ResMed Inc.

Welcome to the Q3 Fiscal Year 2019 ResMed, Inc. Earnings Conference Call. My name is Julie, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Amy, you may begin.

Great. Thank you, Julie. Good afternoon and good morning, everyone. Thanks for joining us and welcome to ResMed's third quarter fiscal year 2019 earnings call. As Julie said, this call is being webcast live and the replay along with a copy of the earnings press release and our investor presentation will be available on the investor relations section of our corporate website. Joining me on the call today to discuss our quarterly results are Mick Farrell, our CEO, and Brett Sandercock, our CFO. Other members of management will be available during the Q&A portion of the call. During the call, we will discuss some non-GAAP measures. For reconciliation of the non-GAAP measures, please see the notes to the financial statements in today's earnings press release. As a reminder, our discussion today may include forward-looking statements, including but not limited to expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. Please refer to our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements. With that, I'd like to now turn the call over to Mick.

Thanks, Amy, and thank you to all our shareholders for joining us today as we review results for the third quarter of fiscal year 2019. On today's call, I will discuss our long-term strategy. I'll review top-level financial results, some business highlights and a few key milestones from the quarter. Then I'll hand the call over to Brett, who's with me here in Sydney, who will walk you through our financial results in more detail. Before I get into the details, I'd like to discuss ResMed's long-term strategy and our goal to improve 250 million lives in 2025. Driven by a number of macro trends such as an ageing population, the increasing impact of chronic disease, growing healthcare costs and a move towards digital transformation in healthcare, we see very exciting opportunities for ResMed. Our goal is to empower people to live healthier lives outside of the hospital. Today there are numerous pain points in existing care delivery models and in the quality of patient care that ResMed can address. We all know healthcare costs are growing faster than GDP in many countries and there aren't enough doctors to treat the people who need to be treated. When you couple that with the difficulty of getting the right care at the right time, delivering that healthcare in lower cost settings and even further changes and challenges with interoperability, documentation and clinical data availability, it's a global healthcare system that is in a crisis and solutions are needed. On the microeconomic side, with ResMed's global leadership in digital health for sleep apnea, for COPD and for outside of the hospital healthcare, we believe that these are problems that ResMed can solve faster and better than our competitors, providing superior value for our customers. With that backdrop, I'd like to quickly review our financial results. We achieved another quarter of strong revenue growth. We were up 12% in US dollar terms. and up 15% in constant currency terms. We benefited from a full quarter of revenue contribution from one of our latest acquisitions, MatrixCare. We also drove constant currency growth in domestic as well as international device sales. Additionally, we had very strong growth in masks and other accessories. I'll talk about some new mask launches a little later. We delivered operating leverage with non-GAAP operating profit growth of 15% year-over-year. Non-GAAP diluted earnings per share was a robust 89 cents. We are proud of the top-line and bottom-line performance from the Global ResMed team. We expect to continue that success as we maintain fiscal discipline and invest in long-term growth of the Global ResMed business. Now let's turn to a discussion of highlights across our sleep apnea and respiratory care businesses. In the devices product category, we delivered a good quarter with year-over-year constant currency growth of 6% globally, supported by 8% growth in the United States, Canada and Latin America in the category. We also achieved a return to constant currency growth for devices in Europe, Asia and the rest of the world. As we discussed last quarter, we continue to cycle through strong year-over-year comparisons in both France and Japan. which were as a result of the digital health related reimbursement changes in those countries that drove the acceleration of device fleet upgrades over the last number of quarters. Despite that headwind that we had in the quarter and we will have for ongoing quarters, our team delivered 3% constant currency growth in devices across Europe, Asia and the rest of the world. Underlying patient activity in all geographies remains very healthy. The masks and accessories side of our business was robust during Q3, growing globally at 13% in constant currency. In the US, Canada and Latin America geographies, masks grew at 13%. And in the Europe, Asia and rest of world geographies, we grew at 12% in constant currency terms in masks. We continue to see excellent traction with the AirFit F2020. in the full-face category and the AirFit N20 in the nasal category. Our recent mask launches of the F30, the N30i and the P30i are all doing very well. Let me provide a little bit of colour on each of these innovative products. During October we launched the AirFit F30. This is an exciting innovation in the minimal contact full-face mask category. In January, we announced broad availability of our first tube-up mask, the AirFit N30, which is in the nasal category. Both these new masks, the F30 and the N30i, contributed to our strong mask growth in Q3. After quarter end, just last month, we announced the launch of the AirFit P30i. This is a new tube-up pillows option that complements our highly successful over many years, P10 mask. I have personally worn ResMed's nasal pillow technology for my own sleep apnea care every night for many years. A few years ago, I thought nothing could beat the Swift FX for pillow technology. Then I upgraded a few years ago to the P10. I'm now looking forward to personally upgrading to the P30i, which has freedom of movement and the ability to enjoy better sleep. We believe