ResMed Inc. (NYSE:RMD) Q3 2024 Earnings Call Transcript

ResMed Inc. (NYSE:RMD) Q3 2024 Earnings Call Transcript April 25, 2024

ResMed Inc. beats earnings expectations. Reported EPS is $2.13, expectations were $1.91. ResMed Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. And welcome to the Q3 Fiscal Year 2024 ResMed Earnings Conference Call. My name is Kevin, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. Please note that this conference call is being recorded. I’ll now turn the call over to Amy Wakeham, Chief Investor Relations Officer. Amy, you may begin.

Amy Wakeham: Great. Thank you, Kevin. Hello, everyone. Welcome to ResMed’s third quarter fiscal year 2024 earnings call. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today’s call, we will discuss several non-GAAP measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for the GAAP financial information. We encourage you to review the supporting schedules in today’s earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including but not limited to, expectations about our future financial and operating performance.

We make these statements based on reasonable assumptions, however, our actual results could differ. Please review our SEC filings for a complete 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 ResMed’s Chairman and CEO, Mick Farrell.

Mick Farrell: Thanks, Amy, and thank you to all of our shareholders for joining us today. Our third quarter fiscal year 2024 results reflect another strong period of execution across our entire business, resulting in solid topline growth and strong double-digit bottomline growth. Our results were driven by ongoing new patient demand for our devices across global markets, high single-digit growth in our Software-as-a-Service business and double-digit global growth in our Masks and Accessories business. This is exceptional performance given that we are annualizing a very strong quarter of growth in the prior year. The recent launch of our ResMed 2030 operating model and our steady focus on driving increased operating leverage are delivering excellent bottomline results and keeping us on a clear trajectory of ongoing profitable growth.

Over 2 billion people worldwide suffer from sleep apnea, what I call sleep suffocation, insomnia or respiratory insufficiency due to chronic obstructive pulmonary disease or neuromuscular disease. These chronic conditions form a healthcare epidemic that ResMed is uniquely positioned to address. We believe that healthcare should be delivered at the lowest cost, lowest acuity and highest comfort location possible. In the optimal case, that’s in a person’s own home. We are the global strategic leader in providing therapies for this epidemic, as well as market-leading enterprise software for Residential Care, including home medical equipment, home nursing and beyond. ResMed is the global leader in digital health solutions with over 18 billion nights of medical data in the cloud and over 24.5 million 100% cloud-connectable medical devices that have been sold into over 140 countries worldwide.

We are the clear leader in sleep apnea, a market of over 1 billion people globally. Our end markets remain significantly underpenetrated. We believe the latest advances in big consumer tech and Big Pharma can potentially bring incredible numbers of new patients into the healthcare system where ResMed is uniquely positioned to provide ongoing care at home. We have a myriad of opportunities to add value, to reduce friction, to improve interoperability, to lower costs and to improve patient outcomes. We’re the global strategic leader with software supporting hundreds of millions of people as they take control of their healthcare journey and navigate the complex healthcare world beyond the hospital system. Many more people can benefit from our products and solutions and we’re laser-focused on growing the market to help people get on the therapy they need and on a pathway to better sleep, better health and better long-term care.

Sales of our devices, including the category-leading AirSense platforms, grew 5% year-over-year globally. Excluding the one-time COVID-related ventilator sales in the third quarter of last year, global devices grew about 300 basis points higher than that, so right around 8% global devices growth. We are maintaining supply of two of the two market-leading 100% cloud-connectable platforms, the AirSense 10 and the AirSense 11. We’re working to increase the global availability of the AirSense 11 platform by securing market-by-market regulatory clearances. We are following a similar path with our recently launched AirCurve 11 Bilevel and non-invasive ventilator platform as we continue its launch in the U.S. and beyond in the period ahead. Our commercial teams are successfully demonstrating the clinical and economic benefits of the ResMed Mask portfolio.

