Welcome to the Q4 Fiscal Year 2017 ResMed Inc. Earnings Conference Call. My name is Mariama, and I will be your operator for today's call. At this time, all participants are in a 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 Agnes Lee, Vice President, Investor Relations and Corporate Communications. Agnes, you may begin.
Thank you, Mariama, and thank you for attending ResMed's live webcast. Joining me on the call today are Mick Farrell, our CEO and Brett Sandercock, our CFO. Other members of the management team will also be available during the Q and A portion of the call. If you have not had a chance to review the earnings release, it could be found on our website at investor. Resmed.com.
I want to remind our listeners that our discussion today may include forward looking statements, including, but not limited to, statements about future expectations, plans and prospects for the company, corporate strategy, integration of acquisitions and performance. We believe these statements are based on reasonable assumptions, that actual results may differ materially from those indicated. Important factors which could cause actual results to differ materially from the forward looking statements are detailed in filings made by ResMed with the SEC. I will now hand the call over to Mick Farrell.
Thanks, Agnes, and thank you to all of our shareholders joining us today as we review financial results for the Q4 of fiscal year 2017. For the call today, I will review top level financial results. I'll then review some geographic highlights and discuss a few key announcements this quarter. Finally, I will hand over to Brett, who will walk you through our financial results in more detail. We achieved solid high single digit global revenue growth this quarter, led by sales of our sleek devices, respiratory care devices, mask systems and software solutions.
At the bottom line on a
non GAAP basis, our diluted earnings per share was $0.77 We have passed the 1 year mark since the closing of our Brightree acquisition. That acquisition has been a significant success for home care customers, for patients and for shareholders. This quarter, we acquired new capabilities and technologies to add to our Brightree offering with 2 tuck in acquisitions that I will go into further detail on later on in the call. We're making great progress with Brightree as we expand our connected care offering for all of our customers, lowering costs and freeing up cash flow that can be reinvested for even better patient care. I'll discuss more details of our digital health and connected care strategy later in my remarks.
We have refined our operating model at ResMed to ensure a direct line from customer insights through upstream marketing to our product and solution development teams and also a direct line back down to the sales interface within each of our vertical businesses. You can think of this as a merging of what were regional sales structures into global business units. We now have a global sleep business vertical, a global respiratory care business vertical and a global software as a service business vertical. We have also maintained a direct line from Rob and me to our Asia Growth Markets business and our Germany Healthcare business due to the unique go to market models of these two businesses. With this refined operating model, we will not only improve our innovation generation capability, we will also be able to scale more efficiently and provide better SG and A leverage as we grow towards our 2020 financial and strategic goals.
Now for some geographic highlights of the business. The Americas sales teams achieved solid revenue growth at 8% year on year or 6% excluding Brightree. These results were fueled by solid growth in devices as well as low double digit software sales growth. Sleep apnea patient volume is growing steadily. We launched the world's smallest CPAP, which is now my favorite business travel companion called the AirMini.
Since its launch around mid May, the AirMini is achieving good early adoption in its product category of small second use travel friendly cash pay CPAP and APAP devices. I'll talk about AirMini in more detail a little later. Growth in devices in the Americas geography was a solid 8% for the quarter. We continue to grow our device market share as home care providers and physicians find value from AirView software and our fast growing patient engagement app called MyAir. We now have over 5,000,000 patients in AirView and over 3,000,000 patients monitored daily with 100% cloud connected medical devices in their homes.
We also achieved very good growth of our respiratory care device platforms in the U. S. Led by the Astral cloud connected life support ventilator. The masks and accessories category grew 4% in the Americas geography this quarter. As we noted on our call 90 days ago, we expected to have mass supply constraints throughout the first half of the quarter and to get our manufacturing sufficiently ramped up so that we would be ahead of demand and have supply ahead of demand by June.
We did just that. However, we clearly missed out on some perishable mask sales of product in April May, while the N 2020 and F 2020 were in limited availability. Now we have supply solidified and we can instill importantly full confidence in our sales force that when they make a sale, we can deliver the N20 and F20 products to fulfill that commitment. We are now set to increase sales growth in masks for FY 2018 as we unleash our sales force with these excellent products and full supply. In terms of customer feedback on the N20 and F20, it remains very positive.
The 97% plus fit range and the comfort of the Infinity Seal technology provide a very long runway of growth throughout fiscal year 2018 and beyond. Let's spend a few minutes now reviewing our European and Asia geographies. Device sales in the combined EMEA and APAC regions were up a very strong 11% this quarter on a constant currency basis. Growth was particularly strong in France, the U. K, Japan as well as Australia and New Zealand.
It is worth noting that reimbursement for telemonitoring has been approved now in France. This has provided and will provide on an ongoing basis increased adoption of the Air Solutions ecosystem, including the AirSense 10 and the AirCurve 10 device platforms as well as AirView and MyAir software platforms. Digital health and connected care are going global and ResMed is a catalyst for that. We have had excellent success with connected care value creation for our U. S.
Customers these last 3 plus years and we expect to continue that. But now we also expect to provide similar value creation from Connected Care for our customers in Europe and across Asia Pacific as we expand this offering. We also achieved solid growth in our dental business in Europe with the Narvaal mandibular repositioning device. Masks and accessories grew at 4% this quarter in combined Europe and Asia geographies. Similar to the U.
