Welcome to the Q3 2015 ResMed Inc. Earnings Conference Call. My name is Adrian, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. Please note this conference is being recorded. I'll now turn the call over to Agnes Lee, Senior Director of Investor Relations. Agnes, you may begin.
Thank you, Adrian, 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&A portion of the call. If you have not had a chance to review the earnings release, it can be found on our website at investor.resmed.com. I want to remind our listeners that our discussion today may include forward-looking statements including, but not limited to, statements about future expectations, plans and prospects for the company, corporate strategy, 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 our shareholders who are joining us on today's investor call as we provide an overview of our Q3 fiscal year 2015 results. I'm pleased to report that we continued to make excellent progress from new product launches in our core sleep-disordered breathing market. We also saw solid progress in our cardiology and respiratory care markets during the quarter. In these opening remarks, I'll discuss our high-level top and bottom line results, our progress in healthcare informatics, and the early trajectory of our latest product and solution launches globally. Finally, I'll cover progress against our longer term Three Horizons growth strategy. I'll turn the call over to Brett in Sydney, our CFO, to walk you through our financial results in greater detail. As you saw in our press release, our global business achieved double-digit revenue growth [of basis] during the quarter.
Including currency headwinds, our global growth was 6% on a year-over-year basis in U.S. dollars. We saw strength in our Americas group with continued double-digit growth in the region, driven by robust sales growth in flow generators, as well as high single-digit constant currency growth in our combined European and Asia Pacific region. These results were fueled by the success of new product launches in sleep apnea and respiratory care markets, including both COPD and neuromuscular disease states. Looking at the bottom line, our diluted earnings per share was $0.65 on a non-GAAP basis. EPS was $0.64 on a GAAP basis. In the Americas, we had strong performance in Q3 sales, with the commercial team there driving 16% year-over-year growth. We are particularly pleased with flow generator growth in the region, which was over 40%.
This exceptional result was driven by the ongoing successful rollout of our Astral, our AirSense 10, and our AirCurve 10 platforms. Customers continue to see the value proposition of our healthcare informatics platform that we have branded Air Solutions. This platform continues to drive our flow generator success. The strong flow generator sales were partially offset by lower mask sales. On that front, we are still facing annualization of price adjustments that we made from January through to June in 2014. In addition, we are facing a tough competitive environment in the mask category. However, we are confident that we will return to positive growth in the mask and accessory category as we move forward. Moving on to our combined European and Asia Pacific region, we grew at a very solid 9% on a constant currency basis in the quarter.
After we account for the strong currency headwinds, particularly from the decline in EUR and the strong U.S. dollar, headline growth declined by 6% for the combined Europe and Asia Pacific region. We saw strong sales growth from flow generators in Europe associated with our new product launches, as well as steady growth in masks in the region. With the latest launch of our AirCurve 10 bilevel flow generator platform in Europe, we continue to add to the broad suite of launches with solid multi-year product life cycles. There continues to be strong interest in respiratory care and cardiorespiratory opportunities across the European region. We have seen good adoption of our Astral platform in Europe, and we are excited about future opportunities as we combine Astral with our healthcare informatics solutions.
We continue to work with our European and Asia Pac teams to develop treatment pathways that facilitate standard of care protocols, including both pulmonary and cardiology physician groups in both hospital and home care environments. As an important component of our SERVE-HF clinical trial, we are investing in cardiology awareness, cardiology screening, and cardiology diagnostic referral infrastructure to the pulmonary folks in the European region and beyond. I will discuss SERVE-HF in more detail later on in these remarks. In Asia Pac, we are continuing to execute on our strategies for longer term growth while working across a variety of mask and market delivery channels. In addition, we had strong double-digit growth in key emerging market countries, particularly China, as we continue to build for the future in those markets. Let me spend a few moments reviewing some of the background behind our progress in informatics.
As outlined earlier, we call our healthcare informatics ecosystem Air Solutions. Air Solutions is providing significant quantifiable value to our customers, leading to discretionary share gains in flow-generator sales. More importantly, Air Solutions is liberating data to help patients, physicians, providers, government and private payers, and other partners in the healthcare delivery channel. We are seeing the results of our innovation, even though it is just over seven months since the launch of our first AirSense 10 product. Customers have recognized the value of Air Solutions, an end-to-end system that can help them, one, lower costs, two, drive efficiencies, three, increase patient adherence, and four, improve patient care. During the quarter, we further enhanced the Air Solutions ecosystem through the integration of our AirView software with leading healthcare informatics partners. We also announced the acquisition of Jaysec.
Jaysec is a provider of internet-based software solutions for our home medical equipment customers. This acquisition allows us to deliver automated, streamlined business solutions such as mask and accessory resupply systems that are both cost-effective and drive efficiencies for our HME partners. We are offering all Jaysec products to all customers. We see many opportunities to enhance and expand our informatics solution as the broader healthcare industry continues to move towards connected care models. We will use our newest core competence in healthcare informatics to drive channel efficiencies, to unlock cost savings, and most importantly, to improve patient outcomes. Let me drill into the detail of our new product launches just a little. We launched the AirCurve 10 in the U.S. in December, and although it is still early days, we had good uptake and excellent customer feedback in this, our first full quarter of sales.
