Welcome to the second quarter 2015 ResMed Inc. earnings conference call. My name is Ellen, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Agnes Lee, Senior Director, Investor Relations. Agnes, you may begin.
Thank you, Ellen. Thank you everyone 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. 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. Thank you to our shareholders who are joining us on today's investor call as we provide an overview of our Q2 fiscal 2015 results. I'm pleased to report that we achieved very strong sales growth this quarter, with excellent progress from new product launches in our core market of sleep-disordered breathing, as well as our cardio and respiratory care markets. In these introductory remarks, I'll discuss our sales achievements. I'll also provide an update on our product launches. Finally, I'll cover progress against our longer-term Three Horizons growth strategy. I'll turn the call over to Brett, 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 in Q2 of 14% on a constant currency basis. Including currency headwinds, our global growth was 10% year-on-year.
We saw strength across all geographic regions, with robust double-digit growth in the Americas, as well as double-digit growth in our combined European and Asia Pac regions on a constant currency basis. These results were fueled by the success of new product launches in our sleep apnea and respiratory care markets, including both COPD and neuromuscular disease. We delivered gross margin of 62.2%, which was just above the middle of our guidance range for the quarter. At the same time, we continued to invest SG&A to promote our global product launches. As a percentage of sales, SG&A remained roughly in line on a year-over-year basis at 29% of sales. We also continued to invest in research and development as we continue to innovate to build long-term sustainable competitive advantage in the marketplace.
R&D represented about 7% of revenues, which is slightly down from prior quarters, primarily as a result of currency movements, particularly in the Australian dollar. Looking at the bottom line, our GAAP diluted earnings per share grew 7% to $0.64. On a non-GAAP basis, diluted EPS was a penny higher at $0.65. Zooming in on our combined European and Asia Pac businesses, we grew at 16% on a constant currency basis in the second quarter. Including currency headwinds, we achieved 8% headline growth for our combined European and Asia Pac business units. This robust sales performance came from a balance of flow generator growth associated with our new product launches, as well as strong growth in masks and accessories in the region. With long multi-year product life cycles for new device platforms, our flow generator launches are still in their early days.
We see upside in Europe and Asia Pac for both the AirSense 10 and the Astral platforms as we look forward. We have seen strong early interest in our Air Solutions platform in Europe, and we will continue to invest and grow that opportunity over time. It is important to note that the digitization of medicine in the respiratory space is becoming a truly global trend, and it's a trend that ResMed is leading. Zooming out to a higher level, we believe that non-invasive home care ventilation solutions, combined with robust healthcare informatics solutions, will be critical to improving patient outcomes and lowering costs for COPD and heart failure patients within global healthcare systems. This is an important macro trend, and we will continue to partner with patients, physicians, hospitals, home care providers, payers, and governments to help solve the chronic disease problem.
We see a significant unmet medical need and a huge opportunity. We are rapidly growing the European respiratory care market. Our established channels in Western European countries have helped us to build good momentum over the last eight months with the launch of our new life support ventilator, the Astral platform, in the region. In addition, during the second quarter, we continued to invest for longer-term growth in Asia Pacific. We are investing in both respiratory care and sleep apnea channel development to help create and lead both sleep apnea and home ventilation markets in Asia Pac, with a focus on the significant growth opportunity potential in both China and India. Moving on to America's results. We had a strong performance in Q2 from the region, with the America sales team driving 12% year-on-year growth.
We have both good momentum and high morale within the team, as our innovative solutions meet and beat customer needs. We are particularly pleased with the initial progress of our U.S. flow generator product launches, with 25% year-on-year growth for that category in the Americas region. Let me drill into the U.S. flow generator category in some detail and talk about three key product launches: the AirSense 10, the AirCurve 10, and then our new respiratory care platform, the Astral. When talking about the AirSense 10, we have to discuss the Air Solutions healthcare informatics ecosystem that surrounds it. One of the key reasons that the AirSense 10 product has exceeded our expectations is the value provided by Air Solutions. We continue to hear positive feedback from customers about this end-to-end solution, including its quantifiable benefit for patients, providers, physicians, and even payers and hospitals.
We're still in early days for Air Solutions, and we will continue to enhance its offerings, but all indicators point to the fact that we have a winning value proposition. We are providing an opportunity to drive more efficiency, to increase adherence, and to improve patient care, all by liberating data and empowering all players in the value chain. AirView, U-Sleep, and myAir are just some of the key components of the Air Solutions ecosystem. As you may remember, we ended last quarter with a backlog on the AirSense 10. This quarter, I am happy to report that our operational excellence went into play, and we've been able to swiftly ramp up our supply chain and manufacturing system to meet demand. We are still working through each detailed product combination to get ahead of demand and build out appropriate levels of safety stock.
It is important to note that any remaining product backlogs are immaterial to the business. The second U.S. flow generator subcategory I want to discuss is the AirCurve 10, which is the bilevel group. As expected, we launched the AirCurve 10 in the U.S. in December, the final month of the quarter, and we are receiving good early customer feedback. The AirCurve 10 devices are an integral part of the Air Solutions platform that I mentioned earlier. This, the AirCurve 10, is a cloud-connected bilevel system that leverages the same end-to-end workflow solution that we provide with the AirSense 10 device range. We have introduced the AirCurve 10 less than four months after introducing the AirSense 10. That is a significant improvement for us over the launches of our two previous generations, the S9 and the S8.
