Welcome to the Q2 Fiscal Year 2016 ResMed Inc. Earnings Conference Call. My name is Suzanne, 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, Suzanne, 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 can be found on our website at investors. 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 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 joining us today as we summarize our results for the Q2 of fiscal year 2016. We have made great progress towards our long term ResMed 2020 goals this quarter. We achieved solid double digit constant currency revenue growth led by strong regional results in the Americas. Last week, we announced the acquisition of Enova Labs based in Austin, Texas. This acquisition expands our Respiratory Care Therapeutics portfolio for COPD to now include portable oxygen concentrators.
First, I'll discuss our top and bottom line results. I will then review some regional highlights from our business and progress on our ResMed 2020 strategy. After that, I'll hand the call over to Brett, our CFO, to walk you through our financial results in greater detail. For the 5th quarter in a row, our global team achieved double digit top line revenue growth on a constant currency basis. We saw strength in the Americas region with robust double digit growth at 17%.
We achieved solid steady growth in our combined EMEA and APAC regional groups. These global results were fueled by the ongoing success of Air Solutions, our cloud based connected care software platform as well as the AirSense 10 and the AirCurve 10 medical device platforms. Looking at the bottom line, our diluted earnings per share was $0.69 on a non GAAP basis. We have been balancing our investments in growth opportunities and significantly expanding our installed base of cloud connected medical devices. At the same time, we have been efficiently managing our OpEx growth in both R and D as well as SG and A.
This quarter, we gained operating leverage in SG and A, keeping its growth well below our top line growth. We continue to invest for the future in research and development, maintaining our R and D investment level at around 6% to 7% of top line revenue. Now for some regional highlights. In the Americas region, we had very strong sales performance in Q2 with our commercial team driving to 17% growth in a competitive market. Flow generator growth in the region was 23%, reflecting the ongoing success of our AirSense 10 and AirCurve 10 platforms powered and catalyzed by Air Solutions software.
The mask and accessories categories grew at a solid 11% in the Americas for Q2. We continue to expect solid mask and accessories growth throughout fiscal year 2016 and beyond. We grew our combined EMEA and APAC group at 7% on a constant currency basis in Q2. We continue to see good growth in our sleep disorder breathing business and our respiratory care businesses in these regions. The headwind that we have faced from the SIRV HF trial results of May 2015 continued to be annualized through the P and L and this will continue until May 2016.
The ASV sales impact for Q2 in Europe was broadly consistent with last quarter. As we noted during our last quarter investor call, the ASV sales impact in the U. S. Continues to be less than that in Europe. The ASV platform remains an excellent therapeutic solution for a number of important clinical applications including: 1, treatment emergent central sleep apnea 2, opioid or pain management induced central sleep apnea 3, post traumatic stress disorder or PTSD.
This quarter, we acquired Marabou Medical, our distributor in Denmark. These forward vertical integration acquisitions have proved very valuable to us in the past. We expect this to be the same. We also expect that our partnership with the great team at Maribow, which is now part of ResMed Denmark will allow us to continue to lead in market development in the country and to build connected care and digital health solutions for sleep apnea, COPD, neuromuscular disease and beyond. Now I'd like to provide an update on our ResMed 2020 strategy.
Before going into the 3 horizons, I'd like to talk about 3 key underlying enablers of our strategy. The first of these is our global leadership in Healthcare Informatics. The second is our expansion in high growth geographic markets. And the third is a focus on our best in class operational excellence. So the first enabler on our list is our global leadership in healthcare informatics.
Connected Care and Digital Health are almost now industry buzzwords that are referred to by many companies in the space. We are not just talking about it. We are executing on this front with over 1,000,000 cloud connected medical devices sending data every morning to the cloud and more than 750 patients signing up every day for our patient application called MyAir. We are transforming ResMed into a tech driven medical device leader. Our first step on this journey has been changing the basis of competition in our core sleep apnea business.
We led the industry 15 months ago with 100% cloud connected medical devices and now our competition has had to follow. We are improving the efficiency of our customers by embedding our software solutions in their workflow and providing value to providers, physicians and patients by improving patient device adherence and therefore patient outcomes. We can leverage this core competency from sleep apnea into chronic obstructive pulmonary disease or COPD into neuromuscular disease and other chronic disease spaces. Our second enabler is our investment and expansion in high growth geographies. Our investment in Curative last quarter is an example of this strategy in action.
Curative allows us to have products developed in China, made in China for sale in China. It opens up channels that just weren't available for imported products. We will continue to invest and expand our presence in China, South Korea, India, Brazil and many countries in Eastern Europe. In each country, the value we deliver is to improve patient outcomes and reduce overall healthcare costs for the country in key chronic diseases. Our 3rd enabler is operational excellence.
It is an important and fundamental foundation to our growth strategy. It's just part of our DNA. We continue to create efficiencies that allow us to free up cash to invest back into innovative organic R and D programs and also allow us to better unlock value from our tuck in acquisitions. We take a continuous improvement approach across our entire global business, including component supply management, manufacturing excellence, supply chain and logistics optimization and OpEx management. We are committed to grow our operating profit and to ensure that we have headroom to free up cash to reinvest in the business and continue to drive profitable growth.
Now I'd like to spend a few minutes updating you on progress against our long term ResMed 2020 growth strategy. In our first horizon of growth, which includes our coarse sleep apnea franchise, our leadership in healthcare informatics remains a critical growth driver. Last month, a market research firm called Berg Insight published a report on mobile health and home monitoring. The report ranked ResMed as the number one global leader in connected care for all medical devices. This was not just in respiratory medicine, but in all device categories including cardiovascular disease, diabetes and beyond.