We also launched the AirCurve 10 in Europe during Q3. This included an important new device, the AirCurve CS PaceWave. PaceWave is our brand name for our proprietary minute ventilation targeted adaptive servoventilation therapy. The acronym for this algorithm is MV-ASV. I think that PaceWave is easier to remember. Our PaceWave algorithm is unique and highly protected with patents and other intellectual property. As part of the AirCurve 10 launch, we added Air Solutions, our cloud-based software solutions technology, to our bilevel, our non-invasive ventilation, and our adaptive servoventilation platforms. The combination of the AirCurve 10 CS PaceWave with our Air Solutions platform is particularly powerful given the hospitalization rates and the severity of disease for patients who suffer from heart failure and concomitant sleep apnea. For our mask and accessories category, the market remains stable but competitive.
As I stated earlier, we are confident that we will return to solid growth in the mask and accessory category as we move forward. I would like to take a broader, longer-term view and spend some time talking about progress against our global Three Horizons growth strategy. In our first horizon of growth, which includes our core sleep apnea market, we have continued to drive healthcare informatics solutions that meet our customers' needs for efficiency, patient adherence, and improved outcomes. Our recent acquisition of Jaysec and completing our integration with leading informatics partners are good milestones in that journey. We are taking advantage of future opportunities to grow even more connected care solutions with customers through the AirCurve 10 launch. Reimbursement remains relatively stable across our geographies, including the U.S.
Last week, our U.S. customers welcomed positive news as Obama signed the Doc Fix bill, which added anti-fraud provisions to competitive bidding. This change requires binding bids and proof that a DME or HME is licensed in the state that it is providing products to customers. Although this legislation does not impact current bidding rounds, it will have a positive impact on future recompete rounds. The bottom line is that this should improve the quality of bidders to ensure that they deliver good service to patients, and it should improve the stability of the channel. On the legal front, we won an injunction against a Chinese-based competitor in Germany during February. The Munich District Court upheld its injunction that prohibits the sale or distribution of that company's masks that infringe our patents.
At ResMed, we are committed to protecting our world-leading respiratory medical innovation, and we will defend our more than 5,000 patents and designs so that we can continue to innovate and continue to change millions of lives as we move forward. We will continue to take action to enforce our intellectual property and to defend our significant investment in research and development. Our global R&D investment is holding strong at approximately 7% of our revenues, with a focus on pioneering clinical research, world-leading biomedical engineering, and cutting-edge healthcare informatics. Moving on to our second Horizon of growth, we are making solid progress on two fronts, our respiratory care market as well as our emerging markets growth. The European respiratory care business is growing from the strong base that we have developed over the last decade and more.
In the U.S., we continue to build our respiratory care channels and our strength in those channels. There is a very long runway ahead for COPD and neuromuscular disease patients to be helped by our Astral life support ventilator and our other offerings. The Astral platform allows patient care to take place in the home rather than in the hospital, providing better quality of life for patients, including caregivers and loved ones, and simultaneously taking costs out of strained healthcare systems. On the geographic expansion component of Horizon II, we continue to make progress in our emerging markets with solid double-digit growth this quarter. We've increased our investment in these markets and are executing on our long-term strategies in China, India, Brazil, as well as Eastern Europe, where there are great opportunities to improve patient outcomes and reduce costs across these emerging markets.
Our third Horizon of growth focuses on cardiorespiratory conditions, with an emphasis on central sleep apnea and Cheyne-Stokes respiration, particularly in heart failure patients. There is growing momentum in the heart failure and sleep apnea space, and we continue to facilitate strong partnerships between cardiologists and critical care and pulmonary physicians. There have been a number of new studies this quarter that continue to build a connection between heart failure and SDB, including obstructive sleep apnea, central sleep apnea, and Cheyne-Stokes respiration. At the American College of Cardiology, or ACC, meeting here in San Diego, we sponsored two posters on sleep disordered breathing in patients with chronic heart failure. One of the posters with final data from nearly 7,000 patients in Germany showed that 46% of patients with stable chronic heart failure had moderate to severe SDB, AHI north of 15.
That's almost every second patient that walks in the cardiologist's door. The second poster from Thomas Jefferson University suggested that treating SDB in chronic heart failure patients may reduce hospital admission and hospital readmission rates. In addition, The Ohio State University researchers published a study in January showing that patients with untreated sleep apnea have worse prognosis for mortality after they have been discharged from the hospital for acute heart failure. The data suggests that those that had their sleep apnea treated with PAP therapy improved survival rates approximately to rates that were similar to patients who had heart failure with minimal or no sleep apnea. This study supports the work that we are doing on our SERVE-HF and our CAT-HF clinical trials. Focusing now on those trials, our SERVE-HF trial in Europe and Australia is going well.
Data collection has been occurring at a faster pace during these last three months. We are now expecting presentation of the SERVE-HF data by the primary investigators to occur before the end of calendar year 2015. This is slightly ahead of the timeline that we discussed on our Q2 call. For our CAT-HF clinical trial in the U.S., we still expect that the CAT-HF results will be available during calendar year 2017. As a reminder, SERVE-HF is powered to show changes in mortality and morbidity in heart failure patients with CSA, while CAT-HF is powered to show improvements in global cardiovascular outcomes. Both trials lead to a potential change in guiding principles and standard of care for heart failure patients.