that many other sleep apnea patients, not just the CEO, will have the same excitement after experiencing the P30i. All these recent mask launches are important additions as we expand our mask portfolio to offer even more options for physicians and home care providers and ultimately for the varying needs of the ultimate customer, a person who suffocates every night. We remain focused on driving innovation to meet underserved customer needs. We have an exciting product pipeline. We are the industry leader in digital health technology. We are now supporting well over 10 million patients with AirView, our cloud-based patient management system, and more than 9 million 100% cloud-connectable ResMed devices in the market. Over the past 12 months, we have improved the lives of nearly 15 million people by delivering sleep apnea and COPD devices and full mask systems. Our industry-changing AirSense 10 device platform and the AirSolutions cloud-based software ecosystem are still seeing strong adoption. Our device market share continues to grow as healthcare providers and patients choose and physicians prescribe ResMed solutions. Our digital health technology solutions have been proven to improve both business efficiencies and patient outcomes. We are clearly the market leader but we will never stop innovating in this space. The success of our connected health devices is producing an incredible data engine. We now have over 4 billion nights of medical sleep apnea and COPD data in the cloud. This is twice as many nights as we had just a year ago. We are truly driving exponential digital health growth. Using advanced analytics, we are turning this clinical big data into clinical actionable insights. We are focused on developing solutions to get the right healthcare to the right patient at the right time and always more cost-effectively for all of our customers. Everything we do supports our ambition to help the more than 936 million people worldwide who suffocate every night with sleep apnea and the nearly 400 million people worldwide who suffer from chronic obstructive pulmonary disease. As we expand our digital health platforms, one of our goals has been to take the success we have had with MyAir and AirView in sleep apnea and replicate that within our respiratory care business vertical. Today, many patients with COPD and other respiratory conditions aren't getting the treatment that they need until it's too late. They're often frequent flyers at the hospital. We believe that technology combined with the medical equipment used to treat patients can add substantial value to improve both clinical outcomes and the patient experience. Digital end-to-end solutions, connectivity, making information available to that ultimate customer, the patient, on their own smartphones and supporting patients through the COPD disease progression can make a huge difference. Through digital health technology, we are driving engagement with patients so they can benefit from the best therapy before it's too late. We've made good progress with cloud-connectable air-curved devices for non-invasive ventilation and with astral devices that have cloud-connectable options for life support ventilation. Non-invasive ventilation and life support ventilation solutions treat stage 3 and stage 4 COPD patients, those who are in the end stages of this dreadful disease. To meaningfully drive improved patient and clinical outcomes, our strategy and approach have expanded to take a more holistic, longitudinal view of the COPD patient journey and to offer solutions for therapy and support through earlier stages of COPD. so that we can be there for the CFPD patient from stage one all the way through to stage four of their disease. In early January, we moved Mobi, our premier portable oxygen concentrator, to a full product launch. Mobi best meets the needs of users who want to be mobile and enjoy healthy, active lives outside the home. Early results have met our expectations and we are about to commence sales of Mobi through our German team. In the US, we are working in partnership with our HMRE customers to grow this category for healthcare system reimbursed patients and to use portable oxygen in situations where a portable solution will benefit the patient most. We also continue to test, pilot and refine other potential go-to-market models with the ultimate goal to ensure the patient has the most efficient path to a portable oxygen solution. We expect the POC category to grow given very strong patient demand. We also expect that Resmil will grow its share within the POC category. I want to be clear that it will take a long while for POC to be material next to our core sleep apnea and our core ventilation device businesses. So it's a long road ahead. During the quarter, we added another significant element to our vision for longitudinal solutions in respiratory care. when we closed on the previously announced acquisition of Propeller Health in January. Propeller's digital health solutions help people and their doctors better manage COPD and asthma. We are helping with this new addition to round out LeadMed's portfolio to treat COPD patients through all stages of their disease as I mentioned earlier. Propeller's sophisticated digital health platform leverages small sensors that are attached to the pharmaceutical inhalers, along with a sophisticated cloud-based mobile application that automatically tracks the medication use and provides personal feedback, coaching and insights to the individual, much like our sleep apnea patient engagement system, MyAir does, just not at the same scale yet. Propeller's clinically validated solutions have demonstrated incredible outcomes including a 58% improvement in pharmaceutical adherence, a 48% increase in symptom-free days and a 53% reduction in emergency room visits. These are truly impressive pilot results and we cannot wait to scale them. In the same way that we scaled our digital medical device ecosystem in Sweet Pat and COPD to now 4 billion nights of medical data. Propeller is operating as a standalone entity with its dynamic and innovative management team still in place in Wisconsin and San Francisco. We are working with the Propeller CEO, David Van Sickle, and his team to continue their momentum towards commercial scale with their