With just less than a month of sales in Q2, and with its launch limited to just the U.S. market geography, the AirCurve 10 is in its very early days of launch. Looking at the masks and accessories category in the Americas, our AirFit range of masks had solid volume growth in the quarter. We continued to gain share on a sequential basis. Customer feedback on the P10, N10, and F10 remain excellent. On a sequential basis, volumes were up, and prices were relatively stable. On a year-over-year basis, we are starting to see stability in pricing as we are seeing more steady markets this year than last year. As a reminder, we are expecting pricing in the U.S. to be an easier comparable for year-on-year revenue numbers after the end of our next quarter, ended March 2015.
It is important to note that the price adjustments that we started 12 months ago were phased in from January to June 2014 on a product-by-product and a customer-by-customer basis. The facts are that the masks and accessories category continues to be competitive, and we are continuing to drive the business in a dynamic market and in a dynamic method. Moving to the respiratory care market, we continue to receive good feedback on our Astral platform as we launch it to key opinion leader physicians, HME customers, and hospitals across the U.S. We look forward to growing our U.S. life support ventilation presence with Astral. With our VPAP COPD device and our Astral platform as a combined offering in this space, we are uniquely positioned to provide doctors and patients the right treatment at the right price at the right time.
Now I'd like to take a broader, longer-term global view and spend some time talking about the progress against our Three Horizons growth strategy. In our first horizon of growth, which includes our core sleep apnea market, we are driving Healthcare Informatics solutions and software engineering innovation with the launch of our Air Solutions ecosystem and our AirSense 10 platform, as I mentioned earlier. With the launch of the AirCurve 10 platform, we are positioned to drive the efficiency, adherence, and the outcomes value proposition even deeper within global markets. The AirCurve 10 range spans from basic bilevel functionality all the way up to non-invasive ventilation, as well as adaptive servo-ventilation technology. To sharpen our focus on informatics solutions, this quarter, Rob and I established a new global business unit for Healthcare Informatics. This global team will be led by Raj Sodhi.
Raj was the CEO and co-founder of Umbian, which is a software-as-a-service company that you recall we bought in 2012. Raj has deep experience in running, growing, and scaling both secure and fast-moving transactional data systems, he has had a big impact in the time he's been here at ResMed. He's made the move from Halifax to San Diego, and we welcome him on board. Healthcare Informatics is now a core competence for our company. It is also a major area for investment that we are using to drive current and future customer value. We are leading the digitization of medicine in the respiratory space, we are just getting started. On the legal front, in December, we won a patent infringement case against a Chinese-based competitor in the U.S. International Trade Commission when the commission ruled that their masks infringe our patents.
At ResMed, we are committed to protecting our world-leading respiratory medical innovation and defending our over 5,000 patents and designs so that we can continue to innovate and continue to change millions more lives as we go forward. We will continue to take action to enforce our intellectual property and to defend the significant investment, which is approximately 7% of our revenues this quarter, in research and development, with a focus on pioneering clinical research and world-leading biomedical engineering. We are making solid progress within our second horizon of growth, which includes both our respiratory care market as well as new emerging market growth opportunities. We continue to see solid growth in our European respiratory care business, where we have had a leading presence in home care ventilation for a number of years. We continue to build our respiratory care channels and strength in the U.S. geography.
With 80 million patients suffering from COPD in the world and 5%-10% of them being candidates for non-invasive ventilation, we have a lot of runway in front of us. When you start to add in opportunities from neuromuscular disease like ALS, and you add in muscular dystrophy, we can help millions of patients and also save hundreds of millions of dollars for healthcare systems by taking care of these patients at home rather than in the hospital. Patients want that. Physicians want that. Payers want that. With accountable care organizations, integrated delivery networks, and growing payer provider models in the U.S., as well as the mostly government-run healthcare systems in Europe and Asia-Pac, we can now say that hospital systems and hospital CEOs are starting to drive towards that same goal.
On the geographic expansion component of Horizon II, we continue to make progress in our emerging markets, with strong double-digit growth this quarter. We have established long-term investment plans for China, India, Brazil, and Eastern Europe to ensure that we help establish good protocols for hospital-to-home, as well as the right care models so that patients and physicians can remain connected. With increasing healthcare investments in emerging markets, we look forward to working with governments so that they can know that they are improving patient outcomes and also being efficient with limited healthcare funds, using objective, quantifiable outcomes data. Our third and final horizon of growth focuses on cardiorespiratory conditions, with an emphasis on central sleep apnea and Cheyne-Stokes respiration in heart failure patients. Our SERVE-HF trial is on track and going well.
We are now expecting presentation and publication of the SERVE-HF data by the primary investigators sometime in late calendar year 2015 or early calendar year 2016. We continue to see excitement in the heart failure and sleep apnea space, and we are facilitating strong partnerships between cardiologists and pulmonary physicians, as well as home care providers. For our CAT-HF clinical trial in the U.S., we continue to enroll patients every week, and we expect that 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 cardiovascular outcomes and to help lead a change in standard of care for heart failure patients. It is important to note that both studies use ResMed's proprietary PaceWave adaptive servo-ventilation technology.