It is important to note that both studies use ResMed's proprietary minute ventilation targeted adaptive servo-ventilation technology, which the acronym again is MV-ASV, that we have branded PaceWave. We will continue to provide updates as significant milestones are reached in both of these important and pioneering clinical trials. We remain active on the capital management front, including share buybacks and dividends. You will hear more about these actions in Q3 from Brett in a couple of minutes. Additionally, we continue to look at M&A opportunities that are aligned with our long-term Three Horizons growth strategy and assets that we can leverage, manage better than the current owners, and enhance long-term shareholder value. Let me close with this. We are excited about our long-term outlook and our Three Horizons growth strategy. We are progressing on our journey to change 20 million lives by 2020 in both sleep and broader respiratory medicine.
We are executing well to that plan. I'll turn the call over to Brett in Sydney for a more detailed review of our Q3 financials. Brett?
Great. Thanks, Mick. As Mick has noted, revenue for the March quarter was $422.5 million, an increase of 6% over the prior year quarter. In constant currency terms, revenue increased by 13%. Movements in exchange rates, predominantly a weaker EUR relative to the U.S. dollar, negatively impacted revenue by approximately $28.5 million in the third quarter. At a geographic level, overall sales in the Americas were $250.9 million, an increase of 16% over the prior year quarter. Sales in Europe and Asia Pacific totaled $171.6 million, a decrease of 6% over the prior year quarter. In constant currency terms, sales in Europe and Asia Pacific increased by 9% over the prior year quarter. Breaking out revenue between product segments.
Americas flow generator sales were $133.1 million, an increase of 42% over the prior year quarter, while masks and other sales were $117.8 million, a decrease of 4% over the prior year quarter. For revenue in Europe and Asia Pacific, flow generator sales were $115.9 million, a decrease of 2% over the prior year quarter. In constant currency terms, an increase of 13%. Masks and other sales were $55.7 million, a decrease of 11% over the prior year quarter, or in constant currency terms, an increase of 3%. Globally, in constant currency terms, flow generator sales increased by 26%, while masks and other decreased by 1% over the prior year quarter. Gross margins for the March quarter was 59.5%, lower than guidance, essentially due to larger than expected depreciation of the EUR during the quarter and outperformance on America's flow generator growth.
On a year-over-year basis, our gross margin contracted by 380 basis points, reflecting declines in average selling prices, unfavorable product mix, unfavorable geographic mix, and adverse currency movements. Looking forward, in the fourth quarter of fiscal year 2015, we expect gross margin to be broadly consistent with Q3, being in the range of 59%-60%, assuming current exchange rates. Gross margin drivers like currency fluctuations and geographic and product mix could swing this range further if they move beyond our expectations. We do expect to see some traction in late Q4 from our cost-out programs for the AirSense platform and should see ongoing benefits from our cost-out programs, including procurement, production, and logistics improvements reflected in our fiscal year 2016 gross margin. Moving on to operating expenses. Our SG&A expenses for the quarter were $116.3 million, an increase of 1% over the prior year quarter.
In constant currency terms, SG&A expenses increased by 10%, primarily due to higher variable employee compensation, the impact of recent acquisitions, and the release of contingent consideration in the prior year quarter. SG&A expenses as a percentage of revenue improved to 27.5%, compared to the year-ago figure of 28.9%. Looking forward, and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 27%-28% in the fourth quarter of fiscal year 2015. R&D expenses for the quarter were $27 million, a decrease of 8% over the prior year quarter, but on a constant currency basis, an increase of 4%. This increase largely reflects incremental investment in the areas of healthcare informatics and cardiology. R&D expenses as a percentage of revenue were 6.4%, compared to the year-ago figure of 7.4%.
Looking forward, subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6%-7% in the fourth quarter of fiscal year 2015. This reflects our ongoing commitment to investing in our diverse product pipeline, informatics solutions, and clinical trials, but also the benefit of the weaker Australian dollar, in which the majority of our R&D is denominated. Amortization of acquired intangibles was $2.2 million for the quarter, while stock-based compensation expense for the quarter was $11.7 million. Our effective tax rate for the quarter was 20.4%. We estimate our effective tax rate for the full fiscal year 2015 will be in the range of 20%-21%. Net income for the quarter was $91 million, an increase of 1% over the prior year quarter.
Diluted earnings per share for the quarter were $0.64, an increase of 2% over the prior year quarter. Foreign exchange movements negatively impacted third-quarter earnings by $0.02 per share, reflecting the impact from the weaker euro, partially offset by the weaker Australian dollar. Cash flow from operations was $90.9 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital. Capital expenditure for the quarter was $10.6 million, while depreciation and amortization for the March quarter totaled $17.9 million. We've continued to be active on the capital management front. Our board of directors today declared a quarterly dividend of $0.28 per share, during the quarter, we repurchased 300,000 shares for consideration of $20.3 million. For the first nine months of fiscal year 2015, we've repurchased 1.8 million shares for consideration of $96.7 million.
At the end of March, we had approximately 16.5 million shares remaining under our authorized share repurchase program. To date, in fiscal year 2015, we have returned 92% of free cash flow to our shareholders via dividends and repurchases. Over the last five years, we have 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 $406 million. At March 31, total assets stood at $2.3 billion, and net equity was $1.5 billion. With that, I will hand the call back to Agnes.
Q&A, we ask that everyone limit themselves to one question and one follow-up question only. If you have additional questions after that, please get back into the queue. Adrian, we are now ready for the Q&A portion of the call.
Thank you. We'll now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using 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 touchtone phone.
Our first question comes from Andrew Goodsall from UBS. Please go ahead.
