ResMed Inc. (RMD) on Q3 2021 Results - Earnings Call Transcript
Operator: 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.
Amy Wakeham: 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 the 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.
Mick Farrell: Thanks Amy. And thank you to all of our shareholders for joining us today as we review result 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 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 mobilize our supply-chain and global operations to address and support ventilation needs world-wide, producing other 150,000 ventilators. We accelerate the production and distribution of noninvasive and life support ventilators in 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 business to meet that need, providing life citing solutions around the world, so that healthcare systems were prepared with the resources needed to treat patients who are fighting COVID-19.
Brett Sandercock: Great. Thanks Mick. In my remarks today I will provide an overview of our results of the third quarter of fiscal year 2021 and comment on our FY 2022 outlook. Unless noted, all comparison are to the prior year quarter. Great 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 prediction during the Q2 earnings call, we drew off negligible incremental revenue from COVID-19 related demand in the March quarter, where their prior year to revenue included an incremental benefits from COVID-19 we've added sales of approximately $35 million. Excluding the impact, they actually carry 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, a 1000 us Canada and Latin America countries were $403 million, an increase in 2%. Prior to Europe, Asia and other markets totaled $272 million, a decrease of 5% or a decrease of 13% in constant glassy terms. By product segment, U.S. Canada and Latin America device sales were 193 million, a decrease of 2%. Mask and other sales with 210 million an increase of 7%. Europe, Asia and other markets, the cost sales totaled $173 million, a decrease of 11% or in constant currency terms, 18% decrease. Now, when I was out 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% than 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% in the same quarter last year. The interest is predominantly attributable to higher freight costs, additional manufacturing costs associated with the transition to our new Singapore site we'll 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 term 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 digit relative to the prior year period. R&D expenses for the quarter were $56 million, an increase of 9% or in constant currency basis, an increase of 3%. R&D expenses as a percentage of revenue was 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 reserves 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 year 2009 to 2018 , as previously disclosed for 2009 to 2013. The OTO issued assessment of $256 million inclusive of penalties and interest. The 2014 to 2018 year audits remain open, ongoing 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 reserve will be taking 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 get. 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 reserve on a GAAP basis, our effective tax rate for March quarter was 136%. While our 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 total $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 Verily joint venture. And 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 in March 31, we had a further $1.5 billion available for drawdown under 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 the 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 will not be 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 providing 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 Cypress Hill. 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 board since our acquisitions of MatrixCare and Propeller Health in fiscal year 2019. Turning now there are expectations on the outlook for Q4, FY 2021 and FY 2022 outlook, The remains uncertainty in the short term particularly interdicting the timing and recovery of the 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 improving in new patient flow and return to more normal I underline revenue growth trends. Additionally, we are seeing minimal COVID-19 generating demand for our ventilators. And do not expect that any material benefit going forward. As a reminder, we recorded 35 million COVID-19 generating revenue in a March last quarter last year, $125 million at June quarter last year, and $40 million in our first quarter of FY 2021. Mask and accessories has 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 every supply service offering. We expect to see continued year on year growth of their mask sell in FY 2022. Finally, like many, many other companies, we continue to experience significant uncertainty in the current environment, particularly in relation to the timing of the reopening of economies if the vaccination programs rolled out. As a result, our forecast and possible future revenue outcomes remain dynamic. And with that, I'll hand call back to Amy.
Amy Wakeham: Great, thanks, Brett. Saline, I'd like to now turn the call over to you to provide instructions and then run the Q&A portion of the call. Saline, are you there, ready to run the QA portion of the call.
Operator: 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.
Lyanne Harrison: Good morning all, and thank you for taking my question. Perhaps I could start with and rest to the world or outside of the United States in America 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 devices decline 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 offering as a percentage of normal, particularly given the increased COVID cases in those countries?
