumer markets like the U.S., where we sell to our home care providers, and then they sell cash to patients, it's been a slower ramp-up, as those customers start to ramp up their cash businesses.

With all the changes of competitive bidding and the U.S. landscape change, our home care providers in the U.S. are loving to build their cash businesses.

And it's something they've been working on strategically for a number of years.

And we think the ResMed AirMini, along with portable oxygen concentrators, is a great opportunity for them, and we're supporting them in both of that.

But with that introduction to it, Jim, anything further to add for the U.S. or beyond?

Yes.

Thanks, Mick.

I would just add that sales of the AirMini in the U.S. are actually going very well.

I think that the comparison intended in Mick's comments is about -- on a sort of per-patient basis what the relative volume of AirMini against the AirSense 10 platform.

So the U.S. market, the AirMini is performing as expected.

We think it's launching really well.

It'll ramp.

We're in a B2B2C model in the U.S. because we're selling it through our channel partners, as Mick just spelled out, and we see those volumes growing very nicely.

It's in the markets for patients who are having to pay cash for an AirSense 10 or if they choose an AirMini, where we're seeing on a proportional basis, AirMini is being purchased more frequently.

And as my follow-up question, you spoke about patient volumes for sleep apnea patients being somewhat strong, which is quite the opposite of what we're seeing in other pockets of medtech utilization.

Can you give us an idea of what you're seeing in patient volumes and how you're measuring that?

Thanks for your follow-up, Joanne.

We don't go into the details of patient volume growth within geographies.

What I can say, and the difference may be between us and other parts of medtech is, this is a very personal experience of suffocation before therapy, and then the experience of getting that gift of breath and the life change that can happen with sleep apnea.

And taking the U.S. geography with somewhere between 40 million to 60 million Americans suffocating every night, and maybe we have 6 million or 7 million so far diagnosed and on treatment, we still have 85 -- 80-plus, 85% plus of the opportunity in front of us.

So I think that large pool of undiagnosed patients provides a regular flow into the sleep labs and into the home care providers that allows for that sort of steady growth of patients into the channel.

We've got a long way to go on that journey.

And if you go to other geographies around the world, Western Europe, 85%, 90% of the opportunity is still in front in terms of sufferers and getting them through the system.

And in our Asia growth markets, the opportunity is above 95%, 98%, 99% in some of the geographies.

So we think we're in mile 1 of a marathon here, and we're really excited about that patient volume growth continuing to grow steadily, not just in this quarter, but throughout the fiscal year that we expect ahead and beyond.

David Stanton from CLSA is online with a question.

I had a question about replenishment of masks.

And I note that you've rolled out a new replenishment system through Brightree.

Can you give us some kind of idea about replenishment growth rates, particularly in the U.S.?

That would be greatly appreciated.

Yes.

Thanks, David.

That's a good question.

Clearly, through ResMed resupply, which is part of the AirView software solutions package and part of Brightree Connect, as we talked about linking on the back end with AirView, we are really working very closely with our home care providers to make sure that every patient who wants a mask and is qualified for a mask has the opportunity to get one.

As I was saying earlier, I'm a personal user of this therapy, and you need to change this mask.

It's a piece of plastic that touches your face every day and stays on it, hopefully, for 7 hours of sleep every night.

And even with regular washing and regular drying, the mask needs replacement.

And we think there's a lot of opportunity.

We know there's a lot of opportunity to work with patients and empower them with the information that they have to be able to access supplies that they need.

So without going specifically into numbers, we can tell you that qualitatively, the pool of installed base of customers, patients, who are using masks and want to resupply them, is increasing quite strongly.

And it's a large part of our mask and accessories category.

And then, I guess, my follow-up would be, would it be fair to say that replenishment masks are growing as strong or less strong than new masks?

So David, we probably don't want to go into the specifics of each category of masks, the installed base and new patient flow and how quickly they're growing.

But if you think about it from sort of a mathematics point of view, as the installed base grows larger and larger, and we work on replenishment protocols with patients and expand them, there's some linear opportunities with new patient setup and some exponential opportunities with replenishment as you engage the patients throughout the world in all sorts of different models.