Thanks very much for taking my call, and congratulations on such a strong flow generator number. I was just going to perhaps focus on masks. Just trying to sort of understand when we might expect, or sort of what internally you're sort of seeing yourself doing, when we might expect, I guess, that to sort of show up in the numbers in terms of recovery against, perhaps, when you moved your prices last year. Perhaps just a comment on the % conversion you might be seeing of your flow generators, the mask conversion, why that's not perhaps a little higher.
Thanks, Andrew. Well, yeah, that question allows us to talk a little bit about the mask side. We are expecting to return to positive growth, not just in the Americas, but globally, to continue the good trends we have outside the Americas. The mask category continues to be competitive, Andrew, but stable. We'll be annualizing those price declines that we made a year ago, sort of January through June of 2014, through January through June 2015. We're over the halfway point. There's still some sort of time to get, as we went customer by customer, region by region, for those to annualize. As we look forward, we will get back to positive growth. We have a strong mask portfolio and a good pipeline to follow beyond that.
Is it reasonable to sort of expect you're achieving some level of, I guess, conversion along with the flow generator, with your bundling or looking to sell the solution as a combined solution?
Look, Andrew, there is some halo effect, certainly, when you walk in with the value proposition of the AirSense 10 and the Air Solutions. As you saw, stellar growth of 42% year-on-year in the Americas there. You obviously got a sales force with a lot of interest from their customers, and it allows conversations to start, obviously, about other parts of the business like ventilation, like respiratory care, and like masks. I do think there are some halo effects that come from that. I think, some of the more important factors are the fact that we're annualizing the January to June price adjustments. The market is competitive, and our team's getting back on the front foot in that category, while winning very strongly in some other categories.
Okay. Terrific. Thank you very much.
Thanks, Andrew.
Our next question comes from Margaret Kaczor from William Blair. Please go ahead.
Good afternoon, all. A couple ones from me. Can you maybe comment on U.S. generator growth, which clearly accelerated this quarter? How sustainable is that? Are you seeing a similar growth rate that you saw in AirSense 10 last quarter, or is that also accelerating?
Margaret, I'll take the first part of that question. I'll hand to Jim Hollingshead, President of the Americas, for the second one. Clearly, with a number like that, we probably haven't seen since 2006, 2007, of 42% growth for the quarter year-on-year in flow generators in the Americas. You're not just growing with the market. You are clearly taking some share. To the extent that there's market share taking, that can happen for a period of time, and then that period of time ends. We do think that there's strong growth in the core U.S. market and, frankly, in our core global markets in the sleep disorder breathing space. We expect that to continue, because we are vastly under-penetrated in developed markets as well as our developing and emerging markets. Jim, would you like to add any more color to that?
Sure, Mick, thanks. Thanks for the question, Margaret. We think that the flow gen growth represents not just the fact that the AirSense 10 platform and the AirCurve 10 platform are really strong products in their own right as flow gens and bilevels, but also the recognition on the part of our customers of the value of the all-in solution that we're offering. Both of those platforms have onboard communications, but it goes beyond just having an onboard modem. It allows our customers to drive efficiencies into their businesses through the use of our Air Solutions software platform. The number of features related to our software that are driving efficiencies in our customers' business, and we think we have a very clear advantage, with the overall offer in the market right now that customers are taking advantage of.
Okay. You guys are seeing kind of similar, maybe accelerating growth in AirSense as kind of the way that I read maybe that answer. Brett, can you walk us through the gross margins this quarter? You guys broadly talked about FX. Which currencies are most important? Just to make sure, the price declines that you guys cited in the press release were really year-over-year versus sequential.
Yeah. Thanks, Margaret. Yeah. On the gross margin, of all the margin drivers, essentially, and I don't think it's happened for a long time, is really mostly sort of headwinds for us this time around. We had, obviously, year-on-year currency impact was negative for us. That's really been driven by the euro, which has declined quite significantly as I think everybody knows. We do get some offset for the Aussie dollar weakening. To some extent, that still lags it a quarter before it turns up in margin. I do expect as well, all things being equal on currency, which is probably a big assumption, but I do expect with that Aussie weakness, some of that benefit will flow through into Q4 for us. We haven't seen that in Q3, but we do cop up front, if you like, that euro fall straight away.
I think that's something that will help us going into Q4. You have the product mix and geographic mix, and really that's kind of driven by flow gen outperformance in the U.S. You've got that geographic impact and that product mix impact, and they've been negative for us as well.
Really, even on the optimization of production and manufacturing, something that we have had a really good track record on, really haven't been able to focus on that just at the moment. We've really been looking to make sure that we meet demand in the marketplace, and obviously take for granted that we absolutely don't compromise on quality either. What we've had to do is probably just delay a little bit on the cost-out programs. We are obviously getting onto those now, and I think we'll see some benefit there. There's other things. We've been running with much higher air freight than we typically would. Again, that's really a consequence of meeting demand, particularly on that flow gen growth number that you saw. There's just a number of factors.
A lot of those are first-class problems to have, the ones on the cost side, they're under our control. We'll absolutely get on top of those.
Is there anything that you can quantify in that in terms of the FX impact this quarter?
The year-over-year, I don't get too granular, it's quite meaningful. It's north of 50 basis points negative.
Okay. Thank you.
Thanks, Margaret.
Our next question comes from Steve Wheen from JP Morgan. Please go ahead.