pharmaceutical customers as well as their health insurance customers. We had a board meeting last month, and I've got to tell you, I'm very encouraged by the progress we're seeing. Earlier this quarter, Propeller announced publicly a partnership with Orion, which is a pharmaceutical company in Finland, and we're going to connect the Propeller digital health platform to Orion's easy inhaler line for both asthma and COPD patients. Propeller Health is at the beginning of converting from pilots to scale and commercialisation. We will empower the team to grow and to scale and bring all our skills to the table. The opportunities are vast. There are more than 60 million diagnosed COPD and asthma patients in the United States and major markets in Europe alone. Many of these patients could benefit from Propeller solutions and Propeller is the clear leader in digital health for inhaled pharmaceuticals. The evolution we have made in our respiratory care business I think is game-changing. We are now in an even better position to become the global leader in digital health for COPD, from Stage 1 to Stage 2, as well as our existing players, Stage 3 and Stage 4 COPD. We will continue to help physicians, providers, payers and patients as they manage this important, progressive, chronic disease. Let's now turn to a quick discussion of our software as a service business, and then I'll hand over to Brett. The Software as a Service portfolio continues its trajectory of excellent growth, with revenue up 101% year-on-year on a reported basis, driven by continued expansion of Bright Tree and Healthcare First, along with the first full quarter of contribution from our acquisition of MatrixCare. On a pro forma basis, comparing results in Q3 to the results of those existing businesses before the acquisition Bright Tree is growing in the mid to high single digit range and Matrix Care is growing at the low double digit growth range. Overall we see significant growth opportunities for these SAS businesses serving the out of hospital healthcare space with a lot of runway ahead. The total addressable market is over $1.5 billion in out of hospital SAS in the United States alone. With our competitive advantages and our leading positions in multiple SAS verticals, we expect ResMed SAS portfolio to move from high single-digit pro forma growth to low double-digit pro forma growth over the medium term and to be sustainable at that rate for the long term. We've started the process of integrating some of our SAS portfolio assets. We recently transferred leadership of our home health and hospice offerings from Bright Tree and Healthcare First to under the Matrix Care Management Team. That will combine our strength in home health and hospice with private duty and beyond. This move will allow us to accelerate our product innovation and deliver a wider range of features for customers who have businesses across these verticals. It also supports our strategy of driving improved patient outcomes and business efficiencies for customers across all out-of-hospital healthcare settings. As our SAS portfolio grows, I'd like to reiterate the promise we made when we first acquired Riketree back in 2016. We are committed to protecting our customers' business sense of information. We have firewalls to do just that. My father founded ResMed 30 years ago. In 1989 the company was founded on the fundamentals of honesty, integrity and doing the right thing always. That is what we've always done and what we will always continue to do. We have a vision to transform and significantly improve out-of-hospital healthcare. We have a strategy to enable better patient care, improve clinical decision support and drive interoperability across these healthcare settings. The acquisitions we have made over the past year established ResMed as the strategic player who is best positioned to lead this transformation in out-of-hospital healthcare. We now offer software solutions across out-of-hospital healthcare settings from home medical equipment to home health and hospice to skilled nursing facilities to senior living to private duty and beyond. We are connecting capabilities across these platforms for these care settings to help our customers be the most efficient they can be. to ultimately better serve people, to keep them out of the hospital and in a lower cost, higher quality setting of their choice as they age. And the best place is often their own home. Together with our customers and partners, we are revolutionising how healthcare is delivered. We're building an ecosystem of integrated digital solutions and services. The ultimate goal is to help individuals, ageing individuals, move seamlessly between these healthcare settings. so that they and their loved ones can receive optimal care and optimal quality of life with frictionless moves wherever they live. In parallel to helping individuals will drive superior outcomes for physicians, payers and providers. We've built a portfolio now to our FASC team to execute and ultimately deliver on the promise of this strategy. At the highest level, the mission of ResMed in our 2025 strategy is to impact and improve 250 million lives in out-of-hospital healthcare. Our purpose is to empower people to live healthier, happier and higher quality lives in the comfort of their own home. Our advantage comes from our focus on tech-driven integrated care, from sleep apnea and COPD awareness, to diagnosis, to treatment, to management and then to ongoing therapy and healthcare management of chronic disease. with digital health solutions. Let me close with this before I hand over to Brett. We have delivered a strong quarter. We are well positioned for continued success throughout the last quarter of FY19 that we're just in and beyond. The continued traction of our diversified mask and device portfolio along with our expanded pipeline of new products and enhanced digital health solutions for sleep apnea, COPD and out of hospital medical software gives us confidence in our ongoing momentum as we look to the future. We have positioned ResNet for the long term as an innovative global leader in digital health but we're just getting started. With that I'll turn the call over to Brett for his remarks and then we'll open the lines up for Q&A. So over the table here in Sydney to you Brett.

