Resmed Inc Q3 FY2021 Earnings Call

Welcome to the Q3 Fiscal Year 2021 ResMed Earnings Conference Call. My name is Celin, and I will be your operator for today's call. At this time, all participants are in 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, Celin. Hello, everyone and welcome to ResMed's third quarter fiscal year 2021 earnings call. We appreciate you joining us. This call is being webcast live and the replay will be available on the Investor Relations section of our corporate website later today along with a copy of the earnings release and presentation, both of which are available now. With me on the call today are CEO Mick Farrell and CFO Brett Sandercock. Other members of management will be available during the Q&A portion following our prepared remarks. During today's call, we will discuss some non-GAAP measures. For reconciliation of non-GAAP measures, please review the notes in today's earnings press release or in the appendix of the earnings presentation. 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. 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. I'd like to now turn the call over to Mick.

Thanks Amy. And thank you to all of our shareholders for joining us today as we review results of the March quarter, the third quarter of our fiscal year 2021. On today's call, I'll provide a high-level overview of our Q3 business metrics, and then I'll hand the call over to Brett for further detail on our financial results. I will review progress towards ResMed 2025 strategic goals including execution highlights against our quarterly and our annual operating priorities. A year ago, today when we discussed our March 2020 results, we were only just beginning to understand the scope of the COVID-19 pandemic. Much of our business, particularly in the United States, had not yet been significantly impacted. However, outside the U.S., countries including China and Italy were already in the midst of emergency needs. We quickly mobilized our supply chain and global operations to address and support ventilation needs worldwide, producing over 150,000 ventilators. We accelerated the production and distribution of noninvasive and life support ventilators and mask systems to those in need, resulting in an incremental $35 million of COVID-related revenue during the March 2020 quarter. I'm incredibly proud of how we quickly pivoted the business to meet that need, providing life-saving solutions around the world, so that healthcare systems were prepared with the resources needed to treat patients who were fighting COVID-19. Today, one year later, the countries we operate in are at various different stages of the post-COVID peak recovery process in terms of returning to normal patient flow. We see a range from about 70% of pre-COVID patient flow in some countries up to 90% of pre-COVID patient flow in other countries. Vaccines are steadily rolling out in the United States, the U.K. and many other countries worldwide. We still see significant impacts from ongoing second, third and fourth waves of infection in some countries in Europe, as well as in South America and Asia, and especially right now in Brazil and particularly India. Our team is working with hospitals and healthcare providers in those two countries and beyond for preservation of life, making sure that they have ventilators, masks and the training that they need to use them. We continue to support the frontline respiratory therapists and the physicians who are there on the ground, as well as providers, patients and ResMedians throughout the more than 140 countries that we operate in. We're pleased with the steady progress that we are seeing in getting new sleep apnea, COPD and asthma patients diagnosed. Excluding the $35 million of COVID-related ventilator sales in the March 2020 quarter, our team delivered positive sales growth across our core sleep apnea and respiratory care business this quarter on both the headline and constant currency basis. We forecast a steady improvement trend of patient flow for sleep apnea, COPD and asthma continuing as we move through 2021 and into 2022. We expect this progress to accelerate as global vaccination rates continue. We are encouraged to see that patients, physicians and providers around the world are adopting digital health tools for remote patient screening, home-based testing, remote patient monitoring, and ongoing patient management. I'd like to be clear that the ventilation sales that we made in 2020 will be part of our comparables for the next two quarters. In the June 2020 quarter, we recognized $125 million in COVID-related ventilator sales. And in the September 2020 quarter, we recognized $40 million in such revenue. Over the coming quarters we expect to continue to show strong positive year-over-year revenue growth excluding these one-time sales from 2020. As we look further forward, we see a clear path to double-digit revenue growth in the back half of our fiscal year 2022 across our full business, powered by opening economies and our pipeline of new technology and innovation. Our headline results were impacted this quarter by an accounting reserve. We took this in connection with discussions with the Australian Taxation Office, or ATO, regarding their ongoing audit going back to fiscal year 2009. Brett has been leading those discussions and we'll speak to the details in his remarks. I will make this statement: ResMed pays significant taxes in countries around the world and we operate in over 140 countries helping people sleep better, breathe better and live better lives well away from the hospital. Brett and his team are working towards a final resolution of these transfer pricing discussions covering 12 years with the ATO. So we have taken this $255 million reserve. We believe that resolving these