S. Commentary, we expect this growth to expand in FY 2018 based on the positive feedback from patients, physicians and home care providers. Customers in Europe and Asia are also excited by the broad fit range and enhanced comfort of the AirFit N20 and the AirFit F20. Let me now take a few minutes to update you on progress against each of the three horizons in our 2020 growth strategy and then I'll hand the call over to Brett. In the first horizon of growth, which focuses on our sleep apnea business, we're making significant advances with the smallest, the quietest and the most comfortable products enhanced by digital health and connected care.
We launched our new AirTouch full face mask in the U. S. During the Q4. The AirTouch Ultra Soft Memory Foam Cushion is a breakthrough in the treatment of sleep apnea. AirTouch is the softest CPAP mask in ResMed's history.
It is a significant innovation that is truly novel and very patient friendly. This mask addresses the number one reason that patients quit CPAP therapy, which is comfort. The ultra soft memory foam is permeable, allowing heat and moisture to escape without compromising therapy pressure. The AirTouch foam mask cushion also fits into the AirFit F20 frame, giving our home care customers interchange and switch options as they fit patients and help patients better adhere to CPAP therapy. As we discussed earlier, we started shipping the world's smallest CPAP midway through May.
It is still very early days, but we have had excellent initial demand for the AirMini and we are expanding and leading in this new niche product category. There is solid demand for a category of small travel friendly second use CPAP devices that patients are willing to buy with their own cash. You will hear more from us as we build this category and drive growth with Air Mini. We continue to lead in the field of connected care, one of the key foundations of our growth strategy. This quarter, we announced 2 tuck in acquisitions within the Brightree product portfolio that enhance existing Brightree modules and address customer pain points for order intake and opportunities in resupply.
The first acquisition of a technology called Conduit Office is the technology behind the Brightree module called MyForms. This technology will allow us to enhance My Forms as a leading documentation and workflow management solution. My Forms provides automation to help improve the order intake process of our home care customers. The net result is reduced claim denials and improved audit outcomes for our home care customers. The second tuck in acquisition is a company called AllCall Connect.
This acquisition provides a full featured live call center for home care customers who subscribed to Brightree Connect, one of our resupply offerings. It can be expensive and sometimes inefficient for home care customers to develop their own in house live calling resupply capability. However, we know from our research that regular CPAP mask and accessory replacement are critical to ensure ongoing patient comfort, fit and adherence to CPAP therapy. AllCore Connect allows us to provide this service to our customers. On the big data to actionable information front, a new study was presented at the American Thoracic Society Conference in May.
This ResMed sponsored study of over 130,000 patients on PAP therapy showed that patients with treatment emergent central sleep apnea or CSA are 2 times more likely to terminate therapy. This study highlights the importance of monitoring patients to support adherence. Also, it shows that early diagnosis of CSA and use of therapies such as ResMed's ASV technology may minimize risk of therapy non adherence. The de identified aggregated propensity match data in the study leveraged the more than 1,000,000,000 nights of sleep data in our connected care and digital health ecosystem. With our new Chief Medical Officer, Doctor.
Carlos Nunez partnering with global teams of researchers in digital health, we predict that the insights gained from studies like this and beyond will provide the opportunity for ResMed and our partners to advance the field of sleep medicine faster than ever before. Moving to the second horizon of our ResMed 2020 growth strategy. Our cloud connected non invasive ventilators and life support ventilators continue to grow globally and we continue to develop our connected care strategy within COPD. The Journal of Global Health estimates that there are over 380,000,000 patients worldwide suffering from chronic obstructive pulmonary disease. With COPD being the number 3 cause of death and the number 2 cause for rehospitalization, we are focused on testing and driving models that lower costs and improve outcomes for COPD patients.
This is an urgent need to address a growing public health crisis. On the clinical front, a study using a combination of home oxygen therapy and home mechanical ventilation, a study known as HOT HMV was published in the Journal of American Medical Association or JAMA. This ResMed sponsored study was presented at the American Thoracic Society in May and was previously presented at ERS. The conclusion of the study is that patients who receive non invasive ventilation at home in addition to oxygen therapy at home had a 51% decrease in the risk of rehospitalization or death. This major finding is now published in the peer reviewed press in a top tier journal.
This is an important milestone. HOT HMV contributes to a growing body of evidence supporting the broader use of non invasive ventilation such as ResMed's AirCurve 10 platform an important treatment for patients with COPD. We are excited that we now have our global respiratory care business vertical including direct line of sight from management down to the sales interface. This augurs well for better leverage of studies like HOT HMV to drive changes in standard of care and drive further growth of non invasive ventilation, portable oxygen concentrator and life support ventilation business. Our 3rd horizon of growth includes a portfolio of opportunities including sleep health and wellness, chronic disease management as well as out of hospital software as a service business models.
We are working with payers and providers to develop and enhance chronic disease management algorithms, including population health models, care coordination models, as well as to acquire and grow software as a service models for home health, home nursing and hospice verticals. We made progress during the quarter in this area with Brightree's new offering for the home health and hospice market. A solution called OASIS, which stands for Outcome and Assessment Information Set. This is an integrated software and service solution with Brightree's coding and billing service that helps home health and hospice agencies reduce errors, improve patient care and optimize reimbursement, saving time so that they can focus on patients. This continues to be an exciting area for us as we look for ongoing growth of our software offerings.
Let me close with this. We are incredibly excited about our new product launches this last fiscal year and during the quarter with the N20, the F20, AirTouch full face masks and the world's smallest CPAP, the ResMed Air Mini. We are well positioned for fiscal year 2018 and we continue to work on a pipeline of new products and connected care solutions for sleep apnea, COPD, neuromuscular disease and other clinical adjacencies. We are positioning the company for long term growth for 2020 and well beyond as we refine our operating model, better enabling customer insights to power our product and service solutions teams developments and then drive even better sales execution. We continue to bring our strategy into action for the benefits of physicians, providers, payers and most importantly to improve the lives of tens of millions of sleep apnea and COPD patients around the world.
