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Text: With me on the call today are 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, our president, sleep and respiratory care; and David Pendarvis, our chief administrative officer and global general counsel.
We believe these statements are based on reasonable assumptions.
However, our actual results may differ.
Our second quarter results continue to demonstrate the strong performance across our business, benefiting from the ongoing extremely high demand for our sleep and respiratory care devices as well as the steady recovery of markets from the peaks of COVID-19 impacts.
We achieved double-digit growth in our business as we navigate three major externalities: one, the recovery of patient flow post the COVID maximum peaks; two, global supply chain constraints, particularly in electronic components; and three, the almost unlimited demand associated with the competitor recall, that has actually extended further in terms of volumes of their devices that were impacted and the duration of their repair and replace process.
The bottom line is we have at least 12 more months of this incredible demand for ResMed products.
I'm very proud of 8,000 ResMedians serving patients in 140 countries worldwide.
Our global teams are finding ways to deliver products and solutions to home care providers, physicians and healthcare systems and ultimately into the hands of patients who need them most.
Clearly, the global supply chain environment remains very challenging across multiple industries, and we are not immune to its impact.
During the quarter, despite growing double digits year-on-year, we were not able to meet all the demand available in the market.
We have being allocated components from our suppliers, particularly electronic components and even more specifically, semiconductor chips, and we are thus being forced to allocate our outbound products to our customers.
We have established an allocation process with clear guiding principles that give priority to the production and delivery of devices to meet the needs of the highest acuity patients first.
In addition to component supply issues, the ongoing challenges of sea freight and air freight are impacting our ability to respond as rapidly as we would like to the demand for ResMed products.
Freight costs are increasing across the board on inbound components from suppliers and on outbound products to our distribution centers and for ultimate delivery to our customers.
As a result of these increased costs, we implemented a surcharge on our products starting in January to share some of the burden of these increased costs with customers.
Given all the increase in prices from commodities to specialty products across multiple industries around the world, the necessity of this surcharge has been understood and accepted by our customers.
We are working closely with our global supply chain partners doing everything that we can to gain access to additional supply of the critical components that we need to further increase production of our medical devices.
We are also reengineering designs validating new parts, pieces, supplies and accelerating new product launch and development to further catch up with the demand.
We understand that this is a difficult situation for all of our customers, including physicians, for medical equipment providers, payers, healthcare systems and the most important customer, the patient.
1 priority will always be patients, doing our best to help those who suffer from sleep apnea, COPD, asthma and other respiratory chronic diseases, as well as those who benefit from our out-of-hospital healthcare software solutions.
To grow and differentiate our Sleep and Respiratory Care business, we will develop, design and deliver world-leading therapy solutions that can be scaled globally, and we're going to deliver the world's leading out-of-hospital software solutions to empower each person's healthcare wherever they are.
Our goal is to ensure that every person gets the care that they need, where they need it and when they need it.
Let me step back to discuss the broad market conditions in our industry.
We're seeing steady ongoing recovery of demand across the countries that we operate in.
We are still seeing a divergence in the total patient flow from 85% to 100% of pre-COVID levels in most countries and above 100% of pre-COVID levels in a few locations.
These metrics will continue to steadily increase toward pre-COVID levels and beyond as vaccines and boosters roll out globally.
Each new COVID variant has an impact, but with the adoption of digital health solutions for screening, diagnosis and remote patients set up and remote patient monitoring as well as established and well-established processes for COVID cleaning protocols at sleep labs, we expect the impact of new variants to diminish in absolute impact each time.
Our global ResMed team remains committed to working with national, state and city governments as well as local healthcare systems, hospitals and healthcare providers to supply ventilators, masks and training for acute care and the important transition home as needed.
Given the steadily decreasing severity of each impact on the hospitalizations and severe disease from COVID, the demand for ventilators is now consistent with pre-COVID levels.
Let me now update you on our top three strategic priorities: No.
1 is to grow and differentiate our core sleep apnea, COPD and asthma businesses; No.
2 is to design, develop and deliver world-leading medical devices as well as digital health solutions that can be scaled globally; and No.
3 is to innovate and grow the world's best software solutions for care delivered outside the hospital and especially in the home.
launch of our next-generation device platform called AirSense 11 continues to go very well.
This new platform has provided much needed additional product supply as we face all-time high demand for ResMed devices.
We expect to introduce the AirSense 11 platform into additional countries throughout calendar year 2022.
In parallel, we will continue to sell our globally available market-leading platform, the AirSense 10, to maximize the total volume of CPAP, APAP and bilevels available for sale.
