Welcome to the Q1 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, Senior Director of Investor Relations. 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 Sander Cock, 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 can 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, but actual results may differ materially from those indicated. Important factors which could cause actual results to differ materially from those in 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 who are joining us today as we summarize our results for the Q1 of fiscal year 2017. We achieved solid double digit global revenue growth this quarter, led by sales from Brightree and strong growth in our device platform categories. For the call today, I'll review high level financial results, outline regional highlights and then discuss progress towards our ResMed 2020 strategic goals. Then I'll hand over to Brett, who will walk you through financial results in more detail. We continue to see the benefits of our leadership in Connected Care.
The ongoing value proposition of the Air Solutions software resulted in strong growth for device platforms in both sleep and ventilation. Brightree's value to providers also led to recurring software as a service revenue from that part of our business. At the bottom line, in terms of non GAAP net operating profit, we grew at 11% on a year on year basis in Q1. Including financing costs, our diluted earnings per share was 0 point basis, which represents 5% year on year growth. We continue to balance revenue growth, gross margin improvements as well as ongoing investments in both R and D as well as SG and A as we prepare for upcoming product launches across our global markets.
Now for some regional highlights. The Americas region produced double digit revenue growth. These results were fueled by software as a service revenue from Brightree and 10% growth in that region in devices. Device growth was up against a robust 40% year over year comparable. The mask and accessory category in the Americas was flat in the quarter.
We are very confident that we will drive strong growth with mask technology that we are launching this quarter. Just yesterday, we started selling our brand new AirFit F20 product into our European market and we will launch another mask technology imminently in Europe. We tested both of these technologies with customers during the quarter and they were very well received in market trials with physicians, providers and with patients. We plan to launch these new technologies into the Americas market during the current quarter. We are incredibly excited about these new products.
In the Americas region, growth in devices was driven by the ongoing strength of the AirSense 10 and AirCurve 10 systems, powered by the cloud based Air Solutions software platform including AirView, U Sleep and MyAir offerings. In addition, we also saw solid performance in our respiratory care device platforms with the launch of cloud connected Astral ventilation systems. We achieved good growth in our combined EMEA and APAC regions with balanced contributions from both devices and mask categories. We are now on a solid positive growth trajectory in ASV therapy in the region. We are seeing good growth in patient groups including central sleep apnea, complex sleep apnea and pain management.
We will see mask and accessories growth accelerate as we move forward with the current and very near future product launches in the category as well as ongoing resupply partnerships throughout fiscal year 2017. We will show some of our new mask technologies to physicians and providers in the U. S. Next week at Medtrade. Patient, physician and provider feedback from control product launches have been excellent and we know these masks will be very well received as they transition to full market launch.
Let me now provide an update on our ResMed 2020 growth strategy. We continue to lead the field of connected care, one of the key foundations of our growth strategy. We have high quality software as a service revenue from Brightree that continues to grow strongly. We are on track with our work to integrate Brightree software functionality with our core air solutions platform. We continue to invest in a portfolio of cloud based computing solutions that help HME customers become even more efficient and help them free up cash flow that can be reinvested to drive even better patient care.
Connected Care solutions are improving operating efficiency, eliminating waste, increasing therapy adherence and improving patient outcomes. We are growing our Connected Care solutions in COPD as well as linking our technology to include other chronic care applications. This technology is a valuable asset that we will continue to leverage and provide insight to channel partners. This foundation of Connected Care is an integral part of our long term strategic plan. Let me now take a few minutes to update you on the progress against each of the three horizons in our 2020 growth strategy and then I'll hand over to Brett.
In our first horizon of growth, which focuses on our core sleep apnea business, we have achieved sustained year on year growth since the launch of the Air Solutions platform more than 8 quarters ago. We were a sponsor at the annual meeting of AdvoMed, the Advanced Medical Technology Association that was held last week in Minneapolis. One of the main themes at AdvoMed 2016 was the importance of digital health and the convergence of technology from data analytics to connectivity to patient engagement. This represents a significant shift from 2 to 3 years ago. I was on a panel titled Unlocking the Transformative Potential of the Internet of Things with colleagues from Deloitte and Medtronic, one of the other medtech leaders in this area of connected care.
While many companies are talking about digital health and connected care strategies, just a few of us are leading the way to value. We now have well over 2,100 percent cloud connected medical devices sitting on patients' bedside tables, liberating data every day. We turn big data into actionable information, which can unlock value for the patient, the provider, the physician and the payer. We are helping to reduce costs for providers and improve outcomes for patients. With our expertise in sleep and respiratory medicine, we are also taking the lead with digital patient engagement tools that drive therapy adherence.
Since we launched Aehr Solutions, we have been actively involved in clinical studies that show increased patient adherence and customer efficiencies as well as demonstrate the value of our Air Solutions platform. Technologies like AirView and U Sleep improve patient adherence from baselines of 50% to 60% adherence all the way up to 80% adherence and above. These are game changing capabilities. We just announced the results from the world's largest study on sleep apnea and connected care using our MyAir technology. This study included over 128,000 patients.