With that, I'll turn the call over to Brett for his remarks and we will go to Q and A after that. Over to you, Brett.
Great. Thanks, Mick. In my remarks today, I'll provide an overview of our results for the Q4 of fiscal year 2017. As Mick noted, we had a solid quarter. Group revenue for the June quarter was $556,700,000 an increase of 7% over the prior year quarter or in constant currency terms revenue increased by 8%.
Taking a closer look at our geographic distribution and excluding revenue from Brightree, our sales in the Americas were $314,000,000 an increase of 6% over the prior year quarter. Sales in combined EMEA and Asia Pacific totaled 2 $6,500,000 an increase of 6% over the prior year quarter. For in constant currency terms, sales in combined EMEA and Asia Pacific increased by 9% over the prior year quarter. Breaking out revenue between product segments. Americas device sales were $174,400,000 an increase of 8% over the prior year quarter.
Masks and other sales were $139,600,000 an increase of 4% over the prior year quarter. Revenue in combined EMEA and Asia Pacific device sales were $145,400,000 an increase of 9% over the prior year quarter or in constant currency terms an increase of 11%. Mask and other sales were $61,100,000 an increase of 1% over the prior year quarter, but in constant currency terms an increase of 4%. Globally in constant currency terms, device sales increased by 9%, while masks and other increased by 4% over the prior year quarter. Brightree revenue for the 4th quarter was $36,200,000 with growth on a prior year comparable basis continuing to track in the low double digits.
During the rest of my commentary today, I'll be referring to non GAAP numbers. The non GAAP numbers in the current quarter adjust for the impact of amortization of acquired intangibles. In the prior year comparable, they exclude amortization of acquired intangibles, acquisition related expenses, Brightree one time deferred revenue, fair value adjustment, serve HF accrual release and the cumulative tax We have provided a full reconciliation of the non GAAP to GAAP numbers in our 4th quarter earnings press release. Our gross margin for the June quarter was 58.2% consistent on a year over year basis. This reflects manufacturing and procurement efficiencies offset by declines in average selling prices and changes in product mix.
Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for fiscal year 2018 to be broadly consistent with our Q4 FY 2017 gross margin. Moving on to operating expenses. Our SG and A expenses for the quarter were $147,900,000 an increase of 10% over the prior year quarter. Or in constant currency terms SG and A expenses increased by 11%. SG and A expenses as a percentage of revenue were 26.6 percent compared to the 25.8 percent that we reported last year.
Looking forward and subject to currency movements, we expect SG and A growth rates to moderate over the course of fiscal year 2018. As a result, we expect SG and A as a percentage of revenue to improve from around 27% at the beginning of the fiscal year to around 26% by the end of the fiscal year. R and D expenses for the quarter were $36,700,000 an increase of 7% over the prior year quarter or on a constant currency basis an increase of 6%. This increase reflects incremental investments across our R and D portfolio. R and D expenses as a percentage of revenue was 6.6% consistent with the prior year.
Looking forward and subject to currency movements, we expect R and D expenses as a percentage of revenue in the range of 7% to 8% for fiscal year 2018. Amortization of acquired intangibles was $11,800,000 for the quarter, a decrease of $900,000 over the prior year. Stock based compensation expense for the quarter was $11,700,000 Non GAAP operating profit for the quarter was $139,100,000 an increase of 3% over the prior year quarter, while non GAAP net income
for the quarter was $109,600,000 an increase
of 5% over the prior quarter. Non GAAP diluted earnings per share for the quarter was $0.77 an increase of 4% over the prior year quarter, while GAAP diluted earnings per share for the quarter was 0 point 7 4th quarter earnings by $0.03 per share, reflecting the unfavorable impacts from the weaker euro and stronger Australian dollar relative to the U. S. Dollar. On a non GAAP basis, our effective tax rate for the quarter was 17.8% and for the fiscal year 2017, it was 20%.
The current quarter effective tax rate was favorably impacted by a tax benefit of $2,200,000 associated with share based payment transactions recorded in accordance with accounting standard ASU 20 sixteen-nine. Looking forward, we estimate our effective tax rate for fiscal year 2019 will be in the vicinity of 22%. Cash flow from operations was $140,300,000 for the quarter, reflecting strong underlying earnings and only a modest increase in working capital balances. Capital expenditure for the quarter was $18,400,000 while depreciation and amortization for the June quarter totaled 28,200,000 dollars Our Board of Directors today declared a quarterly dividend of $0.35 per share, an increase of 6% over the previous quarterly dividend. As previously announced, we have temporarily suspended our share repurchase program due to recent acquisitions.
However, we expect to recommence our share buyback in the second quarter of fiscal year 2018. As a minimum, the aim of the buyback will be to offset the dilution impact from employee equity grants. This is estimated to be in the range of 1,000,000 to 1,500,000 shares annually. At June 30, we had $1,100,000,000 in gross debt and 3 $57,000,000 in net debt. Our balance sheet remains strong with modest debt levels.
At June 30, total assets were $3,500,000,000 and net equity was 2,000,000,000 dollars And with that, I will hand the call back to Agnes.
Thanks, Brett. We will now turn to Q and A and we ask everyone to limit themselves to one question and one follow-up question. If you have additional questions after that, please get back in the queue. Ariama, we are now ready for the Q and A portion of the call.
