ResMed Inc. (NYSE:RMD) Q4 2023 Earnings Call Transcript

ResMed Inc. (NYSE:RMD) Q4 2023 Earnings Call Transcript August 3, 2023

Operator: Hello, and welcome to ResMed’s Fourth Quarter Fiscal Year 2023 Earnings Conference Call and Webcast. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Amy Wakeham, Chief Communications and Investor Relations Officer. Please go ahead, Amy.

Amy Wakeham: Great. Thank you so much, Kevin. Hi, everyone, and welcome to ResMed’s fourth quarter fiscal year 2023 earnings call. This call is being webcast live and a replay will be available on the Investor Relations section of our corporate website later today along with the copy of the earnings press release and the presentation both of which are available now. On the call today are Chief Executive Officer, Mick Farrell; and Chief Financial Officer, Brett Sandercock. Following our prepared remarks, Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer; and Lucile Blaise, President of our Sleep & Respiratory Care Business for the Q&A portion of the call. During today’s call, we will discuss several non-GAAP measures.

Please review the supporting schedules in today’s earnings press release for a reconciliation of the non-GAAP measures to our GAAP reported numbers. Our discussion today will also include forward-looking statements, including but not limited to expectations about our future financial and operating performance. We believe these statements are based on reasonable assumptions. However our actual results could differ. Please review our SEC filings for a complete discussion of the Risk Factors that could cause our actual results to differ materially from any forward-looking statements made today. I’d like to now turn the call over to Mick.

Mick Farrell: Thanks, Amy, and thank you to all our shareholders for joining us today as we review the results of our June quarter, the last quarter of our fiscal year 2023. Our results reflect incredible growth across our entire business with double-digit growth in our devices, masks, and software businesses. Unconstrained availability of our market leading cloud connected flow generator platforms has enabled us to continue to offer access to 100% cloud connectable AirSense 10 flow generated devices in all of our major global markets and beyond. In parallel, we are ramping up and improving the availability of our best-in-class AirSense 11 platform, which will gain further geographic regulatory approvals throughout the fiscal year and steadily increasing supply also throughout the fiscal year 2024 and beyond.

Although challenges within the post-COVID supply chain haven’t completely been mitigated yet, we expect ongoing steady improvement in component and end product supply in the quarters ahead using a combination of AirSense 10 and AirSense 11 platforms. While we remain focused on scaling production and global availability of the AirSense 11 platform, we remain on allocation for the Air 11 platform for the next few quarters. But I want to be clear on this point. With combined availability of the unconstrained Air 10 platform, we have enough devices to meet all of the customer needs that we see in major markets and globally. With the powerful combination of the Air 10 and the Air 11 platforms, we have the two best device platforms on the market.

Our strong double-digit 23% year-over-year growth in the devices category demonstrates that customers are choosing ResMed and we are delivering. Our masks and accessories business also performed at a very strong 18% growth in constant currency this quarter. Patient demand continues to drive increased adoption and utilization of our mask resupply programs, augmenting a steady cadence of new patient setups. We continue to see strong growth in both the U.S. business where provider resupply programs have augmented growth and in our markets outside the U.S. where our consumer outreach and subscription programs are also driving mass replenishment directly with those end user patients. Our teams continue to work incredibly hard to achieve these strong growth results amid a challenging industry environment where component costs and freight costs are still working their way through our inventory post this supply chain crisis.

I’m proud of the work that 10,000 ResMedians have put in every week, every month, every quarter to deliver these incredible results for the business, for our customers, for our shareholders, and ultimately for our most important customer, our patients. Let’s now briefly review updates on the top three strategic priorities for our company. Number one, to grow and differentiate our core sleep apnea and respiratory care business; number two, to design, develop, and deliver market leading medical devices as well as digital health solutions that can be scaled globally; and number three, to create, innovate, and grow the world’s best software solutions for care delivered outside the hospital, a field that we call residential medicine. In terms of our patient facing digital health platforms, adoption continues to go very well.