Great, thanks Mick. In my remarks today I will provide an overview of our results for the third quarter of fiscal year 2019. As Nick noted, we had a strong quarter. Group revenue for the March quarter was $662.2 million, an increase of 12% over the prior year quarter. In constant currency terms, revenue increased by 15%. Taking a closer look at our geographic distribution and excluding revenue from our software as a service business, our sales in US, Canada and Latin American countries were $350 million, an increase of 10% over the prior year quarter. Sales in Europe, Asia and other markets totaled $232.3 million, a decrease of 1% over the prior year quarter. However, in constant currency terms, sales in combined Europe, Asia and other markets increased by 6% over the prior year quarter. Breaking out revenue between product segments, US, Canada and Latin America's device sales were $181.3 million, an increase of 8% over the prior year quarter. Masks and other sales were $168.7 million, an increase of 13% over the prior year quarter. For revenue in Europe, Asia and other markets, device sales were $155.2 million, a decrease of 3% over the prior year quarter, but in constant currency terms a 3% increase. Masks and other sales were $77.1 million, an increase of 4% over the prior year quarter, or in constant currency terms a 12% increase. Globally, in constant currency terms, device sales increased by 6% while masks and other sales increased by 13% over the prior year quarter. Software as a service revenue for the third quarter was $79.9 million, an increase of 101% over the prior year quarter. This includes revenue from our Bright Tree, Healthcare First and MatrixCare businesses. During the rest of my commentary today, I will be referring to non-GAAP numbers. The non-GAAP measures adjust for the impact of amortisation of acquired intangibles, a purchase accounting fair value adjustment to MatrixCare's deferred revenue and tax-related expenses associated with US tax reforms. The prior year comparable excludes amortisation of acquired intangibles, tax-related expenses associated with US tax reform and restructuring 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 59.2%. Excluding the MatrixCare purchase county deferred revenue adjustment, our gross margin for the March quarter was 59.3% compared with 58.2% during the same quarter in the prior year and 59.1% in Q2 FY19. Compared to the prior year, our adjusted gross margin increased by 110 basis points Predominantly attributable to manufacturing and procurement efficiencies, the matrix care acquisition and favourable product mix partially offset by typical declines in average selling prices. Excluding the deferred revenue fair value adjustment, the matrix care acquisition was accreted to our gross margin by approximately 50 basis points. Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margins for the remainder of fiscal year 2019 to be broadly consistent with our Q3 FY19 gross margin. Moving on to operating expenses. Our SG&A expenses for the third quarter were $164.5 million, an increase of 11% over the prior year quarter. In constant currency terms, SG&A expenses increased by 17%. Excluding acquisitions, SG&A expenses increased by 6% on a constant currency basis. SG&A expenses as a percentage of revenue improved to 24.8% compared to the 25% that we reported in the prior year quarter. Looking forward and subject to currency movements and taking into account our recent acquisitions, we expect SG&A as a percentage of revenue to be broadly in the range of 25% for the balance of fiscal year 2019. R&D expenses for the quarter were $47.6 million, an increase of 27% over the prior year quarter, while on a constant currency basis an increase of 32%. Excluding acquisitions, R&D expenses increased by 6%, reflecting incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue were 7.2% compared to the 6.3% in the prior year. Looking forward, subject to currency movements and taking into account our recent acquisitions, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of fiscal year 2019. Amortisation of acquired intangibles, $22.8 million for the quarter, an increase of 95% over the prior year quarter, reflecting the impact from our recent acquisitions. Stock-based compensation expense for the quarter was $12.8 million. Non-GAAP operating profit for the quarter was $182 million, an increase of 15% over the prior year quarter, while non-GAAP net income for the quarter was $128.1 million, a decrease of 3% over the prior year quarter. Non-GAAP diluted earnings per share for the quarter were $0.89, a decrease of 3% over the prior year quarter, while GAAP diluted earnings per share for the quarter was $0.73. Foreign exchange movements positively impacted third quarter earnings by one cent per share reflecting the favourable impacts from the weaker Australian dollar relative to the US dollar which were partially offset by the weaker Euro. On a GAAP basis our effective tax rate for the March quarter was 23.6%. On a non-GAAP basis our effective tax rate for the quarter was 21.4%. We estimate that our effective tax rate for fiscal year 2019 will be in the range of 21% to 23%. Cash flow from operations for the third quarter was $139.6 million, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $15.1 million. Depreciation and amortisation for the March quarter totalled $41.8 million. During the quarter we paid dividends of $53 million. On 7 January 2019 we closed on our previously announced acquisition of Propeller Health for consideration of $225 million net of cash acquired and debt assumed. Our joint venture was verily continued operations during the quarter and we recorded equity losses of $6 million in our income statement in the March quarter associated with the joint venture. We expect to record approximately $7 million of equity losses each quarter for the balance of fiscal year 2019 and also in fiscal year 2020 associated with the joint venture operations. Given the recent acquisition activity and interest rate movements I would like to update you on our expected net interest expense. Our net interest expense in Q3 FY19 was $12 million and going forward we expect to record quarterly net interest expense in the range of $12 million. Our board of directors today declared a quarterly dividend of $0.37 per share. At March 31, we have $1.3 billion in gross debt and $1.2 billion in net debt. Our balance sheet remains strong with modest debt levels. At March 31, total assets were $4.1 billion and net equity was $2 billion. Finally, in summary, our top line revenue was strong this quarter with growth across all major categories. Growth margin is improving supported by the contribution from recent SAS acquisitions and our ongoing efforts to drive COGS efficiencies as well as favourable product mix. Our operating costs remain well controlled even as we absorb the impact of acquisitions. As a result, we're continuing to drive operating leverage with Q3 non-GAAP operating profit up 15% year on year. We are focused on driving solid operating results while ensuring we continue to invest in our strategic long-term opportunities. And with that, I'll hand the call back to Amy.