In fact, the only product that the AirSense 10 is inferior to is the AirSense 11.
As you saw in our results with double-digit growth this quarter, the ongoing adoption of both the AirSense 10 and AirSense 11 platforms remains very, very strong.
With the AirSense 11 platform and our digital health technology ecosystem, we are engaging patients in their therapy digitally like never before in the industry.
We are also making it easier and more efficient for our customers to manage their patient populations using our full suite of software solutions, including myAir for patients, AirView for physicians and Brightree for home medical equipment providers.
When customers use these digital health technology solutions, they have increased efficiencies, lower costs and we achieved improved outcomes for patients and their physicians.
We have peer-reviewed published evidence showing that combining AirSense platform with myAir software and AirView software, we see over 87% adherence to positive airway pressure therapy.
This was in the study with over 85,000 patients.
On our latest and greatest platform, the AirSense 11, we are driving even higher adoption rates of the myAir app than ever before.
In fact, we are seeing more than double the uptake of patients signing up to myAir and fully engaging with ResMed software technology.
The net result is that this delivers a better patient experience, better efficiency for the home care providers and more importantly, greater long-term adherence to therapy.
We saw this demonstrated in the Alaska study in partnership with the French healthcare systems, where we showed in a study with over 176,000 patients that those patients who had adhered to CPAP therapy had a 39% relative reduction in mortality rates versus control.
Demonstrating these types of better patient outcomes and lower costs for the healthcare system at a scale not seen before in the industry are critical components of the ResMed 2025 strategy.
Another key aspect of our long-term growth strategy is driving awareness and increasing the flow of patients through the top of the sleep apnea diagnosis funnel.
COVID-19 has advanced awareness, adoption and acceptance of respiratory health and respiratory hygiene but also adoption and acceptance of digital health and telehealth tools, including home-based sleep apnea tests.
Although increasing demand is not as important in the immediate short term, given the ongoing competitor recall, we have a long-term focus, and we're always focused on that long-term demand gen opportunity.
We are innovating with partners and our customers to create an even more efficient and effective approach to sleep apnea patient identification, screening, diagnostics, treatment and management.
We will continue to invest in technology that enables an end-to-end seamless digital experience for patients.
As we mentioned in our October call, during the second quarter, we acquired Ectosense, a leading provider of cloud connected home sleep apnea testing technology worldwide.
We believe Ectosense's digital and easy-to-use solutions in the hands of physicians, sleep lab technicians as well as consumers can help significantly increase both diagnostic and screening rates as well as general sleep apnea awareness.
Let me now turn to a discussion of our Respiratory Care business, focusing on our strategy to better serve the 380 million patients with chronic obstructive pulmonary disease or COPD worldwide, and the 330 million patients that suffer from asthma worldwide.
Our goal is to reach hundreds of millions of patients with our respiratory care solutions, including noninvasive ventilation and life support ventilation, as well as newer therapeutic areas such as cloud-connected pharmaceutical delivery solutions from our Propeller technology and high-flow therapy offerings such as our product platform called Lumus HFT.
Demand for our core noninvasive ventilation and life support ventilation solutions was strong throughout the quarter, especially in markets outside the U.S., where provide a shifted focus to support the most severe highest acuity patients.
This demand is aligned with the guiding principles of our allocation process, namely to give the highest priority to manufacturing life support ventilation and noninvasive ventilation devices, including buy levels that meet the needs of these highest acuity patients first.
Adoption of the AirView for ventilation software solution that we launched in Europe a little over a year ago, remains solid, and we continue to expand this technology to regions around the world.
AirView for ventilation has provided valued by helping physicians and the healthcare systems they operate in to manage high-risk patients during the COVID-19 pandemic.
But it is also increasingly being used on an ongoing basis to enhance quality of care through early and proactive intervention at the first sign of respiratory medical issues to help reduce the risk of hospitalization.
We see a world where AirView for ventilation is standard of care for COPD treatment.
The way that our core sleep apnea AirView platform is now standard of care for sleep apnea treatment.
Let me now review our Software as a Service business for out-of-hospital care.
During the quarter, our SaaS business showed improved sequential growth.
We achieved high single-digit growth year-on-year across our portfolio of SaaS markets, including home medical equipment, as well as facilities-based and home-based care settings.
The continued growth of home-based care is providing tailwinds for our home medical equipment as well as our home health and hospice products, and we continue to grow with customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care, including Brightree and Snap resupply.
