Earnings Transcript for RMD.AX - Q1 Fiscal Year 2024

Operator: Hello, and welcome to the ResMed First Quarter Fiscal Year 2024 Earnings Conference Call and Webcast [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Amy Wakeham, Chief Communications and Investor Relations Officer. Please go ahead, Amy.

Amy Wakeham: Great. Thank you, Kevin. Hi, everyone. Good morning and good afternoon. Welcome to ResMed's First Quarter Earnings Call for Fiscal Year 2024. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate Web site later today along with a copy of the earnings press release and presentation, both of which are available now. On the call today are Chief Executive Officer, Mick Farrell; and Chief Financial Officer, Brett Sandercock. Following our prepared remarks, Mick and Brett will be joined by Rob Douglas, President and Chief Operating Officer, to answer any questions you may have. During today's call, we will discuss several non-GAAP measures. We encourage you to review the supporting schedules in today's earnings press release for a reconciliation of the non-GAAP measures to the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ. Please refer to our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'd like to now turn the call over to Mick.

Mick Farrell: Thanks, Amy, and thank you to all of our shareholders for joining us today. Our first quarter fiscal year 2024 results reflect strong growth across our entire business with double digit top line growth. This growth was driven by double digit global growth in the masks category and double digit growth in our software as a service business. We also achieved high single digit global growth in devices even as that category annualizes very high growth in the prior year period. The flexible and agile work of our supply chain, manufacturing and distribution teams has enabled us to provide ongoing global availability of our market leading 100% cloud connectable flow generator platforms. We have unconstrained supply of our AirSense platforms enabled by excellent volumes of the AirSense 10 platform globally and fast ramping approvals, launches and delivery of the best-in-class AirSense 11 platform country by country. During the quarter, we accelerated delivery of the AirSense 11 in Japan, and we launched the AirSense 11 in Australia and New Zealand. We have plenty of runway ahead on our pathway to launch in all of the 140 countries where we sell our solutions. We are very proud to be able to support all global demand for flow generators through a combination of AirSense 10 and AirSense 11 platforms. We remain laser focused on accelerating the production and delivery of the AirSense 11 platform. We are moving swiftly on that front. Our Masks and Accessories business grew 21% year-over-year, amongst a highly competitive market with all global players on the field in this category. Our commercial teams are doing an amazing job of showing the clinical and economic benefits of the ResMed mask portfolio. Our clinical and commercial teams are also partnering with physicians and provider customers to drive resupply programs directly with patients. The peer reviewed and published clinical evidence showing that adoption of a resupply program leads to better patient outcomes is proving itself out in the real world customer by customer. We continue to see strong growth in the US mask business where provider resupply programs can scale, powered by our digital health ecosystem, including AirView for physicians and providers and myAir for patients. For patients around the world, especially in nonreimbursed markets, we are developing, launching and scaling outreach and subscription programs to help the consumer who is the ultimate customer to take control of their own health and engage directly in refreshing their mask, tubing, humidifier and other accessories. This has been a permanent uptick since COVID-19. People care about respiratory health and respiratory hygiene and they are taking action, and we are supporting them with digital solutions and services to meet their needs. Before I turn to review updates on our key strategic priorities, I'd like to spend a little time discussing actions we've taken to accelerate profitable growth across ResMed and to power our long term success. We've taken immediate steps to ensure we're prioritizing the right things to drive profitable growth and our leadership teams have carefully reviewed opportunities to improve our performance. We have stopped some projects that were not working out as well as we thought. We've increased investment in areas that we believe will be pivotal to long term success, such as our digital health tech investments as well as focused hardware and software development. Creating the smallest, the quietest, the most comfortable, the most connected and the most intelligent healthcare solutions in the market. These changes have impacted some of our teams. And this week, we have taken actions that resulted in a reduction of our global workforce by 5%. Decisions like this that impact people are never easy. However, we know that we are doing the right thing, and we're doing the right thing to accelerate our growth and to refocus on our long term mission. I feel more strongly than ever that we are well positioned with an incredibly long runway of profitable growth and value creation for all of our stakeholders as we move forward. Let's now turn to a discussion of our three key strategic priorities