Thank you. We will now begin the question and answer Margaret Kaczor from William Blair is on the line with a question.
Hi, guys. This is actually Scott on for Margaret. I wanted to start on U. S. Market growth for both devices and masks.
Meg, should we look at device growth on a 6 month basis? Or is underlying device growth accelerating in the U. S? And then on masks, how did that underlying market growth compare to last quarter in Q4?
Thanks for the question, Scott. In terms of market growth, look, I think it's always good to look at a 6 month or even 12 month trailing period because there's lots of sort of fluctuations that can happen on a quarterly basis, seasonally adjusted and aspects of how the market may turn. In general, we look at the market as mid to high single digits growth for the market and devices are at the low end of that range and masks are at the high end of that range. At ResMed, we like to not just meet, but beat market growth rates. And I'd say if you look at this quarter, clearly, we beat market growth rates with our device growth and we're a little behind it on our mask growth rate given some of the supply constraints in the first half of the quarter.
But the market growth rate I think it is good look at a 6 or 12 month trailing period to sort of get a better picture of what the market growth is.
Okay, great. And then Brad, I wanted to ask on gross margin in the quarter and then the puts and takes to that number in terms of currency and mix and pricing and you guys guided to gross margin for the next fiscal year to be consistent with this quarter. The same kind of question in terms of headwinds and tailwinds concerning you guys will probably have a pretty strong mass growth rate throughout the year.
Yes. I mean, on the as you said, Scott, lots of puts and takes on that. But I guess the margin is looked at over the last few quarters relatively stable in that sense. And we're seeing certainly sort of moderation in that product mix impact. It's still there.
A little bit negative, we still had we had really strong device growth. So obviously, if devices are growing more strongly than masks, then you have a slightly negative impact on margins. But to the extent we get we see some improvement in that mask growth for FY 2018, then that would certainly be supportive of product mix and supportive of the gross margin.
And then lastly for me, kind of a bigger picture question on AirMini. Could this potentially be something you push as more of a mainstream product or something you would consider investing DTC advertising dollars towards? Or are you guys just going to rely on kind of your traditional customers to promote the product themselves? Thanks.
Yes. Thanks for the question, Scott. Look, the M and E is a really exciting product, and it's the world's smallest CPAP. But it is designed to be a second use cash pay travel friendly device and that's sort of the niche segment category, if you like, that it's creating and growing and leading. We've seen great initial demand in the U.
S. Through our home care channel as they get the opportunity to enhance their cash sales. And in markets around the world where there are other go to market models, patients are willing to pay out of pocket. And I think there was some good pent up demand for a travel friendly CPAP like this and we explored we look forward to expanding that niche category to a larger niche and continuing to lead it and the M and A technology is doing a great job in that.
Thanks.
Sean Laymon from Morgan Stanley is online with a question.
Good morning, everybody, and thanks for taking my question. Just to re ask the question, Brett, on gross margin. I mean, if the feedback on if the mass is good as what the feedback suggests, I'm not really sure why we don't really see a meaningful tick up in mass growth and therefore why wouldn't we see some upward pressure on gross margin?
Well, in that sense we would Sean. I guess what I'm saying at the moment, it's broadly consistent. We're still seeing some pretty good device growth. Again, we expect to see better growth in mass than what we saw this quarter. And to the extent we see that coming through, then I'll update gross margin guidance in a dynamic way.
We'll still continue to update as we go and it's the same story. If we do we could take acceleration last and you'll see some improvement in gross margin. But we're still doing pretty well in devices also. And year on year, we've had a few if you look at that with FX and things like that year on year, it
was a little bit of
a headwind for us as well. So, a few things playing out on that, but I don't yes, I mean, the thesis still holds. We get good mass growth, then you'll see an improvement in product mix and improvement in gross margin.
Sure, sure. Great, Brett. Thanks for taking my question. That's all I have. Appreciate it.
David Lowe from JPMorgan is online with a question.
Thanks very much. If we could just touch on the device growth, as you say, there's good strong results there. Just wondering if you could give us some sense as to what contribution you saw from the non invasive ventilation line, was that growing strongly? And was the mini device much of a contributor to that line please?
Hey, David. It's Mick here. As you know, we don't split out our respiratory care device growth versus sleep device growth at this point. But look, what I can say qualitatively is that the vast majority of that growth was the sleep apnea device growth powered by the AirView software solution and uptake of the great value for physicians and providers from AirView. But that is as we move Connected Care over to our respiratory care platform that is starting to get some momentum there.
I will say that AirMini coming out the gates was relatively minimal on its impact on the aggregate device growth because that niche is really just starting up. But there was some balance between sleep apnea and respiratory care growth, but heavily weighted towards sleep apnea device growth, particularly in the U. S. Region in terms of
the year on year growth there. Right. Thanks. And sorry, just a related question. I mean, the French change, so the tele monitoring, was that meaningful in this quarter or is that something that's likely to become more of a contributor going forward?
Yes. That's more of an ongoing it's more of an ongoing contributor. It will have had some influence on product selection by customers as they were looking to make purchases during those 90 days. But that changes something that is actually changing the fundamental basis of competition, if you like, in the industry in France. And it's an ongoing opportunity for us to drive AirSense, AirCurve and really the whole Air Solutions ecosystem, particularly the software side of AirView.
And we're seeing the French physicians really embracing the technology and we're seeing French customers really liking the efficiencies that they can get from the technology. And we're looking forward to patients getting the ability in France to get access to my data and at the same levels that patients throughout the U. S. Have these last 3 or 4 years. And we think the value across that whole ecosystem of customers will be strong.