The feedback we hear from patients and healthcare professionals remains very positive. We are seeing strong adoption of the myAir patient app by folks using AirSense 11. In fact, it is more than double the adoption rate that we saw with our AirSense 10 platform with many, many millions of patients signing up and engaging daily on their myAir app to view their own sleep data on their own phone and to review their own therapy data. This is important as engagement with a digital health platform like myAir is directly linked to higher adherence to therapy in patients. And higher adherence to therapy is directly related to better patient outcomes, to increased resupply and to better economics for the payer and the healthcare provider with lower overall healthcare costs.

Last month, we announced and closed the acquisition of Somnoware. Somnoware is a U.S.-based leader in sleep and respiratory care diagnostics software and physician management software. As part of our ongoing efforts to improve and streamline the end-to-end pathway for patients and make it easier for sleep labs and physicians and their practices to diagnose and manage patients, we’re excited about this acquisition that complements our current ecosystem of software solutions, including AirView for providers and physicians and Brightree for home care providers. These ecosystem together will drive greater efficiency and better patient care by accelerating the pathway to therapy and with a better overall customer experience. We’re also excited about our progress across several digital health technology initiatives to further increase the value proposition for our connected healthcare ecosystem.

Over the next several quarters, we plan to introduce several artificial intelligence driven data products and capabilities on both the physician and provider facing AirView platform, as well as the patient facing myAir app. Early testing of these AI driven data products is very positive in both of these customer groups, and we will refine to the optimal digital design and then we will launch and then we will scale these products around the world. These AI driven data products provide personalized suggestions to increase therapy adherence and to ultimately improve patient outcomes as well as patient, physician, and provider experience. We will continue to invest in the world’s largest digital healthcare ecosystem that we have with over 15.5 billion nights of medical data in the cloud as we continue to unlock value from those data to benefit physicians, providers, payers, and patients.

We saw strong growth in our respiratory care business in the quarter through ongoing adoption of our non-invasive ventilators as well as our life support ventilator solutions. We’re still in the early stages of market development with some of our newer to market technologies in this category, including home-based high-flow therapy that we call HFT for treating chronic obstructive pulmonary disease or COPD in the home. We continue to generate clinical evidence and economic outcomes to support broader adoption of these technology innovations for treating lung disease in the home. We’re encouraged by the clinical results we’ve seen with our HFT trials so far, and we continue to remain very focused on addressing COPD as one of the top diseases globally for hospitalization and the number one cause of re-hospitalization in the U.S. geography.

The prevalence of respiratory insufficiency due to COPD as well as respiratory insufficiency due to neuromuscular disease continues to increase and we are focused on having low cost, high quality solutions to address this health epidemic. Our SaaS business had another great quarter with year-over-year growth of 34%. Our SaaS business growth was supported by another full quarter contribution from our fast growing MEDIFOX DAN business, as well as solid organic growth of 8% across our Brightree and MatrixCare portfolio of SaaS businesses. We’re pleased to see sustained high-single-digit growth in our SaaS business on an organic basis, driven by the ongoing strength in the HME and infusion segment, and more stability in the facility segment as patient flows have now rebounded post-COVID.

I’m very impressed by the leadership of our most recent SaaS portfolio addition MEDIFOX DAN, which is on track and meeting or beating our expectations. I’ll be visiting personally with the team in Hildesheim, Germany, this quarter to discuss the growth face-to-face with the digital health innovators there in Hildesheim who are changing healthcare and taking care of people in the lowest cost, lowest acuity and highest quality of life setting, which is very often the home. We believe this is the future of healthcare and that’s where we’re investing and that’s where we’re winning. Our customers continue to see the value of adopting technologies to improve and optimize business efficiencies and personalized care, and we deliver the best software solutions to help customers do just that.