Mick Farrell: 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, and so probably Hubei province and Northern Italy. So China and Italy. And 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 on year-on-year is significantly below that 18% cc that you talked about, much further below that. And really importantly, when you look at the sort of 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, the healthcare was not as impacted. And our digital health solutions, particularly around remote patient screening diagnosis have been effective. And so, we're seeing that open up as we move forward. Rob, do you want to take the second part of the question?
Rob Douglas: Yes. The Germany and France?
Mick Farrell: Yes.
Rob Douglas: The challenge in Germany and France really in this quarter has been sort of the second waves, which really caused extensive lockdowns and put challenges in there. We had seen sort of incremental opening up, that actually slowed down. It wasn't quite as significant as before, where we really saw all of the sleep labs get converted into COVID wards. But we certainly saw a reduction in new patient flow in most countries as well, there's been a significant issue. In terms of actually breaking out the sort of the device sales in those specific countries without the COVID impact earlier, and I don't think we'll be able to give that sort of granularity to really clarify that for you. But underlying it, we need to understand that those sleep businesses continued, and also you're probably aware that ventilation businesses in Europe are a larger share than what they are with the ResMed business and what they are in terms of the global ResMed business. So there was a factor in that in terms of the relativity to what had happened with the incremental COVID ventilator sales in the previous period.
Lyanne Harrison: Thank you very much.
Rob Douglas: Thanks, Lyanne.
Operator: We have our next question coming from the line of Gretel Janu with Credit Suisse. Your line is open.
Gretel Janu: Thanks. Good morning. Just firstly on U.S. devices. What was the performance of underlying CPAP devices next COVID? I'm assuming, there was very limited COVID ventilator sales in the prior year. So I guess when we compare this last quarter, was actually much weaker. So is that because there's less 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.
Mick Farrell: Thanks, Gretel. Good question. And if you look at just U.S., Canada, Latin America, so the Americas numbers, devices were down 2% year-on-year. And if you think about what we're talking about the COVID recovery rates being somewhere between 70% of pre COVID patient flow to 90% of recovered patient flow depending on the country. If you just do that raw math there, that comes out to 98% of pre-COVID, basically, which is not quite there, because there are some replacement devices included there. But certainly, we actually saw very steady market share, some gains in some of the mask areas, but very steady market share in the device side. Some of our competitors are having some difficulties around supply, as well as our global supply chains and other factors going on. We may have even taken some share in the device side. So, what we're seeing just 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 around deductibles, resetting those deductibles and impact devices significantly more than masks and accessories. If you look at the masks and accessories, just in that quarter, we saw 7% constant currency growth in masks and accessories in the March quarter year-on-year. But always there's a sequential impact from December to March. And so that's the net. But no actually share very steady, maybe moving up a little on the mask side, very steady on the devices with some modest gains. But the year-on-year 2% decline in devices is truly around the COVID recovery rates. And as we know, the rollout in the U.S. has actually been pretty strong in terms of the vaccinations. I don't think we're quite at the 98%, which would mean, that 2% decline could indicate. But I do think that we are moving well towards the 90% range in some states, and the sort of 80% range and some other states of pre COVID patients flow. But every period we look at, we see improvement in both of those. Thanks for the question Gretel.
Gretel Janu: Thanks very much.
Operator: We have a next question coming in from the line of Margaret Kaczor with William Blair. Your line is open.
Margaret Kaczor: Hey. Good afternoon. Thanks for taking the question. You guys mentioned that -- I believe one point in the comments that you expect to return to that double digit underlined growth in the second half of fiscal 2022. And then you were kind enough to give us a series of free instances, while suggests will go on the offensive. But the question is, how quickly can those investments take hold? And as you look at the short term, will growth still remain on the bottom of that you shaped that you discussed previously until you get to that second half of the fiscal year? Or can there be meaningful, more meaningful improvements driven by some of these investments? Sorry, I know, it's a long question. But can the U.S. for example, even being further ahead on the vaccination curve actually help you guys and offset maybe some other geographies that are a little weaker? Thanks.