Our Masks and Accessories business achieved 10% growth year-over-year, expanding at or above the market in a competitive category globally. During the quarter, we introduced our latest mask innovation into the U.S. market called the AirFit F40. The F40 features a proprietary new technology that we call AdaptiSeal. It is a silicone cushion designed to create and maintain a better facial seal even when the person is moving frequently during sleep. It leverages a fully flexible frame technology to cope with such frequent nocturnal movement. Physicians, respiratory therapists and patients love the F40 for its comfort, its fit and its ease of use. It is the smallest full-face mask on the market from ResMed. Patients are voting with their wallets and respiratory therapists and physicians are voting with their recommendations and their prescriptions.

We look forward to ongoing success in the U.S. and to swiftly bring the F40 to other global markets very soon. Mask and Accessory ReSupply programs are an important element of our offering, as we serve the ongoing therapy needs of patients globally. ResMed’s clinical and commercial teams continue to partner with physicians and providers to drive ReSupply programs directly for their patients. In our cash pay markets, we’ve established a number of subscription programs that have been adopted by consumers. Research shows that ReSupply programs lead to better patient adherence and better long-term clinical outcomes for the patient and their caregivers. In the U.S., our ReSupply programs are powered by our digital health ecosystem, including AirView for physicians, myAir for patients and Brightree for home medical equipment providers.

We will continue to develop, launch and scale these technologies, as well as direct subscription programs to help people take control of their own health. Regularly refreshing ongoing therapy needs including masks, tubing, humidifiers and other accessories. Let’s now turn to a discussion of our top three global strategic priorities here at ResMed. Number one is to grow and differentiate our core sleep health and breathing health business. Number two is to design, develop and deliver market-leading medtech and digital health solutions that can be scaled in 140 plus countries worldwide. Number three is to create and leverage the world’s best software solutions for Residential Care. As a global market leader in these significantly underpenetrated markets, our most significant opportunity is actually to expand and grow the market itself through awareness, diagnosis and pathways to treatment.

We aspire to be the digital health concierge for each person as they pursue their personal journey to better sleep, better breathing and better care where they live. We are ramping up our demand generation initiatives to do just that. The ResMed 2030 operating model changes that we made recently position us for success as a product-led, customer-centric, brand-enhanced leader in health tech. We’re raising awareness and creating pathways for patients to find access to care for their sleep health and their breathing health across the globe. We are leveraging traditional market channels and investing in cost-effective, social media-driven demand generation campaigns. The goal is to help consumers concerned about their sleep and breathing find their way into appropriate screening, diagnostic, treatment and management pathways.

As we continue on our journey to create this digital health concierge for individuals, we are tracking progress with hard metrics. We are looking at new patient starts in our physician and provider-based ecosystem, including AirView, which now contains more than 27 million patient records. We’re also tracking new starts in myAir, our consumer patient engagement app, where people choose to participate in their personalized healthcare journey to better sleep and better breathing. myAir now includes a population of 7.8 million users. We will drive more and more of the over 1 billion people worldwide who need our help for their sleep suffocation into the health care system. We believe two global megatrends will further support our ongoing growth.

Awareness driven by consumer tech, specifically sleep tracking wearables like the Samsung Galaxy Watch which has a de novo FDA clearance to screen for sleep apnea. We expect similar capabilities from other wearables from Big Tech including the Apple Watch and Google’s Fitbit. In addition, we believe that the population of patients, the other megatrend, the population of patients coming from Big Pharma as they focus on obesity and related impacts on health, including sleep health, will bring an incredible volume of patients into the healthcare system and the patients will have clinically significant sleep apnea that is best addressed by our therapies post these other therapies. We love this attention from big consumer tech on the field of sleep wellness tracking and we believe that many of these wearable technologies will help consumers find out if they have issues with breathing during sleep or maintaining high quality sleep.

This could be one of the biggest waves of people taking control of their own pathway for discovering they have sleep issues like sleep apnea or insomnia or both, a new disease state that has been called by the physicians COMISA. Ultimately, we believe that this will lead to increased patient awareness and sustainable long-term growth for ResMed. Our goal is to educate people as they move from sleep wellness tracking with these wearables to what I call sleep health tracking and from consumer awareness to a true healthcare pathway for screening, diagnosis, treatment and ultimately ongoing management of their sleep health and breathing health. We believe that here at ResMed we are uniquely positioned to help. Big Pharma is squarely focused on GLP-1 medications right now.

