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Text: With me on the call today are ResMed's chief executive officer, Mick Farrell; and chief financial officer, Brett Sandercock.
During the Q&A portion of our call, Mick and Brett will be joined by Rob Douglas, our president and chief operating officer; Jim Hollingshead, the president of our sleep & respiratory care business; and David Pendarvis, chief administrative officer and global general counsel.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions, however, our actual results may differ.
Our first quarter results demonstrate strong performance across our business, void by extremely high demand for our sleep and respiratory care devices as well as continuing recovery of many markets from COVID-19.
We achieved double-digit growth at both the top and bottom line metrics of our business.
I want to be clear that achieving these results has not been that easy in this quarter.
We are dealing with an unprecedented, what I would call, perfect storm of elements, including the COVID recovery but also including a competitor recall that's ten-fold higher than any in the industry to date, and supply chain constraints that are impacting not only our industry but multiple industries worldwide.
I'm incredibly proud of ResMedians across our global teams, many of whom are working 24/7 to get our products and solutions into the hands of patients who need them most.
Despite these extraordinary efforts, we know that we have not been able to meet all of the demand.
As such, the market leader, our competitor, that is in the not No.
2 market share position, announced a recall mid-June that has created unprecedented dislocations in the market.
In effect, we are facing the challenge of providing the volume for our own No.
1 market share position and also trying to meet as much of the No.
2 market share position as possible around the world.
Given the supply chain crisis, our suppliers have been allocating components to us on the inbound side.
We have, in turn, been forced to allocate our products on the outbound side to our customers.
We have been clear on the guiding principles for that allocation of our products.
Namely that we are giving priority for production and delivery of these devices to meet the needs of the highest acuity patients first.
The allocation conversations that I have with our customers are the same ones that I am having with my suppliers and their suppliers and so on up the supply chain.
As an example, during the quarter, I was on a Zoom call with one of our suppliers, suppliers, suppliers, suppliers, suppliers, suppliers, and I'm not kidding.
We have achieved the goal with that manufacturer and we received increased allocation from that manufacturer.
But then we face the challenge, and are still facing it, of working with the five customers of theirs.
All the way down that chain to get to us to ensure that the agreed upon increased allocation of that component actually gets to ResMed, gets manufactured into ResMed products, and then sent to ResMed customers and ultimately to patients.
That's just one example of a high degree of difficulty dive for our supply chain team.
The supply chain analyses and negotiations are ongoing, and the situation is very, very fluid, and changing day by day, week by week and month by month.
We have an incredible Six Sigma Black Belt laden team of supply chain specialists working on these issues 24/7.
In short, supply bottlenecks continue to restrict our access to critical electronic components, especially semiconductor chips, that ultimately limit our net production output.
In addition to component supply issues, the ongoing challenges of seafreight and airfreight from manufacturing facilities to the distribution warehouses, and ultimately, the customers are increasing our costs and further impacting our ability to respond as rapidly as we want to the huge demand for ResMed products.
The combination of component shortages and transportation bottlenecks makes providing steady and smooth flow of products to the market very difficult.
We are working incredibly closely with our global supply chain partners, doing everything we can to gain access to additional supply of the critical components that we need further increase production of our medical devices.
We will continue to coordinate with all stakeholders as the situation develops.
We understand that this is a difficult situation for all of our customer groups, including physicians, home medical equipment providers, payers, and the most important customer, the patient.
1 priority will always be patients, doing our best to help those who need treatment for sleep apnea, for COPD, for the asthma and for other chronic respiratory diseases as well as critical out-of-hospital care.
Our goal is to ensure that patients get the therapy that they need, where they need it and when they need it.
Let's now discuss the overall market conditions in our industry.
We are also seeing a steady ongoing recovery of demand in the countries that we operate in.
They remain at various stages of the post-COVID peak recovery process in terms of patient flow.
We are still seeing a divergence in total patient flow and sleep lab capacity from 75% to 95% of pre-COVID levels in some countries, up to 100% plus of pre-COVID levels in others.
These metrics will now continue to ebb and flow as vaccines and boosters roll out globally and as new variants of the coronavirus arise and cause temporary perturbations.
Our global ResMed team remains committed to working with national, state, and city governments, as well as the local health systems, hospitals and healthcare providers to supply the ventilators, the masks and the training for acute care and the transition home for affected patients.
Let me now update you on our three strategic priorities as we pivot back to grow our core business.