Mick Farrell: Yes. Thanks Margaret. That is a very good question and a thorough one. Look, clearly, we're very confident that the medium to long term of the core business is incredible, given the flow of patients and the flow of our new technology. There are short term dynamics around second and third waves, and then the vaccinations on the positive side and the opening up of the economies on the positive side. As we put it all together, we are very confident that as we get the AirSense 11 from control product launch, to then start to roll that out over this calendar year in the U.S. market, that will be a catalyst for growth. It brings not only the hardware, but also amazing software solutions for patients, physicians, providers, and others. And as we think about the scaling of just the remote patient, digital health models from some of our partners, and identification, engagement and enrollment, all the way through to home sleep, testing and home sleep set up and rolling out of those devices, we're seeing a lot of investments start to pay off on that. So look, it's really hard to get down to the dynamics of how quickly vaccines will go. How quickly economies will open up. But here in the U.S., which is our biggest market, we're certainly seeing both of those trend in a really positive manner. And that led me to talk about pretty bullish sort of double digit growth towards the back end of our fiscal year 2022. And so, I think they're all the dynamics going into it. I don't know Jim Hollings, if you've got any further thoughts as the President of our Sleep and Respiratory Care Business about how quickly we can use that technology to drive growth towards that back end.
James Hollings: Yes. Thanks, Mick, and thanks, Margaret, for the question. I really just would reiterate what Mick says. I think that when you think about growth, when we get back to double digit growth, the numbers were against the big comps that came out COVID, right? So when you think about growth as a percentage. And so, the underlying dynamic in the market and U.S. specific about the U.S. market, it’s pretty strong. March was the best month of the quarter for us in new patient growth than the U.S. market. And so we think that that trend is going to continue. And we're very hopeful about vaccine rollouts. We'll start to open up diagnostics. And of course, we have the new product that will come out in the calendar year. So we feel very confident about the underlying cores, the business continuing to grow over the coming quarters. And then we'll be able to not just maintain share, but probably take some share. But there's obviously some uncertainty associated with COVID, and some other things where we feel very confident for underlying growth dynamic, and it's the COVID comp that has to clear for us to be able to talk about double digit growth.
Margaret Kaczor: Okay. Thanks.
Mick Farrell: Thanks, Margaret.
Operator: We have our next question coming from the line of Matthew Mishan with Keybanc. Your line is open.
Matthew Mishan: Great. Hello, Mick, thanks for the questions. I listened to the HCA calls, which is a theater large hospital system in the U.S. They seem to be integrating in hospice and home health into their systems at this point. And you've seen like Cerner not really want to follow up the hospital customers down. How can you work with large hospital systems as they migrate down into your victim to scale?
Mick Farrell: Matt, it’s a great question, and it talks to within our software as a service business, obviously, we have privacy, we have cyber security, but then we have interoperability. And interoperability making sure our data can through secure Private API's be able to interact with hospital care systems, is an incredibly important part of the system. We call an out-of-hospital healthcare, because we don't believe you have to go to hospital to get good health care, but the hospital systems call it post acute care. And that link between post acute care and out-of-hospital care has to be very secure and has to be very seamless, if you like for the patient and for the healthcare system. We're now many quarters into our Cerner partnership and what we've shown in that to our partner there, Cerner is that ResMed is a great recipient of patient from the hospital system into both home health and hospice and beyond now into infusion with that partnership. And I think we've got a sort of a track record, that ResMed can take care of those patients and make sure that there's a seamless transition from hospital to the out-of-hospital healthcare network. And so, with that proven track record, I look to their customers, those sort of Cerner, Epic and Allscripts, their customers being HCA and others, as HCA sort of broadens their holistic care if you like, our patients from hospital to the home, that's an opportunity for those providers to partner with someone like ResMed. So there's the seamless transfer of the patients. Look, the ultimate goal is that we take costs out of the system. We take care of the patient better. And we have seamless transfer from hospital to home or out-of-hospital care. And then hopefully not but if you do go back to the hospital, that record can move back and forwards very well. We've got a good track record of it. And I actually see a lot of upside, as hospital systems think holistically in that sort of ACO sort of Accountable Care Organization approach. And we've got a lot of experience in Western Europe, in patients taking care of holistically throughout Northern Europe and beyond. So I'm confident that we will do well in this evolution of sort of an acute care system or sick care system to a true healthcare system and a preventative health care system, which is where ResMed best 90 plus percent of our revenues and profits, and really with the SAAS business, it's where we are the only strategic with the capability to scale not just across the U.S., but globally.