For many people dealing with their obesity, their healthcare goals are focused on losing weight while improving their diet, exercise and their sleep routines. We believe that increased utilization of GLP-1s to treat obesity will bring many new people into the healthcare funnel, activating them to see their primary care physicians as they strive for weight loss and other medical health. We believe this will open these patients up to knowledge of their other chronic diseases from their primary care physicians, including awareness of chronic diseases such as sleep apnea, ultimately driving new patients into diagnosis and treatment pathways that may not have previously been considered or been treated for those patients. So we believe this will drive not just more patients into our channel, but also more motivated patients into our channel.

ResMed has been tracking the impact of GLP-1s through a de-identified patient analysis using an overlap of our data and third-party claims data. With another quarter of data analyzed, we are now up to an incredible N equals 660,000 subjects in our analysis. The bottomline is that the data show that GLP-1s are having a positive impact on patients seeking and adhering to positive airway pressure therapy. The latest numbers are an improvement from what we presented previously. For patients prescribed a GLP-1 medication, the latest data show a 10.5% higher propensity to start positive airway pressure therapy over those not taking the drug. As we follow these patients longitudinally, the ReSupply rate at T equals 12 months is 310 basis points higher.

That’s 3.1 absolute basis percentage points higher for patients who have a GLP-1 prescription. And then at T equals 24 months, the ReSupply rate is 500 basis points. So 5.0 absolute percentage points higher for patients who have a GLP-1 prescription. These data show clearly that these new GLP-1 pharmaceutical class is actually a tailwind for our ResMed business, bringing more patients and more motivated patients into the healthcare system. We’ve included the full analysis of these data in our investor deck and I encourage you to review the data there. It’s very positive information and very thorough and detailed work by our healthcare economics and outcomes research, as well as our digital health analytics teams here at ResMed. Existing clinical studies show many factors impact sleep apnea epidemiology, including craniofacial anatomy, age of the subject, gender and weight.

With over 1 billion people on the planet with sleep apnea right now, 80% plus of them are undiagnosed in our biggest market, the United States and over 90% of patients are undiagnosed globally. There remains an incredible opportunity to help people sleep and breathe better through positive airway pressure therapy, the universally recognized gold standard for treating sleep apnea. We look forward to more patients entering the healthcare system for care and more motivated patients who can get on our therapy faster and stay on it longer. In terms of best-in-class treatments for sleep apnea, achieving that goal of good sleep and good breathing, we have peer-reviewed and published evidence demonstrating that we can achieve over 87% of patients’ adherent to our positive airway pressure technology by combining our market-leading device platforms, our market-leading masks, with our digital health solutions.

Even with this best-in-class global tech, just over 10% of patients still need alternative therapies, and we have a very high volume of patients coming through these days. We’re investing in alternative therapies and we’re working to help patients who just can’t adhere to positive airway pressure therapy despite the latest technology to find their path to second-line therapies, such as dental devices, where ResMed has the market-leading 3D printed dental device on the planet for sleep apnea in Western Europe and Northern Europe. That’s called Narval. In addition, we have investments in third-line therapies, including pharmaceutical options. We’re an investor in Apnimed, and we’re also an investor in hypoglossal nerve-stimulation technology through our investment in a company called Nyxoah.

ResMed is about sleep health, it’s about breathing health and it’s about delivering the best care right where you live. We make sure the person finds the path to the highest efficacy, lowest cost, most comfortable therapy that’s best for them. Let’s pivot now to talk about our digital health technology investments, leveraging our 18 billion nights of de-identified medical data in the cloud and our 24.5 100% cloud-connectable devices that are out there in our ecosystem across 140 countries. We are investing in a portfolio of artificial intelligence-driven capabilities, as well as customer-facing AI products in our ecosystem. We continue to roll out these products in our AirView ecosystem, such as Compliance Coach, that I talked about last quarter, that’s rolling out in the United States.