These data will be presented at the CHEST Medical Meeting tomorrow in Los Angeles and without stealing too much thunder from the investigators at the highest level, these online self monitoring tools engage patients and improve adherence to therapy. In the MAIA study, we showed an absolute increase in adherence of approximately 17 percentage points. This represents a relative increase in adherence of over 24%. This adherence study was executed in our core sleep apnea market, but we know that these technologies and capabilities can be applied to our ventilation and to our portable oxygen concentrator technologies for use in patients with COPD, neuromuscular disease and other chronic diseases. During the quarter, we enhanced MyAir with the launch of a new smartphone app, which has been very well received by patients.
We now have well over 1,000 patients each day signing up for the MyAir app. Patients love getting a daily MyAir score for their sleep, learning about the quality of their sleep and learning about the quality of their breathing at night. Patients like to engage with their sleep health as much or more than their exercise health and their nutrition health. Our view is that these are 3 equal parts for good overall preventative health care. Moving on to the second horizon of our ResMed 2020 growth strategy.
This quarter we announced positive results from a randomized controlled trial in the field of home oxygen therapy and home mechanical ventilation. The acronym for this trial is HOT HMV. The data from this study were presented in September at the European Respiratory Society Congress in London. In HOT HMV, patients who received non invasive ventilation in addition to home oxygen therapy had an astounding 51% decreased risk of rehospitalization or death in the 1st year compared to patients who received oxygen therapy alone. Additionally, the patients who received at home NIV and oxygen experienced an average of 4.3 months without a hospital admission or death compared to 1.4 months for those on oxygen alone.
The reduction in mortality speaks for itself for caregivers and loved ones. The extra almost 90 days without hospitalization also speaks to government payers and to private payers. In the U. S. Market, hospitals face a Medicare payment penalty if COPD patients are readmitted to a hospital within 30 days for any reason.
A future where NIV and portable oxygen concentrators are standard of care to reduce mortality and reduce hospitalizations in COPD patients upon discharge is well within our second horizon view. Turning to progress in our Respiratory Care product portfolio more broadly, we launched cloud connected connectivity for the Astral platform. We continue to enhance air solutions to provide more value for Astral so that it can provide value for COPD and neuromuscular disease patients and beyond. We are on track with the Inova acquisition integration process and we are leveraging our quality systems and product development expertise to further improve the Actavox portable oxygen concentrator or POC platform. We expect to make good progress in the global rollout of Actavox over the following 90 days and beyond.
We have significant opportunities to grow POC revenue by selling through our global market channels throughout fiscal year 2017. COPD as a reminder is the number 3 cause of death in the Western world and it is the number 2 cause of rehospitalization. We know that our spectrum of cloud connected respiratory care products across our portfolio will play a big role in reducing costs for providers and improving outcomes for millions of patients with this debilitating disease. Our third horizon of growth includes a portfolio of long and the broader field of chronic disease management. In the area of sleep health and wellness, we announced a sleep awareness partnership with the Doctor.
Oz Show through the use of the S Plus by ResMed device. The S Plus is the world's first non wearable sleep device and smartphone app designed to help people track, better understand and improve their sleep. Doctor. Oz dedicated an entire show to the field of sleep wellness with guests including Doctor. Michael Bruce, a Board certified sleep specialist and Arianna Huffington, the Co Founder of the Huffington Post who has written broadly about the importance of sleep health.
The sleep awareness campaign involves selling thousands of S plus devices and tracking anonymous sleep data to create a database with over 1,000,000 nights of sleep. Doctor. Rawls plans to calculate what he calls America's overall sleep score and to announce the results at the Consumer Electronics Show or CES in Las Vegas early in 2017. For ResMed, this is about driving the importance of sleep health and helping consumers realize that they need to go see their doctor if they have any risky breathing or shortness of breath. These and other signs and symptoms of sleep apnea and COPD impact overall sleep health and overall health.
This will be a critical part of the overall sleep awareness work. Moving from sleep awareness to hard clinical data, we presented positive results from the CAT HF trial this quarter. The randomized clinical trial results were presented at the Heart Failure Society of America Annual Conference in Florida last month by the cardiologist and electrophysiologist, Doctor. Jonathan Pacini. Doctor.
Pacini's analysis showed a reduction in atrial fibrillation burden for heart failure patients who used ResMed's adaptive servo ventilation or ASV therapy to treat their sleep disordered breathing. This is the first study to show that addressing sleep disordered breathing with ASV may improve cardiovascular outcomes for patients with atrial fibrillation and heart failure with preserved ejection fraction. This is a large population of heart failure patients for which there is no Class 1a guideline therapy. Researchers are finalizing the manuscript for full publication of the CATHF study. We are excited about the patient outcome data and the potential opportunities to save hospitalization costs for the health care system globally.
Let me close with this. We are incredibly excited about the ongoing launch of our new mask technologies globally. We continue to lead in connected care with enhanced solutions that lower costs for providers and improve outcomes for patients. Customers are voting for this technology by signing up for our patient engagement apps and by voting with their wallets. We are also leading the industry driving consumer awareness of sleep so that undiagnosed consumers go to see their doctors and healthcare providers for diagnosis and for treatment.