Matthew Mishan: Thank you.
Operator: We have our next question coming from the line of Mike Matson with Needham and Company. Your line is open.
Mike Matson: 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. And then, historically, when you've launched new for generic platforms, it has had a fairly sizable impact on your growth, at least on the device side. So is there any reason to believe that that won't happen with this? And then, similar question on the cost. Is this going to be a higher, I guess a lower cost of manufacturing slash higher gross margin product? What just ramps up, obviously? Thanks.
Mick Farrell: Yes, Thanks, Mike. Great question with three great parts to it. So the first part, the AirSense 11 is out there. It's in control product launch. As I said, in the prepared remarks, I'm personally part of that CPL. And just amazing benefits for the individual patient and the bed partner in terms of how quiet comfortable cloud connected and capabilities. So the features are extraordinary. One thing, we've opened up to the most we ever have around the pipeline that is out there, because there's a public regulatory documents out there, and it's in CPL. I don't want to go through all the features and functions other than to say that, but it's smaller, it's quieter, it's more comfortable, it's more cloud connected. And it's not just the device, it's the software system that goes with it that provides a value for not just the patient, but the physician, the provider, and the healthcare system that are part of it. So, to the second part in question around growth, yes, look, I do think this will be a catalyst for growth. That’s why I'm comfortable in the prepbox . And you answered to Gretel earlier to talk about our comfort in saying, we're going to push towards double digit growth for the back end of this fiscal year that we're in here. And I think this device will be a catalyst for it. I think the software, the digital health technology software around it will be a large part of that catalyst for growth. Obviously, we're a different business than, when I was running the Sleaford, we launched the S9. It was, I think the total revenues of the company were less than a billion dollars. And now the total revenues are over $3 billion, trailing 12 months. And so, the percentage growth, the numbers won't be as impressive as 10 years ago, but the growth in terms of net revenue and profitability, we can reinvest in the business for more devices and less software will certainly be there. The third party question around cost. Clearly our goal, every generation is to create smaller, quieter, more comfortable, more clever devices and software systems, but also ones that have better efficiency. So we lower cost of manufacturing low cost to our supply chain. So clearly, that's an important part of this platform. We expect to do that, as he said, as we scale that up across our global business.
Mike Matson: Thank you.
Mick Farrell: Thanks, Mike.
Operator: We have our next question coming from the line of David Low with JPMorgan. Your line is open.
David Low: Thanks very much. Mick, we are all aware that Philips had the issue with their devices. Just wondering what your expectations are? One, if we can clarify whether there's any risks that ResMed has the same issue with ozone cleaning? And then secondly, what the implications might be for ResMed position in the market?
Mick Farrell: Yes, Thanks, David. And we clearly saw from the earnings call from our competitors, some issues that they're having with product quality. And I never comment on details of that. And I think all of us care most of all about our patients. And so, Rob, you want to talk a little bit to our quality standards and what we're working on as we look at that issue?
Rob Douglas: Sure. Yes, David, as Mick said, patient Safety is our number one priority, and we really focus on that. And we've actually paid a lot of attention to the timing devices over the years. And I can confidently say, we actually don't have this problem that has been reported by competitors. We have a different design using different materials. And we have a very solid test, aggressive testing procedure looking at this. We have a very sophisticated complaint tracking system, and across our 40 million installed base, we -- this is just not there at all. So we're extremely confident with that. We do -- we will always continue to pay close attention to patient safety and keep on it. The issue of ozone cleaning is an issue there. And we have communicated regarding our warranty position on that. It's an effective disinfectant, but the amount of use is important to keep a close eye on. So we've publicly put out information on that. And you can find that on our website, if you're interested in that. So, but we'll keep a close, very close eye on this as we would with any industry safety issue.