We’re also progressing well with our generative AI capabilities to help patients along their journey, really people before they’re patients and then they become people seeking sleep health and breathing health solutions, and then on their journey they become patients. And we’re rolling out that gen AI capability in the Asia-Pac region for now and we’ll look to scale that as we move forward. We’ll continue to share progress on this front, as this revolutionary tech is developed and scaled across our business and many of medtech and health tech peers are doing the same and our ecosystem will move forward. Our Respiratory Health business continues to be supported by sustained activity across our non-invasive ventilator platforms and our life-support ventilator platforms.

We continue to invest in clinical and economic trials for high-flow therapy that we call HFT to treat chronic obstructive pulmonary disease at home at a cost-effective rate. This is a long-term opportunity focused on generating evidence, developing pathways and driving new reimbursement options. We are focused on driving adoption of these technologies for treatment at home. The prevalence of respiratory insufficiency due to COPD, as well as neuromuscular diseases, continues to increase, and we have low-cost, high-efficacy and high-tech treatments in HFT and beyond to address this healthcare epidemic. Turning to our Software-as-a-Service business in the field of Residential Care, we have another strong quarter with year-over-year growth of 8%.

We plan to maintain high single-digit growth in the remainder of fiscal year 2024 and we plan to accelerate to double-digit growth for our Residential Care Software-as-a-Service business on an organic basis throughout fiscal year 2025. We are seeing ongoing customer-facing synergies between our Brightree offering in the U.S. and our core home medical equipment channel and its ReSupply capabilities. We are driving good growth across both our Residential Care SaaS and our core sleep health and breathing health businesses while serving many hundreds of thousands of patients. Our Residential Care SaaS business is integral to ResMed’s growth portfolio and we’re excited to have created a global business that will achieve double-digit growth on an organic basis throughout fiscal year 2025.

We continue to drive OpEx leverage by managing our capabilities for cloud compute, cybersecurity, interoperability, privacy and R&D across our go-to-market brands that include Brightree, MatrixCare, and MEDIFOX DAN. And those synergies go not just across the SaaS businesses, but also directly into our core sleep health and breathing health business. And beyond this infrastructure leverage, our Residential Care SaaS business drives platform development synergies and customer engagement facilities and capabilities that are synergies as well, and these highly complement the market-leading medtech and software solutions capability that’s there right in our core sleep health and breathing health business ecosystem, including products like AirView and myAir and beyond.

We are transforming Respiratory Medicine and Residential Care at scale. We are leading the industry in developing, applying and adopting digital health technology across our markets. We continue to scale and drive efficiencies in our operations. We’re focused on driving topline revenue growth, focused cost discipline and increased efficiencies to accelerate profitability all the way to the bottomline, and we made very good progress on that this quarter. The team delivered non-GAAP operating income up 23% and non-GAAP net income up 27%. We have created differentiated products and solutions for customers worldwide, driving long-term sustainable value for our shareholders. We lead the industry in digital health technology with the smallest, quietest, most comfortable, most connected, and most intelligent medtech solutions.

During the last 12 months, we have improved over 174 million lives by delivering a medical device directly to a patient, a complete mask system to a patient or a digital health software solution that provides personal care for a patient right where they live. We’ve helped each person sleep better, breathe better and live higher quality lives with best-in-class healthcare. In closing, I want to express my sincere gratitude to the more than 10,000 ResMedians for their perseverance, hard work and dedication today and every day. Thank you. With that, I’ll hand over the call to Brett in Sydney for his remarks and then we’ll open up to Q&A with the entire team between Sydney and San Diego. Over to you, Brett.

