ResMed Inc.

Welcome to the Q1 fiscal year 2020 ResMed, Inc. Earnings Conference Call. My name is Chris, and I'll 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, Investor Relations and Corporate Communications. Amy, you may begin.

Great. Thank you, Chris. Good afternoon and good morning everyone. Thanks for joining us and welcome to ResMed's first quarter fiscal year 2020 earnings call. This call is being webcast live and the replay along with a copy of the earnings press release and our updated investor presentation will be available on the investor relations section of our corporate website later today. Joining me on the call today to discuss our quarterly results are CEO Mick Farrell and CFO Brett Sandercock. Other members of management will be available during the Q&A portion of the call. During our call, we will discuss several non-GAAP measures. For reconciliation of the non-GAAP measures, please review the notes to today's earnings release. As a reminder, our discussion today may include forward-looking statements, including but not limited to expectations about our future performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. You are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. With that, I'd now like to turn the call over to Mick.

Thanks, Amy, and thank you to all of our shareholders for joining us today as we review the results for ResMed's first quarter of fiscal year 2020. On today's call, I will discuss our long-term strategy. I'll then review top-level financial results, some business highlights from the quarter, and a few key milestones. Then I'll hand the call over to Brett, who will walk you through our financials in further detail. We have started fiscal year 2020 right where we left off with 2019. Our team achieved another quarter of balanced growth across the portfolio. driven by continued strong performance in the mask category. We are taking share with recent new product introductions, and our solutions are enabling increased therapy adherence as well as expansion of resupply programs to those who need it. Our dedicated team of more than 7,500 ResMedians around the world have again delivered strong results. As the world's leading software-driven medical device company, we continue to use technology to advance our leadership position. We have sold more than 10 million 100% cloud-connectable medical devices into the market, and our AirView cloud-based ecosystem manages more than 11 million patient accounts. In the last 12 months, we changed over 15 million lives by providing a person with a ResMed device or a complete mask system to help them breathe better, and live better lives. In addition, our Bright Tree and MatrixCare branded out-of-hospital software systems are helping to manage 93 million more people. So during the last 12 months, we improved more than 108 million lives with ResMed products, services, and software solutions. We are well on our way to the ambitious goal to improve 250 million lives in 2025. Our connected solutions are providing us with valuable access to de-identified therapy data that we are using to derive actionable insights to benefit patients, physicians, and providers, as well as to inform future innovation in products and software. These datasets are growing exponentially, and we now have 5 billion nights of medical sleep and respiratory care data in the cloud. Our relentless focus on product and software innovation continues to set us apart from our competition. We remain laser focused on growth in our core market of sleep apnea, as well as in our adjacent respiratory medical markets of chronic obstructive pulmonary disease, as well as asthma. Our expanded focus to now grow outside the hospital software solutions allows us to help customers create efficiencies to take costs out of the healthcare system and to improve the quality of care across home medical equipment, home health, hospice, skilled nursing facilities, life plan communities and beyond. We believe the future of healthcare is outside the hospital. That's where ResMed competes today, that's where we are winning today and that's where we will continue to win in the future as we provide market leading value to customers. Let's now briefly review our top level financial results for the quarter. We achieved another quarter of double digit revenue growth, up 17% in constant currency across the portfolio. This growth was well balanced across domestic US and global product sales, as well as balanced across our software as a service businesses. We continue to deliver operating leverage in the quarter. leading to a non-GAAP operating profit growth of 22% year-over-year and non-GAAP diluted earnings per share of 93 cents. Turning to a brief discussion of our sleep apnea and respiratory care businesses, in the devices category, we delivered a good quarter. We achieved year-over-year constant currency device growth of 6% globally. supported by very strong 8% device growth in the United States, Canada and Latin America geographies. We achieved 4% constant currency growth of devices in combined Europe, Asia and rest of world. We achieved excellent device growth in the UK, Switzerland and across our Nordics countries. As discussed over the last few quarters, we experienced a continued headwind during the quarter for device growth in France. as a result of digital health-related fleet upgrades. We expect that headwind to ease by the end of this fiscal year and then return to market device growth in France. It is great to see a steady flow of our digital health