We will continue to provide updates as significant milestones are reached in both of these important global pioneering clinical trials. We remain active on the capital management front, including share buybacks and dividends. You'll hear more about these actions in Q2 from Brett in a few moments. 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 to enhance long-term shareholder value. We have opportunities on our radar screen of all sizes. We have over $400 million in net cash on our balance sheet and significant borrowing capacity. We have the dry powder that we need to acquire the right assets at the right time and at the right price. Let me close with this. We are excited about our long-term outlook and our Three Horizons growth strategy. We are executing well to that plan.
We continue to lead the market with innovative products, services, and solutions that achieve three important end goals that we call the Holy Grail. Goal one, improve patient quality of life. Goal two, halt the progression of important key chronic diseases. Point three, lower the costs of highly stressed healthcare systems 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. As Mick has noted, revenue for the December quarter was $423 million, an increase of 10% over the prior year quarter. In constant currency terms, revenue increased by 14%. Movements in exchange rates, predominantly a weaker EUR relative to the US dollar, negatively impacted revenue by approximately $13.8 million in the second quarter. At a geographic level, overall sales in the Americas were $231 million, an increase of 12% over the prior year quarter. Sales in combined Europe and Asia Pacific totaled $192 million, an increase of 8% over the prior year quarter. In constant currency terms, sales in combined Europe and Asia Pacific increased by 16% over the prior year quarter. Breaking our revenue between product segments. Americas flow generator sales were $111 million, an increase of 25% over the prior year quarter.
Masks and other sales were $120 million, an increase of 2% over the prior year quarter. For revenue in combined Europe and Asia Pacific, flow generator sales were $129 million, an increase of 9% over the prior year quarter, or in constant currency terms, an increase of 17%. Masks and other sales were $63 million, an increase of 6% over the prior year quarter, or in constant currency terms, an increase of 14%. Globally, in constant currency terms, flow generator sales increased by 20%, while masks and other increased by 6% over the prior year quarter. Gross margin for the December quarter was 62.2%. On a year-over-year basis, our gross margin contracted by 250 basis points, reflecting declines in average selling prices and unfavorable product mix, partially offset by manufacturing and supply chain improvements.
With respect to currency impacts on gross margin going forward, on a sequential basis and assuming current exchange rates, we now expect to see only a very minor positive impact on gross margin, as the impact from a weaker AUD will be largely offset by the weaker EUR. Looking forward in the second half of fiscal year 2015, we expect gross margin to be in the range of 60%-62%, given likely trends in geographic and product mix. As always, we continue to focus on initiatives targeted at improving our global manufacturing supply chain and logistics cost structures. Moving on to operating expenses. Our SG&A expenses for the quarter were $122.5 million, an increase of 10% over the prior year quarter.
In constant currency terms, an increase of 15%, primarily due to higher marketing costs associated with recent product releases, higher variable employee compensation, some impact from the recent acquisitions, and the release of contingent consideration in the prior year quarter. SG&A expenses as a percentage of revenue were 29%, compared to the year ago figure of 29.1%. Looking forward, subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 29% for the second half of fiscal year 2015. R&D expenses for the quarter were $29.3 million, a decrease of 1% over the prior year quarter, but on a constant currency basis, an increase of 7%, reflecting incremental investment in areas of Healthcare Informatics and cardiology. R&D expenses as a percentage of revenue were 6.9%, compared to the year ago figure of 7.7%.
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 second half 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 $2.3 million for the quarter. While stock-based compensation expense for the quarter was $11.7 million. Our effective tax rate for the quarter was 21.1%, and we estimate our effective tax rate for the full fiscal year 2015 will also be in the vicinity of 21%. Net income for the quarter was $91.2 million, an increase of 5% over the prior year quarter.
Diluted earnings per share for the quarter were $0.64, an increase of 7% over the prior year quarter. Foreign exchange movements did negatively impact second quarter earnings per share, but this impact was less than $0.01 year-over-year, as the impact from the weaker euro was essentially offset by the weaker Australian dollar. Cash flow from operations was $106 million for the quarter, reflecting strong underlying earnings and a modest increase in working capital. Capital expenditure for the quarter was $19 million, while depreciation and amortization for the December quarter totaled $18.9 million. We have continued to be active on the capital management front. Our board of directors today declared a quarterly dividend of $0.28 per share, and during the quarter, we repurchased 667,000 shares for consideration of $33.5 million.
At the end of December, we had approximately 16.8 million shares remaining under our authorized share repurchase program. To date, in fiscal year 2015, we have returned 101% of free cash flow to our shareholders via dividends and repurchases. Over the last five years, we have returned 97% 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 $431 million, and at December 31, total assets stood at $2.3 billion and net equity was $1.6 billion. With that, I will hand the call back to Agnes.
Thanks, Brett. We will now turn to the Q&A session of the call. We ask that everyone limit themselves to one question and one follow-up. If you have additional questions, please get back into the queue. Ellen, 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 sign or the hash key. If you are 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. Our first question is from Margaret Kaczor with William Blair. Please go ahead.
Good afternoon, guys. Mick, can you maybe give us some more color in terms of components of that strong U.S. lower growth? You had mentioned that backlog was immaterial going forward, but how much of an impact did that have this quarter versus mix towards auto and bilevels and vents?
Yeah. The backlog was pretty modest, Margaret, last quarter. We brought it up because we thought it was important to just be fully transparent about that. It was in a couple of different stock keeping units. A particular one was the AutoSet for Her stock keeping unit, which was a brand new algorithm, the first ever introduced to the global market of an algorithm for female breathing patterns. It was taken up much faster by physicians and home care providers in the U.S. channel than we had thought. There were a couple of other varieties where the ClimateLine air tube goes in or not in the device, and some bundling SKUs that were also on backorder. What we did in the 90 days is ensure that we got the supply chain up to speed, and we're able to deliver that.