discussions is the pragmatic thing to do for all of our stakeholders, so that we can put this behind us and focus all of our efforts on our core mission of improving lives in respiratory medicine around the world. During the third quarter of fiscal year 2021, we generated over $196 million in operating cash, allowing us to return $57 million in cash dividends to shareholders. We also increased our R&D investments in the period in digital health technology, as well as R&D for hardware, embedded software and clinical research, while maintaining financial discipline with reduced SG&A and other operating costs. We are seeing increased demand for our digital health solutions from patients, physicians, providers and healthcare systems around the world as they embrace remote patient engagement and adopt population health management. We are the clear leader in this field with over 14 million cloud-connectable medical devices in the market. Our ongoing and increasing investments in digital health innovation will ensure we provide superior value to patients, physicians and providers to be their partner of choice. We don't take our leading market share position for granted. We fight for it every day through innovation. Our digital technologies are a growth catalyst for our business. We have an exciting pipeline of innovative solutions that will generate both medium- and long-term value with an industry-leading IP portfolio including over 8,000 patents and designs. We now have over 8.5 billion nights of respiratory medical data in our cloud-based platform called Air Solutions. We have over 15.5 million patients enrolled in our cloud-based AirView software solution. And we also have over 1.05 million patients managed within our software-as-a-service network for out-of-hospital healthcare. These data assets allow us to unlock value for all of our customers, patients, physicians, providers, as well as private and government payers. Let me take a few minutes to share some recent clinical highlights that show how we are working with researchers to advance the field of sleep and respiratory medicine with these data and beyond. During 2020, an important 30-year duration study was published in the European Respiratory Journal following over 4,500 diagnosed OSA patients to better understand the long-term impacts of untreated sleep apnea. The study showed that untreated sleep apnea leads to a higher incidence of myocardial infarction or heart attack, a higher incidence and prevalence of Type II diabetes and a higher incidence of ischemic heart disease. This real-world clinical analysis is showing what we've known for over three decades: sleep apnea is a public health epidemic that simply can't be ignored. In terms of clinical quality-of-life improvement from CPAP therapy, the data are also clear. In late 2019, the multicenter randomized controlled trial called MERGE was published in Lancet Respiratory Medicine. The results were that patients randomized to CPAP demonstrated clear improvement in quality of life versus standard of care, with symptomatic benefits including reductions in sleepiness, as well as improvements in fatigue and, importantly, depression, a key part of mental health. Importantly, these results were evident in mild as well as moderate and severe sleep apnea. In terms of economic data, and a dose-response relationship from CPAP therapy, the data are also unequivocal. In 2019, a study was published in the Journal of Clinical Sleep Medicine showing the quantified dose-response relationship from CPAP therapy. For every additional hour of Positive Airway Pressure use, there was an 8% decrease in hospital inpatient visits and a 4% decrease in overall physician visits. In other words, treating sleep apnea with CPAP therapy not only improves lives, it also saves money for the healthcare system by lowering total healthcare utilization costs. During the quarter, we saw the publication of a draft technology assessment from the Agency for Healthcare Research and Quality, or AHRQ, here in the U.S. market. AHRQ sought input and ResMed filed public comments, along with comments from many physician groups, sleep apnea patient advocates, provider groups and others. I won't repeat all the details of those public comments, but I will say this: we presented peer-reviewed and published data showing that CPAP therapy improves quality of life, reduces healthcare costs, and even reduces mortality. In short, these data prove that in partnership with our physician and provider colleagues in the market, we are saving lives and saving money for the healthcare system through our medical technology. We have peer-reviewed and published data showing a reduction in incidence of heart attack, a reduction in hypertension, as well as a reduction in the incidence of certain solid cell tumors. All of these are logical sequelae of the elimination of hypoxia that is associated with CPAP therapy in treated sleep apnea patients. We are encouraged by technical studies completed by the National Institute for Health and Care Excellence, NICE, in the U.K. Just last month NICE published their 2021 draft guidelines that recommend that CPAP therapy along with telemonitoring is a frontline treatment option for patients with mild OSA. That would be an expansion of coverage in the U.K., and also an expansion of the use of digital health technology in that market. Similarly, the ministries of health in France, Germany and Japan have seen the value of digital health in sleep apnea therapy and have begun investing reimbursement funds in the space. It's great to see this expansion of coverage for sleep apnea therapy and digital health around the world as governments see improvement in outcomes and reductions in total healthcare system costs with this technology. While we respect the work of