Hi. Good afternoon. Yeah, just a follow-up question on the gross margin. Brett, there's a lot of things that you can do going forward. I was just surprised to see your guidance for the fourth quarter be very much the same as third quarter. Can you tell us what's holding you back on that front?
I guess we're sort of looking at what we're seeing in terms of product and geographic trends, okay, which would probably tend to be negative on that. Offsetting that, I think we'll see some benefit from the weaker Aussie, and we will start to see some of our cost-out program gain some traction. When you look at it, going forward, looks like we have some negative kind of drivers, if you like, and then there's some positive ones, and then it's a question of what the timing's like and how they balance up. When I looked at it, I think in that kind of short term, we're broadly consistent with where we are in Q3.
When we look forward and we look at some of the things that are coming through, if you think of the AirCurve on the bilevels, if you think of Astral and as we build that market in the U.S., clearly those sort of products will be supportive of the margin. I think we'll get some momentum on our cost-out programs. That will be supportive of the margin. You can see some of these shorter-term headwinds, I think, will certainly abate, and then some of them, I think, will turn positive for us. If you look forward, I think optimistic on the margin. At the moment, we are dealing with quite a few headwinds. Notwithstanding that, I still think the margin's in pretty good shape.
Okay. Great. Could you also just provide some comment on some of the rest-of-world markets, maybe France, Germany, and Japan? Perhaps most interested in Japan as to, that's obviously been hit quite historically lumpy, what your experience was in the latest quarter for that region.
Steve, that's a good question. I'll hand to Robert Douglas, our President and Chief Operating Officer, to talk through those.
Yeah. Thanks, Steve. Japan, yeah, is historically lumpy. Had a pretty good quarter. This quarter with the products getting good take-up, going well. We continue to have excellent relationships with our customers, and we stay in close touch. The market there is very stable and moving along well. We'll continue to be lumpy through the ordering patterns. Europe had a pretty good quarter as well. France performed well. There's still the debate going on in France over the telemonitoring, where for a while, the rules were very supportive of telemonitoring, and many telemonitored units are in the market there. At the moment, it's still in a sort of a government legal case while they decide what their future policy's going to be. The market there is, again, stable and moving along well. Germany is also moving well.
Both our home care business has been winning business and also our wholesale business there is working well. Germany's moving well. Call out a highlight, the U.K.'s been very strong, and some of our market development programs there are really gaining traction, and the basic fundamentals of the benefit of treating sleep apnea is so well understood in the healthcare system there, that we're seeing good progress.
Excellent. Thanks very much.
Our next question comes from Chris Kallos from Morningstar. Please go ahead.
Great. Thank you for taking my question. Brett, just to clarify, the adverse product mix in the U.S., you're suggesting that the success of the flow generators being a lower margin product has impacted the margin? Is that clear? Is that what you're saying?
Yeah. That's correct.
Just the other question I have was just, can we get an update on Astral, how that's tracking?
Sure, Chris. We'll take a broader view on that. Astral has had a good two or three quarters of runway in our European markets. In those markets, Chris, we have more than a decade of established partnerships on the pulmonary critical care, discharge from the hospital to home care environment. Astral is seeing very good success in, as Rob just sort of went into detail a little bit around France, Germany, U.K., and beyond in Western Europe. In the U.S. market, we launched it later. We launched it sort of in the August, September timeframe.
In the U.S. market particularly, we're still developing the respiratory care channel and our strength and capability to sell into that. Having said that, we have many thousands of customers in the U.S., and all of them are now aware that ResMed has a life support ventilator, that it's called Astral, and that it has some great benefits, such as giving freedom back to patients, with a battery that can extend up to 24 hours away from home, so giving freedom back to their patients. We think there are some great sort of unique selling propositions around it, which will give us, over the coming fiscal quarters and fiscal years, frankly, an opportunity to grow that business in that geography. We're excited about Astral as a long-term sustainable opportunity for us to drive high margin flow generator growth.
Great. Thanks, Mick.
Thanks, Chris.
Our next question comes from Sean Laaman from Morgan Stanley. Please go ahead.
Thank you. Good afternoon and good morning. Guys, I'm wondering if you can just talk about the pricing strategy on U.S. devices, particularly compared to the prior corresponding period. Thanks.
Steve, I'll hand that question to Jim.
It's actually Shaun, by the way, too.
Oh, Shaun.
Oh. They introduced you as Steve, and I wrote it down, but I was hearing Shaun. Good to hear you, Shaun. Okay. Jim will still answer your question.
Thanks.
Shaun, we haven't made any dramatic changes to our pricing strategy. The biggest thing we're seeing in pricing in the U.S., as we've discussed on the call, is the grandfathering in of some changes we made to our pricing approach last year at this time. We're still working through some of the pricing changes we made during Q3 and Q4 of last year, and that's grandfathering through. Other than that, we haven't made any dramatic changes to pricing.
Sure. Thanks. Just one follow-up. Were there any sort of lumpy contracts in the U.S. device business, sort of one or loss during the quarter compared to the prior corresponding period? Thanks.
Thanks for the question, Shaun, but we don't go into details on a customer basis. It just doesn't make sense to go into that level of detail for competitive reasons on a public conference call like this. Thanks for the question, but we really can't answer that.
No problem, Mick. Thank you.
Thanks, Shaun.
Our next question comes from Mike Matson from Needham. Please go ahead.