We look forward to executing on our strategies to benefit physicians, providers, payers and most importantly to improve the lives of tens of millions of undiagnosed sleep apnea and COPD patients around the world as we move forward. With that, I'll hand the call over to Brett for more comments. Over to you, Brett.
Right. Thanks, Mick. In my remarks today, I will provide an overview of our results for the Q1 of fiscal year 2017 with more detailed commentary around revenue given our recent acquisitions last fiscal year. As Mick noted, we had a solid start to the year. Group revenue for the September quarter was 400 and $65,400,000 an increase of 13% over the prior year quarter.
In constant currency terms, revenue also increased by 13%. Excluding the acquisition of Brightree, revenue increased by 5% over the prior year quarter. Excluding all acquisitions, organic revenue increased by 3% over the prior year quarter. Taking a closer look at a geographic level and excluding revenue from our Brightree acquisition, our sales in the Americas were $267,900,000 an increase of 5% over the prior year quarter. Sales in combined EMEA and Asia Pacific totaled $164,500,000 an increase of 4% over the prior year quarter.
In constant currency terms, sales in combined EMEA and Asia Pacific increased by 5% over the prior year quarter. Breaking out revenue between product segments. Americas device sales were 145,600,000 an increase of 10% over the prior year quarter. Masks and other sales were $122,300,000 consistent with the prior year quarter. For revenue in combined EMEA and Asia Pacific, device sales were $113,600,000 an increase of 6% over the prior year quarter and in constant currency terms also an increase of 6%.
Masks and other sales were $50,900,000 an increase of 2% over the prior year quarter and in constant currency terms an increase of 4%. Globally in constant currency terms, device sales increased by 8% while masks and other increased by 1% over the prior year quarter. Brightree revenue for the Q1 was $33,100,000 During the rest of my commentary today, I'll be referring to non GAAP numbers. The non GAAP measures adjust for the impact of amortization of acquired intangibles, a one time expense associated with the field safety notification. In the prior year comparable, they exclude the amortization of acquired intangibles.
We've provided a full reconciliation of the non GAAP to GAAP numbers in our first quarter earnings press release. Our non GAAP gross margin for the September quarter was 58.9%. On a year over year basis, our gross margin increased by 90 basis points, reflecting manufacturing and procurement efficiencies and the favorable impact from our Brightree acquisition, partially offset by an unfavorable but moderating product mix and typical declines in average selling prices. On a sequential basis, our gross margin increased by 70 basis points, largely attributable to manufacturing and procurement efficiencies. Assuming current exchange rates and likely trends in product and geographic mix, we are narrowing our guidance range and expect gross margin to be in the range of 58% to 60% for fiscal year 2017.
Moving on to operating expenses. Our SG and A expenses for the quarter were $128,900,000 an increase of 16% over the prior year quarter. In constant currency terms, SG and A expenses increased by 15%. Excluding the impact from acquisitions, our SG and A expenses increased by 6% in constant currency terms. SG and A as a expenses as a percentage of revenue were 27.7% compared to 27% that we reported last year.
Looking forward and subject to currency movements, we expect SG and A as a percentage of revenue to be in the range of 27% to 28% for fiscal year 20 17. R and D expenses for the quarter were $34,400,000 an increase of 27% over the prior year quarter, or on a constant currency basis an increase of 21%. This increase largely reflects the impact of our recent acquisitions and incremental investments across our R and D portfolio. Excluding the impact from acquisitions, our R and D expenses increased by 8% in constant currency terms. R and D expenses as a percentage of revenue was 7.4% compared to the year ago figure of 6.6%.
Looking forward and subject to currency movements, we expect R and D expenses as a percentage of revenue to be in the range of 7% to 8 percent for fiscal year 2017. Amortization of acquired intangibles was $11,700,000 for the quarter, an increase of $9,400,000 over the prior year, reflecting the additional amortization associated with our recent acquisitions. Stock based compensation expense for the quarter was $12,000,000 Non GAAP operating profit for the quarter was $111,000,000 an increase of 11% over the prior year quarter. Non GAAP net income for the quarter was $87,700,000 an increase of 4% over the prior year quarter. Net income for the quarter was 76,100,000 dollars Non GAAP diluted earnings per share for the quarter was $0.62 an increase of 5% over the prior year quarter, while diluted earnings per share for the quarter were $0.54 Overall, foreign exchange movements negatively impacted 1st quarter earnings by 0.01 dollars per share reflecting the unfavorable impacts from the weaker British pound and stronger Australian dollar relative to the U.
S. Dollar. On a non GAAP basis, our effective tax rate for the quarter was 20.1%. Looking forward, we estimate our effective tax rate for the fiscal year 2017 will be in the range of 20% to 22%. During the quarter, we initiated a field safety notification regarding potential degraded battery performance in our Astral device.