Great. Thanks, Brett. Thanks, Mick. We'll now turn the call to the Q&A portion. I'd like to remind everyone to please limit yourself to one question, and if you do have additional questions, you're free to return to the call queue. Julie, we're now ready to start the Q&A section.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. Shawn Lawman from Morgan Stanley is on the line with a question.

Sean, you might be on mute. Hello? Can you hear me?

Yep. You need to start from the start, Sean. You were on mute, I think.

Yep. Sure. Yeah. Okay. Mick, well, I hope you're well, everybody. But on the rest of world mass, so a strong number there, you're able to talk about or give us some granularity around your experience with the upgrade of devices in France and Japan and sort of how much runway is there to go on that benefit on that resupply side of the equation?

It's a good question in terms of allowing us to talk about France and Japan and what we've done there. Look, clearly global revenue growth in masks was exceptional in the quarter, 13% constant currency globally, 13% in the US, Canada, Latin America and 12% across Europe, Asia and the rest of the world in constant currency terms. So we've had probably four to five plus quarters of upgrades in France and similarly in Japan. And as we said in the prepared remarks and we said last quarter and the last number of quarters, we're going to be facing a headwind of the device sales in both France and Japan, although we bowed through to get a modest positive on the rest of the world devices this quarter. But it allows us, through that upgrade of digital health assets in both France and Japan, to now start interacting with patients and driving patient behaviour through apps like MyAir and with physicians through solutions like AirView and the Whole Air Solutions portfolio. So we believe there's long term sustainable mass growth that we can achieve in both France and Japan that should help continue to grow our share which is quite high already in those geographies. But look, you know, we're not done with this. Obviously, the last five years brought digital health to the United States and now to France and Japan. There's 120 other countries worldwide that we now need to start that opportunity on. But, yeah, certainly great growth in masks in the quarter, off the back of digital health, but also off the back of some great mask launches.

Sure. Thanks, Mick. And just one follow-up. You know, a lot of activity there with the integration of the software platforms. Just wondering either... qualitatively or quantitatively, if you could give us some description on some of the financial benefits of that integration process that we might see.

Yes, Sean. Look, we always think about the great investment in digital health technology and it drives such good growth of the core sleep apnea and respiratory care devices and as I mentioned just now, also growth of the core masks and accessories. We have a lot of internal models. I'm not prepared to share how those internal models of digital health technology are catalyzing growth of those areas. But what I am prepared to talk about is our public news segmentation of the SAS business, which is powered by the same digital health technology capability. And that part of our portfolio grew 101%, including the acquisitions. But as I said, on a pro forma basis, it was growing that... high single digit range and we think over time we can optimize that digital health tech and that SaaS portfolio to grow in that sort of low double digits on a sustainable basis as we look out multiple years towards our 2025 strategy and we think that's a big part of it. Thanks for your question, Sean.

Thank you, Mick.

Gretel Janu from Credit Suisse is on the line with a question.

Hi, thanks very much. So just on rest of world devices, would you be able to give a little bit more about the breakout in terms of the performance of Japan and France in third quarter, and then just in terms of the other rest of world countries, were there any other surprises in the results?

Yeah, thanks for the question, Gail. We already break out a lot of information when we say all the different categories we go down to, but I'm happy to talk to some colour to Europe, Asia and the rest of all countries. As I mentioned in the prep remarks, it was a great expansion of France and Japan in these last number of quarters, but that great expansion and extraordinarily high share that we've achieved there now means that you're going to slow down as those fleets have already been upgraded on the device side. As you saw, the total Europe, Asia, rest of world growth was in that sort of modest positive on the CC and slightly negative on the headline number in US dollars given currency movements. We expect that aggregate portfolio to grow at that type of rate as we look forward. There will be some lumpiness up and down over time but the device side of our portfolio is going to be a little up and down in Europe, Asia and the rest of the world over the next number of quarters as I think we addressed last quarter and most of the sell side analysts have put in there. But as we move forward and we start to lap those fleet upgrades, we'll get back to what we're seeing which is core patient growth that is very strong in both France and Japan and throughout the rest of the countries we have there. That's what's the real determinant of long-term growth. The 900 million people suffocating to realise they are suffocating and get into the system, talk to their doctors and get diagnosed and treated. That flows things to be pretty steady in Europe, Asia and the rest of the world. So yes, there'll be some lumpiness in device sales here as we lap France and Japan, but we'll get back to growth. But yes, sorry, I'm not going to give detail on China, Germany and all the other countries until and when there's a digital health update in one of those countries and then it'll become a material element and I look forward to it. for doing that with you.

Okay, thank you very much.

David Lowe from JP Morgan is on the line with a question.

Thanks very much. If we could just start with the commentary around the software as a service business. You're suggesting that the return to low double digit growth is the medium term or long term aspiration. I was just wondering if you would talk a little bit to Bright Tree versus the long-term post-acute care space. Would I be right in assuming that the long-term post-acute care growth opportunity is quite a lot larger than Bright Tree just given how immature it is?

Yeah, I think, look, there's runway still ahead, David, in the core Bright Tree business of home medical equipment. There's just so many efficiencies that we can have there. But, yeah, as you noted, I said, you know, in the quarter it was mid to high single digit growth. I do think we can get that part, even just the bright tree part to the high single digits and probably brushing up and touching the low double digit growth within that bright tree home medical equipment segment because there's just so many efficiencies to gain. A little bit of market share again. We have good market share, but it's more about bringing in modules and capabilities that take waste away from our home medical equipment companies and bring such value that we can then share in some of that value creation. But yeah, look, the $1.5 billion addressable market includes many other out-of-hospital verticals. We're already playing in around seven of them. and at scale at least three. We're in home health and hospice at scale now. I'm really excited about the Bright Tree Healthcare First and MatrixCare assets all being combined under John Damgard and his team up there in Minneapolis. I think they're going to do a great job in that vertical, home health and hospice, and additionally that same team working in skilled nursing facilities where we already have a strong position but a lot of runway for growth. I think one of the things that ResMed brings that's unique is we're a strategic player and we can bring capabilities like cyber security, our management of AWS, Azure and all the cloud-based systems around managing that digital portfolio that we can bring superior value to it. But look, it's really a portfolio. Brighttree will be a good part of that growth. MatrixCare will be a good part of that growth and we're looking to continue to grow as we empower that team. Raja's team is doing a great job.