Steve Wheen from JPMorgan is online with a question.

I apologize.

Steve Wheen is from Evans & Partners.

I just had a question, just on the revenue for masks.

Obviously, a very nice step-up in mask growth, and it follows the fourth quarter where there was a bit of a hiatus just because of capacity.

Is this unusual growth rate that we're seeing in this quarter in terms of catch-up?

And therefore, it might moderate going forward?

Or how do you see the appetite for these new masks now that there's no restrictions over supply?

Yes, Steve.

As we talked about 90 days ago, we did 90 days ago still have some supply constraints that we were just leaving at the end of Q4.

Throughout Q1, we were supply-unconstrained, and we were able to meet and beat the very fast demand, as you saw, for masks throughout the world.

And if you look at the masks and accessories category, it grew at 13% on a constant currency basis in the U.S., Canada and Latin America, and it grew at 15% on a constant currency basis in Europe and Asian countries.

Look, we think that we can continue to grow masks all the way throughout the fiscal year.

There are all sorts of different changes that happen in terms of comparables from quarter X and quarter Y as you go throughout a fiscal year.

But as you think about the next 12 months and 24 months, we think the runway of the F20, the AirFit F20, the AirFit N20, so the full face and the nasal components are very strong.

And we're just out of the gate with the AirTouch F20, which is our brand-new technology, which incorporates both the LSR or liquid silicon rubber, but also foam technology.

And it's early days, but patients are really loving that opportunity.

And so we're working with our channel partners on the business side of it.

But in terms of patient acceptance, we're seeing some really good patient acceptance.

So having said all that, I think we've got a really good runway ahead for growth throughout fiscal '18 for our masks.

I don't think it's a catch-up.

I think it's the start of a steady growth pattern that we should see throughout fiscal '18, '19 and beyond.

Great.

And then just for my follow-up question.

On the SG&A side, I wonder if, Brett, you might be able to give us some color as to the major drivers of that tailing off as a percentage of revenue by the end of year.

What's driving that?

Is it legal cost-related?

Yes, if you could just give us some color as to what the major -- what's underpinning that.

Yes.

Sure, Steve.

I mean, it has been -- if you look over the last several quarters, we have -- obviously, we've been -- if you like, been a bit elevated in terms of things such as litigation costs.

But also, we launched a lot of new products.

So in terms of marketing promotion and so on, that's probably running a little more elevated as well.

And we're probably -- you're seeing -- you still see some of that manifest in Q1.

But as we work through the quarters, and obviously, we'll work -- we work as a team on this as well, we expect those growth rates to moderate or if you kind of more -- sort of more normalized, I guess, than what we've seen over the last 12 months.

And I think we have confidence that we can trim that down.

So there would be specifically a reduction in legal costs within that number?

No, I'm not -- [let that] I mean, you can't.

That's a difficult one to predict.

I wouldn't say that.

I'd say you've kind of -- it builds more -- let's say it builds more into the run rate, so to speak.

David Low from JPMorgan is online with a question.

Could I just start with, Brett, your comment with when you get when you talked on gross margins about some ASP pressure.

Perhaps you could talk whether there's anything in particular that's shown up in this quarter that's different from what we've seen in the past?

I mean, not particularly, Dave.

We've -- we -- you see every -- year in, year out, I guess, you see ASP declines impacting the gross margin.

So I guess it's just the call-out of the main impact on gross margin year-on-year.

If I look at it sequentially, it looked actually pretty good, and we're quite pleased with that uptick there on the margin.

So no, I wouldn't say there's anything unusual in that.

It's kind of more typical of what we experience in terms of ASP declines.

Okay, great.

And if I could just touch on the oxygen concentrator, the Activox, could you talk a little bit about where you think that product is positioned versus the competition?

It's been a fast-growing space.

Do you see something that now becomes a material contributor quite quickly?

Or is it something that's likely to grow gradually over time?

Look.