Brett Sandercock: Great. Thanks, Mick. In my remarks today, I'll provide an overview of our results for the first quarter of fiscal year 2024. Unless noted, all comparisons are to the prior year quarter. We had strong financial performance in Q1. Group revenue for the September quarter was $1.1 billion, an increase of 16%. In constant currency terms, revenue increased by 15%. Revenue growth reflected the ongoing combined availability of AirSense 10 and AirSense 11 sleep devices to support solid underlying global demand as well as strong growth across our mask product portfolio. Year-on-year movements in foreign currencies positively impacted revenue by approximately $10 million in the September quarter. Looking at our geographic revenue distribution and excluding revenue from our software as a service business, sales in US, Canada and Latin America countries increased by 10%. In constant currency terms, sales in Europe, Asia and other markets increased by 18%. Globally, in constant currency terms, device sales increased by 8%, while masks and other sales increased by 21%. Breaking it down by regional areas, device sales in the US, Canada and Latin America increased by 2%, which reflects the fact that we are cycling a particularly higher prior year comparable that was driven by sales of our card to cloud devices. Masks and other sales increased by 23%, reflecting growth in resupply and new patient setups. In Europe, Asia and other markets, device sales increased by 20% in constant currency terms, again, reflecting strong demand and significantly improved availability of cloud connected devices [Technical Difficulty] these patient setups. Software as a service revenue increased by 32% in the September quarter, reflecting the contribution from our MEDIFOX DAN acquisition and continued strong performance from our HME vertical. Excluding our MEDIFOX DAN acquisition, SaaS revenue grew by 7% in the September quarter. MEDIFOX DAN contributed revenue of $25.7 million for the September quarter, consistent with our expectations at the time of the acquisition. Note, we will anniversary this acquisition in Q2 FY24, so our headline SaaS growth rate will moderate in Q2. Turning to my commentary today, I will be referring to non-GAAP numbers where we’ve provided a full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release. Gross margin declined by 160 basis points to 56% in the September quarter. The decrease primarily reflects an increase in component and manufacturing costs, partially offset by favorable product mix due to the increase in mask growth relative to device growth and favorable foreign currency movements. Sequential gross margin improved by 20 basis points, driven primarily by favorable product mix. Moving on to operating expenses. SG&A expenses for the first quarter increased by 15% or in constant currency terms increased by 14%. The increase was predominantly attributable to increases in employee related costs as well as the incremental SG&A expense associated with the MEDIFOX DAN that we acquired in November 2022. SG&A expenses as a percentage of revenue was 20.2% compared to the 20.3% in the prior year period. Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 18% to 20% for fiscal year '24. This guidance also reflects the impact of restructuring we initiated earlier this week and we estimate this will result in a reduction in our workforce of approximately 5%. We expect to complete the restructure during our second quarter of fiscal year '24. R&D expenses for the quarter increased by 20% or in constant currency terms increased by 21%. The R&D expenses as a percentage of revenue was 6.9% compared to the 6.6% in the prior year period. Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year '24. Operating profit for the quarter increased by 10%, underpinned by strong revenue growth, partially offset by a lower gross margin. Our net interest expense for the quarter was $15 million and we expect interest expense to be in the range of $12 million to $14 million per quarter over the balance of fiscal year '24. Our effective tax rate for the September quarter was 20.1%, broadly consistent with the prior year quarter. Looking forward, we estimate our effective tax rate for fiscal year '24 will be in the range of 19% to 21%. Our net income for the September quarter increased by 9% and non-GAAP diluted earnings per share of $1.64 also increased by 9%. During the quarter, we recorded a provision of $8 million associated with the expected cost of the recently announced Astral field safety notification. We also recorded acquisition related expenses of $0.5 million during the quarter. These both have been treated as non-GAAP items in our Q1 financial results. We recorded losses of $4.5 million in our September quarter associated with the Primasun joint venture with Verily. As Mick discussed, the joint venture will be winding down operations and we will incur no further losses going forward in relation to Primasun. Cash flow from operations for the quarter was $286 million, reflecting solid underlying earnings and stable working capital balances. Capital expenditure for the quarter was $30 million and depreciation and amortization for the quarter totaled $45 million. We ended the first quarter with a cash balance of $209 million, and at September 30, we had $1.4 billion in gross debt and $1.2 billion in net debt. During the quarter, we reduced our debt by $80 million. At September 30, we had approximately $825 million available for drawdown under our revolver facility, and we continue to maintain a solid liquidity position. During the quarter, we also closed our previously announced Somnoware acquisition, a company that provides an upstream diagnostic management platform that is complementary to our current AirView and Brightree solutions. Our Board of Directors today declared a quarterly dividend of $0.48 per share. As part of our capital management activities, we plan to resume our previously authorized share buyback program starting in our second quarter. We expect to purchase shares to the value of approximately $50 million per quarter. This will more than offset any dilution from the issue of employee equity during the year. Finally, concurrent with our capital management activities, we plan to continue to reinvest in growth through R&D and expect to deploy further capital for tuck-in acquisitions. And with that, I will hand the call back to Amy.