As you looked at the 25% year-on-year growth in Americas flow generators, a very small portion of that was sort of catch up on the backlog. As we look forward, as I said in the prepared remarks, there's immaterial backlog left. There's still a couple of ones that we're working through, but it's not going to affect the ongoing business, Margaret.
Okay, thank you. In terms of international, again, very strong growth out there. What were the country by country breakdowns? Was it Japan, Germany? Maybe give us more clarity as to why.
I'll hand to Rob, our COO present, to answer that question.
Yes, Margaret.
Thanks.
We're pretty strong on most of the countries. You'd call out France and Japan. A lot of the other European countries were very strong. We don't give detailed breakdown of all of that, we won't be doing that. Really underlying it, patient flows remain strong in all those markets. They haven't all got AirSense 10 yet, but in the markets where they do have it, which is most of them, it's had a very good reception. As Mick was saying earlier, the Air Solutions is a very positive part of the value proposition. Of course, Astral was also in the market in Europe. Also, as we said earlier, we've been selling successfully life support ventilation and have a strong market position there. The Astral's building on that and already generating good momentum.
Thank you.
Thanks, Margaret.
The next question is from Andrew Goodsall with UBS.
Thanks very much and congratulations on that AirSense 10 result. Just want to talk about gross margin and just to understand where you are in the cycle. Previously, when you've launched a new product, you've been able to extract some costs, I guess, from the manufacturer. Just trying to understand a little bit more where you are in that, and I guess in particular whether you're manufacturing mainly in Australia or Singapore at this stage.
I'll answer the first part and then maybe hand over to Brett to address the second part. With regard to gross margin, in general, when we are successful in growing very well in our flow generators, it's very good in driving the top line, but it has some negative implications on gross margin. You get the positive of the revenue and the implications on the gross margin. As we're more successful in growing in the Americas, again, it's very good in driving the top line, but can have an impact on the gross margin. This quarter, you saw very strong growth in flow generators globally, and you saw very strong growth in the Americas, there was some impact on the gross margin.
Brett, do you want to provide a little bit more color and detail for Andrew into gross margin and maybe the guidance of 60%-62% going forward?
Yeah, sure, Mick. We just brought it down a little bit really on those factors that I spoke about. With the AirSense and Air Solutions, the whole platform, you'll recall we did elect to put the built-in comms or reinvest some of the sort of typical savings that we make on platforms back into the platform. I think that's really created quite, along with the whole ecosystem, I think very compelling value prop in the marketplace. We've done that, and we do obviously run cost out programs and so on. Just in the short term, we've really been focused on ratcheting up supply to really meet demand.
It probably puts a little bit further back in terms of some of these cost out programs, which we'll certainly run, but that might be quite short term until we catch up with demand properly, and then we can start running those and start optimizing the factory on efficiencies and so on, rather than just supply. I think in the longer term, and I'm not talking a lot, but after a few quarters, I think we've got some good opportunities to drive some of the cost out of the platform as we did for S9.
Yep. That's terrific. Thank you.
Thanks, Andrew.
The next question is from Sean Laaman with Morgan Stanley. Please go ahead.
Thank you. Good morning, and congrats on some good numbers there. Just a question on masks in the U.S. If you give us a bit of sense, please, Mick, on volume against price?
Yes, Sean. Actually, I'm going to hand that question to Jim Hollingshead, who runs our Americas business. Volumes and price for masks.
Thanks, Mick. Sean, we're seeing good volume growth in masks, as Mick said in the prepared comments, the AirFit line is doing very well. It's being very well received across all 3 categories and sequentially, we continue to take share in all 3 categories. I know we've talked about a change in pricing strategy that we had several months ago. What we're going to see, I think, is we're against a tougher pricing comp right now, probably through our March quarter, than we have been. I think what we'll see is, with the volume growth, we'll also see some improved results as the pricing sort of cascades through. I think it's worth noting that there wasn't a cliff event in that. What we did when we changed our pricing strategy in the category was we empowered our sales representatives to negotiate pricing on a customer-by-customer basis.
I think we'll see that comparable in terms of ASP feather in over the course of the second half of the year.
Great. Thank you. That's all I have.
Thanks, Shaun.
The next question is from David Low with Deutsche Bank. Please go ahead.
Thanks very much. Just sticking with that mask issue. I have worried for a while now that the mask resupply business might slow down as the number of masks per patient starts to sort of match needs. I'm just wondering whether you get any sense as to what the market growth has been like in the last quarter and even the last year across the mask and device categories.
Thanks, David. The line was quite soft. For those who didn't hear it, the question was about mask resupply and questions of volume really going over versus the sort of year-on-year price elements that Jim was talking about. As I said in the introductory remarks and as Jim just commented right now, actually, our volume growth both on a year-on-year basis and on a sequential basis, is pretty solid in masks. We actually have pretty good market share data, which we won't share here publicly, David, with regard to each of those categories, nasal, pillows, full face, right? With the N10, the P10, and the F10, we believe we took incremental sequential volume share from Q1 to Q2, and the products are doing very well out in the market.