David Low: Okay. Thanks very much.
Mick Farrell: Thanks. David, actually does the second part of your question talks about what would be the implications in the market? I mean, clearly, I don't know if Jim Hollings wants to talk to this. But look, we want to take share when our products are smaller, quieter, more comfortable and better. And we've been doing that for three decades. But clearly, they might be some share implications if a competitor has constraints around supply. Jim, do you want to talk a little bit to that?
James Hollings: Sure. I think we're waiting to see what will happen with our competitors position and their ability to deliver product, but we're obviously always ready, willing and able to help our customers and more product. And to whatever extent there's potential upside for us and market share gains during the next quarter or two, and that we'll certainly do our best to take advantage of it.
Operator: We have our next question coming from the line of Sean Laaman with Morgan Stanley. Your line is open.
Sean Laaman: Thank you. And good morning, Mick. Good morning, everybody. Mick, even just in broad brushstrokes to answer this question. We've seen, I guess, one of the better term the finale of competitive bidding, and it shape many, in its proposed shaped many months ago. I'm wondering if that's had any influence or what influenced that might have had with respect to pricing since that point in time?
Mick Farrell: Thanks, Sean. That's a great question. And I'll hand back to James Hollings to talk about whether the elimination of competitive bidding pretty much in terms of delight in 2024 has any implications for pricing with us without the U.S. customers. Jim, do you want to take that?
James Hollings: Yes, sure. Thanks. Thanks for the question. Competitive bidding being cancelled led to ongoing stability in the pricing in the U.S. market, and that's what we see. There's instability in pricing throughout the period, because there's stability of reimbursement. And we -- but far, we haven't seen any signals from CMS that they intend to relaunch a program. So it's a weird way to answer the question, but the non event lesson a little changes, we've just seen price instability.
Sean Laaman: Great. Thanks. Awesome. Appreciate the answer.
Mick Farrell: Thanks for the question, Sean.
Operator: We have our next question coming from the line of Andrew Goodsall with MST Macquarie. Your line is open.
Andrew Goodsall: Good morning. Thank you for taking my question. I'm just going to touch back on your SAAS business. I know a few questions on this particular MatrixCare. But just trying to think in practical terms, how quickly we can sort of see that come back to certainly a lot of commentary in the marketplace that there's a big swing on the back of COVID to home delivery care in the home. So yes, just trying to sort of think just over the next sort of quarter how you're seeing the profile, that recovery?
Mick Farrell: Yes, Andrew, thanks. It's a great question. And there are so many dynamics of hospital care and in the flow out through post acute care to our SAAS system. I think, as we look forward, we saw 5% growth in the quarter across our SAAS business. We think the weighted average market growth across those seven or now eight verticals that we're in with Citus joining the portfolio, and specialty pharmacy and home infusion. We think that sort of mid single digit growth can move towards high single digit growth as we see patients get back to the hospital and therefore get back to the discharged to skilled nursing facilities, home health, hospice, and beyond. And so, it's difficult to say the exact rate of increase, but it's going to increase. And I think our technology and what we've invested in, particularly, even during COVID, some of the software that we put for our skilled nursing facility customers to manage patients who may or may not be infected by COVID, and how they operate their businesses have been very well received. So even as case rates declined, but COVID is still here, and it is still across, even with vaccinations going up, still going to impact those customers. I think some of those tools will help us see a faster path to getting from that mid single digit growth to high single digit growth across the group. And as I said in the prep remarks, and this is true for ResMed always. We don't just want to meet market growth, we want to beat that market growth. So, as I look towards our long term strategy and 2025, we've got the opportunity for to get way back to double digit growth in our SAAS business. But in the short to medium term, I think we can move from mid single digits to high single digits in this part of our portfolio. We've made the investments in the technology. We've made the investments for the customers to help them deal with the dynamics of code. And as recovery happens, we will be a partner for them for growth on the other side.