Amy Wakeham: Great. Thank you, Brett, and thank you, Mick. Kevin, let's go ahead and turn the call back over to you to remind participants about instructions for the Q&A portion of the call.

Operator: [Operator Instructions] Our first question is coming from David Bailey from Macquarie.

David Bailey: Mick, I'd just like to press a bit more on some of the comments around the market to 2050. Just interested in your thoughts around GLP-1s as potentially being complementary to CPAP as opposed to being a substitution for. And maybe just giving some thoughts around the upcoming clinical trials and how that could influence that will take going forward?

Mick Farrell: And I'm just happy that we've had 90 days and we put some sites behind the analysis of this as the world leader in the field of respiratory medicine and sleep apnea, we really know these prevalence numbers really well. And so that baseline of 936 million patients from 2015, growing to 1.4 billion through 2050 is really, I think, pretty conservative in its assumption of the growth rate of populations and aging populations in lower growth areas. But what that shows is 1.4 billion available in that time, not including any impact from any of these GLP-1 class of drug. And we took really the maximum aggressive efforts, including all current indications and some future ones to assess what the impact could be on the potential of patients in terms of sleep apnea prevalence worldwide, really aggressive and assume not only aggressive penetration but sustained that the adherence rate would stay sort of 80% to 100% on these drugs, which they're not achieving out there in the market, but we just said, let's take that high penetration case and that showed 1.2 billion patients in 2050. And so we will look at every update that comes from the pharma industry. They're very active in this class of GLP-1 but we think we're taking a very high penetration analysis to get there. And so we'll continue to look at any new data that come on and every quarter, we'll update that epidemiology model and move it around. But what it shows is a huge opportunity, 1.1 billion patients above our penetration at quite high growth rates through the next number of decades. To your question around concomitant therapy and use what we've been seeing in the last two years since a number of these have been out there in the diabetes side and on the obese indications, it's obviously early days, but we're tracking many thousands of patients on GLP-1s and PAP and we're seeing maintenance of adherence, we're seeing maintenance of resupply programs and really no change. When you look at -- so that’s at the aggregate level, we are seeing no change there. We are seeing more patients coming into the funnel. Look, we know we're doing our awareness programs, our demand gen programs and there are other alternative therapies doing demand gen that bring patients into the funnel that we get a benefit from. But we truly believe that this idea that you could come in to the healthcare system, someone who's maybe obese, moderately obese and likely avoiding the healthcare system, there's a high avoidance of people with BMI of 30, 32, 35 of the primary care system. And so we believe it will bring more patients in. We're seeing that with our very high patient flow. So look, we're just looking at the data we're observing, which is patients on concomitant therapies there multiple years, and we're going to track those and track the adherence and we'll publish that every quarter. We're seeing actually our adherence rates steady and resupply rates steady in that installed base. And in the new patient flow side, we're actually seeing increased all-time highs of patients coming into the funnel. So we're watching all of these above and we're looking for two to three decades and still see with highest case penetration, you can roll in any study like you're still going to see north of hundreds of millions to 1 billion patients between the likely penetration in our disease state and beyond. But David, thanks for the question, and I look forward to ongoing discussions.