Hi. Thanks for taking my questions. I guess I just wanted to go back to the gross margin. I know you mentioned the various factors that affected it, but I was just wondering, one, if you could quantify those. I know some of my other companies will talk about specific basis point impacts for currency, pricing, et cetera. If you can't get into that level of detail, can you at least kind of prioritize them and tell us which ones, what had the greatest, the least impact on the gross margin?
Brett, do you want to take that question?
Yeah, sure. Thanks, Mick. Yeah, Mike, we don't get quite as granular as that, but on those ones that I've mentioned, if you looked at it year-over-year, all had a meaningful impact on the gross margin. Clearly, I mentioned on the FX impact, which was quite large, product and geographic mix had a quite large impact as well. An element of ASP declines year-over-year also that we've been discussing. All of them were kind of meaningful contributors to that gross margin decline.
Okay. Would you say pricing, I think investors are going to be concerned about pricing and given these other factors, just wondering if you could, was the pricing kind of equivalent to these other things? Was it more, was it less than the other factors taken individually?
They're all meaningful or not. There wasn't any particular one that overwhelmed the rest. Let me put it that way. They were kind of all there in the mix, which is really unusual for us to have almost all of them as a headwind. It's not like any of them were completely driving it, but when you take them as a sum total, that adds up to quite a large contraction that we saw.
Okay. Just on the sort of HF clinical data. When that comes out, assuming the data's strong, positive, how do we think through the impact of that on your business, on your flow generators? I guess it would ultimately translate into sales of the, I can't think of the name of it now, but the ASV product, ASV or whatever it's called, product. What's the timing of that? Do you expect that to kind of pick up immediately, pick up just in Europe first? Do you have to get some additional indications approved through the FDA in the U.S. before you can really market it for the heart failure patient population, et cetera?
Thanks for the question, Mike. SERVE-HF is a multi-year journey for us, going back a number of years, and we expect that first publication of the trial results before the end of the calendar year. That's almost the starting gun that would go off on a long journey, Mike. There are multiple outcomes in a trial like this. There's the outcome that could improve cardiovascular outcomes. There's an outcome that could improve bigger things like morbidity or mortality and intention to treat versus per-protocol analyses. So many analyses that the primary investigators will have to do from when they crack the code all the way through to when they present the results and then later publish them in a peer-reviewed and published journal. There is a long lead time. To your point, it will benefit the business.
Mike, I find the easier brand to remember is PaceWave. The PaceWave product will be picking up from that. The studies both used PaceWave, the SERVE-HF and the CAT-HF. We're excited to have that sort of proprietary technology included in the trial. It's a long journey from there, so you won't see an immediate inflection point the day of presentation at whichever cardiology conference it may be. What you'll see is the starting gun go off on a marathon opportunity for us, which goes over multiple quarters and multiple years. Really a lot of it comes down to changing standard of care country by country, hospital by hospital, payer by payer, and frankly, cardiology and pulmonary group by cardiology and pulmonary group, and getting them to partner across hospitals. We see it as a great long-term opportunity for us.
Okay. Just in the U.S., is there anything from a regulatory standpoint you're going to need to do once that data's out? Can you just go ahead and begin to target the U.S. heart failure market as well?
Well, in the U.S., our indication for use is to treat central sleep apnea, periodic breathing, and Cheyne-Stokes respiration. We'll be focusing on that in the U.S. In other markets, in different parts of the world, there'll be different approaches of working with cardiology groups. In the U.S., it'll be focused on what we do in treating these very severe types of sleep disorder breathing amongst chronic disease patients.
Okay, thanks. That's all I have.
Thanks, Mike.
Our next question comes from David Stanton from CLSA. Please go ahead.
Thanks very much for taking my question. I wonder if you could give us an update on your views in terms of overall market growth rates in the U.S. and Europe, whether you think that's accelerating from the 4%-6% that you previously talked about, given the strong growth that we've seen in this quarter and previous quarters as well. That's my first question. Thanks.
Yeah, David, look, it's really hard being the only public company that sort of talks on a 90-day cycle here about growth rates to get details of the market growth rates. We talk about it in the mid-single digits in the U.S. and Western Europe. I think there certainly are regions and countries where you're getting double-digit growth, mostly in the emerging markets. We talked earlier about China and India, Brazil and Eastern Europe, where we're really partnering with our channel and focusing on growth in those areas. Then, you get some opportunities like we have with Air Solutions and what it's driven in great value to customers, and you get some share gains as part of that as well. Has market growth tipped up a little because we're moving to connected care models and we're partnering with Integrated Delivery Networks and accountable care organizations?
I'd say it's a little early for that traction to have started to really move the market in growth. I think that's more of a longer-term story as you look out sort of one, three, five years where you'll start to see us be able to influence market growth by the great solutions we're providing to take patients out of hospitals, put them in homes, and save money for broken healthcare systems. I think we're still sort of looking in that mid-single digit range. Again, it's blurry, and there's a lot of multiple data sources to get to that.
Thanks. I guess my follow-up to that is, as it's getting a little bit closer, can you give us sort of your views on where you see the introduction of the third round of competitive bidding in the U.S. for next year, and what that'll do to perhaps in your eyes, to those market growth rates? Thanks very much.
I'll hand that question to Dave Pendarvis, our Chief Administrative Officer, Global General Counsel.