So 15 months after the launch of AirSense 10, AirCurve 10 and Air Solutions, the cloud based software platform, we have achieved this market leadership position. I want to tell you that we are not done. We intend to continue our leadership in Connected Care and Digital Health as we add features and enhancements to our solution to bring even more value for providers and physicians and even better applications for patients to see their own data to participate more in their own health and wellness. With well over 1,000,000 patients, cloud connected medical devices sitting on their bedside tables, providing daily updates to the cloud, we are liberating data, providing actionable information, unlocking value and improving outcomes for patients, physicians, providers and for payers. Our customers are clearly experiencing the value proposition of the AirSense and Air Solutions platform and incorporating this into their workflows and reaping cost savings in their own P and L.
On an investor call last year, I referenced a clinical care study that was presented at the American Thoracic Society in which an Air Solutions customer saw patient adherence increase from 73% to 83%, along with a 59% decrease in their own labor costs. Earlier this month, this clinical care study was published in the peer reviewed journal called Sleep and Breathing. We continue to deliver results like this for many of our customers and many of these are proprietary results that we just cannot share. One study that I was permitted to share at the JPMorgan Healthcare Conference in San Francisco earlier this month showed an increase from a very solid baseline of 60% adherence for a customer with standard care up to top tier patient adherence of 87% when using our cloud based Air Solutions platform. You will see further publications and evidence from us showing increased operating efficiencies for our customers and increased patient adherence like this, all enabled by our solutions.
Connected Care is here to stay. Our acquisitions of JSEC and CareTouch have added both ResMed branded resupply solutions combined with an end to end referral and document management system for our customers. Our system provides automated resupply solutions for customers so that they can effectively manage ongoing supplies of masks and accessories to patients via automated text, via email and even via interactive voice response. We also have a multilingual call center backing up the solution. The referral and document management capability reduces days to patient and physician sign off, reduces the number of errors and incomplete documents and eliminates a large number of follow-up phone calls.
These systems improve both our home care customers' efficiencies and just as importantly their cash flow. In terms of progress against the 2nd horizon of our ResMed 2020 growth strategy, we announced the acquisition of Austin, Texas based Inova Labs, which we plan to complete this quarter. With this acquisition, we have expanded our therapeutic portfolio for COPD to include portable oxygen concentrators or POCs. POCs enable patient mobility and fit well with our life support ventilator platform called Astral. Both of these give increased mobility and increased freedom back to COPD patients.
Inova Labs fits well with our respiratory care strategy and our innovative company culture here at ResMed. We know that we can manage the business to add to ResMed shareholder value. With Enova, we will have opportunities to grow revenue by selling POCs through our global market channels. We will work to prioritize the 100 countries that we sell into to maximize physician, provider and patient value. We will also be able to bring global operational and technological capability to create economies of scale in supply chain management, manufacturing and logistics at Inova Labs.
Finally, together with the team in research and development in Austin and Sydney and beyond, we can create next generation products that leverage our healthcare informatics leadership to create solutions for connected care for COPD. Finally, I'd like to review our 3rd horizon of growth. Our 3rd horizon of growth includes a portfolio of opportunities in new markets including atrial fibrillation, nocturnal asthma and also sleep health and wellness. Rob and I others from our team attended the Consumer Electronics Show or CES earlier this month in Las Vegas. Almost every wearable and non wearable health and wellness technology at CES included sleep as part of their offering.
This clearly shows that there is a demand from consumers to measure, monitor and improve their sleep. Our S plus by ResMed sleep wellness tool is just our first foray into this space. Consumers realize that sleep health is as important as cardiovascular exercise and good nutrition for overall health and we agree. We also continue to explore clinical areas of interest in adjacent markets. For our more than 26 history, our team at ResMed has emphasized relationships with key opinion leaders in pulmonology, cardiology, neurology and related clinical areas.
Through our recent $5,000,000 gift to the University of California at San Diego, we have helped establish a world leading center for clinical care and medical research in the fields of sleep apnea and COPD, the 2 most costly and most important chronic diseases in the field of respiratory medicine. You will see plenty of exciting developments in the field from this team. One recent example was a sleep apnea and cancer symposium at UCSD that brought together key opinion leaders in pulmonology with KOLs from oncology to discuss the impacts of sleep disorder breathing and specifically repetitive hypoxia on cancer cell development. Although these discussions are still in their early days literally at the molecular level, this is just one of many new clinical areas that could lead to new therapeutics and solutions for patients that ResMed could provide in the future. So returning back to our quarterly results, we remain active on the capital management front.
And this quarter in Q2, we bought back 700,000 shares. In addition to funding our dividend and completing the acquisitions of Curative Medical and Maribone Medical. We continue to look for potential acquisitions where these three criteria are met. 1, the business is aligned with our long term ResMed 2020 growth strategy. 2, we can leverage the asset to increase ResMed shareholder value and 3, really importantly, that there is a cultural fit between the business team and ResMed.
We clearly hit and nailed all of these three criteria with our acquisition of Enova and our acquisition of Maribow. And we will continue to refresh our acquisition radar screen with further growth opportunities as we move forward. We are the global leaders in sleep apnea and respiratory medicine, not just in market share, but more importantly in products and solutions innovation, in connected care. We remain excited as we build the road ahead for our industry, our partners and most importantly for patients all around the world. With that, I'll turn the call over to Brett for a more detailed review of our Q2 financials.
Brett? Great.