To your broader question, that the market segment of mask replenishment is actually growing quite well, not just within the U.S. market, which I think your question was related to, but also globally. You saw that in our numbers. One thing that we're working very carefully on is ensuring patients get access to great care. When they get great care, the informatics systems are there to allow their doctors to interface with them through the Air Solutions platform. When they're engaging with their own therapy through myAir, which is a personalized app for patients, we find that adherence goes up. The U-Sleep program we have running there drives adherence up by up to 10 percentage points, that drives ongoing adherence and use.
We feel quite confident going forward that volume mask growth will be there, and as we get into some more stable pricing environments, that you'll start to see that come in through the revenue numbers. That's our long-term goal, and it's what we're executing to.
Thanks very much. Just one quick follow-up. Market growth rates, I mean, clearly we went through competitive bidding. I presume things have stabilized. Do you have any sense as to whether, or do you have a view as to whether market growth has picked up in the last quarter or two?
Look, yeah. I think when you look at a global level, we've got pretty good sort of mid-single digit market growth. Our goal is not to accept market growth, but to drive market growth. As you saw our numbers this quarter, we're ahead of that global market growth, and that comes from our investments. Brett talked about some of the investments in putting a CDMA chip in every device. That's an investment in driving a value proposition that is now allowing us to achieve very strong flow-generated growth in our CPAP and APAP category. That's then going to happen in our bilevel category. We make investments, as we talked about in China and India, by partnering with local governments and partnering to develop infrastructure and education of physicians to facilitate the growth of both sleep apnea and respiratory care opportunities.
We think that those market growth rates are not only sustainable, but we're expanding beyond them with our cardio respiratory care, our SERVE-HF investment, and others.
Great. Thanks very much.
Thanks, David.
The next question is from Steve Wheen with JPMorgan. Please go ahead.
Thank you. This is a question for Brett. Just on the gross margin guidance. There's obviously a few moving parts there. I wonder if you could just separate out what the currency related effect on that gross margin shift down that you're expecting for the remainder of this calendar year.
If you look going forward, Steve, if you look at currency impacts, it's so volatile at the moment, I'm kind of a bit reticent to say anything. If you look at it right here and now, whilst we're expecting a reasonable benefit maybe a quarter or two ago, it's really down, I think, probably a positive benefit of as little as 10 basis points going into Q3. It'll be a little better in Q4, and we'll get a bit more of the Aussie coming through because of that lag impact. They're fairly small now given how weak the euro's been. We're still in a pretty reasonable position because the Aussie is essentially offsetting that weakness in the euro, but we're not getting as a pronounced benefit as we may have seen if we were talking about this three, six months ago.
The major driver of you downgrading, I guess, your expectations around gross margin, what would be the major driver there?
The trends around geographic, around product mix, I think if you looked at likely trends there, I think that's just enough that we felt that the margin might trend down a little, and we wanted to just bring that guidance down a little to account for that.
Okay, thanks.
Thanks, Steve.
The next question is from David Clair with Piper Jaffray. Please go ahead.
Hi. Good afternoon, everybody. Congrats on the great quarter. My first question is on the flow generator number in the U.S. I'm just wondering if you can give us some more detail behind what drove the strength there. Is that Astral getting traction or just the new product launches in general? You face another pretty easy comp next quarter, so should we think that, I guess, a result in this ballpark is achievable again next quarter?
Well, thanks, David. I'll take the first half of the question and hand the second half to Rob. With the first half of where the growth came from in the quarter for the flow generators in the Americas. We launched both the AirSense 10 and the Astral to our U.S. sales force at the same time. It was at the Americas sales meeting in August here in San Diego. The teams had to get out there and talk to their customers around the traps and get them up to speed. For the AirSense 10, the value proposition was built in. As I talked about, it's not about the AirSense 10, it's about the Air Solutions healthcare informatics ecosystem.
It sounds like a whole bunch of buzzwords, but when you drill it down, what it does is it saves costs, and it saves time, and it saves money for our home care provider customers. For patients, it gets them more engaged in their therapy. For physicians, it allows them to do management by exception and manage a whole portfolio of patients. When you nail value propositions for three of your key constituents and they get it, you get a really quick ramp-up. Our U.S. sleep and respiratory distribution system is very good, second to none in the U.S. market. I think that's what drove the vast majority of the very successful sort of 25% year-on-year growth for the Americas in flow gens for the quarter. Your question was, is it Astral?
Astral, we're just developing the U.S. respiratory channel, for life support ventilation. It's the first FDA 510 clearance we've had of a life support ventilator, and we've got a very strong respiratory account manager or RAM team out there around the U.S. driving the message. It'll take some time for the home care providers to test the product and get to like it, and for the doctors to get used to how it works, doing the settings at the RT, the respiratory therapist level, and driving it. It's a much longer and deeper S-curve. Its impact in that first quarter was much less than the AirSense 10 and the Air Solutions platform. That's the first half about the products. It's mostly AirSense 10 and much less Astral. Rob, do you want to take the thoughts for next quarter?
Obviously, we don't get specific about what's coming up on the quarters. What we believe is that the value proposition behind the AirSense 10 and the Air Solutions platform is quite solid. We're not resting on our laurels around that, and our team are doing everything to promote it and convert our customers to it. Our in-house teams are still continually developing it, and we've got a lot of improvements that are going to come through in that system in the near-term future. Our view is that this value proposition should keep being seen by the customer, and the results will then speak for themselves. Similarly, with Astral, it's still early days in that product and we believe that it's performing very well and getting a great response, and we think that should continue.