Under the notification, we will replace all the batteries in our Astral devices. In our Q1 GAAP results, we have recognized a charge of $5,100,000 for the expected costs associated with this action. Cash flow from operations was $86,200,000 for the quarter. This reflects strong underlying earnings offset to some extent by an increase in net working capital balances during the quarter. Capital expenditure for the quarter was $14,600,000 Depreciation and amortization for the September quarter totaled $27,800,000 Our Board of Directors today declared a quarterly dividend of $0.33 per share, an increase of 10% over our prior year quarterly dividend.
As previously announced, we have temporarily suspended our share repurchase program due to recent acquisitions. At present, we expect to recommence the buyback in fiscal year 2018. At September 30, we have approximately $1,200,000,000 in gross debt and $391,000,000 in net debt. Our balance sheet remains strong with modest debt levels. At September 30, total assets were $3,300,000,000 and net equity was 1,800,000,000 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 an additional question after that, please get back into the queue. Mariama, we are now ready for the Q and A portion of the call.
Thank you. We will now begin the question and answer Steve Weid from Evans and Partners. Your line is open.
Yes, good morning. Thanks for Just wanted to ask about the Brightree revenue growth. Just wondering in the quarter whether or not you've seen any pushback from DMEs with regards to ResMed owning that particular software?
Thanks for the question, Steve. No, we haven't seen customers moving out of the Brightree system since ResMed acquired or announced the acquisition in February or closed the acquisition in April or has formally moved forward from then. So we've had a good 8 months of customers being aware of this. And what we've seen is customers love the value that's been provided and they actually I think the customers I've spoken to love the fact that there's a multibillion dollar public company that's going to make sure they invest cash in this business for the long run, which is investing in the infrastructure and extracting value for our HME provider customers and adding even more value as we integrate some of the functionality from Brightree as we said in some of the prepared remarks between Brightree and our broader air solutions platform across sleep apnea and
COPD. Okay. And can you is the gross margin on that revenue similar to what was reported when you gave the historical figures for Brightree when it was acquired?
Yes. Brett, do you want to drill down into some of the GM implications pre and post acquisition there for Steve?
Yes. Steve, it's Brett. Yes, I mean, yes, that's pretty consistent with when we filed the 8 for example, on profitability ratios. And obviously, Brightree contributes to our gross margin there as well. I should say we've got I mean it's consistent with our expectation.
We're very pleased with how we're progressing and how Brightree is progressing. So I think that's good positive business there and it's definitely meeting our expectation.
Great. Thanks very much.
Thanks for the question, Steve.
Your next question comes from Ben Andrew with William Blair. Your line is
open. Good afternoon, guys. Thanks for taking the question. Mick, can you or maybe, Brett, can you talk about the kind of the flat M and A or mask and accessory growth in the quarter? Maybe what are the inputs to that?
Was it perhaps some people holding out purchase is typical at the end of the quarter in front of the new product launch because you've been pretty vocal about having stuff coming? And then my follow-up is within the 10% device growth, can you give us some flavor about the product mix and what the bigger drivers were within that across the range?
Yes. So first, the EMEA and APAC masks and accessories growth was 4%, Americas was flat. Obviously, we showed these new technologies at the European Respiratory Society Congress in September.
And
as you noted Ben, we've been pretty public about that. And so it had been out in the public forum. There may have been some impact on Americas customers knowing that new products will be coming to market soon in terms of their purchases during the September quarter. But look, the way that we look at it is we've got some excellent first results here in our control product launches on this product, the F20. It's an excellent full face mask that we think is going to be incredibly successful as we've tested it out there.
And certainly there were some customers testing it in the Americas and some testing it in Europe and we did show it at the conference there in European Respiratory Society. But we do expect very significant growth for this throughout fiscal 2017 and we will launch the product. As I said, we launched it yesterday in Europe and we will launch it another technology into Europe and both technologies we plan to launch into the U. S. This quarter.
So I do think the future looks pretty exciting on that front. To the devices breaking out the 10% year on year growth in devices in the Americas, we don't typically break it out precisely between how much was ventilation and how much of the growth was sleep. But we talk about the sleep apnea market generally growing in that sort of mid to high single digit number and devices growing in the mid single digits and masks growing at the high single digits. So you can sort of look at that 10% and say well if it's mid single digits on the sleep flow generators then there's some incremental growth from the ventilation and the portable oxygen concentrators on top of that.
Great. Thank you. And I guess if you'll allow me, I'll just ask about ACTIVOX and how you might size the OUS opportunities you launch that over fiscal 2017 because that's kind of the first you've talked about that rolling out more broadly? Thanks.
Yes, absolutely. Ben, we'll give an update next quarter as we really start to roll that out. The point I was making in this call is that we've now got the quality to a level that we like and that we're launching it now to not only U. S. But our global sales forces over the coming quarter.
And as you know the sales cycle on POC is an S curve and you start to ramp that up this quarter. But we'll give an update in 90 days as to the progress on that. Thanks for the questions Ben. Thanks.
Will Dunlop from Merrill Lynch is on the line with a question.