Thanks, Mick. Revenue for the December quarter was $454,500,000 an increase of 7% over the prior year quarter. In constant currency terms, revenue increased by 13%. Movements in exchange rates predominantly a weaker euro relative to the U. S.
Dollar negatively impacted revenue by approximately $21,700,000 in the second quarter. At a geographic level, overall sales in the Americas were $269,500,000 an increase of 17% over the prior year quarter. Sales in combined EMEA and APAC totaled $185,000,000 a decrease of 4% over the prior quarter. However, in constant currency terms, sales in combined EMEA and APAC increased by 7% over the prior year quarter. Breaking out revenue between product segments, Americas Flow Generator sales were 136,500,000 an increase of 23% over the prior year quarter.
Masks and other sales were $133,000,000 an increase of 11% over the prior year quarter. Revenue in combined EMEA and APAC flow generator sales were $123,500,000 dollars a decrease of 4% over the prior year quarter, but in constant currency terms an increase of 6%. Masks and other sales were $61,400,000 a decrease of 2% over the prior year quarter or in constant currency terms an increase of 8%. Globally in constant currency terms flow generator sales increased by 14% while masks and other increased by 10% over the prior year quarter. During the quarter, we incurred restructure expenses of $6,900,000 associated with rationalizing our European R and D and manufacturing facilities.
These operations have been integrated into our existing largest scale locations. The restructure charge consists primarily of severance payments and an asset write down of a legacy manufacturing facility. Additionally, during the quarter, we released $2,400,000 of an accrual associated with our CIRM HF field safety notice activities. As we substantially concluded the obligations arising from the field safety notification. During the rest of my commentary today, I'll refer to non GAAP numbers.
The non GAAP measures exclude the impact of the restructure expenses and the CIRF HF accrual release in the current quarter, as well as the amortization of acquired intangibles both in the current year and last year. We've reconciled the non GAAP to GAAP numbers in our Q2 earnings press release. Non GAAP gross margin for the December quarter was 58.1%. On a year over year basis, our gross margin contracted by 4 10 basis points, reflecting an unfavorable product mix, declines in average selling prices and an unfavorable geographic mix, partially offset by favorable net currency movements. However, on a sequential basis, non GAAP gross margin improved slightly, increasing from 58% in the September quarter.
Given current exchange rates and taking into account the current trend in product and geographic mix, combined with the impact from our cost out programs and our recent acquisitions, we continue to expect gross margin to be in the range of 57% to 60 percent for the remainder of fiscal year 2016. Moving on to operating expenses. Our SG and A expenses for the quarter were $118,200,000 a decrease of 4% over the prior year quarter. In constant currency terms, SG and A expenses increased by 4%. SG and A expenses as a percentage of revenue improved to 26 percent compared to the year ago figure of 29%.
Looking forward and subject to currency movements, we expect SG and A as a percentage of revenue to be in the range of 26 percent to 27% for the remainder of fiscal year 2016. R and D expenses for the quarter were $29,000,000 a decrease of 1% over the prior year quarter, but in constant currency terms an increase of 14%. This increase largely reflects incremental investments across our R and D portfolio. R and D expenses as a percentage of revenue was 6.4% compared to the year ago figure of 6.9%. Looking forward and subject to currency movements, we expect R and D expenses as a percentage of revenues to be in the range of 6% to 7% for the remainder of fiscal year 2016.
This reflects our ongoing commitment to investing in our diverse product pipeline, including informatics solutions, but also the benefit of the weaker Australian dollar in which the majority of RMD is denominated. Amortization of acquired intangibles was $4,400,000 for the quarter. The increase over the prior year amortization expense of $2,200,000 reflects the additional amortization associated with our recent acquisitions. Stock based compensation expense for the quarter was $11,500,000 Our non GAAP effective tax rate for the quarter was 20.5% compared to 21.1% in the prior year quarter. Looking forward, we estimate our effective tax rate for the full fiscal year will be in the range of 20% to 21%.
Non GAAP operating profit for the quarter was $116,900,000 an increase of 5% over the prior year quarter. Non GAAP net income for the quarter was $97,500,000 also an increase of 5% over the prior year quarter. Net income for the quarter was $9,500,000 Non GAAP diluted earnings per share for the quarter was $0.69 an increase of 6% over the prior year quarter, while diluted earnings per share for the quarter were $0.64 Overall, foreign exchange movements positively impacted 2nd quarter earnings by $0.04 per share, reflecting the favorable impact from the weaker Australian dollar, partially offset by the weaker euro. Cash flow from operations was a record $147,400,000 for the quarter. This reflects strong underlying earnings and improvement in the net working capital balances.
Capital expenditure for the quarter was $12,900,000 while depreciation and amortization for the December quarter totaled $21,500,000 We've continued to be active on the capital management front. Our Board of Directors today declared a quarterly dividend of $0.30 per share. Additionally, during the quarter, we repurchased 700,000 shares for consideration of $40,100,000 At the end of December, we had approximately 13,600,000 shares remaining under our authorized share repurchase program. During the quarter, we completed 3 international acquisitions, Purative Medical based in China, Mariboe Medical, our distributor in Denmark and Bennett Precision Tooling Company located in Sydney. These acquisitions were funded by utilizing our existing cash balances.
Additionally, this month we announced a definitive agreement to acquire Enova Labs. Enova Labs is a U. S. Domiciled entity and this acquisition will be funded by utilizing our existing credit facility. We expect to include Inova Labs in our consolidated results in the Q3 of fiscal year 2016.