So the short answer is it's an ongoing thing and it did impact a little bit
in the quarter, but it
will be ongoing for FY 2018 and beyond.
Right. Thanks very much.
Thanks, David.
Saul Hadassan from Credit Suisse is online with a question.
Thanks. Good morning, guys. Can I just check regarding just the Brightree commentary in terms of growth? If I go back to the 4Q 2016 period and just look at revenues there, it looks like growth implied growth was about 25% this quarter. Can you just clarify whether that was the case?
And was there any contribution from some of those tuck in acquisitions you made? Thanks. Yes. So that's right. So it was a little bit complicated last year with a fair value adjustment that we had from Brightree around the acquisition and on the revenue side and a few like it was a slightly shorter quarter.
So what I've done and what I said for that is really an underlying true comparable growth rate. If you look at like for like on that, just on the numbers that we've got our filings, for example, you're exactly right. It's around that 25%. But if you look at it on a pure comparable basis, I'll try to strip out some of those sort of adjustments, then we're looking at that pretty solid low double digit growth. Thanks, Brett.
And can I just ask one additional question about the impact of currency for fiscal 2018 on gross margin as in terms of where currency stands at the moment? Is there a net benefit coming through this fiscal year based on what the euro has done versus the USD? Or is that effectively offset by the rise in the Aussie dollar on the COGS side? Thanks. Yes, you're right.
If I have a look, just to give you a sense for it, if I look currencies are moving around a lot lately as you'd be aware. But if I look at it going into sequentially going into Q1, then I think we'd get a benefit of some where they are at the moment, I think we're looking to get a benefit of maybe sort of that 20 to 30 basis points. But then if I take it into Q2, where we then start to pick up some of the impact from the appreciating Aussie dollar, it basically reverses that. It's basically roughly 40 basis point reversal. It's a little bit of a tailwind sequentially going into Q1, but then turns into a small headwind into Q2.
So and then going forward that should then just sort of flatten out. But if you look at it sequentially, there the impacts better in Q1, but then a worse impact in Q2 for us. And that's really driven off that pretty sharp increase in the Aussie dollar, which just happened quite recently. And then we'll see where that hits, but at the moment that's the impacts that we're looking at. That's great.
Thanks very much, Greg.
Joanne Wuensch from BMO Capital Markets is online with a question.
Good evening. Can you hear me okay?
I can hear you fine, Joanne.
Terrific. Two questions. The first one is, it's great to hear that you're out of supply constraint on the masks and the accessories or the 2 new mask items. Can you give us an idea of where do you go from here with full supply? What kind of demand that you're seeing for those products?
Yes. Look, I think the demand is high. Physicians like it because it's broad fit range. Technicians like it because most importantly patients like it and it has a good first time fit ratio and a very broad fit range of 97% on one of them 99% on the other. And the INFINITI Seal Comfort Technology just having very light levels of plastic around the bridge of the nose is very comfortable for patients.
So, yes, we missed some perishable sales in the first half of the quarter due to supply constraints. That goes away in Q1, right? As we look forward to FY 2018, our sales force confidence will really be there. And I think that's a part that you shouldn't underestimate that when salespeople aren't sure of supply, they don't sell that product line. And when they are sure of supply, they can sell that product line.
So as we look forward to FY 2018, we think there'll be some very good success of the N 2020 and F 2020 and really happy to let that sales team do what they do best, which is provide that value to customers in a way that they can help give it to their customers for the patients.
Is there a way to quantify those loss perishable sales?
There are probably 20 different models that we have internally, but it's not something we talk about externally. It's certainly something that as we said 90 days ago, we never like to be under supply constraints. With innovation, new technologies, new plastics, new ways of designing single cushion masks that revolutionize the market. We had some challenges with the technology there last quarter. But the good news is we're through that.
As we look forward, we're looking to continue growth and particularly growth in masks.
Excellent. And then my second question really is operating margins. They compressed year over year on higher SG and A. Do you see sort of this new annual run rate as a steady state or should we start moving up from here with the higher mask margins?
Yes. I mean on operating margins, John, yes, I mean, we've got I mean, we've guided to improve the consistent on the gross margin. We've answered that around, hey, look, if we get through FY 'eighteen, so improving that mass growth and so on, that's going to be supported for gross margin. Then on the operating margin side, I do we expect that we'll get some moderation in those SG and A growth rates. Things such as legal costs and so on are hurting us have been hurting us through FY 2017.
As we work through FY 2018, we're focused on driving some operating leverage and we expect to improve that over the course of FY 2018. And to the extent we do that, then that will drop through to
the bottom line. What I'd add to that I think is as we look to drive operating leverage on a longer term basis and moderate SG and A as a percentage of revenue, I think we can get more aggressive in how we scale our business. And as I said in the prepared remarks, Joanne, we've refined our operating model with business verticals that include the sales force and marketing teams, downstream marketing teams in region and in countries. I think there's a lot of opportunity for us to grow revenue significantly faster than we grow our SG and A as we look forward to 2020 and well beyond. So short term, I agree with Brett.
We've got some refinements and great capability to drive operating leverage, but longer term could be even better.
Terrific. Thank you so much.
Will Dunlop from Bank of America is online with a question.
Thanks very much. Just again wanted to ask about the gross margin and perhaps why you didn't provide a range for the guidance. That guidance seems quite specific given that there's probably quite a bit of variability in the product mix that could occur and geographic mix that could occur throughout fiscal 2018?