Hi, guys. Thanks for taking my questions. Just firstly, I wanted to ask you about SG and A. Growth accelerated this quarter, and I'm wondering whether that's related to the upcoming product launches or if there's something else in there, if you could talk to that, it would be great. Thanks.
Yes. Will, there are 2 factors involved in SG and A. 1 is the absorption of some of the acquisitions we've made and that has contributed to the SG and A. And in addition to that, as you noted, we're launching 2 new masks in Europe and we plan to launch them in the Americas. And these things that we prepare for, we've done them many times, but you do prepare for them in terms of the marketing, promotional capabilities and so on.
So those two factors of the acquisitions and the preparation for new product launches were both factors in the SG and A.
Okay, thanks. And then on gross margin, despite what seems to be quite a negative product mix effect in the U. S, You still posted very strong non GAAP gross margin relative to the last few quarters. Can you just talk to the pricing environment in the U. S.
And whether you are seeing pressure to cut prices and whether you think you will as a result of Medicare funding cuts that went live in July? Thanks.
Yes. Well, I'll take the second part of that and I'll hand to Brett for the first part of that and the broader GM review and what's going on there. But with regard to pricing, we haven't seen anything out of the ordinary in pricing. There's obviously, we don't break it out in detail here, but what I'd say is we've seen sort of what we've seen traditionally in year on year price deltas in our U. S.
And other markets. Throughout the whole CB process, it's been very visual and open as to what the new prices will be. And we've been working with our customers as soon as prices were announced 6 months ago, not as they start to go into play during this sort of July, August, September quarter. So pretty steady as she goes in terms of historic price deltas there. But Brett, do you want to provide a little more color for Will with regard to what's happening there with GM?
Sure. Yes. So I mean even though the product mix continues to be unfavorable for us, but certainly in moderate, that headwind has definitely moderated in this quarter, which is good. And the other thing also on ASVs, which is a pretty big headwind, that's that our ASVs return to a growth trajectory and that's helping us on the product mix because it's not a headwind now. But the biggest component there I think has been driving through on the margin has been manufacturing and procurement and sort of really getting some traction on those cost out programs.
So we've been running all the time, but you kind of it's becoming more evident because of that product mix moderating. So that's sort of working through. As you know, the 1st 12 months we couldn't really work on it. We're really concentrating or focusing on just meeting demand. But as we've worked through the last 12 months, we've been really out of the ratchet up that program and the team has done a great job just working through on the various cost out programs particularly for the platforms.
And that's definitely now flowing through on the gross margin. And I guess the other one obviously is with the Brightree acquisition is a meaningful contributor as well. So I mean I guess you're saying some of these headwinds are perhaps turning into tailwinds. So we're getting we're seeing that come through on the gross margin.
Thank you.
David Loe with JPMorgan is online with a question.
Thanks very much. If we could return to Brightree, I was just wondering if you could talk to the level of growth you've seen given we don't have much in the way of historics And perhaps some sense as to what integration benefits or what the opportunity feels like it could be now that you've owned it for, I think, you said 8 months?
Yes. Look, the Brightree growth in that sort of low to mid teens, low teens sort of area, good solid double digit growth. It's 80%, 90% plus recurring revenue there, David. So the Brightree business is a very solid and strong recurring revenue business. It's providing incredible value to provide us automating process flows for inventory management, clinical informatics management, revenue cycle management in terms of ensuring payment and also even managing physician scripts.
And so when you think about the sort of synergistic value if you like between a customer who's operating on ResMed's air solutions for patient engagement through MyAir and physician engagement through AirView and now HME engagement through Brightree. There are many of those workflows that you can look to if you're removing costs from the front end of patient engagement and the back end of inventory Brightree and particularly Brightree and particularly those who use both to really help them garner those savings in their own operating costs to improve their own P and L and free up more of their own cash flow to then reinvest in better patient care and drive adherence rates up of the likes of what we've seen in the MAIA study and the U Sleep study where we're able to achieve 80 plus percent adherence rates. That's a win for the patient obviously, but it's also a win for the physician getting the patient on therapy and their provider in terms of keeping that sleep apnea patient on good therapy and ongoing resupply.
Great. And if I could just change topics a little bit. You talked about the connected devices and I think more than 2,000,000 connected with Air Solutions now. Just making sure that I understand, I mean, this is AirSense, AirCurve products. Are the vast majority of those devices that you've sold effectively connected devices now?
Yes. So since we launched the AirSense 10 and AirCurve 10 lines, every single sleep apnea, non invasive ventilation device that we've sold has communications capabilities in it. And so we have more than 2,000,000 of them well over 2,000,000 of them sending data to the cloud every day so that if it's sent at 6:30 in the morning, we call it the halo, hour after last off. By 7:30 in the morning, those data are available for the patient that they can review on MyAir, for the doctor if they go see them at an 8 o'clock appointment on AirView and even for the government of Finland or United or Blue Cross Blue Shield in terms of their population health management into their systems that very day.
All right. Thanks very much.
Thanks, David.
Joanne Wuensch with BMO Capital Markets is online with a question.