Yes, David, as I said in the prepared remarks, we just relaunched with the new quality and new capability and systems around our Activox system, as we've now incorporated that acquisition of Inova into our business and relaunched it really with our sales team this quarter.

I'll hand to Rob Douglas, our COO, to maybe provide some further detail on our POC business.

Sure, David.

We described some of the quality improvements, it's really under-the-hood quality improvements.

So we're very happy with those quality improvements and how they're going.

And now our customers who say use the product will start to experience those improvements.

Now the product's positioned as very portable.

It's got the longest battery life.

It's very lightweight.

It's a good performer, and we think we see steady take-up of it.

And we're patient with this product, and we're going to make sure it has really the ResMed quality and provides really good treatment for patients.

And we'll build on that.

We've got a great R&D program behind it, which of course we won't publicly forecast.

And we'll keep developing it, and we're very optimistic about it as a product category.

It's really going to make a lot of difference to a lot of patients.

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

First question for me is on the generator growth this quarter, which remained quite strong in the Americas.

So maybe you guys can give us a little bit more detail around what's driving the strength.

You've been keeping in this high single-digit range.

Is it existing accounts increasing their mix of the ResMed platform, given all of the new software offerings, just underlying patient volume?

Any additional color here is great.

Thanks for the question, Margaret.

And yes, we did see strong growth in Q1.

If you take the U.S., Canada, Latin America countries combined, we saw 8% constant currency growth in Q1.

And across the Europe and Asia countries, we saw 9% constant currency growth.

Look, we think the total market is growing in that mid- to high-single digits across the sleep market, with devices sort of more towards the mid-single digits and masks towards the high-single digits, implying in Q1 that we did take share within the device and mask categories.

And we believe that to be true.

Of course, we don't go into detail around that.

But some of the reasons behind that are -- certainly all boats are floating on the strong patient growth that we talked about earlier.

But we are taking share.

And I think the share is -- as you've seen now, it's 36 months since we launched the AirSense 10 and the Air Solutions platform.

And it's really a solution when you combine it together.

We've published data now in the peer-reviewed press that shows that we can reduce labor costs for our home care provider customers by up to 59%.

So when you have a system that can lower labor costs for your customers by 59%, it can really help them to start to say, "Not only will I try this device and try this software, but I'll double down on it, and I'll continue to invest in it." And we're seeing a lot of customers garner a lot of profit growth for themselves that they didn't take that cash and reinvest in the business for better patient care.

So we think this is really a win for ResMed.

Obviously, as you see in these numbers, it's a win for our home care provider customers that choose ResMed, and it's a win for the patients because they get better care.

They engage daily sometimes with their myAir app and check out their myAir score.

And their adherence rates moved from 50%, 60% historically in this industry up to 87% in one of our published studies and beyond that in some of our unpublished work.

So we think it is a sustainable, strong value proposition with our customers that's driving it, Margaret.

Great.

And then on the Brightree side as the follow-up, that one's chugging along as well.

You've got this low- to mid-teens.

I know some of that is the acquisitions, but how should we think about acquisitions [being offered] the rest of the Brightree installed base?

Can they -- can those be material to your growth?

And then just as you think about that underlying growth, is it new accounts or are again, those existing accounts just choosing and selecting more new offerings that you have?

Yes.

So another good question, Margaret.

Yes, as you saw in the quarter, our Brightree growth was 13% constant currency if you didn't include any of the tuck-in acquisitions, and it's 15% constant currency including the modest tuck-in acquisitions that we did throughout the year, AllCall and so on, into Brightree.

Look, yes, solid, low to mid-teen growth in our software-as-a-service business.

We think that some of that is new accounts.

Our sales team at Brightree is excellent.

Rob and I and a bunch of the team, Raj, went out there to Atlanta to spend time with the team and -- in a leadership program and looking at those top, not just sales, but development leaders and how they're teaming up, and really adopting the ResMed culture, but keeping a strong Brightree software-as-a-service culture, they're driving a really strong commercial performance.

And so we think that's sustainable, taking new account share, but also growing users within existing accounts.

We find that the HME providers who are partnered with Brightree grow.