You're right, Will. I mean, there's always going to be variability. There's a number of factors that play out. I mean, I'll just mention a few of them, but you've got the implied of players to procure manufacturing improvements, FX, product mix, geographic mix. There's a bunch of factors that play out on that side.
It is difficult to predict, I guess. But I think broadly consistent. I mean that easily you can see that as being not don't think of that as being like purely consistent, but I think there's you could see that you can argue that's a bit of a range anyway around where we're at. So it certainly can be and we've talked about it already on improvement in masks and so on can mean that we can get some expansion in gross margin. So I didn't mean that to be a really precise measure or guidance.
I think you could range around that 58.2%
as well.
Okay, great. Thanks. And secondly, just SG and A as a percentage of sales guided to be declining through fiscal 2018. Is that because you expect litigation costs to roll off? And if not, are they going to be a material component of SG and A for fiscal 2018?
Well, I mean, we're still going to we still have litigation costs and they'll still be coming through FY 2018. But we did ramp up through FY 2017, I guess, and that was hurting our growth rate on SG and A. We do think in terms of litigation, it's hard to predict exactly where that will end up. But I think it will be not sort of accelerating in terms of our growth on where we were in FY 2017, but we'll continue to be spending money on legal expenses around litigation.
But it will be
I think it's more broader than that in terms of moderating the SG and A growth rate. So it's not just about legal costs leveling out or going down or whatever that might be. It will be more broad based than that. And I should say that guidance as well is notwithstanding pretty sharp appreciation in the Australian dollar, which we've got a lot of operating costs in Australian dollars. So we're going to deal with that as well.
So obviously that's going to be a little bit of a headwind through FY 'eighteen, but we remain confident that we can moderate the SG and A growth through FY 'eighteen, notwithstanding currency impacts.
Great. Thank you very much.
Andrew Goodsell from UBS is online with a question.
Thanks very much for taking my call. I'm just coming back to, I guess, how you traded across the quarter, particularly masks. I know you've labeled this a little bit or we've labeled a bit. Just trying to sort of understand when the back order came off and when we look at that mask number, we're sort of looking at really a sort of a 1 month effective full availability? And I guess just trying to understand the exit rate to give us some confidence around 2018?
Yes, Andrew. So as I said, we have supply constrained through well beyond halfway through the quarter. So you can sort of look at it as yes, 4 to 5 weeks of the supply constraints starting to go away SKU by SKU and us getting supply ahead demand. I think the fact that I talked a little bit too earlier Joanne's question with regard to sales force having full confidence that they're going to have supply, it's not that's not binary. You don't just go Monday morning and say we've got full supply and the sales force says fantastic.
I'm going to go and sell a truckload of F-20s. I think what it takes is some time and they make some small orders and make sure it comes through and then ramp up because they're intelligent salespeople that have very good relationships with their customers. They want to fulfill those relationships with when they make a sale that we can deliver the order. I think what we've shown in the last 4 plus weeks of the quarter is that we were able to deliver on all those sales. And so I think the exit rate from Q4 was very strong from our team in terms of what they're able to provide to customers for N 2020 and F 2020.
And I expect that to continue very strongly in Q1 and throughout FY 2018 as we are completely supply non constrained and the sales force can be really out there driving the full bag of products that ResMed has for our customers, which is a really strong portfolio right now.
That's great to get that exit rate. And I guess, maybe without answering my own question, I guess just obviously the UltraSoft does have a pretty intense replenishment schedule or monthly. So I guess it's fair to say no real effect of that in this quarter. I mean that sounds like it's sort of a next quarter event.
Yes. The AirTouch range with the foam masks does have a faster replacement cycle. It's incredibly comfortable heat and moisture can be removed, but air pressure stays high, but it does have a faster replacement cycle. Yes, I mean, we really started launching that mid May. And so you got very little if any replacement cycles on the AirTouch.
And that whole category of a foam mask with a different replacement cycle of intense comfort is really a category that we're developing over time. I don't know, Jim, head of our sleep business there running the Americas last quarter, you want to give any further insights to Ed touch?
Yes. I think we're confident in all three masks. The F 2020 and the N 2020 are both on great trajectories. And now that we're off supply constraint, we're very confident in forward growth in Q1 and throughout the year. EnerTouch would start later, launch later.
It's getting fantastic reviews from both physicians and patients. And again, you're absolutely right, we're not yet really into it didn't launch early enough for us to see any real impact or resupply on the cushions in the quarter.
That's great. Thank you very much.
Thanks, Andrew.
Steve Wein from Evans and Partners is online with a question.
Yes, hi. Just a question on Brightree. We haven't had an update in the gross margin of that business since you first acquired it. And I just wonder how that might look today, particularly in light of some of the acquisitions that you've made?
Sure, Steve. It's Brett. Yes, I mean, look, they're pretty consistent with those that we
disclosed at the time we made the acquisition.
So there's really no I guess, but not it's sort of not enough to move in any significant way the operating margins of Brightree. So they've been pretty consistent through that period since acquisition.
Yes, okay. And then just with the R and D guidance, that looks like it's stepping up a bit in 2018. Is that is there anything you can talk to on the R and D front that might be driving that other than currency?
Yes. Well, currency is pretty big one, Steve. So I mean the two things is we'll continue to invest in R and D. So we're going to continue to do that. So we'll continue to grow our investment there.