AHRQ, we, along with many other academic research-focused institutes and practicing physician groups believe that they bypassed a generation of real-world evidence that needs to be taken into account along with their own selected group of RCTs in the draft report. We are optimistic that the final report, when issued, will reflect the preponderance of real-world evidence and broader RCTs showing both the clinical and economic benefits of treating sleep apnea with positive airway pressure. Okay, let me now update you on our top three ResMed strategic priorities. These are: one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses; two, to design, develop and deliver world-leading medical devices, as well as globally scalable digital health solutions; and three, to innovate and grow the world's best software solutions for care delivered outside the hospital and preferably in a person's home. In our core market of sleep apnea, we continue to see sequential improvement in new patient diagnosis trends, as we seek to provide solutions for the 936 million people worldwide who suffer each night. The rate of new patients starting sleep apnea therapy in the U.S. was impacted by the typical seasonality that we see in the March quarter, primarily as a result of insurance deductibles resetting at the start of each calendar year. This seasonality affects devices more than mask systems, given the incremental cost of diagnosis and the relative price points of the two categories. We expect sequential growth in sleep and respiratory care as we move past this typical seasonality. We continue to see strong ongoing mask and accessory resupply in the U.S. market and beyond. New patient flow during the quarter was impacted by the recent COVID-related case surges in select countries in Asia and Europe, including two large markets, France and Germany. We see that impact in the number of patients going for clinic-based diagnosis pathways in these affected countries. We expect to see these markets reopen along with hospitals as vaccines continue to roll out, and as we see further scaling of remote home-based diagnostic capacity. Clearly the kinetics of opening these economies and the rate of vaccination rollout are beyond our control. However, we can control our investments in digital solutions for our physician and provider partners, which we are doing at increasing velocity and with scalable systems and processes. More broadly, we are seeing growth in total new sleep apnea, COPD and asthma patient flow, and we expect to see this improve over time in our portfolio of 140 country markets each quarter. Importantly, our market-leading share position has remained stable across both masks and devices, and we're excited about our future pipeline. We rarely talk about our future pipeline as those who've followed us for a long time know. But today I would like to open up the curtain just a little bit on our next-generation sleep apnea platform. You may have seen some recent U.S. regulatory filings that we made for our next-generation flow generator platform called the AirSense 11. Clearly, there are multiple steps in the process to bring this new platform to global markets and these public regulatory filings are simply one important step, but we are making good progress. Earlier this month, we started a limited controlled product launch of the AirSense 11 in certain parts of the United States. We expect to move to a broader commercial launch of the platform later this calendar year in the U.S. and then to country markets worldwide in sequence after that. For now I can say that as a personal user of our CPAP therapy, I have firsthand knowledge that the AirSense 11 device will benefit patients and their bed partners. Our early data show that the device and software platform combination will benefit physicians, providers, payers and others, and ultimately continue to catalyze ResMed's global leadership in digital health solutions for sleep apnea and also accelerate our success in digital health solutions for COPD, asthma and other chronic diseases. We make the smallest, quietest, smartest and the most comfortable devices on the market. Importantly, they are all cloud connectable with the latest and greatest digital health technology to increase adherence, improve clinical outcomes, and deliver proven cost reductions for our customers and healthcare systems. Let me turn now to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD patients and the 340 million asthma patients worldwide. Our goal is to reach more patients with our core respiratory care solutions including both noninvasive ventilation and life support ventilation, as well as newer therapeutic areas, such as cloud-connected drug delivery devices and high-flow therapy devices. Our respiratory care business benefited in the March 2020 quarter as we sold incremental ventilator devices and ventilation mask solutions to meet growing demand worldwide as a result of the pandemic. During the March 2021 quarter COVID-related ventilator sales were not material to the global business. However, we are seeing some demand in select countries affected by these latest COVID surges, such as just this month with the surge in India. We're getting many thousands of devices to those in need. The demand is there in that country. But as in Q3, we do not expect the revenue to be material to our global business. Even though the broader impact, particularly with preservation of life in these countries, is clearly priceless and incredibly important to not only our local team in India, but to all of us here at ResMed worldwide. Demand for our core noninvasive and life support ventilator solutions for COPD and other respiratory insufficiency are experiencing the same steady recovery in new patient flow as in sleep apnea. We are balancing