Operator: [Operator Instructions] Our next question is coming from David Low from JPMorgan.

David Low: If I could stick on the same topic. Mick, could I get you to talk a little bit to the 22.5 million patients that you've got on myAir? It would be really good to understand how they sort of fit into the categories of mild, moderate and severe sleep apnea. Because as much as you've given us some very big numbers, we're fully aware that about half of those patients are in the mild category. And it's unclear to me that many of those patients are currently seeking treatment or will seek treatment in future. So if you could just help us with what you can see in the data and so we can make an assessment as well, please.

Mick Farrell: Yes, David, look, thanks for the question. And as you look at the epidemiology data, there's a number of splits on AHI. What we're lacking in the market is a split around symptomatology and how patients feel. And as we're looking at the data, patients with AHIs, 5 to 15, 15 to 30 and 30 plus and overlapping that with concomitant therapy, we'll be peer reviewing and publishing data at upcoming conferences in 2024 on this to show some of these nuances of deltas. But on the aggregate group, we're not seeing changes in adherence. And even in the subsets of mild to moderate, we're not seeing significant changes in adherence rates or new patients coming into the funnel. AHI is a great measure of the number of suffocation episodes per hour. Just to remind people, an AHI 14, just under 15, which is considered mild is suffocating every four minutes of sleep. So a doctor may call that mild, but to a patient who's suffocating every four minutes of sleep, in 15 -- 14 times an hour, and you're sleeping all through the not having 80, 90 suffocation episodes, they stick on the therapy and new patients coming in as well. So look, we're watching this really carefully, and we're really analyzing by AHI, by symptomatology, by craniofacial distance between the tongue and the uvula and actually size of time because there's a whole lot of factors that go into go into the prevalence of sleep apnea and obviously, the issues around hypopneas, which are far more prevalent in women and lead to worse excessive daytime sleepiness, headache and comorbidities that are not associated with weight at all. But look, we're looking through all of these data. And as we look forward over the next number of decades, there will be an impact. There's no question by these weight loss medications. But it will be on the margin and it won't be -- I mean, certainly, the market believes it's going to be dramatic given the last 90 days of our stock. And I can tell you, every bit of clinical data that we have going forward and every bit we have going retrospectively, we've got the biggest database in the world and it's 21.5 million patients. As we look at that split between mild, moderate and severe, we're not seeing changes. But look, every quarter, we'll continue to update that, and we'll do more and more splits on severity. We published this epidemiology model this quarter and we'll continue to update it and continue to provide data. I'm also making sure that we keep some of those data so we can get them into the peer reviewed and published press like the Lancet article that started the epidemiology model, and so we'll be publishing the information that we can. And then every quarter here on the -- on our investor site, but they will also be running the real sites in epidemiology models and health econ and outcomes research work and making sure that gets into the peer reviewed and published press as well.

Operator: Next question is coming from Dan Hurren from MST.

Dan Hurren: I was going to ask some questions about the results rather than GLP-1 drugs, if that's okay?

Mick Farrell: Dan, that would be delightful.

Dan Hurren: Look, just a question for Brett. Could you walk us -- can you just walk us through the headwinds and tailwinds for gross margin over the balance of FY24. And maybe we're seeing some pricing increases out there in the market and product mix shifting around. Could you just perhaps walk through those factors?

Brett Sandercock: As we look forward on GM, I mean, Mick mentioned it in his remarks as well. But if you look at it in terms of GM, we do feel that we're going to see improvements in our gross margin over FY24. And those tailwinds are really going to be around improved product mix, manufacturing improvements and efficiencies that we think we can drive. Freight cost reductions are still making their way through inventory and some of that will manifest in FY24. We're seeing stabilized component costs now, that was a headwind even for this quarter but we're cycling, largely cycling that, particularly in the second half FY '24. And then we have, obviously, the AS10 to AS11 transition that will be progressive over FY24 as well and then your point mentioning a little bit around pricing as well. So a combination of those factors will give us confidence, I think, in the gross margin through FY24.