The COVID-19 pandemic has been and remains challenging for some of the verticals in our SaaS business, particularly skilled nursing facilities as the effects of the highly contagious Omicron variant remains a headwind for patient volumes in these settings.
We will continue to watch this closely as COVID rates peak and then decline with this latest variant as has happened in many regions around the country and around the world.
As COVID restrictions continue to ease and our customers improve their line of sight to better conditions, we expect to see pent-up demand for technology investments, which provides opportunities for us to sell more and more services and solutions to existing customers, as well as to increase our new customer pipeline.
As we look at our portfolio of solutions across care settings, we expect our SaaS group revenue growth to accelerate, achieving sustainable high single-digit growth as we exit this fiscal year.
As always, our goal is to meet or beat that market growth rate as we continue to innovate and continue to take market share from competitors.
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.
Our latest and greater SaaS solutions addressed the No.
1 issue reported across our customer base, which is staffing challenges.
Our SaaS customers expect this problem to persist and they recognize the need for technology solutions to help solve their challenges with efficiency and scale.
And our software services and solutions help them achieve both of these outcomes.
We are well positioned, and we have created differentiated value for our customers and for ResMed within our SaaS business.
Looking at the broader portfolio of ResMed's businesses 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 sleep and respiratory care solutions treat the most prevalent and highest cost chronic conditions, and our SaaS solutions support the care settings where people face these and other chronic conditions.
With this combination, we can fundamentally transform out-of-hospital healthcare at a scale that no other company can match.
And we are set up for sustainable growth through ongoing investments in R&D to the tune of 7% of our revenues, commercial excellence in partnerships with CVS, Verily and beyond, as well as future acceleration through strategic M&A, as well as tuck-in M&A as we move forward.
Our patient-centric physician-centric and provider-centric approach, combined with our unique ResMed culture, means that we are positioned to continue winning in the vastly underserved medical markets of sleep apnea, chronic obstructive pulmonary disease, asthma and beyond.
We are transforming out-of-hospital healthcare at scale, leading the market in digital health technology with over 10.5 billion nights of medical data in the cloud and over 16 million 100% cloud connectable medical devices on bedside tables in 140 countries worldwide, we are unlocking value by using de-identified data to help patients, providers, physicians, payers and in entire healthcare systems.
We have invested in the privacy cloud operations and AI and ML-driven data analytics capabilities to do this at a scale that is unmatched by competitors, and we are increasing our lead every day.
Our mission to improve 250 million lives through better healthcare in 2025, drives and motivates ResMedians every day.
We again made excellent progress toward that inspiring goal during this last quarter.
Before I hand the call over to Brett for his remarks, I want to once again express my sincere gratitude to more than 8,000 ResMedians for their perseverance, hard work and dedication during these ongoing unprecedented times.
With that, I'll hand the call over to Brett in Sydney and move to the group for Q&A.
Brett, over to you.
In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2022.
Unless noted, all comparisons are to the prior year quarter.
We're pleased with our financial performance in Q2 despite the headwinds we faced as a result of significant ongoing supply chain constraints in a challenging freight environment.
Group revenue for the December quarter was $895 million, an increase of 12%.
In constant currency terms, revenue increased by 13%.
Revenue growth reflects increased demand for our sleep and respiratory care products across our portfolio, driven by recovering market conditions and by increased device demand in response to the ongoing product recall by one of our competitors.
In the December quarter, we recorded immaterial incremental revenue from our COVID-19 related demand consistent with the prior year quarter.
Looking forward, we expect negligible revenue from COVID-19 related demand.
However, we will continue to estimate it for you as appropriate.
In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $45 million to $55 million in the December quarter.
For the first half of FY '22, this reflects incremental revenue in the range of $125 million to $145 million.
We continue to expect component supply constraints will limit the total incremental device revenue opportunity to somewhere between $300 million and $350 million for the full fiscal year 2022.
As we shared last quarter, we expect our fiscal third quarter to remain supply constrained similar to our fiscal second quarter, therefore, limiting incremental revenue during the third quarter.
We see supply challenges to some extent easing in our fiscal fourth quarter and into fiscal year 2023.
Looking at our geographic revenue distribution and excluding revenue from our Software as a Service business, sales in U.S., Canada and Latin America countries increased by 14%.
Sales in Europe, Asia and other markets increased by 12% in constant currency terms.
By product segment, Globally, in constant currency terms, device sales increased by 16%, while masks and other sales increased by 10%.