Over the long term, those products are really going to keep contributing for us.
Great. Any updates on where we are in terms of home sleep testing?
David, the home sleep testing, are you talking globally or U.S. geography or?
US.
Within the U.S. market, we have sort of two models. We have our own ResMed model, and then we have a retrospective data analysis where we look at both public data and some private data, the proprietary data that we get access to. Those models provide a range. We, based on those two models, believe that anywhere between 35%-45%, when you take a trailing 12 months, anywhere between 35%-45% of the sleep diagnostic tests in the U.S. were done using home sleep testing. It's growing every day. It's growing every quarter. It's broken out by geography and healthcare system type.
If you take, I don't know, the Northeast, maybe Massachusetts, and look at an area where you have a specialty benefits manager driving with a payer, a model, you can get areas where it's up to 75% or 80% plus home sleep testing within that type of a system. You can get states in the South, like Alabama, where there's a very strong push from the local physicians' groups, and it's only 5% of the tests within that geography. You've got a big range, and it's very hard to put a precise number on it. The range is 35%-45%, we expect it to go up every quarter because the payers are driving it and pushing that forward. Our challenge in making it all happen is ensuring that we provide the right systems to both ways of getting diagnosis done.
We have the ApneaLink Air platform, which is a cloud-connected home sleep testing system, that after the device is finished. The data go to the cloud, and you could see the doctor that day, and they'd have access to the information you got from that previous night. We think that sort of efficiency in taking care of patients and helping doctors and helping the system work is very important for us. We also partner with sleep labs, and we have the VPAP Tx titration system, which is basically a box that has all of our algorithms in the one box. The respiratory PSG technicians, the RPSGTs, and the sleep physicians can operate and prescribe adaptive servo-ventilation or bi-level ST or APAP out of that.
What we're seeing with that trend, as that home sleep testing of 35%-45% increases to 40%-50% and 45%-55% over time, is that you get a mix shift in the devices that come out on the back end, so that you get more of a mix shift from CPAP to APAP. In our case, from our basic CPAPs up to our AutoSet-type products.
Great. Thank you.
Thanks, David.
The next question is from Saul Hadassin with Credit Suisse. Please go ahead.
Thanks. Good morning. Yeah, Mick, just following up on that commentary around that mix shift. I'm just wondering if you're able to give us a sense of how far you guys are progressed in moving to APAP versus fixed pressure, and how much runway you see in terms of uplift to that number?
Saul, as you know, we don't provide the details of the sort of split by product category code, but we do talk about trends. As you see that 35%-45% go to 40%-50% and 45%-55%, you can think that there's sort of a baseline of a minimum of one to one of what you get out of APAPs from that for new patient setups. Then there's a halo effect as physicians see the benefits of AutoSet. That AutoSet has not only intra-night variability, that it monitors breath by breath what's going on. It has inter-night variability that people might have more alcohol on a Friday or Saturday night, or during flu season might have a higher pressure needed to overcome apnea with inflamed upper airway or whatever.
We are seeing a trend that's ahead of those numbers that you see in the home sleep testing one. But we're not going to break it exactly down for competitive reasons, Saul. But it's a positive trend. It has been, and it will continue to be for quite a while in the future.
Fair enough. Thanks. Just to follow up on the COPD space in the U.S., can you give us some color around any easing of restrictions for patients accessing the VPAP for COPD and just what you're seeing with demand and patient accessibility to that specific device? Thanks.
Thanks, Saul. I'll hand that question to David Pendarvis.
Saul, there's been a lot of talk about trying to ease the restrictions for a device like a VPAP COPD, that you can get it to the patients who really need it, and it can be just as easy to prescribe as other devices. At the moment, those efforts haven't yielded fruit yet, it's still an effort that we see that is underway, and we'd be optimistic that that device will be more available in the future. Obviously, it plays a good positioning in the marketplace. We've got our life support ventilation device in the U.S. that can fit other codes as well.
We feel like we're pretty well positioned with an offering in each reimbursement category, that if those categories shift one way or the other, we're positioned with the right device for the patients, gives them the right care, will also fit the reimbursement category as the payers drive.
Thanks, Saul.
Thanks, Saul.
The next question is from Anthony Petrone with Jefferies. Please go ahead.
Thanks. Maybe just to begin on the AirSense 10 and to drive into that a little bit. Can you give us a sense first on pricing and how the series compares to prior generations of flow generators, say, the S9? Then Mick, you shared quite a bit on just the benefits for DME customers in driving essentially savings and efficiency for their businesses. Can you maybe elaborate a little bit and maybe quantify how an AirSense 10 is benefiting above and beyond, say, an S9?
Yeah. I'll hand that question to Jim, runs our Americas. I might follow up after.
Yeah. Okay. In terms of AirSense 10 and pricing, we're seeing that AirSense 10 pricing is actually holding up very well. The bulk of our growth in the quarter was with AirSense 10, and we think the value proposition is strong, and the pricing has held up very strongly. In terms of efficiencies, well, if I just say the AirSense 10 as a FlowGen, just as a product, is an outstanding product, right? When you layer on top of that what we call the health informatics ecosystem and a set of solutions that ride on that platform, you're adding extra to just the decision on a FlowGen that's already a winning FlowGen. The way it drives efficiencies for our customers is, as Mick was saying, it takes out cost.