Great, thanks very much for that. Just my other question, big picture, the growth that we saw from ResMed in your traditional sleep business looks very strong across both devices and masks. I think we'd hesitate or extrapolate that out in the rest of the world as well, trying to pull out the impact of France and Japan. Just would like your thoughts on whether market growth is picking up or whether you think this is being a large or significant contribution from market share gains.

Yeah, it's interesting, David, and you follow the same other companies that I do to try and track it. We've got some really good market share data in some of our geographies and less good in others. Look, I look at this quarter, we had constant currency growth of devices globally at 6% and we had constant currency growth of masks at 13%. Traditionally, we say, and I think it's still true, that devices are sort of growing in that mid-single digits and masks are growing at the high single digits. So that would imply that we took some modest share in devices. You know, obviously, geography is outside science in Japan. We already took the share there. And in masks, you know, I think the N30i, the F30... We didn't even count any of the P30i, but that 13% growth is clearly including some share growth as well. We love the game of innovating. Smaller, quieter, more comfortable, more connected devices. It's a competitive game, but, yeah, we're winning more than we're losing. Thanks for your question, David. Thanks.

Andrew Goodsolve from MST Marquis is on the line with a question.

Good morning and thanks very much for taking my question. Just on Mobi, you haven't called that out separately. Just if you could characterise any contribution or feedback around the quarter and also your move to go direct to consumer with OEM for Mobi.

Andrew, thanks for the question. As I said in the prep remarks, the whole POC category, even if we had 100% share, would struggle to be material to our business. We're starting from a very early stage. We're just flipping to full product launch as we move forward. As I said, we're very closely partnering with our home medical equipment provider customers. And what we're looking to do is find patients that qualify. If they qualify for reimbursement, whether it's Medicare or private insurance, we're working with our HME customers to provide that lead, if you like, that person who's in need of a POC and to have them provide great care for that person. Two of our competitors have been, you know, one of them for many years and one for a period of time, experimenting with models that compete with the channel on that reimbursed business and go direct to patient. We have stayed away certainly from competing with our customers in the reimbursed business in the United States. It's not our game and we haven't been doing that. We don't plan to do that. In the case that a person who wants to buy a device by cash, we are piloting different models with them in the way that two competitors are. I think you'd be foolish not to take care of the ultimate customer who's a patient who needs it when two other players in the market are doing that. But it's very early days in this. I've got to say that the opportunity is huge for us and we think of it as a... longitudinal play across COPD. POC is an interesting part of a big journey of COPD patients. We want to talk to the patient in stage one, stage two through digital health and inhalers. That's about 80 plus percent of the cost of a COPD patient is in the pharmaceutical side. So propeller health is the one we should be talking about as a material element. I think, look, POC, non-invasive ventilation and life support ventilation, we're already in those and it's exciting, but it's really that long term term play of the patient through digital health to keep them out of hospital, to keep them happy, so that their physician is happy, that the health insurance company is happy, that their caregiver loved ones are happy and also that our customers, the home medical equipment customers can be happy. If it's a reimbursed patient, we want them to take care of it.

Terrific. Thank you. And just my follow-up, just obviously GM, half of that was you attributed to Matrix. The other half I presume is predominantly mixed with the higher growth in the US?

Yeah, hi, Andrew. It's Brett. There's meaningful impact probably from the production efficiencies and procurement efficiencies that we're driving for, and we always do that. And then obviously product mix was favourable, and that was a meaningful impact on that as well.

Terrific. Thank you very much.

Thanks for your questions, Andrew.

David Bailey from Macquarie is on the line with a question.

Yeah, good morning, guys. Just a quick one for me from Fred, just following up on the gross margin. Just wondering if you can, excuse me, quantify the impact of currency on gross margin on a year-on-year basis.

Yeah, year-on-year, it was favourable around 40 basis points, and then sequentially, it was basically pretty negligible.

So in the context of the 50 basis points you referred to earlier, you're probably looking at around 10 basis points of organic gross margin expansion for the quarter year-on-year. Next question, currency.

Yeah, and actually on the currency, it's actually pretty negligible on both, actually, if I look at it year-on-year. So I'll correct that. So pretty negligible on FX. And really because we saw weakness in... Yeah, because we saw weakness in the... but we also saw weakness in the Euro over the course of the year and they largely offset each other for us.

Okay, thanks.

Yep.

Saul Hoddison from UBS is on the line with a question.

Thanks, good morning. Just one question from me. Mick, the US mask growth rate, 13%, ahead of market growth again. Can you talk to how much of that is resupply growth and acceleration in resupply as opposed to success on new product launches? I mean, we have the impression that resupply accounts for the vast majority of your US mask sales. If you can talk to what you're seeing in the dynamic between resupply growth versus share shift, that would be great.