Andrew Goodsall: That's great. Thank you.
Mick Farrell: Thanks, Andrew.
Operator: We have our next question coming from the line of Suraj Kalia with Oppenheimer. Your line is open.
Suraj Kalia: Hi, Mick. Brett, can you hear me, Alright?
Mick Farrell: Got you loud and clear, Suraj. Perfect.
Suraj Kalia: So, Mick, couple of questions. And I'll just kind of put them together. Mick, I'm not sure I heard about the EHR 2 report. Would love to get you a perspective from a counter messaging perspective and any quantification of impact? And the second part of my question, Mick, if I could, the SAAS business, there was a period of time that it was a tailwind to margins to top line growth. And just kind of looking at it over the last, let's say, four or so quarters, it seems to be becoming a drag for the overall growth, some of these COVID issues notwithstanding, maybe you can just kind of parse this through the structural dynamics of returning this line item to what you would have perceived as normalized growth? Thank you for taking my questions.
Mick Farrell: Thanks, Suraj. I'll hand the first question to Dave on AHRQ. And then I'll take the second one on SAAS.
David Pendarvis: Yes. Thanks, Suraj. And I'll give you this kind of a brief response here. If you want any more details, feel free to reach out to Amy, and she can bring you up to speed. But basically, AHRQ, we believe is taking a very narrow perspective on looking at the clinical literature, looking at only randomized controlled trials done under certain very careful criteria. And while traditionally, that has been the hallmark of the gold standard of trials, we think, particularly in this industry, where you've got a massive amount of real world evidence and a lot of other longitudinal trials that clearly demonstrate a benefits in terms of longevity, benefits in terms of clinically significant cardiovascular outcomes, also quality of life outcomes, and also outcomes in terms of healthcare utilization, lower costs, all of that evidence ought to be used to come to a conclusion that treating sleep apnea with CPAP therapy is not only good for patients, but good for the healthcare systems, and good for economies as a whole. So, we're hopeful that all that evidence that we've brought in, and it's not just us, other societies, many of the clinical societies have come out. And there's been a vigorous sort of a cross industry wide cross clinical, academic, keeping leaders have all come out in the same direction. So we're hopeful that will be taken into account. And the final report, which we don't know when it'll be even likely, perhaps later this calendar year, we'll include that data and come to a better conclusion.
Mick Farrell: So Suraj, the only thing I'd add to Dave's response, which is very thorough, is that actually there are RCTs randomized control trials but also are excellent that weren't included. So if you're just looking at RCTs, even, you need to include some of those RCTs, which were in fact very positive. And the AHRQ just looked at some neutral RCTs and said, well, neutral that means no benefit. There's all these other proponents of evidence real world and RCTs that are positive. So, it was an interesting some section of the literature that they used. And we have lots of folks ask at academics working on that. On a second party question, SAAS, if you look at, it actually was a strong tailwind for us in this quarter, 5% growth versus the COVID included core part of the business. And I think it can be. As we look forward, and I spoke to this earlier in my answer to Andrew, about SAAS, going from mid single digits to high single digits, I think it can -- and then after meeting or beating that, so getting to double digit growth, in the SAAS part of our business, I do think that will become a tailwind for us that 12% of our revenue. So for the SAAS, as we get out of, the COVID, sort of slowdown of census rates in this out-of-hospital care, we get back to a normal flow of patients through. Because people are wanting to age in place, people are wanting to be outside the hospital. COVID just increase. The probability that people do not want to be in a hospital for any longer than they need to. And so I think the geographic and socio economic trends of a growing community and people wanting to age in place in an aging population, and the fact that people are seeing lower cost, lower acuity and better healthcare delivered outside the hospital all lead towards this. The dynamics of how quickly we go from mid single digit growth to high single digit growth, we can divide. But the fact is, it's going to go there, because people are moving from the hospital to out-of-hospital healthcare. And that's where we're investing. So, as I look forward to our long term strategy 2025, I am very confident that this will be a very strong tailwind to our business. The recovery of our whole business post COVID is what we're talking about here. But I look on the end of the FY 2022, strong double digit growth across our business. And I mean that across our whole business. Thanks for the questions, Suraj.