These three 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 digital health solutions that can be scaled globally; and three, to innovate and then grow in the world's best software solutions for care delivered outside the hospital and especially in the home.
In August, we launched our next-generation device platform that we call AirSense 11 into the United States market.
In short, that launch has been very successful.
We will be introducing the AirSense 11 into additional countries very soon.
Our market-leading R&D team accelerated the launch of this amazing innovation.
So, first, by expanding the controlled product launch to additional customers and then accelerating to an earlier full product launch date to bring this product to market faster.
Globally, we continue to sell our market-leading legacy platform, the AirSense 10, to be able to maximize the total volume of CPAP, APAP, and bi-levels available for customers.
Clearly, the ongoing adoption of both the AirSense 10 and the AirSense 11 platforms remains very, very strong.
It's still early into the SirSense 11 launch but initial customer feedback, combined with the detailed responses to our controlled product launch, tells me that the AirSense 11 is also another success for ResMed.
Physician, provider, and patient feedback are all very positive.
I was able to attend the California Sleep Society meeting in person actually during the quarter, and I was able to observe this firsthand the responses to the latest innovations on the AirSense 11, such as personal therapy assistant, care check-in, and the incredible rate of uptake of the patient-centric app called myAir, which has been upgraded for AirSense 11.
And the uptake on that is almost double what it was for the myAir app than AirSense 10.
What's clear to me is that this platform, the AirSense 11, benefits not only patients and their bed partners.
In addition, the device and software combination benefits physicians, it benefits providers, and it benefits payers as well as entire healthcare systems with more data, more insights, and better outcomes.
As a two-way digital health comms platform with many technical features of -- that represent significant therapeutic advances, AirSense 11 is not only easy to set up and use, it also offers a very rich patient-centric experience.
All AirSense 11 devices are 100% cloud connectable with upgraded digital health technology that is able to increase patient adherence to improve clinical outcomes and to deliver proven cost reductions within healthcare providers and physician's own health systems.
We are engaging with patients in their therapy digitally like never before in the industry.
This is a critical part of the ResMed 2025 strategy as presented at Investor Day, which we held virtually during this last quarter.
Another key aspect of our long-term growth is linked to the awareness and the increasing flow of sleep apnea patients.
With 936 million sleep apnea sufferers worldwide, this work is critical to our mission.
COVID-19 has advanced awareness, adoption, and your acceptance of digital health and remote care, including home-based sleep apnea tests.
We want to support seamless and cost-effective approaches to sleep diagnostics.
We want to scale technology that in our consumer markets enables an easy-to-use device experience and technology that in our reimbursed markets, can be a low-cost, clinically reliable, screening tool for sleep apnea.
In this vein, on October 1st, we then closed a transaction to acquire Ectosense, a leader in cloud connected home sleep apnea testing technology from Belgium.
We believe Ectosense's digital and easy-to-use solutions in the hands of both physicians and sleep lab technicians, as well as consumers, can help significantly increase sleep apnea diagnosis rates, as well as general sleep awareness.
Ectosense will operate within our sleep and respiratory care business unit, we're excited to bring this innovative technology to more global markets as we move forward.
Let me now turn to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD patients and the 330 million asthma patients worldwide.
Our long-term goal is to reach hundreds of millions of patients with our respiratory care solutions, such as noninvasive ventilation and life support ventilation as well as newer therapeutic areas such as cloud-connected pharmaceutical delivery solutions and high-flow therapy offerings.
Demand for our core noninvasive ventilation and life support ventilation solutions for COPD and the -- beyond was strong throughout the quarter, especially in markets outside the United States, where physicians and providers shifted focus to support the most severe, highest acuity patients.
This demand is aligned with our strategy to ensure priority for manufacturing and delivery of the devices that meets the needs for patients, specifically those that need life support ventilation or noninvasive ventilation, including bi-level support, first.
We are balancing the growth in the respiratory care demand with the supply of ventilators that made it to market throughout the coronavirus pandemic as well as customers as they balance their inventory with ongoing acute and chronic ventilation patient needs.
We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe a little over a year ago, and then we continue to really expand this technology to regions around the world.
The value being provided through AirView for ventilation has been very helpful to physicians not only during COVID, but it is increasingly valuable on an ongoing basis for them and the healthcare systems that they operate in.
In the not-too-distant future, I can see that AirView becoming standard of care for patients on home-based ventilation protocols in many healthcare systems.
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, including home medical equipment, as well as facility-based and home-based care settings.