solutions into different European countries and to see positive constant currency device growth across the continent this quarter. The growth in the masks and accessories category of our business was incredibly strong during the quarter. We were up 19% in constant currency globally. This is well ahead of market growth rates, indicating we gained significant market share during the quarter. The reason that we continued to take share around the world is that we make the smallest, the quietest, and the most comfortable masks available in the market. Our flagship masks, the AirFit F20 and the AirFit N20 continue their growth across global markets. The success of these flagship masks was augmented during the quarter by good uptake of our recent mask launches. To recap those launches, we have now launched four new masks during the last 12 months. The F30, the N30i and the P30i. And just this week, actually on Monday, our newest innovation was launched, the N30. We have the right mask for every patient, every time. And the N30 adds innovative dimensions to this portfolio. The N30 is a world-first tube-down nasal cradle CPAP mask in a new product subcategory that we are calling the minimalist category. The N30 is our smallest, our lightest mask ever and our quietest nasal mask ever. I personally think this new N30 is another winner from our amazing research and development engineers. Watch this space as it gets into the hands of our market leading marketing and sales teams. Our mask portfolio overall is positioned to offer world leading options for physicians to prescribe for home care providers to fit in a first-time setup, and most especially for the needs of the ultimate customer, the person who suffocates every night with sleep apnea. We remain focused on driving innovation to meet all underserved customer needs. The bottom line is that our new masks have a lot of runway ahead. Unfortunately, they don't let me talk about ResMed's future product pipeline, so I won't. Our success comes as healthcare providers, physicians, and patients around the world continue to vote with their wallets and choose ResMed products, not just for the innovative design and high quality of our devices and masks, but also for the sustainable value proposition of the digital health solutions that we offer. Our digital end-to-end solutions, combined with available 100% cloud connectivity, as well as information provided to patients on their own smartphones smartphones through apps like MyAir and apps like Propeller are all leading to significant improvements in lowering cost, in improving health outcomes and improving quality of life for patients around the world. Through digital health technology, we are driving patient engagement so that people can enjoy the benefits of the best therapy available. In parallel, we are also ensuring that the cost of chronic disease can be better managed by physicians, healthcare providers, payers and governments. There's still a long way to go. Our research that was just published by the Lancet Respiratory Medicine Journal in July shows that there are over 936 million sleep apnea sufferers worldwide, while only around 20 million or so are being treated today. We keep forging ahead, investing in our own research and development to drive further innovation and advancement, as well as by working with partners. On the partnership front, our joint venture with Verily is working on software solutions to help identify and engage and better manage more people with sleep apnea. It is very early days on in this JV, but our philosophy is that the more a person knows about how much they suffocate every night and the consequences of that suffocation on their own personal healthcare outcomes, the more likely they will seek solutions. Over time, we know this partnership will drive incremental growth in our core sleep apnea business while allowing ResMed to participate in a broader chronic disease management ecosystem covering not just sleep apnea but also cardiovascular disease, diabetes, COPD and beyond. These chronic disease management platforms will include clinical care as well as wellness improvements in nutrition, in cardiovascular exercise and in mental health. Let's now turn to our second vector of growth here at ResMed, our business in respiratory care. There are nearly 400 million people worldwide suffering from chronic obstructive pulmonary disease, or COPD. We don't believe they are well served by healthcare systems today. We see the opportunity to better manage COPD through the use of technology with digital end-to-end solutions that can help patients as they progress with this chronic disease including how patients are communicated to, how patients are encouraged in their medical care, and how patients are looked after as individual persons. We're advancing our respiratory care strategy in multiple ways. Earlier this summer, we introduced a number of enhancements to Airview, our cloud-based patient management platform. We are making management of ventilation patients much simpler and much more useful for home medical equipment providers. Physicians and HMEs can now look deep into therapy data to see key performance indicators, such as pulse rate, inspiratory time, maximum airflow, and even a patient's rapid shallow breathing index, or RSBI. All these data are now available within our digital healthcare ecosystem with the easy-to-use AirView platform. Our goal is to help create a frictionless experience when managing COPD patients with ResMed's solutions. Our team at Propeller