And the second one that's probably earnings a bit on that on the guidance or basically looking at 7% to 8% is really the uptick. I'm looking at this Aussie dollar and if you know a lot of our R and D is still done down in Sydney and in Australian dollars. So that's sort of if I look at the forecast that's sort of a bit on the R and D just in R and D in terms of U. S. Dollars.
So those two factors have led us to guide around that 7% to 8% mark for FY 2018.
Yes, okay. And then just one other. Could you just give a bit more color around the effective tax rate? It's just even without the change around accounting standard, it looks a lot lower than what I was expecting.
Yes, if you could just address that that would be great. Yes, Caim. I mean overall for the year Steve, the quarter is a bit hard because anything you do in terms of year end calculation of tax everything gets sort of or true ups get concentrated into the last quarter. But if you look at full year, we're around 20%. And that was probably helped a little bit by the ASU 20 sixteen-nine accounting standard.
So that sort of contributed a little bit there. Perhaps underlying it's more like 21% or something like that. So that's sort of where we've landed at an underlying rate. If we look at it going forward, it's just I've uptick that a little bit with just around looking forward around the geographic distribution of taxable income is a factor. The stronger Australian dollar is going to be a factor on that.
These are all sort of contributing a little bit. And a few other things such as the R and D tax concession in Australia, which is capped out at $100,000,000 and it's reduced from 40% to 38.5%. So a number of those factors that sort of playing out on the tax rate and has led us to just increase that just a little bit from where we were in FY 2017.
Right. Can I just ask one more, just the other income line that reverses from a profit to a loss, is that just hedging? Or is there anything else in there?
Yes, that's predominantly FX losses through hedging. Right. Thank you. Thanks, Dave.
Victor Wendyer from Citi is online with a question.
Yes, thanks very much. Look, I just wanted to ask about the portable oxygen concentrator business. I suppose my sense is that hasn't sort of grown. It's been a little disappointing. But what's your sort of take on where that business is going and how you can sort of really drive growth there because it looks like an opportunity?
Yes. Victor, I'll hand that to Rob Douglas to talk about POCs. Yes.
Thanks, Victor. Victor, we've continued to work hard on the Activox product and we've actually made a number of improvements under the hood, so to say, of the device. And we've seen a lot of improved performance. And we think our teams have done a great job on that improved performance. And now we're just sort of getting that through to the customer base.
But we're not rebranding yet. We're still waiting for further improvements that we think and you know when we're happy with the devices when ResMed puts its brand on So today, we're still work in progress. We're making very good progress. The Active Ops unit remains a very good, very light, very long battery life device and our teams are promoting it appropriately to key customers. So we're in it for the long haul and we believe it's going to be a very good business.
Okay. And do you think I mean in terms of a ResMed branded product, are you well down the path in terms of development of that Rob or is that some years off still?
Victor, one of the things we've learned over the years, we really can't forecast our R and D program. It's just too good for competitors and everyone like that. So we're really reluctant to give you a timeline and details on that.
Yes, okay.
And does this form part of this new I mean, it sounds like you're sort of doing a slight reorganization in terms of the operations with these new business verticals. Is this generally this falls into the respiratory care
part of that business, is that right?
Yes. Victor, we've got a very strong respiratory care team that's able to focus on getting out and treating patients with respiratory insufficiency or COPD is one of the main patient conditions that we're aiming to treat. We've got an improving and an emerging portfolio of treatment much closer engagement
between
our sales organization, much closer engagement between our sales organization and our customers back through to our R and D teams. We should over time see benefits on the R and D programs for that.
Yes,
okay. All right. Thanks very much.
Matt Taylor from Barclays is online with a question.
Hi, thanks for taking the question. First one I wanted to ask was just about the acquisitions, another tuck ins. But could you help us understand whether there was any contribution in the quarter and what you're expecting from those in terms of contribution in the next fiscal year?
Thanks for the question, Matt. No, there was de minimis contributions in Q4 from those tuck in acquisitions. They're really about technologies that will enhance our ongoing future growth of the Brightree offering. So to maintain and grow that double digit growth of high margin business in software as a service, we're finding tuck ins of some good technologies can really help enhance that growth and drive further value for healthcare informatics team. Straight after the acquisition already engaged with our software development teams and really starting to say, well, how do we link this tuck in technology with all the great offerings we currently have on Brightree and continue to provide that value as we go forward.
So the short answer is no contribution Q4 'seventeen. We expect great contributions as that capability of AllCall and conduit office roll into the offerings from Brightree, some particular modules that will expand over FY 2018, 2019 and beyond.
Okay. And just a question on leverage. I mean, if I look at the guidance quite literally, it would imply slight negative leverage in fiscal 2018. I know you have a headwind from foreign exchange, but what are the other headwinds that you have that maybe we're not thinking about? And how can you get more leverage out of the business as you continue to grow the top line?
Yes, Matt. Look, it's a great question. And clearly, we are looking for operating leverage and you can't control things like FX and those just have to be budgeted where they are now where they will be, who knows, but we will see as those move. The things you can control, your SG and A growth, your R and D growth, your investments across your portfolio and how you go to market. As I said in the prepared remarks, establishing these new business verticals, rolling sales into global businesses, we think there's a lot of efficiency we can gain in how we grow revenues significantly faster than growing SG and A while providing the same or even better value to customers.
So it's something that we're laser focused on in terms of operating leverage, getting SG and A leverage and driving that growth. We're not going to grind out R and D dollars and not invest in innovation. I mean that's something we're going to continue to invest at a very strong rate, right, put that sort of 7% plus guidance in there and FX might tick that up to 8%. But SG and A can come down from 27% to 26% below because there are great ways to scale marketing through social media and digital marketing. There are great ways to scale our sales force and how we go to market in different countries.