For the rolling 12 months ended December 31, we returned 84% of free cash flow to shareholders through dividends and repurchases. Over the last 5 years, we've returned 98% of free cash flow to our shareholders via dividends and repurchases. Our balance sheet remains very strong. Net cash balances at the end of the quarter were $257,000,000 while December 31, total assets stood at $2,200,000,000 and net equity was $1,500,000,000 And with that, I will hand the call back to Agnes.
Thank you, Brett. We will now turn to Q and A and we ask everyone to limit themselves to one question and one follow-up question, please. If you have additional questions after that, please get back into the queue. Suzanne, we are now ready for the Q and A portion of the call. Thank
Your first question comes from the line of Matthew O'Brien of Piper Jaffray. Your line is open.
Good afternoon. Thank you so much for taking the question. I was hoping to start off on the generator side and the performance in the quarter, again, very, very strong. Just curious, Nick, as far as what you're seeing in the marketplace with rest products now out there today, are you guys competing head to head? And if so, it seems like you're continuing to be very successful.
Is that a trend that we should expect going forward?
Thanks for the question, Matt. That allows us to talk about our air solution portfolio and AirSense 10 and how it sits in the market. I'll have a first go and I might hand to Jim Hollingshead to talk a little bit about the Americas business and what's happening there with the AirSense 10 launch. Yes, so as I said in the remarks earlier, we have had competitors fall into the space with the cloud connected devices. We think our offering is superior because it's 100 percent cloud connected and requires the channel to do nothing other than plug it in and breathe.
And in the morning, the data go to the cloud and then can be accessed by the patient on MyAir or the physician on AirView or the payer provider through an API from their solutions. And we think it's a really strong value proposition taking up to 60% of the labor costs out of the channel for them. It's just a really important improvement to their P and L and it's really embedded in their workflow and becomes something that they're doing well. We believe in competition. We like healthy competition and we like the fact that our competitors are looking to compete on value offerings not just in the Flow Generate segment but in the mass segment and looking to compete with technology.
And so look as we look forward the market growth rate is in the mid to high single digit numbers. We like to meet or beat market growth rate. We don't accept it. We drive beyond it. That's sort of where we're at.
But Jim, any more color on the Americas?
Yes. Thanks, Mick. We're very confident in our offering. I mean the AirSense 10, the AirCurve 10 platforms have been very, very well received. We've taken a lot of excuse me, we've taken significant market share.
And the Air Solutions inclusion in that, so as Mick is saying, I think we've now clearly proven to our customers that we can drive efficiencies in their business with the platform. And so that's a very compelling offer, remains a very compelling offer even in light of competitor launches. We obviously have big comps that we're going to work through. And so your question was about sustainability. We intend to continue to grow our FlowGen position above market growth rates.
But given the share we've taken, I don't think that's sustainable indefinitely, the growth
rate you've seen this quarter.
Okay. Thank you. And as a follow-up, talking about the Inova acquisition, just curious as far as where they were selling historically and where you can take that device here fairly quickly. And then the investments that you're going to need to make in support of it, is that going to be pretty sizable? And then how does that business affect the financial makeup of ResMed?
I think that the gross margin profile and operating margin profile will likely be somewhat of a headwind going forward?
Thanks, Matt. The Inova acquisition is a great opportunity for us. It's our first foray after 26 years of positive airway pressure, non invasive ventilation and dental sleep medicines. Our first foray into portable oxygen concentrators. And it's a great technology, has great mobility and gives great freedom back in terms of the battery life and the weight of these portable oxygen concentrators.
Yes, look, when you look at our scale and selling to 100 countries, Inova currently sells into 5 to maybe 10 countries. So you've got a 10 to 20x multiple just on the number of geographic countries that we can move into. And so we're really excited about it. I might ask Rob, Rob Douglas, our COO, President and Chief Operating Officer and I were touring the plant in Austin last week just before JP Morgan and it was great to walk around and see all the team and to get a feel for the innovation. Rob, any further comments as to the investments and what we need to do going forward?
Yes. I mean, obviously, Enova at a scale not where ResMed is at, but they are at scale that ResMed used to be at. And so walking around the factory, there's a lot of very similar approaches what ResMed had taken in the early days. And we know that we can actually share a lot of experiences in working and integrating those teams. We can really accelerate the development of where that where those products go and how we take them into the market.
Huge amount of opportunity there, really good cultural fit. It's going to be very exciting for us all to work in that area.
Thanks for the questions, Matt.
And your next question comes from the line of David Lowe of Deutsche Bank. Go ahead. Your line is open.
Thanks very much. Firstly, I'll just ask around pricing. I mean, clearly, there's been experience of competitive bidding round 2 and what that led to in other manufacturer prices. Just wondering what your experience has been as we head into what has national rollout of competitive bidding?
Thanks for the question, Dave. Competitive bidding has been in play for almost 7 years now, CB1, CB2 and then the national expansion that is going on as we speak from January 1 through July 1. So these obviously have had an impact and we've talked about that over the last number of quarters on our customers and we work with our customers to make sure that we can help them improve the efficiencies of their P and L and drive to profitable growth for all of us in the value chain so that we can continue to serve patients and invest in infrastructure. A lot of our investments around air solutions are about taking 50%, 60% of the cost, the labor cost out of the channel and so therefore improving the P and L. Obviously acquisition price of CPAPs, APAPs and non invasive ventilators are in their P and L as well.
But when you're able to take 60% of the labor costs out that frees up a lot of cash for reinvestment in their business and it's really bringing a technology solution into play. I would characterize the pricing environment as historic normal and what it has been over the last number of many years. We don't go to quantitative detail of that for competitive purposes, but I'd say it's at historic normal levels.