And as they grow, they get more users.

And our software-as-a-service system users -- is paid on a per-user, per-month basis.

And so you can grow by getting new accounts.

You can also grow by helping your customers grow.

So we're doing both.

Sean Laaman from Morgan Stanley is on line with a question.

Just back on Activox, Mick.

I'm just wondering if you can give us a bit more granularity on sort of why specifically the relaunch and what you might have changed from what you were doing before to what you're doing with the relaunch.

That would be really good.

Yes.

I'll hand that over to Rob.

Yes, Sean.

As I said before, we -- ResMed's position in the market is very high-tech, high-quality in value and innovation.

As we got our early experience with the Activox, we saw a number of improvements that we wanted to make, and we've progressively made those improvements.

I described them earlier as improvements under the hood.

So they're really -- they're not new features, but they're improving the delivery of the existing features.

And we've -- as I say, we've progressively incremented them in a sequential basis.

And then we -- really looking to the absolute measure, which is our customers' response to those, to see how we go, to see -- to really put the metrics around the quality improvements and what extra value that adds.

And I can't really get granular on the exact next steps of improvements that we're coming up, simply because we don't forecast our R&D program for competitive reasons.

But I would say we've got a very strong team working on it.

We've got some great ideas.

We've still got the future that we have talked about of adding in some of our connected care capability into the system, which we believe will further improve the quality of delivery of oxygen treatment of patients, but also improve the ability of our HME customers to manage those patients and those fleets of devices as they need to.

And that -- that's all work in progress.

And maybe just a quick follow-up for Brett.

Are you able to give us a sense of what currency you might be thinking going forward for the euro and the Aussie?

Well, I'm [thinking of some rates].

I've got in this morning, and they changed on me already.

But when I was looking at that, we're sort of -- we would have been forecasting around that sort of $0.78 to $0.79 of the U.S. and around $1.18 on the euro, euro-U.

S. But they're moving around, quite a bit of volatility.

So yes, tough to [break] on that one, Sean, but that's kind of -- that's sort of what we're using as being current rates at the time that -- at the time we looked at it a few days ago.

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

Brett, could I just start with a quick question on gross margin?

Just to clarify or confirm your comments regarding the outlook for gross margin of the remainder of fiscal '18, did you say should it be consistent with 1Q '18 as a result?

Yes, Sean, I said broadly consistent.

And so I just wonder if you can give us some of the contributing points to that considering the mix seems to be improving on the mask side and just cognizant of what currency's doing.

But is there anything else?

Presumably, you'll get some efficiencies coming through in manufacturing.

So what's maybe offsetting a incremental improvement in gross margin over the fiscal year?

Sure.

And we saw -- well, and I'll just preface that by saying that we did see some incremental improvement from Q4 into Q1, and we did see -- certainly did see some improvement in product mix.

And that's been a turnaround for us.

And I guess, the expectation is that will be more of a tailwind for us as opposed to a headwind over the last few years.

So that's positive on that.

I mean, there's a number of factors playing out on ASP declines, FX, manufacturing procurement efficiencies and so on, which we do expect to get over the course of the year.

But the product mix and how we're looking, I guess, the portfolio's a little more diversified now as well.

So that plays into trying to look and predict on gross margin as well.

So it's all in the mix.

I guess, the other thing that I would say is that the stronger Aussie on a sequential basis is going to hurt us going into Q2.

And essentially, I'll factor that in as well.

So that would be a headwind for us going in sequentially.

So let's [fact] inclusive of that.

So some of the under -- other underlying trends, I think, are there and are positive, but there could be a few going against us, particularly on the FX going the next quarter.

But -- it's broadly consistent.

I guess, what we're saying is we're comfortable with that margin around where it's at.

We're seeing good growth across both devices and masks, which I think is really showing the strength of the business and a good diversified portfolio.

So I think it's going to -- if we -- with that sales growth, we bring good gross profit dollars.

And I think that's looking in good shape for us going forward.

Andrew Goodsall from UBS is online with a question.

Just in the U.S., we've seen quite a consolidation of DMEs over the last few years.