also continues to grow their business as we move from pilot trials to commercial partnerships with leading respiratory pharmaceutical companies. The team was recently at the European Respiratory Society Annual Congress in Madrid. It was great to see Propeller represented at multiple pharma booths including live demonstrations of Propeller solutions for physicians. Propeller was also featured in several scientific presentations during ERS, including the public announcement of a new large COPD outcomes trial that's sponsored by Novartis. The trial will compare Propeller plus COPD standard of care to COPD standard of care alone. The trial has already begun enrolling patients during this quarter. As we outlined when we acquired Propeller in January, the digital health opportunity with respiratory medicine adherence will take time to build into critical mass. This quarter, we passed a significant milestone with more than 100,000 people enrolled into the Propeller ecosystem. Let's be clear, we are still in the early days of market development here. The analogy is that we are now just lacing our shoes for the digital health ultramarathon in both COPD and in asthma. So there's lots of terrain ahead. The evolution that we have made in our respiratory care business has set ResMed up to become the global leader in digital health for COPD. From stage one and stage two COPD with Propeller's pharmaceutical adherence solutions, to stage three and stage four COPD with portable oxygen concentrators, as well as our cloud-connected non-invasive ventilation solutions. Let's now turn to our third vector of growth, our software as a service business. We continue to integrate and optimize the SAS portfolio for long-term growth. Our competitive advantage derives from our leadership position in SAS solutions for home medical equipment, for skilled nursing facilities, for home health, hospice, life plan communities, and home care services. ResMed is the best strategic player competing in these verticals, and we have the expertise running global digital health systems at scale to be able to succeed in the future. Our SAS portfolio continues its growth trajectory this quarter, with revenue up 83% year on year during the quarter. Clearly, growth in this first quarter was accelerated, leveraging our MatrixCare acquisition in November of 2018. We will lap that acquisition during this current second quarter. We estimate that the underlying market growth of the blended portfolio of seven out-of-hospital SAS verticals that we serve is in the high single digits. Leaving out the MatrixCare acquisition, we grew right in line with the market in Q1. We have set up an execution plan to continue to innovate and to continue to launch market leading upgrades combined with new capabilities that will allow us to gain market share in our SaaS verticals and participate in the fastest growing ones so that we can beat market growth. We plan to exit fiscal 2020 with solid double digit growth in our SaaS business segment. One example of the progress that we're making in our SaaS portfolio is the recent announcement of our collaboration with Cerner as their new preferred provider for home health and hospice software. This agreement validates ResMed as an industry-leading provider of digital health solutions for out-of-hospital healthcare. Our MatrixCare managed offering for home health and hospice customers includes the best-of-breed capabilities from both the MatrixCare technology and from the BrightTree technology. This agreement ensures our home health and hospice solution is available to all of Cerner's large customer base. The net result is growth opportunities for both Cerner and MatrixCare sales teams. In fact, at the recent Cerner healthcare conference, a major healthcare system with a very large home health business was introduced to the ResMed solution, and they are quickly moving towards a contract with our MatrixCare team. It is clearly early days as the ink dries on the Cerner contract, but the bottom line is we are excited to drive growth from this partnership and to leverage interoperability to provide value for all of our customers. In summary, for the SaaS business, we have the vision to transform and significantly improve out-of-hospital healthcare. We are helping people stay out of the hospital and in the care setting of their choice with lower costs and a higher quality of life for the person. The best place that people often choose is almost always their own home. Ageing in place is a trend that is growing not just in the US but globally and we plan to enable and leverage that positive change. We think that's an important part of the future of healthcare. Before I turn the call over to Brett, let me close with this. We have had a great start to the new fiscal year and we are well positioned to grow throughout fiscal year 2020 and beyond. We've positioned ResMed for the long term as the global leader in digital health, driving both top line and bottom line growth, as well as executing on our strategy to improve 250 million lives in healthcare that's delivered outside the hospital in 2025. We are focused on our triple aim, to slow chronic disease progression, to reduce overall healthcare system costs, and to improve outcomes and quality of life for the ultimate customer. the person who simply wants to sleep well, to breathe well, and to live a better life well away from that hospital. With that, I'll turn the call over to Brett in Sydney for his remarks, and then we'll open up for Q&A. Brett, over to you in Sydney.