Great. Thanks very much. I mean, look, I think I'll follow-up on the same topic. I guess what I'm looking for is a little bit of comfort that what we saw with round 2 where I think your commentary was quite similar at this stage after it had just been announced that we're not or that you're comfortable that we're not going to see the same sort of dynamic where the competitors, I think, in my read of it, the competitors push prices down and ResMed in due course followed. Are you concerned that there's a risk of that playing out again?
Or are we really well
Yes, David, I can't predict the psychology of other players in the market. I can tell you what we've done and what we continue to do, which is we bring technology into play that improves the P and L for our value chain. And we really understand how that value chain operates. And we've got embedded into the workflows and really helped partner with the industry to take those costs out. We will continue to do that in the future.
Other players in the marketplace have followed and produced similar technologies. We don't think they're quite as good, but they're doing similar things, which is looking to take labor cost and inefficiencies out of the system. And frankly, together, we and our competitors in this space are fighting the real competitor, which is frequent flies in the hospital and getting those patients with sleep apnea and COPD rather than going back to the ER, taking care of them by product on their bedside table and using data from that to go back to the hospital system, back to the ACO system so that they know that they kept out of play. Thanks for the questions, Dave.
Chris Callow from Morningstar is online with a question. Please go ahead. Your line is open.
Great. Thank you. Thanks for taking my question. Mike, I just wanted to ask, in light of the acquisitions in Innova and Denmark, how does that affect your CapEx going forward? Can you provide some guidance on that?
Brett, do you want to take that question?
Yes, I will. Thanks, Amit. I mean, the CapEx was sort of running at around let's sort of run rate $13,000,000 $14,000,000 15,000,000 a quarter something like that. In terms of Maribor, it's very much a distributor. So it's not a lot of capital kind of tied up that one.
So it's actually too much impact there. To move to things like Enova, it probably be a small uptick, but it will be pretty negligible. It's fairly small operation at the moment. I think the big one on that in terms of investment there not big, but where we'll incrementally put some money I think is in R and D. Really think we can turbocharge those products and make them very effective.
And with the obviously, with our distribution channel capability, with what we can bring to the table, we very much think that we can grow that business very nicely. So pretty some small investments, but nothing significant.
And just a follow-up on the R and D in ANOVA. Are you planning on keeping that domiciled in the U. S? And how does that affect your 6 to 7% forecast on R and D?
Rob, do you want to address that question maybe? Or yes, Rob, why don't you go first and maybe Brett
can add some color. Sure. So Chris, we're still working on integration plans and finalizing how that's going to work. But we don't see in the short term major moves. There's a really good team in Austin who really know their stuff around that and it's their core competence, And we're very keen to maximize the value of that.
In terms of ongoing D ratios, this will need a short term bit of investment in the R and D, but long term, it shouldn't change how we think about the right level of investment for R and D for our overall business.
Okay. And Anthony Petrone of Jefferies is online with a question. Please go ahead. Your line is open.
Great. Thanks a lot. One quick for Brett and then I'll follow-up with a question on just some CMS news that was coming out late last year. Just Brett on the acquisitions in the quarter, there were 3 that one was we were aware of, but the other 2 in terms of distributor vertical integration, we were not aware of. So what was the collective contribution just from those 3 acquisitions in the quarter in terms of revenue and EPS?
And then one follow-up. Thanks.
Yes. I mean these are still pretty small acquisitions. So that we're not going down to that granularity. I think we did for those ones not material from our perspective. So we haven't disclosed too much detail on that.
Great, great. And then just from a margin perspective, this vertical integration, will that help offset some of the pressures that you've been seeing? And maybe just an update on the transition from, I guess, air freight charges, which was a tailwind that was potentially coming in the second half of this year. Has that was there any benefit from that this quarter? Or do you expect that to be more of a second half event?
Yes. So just on the first one, it really will depend on the acquisitions. Again, I'll frame it that they're fairly small, so it's kind of around the edges. But typically with a vertical integration, for example, in the distribution that would help that would sort of be a if you like to help improve your margins or be accretive to your margin for example. If you look at Bennett for example that's really vertical integration within our suppliers and we think there we can pick up obviously sort of better tooling cost but also improvements in strategically in time to market and things like that.
So that was what we thought was quite a smart strategic tuck in for us. If you look at acquisitions such as Innova and I think we highlighted that at the time there will be a little bit of dilution to gross margins there. So that does present a little bit of a headwind. But I think the opportunities are so good for us on that on growing that portable oxygen concentrator market and our share in the product and so on that it was I think it was quite compelling for us to do. So we weren't going to worry about sort of some sort of minor margin dilution if you like impact for not doing the deal.
We think it will be pretty compelling in due course. And on the freight side of things, I mean, we're seeing some of that coming through and obviously we'll see kind of more of that come through in the second half as well of the fiscal.
Thanks for your questions, Anthony.
And Saul Hadison of Credit Suisse is online. Please go ahead. Your line is open.
Thanks very much. Maybe a question for Brett as well. Just Brett, on gross margin, just looking at the sequential movements up about 10 basis points. Looking at your mix, product mix, if anything, it's probably slightly better this quarter than 1Q 2016. You should have had a benefit from a lower Aussie U.
S. Through the COGS line. Just wondering, was there anything holding back that gross margin uplift? For example, what was referenced before, so that move to sea freight, is that still to come through? In terms of your underlying gross margin, ex the dilution that might come from the Innova, just wondering should we think sequential gross margin uplift over the course of this fiscal year assuming currency holds where it is?