The continued growth of home-based care is providing tailwinds for our home medical equipment and our home health products, and we continue to grow with customers as they utilize our software and data solutions, including Brightree and Snap ReSupply to improve and optimize business efficiencies and patient care.
The COVID-19 pandemic has also been challenging for some verticals in our SaaS business, particularly skilled nursing facilities.
However, we are seeing positive trends as census rates of patients improve across SNFs and other facility-based care settings.
We will continue to watch this closely as COVID cases ebb and flow at a really slower and slower rates around the country.
We expect there to be pent-up demand for technology investments in these SaaS verticals, which provides opportunities for us to increase our new customer pipeline that the COVID restrictions continue to ease.
As we look at our portfolio of software solutions, we expect SaaS revenue to accelerate, increasing from mid single-digit growth to high single-digit growth by the back end of this fiscal year.
As always, our goal is to meet or beat these market growth rates as we continue to innovate and take market share.
We are the leading strategic provider of SaaS solutions for out-of-hospital care, and we provide mission-critical software across a broad set of very attractive markets.
We are uniquely positioned, and we have created this differentiated value for ResMed with our SaaS portfolio.
We are set up for sustainable growth through ongoing innovation investments, commercial excellence partnerships and future acceleration through strategic M&A as well as selective tuck-in M&A opportunities.
Looking at the portfolio of ResMed's business across sleep and respiratory care as well as our SaaS solutions, and we remain confident in our long-term strategy and our pipeline of innovative solutions.
Our patient-centric, physician-centric, and provider-centric approach, combined with our unique ResMed culture means that we are well positioned to continue winning in the vastly underserved respiratory medical markets of sleep apnea, COPD, asthma, and other chronic diseases.
We are transforming the out-of-hospital care at scale.
We are leading the market in digital health technology.
With over 10 billion nights now, 10 billion nights of medical data in the cloud and over 15.5 million, 100% cloud connectable medical devices on bedside tables in 140 countries worldwide, we are unlocking value from these data to help patients, providers, physicians, payers, and entire healthcare systems.
Our mission and goal to improve 250 million lives through better healthcare in 2025, drives and motivates me and ResMedians every day.
We again made excellent progress toward that goal this quarter.
You, our ResMed team, have helped save the lives of many hundreds if not thousands of people around the world with COVID-19 with those emergency needs these last 18 months.
And you are now, and you have now already, pivoted back to provide ongoing support for all our customers during some of the most challenging industry dynamics that we've seen in the industry.
With that, I'll hand the call over to Brett in Sydney, and then we'll open the call up for Q&A.
In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2022.
As noted, all comparisons are to the prior year quarter.
Group revenue for the September quarter was $904 million, an increase of 20%.
In constant currency terms, revenue increased by 19%.
Revenue growth reflected increased demand for our sleep and respiratory care devices, driven by both sleep patient flow recovering from COVID-19 impacted reduced levels experienced in the prior year quarter and by increased demand in response to the recent product recall by one of our competitors.
In the September quarter, we estimate the incremental revenue from COVID-19-related demand was approximately $4 million, compared to $40 million estimated incremental revenue from the COVID-19-related demand in the prior year quarter.
And excluding the impact of COVID-19-related revenue in both the September 2021 and September 2020 quarters, our global revenue increased by 25% on a constant currency basis.
Looking forward, we expect negligible revenue from COVID-19-related demand.
In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $80 million to $90 million in the September quarter.
So, taking a look at our geographic revenue distribution and excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada and Latin America countries were $491 million, an increase of 22%.
Sales in Europe, Asia, and other markets totaled $315 million, an increase of 23% and or an increase of 21% in constant currency terms.
By product segment, U.S., Canada and Latin America device sales were $276 million, an increase of 40%.
Masks and then other sales were $215 million, an increase of 5%.
In Europe, Asia and other markets, device sales totaled $218 million, an increase of 24% or in constant currency terms, a 22% increase.
Masks and other sales in Europe, Asia, and other markets were $97 million, an increase of 21%, or in constant currency terms, an 18% increase.
Globally, in constant currency terms, device sales increased by 31% while masks and other sales increased by 8%.
Excluding the impact of COVID-19-related sales in both the current quarter and the prior year quarter, global device sales increased by 44% in constant currency terms while masks and other sales increased by 10% in constant currency terms.
Software-as-a-Service revenue for the September quarter was $98 million, an increase of 6% over the prior year quarter.