the growth in patient demand there with the supply of ventilators that we made to the market throughout 2020 as customers balance their inventory and their core ongoing patient needs. We continue to see rapid adoption of the AirView for Ventilation software solution that we launched in Europe in the midst of the pandemic a year ago. We are now seeing that this technology has expanded to regions around the world. The value provided through this cloud-based software solution has been fruitful not only during the COVID pandemic and the peak parts of the crisis, but it's also valuable on an ongoing basis for physicians as well as the healthcare systems they operate in. We are helping to ensure that digital health is now the new standard of care for respiratory care. Let me now review our software-as-a-service business for out-of-hospital care. During the quarter our SaaS business grew in the mid-single digits year-on-year across our portfolio of markets. The verticals include home medical equipment (Brightree HME), skilled nursing facilities, home health, hospice, private duty home care, home infusion, senior living and life plan communities. Our HME customers are leveraging our advanced resupply solutions, including SNAP technology and Brightree resupply for our existing portfolio of patients, and they are contributing to ongoing growth as the flow of new patients in HME continues to recover steadily period by period. Over the past 12 months COVID-19 has had a dampening effect on elective and emergent procedures at hospitals as we all know, and that has slowed hospital discharge rates affecting patient flow and ultimately the census rates at skilled nursing facilities, home health, hospice and beyond. As the rate of vaccinations accelerate across the U.S. and the number of COVID-19 cases continues to trend downward in this country, we're seeing improvements in the census rates across skilled nursing facilities, home health, hospice, and across all post-acute care settings. In addition to the solid organic growth that we're seeing in our SaaS business, we closed an exciting acquisition just this month. The company is called Citus Health. Citus is a digital health leader specializing in patient engagement solutions for home infusion and specialty pharmacy, as well as the home health and hospice markets. Citus enhances the patient experience and it also improves provider efficiency and reduces the workload for frontline clinicians and caregivers. We are excited to have the Citus team as part of the ResMed family of solutions and to leverage their digital collaboration and patient support platform in our mission to improve patients' lives outside the hospital. I'm very impressed by the breadth and depth of talent at Citus and their passion for patient care, from their CEO and co-founder all the way to the front line. We're very excited to have them join our team and we will be better together. As we look across our portfolio solutions from Brightree to MatrixCare to now Citus, including HME, specialty pharmacy, home infusion, skilled nursing facilities, home health, hospice, senior living, life plan communities and private duty home care, we expect this SaaS portfolio revenue growth to accelerate, increasing from the mid-single digit growth that we saw this quarter to high-single digit growth as we move forward. As always, our goal is to meet or beat these market average growth rates and we continue to take share across the verticals that we're in. We also see opportunity to drive growth through further acquisitions that will augment and add to our existing portfolio of solutions. Our offerings are well received in each of these verticals and we continue to leverage analytics and the technology that we have across our core business and the SaaS business to help people age in place and minimize or eliminate acute care episodes. Looking at the broader ResMed portfolio of business across sleep and respiratory care as well as our SaaS solutions, we remain confident in our long-term strategy and our pipeline of innovative solutions. Our mission to improve lives drives and motivates millions across the world every day. COVID has highlighted and continues to highlight the importance of respiratory health and respiratory hygiene. It has also highlighted the importance of digital health and remote care, and it has accelerated awareness and adoption of technologies that can be used for remote patient screening, diagnosis, setup, and remote patient management and monitoring. We've continued to invest aggressively in R&D and innovation to ensure our solutions are best-in-class and a catalyst for future growth. With 1.5 billion people around the world suffering from sleep apnea, COPD and asthma combined, we see incredible opportunities for greater identification, enrollment and engagement of people with our digital health pathways. We are relentlessly driving innovation and development to provide the scale needed to expand the impact of this technology across the 140 countries that we operate in. Before I hand the call over to Brett for his remarks, I want to once again express my sincere gratitude to more than 7,500 ResMedians for their perseverance, hard work and dedication during these most unusual circumstances over the last 15 months. This team has helped save the lives, literally, of many hundreds of thousands of people around the world with ventilators for emergency needs. The team has now rapidly pivoted back to our core markets and our core purpose of helping people with sleep apnea, COPD and asthma, and for all those who need world-class care delivered well away from the hospital, and preferably in their own home. Thank you. With that, I will now hand the call over to Brett in Sydney, and then we will move to Q&A. Brett, over to you.