I'm just trying to get a sense of whether you're seeing any pressure on prices, as I guess, the businesses go into the hands of larger players.

Thanks for the question, Andrew.

Clearly, over the last 3 to 5 years, there has been some consolidation in our U.S. home care provider base, still around 5,000-plus home medical equipment providers in the U.S. So quite a large and diverse group of local mom-and-pop, regionals as well as national players.

And we partner with people across that spectrum.

As I look at the market, I think we're seeing a relative settling of changes in reimbursement, some of those big step-changes that happen in the early phases of the U.S. government CMS program to get in line with the private payers.

And now we just have a sort of steady program going forward.

And I think a pretty broad view at CMS that actually investing in sleep apnea care reduces long-term costs for the government.

And we're certainly, as I sit on the AdvaMed board of directors, we definitely spend time in Washington letting Washington know that medical devices, as an industry, is able to lower long-term costs by keeping patients, particularly in sleep apnea, in COPD, out of hospital and under better care.

So we're seeing a pretty steady reimbursement environment.

It does have reductions, but they're reasonably steady.

So I think we're able to weather that and work with our home care providers to make sure that they use Brightree and they use AirView, and they can lower their labor costs by 50%, 60%.

And that's the way to free up cash to reinvest in marketing to primary care doctors and going after the 40 million, 50 million, 60 million people who are suffocating and as yet haven't had a chance to get diagnosed, get treated and get a better quality of life.

I'll maybe just use that as my follow-up question.

I guess, just in terms of your proposition, which is, I guess, potentially higher-priced masks relative to some of the competition, but I get it, I guess, a better longer-term recurring revenue line.

I guess, just trying to understand how that's going with the -- better sales propositions going with the DMEs in terms of them thinking through the benefits of that program versus perhaps just going for low-margin -- or sorry, lower priced to improve margin initially.

Yes.

Thanks, Andrew.

I'll hand that follow-up to Jim Hollingshead, our president of the global sleep Business.

Andrew, I think on -- just on your first question, we still see consolidation in the market, but it's nothing off trend, right?

I mean, there's been no unusual change in consolidation.

And the U.S. market, as Mick said, remains very fragmented when you get right down to it, right, 5,500 roughly providers of sleep.

What we're seeing is that HME customers more and more are realizing how important it is to them and their business to resupply patients.

And so we have seen, this came up a little bit earlier in the call.

We have seen an ongoing increasing adoption of ReSupply platforms.

And our offerings, especially through Brightree, have made that a lot easier for our customers.

And so as they adopt those more automated approaches to ReSupply, they're able to grow that side of their business.

Matt Taylor from Barclays is online with a question.

So Brett, I did want to ask one follow-up on the gross margin.

You had talked in the past about mix being the biggest factor.

So I was still a little bit surprised that we didn't see more of a lift this quarter.

Can you just talk about the rest of the year, what you're expecting from [spectrum] gross margin?

And is it mainly the Aussie dollar that's holding it back from being better with this better mix?

Sure, Matt.

I mean, I guess, if you go back a little while, I guess, you've got to put in a little bit of context a few years ago when we're seeing, we're experiencing like huge growth rates in devices.

So we're talking 30%, 40%, almost 50%.

So the differential between the device growth and mask growth was very substantial back then.

So it did have a bigger impact on product mix.

So we're still seeing that product mix impact.

But obviously, it's going to be more modest when the differential is perhaps more like 5%.

So I mean part of it is, if you like, the resilience and the strength of the device growth that we're seeing, which is a very good thing.

So therefore, with the product mix, I guess, it's more modest than what you might have seen 2 years ago, which makes sense.

And I mean, the only other thing I'd add to that is if you looked at -- you go back to FY '14, right, masks are probably something like -- that masks and other category is something like 46% of our revenue.

You fast-forward to today, it's about 38%.

So it's kind of been that kind of overall change or mix as well.

So that plays into it as well.

But -- so it's still there.

The trend's there.

The improved product mix is there, but it's on a more modest scale than what you might have seen when devices were growing really strongly back in FY '15, FY '16.