Hi, this is Matt Henriksen in for Joanne. Our questions for first are for R and D. And we are looking to see whether or not this increase in guidance is kind of a short term related to acquisitions and integration or if this is kind of more of a longer term strategy. And then my follow-up question is with regards to the Curitiba acquisition, we're at the 1 year mark. Is there any observations that you've made that were different from your initial expectations?
Thank you very much.
Thanks for the questions, Matt. And I'll hand both of those actually over to Rob Douglas, our President and COO.
Yes. Thanks, Matt. Yes, the R and D increase largely has been around bringing the acquisitions in and the engineering work that we want to do to make sure quality is right and really synchronizing the roadmaps and making sure everything is on track. We're committed to innovating in our industry and we see the R and D program sort of continuing at pace. We've got a lot more things on our road map than what we can actually do and a lot more plans and ideas and where anything we can invest sensibly into the R and D program we will.
On to your other question regarding curative, you're asking about any differences from how we how the early integration program went. We're really encouraged with Curative and its position in the Chinese market. The whole Chinese economy has had some interesting developments and changes and things going on like anti corruption drives and stuff like that have made the market continue to be interesting. We still see a huge opportunity there just in terms of the number of untreated patients both in obstructive sleep apnea and also in the number of untreated COPD patients in the standard of care there. We're making great progress on the integration program.
We're very happy with the role of a few key players that we've got in China at the moment. We've got Justin Leung who's sort of heading up our Asia Growth Markets Group and Jason Sun who has remained as the CEO of the Curative subsidiary. And together they're bringing together the team of Curative and ResMed and we're the major player in treating sleep disordered breathing and long term ventilation in China and we've got lots of good plans to further develop that.
Andrew Goodsall from UBS is online with a question.
Thanks very much for taking my question. Just wanted to know if you've got any early feedback on the launch of the new 20 Series mask just from the market testing that you're doing? And then just a follow-up question is to what extent does your outlook or your upgrade gross margin consider that new mask launch?
Thanks for the questions, Andrew. Yes, clearly, we've got some really good early data from the control product launches of F-twenty in Europe and in the U. S. Markets in these sort of controlled product launches where we've had customers looking at the product, putting it on patients, seeing how the setup goes for a provider and working with physicians so that they can see the change of care. The F-twenty is a fabulous full face mask, one of the best I've seen that ResMed has produced.
And I think as you look forward over the next number of quarters, this thing is going to be a real winner for us. To your second part about upgrading our gross margin guidance, I'll let Brett go into that in more detail. But at a high level, yes, there's a combination of ASV as Brett said earlier, ASV has turned from a headwind, now it's a tailwind. Mask growth is at its nadir here as we transition from 2 year old mask product to brand new mask product and both of those are tailwinds in terms of positive GM contributions. But Brett any further color on that for GM?
Yes. Andrew, I mean we try to look at that and try to factor that in. As you know on gross margin, it's always hard to predict because you've got ASP movements, FX, product mix, geographic mix, what we do in manufacturing procurement, what happens with how the acquisitions go and so on. So, we sort of put all that in. But I guess we're getting kind of more confidence in the range there on the margin.
And certainly, we saw some really good improvements on the margin in Q1. And clearly, we look to build on those.
But in terms of
product mix, to the extent the mask growth accelerates and we think these masks will be successful and we do think we'll get share back with these masks. And clearly that's going to be supportive of the gross margin. And then it just depends on relative mix of devices versus masks and so on. But certainly those the expectation is those new masks will be supportive of the gross margin. I mean you have to think that.
Yes, terrific. Thank you.
Thanks, Andrew.
Matthew O'Brien from Piper Jaffray is on the line with a question.
Thanks so much for taking the questions. Just to follow-up a little bit on the math commentary. Given that you have rolled that out internationally and we're going to see it next week at Medtrade, can you just talk a little bit about where you what are some of the unique or differentiating points that you see in the masks versus what you've been selling? And then how should we think about things from a cannibalization and pricing perspective? Is this environment one where you can ask for some uplift in pricing versus what you're charging right now?
Thanks for the question, Matt. I'll take the second part and I'll hand the first part to Rob to talk about some of the features of the F 2020. Yes, with regard to pricing, we work very carefully with our customers in each of the 100 countries we're selling to and each market we're launching to. This is some very innovative technology in these multiple mass technologies that we're bringing to market. And we're certainly working with customers to understand that value and ensure the price is appropriately in line with that value.
And so I see it rolling in as we traditionally have with our mask launches at appropriate pricing that it takes account of the value, but also takes account of the realistic nature of the markets in which we're selling in the health care world. Rob, do you want to take the second part of it?
Sure. The first part of the question. Yes. These masks are really about comfort and seal and ease of use. Our early testing and all of our mass development programs are heavily involved with working with patients and trying ideas and working through and it's sort of iterative and keeps going.
But we believe the F-twenty and the N-twenty have really superior seal and that they just don't leak and they're more comfortable and easier to use than earlier masks. To your question of cannibalization, the market will fall out as to what are the preferences and people will have to develop their preferences over time for that. And so that will all some time to fall out. But we're extremely excited about the response that we've already had on these masks. Yes.