Breaking it down by regional areas, device sales in the U.S., Canada and Latin America increased by 19%, as we benefited from incremental revenue due to a competitor's recall and favorable product mix as we sold an increased proportion of higher acuity devices.
This is consistent with our guiding principles for product allocation, namely that we are giving priority to the production and delivery of our devices to meet the needs of the high security patients first.
Masks and other sales increased by 9%, reflecting solid resupply revenue and achieved despite the challenging device supply environment, which continues to limit new patient setups.
In Europe, Asia and other markets, device sales increased by 13% in constant currency terms, again reflecting the benefit from incremental revenue due to a competitor's recall.
Masks and other sales in Europe, Asia and other markets benefited from improved patient flow relative to the prior year and increased by 11% in constant currency terms.
Overall, our Asian operations, in particular, delivered a strong quarter.
Software as a Service revenue increased by 8% in the December quarter.
We saw strong performance out of the HME segment as customers continue to utilize our SaaS solutions to streamline and more efficiently run their businesses, and we are seeing some stability in the skilled nursing care segment as it continues to emerge from the challenges of the COVID-19 pandemic.
For the second half of fiscal year '22, we expect to continue to benefit from our competitors' inability to supply new patients and from the global fleet markets general recovery from COVID-19 impact.
However, as we have said for the last few quarters, while we are working hard to increase device output, we will not be able to meet all the expected demand resulting from our competitors' recall, primarily because of significant and ongoing supply constraints for electronic components.
We are operating in a very dynamic supply chain environment.
As I stated earlier, we continue to expect component supply constraints will limit the incremental device revenue resulting from our competitors' recall to somewhere between $300 million and $350 million for fiscal year '22.
This includes the device revenue we were able to generate in the first half of fiscal year '22.
We expect Q3 to remain challenging but Q4 to be better.
During the rest of my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin declined by 230 basis points to 57.6% in the December quarter.
The decrease is predominantly attributable to higher freight component and manufacturing costs and unfavorable currency movements, partially offset by positive product mix, particularly in relation to strong growth of our higher acuity devices.
Moving on to operating expenses.
During Q2, we maintained a disciplined approach in our ongoing spend to support our operations.
But we are seeing a more normalized expenditure profile as COVID-19 impacts subside.
G&A expenses for the second quarter increased by 9% or in constant currency terms increased by 10%.
The increase was predominantly attributable to an increase in employee-related expenses.
Importantly, SG&A expense as a percentage of revenue improved to 20.7% compared to 21.2% in the prior year period.
Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the second half of FY '22.
R&D expenses for the quarter increased 14% on both a headline and a constant currency basis.
R&D expenses as a percentage of revenue was 7% compared to 6.9% 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 second half of FY '22.
Our non-GAAP operating profit for the quarter increased by 5%, underpinned by strong revenue growth, partially offset by the contraction of our gross margin.
On a GAAP basis, our effective tax rate for the December quarter was 15%, while on a non-GAAP basis, our effective tax rate for the quarter was 15.6% compared to the prior year quarter of 15.2%.
The relatively low tax rate in Q2 in both the current quarter and prior year quarter reflects a favorable tax benefit associated with employee equity investing that typically occurs in the second quarter.
Looking forward, we estimate our non-GAAP effective tax rate for the full fiscal year '22 will be in the range of 19% to 20%.
Our non-GAAP net income for the quarter increased by 5% and our non-GAAP diluted earnings per share for the quarter increased by 4%.
Our cash flow from operations for the quarter was $220 million, reflecting robust underlying earnings, partially offset by higher working capital.
Capital expenditure for the quarter was $30 million.
Depreciation and amortization for the quarter totaled $41 million.
During the quarter, we paid dividends to shareholders totaling $61 million.
We recorded equity losses of $1.9 million in our income statement in the December quarter associated with the Primasun joint venture with Verily.
We expect to record equity losses of approximately $2 million per quarter through the balance of fiscal year '22 associated with the joint venture operation.
We ended the second quarter with a cash balance of $194 million.
At December 31, we had $680 million in gross debt and $486 million in net debt.
Our debt levels remained modest.
And at December 31, we had approximately $1.6 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declared a quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provide flexibility in how we allocate capital.
Going forward, we plan to continue to reinvest for growth through R&D.
We also expect to continue to deploy capital for tuck-in acquisitions such as [inaudible] Health, [inaudible], an acquisition we completed on October 1.
And with that, I will hand the call back to Amy.

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q2 revenue rose 12 percent to $894.9 million.

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