And your continued devices growth a couple of years after the AirSense launch has been impressive.

And I guess, I was wondering if you thought you'd continue to grow at kind of above-market rates with just the base AirSense, and if you could comment on how material you think portable oxygen concentrators and the Mini could be.

Yes.

That's a great question, Matt.

I'll take that.

Look, if you think about it, the portfolio of devices we have is a lot broader now.

Brett's talking about the change of connected care and our sort of leadership in connected care, not only within our vertical, sleep apnea and COPD, but across the medtech sector has launched us to the #1 position in devices, in flow generators.

And that's a large ballast in the boat, to Brett's point, and a much higher percentage of our portfolio.

So GM percentage lines move less strongly, although gross profit dollars and net operating profit, as you saw this quarter growing at 12% year-on-year in OP, is really solid growth.

And that's free cash flow.

And we invest free cash flow cash back into our business.

We don't invest percentages back into our business.

And so we manage on the growth of that.

But our continued device growth will expand, and I think you can add on sort of strong, steady maintenance and growth of share, but more importantly, growth of patients into the funnel to keep device growth strong and steady.

And as you said, there's upside as you add on the ResMed AirMini, which is a brand-new category.

It's cash pay.

It's a second use, it's a travel path and it's sold -- direct in some markets.

It's sold through our great home care provider customers in the U.S. and many European countries, and we think that's a good addition.

As you said, there's portable oxygen concentrators, and there's also our growing COPD play in noninvasive ventilation and life support ventilation.

And we have now cloud-connected both of those, the NIV.

So our AirCurve 10 range and our Astral devices both now have cloud connectivity.

We're in the early days of driving our connected COPD strategy, but that's a very high-cost disease state, the #3 killer in the world, COPD, and it's the #2 cause for rehospitalization.

So we think as we look forward to 2020 and beyond, there's a lot of opportunity to have steady and growing device growth as we look forward to the longer term.

Victor Windeyer from Citi is online with a question.

I just wanted to ask a bit more about the COPD, and also -- as it relates to the device growth overall.

So just as we look forward, do you think RSA itself can continue to grow mid-single digits?

And then the COPD part of the business, if you like, is on top of that device growth, given we're relatively early in the journey there.

Or how does that sort of play out long-term?

And then also perhaps you could talk to where you think we are in terms of capturing the value out of the noninvasive bedside that we used to talk about on the Europe side.

Yes.

Thanks, Victor.

The answer is yes.

I mean, I think the sleep apnea market, as we said earlier, is growing in mid- to high-single digits, with the devices more in that mid-single-digit range.

I think we can continue to hold and grow share in the device side that will allow us to grow the sleep apnea business in that mid-single digits in the device category.

And in addition to the ResMed AirMini, which is on top of that as a cash pay, and the POCs, which is on top of that, there are the noninvasive ventilator devices.

Where we're at on that is the early stages.

There are 400 million, 500 million patients worldwide who suffer from chronic obstructive pulmonary disease or lung disease.

Many of them remain undiagnosed or undertreated.

Many of them need to get first initial drug therapy, and they need oxygen therapy, and then they need noninvasive ventilation therapy.

And as their disease progresses towards more chronic care, they need life-support ventilation therapy.

And so ResMed plans to be walking with those COPD patients along that channel.

So this is a longer-term development.

It's sort of part of our 2020 and even our 2025 strategy, as we're starting to put that together in developing our connected COPD strategy, and we'll be doing that with partners across medtech and pharma and beyond.

And so watch this space for longer-term growth there, but we're really excited about the growth in our core business of sleep apnea and our second horizon of growth in COPD and our third horizon of growth in out-of-hospital software.

And if you put them all together, I think you've got a very strong and dynamic portfolio.

Okay, great.

And then just to follow up on the cash pay channel [sweep back fod] seems that it's going better (technical difficulty) [back off] Australia stage.

Is that cannibalizing mainly the cash pay markets?

Is it cannibalizing other sales?

Or how much is there (inaudible)?