If, for example, somebody has an AirSense 10 and they're using our U-Sleep platform, they're able to manage patients by exception. They're managing patients based on their compliance. They're automating, to some extent, coaching for compliance. That's both a revenue generator and a cost cutter. We published a study, it was actually a randomized controlled trial, a few months ago that showed that for one of our customers who actually ran an RCT in the space, they were able to increase compliance by 10 points off of their very high standard of care compliance rate from 70 to 80. They were able to cut their labor costs 59%. Right? That's just one of the features in the solution, and that's just the solution that's out now. There's a roadmap for solutions that are coming.
In addition to continuing to provide just an outstanding product that's comfortable, quiet, easy to fit, easy to set up, we're providing solutions on top of that that are going to increase revenue and save costs for our customers.
The only thing I'd add on to that, Anthony, to what Jim said, which is a really good comment, is that there's an addition for the ability to do remote assist. Our HMEs can remotely, HME customers can remotely access their patients' devices over the web, so they can be on Air Solutions, on AirView, specifically, and interrogate the capability of a flow generator. If a patient says, "Look, I've got a problem and the humidifier is not working," they're able to go online and say, "Well, actually, look, I just did an interrogation of the machine, and it looks like it is working. But I see the setting is at 70 degrees Fahrenheit. What's your thermostat set on at home?" They can say real time, "Well, it's set at 72." They can say, "Well, you know what?
It's not going to heat if it's set at 70 and your thermostat's 72. Why don't I change that up to 74, and it will heat up tonight." That conversation, which is two minutes, could have been a device driven into an HME, so the patient's upset. The DME, sending it back to ResMed's tech services center, our team analyzing it, saying, "No fault found," shipping it back, and then getting it back to the patient. All that inefficiency of the FedEx, the patient time, the RT time, our technician's time, it's all tax. It's all waste. We can eliminate that. It's good for us as ResMed. It allows us to be more efficient. It's good for our customers, our HME providers, to be more efficient. Most important of all, it's good for the patient who gets the care.
They can stick to the care, and they're not without it, and they're not upset about it. Those two examples of taking labor cost out and reducing inefficiency in the supply chain are just some of the benefits, the early benefits we're seeing from Air Solutions.
Very helpful. Real quick, just on buybacks, just an update there. Where the program is, and will you accelerate that given where the gross margin outlook kind of is at this point and some of the FX headwinds? Thanks.
Brett, you want to take that?
Thanks, Mick. We've been reasonably consistent, I think, on the buyback. In some years, we buy back more than others. The baseline we look at is certainly to buy back enough to offset the dilution from any issues to employees in terms of equity. That's sort of, probably around between 1 and 1.5 million shares as a baseline. Typically, we do a little more than that. We did 667,000 shares this quarter. We'll certainly continue to buy back stock, and it'll just depend on what's happening. We'll have a baseline that we'll buy back, and then it'll kind of somewhat opportunity a little bit after that, I guess.
Thanks again.
Thanks, Anthony.
The next question is from Ian Abbott with Goldman Sachs. Please go ahead.
Hi. Yes, good afternoon. My first question is just around competitive bidding round 3. Just wondering if you could perhaps give your view on how big an event it is for the industry relative to CB2.
I'll hand that question to Dave Pendarvis.
Okay. Thanks, Ian. From our perspective, in the sleep space and the respiratory space, so sort of excluding oxygen, importantly, it's about 30% or so of the Medicare patients who are remaining. You size the thing on an overall basis, think of the U.S. being 50% of our business, and think of Medicare patients who are in the U.S. being roughly 20%-25% of that. And then you've got, of that Medicare population, roughly 30% or so remaining in CB3. I think some of the estimates that are out there of broader product offerings from DMEs, including oxygen and other things would be greater than 30%. From our patient perspective, that's how we would size it up.
Obviously, the rules that are out there are showing that it's going to phase in in January 2016, with sort of a blend of half and half of the existing rates and half of the average rates from the other regions. That phases into a full average once you get to July 1, 2016. That's where we see it going. There's not a lot of mystery about that at this point. Obviously, we work with our customers, and our customers have discussions with CMS all the time about whether they can improve on that and do more in the rural areas, et cetera, for the few details that are left. From a sizing perspective, it's a relatively small size of our overall global business.
Okay. If I could ask Brett Sandercock a question. I'm not sure, I might have missed it, just touching on the contingent consideration right back, can you perhaps expand on that?
Yeah, sure. That was in our SG&A, and that was a release that we did 12 months ago, and that was just impacting the comparable for this year.
Okay, great.
Yeah, something we did this time last year. Yeah.
Thanks, Ian.
Thank you.
The next question is from Craig Collie with Macquarie. Please go ahead.
Hi, guys. A couple of questions from me. The first on the strong FlowGen numbers. Any chance of, I guess, splitting that out between what you think are new patients to sleep therapy and what the remaining portion in terms of existing patients upgrading their old flow generators?
Good question, Craig. I'm going to hand that to Jim Hollingshead.
It's a great question, Craig. We're not going to guide on that. If we had the data, we don't have clear data on that to begin with, but if we did, we probably wouldn't guide on it.
Okay. All right. Second question on bundling. Any updates on whether the pilot's started and, I guess, any detail around that?