Thanks, David. CB3, as it's been announced, is pretty much a known quantity now. That's a good thing. There's stability and predictability in the market for our U.S. customers. They now know that in January of 2016, there begins a phased process that runs through the middle of the year, where reimbursement will be adjusted. There's still some questions about rural adjustments, where there can be 110% of the national rates. By and large, CB3 should be predictable and therefore business planning can occur with customers knowing what the reimbursement is they're going to face. Without there being a reduction in the number of authorized customers or authorized suppliers in a region, we don't expect the kind of disruption that we saw in the second round competitive bidding. I'm not sure that that would have a significant impact on growth rates.
Obviously, the patients are getting diagnosed. That reimbursement for diagnosis isn't changing. I think our best guess would be that the growth rates would stay roughly the same in those markets that are affected by the third round of competitive bidding.
Thank you.
Our next question comes from William Dunlop from Merrill Lynch. Please go ahead.
Thanks for taking my question. I just wanted to get a little bit more color around the level of competition you're seeing in masks.
Sure, William. Well, masks are multiple categories. You have the full-face masks, you have nasal pillows, and then you have nasal masks. In each of those subcategories, there are multiple players in multiple countries competing with their own innovation. What I can tell you is that it is a competitive game, and we are innovating incredibly well, and some of our competitors are doing a reasonable job, too. What that allows is good competition in a market, healthy competition in a market, and the opportunity for us and our competitors to present those opportunities to patients, to HME providers, and to clinicians, and get them excited about what we have. As you go through each of the categories, and you go through each of the countries, you win in some categories, in some countries, and then you don't win for a while in some categories and countries.
Over the long term, what we've shown at ResMed that of the 7% of our revenues that we invest in research and development, we put a good chunk of that into world-leading mask and patient interface, more generally, and accessory research. We have, I would say, across countries and across categories, some world-leading innovation that's doing very well, and more in the pipeline. As I said, we're going to get back to positive growth in our major geographies and around the world on that, and we're confident about that.
Thanks, Mick. Just following on from that, last quarter, you mentioned that you think you probably took market share sequentially in masks. Would you be able to comment on what you think market share did in this quarter? Just finally, are you able to elaborate more on the pipeline that you just mentioned?
I'll take the second part first, and the answer to that is no. We're not going to go into details on the pipeline. I'll hand the first part of the question to Jim to talk about relative share that you might have seen, particularly in the U.S. geography.
Yeah. It's a difficult number to get to, market share, because there's not terrific data. Based on what we see in the market, we think the shares are relatively stable, and probably we took a little bit of share on the margin in the quarter. It's very difficult to estimate. If you went with stable shares, you probably wouldn't be far off.
Okay, thanks. That implies that the mask market in the U.S. is perhaps going backwards, if you took a little bit of share in the quarter?
Well, you've got the difference between unit share and then you've got revenue share, and you've got pricing and many factors into that, William. One of the things that we've said on these calls is we're not going to go into details of year-on-year price deltas. If we start to talk about volumes and exactly where that's at, then everyone can reverse engineer the pricing, including competitors or others who may be reading the transcript or listening to this call. William, I appreciate where you're going in the drill down, but I think we're going to have to go to the next question.
Thank you very much.
As a reminder, please limit yourself to one question and one follow-up question. Our next question comes from David Low from Deutsche Bank. Please go ahead.
Thanks very much. Brett, if I could just start with a quick one on the other income line. I was wondering if you could talk what's in that. Is it largely FX hedge gain?
Yeah, the majority of that is some FX hedge gains, and that was largely around our Euro hedging structures. Yep.
Great. Thanks very much. Just look, the only other one I had was with the very strong sales growth you saw in the U.S. devices, just wondering if you're on backorder or whether you've been able to fully supply those orders?
No, David, we are off backorder in the U.S. flow generators. That's a really good thing. The downside of that, as Brett said, is that we're doing a lot more air freight than we'd like at this time. Brett and Don and the team in Sydney are really getting the factory both there and in Singapore moving, so we will expect to start to move from air freight to sea freight. As Brett said earlier, to start those cost-out programs over the coming quarters to get us back on track there. No, we were not on backorder this quarter, which is a good thing.
Great. Thanks very much.
Thanks, David.
Our next question comes from Anthony Petrone from Jefferies. Please go ahead.
Thanks for taking the questions. Maybe to focus in on U.S. flow gens as well, just trying to get a sense of AirCurve in the quarter. Were there any large stocking orders on the BiLevels in the quarter? I know it was launched late last quarter, so just wondering the extent of the impact in this quarter. Then a follow-up.
Yeah. Jim, do you want to take that question about the orders? Do you know how it impacted inventory-wise or replacements?
It's not something we have perfect visibility into, I didn't see anything unusual in the quarter in terms of stocking orders. The AirCurve's off to a really good start since its launch, it's on a really good growth and adoption ramp, and we think we're taking share in that category as well as in APAP and CPAP. We didn't see anything unusual.
I think what you saw last quarter was a good ramp-up of the AirSense 10, what you saw this quarter was a good ramp-up of the AirCurve 10 combined with ongoing ramp-up of the AirSense 10. You have the addition of Astral, mainly in Europe, but starting to happen in the U.S. geography, Anthony.
That's helpful. Then, the second one is on CHF, just trying to get a sense of how this plays out potentially into 2016. Specifically from an operational standpoint. I would imagine some of the R&D expenses will fall off when SERVE-HF is done. Is that the case? Will that be completely offset by reinvestments into the marketing efforts for SERVE-HF, or is that a net benefit?