There is pent-up demand for technology investments in residential medicine verticals, particularly as staffing shortages continue to impact the industry, particularly in nursing, but across the clinician and provider groups. This presents opportunities for ResMed’s SaaS solutions to streamline operations and create workflow efficiencies so our customers, staff can focus on providing personal care. It’s up to us to deliver for our customers and drive growth. I have confidence that our SaaS business can accelerate from these high-single-digits on an organic basis to double-digit growth on an organic basis in the mid to long-term. Our SaaS business remains an integral part of ResMed’s growth strategy. This business complements the market leading software and device solutions that we have in our core sleep apnea and respiratory care businesses.

As an important example, our Brightree ReSupply program continues to demonstrate strong synergies between SaaS and our core business, providing resupply for patients with sleep apnea, COPD, neuromuscular disease and beyond. The output of this work can be seen in our very healthy 19% growth in mass revenues in the U.S. geography this quarter. Ultimately, this work results in better outcomes for the patient, the physician, the provider, and the payer with lower overall healthcare costs. We are well-positioned as the leading global strategic provider of SaaS solutions for residential medicine globally. We have created differentiated value for our customers as well as long-term sustainable growth for our stakeholders. Here at ResMed, we are transforming respiratory medicine and residential medicine at scale, leading the market in digital health technology across our businesses.

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As we continue to scale and drive efficiencies in our operations in this post-COVID world, we continue to leverage appropriate pricing and cost reductions to drive accelerated growth in our bottom line. We are focused on driving top-line revenue and maintaining tight discipline and increasing efficiencies so that we can lower costs and ultimately so that we can accelerate our impact and our bottom line profitability, delivering even further value for all of our shareholders. As we move through fiscal year 2024, I see improvements in our business margins with geography mix, with product mix, and specifically with strong bi-level and non-invasive ventilator growth with strong mass growth and with increased software solutions growth. All these business lines are margin accretive to our growth.

I also see that the higher inventory costs and freight costs that we’ve seen through the supply chain crisis continue to work their way through our sold products and as we progress through the fiscal year, we will continue to drive the transition to AirSense 11 and we will gain regulatory approvals and we will scale production. All these factors above lead to tailwinds for the gross margin and the net margin of our business as we move through the fiscal year. I can tell you we are working furiously to drive all of the above elements with our global teams. We now have over 15.5 billion nights of medical data in the cloud, as I said earlier, and those data come from over 21.5 million 100% cloud connectable medical devices on bedside tables in 140 countries worldwide.

We continue to lead the industry in digital health and we don’t plan to stop anytime soon because there’s so much opportunity ahead of us. 7% of our revenues go straight into R&D to power our hardware and our data innovation engines. ResMed’s mission and key goal remains crystal clear. We will improve 250 million lives through better residential healthcare in 2025. This patient-centric mission drives and motivates ResMedians every day. We made excellent progress towards that inspiring goal over the last 90 days and during the trailing 12 months, we have improved over 160 million lives with the delivery of a complete device platform to a patient or a complete mask system to a patient or a digital health software solution that is helping each person to sleep better, to breathe better, and to live a high quality life with healthcare delivered right where they live.

As we start fiscal year 2024 here, I’m very excited about the opportunities in front of us. We just had our SaaS ASM earlier this week, and I’ll be attending the Country Market Group CMG Group for our North America team in the coming weeks. And sales meetings are happening around the world. We’re on a good trajectory. We have an exciting pipeline. In closing, I want to express my sincere gratitude to the more than 10,000 ResMedians for their perseverance, their hard work and their dedication both today and every day. With that, I’ll hand the call over to Brett in Sydney and then we’ll move and open up for Q&A for the group. Brett, over to you.

