Welcome to the Q2 fiscal year 2016 ResMed Inc. earnings conference call. My name is Suzanne, 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. 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&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 second quarter 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 Inova 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 the 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 fifth 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 install base of cloud-connected medical devices. At the same time, we have been efficiently managing our OpEx growth in both R&D as well as SG&A. This quarter, we gained operating leverage in SG&A, keeping its growth well below our top-line growth.
We continue to invest for the future in research and development, maintaining our R&D investment level at around 6%-7% of top-line revenue. 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-disordered breathing business and our respiratory care businesses in these regions.
The headwind that we have faced from the SERVE-HF trial results of May 2015 continued to be annualized through the P&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, one, treatment-emergent central sleep apnea. Two, opioid or pain management-induced central sleep apnea. Three, post-traumatic stress disorder, or PTSD. This quarter, we acquired Maribo Medico, 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 Maribo, 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. I'd like to provide an update on our ResMed 2020 strategy. Before going into the three horizons, I'd like to talk about three 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. The third is the focus on our best-in-class operational excellence. 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 million 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'll 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 third 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&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 supplier 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. 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 core 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. 15 months after the launch of AirSense 10, AirCurve 10, and AirSolutions, the cloud-based software platform, we've 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 million 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 AirSolutions platform and incorporating this into their workflows and reaping cost savings in their own P&L. On an investor call last year, I referenced a clinical care study that was presented at the American Thoracic Society, in which an AirSolutions customer saw patient adherence increase from 73%-83%, along with a 59% decrease in their own labor costs.
Earlier this month, this clinical care study was published in the peer review 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 J.P. Morgan 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 AirSolutions 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 AirSolutions. Connected care is here to stay.
Our acquisitions of Jaysec 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 second 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 Inova, 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 third horizon of growth. Our third 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 and 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+ 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. We agree. We also continue to explore clinical areas of interest in adjacent markets. For our more than 26-year history, our team at ResMed has emphasized relationships with key opinion leaders in pulmonology, cardiology, neurology, and related clinical areas. Through our recent $5 million gift to the University of California, 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 two 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. Returning back to our quarterly results, we remain active on the capital management front. This quarter in Q2, we bought back 700,000 shares, in addition to funding our dividend and completing the acquisitions of Curative Medical and Maribo Medico. We continue to look for potential acquisitions where these three criteria are met. One, the business is aligned with our long-term ResMed 2020 growth strategy.
Two, we can leverage the asset to increase ResMed shareholder value. Three, 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 Inova and our acquisition of Maribo. 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 $454.5 million, 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 $21.7 million in the second quarter. At a geographic level, overall sales in the Americas were $269.5 million, an increase of 17% over the prior year quarter. Sales in combined EMEA and APAC total $185 million, a decrease of 4% over the prior year quarter. 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 $136.5 million, an increase of 23% over the prior year quarter. Masks and other sales were $133 million, an increase of 11% over the prior year quarter.
Revenue in combined EMEA and APAC flow generator sales were $123.5 million, a decrease of 4% over the prior year quarter, but in constant currency terms, an increase of 6%. Masks and other sales were $61.4 million, a decrease of 2% over the prior year quarter, but 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 $6.9 million associated with rationalizing our European R&D and manufacturing facilities. These operations have been integrated into our existing larger-scale locations. The restructured charge consisted primarily of severance payments and an asset write-down of a legacy manufacturing facility.
Additionally, during the quarter, we released $2.4 million of an accrual associated with our SERVE-HF field safety notice activities, as we have substantially concluded the obligations arising from the field safety notification. During the rest of my commentary today, I will refer to non-GAAP numbers. The non-GAAP measures exclude the impact of the restructure expenses and the SERVE-HF accrual release in the current quarter, as well as the amortization of acquired intangibles, both in the current year and last year. We have reconciled the non-GAAP to GAAP numbers in our second quarter 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 410 basis points, reflecting an unfavorable product mix, decline in average selling prices, and an unfavorable geographic mix, partially offset by favorable net currency movements.
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%-60% for the remainder of fiscal year 2016. Moving on to operating expenses. Our SG&A expenses for the quarter were $118.2 million, a decrease of 4% over the prior year quarter. In constant currency terms, SG&A expenses increased by 4%. SG&A expenses as a percentage of revenue improved to 26% compared to the year-ago figure of 29%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 26%-27% for the remainder of fiscal year 2016.