Thanks.
Yes. So I mean, so if we look at sequentially, we still are seeing an impact on a negative impact from product mix and also geographic mix. And it's good. I mean the big standouts obviously Americas growth and the flow generator growth as well. So it remains really strong.
So there's still headwinds for us. That's in the frame. I mean, there's a whole bunch of other stuff. We had a small uplift from FX, you're right. That was probably around kind of 40 basis points or so.
There's a bunch of other and there's other stuff that plays out on that that can impact you kind of quarter to quarter. But overall, I guess you characterize that as kind of margins pretty much stabilize. And depending on trends on product mix and geographic mix, I suppose determines kind of where we land within that kind of guidance band that I gave. So we're still working away on the cost out programs and so on. We've got opportunities there that will flow through into the second half.
But then it does depend a lot on the normal product mix, geographic mix, a little bit on the acquisition around the edges will be a little bit of a headwind for us. You got typical ASP declines are always in the mix. So you got to throw that all in. And as I said a lot quite a lot, it's pretty hard to predict on the gross margin when you're looking at kind of 90 day windows. But overall, I think pretty comfortable where that margin is and clearly we'll work hard to improve that.
But we've got to be realistic on what we're seeing with product mix and geographic mix and acquisitions and so on. But rest assured we're working hard on margin improvement.
And just
to follow-up on that regarding the ASV sales that you would have not had this quarter, was there any material change to those lost sales relative to the quarter that's just passed, so relative to 1Q 2016?
Yes. So I'll take that, Brett, if that's right. The AC sales, as I said earlier, the impact that we saw in Q2 was the same as the impact we saw pretty much in Q1 for Europe. And the impact that we saw in the U. S.
Was much less than that that we saw in Europe, which is again the identical situation to what we saw in Q1. So that it's still going through the P and L being annualized, the impact of the survey itself from May 2015. And we're in mid January now, so we've got 4 more months of annualizing that through the P and L and then we'll be clear of the sort of annual comps of the ASV impact in May 2016 here in 5 months 4 months' time from now.
And Margaret Kaczor of William Blair is online with a question. Please go ahead. Your line is open.
Good afternoon, everyone. So just to go back to Nova Labs and that acquisition, obviously, they have a good product. They've got some good advantages. But that said, do you have an interest in bringing a new POC to market that's up to the same standards as ResMed, similar to what you guys did with Astral and Sems? And should this be a shorter or longer time frame?
Or are you happy and willing to continue selling the existing products to your customers today?
Yes. Thanks, Margaret. Good afternoon to you. That's a good question. It allows us to talk to the longer term play here around Enova.
So Inova is a strong player in the POC market and they have excellent mobility and excellent freedom that they give back to patients because their battery life is best in class and lasts a very long time similar to what we do with the Astral life support later where we give 24 hours of freedom back to patients with that. Having said all that, and as Rob alluded to earlier, there's a lot of capabilities that we have from our global business in the 26 years in respiratory medicine here that we can bring some skills to the table for the next generation of products in the portable oxygen concentrator front. And some of that will be some of the engineering around efficiencies of supply chain, logistics, manufacturing, quality reliability and those types of factors that we've learned a lot. But really importantly, bringing the capability or the core competence of cloud based healthcare informatics solutions to be able to put a cloud connected POC as part of a end to end across the chronic obstructive pulmonary disease medical device space. So all the way from non invasive ventilators, life support ventilators and portable oxygen concentrators and take that data and be able to give pulmonary and critical care physicians or ACOs data that can really help them understand mobility, freedom, breath rate and hospitalization rates of their COPD patients to help them improve outcomes and lower costs.
That's the game. And we do think that we can bring a lot to the table. So the short answer is obviously we like the product. We'll continue to sell existing products, but we like even more the combination of the Inova portable oxygen concentrator engineering with ResMed's healthcare informatics engineering and what the two combinations what that synergy could bring.
Okay. And then I don't know if
you had talked at all about the time frame because it obviously took you guys a little bit of time with sense to bring that kind of a product to market. So should we assume it's within that 2020 timeframe or longer than that?
You should assume it's within the 2020 timeframe for sure. Yes, the difference between Sam, we've got life support ventilators where the life cycle of those is sort of 6 to 7 or even up to 8 to 10 years, the life cycle of a portable oxygen concentrator is probably closer to that of a CPAP type device or that sort of time horizon. So yes, we will have a next generation well before 2020.
And Joanne Wuensch of BMO Securities is online for the question. Go ahead. Your line is open.
Hi, good evening. Very nice quarter. Can we touch on SG and A please? Revenue was stronger than we expected, but you really also pulled in your SG and A. What's going on there?
Great question, Joanne. Rob, do you want to address that maybe or maybe Rob first, Brett and then you can go.
Yes. So Joanne actually we've got a number of areas that we're working on and Brett will probably go into a few of them. But across the board we're running a really strong operational excellence program that not only talks about our products and our supply chain, which we've talked about a lot, but we're also moving a lot of that thinking and approach into our SG and A world as well. And so we've done a lot of work around the world in these we are we do run our different countries with different go to market models. So there are different programs around the world, but we can really call out the U.
S. And Americas teams are pulling a lot of operational leverage in. And we've got very strong plans around our European teams for some really easy stuff for us to do in terms of sharing the way some things work, making it easier. We are taking a view of that we're freeing up a lot of capacity to continue to invest in innovation and really optimizing these acquisitions as well. So Brett, I don't know if you want to go into a little more on some of the
areas that we're looking to do. Yes.