Great. Thanks Mick. In my remarks today I will provide an overview of our results for the third quarter of fiscal year 2021 and comment on our FY 2022 outlook. Unless noted, all comparisons are to the prior year quarter. Group revenue for the last quarter was $769 million, which is consistent with the prior year quarter. In constant currency terms revenue decreased by 3% compared to the prior year quarter. Consistent with our commentary during the Q2 earnings call, we drew off negligible incremental revenue from COVID-19 related demand in the March quarter, whereas the prior year revenue included incremental benefits from COVID-19-related sales of approximately $35 million. Excluding that impact, our FY 2021 revenue increased by 1% in constant currency terms. Taking a closer look at our geographic distribution and excluding revenue from our software-as-a-service business, U.S., Canada and Latin America countries were $403 million, an increase of 2%. Europe, Asia and other markets totaled $272 million, a decrease of 5% or a decrease of 13% in constant currency terms. By product segment, U.S., Canada and Latin America device sales were $193 million, a decrease of 2%. Mask and other sales were $210 million, an increase of 7%. Europe, Asia and other markets, device sales totaled $173 million, a decrease of 11% or in constant currency terms an 18% decrease. Masks and other sales in Europe, Asia and other markets were $99 million, an increase of 9% or flat year-over-year in constant currency terms. Globally in constant currency terms, device sales decreased by 10% while masks and other sales increased by 4%. Excluding the impact of COVID-19-related sales in the prior year quarter, global device sales declined by 3% in constant currency terms, while masks and other sales increased by 6% in constant currency terms. Software-as-a-service revenue for the third quarter was $94 million, an increase of 5% versus the prior year quarter. During my commentary today, I will be referring to non-GAAP numbers. We've provided a full reconciliation of the non-GAAP to GAAP numbers in our third quarter earnings press release. Our non-GAAP gross margin decreased by 40 basis points to 59.6% in the March quarter compared to 60.0% in the same quarter last year. This decrease is predominantly attributable to higher freight costs, additional manufacturing costs associated with the transition to our new Singapore site as we commenced operations during the quarter, and geographic mix changes. Moving on to operating expenses. Our SG&A expenses for the third quarter were $160 million, a decrease of 7% or in constant currency terms SG&A expenses decreased by 11% compared to the prior year period. SG&A expenses as a percentage of revenue improved to 20.9% compared to the 22.4% we reported in the prior year quarter, benefiting from cost management and reduced travel as a result of COVID-19 restrictions. Looking forward, we expect SG&A expenses in Q4 FY 2021 to increase in the low single digits relative to the prior year period. R&D expenses for the quarter were $56 million, an increase of 9% or on a constant currency basis an increase of 3%. R&D expenses as a percentage of revenue were 7.3% compared to 6.7% in the prior year. Looking forward, we expect R&D expenses in Q4 to increase year-over-year in the high single digits reflecting our long-term commitment to innovation. Total amortization of acquired intangibles was $18 million for the quarter and stock-based compensation expense for the quarter was $16 million. Our non-GAAP operating profit for the quarter was $242 million, an increase of 2%, reflecting well-contained operating expenses. For the March quarter, we estimated and recorded an accounting tax reserve of $255 million, which is net of credits and deductions, for a proposed settlement and third-party audits by the Australian Taxation Office, or ATO. The audits covered tax years 2009 to 2018, as previously disclosed for 2009 to 2013. The ATO issued an assessment of $256 million inclusive of penalties and interest. The 2014 to 2018 year audits remain open and assessments have not been issued. We have tentatively agreed on a number with the ATO to resolve the entire matter for all years. We expect any adjustments to the reserve to be taken this quarter would be material. Next steps include getting to a written agreement and final Board approval. If the deal falls apart, we will wait to proceed. We continue to believe we are more likely than not to succeed in litigation. However, transfer pricing litigation is complex, costly and uncertain. So we are looking forward to putting this behind us. As a result of reporting the reserve on a GAAP basis, our effective tax rate for the March quarter was 136%. On a non-GAAP basis, which excludes the reserve, our effective tax rate for the quarter was 19.4%. Looking forward, we estimate our underlying non-GAAP FY 2021 effective tax rate will be in the range of 17% to 19%. Our non-GAAP net income for the quarter was $190 million, an increase of 1%. Non-GAAP diluted earnings per share for the quarter was $1.30, an increase of 1%. As a result of the tax reserve recorded this quarter, our GAAP net loss for the quarter was $78 million and our GAAP diluted loss per share for the quarter was $0.54. Cash flow from operations for the quarter was $196 million, reflecting solid underlying earnings, partly offset by increases in working capital. Capital expenditure for the quarter was $26 million. Depreciation and amortization for the March quarter totaled $40 million. During the quarter we paid dividends of $57 million. We recorded equity losses of $5 million in our income statement in the last quarter associated with the Verily joint venture. Going forward we expect to record equity losses in the range of $3 million to $5 million per quarter associated with the Verily joint venture. We ended the third quarter with a cash balance of $231 million. At March 31, we had $734 million in gross debt, and $503 million in net debt. Our debt levels remain modest and as of March 31 we had a further $1.5 billion available for drawdown under the existing revolver facility. In summary, our liquidity position remains strong. During the third quarter we completed the acquisition of Citus Health. Citus Health is a digital health leader specializing in patient engagement solutions that enable real-time secure collaboration between patients and those involved in care. We also acquired certain business assets of Tongil Medical Company based in Korea, which primarily represented Tongil's sleep and respiratory distribution business. Both these acquisitions are not material to our group results. Our board of directors today declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance. Our solid cash flow and liquidity provide flexibility in how we allocate capital. During the pandemic we have focused on paying down debt. Going forward, we plan to continue to invest for growth through R&D. We will also likely continue to deploy capital for tuck-in acquisitions like Citus Health. We intend to continue to return cash to shareholders through our dividend program. We may also resume our share buyback program sometime during the calendar year. This program has been on hold since our acquisitions of MatrixCare and Propeller Health in fiscal year 2019. Turning now to expectations on the outlook for Q4 FY 2021 and FY 2022, there remains uncertainty in the short term particularly regarding the timing and recovery of patient flow from COVID-19-related impacts across the many countries we operate in. Consequently, we expect Q4 FY 2021 revenue to reflect low single-digit sequential growth over Q3 FY 2021. As we move through FY 2022, we expect to see continued improvement in new patient flow and a return to more normal, underlined revenue growth trends. Additionally, we are seeing minimal COVID-19-generated demand for our ventilators and do not expect any material benefit going forward. As a reminder, we recorded $35 million of COVID-related revenue in the March quarter last year, $125 million in the June quarter last year, and $40 million in our first quarter of FY 2021. Masks and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient installed base and the success of our resupply service offering. We expect to see continued year-on-year growth of mask sell-in in FY 2022. Finally, like many other companies, we continue to experience significant uncertainty in the current environment, particularly in relation to the timing of the reopening of economies and the rollout of vaccination programs. As a result, our forecast and possible future revenue outcomes remain dynamic. And with that, I'll hand the call back to Amy.