R&D expenses for the quarter were $29 million, a decrease of 1% over the prior year quarter. In constant currency terms, an increase of 14%. This increase largely reflects incremental investments across our R&D portfolio. R&D expenses as a percentage of revenue were 6.4% compared to the year ago figure of 6.9%. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6%-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 R&D is denominated. Amortization of acquired intangibles was $4.4 million for the quarter. The increase over the prior year amortization expense of $2.2 million reflects the additional amortization associated with our recent acquisitions.
Stock-based compensation expense for the quarter was $11.5 million. 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%-21%. Non-GAAP operating profit for the quarter was $116.9 million, an increase of 5% over the prior year quarter. Non-GAAP net income for the quarter was $97.5 million, also an increase of 5% over the prior year quarter. Net income for the quarter was $90.5 million. 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 second 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 $147.4 million for the quarter. This reflects strong underlying earnings and an improvement in the net working capital balances. Capital expenditure for the quarter was $12.9 million, while depreciation and amortization for the December quarter totaled $21.5 million. 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 $40.1 million. At the end of December, we had approximately 13.6 million shares remaining under our authorized share repurchase program.
During the quarter, we completed three international acquisitions: Curative Medical based in China, Maribo Medico, 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 Inova Labs. Inova 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 third quarter of fiscal year 2016. For the rolling 12 months end of December 31, we returned 84% of free cash flow to shareholders through dividends and repurchases. Over the last five 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 million, while December 31 total assets stood at $2.2 billion and net equity was $1.5 billion. With that, I will hand the call back to Agnes.
Thank you, Brett. We will now turn to Q&A. 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&A portion of the call.
Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound key or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. Your first question comes from the line of Matthew O'Brien of Piper Jaffray. Your line is open.
Well, 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, Mick, as far as what you're seeing in the marketplace with ResMed products now out there today, are you guys competing head-to-head? 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. Yeah, that allows us to talk about our Air Solutions 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. As I said in the remarks earlier, we have had competitors follow us into the space with the cloud-connected devices. We think our offering is superior because it's 100% 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 Air Solutions.
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&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 generator segment, but in the mask segment and looking to compete with technology. 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. Jim, any more color on the Americas?
Yeah. 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 significant market share and the Air Solutions inclusion in that. As Mick's saying, I think we've now clearly proven to our customers that we can drive efficiencies in their business with the platform. 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. Your question was about sustainability. We intend to continue to grow our flow gen position above market growth rates. 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. 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 fairly quickly, then the investments that you're going to need to make in support of it. Is that going to be pretty sizable? 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. It's our first foray into portable oxygen concentrators, and it's a great technology. It has great mobility and gives great freedom back in terms of the battery life and the weight of these portable oxygen concentrators. When you look at our scale and selling to 100 countries, Inova currently sells into five to maybe 10 countries. You've got a 10 to 20x multiple just on the number of geographic countries that we can move into. 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 J.P. Morgan. 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?
Yeah. Obviously, Inova at a scale, not where ResMed's at, but they are at a scale that ResMed used to be at.
Walking around the factory, there's a lot of very similar approaches to what ResMed had taken in the early days. 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 those products go and how we take them into the market. There is a huge amount of opportunity there, and a really good cultural fit. It's going to be very exciting for us all to work in that area. Thanks for the questions, Matt.
Your next question comes from the line of David Low of Deutsche Bank. Go ahead, your line is open.
Thanks very much. Firstly, I'd just like to ask a question around pricing. Clearly, there's been experience with competitive bidding round two and what that led to in other manufacturer prices. Just wondering what your experience has been as we head into a national rollout of competitive bidding.
Thanks for the question, Dave. Competitive bidding's been in play for almost seven years now, CB1, CB2 and then the national expansion that is going on as we speak from January 1 through July 1. These obviously have had an impact, and we've talked about that over the last number of quarters on our customers, and we've worked with our customers to make sure that we can help them improve the efficiencies of their P&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 labor cost out of the channel, and so therefore, improving the P&Ls. Obviously, acquisition price of CPAPs, APAPs and non-invasive ventilators are in their P&L as well.
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.
Oh, great. Thanks very much. I might as well, I think, 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 two, where I think your commentary was quite similar at this stage, after it had just been announced, 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 pushed 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 past it?
Yeah, 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&L for our value chain, and we really understand how that value chain operates. We've got embedded into the workflows and really helped partner with the industry to take those costs out, and 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.
Frankly, together, we and our competitors in this space are fighting the real competitor, which is frequent flyers in the hospital, and getting those patients with sleep apnea and COPD, rather than going back to the ER, taking care of them by a 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're kept out of play. Thanks for the questions, David.