Brett Sandercock: Great. Thanks, Mick. In my remarks today, I’ll provide an overview of our results for the third quarter of fiscal year 2024 and let’s note that all comparisons out of the prior year quarter and in constant currency terms were applicable. We had strong financial performance in Q3. Group revenue for the March quarter was $1.2 billion, a 7% headline increase and a 7% increase in constant currency terms. Revenue growth reflects positive and consistent contributions across our product and ReSupply portfolio. Year-over-year movements in foreign currencies had a negligible impact on revenue during the March quarter. Looking at our geographic revenue distribution and excluding revenue from our Software-as-a-Service business, sales in U.S., Canada and Latin America increased by 9%.

Sales in Europe, Asia and other markets increased by 3%. Globally, device sales increased by 5%, 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 7%, supported by solid ongoing new patient diagnosis, while masks and other sales increased by 12%, reflecting growth in both ReSupply and new patient setups. In Europe, Asia and other markets, device sales increased by 1% on a constant currency basis. Year-over-year growth moderated due to incremental revenue in the prior year quarter of approximately $15 million from COVID-related demand. Excluding the COVID-related sales, device revenue increased by 8% on a constant currency basis. Masks and other sales increased by 6% on a constant currency basis.

Software-as-a-Service revenue increased by 8% in the March quarter, underpinned by growth from MEDIFOX DAN and continued strong performance from our HME Vertical. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our third quarter earnings press release. Gross margin increased by 240 basis points to 58.5% in the March quarter. The increase was driven by reductions in freight expense, manufacturing cost improvements, favorable product mix and an increase in device average selling prices. Sequential gross margin improved by 160 basis points. We continue to monitor potential headwinds that could arise from the Middle East conflict. Disruptions in the Red Sea have increased freight costs and shipping lead times.

We estimate this will negatively impact our Q4 gross margin by around 30 basis points to 50 basis points. Moving on to operating expenses, SG&A expenses for the third quarter increased by 1%. SG&A expenses as a percentage of revenue improved to 19.2%, compared to 20.5% in the prior year period and reflect savings and ongoing cost discipline following restructuring actions undertaken early in the December quarter. Looking forward and subject to currency movements, we expect SG&A expenses as a percentage of revenue to be in the range of 18% to 20% for the balance of fiscal year 2024. R&D expenses for the quarter increased by 2% on a constant currency basis. R&D expenses as a percentage of revenue were 6.4%, compared to the 6.8% in the prior year period.

Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for the balance of fiscal year 2024. Operating profit for the quarter increased by 23%, underpinned by revenue growth, gross margin expansion and modest growth in our operating expenses. Our net interest expense for the quarter was $11 million. Given our lower debt levels, we expect interest expense to be in the range of $7 million to $9 million in the final quarter of fiscal year 2024. Our effective tax rate for the March quarter was 20.3%, broadly consistent with the prior year quarter. We continue to estimate our effective tax rate for fiscal year 2024 will be in the range of 19% to 21%. Our net income for the March quarter increased by 27% and non-GAAP diluted earnings per share also increased by 27%.

Cash flow from operations for the quarter was $402 million, reflecting solid underlying earnings and improvement in our working capital position. Capital expenditure for the quarter was $21 million. Depreciation and amortization for the quarter totaled $43 million. We ended the third quarter with a cash balance of $238 million. On March 31 we had $1 billion in gross debt and $676, sorry, $769 million in net debt. During the quarter we reduced our debt by $220 million. On March 31 we had approximately $1.2 billion available for drawdown under our revolver facility and we continue to maintain a solid liquidity position. Today our Board of Directors declared a quarterly dividend of $0.48 per share. During the quarter we purchased 261,000 shares under our previously authorized share buyback program for consideration of $50 million.

We plan to continue to purchase shares for the value of approximately $50 million per quarter for the balance of fiscal year 2024. This will more than offset any dilution from the vesting of equity to employees during the year. Going forward we plan to continue to reinvest in gross through R&D, pay down outstanding debt and deploy further capital for tucking acquisitions. And with that, I will hand the call back to Amy.

Amy Wakeham: Great. Thank you, Brett. Thanks Mick. Kevin, let’s go ahead and turn the call back over to you to provide the instructions and then run the Q&A portion of the call.

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