Brett Sandercock: Great. Thanks, Mick. In my remarks today, I’ll provide an overview of our results for the fourth quarter of fiscal year 2023. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q4. Group revenue for the June quarter was $1.12 billion, an increase of 23% on a headline basis and in constant currency terms. Revenue growth reflected the ongoing combined availability of cloud connected AirSense 10 and AirSense 11 sleep devices to support strong underlying global demand, as well as solid growth across our broader product portfolio. Year-on-year movements in foreign currencies negatively impacted revenue by approximately $3 million in the June quarter. Looking at our geographic revenue distribution, excluding revenue from our Software-as-a-Service business, sales in U.S., Canada, and Latin America countries increased by 25%.

In constant currency terms, sales in Europe, Asia and other markets increased by 14%. Globally in constant currency terms, device sales increased by 24% while masks and other sales increased by 18%. Breaking it down by regional areas, device sales in the U.S., Canada, and Latin America increased by 30% as we benefited from strong demand. And as previously mentioned, our continued ability to fully supply the market with combined availability of AS 10 and AS 11 cloud connected devices. Masks and other sales increased by 19%, reflecting growth in resupply and new patient setups. Europe, Asia, and other markets, device sales increased by 15% in constant currency terms, again reflecting strong demand and improving availability of cloud connected devices.

Masks and other sales increased by 14% in constant currency terms, reflecting increased patient setups. Software-as-a-Service revenue increased by 34% in the June quarter, reflecting the contribution from our MEDIFOX DAN acquisition and continued strong performance from our HME vertical. Excluding our MEDIFOX DAN acquisition, SaaS revenue grew by 8% in the June quarter. MEDIFOX DAN contributed revenue of $27.3 million for the June quarter consistent with our expectations at the time of the acquisition. During the rest of my commentary today, I will refer to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our fourth quarter earnings press release. Gross margin declined by 200 points to 55.8% in the June quarter.

The decrease primarily reflects component cost increases; warranty and manufacturing related cost increases and product mix shifts due to the significant increase in sleep device sales partially offset by increases in average selling prices On a sequential basis, unfavorable foreign currency movements accounted for the 30 basis points decline in our gross margin and we saw a lower than expected product mix benefit as we continue to see strong growth in sleep devices in the U.S. market. Moving on to operating expenses. SG&A expenses for the fourth quarter increased by 25%, or in constant currency terms increased by 26%. The increase was predominantly attributable to increases in employee-related costs marketing and travel expenses, as well as the incremental SG&A expenses associated with MEDIFOX DAN that we acquired in November 2022.

SG&A expenses as a percentage of revenue was 21.5% compared to 21.1% in the prior year period. Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% during fiscal year 2024. R&D expenses for the quarter increased by 21% or in constant currency terms increased by 23%. R&D expenses as a percentage of revenue was 7% consistent with the prior year quarter. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% during fiscal year 2024. Operating profit for the quarter increased by 13% underpinned by strong revenue growth partially offset by lower gross margin. Following the acquisition of MEDIFOX DAN, our net interest expense for the quarter is $15 million and we expect interest expense to be a similar amount per quarter in the first half of fiscal year 2024.

Our effective tax rate for the June quarter was 18.3% compared to the prior year quarter rate of 17.6%. Looking forward, we estimate our effective tax rate for the fiscal year 2024 will be in the range of 19% to 21%. Our net income for the June quarter increased by 7% and non-GAAP diluted earnings per share also increased by 7%. During the quarter, we incurred $1.8 million in acquisition expenses associated with our Somnoware acquisition, and we recognized restructuring costs of $9.2 million associated with the closure of the Aria lymphedema business and workforce rationalization in our German and SaaS business verticals. We also recognized a gain of $20.2 million within our income in relation to a business interruption insurance claim. These have all been treated as non-GAAP items in our Q4 financial results.