Just a reminder, it is one question and one follow-up question. Chris Kallos of Morningstar is online with a question. Please go ahead. Your line is open.
Great. Thank you. Thanks for taking my question. Mick, I just wanted to ask, in light of the acquisitions and Inova in Denmark, how does that affect your CapEx going forward? Can you provide some guidance on that?
Brett, do you want to take that question?
Yeah, I will. Thanks, Mick. The CapEx, we're sort of running at around, let's call a sort of run rate, $13 million, $14 million, $15 million a quarter, something like that. In terms of Maribo, it's very much a distributor, so it's not a lot of capital kind of tied up in that one. Don't see too much impact there. To move to things like Inova, there'll probably be a small uptick, but it'd be pretty negligible. It's a 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&D. Really think we can turbocharge those products and make them very effective. Obviously, with our distribution channel capability, of what we can bring to the table, we very much think that we can grow that business very nicely.
Some small investments, but nothing significant.
Great. Just to follow up on the R&D, in Inova, are you planning on keeping that domiciled in the U.S.? How does that affect your 67% forecast on R&D?
Rob, do you want to address that question maybe? Yeah, Rob, why don't you go first and then maybe Brett can add some color?
Sure. Chris, we're still working on integration plans and finalizing how all that's going to work. 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 R&D ratios, this will need a short-term bit of investment in the R&D, but long-term, it shouldn't change how we think about the right level of investment for R&D for our overall business.
Okay. Anthony Petrone, Jefferies, is online with a question. Please go ahead. Your line is open.
Great. Thanks a lot. One quick for Brett, I'll follow up with a question on just some CMS news that was coming out late last year. Brett, on the acquisitions in the quarter, there were three that one was we were aware of, but the other two in terms of distributor vertical integration, we were not aware of. What was the collective contribution just from those three acquisitions in the quarter in terms of revenue and EPS? One follow-up. Thanks.
Yeah. These are still pretty small acquisitions. We're not going down to that granularity. I think we did for those ones, not material from our perspective. We haven't disclosed too much detail on that.
Great. Just from a margin perspective, this vertical integration, will that help offset some of the pressures that you've been seeing? 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. Was there any benefit from that this quarter, or do you expect that to be more of a second-half event?
Yeah. Just on the first one, it will depend on the acquisitions. Again, I'll frame it that they're fairly small. It's kind of around the edges. Typically with a vertical integration, for example, in the distribution, that would help. That would sort of be a, if you like, help improve your margins or be accretive to your margin, for example. If you look at Bennett, for example, that's really a vertical integration within our suppliers. We think there we can pick up obviously better tooling costs, also improvements strategically in time to market and things like that. That was what we thought was quite a smart strategic tuck-in for us. If you look at acquisitions such as Inova, I think we highlighted that at the time, there will be a little bit of dilution to gross margins there.
That does present a little bit of a headwind. 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 I think it was quite compelling for us to do so. We weren't going to worry about some sort of minor margin dilution, if you like, impact, for not doing the deal. We think it'll be pretty compelling in due course. On the freight side of things, we're seeing some of that coming through and obviously we'll see more of that come through in the second half as well of the fiscal. Thanks for your questions, Anthony.
Saul Hadassin of Credit Suisse is online. Please go ahead. Your line is open.
Thanks very much. A question for Brett as well. Brett, on gross margin, just looking at the sequential movement up about 10 basis points. Looking at your product mix, if anything, it's probably slightly better this quarter than 1Q 2016. You should have had a benefit from a lower AUD/U.S. through the COGS line. Wondering, was there anything holding back that gross margin uplift? For example, what was referenced before, 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 Inova, wondering, should we think sequential gross margin uplift over the course of this fiscal year, assuming currency holds where it is? Thanks.
If we look at sequentially, we still are seeing a negative impact from product mix and also geographic mix. The big standout's obviously Americas growth and the flow generator growth as well. There's still headwinds for us. That's in the frame. There's a whole bunch of other stuff. We had a small uplift from FX, you're right, that was probably around 40 basis points or so. There's a bunch of other stuff that plays out on that can impact you quarter to quarter. Overall, I guess you'd characterize that as margins have pretty much stabilized, and depending on trends on product mix and geographic mix, I suppose determines where we land within that kind of guidance band that I gave. We're still working our way on the cost-out programs and so on.