Yeah, that's a great question. We have Jim Hoynted, the head of our global sleep business, on the line. Jim, you want to talk to as much color as you can give on U.S. growth, organic, et cetera?

Yeah, sure. Thanks, Mick, and thanks for your question, Saul. I think the answer is both and. You know, we're seeing very strong results in resupply, and we've seen that over the last several quarters as more and more of our HME customers have adopted automated resupply solutions. So that continues to be very strong, lead to very strong results for us and for our customers. But the new products have also all gotten off to a terrific, terrific start. F30 is out of the gate very strong. N30i has terrific patient preference and is doing very, very well. And early results on P30 are also extremely encouraging. So I think we're getting both organic growth and we're taking some share in this space, but we're also enjoying very good results with resupply.

Thank you. Joanne Winch from BMO Capital Markets is on the line with a question.

Good afternoon, everybody, and thank you for this quarter after the last quarter experience. Anyway, two quick questions. What was the total acquisition revenue impact on the fiscal year third quarter? And then the second question is, how do we think about operating leverage in the coming quarters and maybe even for next year? Thank you.

I'll talk to the operating leverage. I'll hand to Brett to talk about organic versus acquisition driven growth. But look Joanne, as you and other sell side analysts have challenged us, we want to see ongoing leverage. It's really our challenge to ourselves to ensure that we can achieve ongoing leverage and I think we've had a good performance the last number of quarters to that end. The operating programs, the business excellence programs have put in place. drive of our Singapore manufacturing team, the Sydney advanced manufacturing team that I'm here on site with this week are all doing excellent work in that. Our commercial teams are looking at how to use digital health technology for social media marketing versus old school paper and television, really pushing the envelope of how we drive business excellence across all our functions and all our business verticals. It's something that we think is sustainable for the medium to long term. But it's a game that never stops, right? It's a game of continuous improvement. And Brett, do you want to have a little discussion as to what's organic versus inorganic growth for the quarter?

Yeah, Joanne, are you talking on the SAS side?

You made a number of acquisitions in the last 90 to 180 days. MatrixCare a propeller, et cetera, just trying to piece through where all that came through.

Yeah, if you looked at... So, yeah, on a group basis, if you look at our kind of organic growth, we exclude all the acquisitions, we grew it around the 8% mark, constant currency.

I think a good way to look at it, Joanne, is that devices and masks and accessories, none of those acquisitions came with those. So if you think of device growth year on year, constant currency at 6%, and masks and accessories go year on year, 13%, that gives you an idea for our sort of core sleep apnea and respiratory care businesses, excluding all acquisitions that happen.

Thank you very much.

Thanks, John.

Just as a reminder to everyone to please limit themselves to one question. If there are additional questions, please return to the queue. Margaret Kasser from William Blair is on the line with a question. Hey, good afternoon, folks. Thanks for taking the question.

You know, for my question, I want to focus a little bit on Bright Tree and some of the strategic changes maybe that you guys are trying to make to accelerate revenue there. I assume part of that is really the number of recent product and program launches that you have. how should we view the typical sales cycle for some of these new product launches? Is it six months, nine months? And then can you give us a sense of where that revenue growth is going to come from, new users versus existing accounts?

Great question. Margaret, I'm going to hand that to Rob Douglas, our Chief Operating Officer. Thanks, Nick. Thanks, Margaret. Margaret, you know with Brighttree and its recurring revenue model, so we compete on bookings. and that then reflects in recurring revenue on a year out. So we do have a view of that. And as we've talked about, we've had headwinds around a little bit of consolidation in the industry. Our approach to that has been to really improve modules on it, and we're really happy with the way the new Bright Tree modules are going, including some of the analytic offerings and certainly some of the direct patient engagement offerings in Bright Tree. We've got the team really focused on you know, driving those offerings in the market. And then even on a longer-term basis, we've got the team working on additional modules and development. So we're very confident that that blight tree growth will continue as it did in this quarter.

We saw a decent improvement in that and we're confident that that will continue.

Thanks, Matt.

Thanks for the question, Margaret.

John Deacon-Bell from Citi is on the line with a question.

My question is just around Propeller. Last quarter you said that that was going to be two to three cents per share diluted per quarter for some time. Can you just confirm that that is the case in this quarter and just give us an update on the trajectory of that, of the losses over the next year or two? Yeah, Brett, you want to talk to the... Sure, yeah, sure, John.

Yeah, so I can confirm that I was in that two to three cent range for this quarter. And I guess for the next little while, next few quarters, I think it'll be around that sort of level.

So for the whole of F520, are we talking about that length of time?

I don't want to make probably that sort of long-term predictions like that on propeller, but I think for the next few quarters, it'll be around that level.