Yeah, good question about SERVE-HF. As we start to complete that study, what you should realize is usually when these studies go out, there are a number of follow-on publications that look to analyze the data that we've collected over these five to seven years from different angles to produce different things. I would expect ongoing analysis and research, certainly on the biostatistician side and analysis of the data from the investigators and workers on the study. Certainly, the day-to-day recruitment of patients does slow down as you move off those studies. One thing about ResMed, Anthony, is that we take a long-term view, and we invest for the long term. The growing needs and opportunities for us in healthcare informatics, for instance, are an area that we are investing in, and we'll continue to ramp up our investment.
The growing opportunities to develop channels and research around COPD and the mortality rate that you saw in the Kohnlein study that we talked about two quarters ago, we have a 76% relative reduction in mortality for COPD patients treated with non-invasive ventilation. I mean, there are so many opportunities for research in the COPD side that I wouldn't, if I was running your model for FY 2016, I wouldn't be pulling out R&D dollars for ResMed. I'd say ResMed is going to reinvest and keep that sort of five, 10, 15-year view that clinical research drives market development, drives market growth, and drives value for patients. That's something that we focus on for the long term.
Thanks a lot.
Thanks, Anthony.
Our next question comes from Saul Hadassin from Credit Suisse. Please go ahead.
Thanks very much. Good morning, good afternoon. Brett, just a question on operating cash flow. I think I heard you right, you mentioned for the quarter, it was around $91 million or $90.9 million. Just wondering if you could give us what that might have been in constant currency or what the FX impact was. That looks like it's down fairly materially on the PCP. Just to follow up to that question, just what's happening on the receivables side in terms of trading terms? That'd be great. Thanks.
Yeah. I'll take the first one on receivables. On the sort of our day sales and trading terms, pretty consistent with where they've been kind of this time last year and over the last few quarters. I think that's been pretty stable. On the operating cash flow front. I mean, down on PCP, the EUR on the decline and so on, that would certainly hurt us a little bit on the cash flow front. You've got to be a bit cautious because in 90-day snapshots on the cash flow, I think I'd prefer to look at it more of a longer-term trend on the cash flow. PCP was down a little bit. I think overall, the cash flow remains quite strong, although probably hurt a little bit on the FX front.
Great. Thanks, guys. That's all I had.
Thanks, Saul.
Our next question comes from Craig Collie from Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. Two for me. The first, just trying to get a sense of the sustainability of the very impressive FlowGen growth number. Mick, could you perhaps give us a little bit of flavor as to the weightings of some of the separate drivers, in particular, share gains from, I guess, new patients being diagnosed with sleep apnea versus the installed base upgrading versus perhaps bilevels and cardiorespiratory sales?
Thanks for the question, Craig. Yeah, I mean, to the comments I made earlier, it's clearly a number of 42% in the U.S. geography, given the large base we have there is exceptional. It's exceptionally good, but it's exceptional and it did include a big chunk of share gain, that we would know. To delve out exactly what was market growth versus share gain growth, I'll leave the mathematics of that up to you and the other experts on the call. As I look to the sustainability of the long-term underlying growth there, I think it is there in that good solid mid-single-digit market growth that we talked about.
The difference between AirSense 10, which is in its third quarter, I guess, of real moving up that S-curve of launch, and AirCurve 10, which is sort of just finishing its first full quarter, and then you add in Astral, which for the U.S. market, has a much longer penetration curve to go. You can sort of get into some pretty complex calculations as to exactly what shares they'll be. What we're focused on is really the long term, Craig. We are absolutely taking share in sleep-disordered breathing. More importantly than that, we're switching the industry to focus on healthcare informatics as a value play. Taking data to the cloud is not enough.
You have to then take that data and provide solutions for your customers to take cost out of the channel, to get efficiencies, and for patients, physicians, and providers to all get real-time data so that they can make their businesses better, make the patients better, and improve outcomes. So it's sort of a long-term game versus for us, let's analyze the 90 days and look at it. I think what the milestone of that 42% says the long-term game is the right game, and it's got some capability, and we should double down our investment in that space.
Okay, thanks. Just lastly, any updates on potential pilot for bundling?
I'll hand that question to David Pendarvis to talk about, I guess, bundling associated with CB future rounds.
Yeah. Thanks, Craig. It's really been no news on that front. The situation remains that there's a initial proposal from CMS that they suggested they might run a bundling pilot. There's no more details on what that pilot might look like, when, if at all, it would go into effect. We've just heard nothing else. Really no developments on that front.
Okay. No news is good news, I guess. Thanks, guys.
Thanks for your questions, Craig. I think that'll be it there. Adrian?
Yes. We'll now turn the call back over to Mick Farrell.
Great. Well, thanks, Adrian. In closing, I'd like to thank the more than 4,000 strong ResMed team from around the world for their continued commitment to changing millions of lives, literally with every breath. We certainly remain inspired by our long-term aspiration of changing 20 million lives by 2020. Thanks for your time today. We hope to see many of you at our ResMed Investor Day, which we're holding this June 2015 in San Francisco. More details from Agnes on that later.
Yes. Thank you all for joining us again today. If there are any additional questions, please feel free to contact me. The webcast replay will be available in the investor relations section of our website at resmed.com. Okay, Adrian, you can close now.
This concludes ResMed's third quarter earnings live webcast. You may now disconnect.