Operator: We have our last question coming from the line of Anthony Petrone with Jefferies. Your line is open.
Anthony Petrone: Thanks. Maybe just to follow up on the SAAS business and kind of going between Brightree and, and Matrix here. On the Brightree side, there was some consolidation in HME space through 2020. And just wonder if that is cycling through the numbers there. And in sort of how that plays out. But when sort of when we think of course, lead trends, if you could provide maybe a quick update on sleep labs in particular, I know, it's a small portion of the overall business. But it sounds like there could be a reversal in activity as folks actually get back to sleep labs. So just sort of an update on sleep labs? Thanks a lot.
Mick Farrell: Yes. Thanks for the questions. Anthony. To your first part of question around SAAS. Yes, I mean, clearly there's consolidation of some plays in the HME industry, and that can impact our contracts with those. In general SAAS is per user per month, like per activating user per month approach. And so, acquisitions are -- HME acquiring another HME that doesn't currently use Brightree. Is actually upside for us, because usually, the acquiring entity has all the efficiencies and scale and capabilities, because they using Brightree, and then they put that into the acquired account. And so therefore, actually increased the number of users and the per user per month revenue for ResMed can be upside on that. If it's a Brightree user acquiring another Brightree user, well, then there can be some reduction, they might get some efficiencies and reductions of the number of chairs. But ultimately, if it's a smart customer it’s going to continue to grow. And so then that over time, as they grow will increase our revenues as part of that. So a lot of dynamics around the M&A there. But in general, in the long run for us, it's about us betting on the winning and efficient ATMs and Brightree helps us do that. Because the people who adopt Brightree other winners, they have the lowest costs and the best outcomes for their patients. So the second part of your question around sleep labs, I look over capacity here in the U.S., and the reduction that happens during COVID or in lab tests, those people scale their digital health solutions in their home sleep testing capability. So as they come back and open up the in-lab facilities, I think that will absolutely have a rebound of the capacity in the in-labs, but they won't lose what they gained in home sleep testing. As Aristotle said, when the mind is stretched by a new idea, it never returns to its original size. So they're not going to forget about these great digital health solutions that have the home sleep testing. So yes, we'll get the capacity back in the sleep lab. But I also think the scalable opportunity for those sleep diagnostics providers to provide low cost, customer friendly diagnostics and the home will be just a part of their portfolio and hopefully, will improve the rate of diagnosing the 936 million people worldwide. But we're just looking at the U.S., the 70 million people in this country that have mild, severe obstructive sleep apnea that need to be taken care of. Thanks for the question, Anthony. And I'll hand back to you, Amy to close up the call.
Amy Wakeham: Thanks, Mick. Did you want to give your closing remarks?
Mick Farrell: Sure. Yes. But I know we're nine minutes over. So I'll make this brief. Thanks again to all our shareholders for joining us on the call. I'd like to thanks once again, the 7,500 ResMedians, many of you, shareholders, thank you for your hard work, dedication, helping people sleep better, breathe better, around 140 countries worldwide. Thank you for the many 1000s of enlightens. You're getting right now to our team in India. So that we can take care of people in this another emergency. I look forward to talking to you and to all of our shareholders here again in 90 days. Thanks.
Amy Wakeham: 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 does conclude our call. Salini, you may now close out the call.
Operator: This concludes ResMed's third quarter of fiscal year 2021 earnings live webcast. You may now disconnect.