The real question John of where that goes from down a penny to up a penny is the sales cycle of Propeller. So Propeller as we said on the prepared remarks are working with Orion in Finland, a sort of niche pharmaceutical company. It's public that Propeller are working with some very large pharmaceutical companies and some of them don't want us to talk about, some of them are okay. any one of these pilots starts to commercialize, and they're comfortable for us talking about that publicly, our customer is, we will update you on that. And this would move very quickly from diluted to accretive in a heartbeat. But that's obviously the play. It's a medium to long-term play. We're not calling the date, the time, or the hour, the quarter that that happens. But that's what the investment's around. And so that's where Brett sort of, as we start to get out there, Those changes may happen and so for the short term, get two or three pennies down. For the long term, it's incredibly exciting for COPD patients to get better digital healthcare. Good call. Thanks for that.

Leanne Harrison from Bank of America Merrill Lynch is on the line with a question.

Good morning gentlemen. I've just got another question on your SaaS business. And you mentioned previously about the home health market and Bright Tree and MatrixCare. Can you actually shed some more colour on how we should be thinking about the revenue synergies in your SAF business with Bright Tree and MatrixCare and also Healthcare First?

Yeah, Leanne, it's a good question. And the combination of those businesses, there's a number of factors. I mean, the sort of, The basic one is that we can combine our digital health capabilities, our cyber security, our cloud-based management, our management team and economies of scale of managing across those multiple portfolios. The big upside is that there are a number of customers, many thousands of customers in out-of-hospital healthcare that operate in multiple settings. They have a skilled nursing facility. They also have a hospice and maybe also a home health. A lot of the players out there are small and or niche players as in terms of our competitors in the SaaS space and they serve one or maybe two of those verticals. I think as ResMed now serves seven verticals, we're able to have frictionless or seamless movement of an aging person from care setting to care setting. That's good for them. It's good for the family. It's good for the healthcare system. It's good for the insurance company. And it's good for the customer, you know, the person who's paying us on a per-user, per-month basis. And so that's the real upside. There's synergies on the back side and the back end and the infrastructure, but there's also incredible synergies for the customer in ResMed being an offering that goes across those. And so Bright Tree, MatrixCare, Healthcare First allow us to really put it all under one umbrella and bring that value to the customer.

Thank you.

Thanks for your question, Leanne.

Chris Cooper from Goldman Sachs is on the line with a question.

Hi. Thank you for taking my question. Most have been asked, but perhaps, Nick, I could just ask one on the growth opportunity in POC since you mentioned it. I'm just curious if you could share your thoughts, please, on how big you believe that addressable market might be and also what you see as the current market growth. I know you've expect to outperform that through share gains. But if you could just give some sense of how big that market is and how quickly you believe it's growing right now, that would be helpful for us. Thank you.

Yeah, Chris, as I said in the prep remarks, it's going to take a long time for POC to get material versus our other two plus billion dollar franchise, but it is exciting as part of the CFPD pathway. Rob, do you want to give a little more detail as to the addressable market and your thoughts of our share? Sure. We've talked about addressable market over the years of being in the $300 million to $400 million range, but it's actually changing a lot because as we have talked about POCs are a disruptive play to other forms of oxygen delivery. But in order for that disruption to really play out, there are a few generations of technology needed. But we could see strong market growth in that market and particularly as we introduce our connected solutions and better management of products and better really management of patients through there. So long term we see a lot of a lot of opportunity in growing that market. But as Nick has said, in the short term it's going to take a long time to be material, particularly given the growth rates of our other businesses. We're very happy with our current programs where we're really focusing on learning and the best way to support patients in the market and the best way to use the capabilities of our existing partners throughout the market.

Got it, thanks. Just one very quick follow-up. Just on the mask side, if you were to apportion or rank the contribution that you expect from the F30, the M30i, and the P30i over the next few quarters, could you just give us some sense of how big you expect each of them to be relative to one another?

Yeah, thanks for the question, Chris. We don't go into that level of detail around UMass setup, the existing or UMass growth, but what I can tell you in terms of colour is we are very excited about the initial performance of the N30i and the F30. They have shot out of the gates beautifully. The P30i wasn't even in the quarter. It was just launched last month. I'm looking forward to opening the packet and using it myself, and I can't wait to see many, many, many others do the same. But, yeah, we won't break that out, but I can tell you this growth in the quarter of 13% constant currency in masks and accessories wasn't a one-timer. I think we have the ability to continue to grow pretty strongly with this really strong portfolio we have.

We are now at the one-hour mark, so I will turn the call back over to Mick for closing comments.

Thanks Julie and before we close the call I'd like to thank our dedicated 7,000 strong ResMed team in 120 countries for their continued dedication, focus and commitment to our growth strategy and our operating excellence and business excellence initiatives. You are the core of what we do and your efforts have enabled us to deliver another quarter of strong revenue growth and solid operating leverage which allows us to reinvest back into the business to drive even further growth and progress our mission. We are focused as a team on our future pipeline of innovative products and software solutions to improve outcomes and benefit all of our stakeholders, the ultimate customers, the patients, the physicians, the payers, the home care providers, and governments. Thanks for all your time today. We look forward to talking to you again in 90 days at the end of our fiscal year. Back to you, Amy, to close out.

Thank you again, everyone, for joining us today. If you do have additional questions, please feel free to reach out to ResMed's IR team directly. As previously mentioned, the webcast replay along with our earnings release and updated investor presentation are available now on our investor relations website at investor.resmed.com. Julie, you can now close the call.

This concludes ResMed's third quarter of fiscal year 2019 earnings live webcast. You may now disconnect.