What I'd add on there is
if there's any cannibalization, cannibalization of some of our competitors positions in full face and nasal. So we will not only keep growing the market as we are with Doctor. Oz and reaching out to get new patients in, but I think we'll be taking some good share in these categories as we launch this amazing new mask technology.
Got it. And then as a follow-up, just a little bit more color on the North American generator performance in the quarter. You had Astral, you said ASP is a tailwind, you're benefiting somewhat from the CEO PD purchase. Is it fair I know you have a really difficult comp here in fiscal Q1, but is it fair to say that that business was actually down when you exclude those other products? Or was it still positive?
No, it was still up. We're not going to break it out in detail. But what I said earlier, I'll say again, which is the sleep market is growing mid to high single digits where the devices are growing mid single digits, masks growing at high single digits. We held share in our sleep devices.
Got
it. Thank you.
Thank you.
Victor Widnayder from Citi is online with a question.
Yes. Hi. Thanks very much. Look, I just wanted to understand mask growth a little bit more if I can. I might just talk about December.
The high single digit mask growth, I hope you could like in the industry, if you like, if you could break out what you think underlying volume growth might be and what I guess the key factors are that are driving that and whether how long that can continue for?
Yes. Thanks for the question, Vic. With regard to mass growth and revenues and volume, we don't break out pricing deltas. What we acknowledged in the prep remarks and I'll say again, we lost some share in masks in the quarter. If masks are growing at high single digits in the U.
S. Market and we're growing 0 or 1, then we're losing some share. We're very confident with the new masks we're launching well, we are launching today, yesterday in Europe and over this quarter. We plan to launch them again in the U. S.
And beyond in global markets that will get back to not only strong market growth, but above market growth as I alluded to earlier. These are great masks that will move us up there. So we're seeing good market growth of mid to high single digits in masks and there's always price declines to play in there. So you've got low double digit growth in volumes of masks in the market, Vic, and that really hasn't changed from Q4 to Q1. It's more about the product life cycle of our 2 year old masks and the brand new ones that are just coming to
market. Okay. I guess I was interested in understanding the importance of your informatics platforms that are driving growth in the mask resupply side and whether you can if you're positioned there get a better part of the share of that going forward?
Yes. Clearly, we have a very large investment in the infrastructure with Healthcare Informatics and Air Solutions. There's a much more direct relationship between the informatics and the connected care and the value we provide to the device growth. You've seen that very strong for now 8 quarters since the launch of Air Solutions, AirSense 10 and AirCurve 10. There is a connection to masks.
Clearly, it's often linked when you think about it all the way through to the resupply programs. We have ResMed resupply. We have Brightree Connect. We have a number of offerings in the U. S.
Market. A number of different offerings for customers in EMEA and APAC where the go to market models are different. We're engaging patients better than ever. Patients are signing up to understand things like MyAir and as part of that we're absolutely contacting patients to let them know when it's time for a new mask and to push them through the system. And so I do think that
and different markets
of the world there's different ways of doing that. You're going to see as you look forward over FY '17, 'eighteen and beyond, a lot more interplay not only between the informatics and device informatics and masks, but also informatics and chronic disease management, keeping these patients out of hospital and providing holistic value to the health care system by what we can do.
Okay. Thanks very much.
Thanks for the questions.
Sal Hadassan from Credit Suisse is online with a question.
Thanks and good morning guys. Mick, maybe just a first question on the Astra. And if you could talk to what impact, if any, that field safety notice had more on sales and just what you're seeing in terms of take up of that device in the non invasive ventilation category, please?
Yes. So I'll take the second part and hand the first part of it to Rob. Sales of the Astral in terms of its use of it's pretty broad, it's different in every market in the world. In Germany, it's far more used as a life support ventilator and in the life support ventilation side. In the U.
S, it's kind of split between Duchenne muscular dystrophy, neuromuscular disease and COPD. With the changes of reimbursement that have been announced recently and have been ongoing for a year plus in the COPD side, we've actually been focusing since we have no entrenched sales in this field saying to customers, do you want non invasive ventilation like an AirCurve 10S ST by level type product or do you want Astral and for which types of patients would you choose this and work with physicians and providers to do that. And so we're really partnering with our HMEs and with the physicians to make sure and keeping the whole context of the health care economics that are involved to make sure that the right therapy goes on the right patient that it's sustainable over time. So that's how we look at NIV as well as LSD for neuromuscular disease and COPD. But as for the field safety notes,
notes, Rob,
you want to yes, so just a sort
of a bit of
background on it. We've had a small number of reports of degraded battery performance, but there and degraded performance. And there are very clear mitigations for patients around it. But we felt it was the right thing to do to put out the field safety notice and alert ventilator dependent patients and their carers about the issue, how they should mitigate the risks and where appropriate how to arrange for a replacement battery. That's a rolling replacement program.
It's proceeding well and we're communicating closely on an ongoing basis with the customers for this. We have to manage the patient population very, very carefully, of course, with this type of device. But the program is running along to plan at this stage.