Cash flow from operations for the quarter was $237 million, reflecting solid underlying earnings, partially offset by a modest increase in working capital. Capital expenditure for the quarter was $34 million. Depreciation and amortization for the quarter totaled $47 million. We ended the fourth quarter with a cash balance of $228 million. At June 30, we had $1.4 billion in gross debt and $1.2 billion in net debt, which mainly reflects the funding of our MEDIFOX DAN acquisition. During the quarter, we reduced our debt by $145 million. At June 30, we had approximately $745 million available for drawdown under our revolver facility, and we continue to maintain a solid liquidity position. Our Board of Directors today declared a quarterly dividend of $0.48 per share, representing an increase of 9% over our previous quarterly dividend and reflecting the Board’s confidence in our operating performance.

Going forward, we plan to continue to reinvest in growth through R&D and expect to deploy further capital for tuck-in acquisitions such as our recently announced acquisition of Somnoware, a company that provides an upstream diagnostic management platform that is complementary to our current AirView and Brightree solutions. And with that, I’ll hand the call back to Amy.

Amy Wakeham: Great. Thank you, Brett, and thank you, Mick. Kevin, I’d like to go ahead and turn the call back over to you to provide the instructions and run the Q&A portion of our call.

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Q&A Session

Operator: Certainly. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Matthew Mishan from KeyBanc Capital Markets. Your line is now live.

Matthew Mishan: Hey, good afternoon, and thank you for taking the questions. Hey Mick, with the devices number sort of steady sequentially around this $600 million mark, is this where the number would kind of base out if you are supplying the majority of the market? And from here, are we looking at just saying $600 million and then add on some percentage of what the underlying fleet market is kind of growing at?

Mick Farrell: Yes. Thanks for the question, Matthew. And it’s a good one. It’s hard to predict because there are so many factors involved that that are going on in the market right now. But yes, as you said, a very, very solid number, $602 million in global devices in the quarter and 30% growth in U.S., Canada, Latin America, 15% growth in Europe, Asia, and rest of world. Look, we’re seeing a strong sort of mid-single-digits level of patient flow into the channel. We’re seeing in addition to that — like in terms of new patients, we’re seeing in addition to that resupply of patients at that five-year point for most U.S. reimbursement and various points in the other 139 countries where people make their own decisions or insurance has other criteria to drive that.

So it’s new patient setups, it’s resupply setups and there’s of course the impact of a competitor recall, which is — was supposed to be over in June 30 and now has no definitive date. And so as we look to that with all those unknown factors, it’s very hard for me to say, Matthew, that it’s just stop and steady growth from here. It might be stronger growth from here. And that makes it hard to predict gross margins because as we grow those CPAP and APAP numbers so well in the U.S. geography, it’s incredible great revenue and cloud connected and links us with the patient for life, but it is lower gross margin than our group. And so it’s great gross profit dollars, but has an impact on our gross margin as you saw that steady apart from FX moving it down 30 basis points.

So a complex equation but I’d say it’s at minimum, it stays where it is and grows with the market but it could potentially grow above that as we continue to take share and solidify that share through our digital ecosystem. Thanks for the question, Matthew.

Operator: Thank you. Our next question today is coming from Margaret Kaczor from William Blair. Your line is now live.

Margaret Kaczor: Hey, good afternoon, and good morning, everyone. I wanted to follow-up first on the competitive dynamic to the extent that you’ll — you see anything maybe into the — in the marketplace. So whether your key competitor is coming back either approaching or maybe hiring processes, marketing campaigns, anything that maybe they’re gearing up for that you’re seeing or is demand relatively similar to what you’ve seen in the past, no real changes. Thank you.

Mick Farrell: Yes. Thanks, Margaret, and welcome back. Yes. I think it’s difficult to predict exactly where they’re at from those sort of the early emerging signs, as you say. Look, we have regional competitors in Europe that we are fighting with every day there. We have regional competitors in Asia that we’re fighting with every day and regional competitors in the Americas that we’re fighting with every day. When Philips comes back, they’ll have to start at position number four, if you like, in new patient setups. We are — they are back and we are competing with them in some countries in Europe, like in Spain, they never went away because they never had a phone device there. So they’ve been there the whole time through this recall, and we’ve been beating them handsomely there.