We've got opportunities there that will flow through into the second half. 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. You gotta throw that all in, as I've said quite a lot, it's pretty hard to predict on the gross margin when you're looking at kind of 90-day windows. Overall, I think pretty comfortable where that margin is, clearly we'll work hard to improve that. We've got to be realistic on what we're seeing with product mix, geographic mix, and acquisitions and so on. Rest assured, we're working hard on margin improvement.
Just to follow up on that, regarding the ASV sales that you would've not had this quarter, was there any material change to those lost sales relative to the quarter that's just passed, relative to 1Q 2016?
Yeah.
If I could just-
I'll take that, Brett, if that's all right.
Sure.
The ASV 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. 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.
It's still going through the P&L being annualized, the impact of the SERVE-HF results from May 2015. We're in mid-January now, we've got four more months of annualizing that through the P&L, and then we'll be clear of the sort of annual comps of the ASV impact in May 2016 here in four months' time from now.
Margaret Kaczor of William Blair is online with a question. Please go ahead. Your line is open.
Good afternoon, everyone. Just to go back to Inova Labs and that acquisition, obviously, they have a good product. They've got some good advantages. 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 Stellar, and should this be a shorter or longer timeframe? Are you happy and willing to continue selling the existing products to your customers today?
Yeah. Thanks, Margaret. Good afternoon to you. That's a good question. It allows us to talk to the longer-term play here around Inova. 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 ventilator, 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.
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. 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 an end-to-end across the chronic obstructive pulmonary disease medical device space. 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. The short answer is, obviously, we like the product.
We'll continue to sell the 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, I don't know if you had talked at all about the timeframe, because it obviously took you guys a little bit of time with Stellar to bring that kind of a product to market. Should we assume it's within that 2020 timeframe or longer than that?
Oh, you should assume it's within the 2020 timeframe for sure. Yeah, the difference between Sem, where 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. Yeah, we'll have a next generation well before 2020.
Joanne Wuensch of BMO Securities is online with a question. Go ahead. Your line is open.
Hi. Good evening. Very nice quarter. Can we touch on SG&A, please? Revenue was stronger than we expected, you really also pulled in your SG&A. What's going on there?
Great question, Joanne. Rob, do you want to address that maybe, or maybe Rob first, Brett, then you can go.
Yeah.
Yeah.
Joanne, actually, we've got a number of areas that we're working on, and Brett will probably go into a few of them. 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&A world as well. We do run our different countries with different go-to-market models. They're different programs around the world. We can really call out the U.S. and Americas team for 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. Brett, I don't know if you want to go into a little more on some of the areas that we've actively talked.
Yeah. I mean, we're doing that. We've adopted, to some extent, some of the methodologies that they're using with the supply management team and so on, and being more disciplined around that. That's certainly helping a lot. Just making sure that everyone's kind of mindset's thinking about expenses as well, in a smart way. That's sort of enabled us to get some pretty solid leverage there. Obviously, if you go back last year, 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. Look, to some extent, you're getting some currency benefit there as well. Even if I normalize for currency, we'd be around sort of that 27% mark.
We'd still be in very good shape, some of those savings or holding expenses type thing, and then with revenue growth, obviously, you'll get that leverage. That's been working on this for a while, and I think it's just starting to flow through into the P&L now.
Just as a follow-up, if I may. I frankly was somewhat surprised you bought Inova, 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 right acquisition at this time? Thank you.
Thanks, Joanne. Well, with respect, I'll disagree that it's not in our space. Our 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. Literally save lives of COPD patients with severe hypercapnic COPD with non-invasive ventilation through the HOT-HMV study that we published.
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 $1.2 billion or so.
Of that, around $200 million, plus or minus, is the portable oxygen concentrator market, but it's that $200 million portable oxygen concentrator market that has very strong growth. Mid to high, even low double-digit numbers growth in terms of year-on-year, we are really excited to participate in that POC market and to bring our innovation to play. We think it's a very logical extension into the vertical of COPD patient treatment, and it'll become a great part of our portfolio, not just in the U.S. where it primarily sells now, but globally.
Your next question comes from the line of Andrew Whipple of UBS. Your line is open.
Thanks very much, and great result. Just wanted to pick up on the masks, obviously, it's the second quarter now that you've achieved quite good U.S. sales. Just wanted to understand sort of what's sitting behind that. Is it conversion or I guess better pairing, or are you getting conversion on the compliance rates data that you're showing? 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 growth masks and accessories in the Americas. I'll hand it to Jim Hollingshead, then Brett, maybe you take the second part about GM.
Yeah. There's a lot going on behind that mask number.
Yeah.