Sure. This is Dave here, Craig. We don't have a lot of details yet on what that pilot would include, other than it's supposed to be six markets on sort of the control arm, if you will, and six markets on the bundled arm. CMS hasn't come out with the details on that. They were supposed to be able to start anywhere in 2015, and there's been no start and no announcement of when it will start. Obviously, they can delay it or start it whenever they like, but you'd expect them to give the market a good notice. We're waiting to get the details on what that might look like, but we're prepared to support our customers any way we might need to.
Okay. You remain relatively relaxed about that, I guess, given that the fact there's going to be appearing to be no minimum supply requirements?
Well, actually, Craig, we don't know that. We don't know if there will be no requirements or if it'll require two masks a year or one mask a year or how many filters and how many tubing. We actually know nothing about it. They haven't given any details. As you know, Craig, we operate in 100 countries, we operate in many different environments, including where there are bundled payments and whether or not. We sell, in some markets, through pharmacies, in some markets, we work with other ways to get direct to patients. What we've found is that in the markets where bundling has happened, we've partnered with our home care providers, we've been able to ensure that not only are the home care providers taken care of, but really importantly, that the patients are able to get access to masks and accessories.
The person that really wants this new mask is the person that's putting it on every night. If it's difficult in the reimbursement environment to get it, particularly in the U.S. with increasing high deductible health plans and health savings accounts, we're finding a lot of people are going online to get those types of devices. We think that a lot of HME providers are establishing those sort of online networks, we're partnering with them in many different countries in the world. The good news about the government is it'll take a while. They'll have to do the pilots, they'll have to get feedback from their constituents because these are Medicare beneficiaries. It'll take some time for them to ramp up, it'll give us time, Jim's team, time to partner with the U.S. home care providers.
What we'll do is get global learning from Germany and France and many other countries where we operate in that environment and make sure that the home care providers, the patients, and the healthcare system is properly taken care of. We think that that can be done quite efficiently.
Great. Thanks, guys.
Thanks, Craig.
The next question is from Joanne Wuensch with BMO Capital Markets. Please go ahead.
Good evening. How are you?
Hey, Joanne.
Well, I have a couple questions. You sounded more optimistic on M&A on this call than you have at any other stage. Is there something that has changed for you?
No, Joanne. I just think that as you talk about capital management, you have to talk about the three arms of it. One arm is making sure that we continue the share buyback, as Brett talked about. It's opportunistic, but it's steady. The second arm is obviously our dividends, which we've established a number of years ago and have increased most years, and we announced another $0.28 today from the board. The third arm is M&A. I just wanted to make it clear that with $400 million in net cash and access to over $700 million through a syndicated loan facility that we declared recently, we have the dry powder to do that. There's nothing imminent on the radar screen that we can talk about or that's there right now that we should talk about.
One of the things that you said, if I heard you correctly, was that there was some M&A or some acquisition revenue in the quarter. I don't remember seeing a press release regarding that. Could you remind me what it was and what that revenue might have been in terms of dollars?
Yeah. Thanks, Joanne. They're pretty small, and I'll hand that to Robert Douglas to talk about any M&A in the last six, 12 months.
Joanne, we had previously talked about some small acquisitions of some Australian distributors that we've made over the last few quarters, and it also included a small one in New Zealand. What's happening in those markets is they're very unique, different markets, and it's quite unusual, particularly in Australia, where there's strong reimbursement for getting diagnosed sleep apnea, but little contribution from government or any public systems towards any of the treatment. It's a unique market, quite differently structured, and we thought that we could help really develop the market there and drive awareness if we're a little bit closer to some of our customers and patients. We're just really trying a marketing experiment in those countries, and we'll let you know the results as they become relevant.
All right. The emails that I'm getting so far are questions, you can hear it throughout this whole call, about your flow generators. It's going in two directions: One, "Wow, can they do 20-something% next quarter?" And two, "Doesn't masks and accessories follow a strong flow placement?" How would you respond to that?
Well, Joanne, as you know, we don't give guidance on a revenue basis, we don't give guidance on a category basis around flow generators. We do think it was an excellent performance, clearly from both our Americas team and our Europe and our Asia Pacific team on the flow generator category. That's a result of three to five years of amazing product development work from engineering teams in Munich, Singapore, Sydney, San Diego, and Halifax. That great level of biomedical engineering, software engineering, has created a value proposition that the marketplace is finding compelling. We were surprised at how successful it was in that first quarter because we thought it'd take some time to walk through. Some of these savings take time for the provider and take time for the patient to get.
It did come out of the gate strong, we do think there's a long runway. These are value propositions that pay back over many, many, not just quarters, but years for our customers and our patients and our home care providers and suppliers. We think it goes pretty well along that front. I don't know if anyone else has got anything to add to that. Jim?
I think it's actually pretty simple, which is we are taking share in masks sequentially. We're taking share in flow gen faster, even faster.
Thank you so much. Have a good evening.
Okay, great. Thanks, Joanne.
We are now at the one-hour mark. I will turn the call back over to Mick Farrell.
Great. Thanks, Ellen. In closing, I'd like to thank the more than 4,000-strong ResMed team from around the world for their contribution to our recent product launches and for their continued commitment to our long-term goals. We remain focused on changing the lives of literally millions of patients with every breath, and we remain inspired by our long-term aspiration of changing 20 million lives by 2020. Thanks for your time today, and we'll talk to you again in 90 days.
This concludes our second quarter earnings live webcast. If there's 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. Thank you again for joining us today.