Great, thanks, Brett. Celin, I'd like to now turn the call over to you to provide instructions and then run the Q&A portion of the call. Celin, are you there, ready to run the Q&A portion of the call?

Excuse me, this is the backup operator. We have a question coming from the line of Lyanne Harrison from Bank of America. Your line is now open.

Good morning all, and thank you for taking my question. Perhaps I could start with rest-of-world or outside of the United States in terms of the device trends you're seeing there. Certainly down 18% on constant currency. Could you help split in terms of what you're seeing in terms of real device declines without the COVID impact there? And then also, particularly for Germany and France, what you're seeing in that market currently, and what sort of rate it's operating at as a percentage of normal, particularly given the increased COVID cases in those countries?

Yes. Thanks for the question, Lyanne. And clearly as I said in the prepared remarks, the March 2020 $35 million worth of ventilators were primarily where COVID was impacting them, which was southwest China, probably Hubei province, and northern Italy. So China and Italy. So clearly, the $35 million worth of sales in the March quarter last year were predominantly in that rest-of-world category. So you can imagine that the actual decline in terms of the COVID impact year-on-year is significantly below that 18% constant currency that you talked about, much further below that. And really importantly, when you look at the kinetics of this, and you think about the December quarter to the March quarter, and then what we're going to see in June, we're seeing countries opening up. They're adopting digital health and they're finding ways to make it work. And even in France and Germany where you didn't see lockdowns in the retail side, healthcare was impacted. Our digital health solutions, particularly around remote patient screening and diagnosis, have been effective. So we're seeing that open up as we move forward. Rob, do you want to take the second part of the question?

Yes. The Germany and France question — the challenge in Germany and France really in this quarter has been the second waves, which caused extensive lockdowns and put challenges in place. We had seen incremental opening up that actually slowed down. It wasn't quite as significant as before, where we really saw some sleep labs converted into COVID wards, but we certainly saw a reduction in new patient flow in most countries. In terms of breaking out device sales in those specific countries without the COVID impact earlier, I don't think we'll be able to provide that granularity. But underlying it, those sleep businesses continued to operate, and also note that ventilation businesses in Europe are a larger share of the ResMed business there than in other regions, and that contributed to the relativity of what had happened with the incremental COVID ventilator sales in the previous period.

Thank you very much.

We have our next question coming from the line of Gretel Janu with Credit Suisse. Your line is open.

Thanks. Good morning. Just firstly on U.S. devices. What was the performance of underlying CPAP devices next to COVID? I'm assuming there was very limited COVID ventilator sales in the prior year. So when we compare this last quarter, was it actually much weaker? Is that because there are fewer patients coming through the sleep labs? Or were there potentially market share losses? Can you explain what happened from a sequential performance between last quarter and this quarter? Thanks.

Thanks, Gretel. Good question. If you look at just U.S., Canada, Latin America — the Americas numbers — devices were down 2% year-over-year. When you think about the COVID recovery rates being somewhere between 70% to 90% of pre-COVID patient flow depending on the country, that math comes out to almost pre-COVID levels, acknowledging some replacement devices are included. We actually saw very steady market share, some gains in some of the mask areas, but very steady market share on devices. Some competitors are having difficulties around supply as well. So we may have even taken some share in the device side. What we're seeing in those U.S. numbers, when you think about sequential from the December to March quarter, is really all about, as I said in the prepared remarks, deductibles resetting at the start of the calendar year, which impacts devices more than masks and accessories. If you look at masks and accessories, we saw 7% constant currency growth in masks and accessories in the March quarter year-over-year. There is always a sequential impact from December to March. So the year-over-year 2% decline in devices is around the COVID recovery rates. The rollout in the U.S. has been strong in terms of vaccinations, and I don't think we're quite at a 98% recovery, but we are moving well toward the 90% range in some states and the 80% range in others. Every period we look at we see improvement. Thanks for the question, Gretel.

Thanks very much.

We have our next question coming from the line of Margaret Kaczor with William Blair. Your line is open.

Hey. Good afternoon. Thanks for taking the question. You mentioned that you expect to return to double-digit underlined growth in the second half of fiscal 2022. How quickly can those investments take hold? As you look at the short term, will growth remain at the bottom end of the shape you discussed previously until you get to that second half? Or can there be more meaningful improvements driven by some of these investments? For example, could the U.S., being further ahead on the vaccination curve, help and offset some weaker geographies? Thanks.

Thanks Margaret. That's a thorough question. We're confident the medium- to long-term outlook of the core business is excellent given the flow of patients and our new technology. There are short-term dynamics around second and third waves and vaccination rollouts. As we get the AirSense 11 from controlled product launch to broader rollout this calendar year in the U.S., that will be a catalyst for growth. It brings hardware and advanced software solutions for patients, physicians and providers. The scaling of remote patient digital health models — identification, engagement, enrollment, home sleep testing and home setup — is showing that investments can pay off. It's hard to predict exact timing of vaccines and reopenings, but in the U.S. we're seeing positive trends which leads us to talk about double-digit growth toward the back end of fiscal year 2022. I think the dynamics all point to that. Jim Hollings, President of our Sleep and Respiratory Care business, if you have further thoughts on how quickly we can use that technology to drive growth toward the back end, please add.