Okay, great. Thanks, guys.
Thanks for the questions, Phil.
Sean Lammon from Morgan Stanley is online with a question.
Good morning, everybody. Two quick questions, Mick. The first one is the and I might have missed it, the time to full rollout of the new MaaS series. So when will it be available to all of your customers? And secondly, I don't know if you could give us a sense of organic growth.
I know you split out Brightree nicely for us, but what organic growth for the rest of the business would be great?
So I'll take the first part and I'll give the second part of the question to Brett. So the time to the full rollout, one thing we're obviously very open here on public conference call, but we don't want to give full indication to our competitors as to the date, the time and the hour of the launch of the F-twenty in each of the specific country markets. I've talked broadly to the fact that we've launched in Western Europe yesterday. So this is available across the major countries in Western Europe already and that our plan is to launch into the Americas and the U. S.
Specifically this quarter. But I don't really want to go into any more granularity than that for competitive reasons on this call, Sean. But I can tell you this thing is going to take off and it's going to be a very valuable mask as it rolls to each of those countries as we launch it. Brett, you want to have a breakdown of the acquisition versus organic growth question?
Sure. Yes, I mean, we mentioned that earlier, Sean. So the organic growth in revenue for us was 3% this quarter.
Okay, great. Thank you. That's all I have guys. Thank you very much.
Right. Thanks, Sean.
Matt Taylor from Barclays is online with a question.
Hi, thanks for taking the question. I appreciate the breakdown of the acquisitions. Can you just talk about not just the top line growth, how much did acquisitions contribute to the bottom line this quarter?
Brett? Yes. Matt, I mean, we've sort of broken down and given more details in terms of revenue, but we haven't gone down kind of a line by line or segmentation out in terms of the acquisition. So at this stage I think we prefer to keep it that way.
Okay. Just curious the
I will say that I mean you know that in the 8 ks on Brightree for example which is the largest acquisition by far the ratios are not inconsistent with historical. So that will give you at least a sense of it. Okay. That's helpful.
And then I wanted to address there's been a number of initiatives that have been talked about by the government in terms of being on kind of a watch list with sleep testing, with vents. I guess, is that a risk that you see for any of those parts of your business? Or do you think this is sort of just normal activity on the part of the government with regards to some of their investigations?
Yes, Matt. Look, I think the government has regularly looked at their spending in all parts of healthcare, whether it's in pharma and different areas of medtech. And clearly, this is something that's important to make sure that the government's money is invested well. There are 40,000,000 to 60,000,000 Americans who suffer from sleep apnea and we've only got 6,000,000 of who are suffocating, only got 6,000,000 of them on therapy, we need to get to the other tens of millions and it needs to be done appropriately and economically. And we're partnering with every government where we do business to make sure that we can appropriately and economically diagnose and treat those patients and than badly breathing and needing to visit the ICU or CCU.
Thanks for the time.
Okay. Thanks, Matt.
Chris Callas from Morningstar is online with a question.
Thank you for taking my question. Sorry to go back to gross margin, but just on the Brightree acquisition, I think previously you've mentioned that, that would have added between 70 and 100 basis points. And I'm just comparing that to the actual result this time around. And I know there are multiple factors here, but can we is it possible to sort of get a correlation between what you expected BroadTree and what it actually has added this time around to gross margin?
Yes. Chris, the brass, Brett, it would be that the Brightree contributed at the top of that range for this quarter.
So out of the 90 basis points most of that is Brightree?
No, because there's basically positives and negatives, right? So it's going to be in absolute terms, it's going to be as I said at top of that range. We said I think 70 or 100 and it's towards the top of that range in terms of basis point contribution. But then you have negative impact from ASP declines. You have negative impact from product mix still flowing through.
But we had good contributions, very strong contribution from manufacturing procurement improvements and then also Brightree. They're probably the kind of the 4 big elements that are playing out on the gross margin. So you can't you got to kind of it's a net position that you end up with.
Sure. So it's tracking as expected more or less?
Yes, absolutely. Yes.
And Brett, can I just trouble you for the device sales non U? S. Again? I just missed that number.
Device sales non U. S.
6% was the EMEA and APAC constant currency growth.
Yes.
Okay, great. That's it for me. Thank you.
Thanks, Chris.
We are now at the 1 hour mark. So I will turn the call back over to Mick Farrell.
Thanks a lot, Mariana. And in closing, I want to thank the now more than 5,000 strong ResMed team from around the world for their commitment to changing the lives of millions of patients with every breath. We remain focused on our long term goal of improving 20,000,000 lives by 2020 literally by giving a product that helps a patient who was suffocating or couldn't breathe before breathe afterwards. Thanks for your time today and we'll talk to you again in 90 days. Agnes?
Thank you again for joining us today. If there's any additional questions, please feel free to contact me. The webcast replay will be available on our website at investor. Resmed.com in about 2 hours. Mariama, you may now close the call.
Thank you.
This concludes ResMed's Q1 of fiscal year 2017 earnings live webcast. You may disconnect.