Just to be succinct 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? We're through that, while 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 well in the market. Our resupply offerings have driven a lot of growth, 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 that's part of our HI offering that's helping to grow our mask business. 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, all of those levers have contributed to the growth we saw.
Yeah. Would you expect on gross margin, Oh, sorry, Andrew.
No, thank you.
Just on gross margin.
I was just going to say, it sounds like most of those would sustain into the next couple of quarters then. Sorry.
Yeah. I mean,
Steve Wheen.
Yeah, Brett, you want to address the, it sounded like it was actually a sort of a third question?
Yeah.
Why don't you address the gross margin and then Jim or I will address the ongoing mask growth.
Great. Okay. Just, yeah. Pretty simply, typically, mask margins are higher than flow gen margins. To the extent you get stronger growth in masks obviously be supportive to group margin. That's kind of the basic math.
Thanks, mate. Yeah, in terms of where it goes, I think all the activities we have in place would suggest that that's sustainable.
Thanks for the questions, Andrew.
Steve Wheen of J.P. Morgan is online with a question. Please go ahead. Your line is open.
Well, thanks very much. This is a 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 the third quarter. Then also, you've often provided the FX impact at the NPAT line as well.
Yep. On gross margin going forward, I'm assuming currencies are where they are, and they're particularly volatile at the moment. Sequentially, we'd probably get a 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. Obviously, if the Aussie takes that little bit of trajectory and stays there, probably Q4, you'd see that impact on a sequential basis being a little bit bigger than Q3, but for Q3, I think it'll be around 10 basis points.
As kind of overall net impact from currencies, I do typically give it on EPS. I think I gave them a commentary. It was around $0.04 favorable this quarter as 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. We are starting to see the benefit from the Aussie dollar now, which is great.
Yep. Just a final follow-up. In the past, or in the last quarter, you guided towards the effective tax rate going down by 100 basis points.
Yep
You seem to sort of have changed the stance on that. Could you just give some reconciliation as to what might have changed there?
It sits around the cusp of each one. I probably should have said in the vicinity of 20. It's kind of around that range, Steve, on that. It varies around with basically where the geographically taxable income is, and 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%, and I've just gone with 20%-21%. Maybe you could say, look, I've sort of increased that a shade of over where I was thinking from Q1.
Your next question is Sean Langan online from Morgan Stanley. Your line is open.
Good morning. 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, it's actually now in our investor deck, that we're adding 750 patients per day to the myAir application. myAir, for those who don't know, is an app that can run on an iPhone or an Android, Samsung, or whatever 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. 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 the 10,000 steps a day and keep their 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, which includes duration of sleep, any apneas, hypopneas, mask leak, and efficacy of the respiratory rate and so on throughout the evening. It's an algorithm, if you like, that scores a patient's 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 J.P. Morgan presentation. I tell you, a big part of that is engagement of the patient through these cloud-based algorithms that interact, email, text, IVR, and psychologically work with patients through these cloud-based capabilities. We're really excited about myAir, and we think it's a big contributor.
We're in mile one 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 Matthew Taylor of Barclays. Go ahead, your line is open.
Hey, thanks. Can you hear me okay?
Yeah, got you loud and clear, Matt.
Okay, great. I just wanted to ask a follow-up on the acquisitions because you're talking about them very excitedly but also think they're immaterial this quarter. You said Curative was about 1% last quarter. Two things. One is: When do they become material? Is Inova more material? And then are you going to call them out separately for reporting purposes? Because most of us just have masks and Flowgen in the model, so it's hard to reconcile.
Yeah. 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. Yeah. At this stage, I mean, they're still not material from an accounting sense and even on aggregate there, Matt. At this stage, we won't disclose that in 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. Matt, just to give you some sort of ballpark on it, we have mentioned that it's less than 2% of our global revenues. You can run the math on $1.7 billion.
That puts it at less than $34 million in revenues. We're not going to go into exactly what number it is for competitive reasons, but take that number and then also think about the $200 million market of POCs and think about what ResMed's 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. How we'd look to do that is the same way we did in sleep apnea, which is innovation in technology. 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. Really importantly, rolling it up to a major play around COPD, which is the number 3 killer in the U.S. and the number 2 cause of rehospitalization in ERs and ICUs and CCUs. 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.
We are now at the end of our remarks. I turn the call back over to Mick Farrell.
Thanks, Suzanne. In closing, I want to thank the more than 4,300 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 million lives by 2020. 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 second quarter of fiscal year 2016 earnings live webcast.