Yes. Thanks, Mick, and thanks Margaret for the question. When you think about growth and when we get back to double-digit growth, the numbers are against big comps that came from COVID. So when you think about growth as a percentage, the underlying dynamic in the market, especially U.S.-specific, is pretty strong. March was the best month of the quarter for us in new patient growth in the U.S. market, and we think that trend will continue. We're hopeful about vaccine rollouts, we'll start to open up diagnostics, and of course we have the new product later in the calendar year. So we feel very confident about the underlying core business continuing to grow over the coming quarters, and we expect to not just maintain share but probably take some share. There is uncertainty associated with COVID, but we're confident in the underlying growth dynamics and it's the COVID comps that need to clear for us to talk about double-digit growth.

Okay. Thanks.

We have our next question coming from the line of Matthew Mishan with KeyBanc. Your line is open.

Great. Hello Mick, thanks for taking my question. I listened to the HCA calls, which is a major hospital system in the U.S. They seem to be integrating hospice and home health into their systems. How can you work with large hospital systems as they migrate into the home to scale?

Matt, great question. Within our SaaS business, interoperability and secure private APIs are essential to enable data to flow between hospital care systems and out-of-hospital care. We're many quarters into our Cerner partnership and we've shown that ResMed is a strong partner to receive patients from the hospital into both home health and hospice and beyond. With that track record, Cerner and Epic customers — such as HCA — can partner with someone like ResMed to ensure a seamless transition from hospital to the out-of-hospital healthcare network. The ultimate goal is to take costs out of the system, take better care of the patient, and have seamless transfer of records. We have a strong track record in Western Europe and elsewhere of holistic care delivery, and I see a lot of upside as hospital systems think holistically in an Accountable Care Organization approach. We're well positioned to scale not just across the U.S. but globally.

Thank you.

We have our next question coming from the line of Mike Matson with Needham & Company. Your line is open.

Yes. Thanks for taking my question. I wanted to ask about the AirSense 11. Is there anything more you can tell us about that product and how it compares to AirSense 10? Historically when you've launched new generation platforms, it has had a sizable impact on growth, at least on the device side. Is there any reason to believe that won't happen with this? And on cost — is this going to be lower manufacturing cost / higher gross margin? How does the ramp look? Thanks.

Great question, Mike. Three parts to that. First, AirSense 11 is in controlled product launch and I am personally part of that CPL. It offers meaningful benefits for the individual patient and the bed partner: smaller, quieter, more comfortable and more cloud-connected. It's not just the device, it's the software ecosystem that provides value for patients, physicians, providers and healthcare systems. Second, on growth: yes, we believe this will be a catalyst for growth — that's part of why we're comfortable talking about double-digit growth toward the back end of fiscal year 2022. The software and digital health around the device will be a large part of that catalyst. Our business scale is much larger today than it was with prior platform launches, so percentage growth won't be the same as a decade ago, but growth in net revenue and profitability will be meaningful. Third, on cost: our goal each generation is to create smaller, quieter, more comfortable and more efficient devices, which includes improved manufacturing efficiency and lower cost across the supply chain. We expect to realize efficiency gains as we scale the platform across our global business.

Thank you.

We have our next question coming from the line of David Low with JPMorgan. Your line is open.

Thanks very much. Mick, we're all aware that Philips had an issue with their devices. Just wondering what your expectations are: one, can you clarify whether there are any risks that ResMed has the same issue with ozone cleaning? And then secondly, what the implications might be for ResMed's position in the market?

Thanks, David. We clearly saw the issues raised by our competitor's call. We care most about patients. Rob, do you want to talk a bit about our quality standards and the ozone cleaning point?

Sure. Patient safety is our number-one priority and we focus heavily on quality. We've designed our devices with different materials and construction, and we have aggressive testing procedures looking at these types of risks. Across our 40 million installed base, we have not seen this problem reported. We're extremely confident that we do not have the issue that has been reported by our competitor. We will always continue to pay close attention to patient safety. Regarding ozone cleaning specifically, it can be an effective disinfectant, but the amount and frequency of use are important to monitor. We've communicated our warranty position on that and have publicly posted guidance on our website for customers.

Okay. Thanks very much.

Thanks. On the second part of your question about market implications, I don't know exactly what will happen with our competitor's position and their ability to deliver product, but we want to take share when our products are smaller, quieter, more comfortable and better. If a competitor has constraints around supply, there may be share implications. Jim, do you want to add on the commercial side?

Sure. We're waiting to see how things unfold with our competitor's supply and market behavior, but we're ready and able to help our customers with more product. To whatever extent there's potential upside for us and market share gains in the next quarter or two, we'll certainly do our best to take advantage of it.

We have our next question coming from the line of Sean Laaman with Morgan Stanley. Your line is open.

Thank you. Mick, good morning. We've seen the cancellation of competitive bidding in the U.S. a while ago. I'm wondering if that's had any influence or what influence it might have had with respect to pricing?