Yes.

Victor, I'll hand that to Rob.

Yes.

So Victor, our view of the travel market is it's a whole new segment.

And so it's very contributive to growth.

And when a person buys an AirMini to travel in addition to their home cpap, that's really good for them.

And -- it's a sale that we otherwise wouldn't have had.

So we'd see it very strongly contributing to growth.

As Jim said earlier, in some of the cash pay markets, there are some people who will say, "Actually, I might use that as my premium one." And we're okay with that either way.

But really, on -- as a whole, in most of the markets, AirMini is really a strong contributor.

Anthony Petrone from Jefferies is online with a question.

Maybe, Mick, a little bit on rising tide carrying all boats here.

Philips put up a pretty good print as well, high single-digit growth.

So maybe a little bit more on, is it a reimbursement thing that's benefiting everyone in the marketplace?

Is it another dynamic that whether it's in the DME channel or, again, you also mentioned reimbursement coverage in France.

Just trying to get maybe why this quarter's a little bit different from an underlying funnel/volume perspective.

Thanks for the question, Anthony.

Yes, look, I think there is some rising tide there, and that's a global mid-single-digits to high-single-digits market growth.

And so other players are growing in that mid- to high-single-digit range as well.

As I said earlier, I do think we're taking share with connected care.

You mentioned France.

There is 4 levels of reimbursement for sleep apnea therapy that starts from January 1 in France.

And the highest is telemonitored patients with adherence over 4 hours, and then telemonitored patients with 2 to 4 hours, and then below that non-telemonitored patients and so on.

And ResMed's been leading in connected care, not just in the U.S., but globally.

And we've been preparing for this type of a change.

And we're really excited that the government of France has recognized that they get a return on investment by telemonitoring patients, increasing adherence and keeping those patients out of hospital.

So we think this market is great and growing and good for all players, but we think it's particularly good for people who are looking at ways to take cost out of that channel and partner with their customers, which include the home care providers, but also the patients, like giving them their own data.

Every day, patients use their devices more.

I mean, adherence rates of 87%, it's unheard of in our industry.

And we're publishing that and getting it in the peer-reviewed press, in the Blue Journal, JAMA and Lancet, and you're going to see more from us on that.

We have 1 billion nights of sleep data in de-identified aggregated data.

And we're going to be putting clinical studies out there to show this therapy, sleep apnea therapy is very beneficial.

And we'll be doing the same in COPD as we move forward.

Great.

And then just the follow-up would be -- just a bit on working capital once again, just on a year-over-year basis.

ARs picked up quite a bit, as did inventory.

I'm just wondering, is there a reason to hold more inventory?

Is there an elongated sales cycle and the same on the credit sales?

And is there an elongated cycle there as well?

So I'll hand that question to Brett.

Right.

Thanks, Mick.

Thanks, Anthony.

Yes, on the data side, I think if I look at [their thousand] and so on, I think it's still within kind of our range that we would expect and fairly typically historically.

And it's probably a little lower maybe 12 months ago, but still comfortable with where we are on that.

On the inventory front, you're right.

We're up a little on the inventory, but it's been pretty well documented.

We were a little bit supply-constrained on masks and so on.

So some of that is kind of a rebuild into getting that right.

So you see that's kind of manifested in the inventory a little bit as well.

That's all the way through the supply chain.

So we're now in much better shape, but I guess that's reflected in some inventory build.

But going forward, I'd expect -- not necessarily come down, but I'd expect that sort of the growth would moderate as we've kind of balanced that a bit better now.

We are now at the 1-hour mark, so I will turn the call back over to Mick Farrell.

Thanks, Mariama.

In closing, I want to thank the more than 6,000-strong ResMed team for their execution on our new product launches.

This quarter, that hard work has translated into market share gains, revenue growth and double-digit 12% net operating profit growth.

Our team remains focused on our future pipeline of products and software solutions that change patients' lives and benefit all of our customers, including patients, physicians, payers and providers.

We will talk to you again in 90 days.

Thank you.

This concludes today's conference call.

You may now disconnect.