And so we've got a lot of very exciting plans for the next fiscal year and beyond in terms of driving our go to market strategy that I very strongly believe will drive better operating and SG and A particularly leverage as we go forward.
Thank you.
Thanks, Matt.
Anthony Petrone from Jefferies is online with a question.
Thanks. Two quick ones for me. Maybe just on masks, generally just an update on the pricing environment overall. And as you get up to speed with some of the new offerings out of the supply issues, do you expect perhaps a little bit of premium pricing on the newer offerings? And then maybe just an update on inventory cycles, receivables cash.
It looks like inventories ticked up a bit as well and just trying to reconcile that with the supply constraints? Thanks again.
Yes. Thanks for the questions, Anthony. I'll hand the first part of the question to Jim Hollingshead to talk about pricing and the second part to Brad.
Thanks, Mick. Hey, Anthony, thanks for the question. What we're seeing is a pretty normal pricing environment relative to historical. And so we're not seeing any unusual declines in pricing. We're seeing the same steady moderate annual ASP declines that we generally see historically in the industry.
All of our mask offerings are priced at a premium. We're the market leader. We're the strongest provider in the industry and we have premium pricing. The new masks themselves also are at a premium to the what was the existing portfolio.
That's helpful.
Yes. And Anthony, just on the inventory, some have ticked there, but we definitely rebuilding through the supply chain to support the new product introductions and to get us into that good strong supply position. So an element of that is building for that and you see that reflected at June 30 in the inventory balances.
Thank you. Thanks for the questions, Anthony.
Suraj Kalia from Northland Securities is online with a question.
Good afternoon, everyone. So, Mick,
two questions from my side. First on Brightree, can you quantify the OUS or ex U. S. Opportunity for us?
Thanks for the question, Suraj. Yes, Brightree has been laser focused on the U. S. HME industry and has an emerging vertical that they're building in home health and hospice. And so we think the value provided is incredible there.
The skill sets, so none of the existing modules if you like from Brightree would be copied and pasted into our German business or to our French business. But the capabilities of running a software as a service business, getting strong annually recurring revenue, monthly recurring revenue from customers having them pay for software per user per month is a very strong capability. So we think that out of hospital software as a service capability is an incredible strength that ResMed now has and we are looking to, as I said in the prepared remarks, expand in home nursing and expand in home health and expand in hospice within the U. S. Environment.
We're also looking to expand our software as a service offerings in France and Germany and the U. K, probably not with a direct copy and paste. It's more of a longer term approach than that. Some things that we are looking to copy and paste and in fact have already started to do that, in the area of the Air Solutions ecosystem including AirView and MyAir. So the AirView software for physicians and for home care providers has already been set up with service based in Europe according to European law and with European security protocols and in line with the needs of our European customers.
So AirView is scaling there. In addition, MyAir, the patient app, that's universal, right? Humans are the same no matter where they are and just translating it into French or into German or into Japanese is the pathway and making sure that we have all the right engagements around local law and security and so on. So that's where the scale is in AirView and myAir and then the capability longer term with regard to Brightree.
Fair enough. And Mick, one last question. This might be a naive question, Mick. So let's say I have to order a resupply or reorder a mask, whether a full face, nasal, what maybe. And let's say the N20 and F20 is not available.
What happens to that patient? I guess I'm just trying to understand if there were supply issues, did those patients stick with their existing masks? Did they go to the N10 or F10 in the interim? Or if you could just help us reconcile, because I'm looking at the 4% Americas mass number. Part of me is like that the patients are they waiting for these new masks to come online or did they switch to F10?
Any color would be great. Thank you for taking my questions.
Yes. Suraj, that's a really good question. And one thing that we talked about internally when we saw supply constraints was focusing to make sure that we had resupply for customers versus going after a new patient sale. And so as I said, there were some perishable sales lost in the first half of the quarter of some new patients that we wouldn't have got onto a ResMed mask and the customer will make the choice whether they went to an N10 or F10 or to a competitor's mask and losing 6 weeks of or 8 weeks of first time setups is a bad thing to do. But what's worse is to your point not being able to resupply an existing customer.
And so we really worked with our home care customers to make sure that any resupply needs from and the masks could only be out there 6 to 9 months. And so it wasn't a huge population resupply, but that the supply was focused on resupply of patients who'd already loved the N20 and F20. So we continue to have those patients really our home care customers continue to have those patients supplied with ResMed masks for their life. And so that was a nuance during the quarter. I see we're just past the bottom of the hour and so we should probably end the Q and A there, Mary Ellen.
Okay. Thank you. We are now at the 1 hour mark. So I will turn the call back over to Mick Farrell.
Great. Thanks. And I guess I could hand it to myself, but thanks, Maryam. In closing, I want to thank the now more than 6,000 strong ResMed team. ResMed has been diligently driving execution of N20, F20, AirTouch, AirMini launches, as well as the future pipeline and even more innovative products and software solutions that we will launch as we move ahead.
Our team continues to demonstrate unwavering commitment to changing the lives of tens of millions of patients globally and we remain laser focused on our goal of improving 20,000,000 lives by 2020. We will talk to you again in 90 days with our Q1 FY 2018 results. Thank you for your time.
Thank you again for joining us today. If there are any additional questions, please feel free to contact me. The webcast replay will be available on our website on investor. Resmed.com. Maruyama, you may now close the call.
This concludes today's conference call. You may now disconnect.