Thanks Sean. I'll hand to Jim Hollings to address competitive bidding and pricing in the U.S. market.

Yes, thanks for the question. The cancellation of competitive bidding has led to ongoing stability in pricing in the U.S. market, and that's what we see. There hasn't been any signal from CMS that they intend to relaunch a program, so pricing has been relatively stable.

Great. Thanks. Appreciate the answer.

We have our next question coming from the line of Andrew Goodsall with Macquarie. Your line is open.

Good morning. Thanks for taking my question. I'm going to touch back on your SaaS business. A lot of commentary suggests a shift due to COVID toward home-delivered care. In practical terms, how quickly can we see that recovery in the next quarter or so?

Andrew, great question. There are many dynamics between hospital care and the flow to post-acute care and our SaaS systems. We saw 5% growth in the quarter across our SaaS business. We think the weighted-average market growth across the verticals — now including Citus — can move from mid-single digit growth toward high-single digit growth as patients return to hospitals and then are discharged to skilled nursing, home health, hospice and beyond. It's difficult to give an exact rate, but it will increase. Our technology investments, including tools we put in place during COVID for skilled nursing facilities to manage patients, have been well received. As recovery happens, we believe we'll be a partner for growth; our aim is always to beat the market and drive the SaaS business to stronger growth over time.

That's great. Thank you.

We have our next question coming from the line of Suraj Kalia with Oppenheimer. Your line is open.

Hi Mick, Brett, can you hear me? Alright. Couple of questions. Mick, can you give us your perspective on the AHRQ report and any counter messaging or quantification of impact? And second part: the SaaS business was a tailwind for margins and top-line growth previously; over the last four quarters it seems to be less of a tailwind. How do you parse the structural dynamics to return this line item to normalized growth?

Got you loud and clear, Suraj. Dave, do you want to handle AHRQ, and then I'll address the SaaS question?

Yes. Briefly on AHRQ: we believe AHRQ took a narrow perspective by focusing on a limited set of randomized controlled trials under specific criteria. While RCTs are important, in sleep medicine there's a massive amount of real-world evidence and longitudinal studies that show benefits in longevity, clinically significant cardiovascular outcomes, quality of life, and reduced healthcare utilization. We think all this evidence should be considered to conclude that treating sleep apnea with CPAP is beneficial for patients and healthcare systems. We and many clinical societies submitted extensive comments. We're hopeful that the final report will take the broader evidence base into account when issued.

Suraj, to add on SaaS: in the quarter it was actually a strong tailwind, with 5% growth. As I mentioned earlier, we expect SaaS to move from mid-single digit growth to high-single digit growth as post-acute care and hospital discharge rates normalize. COVID depressed census rates across those settings, and as vaccinations increase and hospitals reopen, we'll see recovery. We have the technology investments in place and the acquisitions like Citus that expand our addressable market. Over the long term, we expect SaaS to become an even stronger tailwind for the group. We're bullish on the medium- and long-term prospects.

We have our last question coming from the line of Anthony Petrone with Jefferies. Your line is open.

Thanks. Maybe just to follow up on the SaaS business between Brightree and MatrixCare: there was some consolidation in the HME space through 2020. Is that cycling through the numbers? And when you think of core lead trends, can you provide a quick update on sleep labs? I know labs are a small portion of the overall business but could there be a reversal in activity as folks get back to sleep labs?

Thanks for the questions, Anthony. On the Brightree side, consolidation in HME can have multiple effects. If an HME customer using Brightree acquires another HME that didn't use Brightree, that's upside for us because the acquiring, more efficient operator will often roll the acquired business onto Brightree, increasing users. If a Brightree customer acquires another Brightree customer, there may be some short-term reductions from consolidation, but over time smart customers will grow and that drives upside. Overall, Brightree tends to be adopted by the more efficient, winning providers, which is good for us. On sleep labs: in the U.S. we've seen reduced in-lab testing during COVID, and many providers scaled home sleep testing. As labs reopen, there will be some rebound in in-lab capacity, but they won't lose the home testing adoption — it's additive. The diagnostics and digital health pathways will remain part of the mix and should help increase diagnosis rates. So yes, there will be some reversal and recovery in lab activity, but home testing will remain an important channel.

Thanks, Mick. Did you want to give your closing remarks?

Sure. I'll be brief. Thanks again to all our shareholders for joining us on the call. I'd like to again thank the more than 7,500 ResMedians for their perseverance and dedication helping people sleep better and breathe better in over 140 countries worldwide. Thank you for the teams helping our colleagues and customers in India and elsewhere during recent emergencies. I look forward to speaking with you and our shareholders again in 90 days. Thanks.

Great. Thanks, Mick. And thank you all again for joining us today. We appreciate your interest and your time. If you have any additional questions, please don't hesitate to reach out directly. This concludes our call. Celin, you may now close out the call.

This concludes ResMed's third quarter of fiscal year 2021 earnings live webcast. You may now disconnect.