I think
yes, I mean, we're doing that. We've sort of we've adopted to some extent some of the methodology that they're using with the supply management team and so on and being more disciplined around that. So that's certainly helping a lot. And just making sure that everyone's kind of mindset thinking about expenses as well in a smart way. And so that's sort of enabled us to get some pretty solid leverage there.
Obviously, if you go back last year running, we had, for example AirSense and so on we're doing some marketing and then some variable comp and so on. That's more normalized this year which has helped us a bit as well. And look to some extent you're getting some currency benefit there as well. But even if I normalize for currency, we still would be around sort of that 27 percent mark. So we'd still be in very good shape some of those savings or kind of holding holding expenses type thing and then with revenue growth obviously you'll get that leverage.
So that's been and we're working on this for a while and I think it's just sort of starting to flow through into the P and L now.
And just as a follow-up if I may. I frankly was surprised about ANOVA, started going outside of your core OSA type of area into more sort of traditional DME type of
oxygen concentrators. What made
this be the space is ResMed
is respiratory medicine and space is ResMed is respiratory medicine. And what we've done in the field of sleep apnea certainly for 25 years is lead that market and most recently lead it by taking cost out through healthcare informatics and really showing we can improve the efficiencies of the delivery of this amazing non invasive ventilation and positive airway pressure therapy to patients in sleep apnea. We'd already started within the field of chronic obstructive pulmonary disease with our non invasive ventilators to help those patients as well stay out of hospital and get better with COPD through non invasive ventilation including publication of studies showing that we can actually reduce the mortality rate to literally save lives of COPD patients with severe hypercapnic COPD with non invasive ventilation through the Kirloin study that we published. So the extension through that vertical if you like of the disease state of COPD into the other medical device that is often used in that COPD space which is oxygen therapy. Now we aren't really doubling down in stationary oxygen.
Inova does have a stationary oxygen concentrator, but it's actually the only one in the world that the stationary oxygen concentrator can allow a portable oxygen concentrator to connect directly onto it and charge and be there. So that when the patient wants to leave the home, because these folks are still active folks with COPD, They can grab their POC and see the grandchildren get out to the park and play ball with the grandkids and have the freedom back which is what POCs bring. The total market for oxygen therapy is $1,200,000,000 or so. All that around $200,000,000 plus or minus is the portable oxygen concentrator market, but it's that $200,000,000 portable oxygen concentrator market that has very strong growth mid to high even low double digit numbers growth in terms of year on year. And we are really excited to participate in that POC market and to bring our innovation to play.
And we think it's a very logical extension into the vertical of COPD patient treatment and it will become a great part of our portfolio, not just in the U. S. Where it primarily sells now, but globally.
And your next question comes from the line of Andrew Kusl of UBS. Your line is open.
Thanks very much and great results. Just want to pick up on the masks. Obviously, it's Q2 now that you've achieved quite good U. S. Sales.
Just wanted to understand sort of what's being behind that? Is it conversion or I guess better pairing? Or is it again conversion on the compliance rates data that you're showing? And then I guess Brett's probably covered this a little bit, but just how, I guess incrementally that continues, we might see that in the margin?
Okay. Well, I'll hand the first part of the question. 11% solid gross masking accessories in Americas, I'll hand it to Jim Hollington. And then Brett, maybe you take the second part about GM.
Yes. There's a lot going on behind that mask number, just to be I'll try to think about it. The first thing is the price reductions that we put into place in the January to June period of 2014 are now completely annualized, right? And so we're through that. And while the market remains the mask market in particular remains very competitive, we're into more of an historic norm kind of pricing situation in masks.
Our offering remains very strong, in particular the AirFit line of masks are very well received and continue to do very, very well in the market. Our resupply offerings have driven a lot of growth and that is directly connected to our health informatics offering because the acquisition of the providers that we're now integrating into a program we call ResMed resupply. That's an automated resupply program. It's part of our HI offering that's helping to grow our mass business. And then we've done a number of things.
We've done a number of without getting into deep tactics, a number of things in marketing and a number of things with sales compensation and so on. And all of those levers have contributed to the growth we saw.
Yes. And what do you On
gross margin, Ian? Sorry,
how do
you go?
I was just going to say, it
sounds like most of those would sustain into the next couple of quarters then.
Yes, Brent, you want to address the it sounds like it was actually sort of a third question. Yes, Andrew, but why don't you address gross margin and then Jim or I will address the ongoing mask. Right.
Okay. So just yes, so pretty simply the typically mask margins are higher than Flowgen margins. So to the extent you get stronger growth in masks, obviously be supportive to group margin. So that's kind of the basic math.
Thanks, Mickey. Yes. In terms of where it goes, I think all the activities we have in place would suggest that that's meaningful.
Thanks for the questions, Andrew.
And Steve Wien of JPMorgan is online with a question. Please go ahead. Your line is open.
Well, thanks very much. The question for Brett, just on the FX. Typically, in the past, you've given us some indication on current exchange rates, what the gross margin impact might be going into Q3. And then also, you've often provided the FX impact at the NPAT line as well.
Yes. So on gross margin going forward, assuming currencies where they are and they're particularly volatile at the moment, but we'd probably sequentially we'd probably get small uptick, but it'd be only around the 10 basis point mark Steve. It'd be pretty small sequentially at this point in time. I mean, if the Ovi sort of takes that little bit of trajectory and stays there, then probably Q4 you'd see that impact on a sequential basis being a little bit bigger than Q3. But for Q3 I think it will be around 10 basis points.