For the balance of fiscal year '22, we expect several factors will drive demand, including the general recovery of the global sleep market from COVID-19 impacts, the ongoing launch of our next-generation AirSense 11 platform into markets and geographies, and share gains during our competitors' recall.
However, as reported last quarter, while we are working hard to increase manufacturing output, we will not be able to meet the expected demand resulting from our competitors' recall, primarily because of significant and ongoing supply constraints for electronic components.
And so as Mick discussed earlier, we're operating a very dynamic supply chain environment.
Based on the latest information available, we continue to expect component supply constraints will limit the incremental device revenue resulting from competitor's recall to somewhere between $300 million and $350 million for fiscal year 2022.
This includes the device revenue we were able to generate in Q1.
In particular, we now do not see any improvement in our component supply position until our fourth quarter of FY '22.
During my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin decreased by 270 basis points to 57.2% in the September quarter, compared to 59.9% here in the same quarter last year.
The decrease is predominantly attributable to higher manufacturing and freight costs, ASP declines, and unfavorable currency movements, which has been partially offset by a positive product mix, particularly in relation to this strong growth of our higher acuity devices.
Moving on to operating expenses.
Our SG&A expenses for the first quarter were $177 million, an increase of 11%, or in constant currency terms, SG&A expenses increased by 10% compared to the prior year period.
The increase was predominantly attributable to an increase in employee-related expenses.
SG&A expenses as a percentage of revenue have improved to 19.5%, compared to the 21.1% we reported in the prior year quarter.
Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 20% to 22% for this balance of the fiscal year '22.
R&D expenses for the quarter were $60 million, an increase of 10%, or on a constant currency basis, an increase of 9%.
R&D expenses as a percentage of revenue was 6.6%, compared to 7.3% in the prior year quarter.
We continue to make significant investments in innovation because we believe our long-term commitment to technology, product, and solutions development will deliver a sustained competitive advantage.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the balance of fiscal year '22.
Total amortization of acquired intangibles was $19 million for the quarter, and stock-based compensation expense for the quarter was around $17 million.
Our non-GAAP operating profit for the quarter was $281 million, an increase of 18%, underpinned by strong revenue growth.
During the quarter, we finalized the deed of settlement with the Australian Taxation Office, or ATO, covering transit pricing audits for the years 2009 through 2018, and also agreed on transfer pricing principles for the future.
And in anticipation of this settlement, we had previously estimated and recorded an accounting tax reserve of $249 million, net of credits and deductions in our FY '21 financial results.
In relation to the conclusion of the settlement in the current quarter, we recorded an additional GAAP tax expense of $4 million associated with lower tax credits, which were driven by foreign currency movements.
So, on a GAAP basis, our effective tax rate for the September quarter was 21.3% while on a non-GAAP basis, our effective tax rate for the quarter was 20%.
Looking forward, we estimate our non-GAAP effective tax rate for the fiscal year '22 will be in the range of 19% to 20%.
Non-GAAP net income for the quarter was $222 million, and an increase of 20%.
Non-GAAP diluted earnings per share for the quarter were $1.51, an increase of 19%.
Our GAAP net income for the quarter was $204 million, and our GAAP diluted earnings per share for the quarter was $1.39.
We had negative cash flow from operations for the quarter of $66 million due to the payment of about $285 million to the Australian Taxation Office associated with the deed of settlement.
After adjusting for this payment, our operating cash flow for the quarter was $219 million, reflecting robust underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $27 million.
Depreciation and amortization for the quarter September totaled $39 million.
During the quarter, we paid dividends of $61.2 million.
We recorded equity losses of $1.4 million in our income statement in the September quarter associated with the Primasun joint venture with Verily.
We expect to then report equity losses of approximately $2 million per quarter through the balance of fiscal year '22 associated with the joint venture operations.
We ended the first quarter with a cash balance of $276 million.
At September 30, we had $806 million of gross debt and $530 million in net debt.
Our debt levels remained modest, and at September 30, we had almost $1.5 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declare our quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provides flexibility in how we allocate capital.
And going forward, we plan to continue to reinvest for growth through R&D.
We will also likely continue to deploy capital for tuck-in acquisitions such as Citus Health and Ectosense, an acquisition we made on October 1.
And with that, I will hand the call back to Amy.

user
q1 earnings per share $1.39.
q1 revenue rose 20 percent to $904 million.
qtrly non-gaap diluted earnings per share $1.51.

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