As kind of overall net impact from starting to see some of that benefit from a lower Aussie dollar kind of kicking through. We're starting to see some of that benefit from a lower Aussie dollar kind of kicking through, which is offset to some extent by the weaker euro, but we are starting to see the benefit
the Aussie dollar now, which is great.
Yes. And then just final follow-up. In the past or in the last quarter, you guided towards the effective tax rate going down by 100 basis points. Just you seem to sort of have changed the stance on that. Could you just give some reconciliation as to what might have changed there?
Yes. It's probably it sits around the cusp of each one. So I probably should have seen the vicinity of 20. It's kind of around that range, Steve, on that. And it just it varies around with the basically where the geographically taxable income is.
And so we continue to have pretty good numbers out of the U. S. And that's probably sort of moved it up a little bit. But in the vicinity of that 20% I've just gone with 20% to 21%. So maybe you could say, look, I sort of increased that a shade of where I was thinking from Q1.
And your next question is Sean Lavin online from Morgan Stanley. Your line is open.
Good morning and thank you. I have a question on MyAir. I'm just wondering if there's any way you've been able to track or quantify the uptake and usage patterns from patients and any observable benefit to the company? Thanks.
Great question, Sean. I mentioned and it's actually now in our investor deck that we're adding 7.50 patients per day to the MyAir application. And MyAir for those who don't know is an app that can run on an iPhone or an Android, Samsung or whatever device, portable device where a patient can access and interact with their own therapeutic data from their device and trends and gaming and interaction with it. And in the same way that many people around the world are now measuring their steps either with a Fitbit or an embedded app in their smartphone to try and get to 10,000 steps a day and keep the cardiovascular exercise up. A lot of patients now with MyAir are looking to get their score to 100 because we literally give a score out of 100 every day on how you slept and which includes duration of sleep, any apnea, hypopnea mask leak and efficacy of the respiratory rate and so on throughout the evening.
So it's an algorithm if you like that scores of patients wellness with regard to sleep and their treatment of sleep apnea. We've seen incredible engagement from patients on it. I talked about 60% adherence going up to 87% adherence with some customers in the case studies from the JPMorgan presentation. I'd tell you a big part of that is engagement of the patient through these cloud based algorithms that are interact, email, text, IVR and psychologically work with patients through these cloud based capabilities. So we're really excited about Mya and we think it's a big contributor.
And we're in mile 1 of a marathon on this one. There's a long way to go into the capability for us to engage with patients. Thanks for the question, Sean. We might just take one more question and then close it up please Suzanne.
Certainly. Your last question in today's question and answer session will be from Matt Taylor of Barclays. Go ahead. Your line is open.
Hey, thanks. Can you hear me okay?
Yes, got you. Loud and clear, Matt.
Okay, great. So I just wanted
to ask a follow-up on the acquisitions because you're talking about
them very excitedly, but also I think they're immaterial this quarter. You said curative was about 1% last quarter. So two things. One is,
when did
they become material? Is Inogen more material? And then are you going to call them out separately for reporting purposes? Because most of
us just have mass and flow gens
in the model, so it's hard to reconcile.
Yes. So I'll let Brett talk to the first part about materiality and then I'll talk into a little bit as to why we're excited about the long term.
Yes. So at this stage, no, I mean, there's still not material from accounting sense and even on aggregate there, Matt. So at
this stage you wouldn't sort
of want to disclose that in sort of any too much granularity. Obviously, as we go forward and so on, we keep looking at how we report or disclose from a business perspective. But at this stage with going through pretty much the same channels and so on, we would continue to basically aggregate that into our results and not try to split that out.
And Matt just to give you some sort of ballpark on it, we have mentioned that it's less than 2% of our global revenues. So you can run the math on $1,700,000,000 that puts it at less than $34,000,000 in revenues. We're not going to go to exactly what number it is for competitive reasons. But take that number and then also think about the $200,000,000 market of POCs and think about what ResMed has done, I guess, if you look back over the last 20, 25 years in the sleep apnea market where we started from a very small base and have grown to a very strong global leadership number one position. We would look to do the same in POCs and how we look to do that is the same way we did in sleep apnea which is innovation in technology.
And I've talked a lot about the innovation in healthcare informatics and engaging patients. Applying that to POCs, we think is a huge opportunity and we're very excited about being a major player in the POC market. And really importantly rolling it up to a major play around COPD, which is the number 3 killer in the United States and the number 2 cause of rehospitalization in ERs and ICUs and CCUs. So we think it's a huge opportunity and we look to be a part of that.
Okay. That's helpful. Thank you.
Thanks for your questions, Matt.
And we are now at the one of our remarks. So I turn the call back over to Mick Farrell.
Thanks, Suzanne. So in closing, I want to thank the more than 4,000 300 strong ResMed team from around the world for their continued commitment to changing the lives of literally millions of patients with every breath. I'm very proud of what our team has accomplished in creating market leading innovation in Connected Care, including new product lines, new solutions, new channels that we've incorporated into our business portfolio. We remain laser focused on our long term goal of impacting 20,000,000 lives by 2020. And that impact is literally giving the gift of breath back to each of those patients.
Thanks for your time and we'll talk to you in 90 days.
All right. Thank you again for joining us today for this call. If there are any additional questions, please feel free to contact me. The webcast replay will be available on our website at investors. Resmed.com.
Suzanne, you may now close the call.
Thank you. This concludes ResMed's Q2 of fiscal year 2016 earnings live web