Operator: Your next question is coming from Chris Cooper from Goldman Sachs.

Chris Cooper: Sorry come back to it, guys, but I think it is an important topic. So just on the patient data mix that you're tracking CPAP patients also in GLP-1s. Can you just update us on how many patients you're tracking there, and when you intend on publishing that? I know Rob foreshadowed last month that you would be sort of releasing that data? Would it make sense to do that before, or do you think maybe after the major study that's going to read out next year? And just any high level thoughts you have on the outcome of that study would be helpful at this stage.

Mick Farrell: And so yes, there will be ongoing longitudinal studies that will get out to the peer-reviewed press, but obviously, look, it's an urgent issue. And if you look at the market reaction the last 90 days, there's an assumption of 30%, 40% reduction in immediate TAM, right? If you look at that market cap change and it's just in congress with every piece of scientific evidence that we've looked at historically and going forward. So there's many thousands of patients on our GLP-1 plus PAP database. We also have 17,000 patients that we're tracking that have had gone through bariatric surgery and are on PAP therapy post surgery with 50%-plus weight loss reductions in that cohort. So we're tracking much stronger weight loss cohort and this sort of -- depending on which type of GLP-1, 10, 20, 30, plus percent weight loss reductions in the extreme case of the 50% weight loss reductions. And so we'll be are publishing data in the peer reviewed and clinical press across all of those cohorts as we go forward. Yes, we will choose -- as we keep putting out the epidemiology data, we will choose to put some of those data, which aren't going into the peer-reviewed press, right? So we don't those studies that we actually want to get into the clinical information that can really be out there versus just the stuff that we put together for an investor, which then would prohibit those same data going into a clinical paper. But we are finding the balance between those and we definitely hear that the market is looking for those data. I can tell you now that the data on aggregate are showing no change despite how you look which GLP-1 class, which AHI group for adherence and resupply. But I will start to find the right division between the information we can get out on the short to medium term basis and the information that needs to go in those longitudinal studies to really show the sites behind this and really balance it out. One of the best ways we're doing it every quarter is to show the incredible growth that we're getting in our devices and our masks and particularly the resupply of masks, right? There's no impact of anyone's recall, there's no impact of any drug therapy and you just look at the replenishment rate of masks, if you're not on therapy, you're not ordering masks. And we're seeing really strong resupply. The other fact to bring into this that we can publish and do publish is the number of patients in our Air Solutions ecosystem, 22.5 million patients that continues to go up. We had record numbers of new patients starting up. And in addition to that record numbers of patients themselves engaging with myAir and that's driven by AirSense 11 being far more digitally engaged and higher rates of adoption of that. But we're seeing a really strong uptake of patients and flow in and patients on adherence, but we'll continue to publish every quarter those data and the appropriate data we can from the clinical, and we'll definitely update the epidemiology model every quarter.

Operator: Next question is coming from Craig Wong-Pan from RBC.

Craig Wong-Pan: Just on your Americas mask growth, could you provide some more details on where that additional growth in resupply has been coming from, and how long do you think you can sustain that strong year-on-year growth in mask revenues?

Mick Farrell: It's a really good question because the mask growth across the group was 21% on constant currency. Europe was incredibly strong at 15% constant currency growth in a full competition market with everybody on the field and 23% in US, Canada, Latin America. Look, as I said in my description in the prepared remarks on our look forward over the next n number of decades, the stable market growth in our field was mid single digits on the device side and high single digits on the mask side. If you look at the five year CAGR, three year CAGR leading into 2019 pre COVID. And that's sort of what we're looking at that epidemiology model that mid single digit growth on devices and high single digit growth on masks. So if you think of that as the market growth in a stable state, it then comes up to, well, what can ResMed do in market demand? What can we do in demand gen? What can we do to get patients into the funnel? I truly believe to the three questions focused on this new class of drugs. I do believe we are seeing more patients come into the funnel, more patients into primary care. That's great. I mean I think there's $1 trillion worth of market cap now from these companies and they will turn that into marketing to bring people in for the miracle drug, and that will absolutely bring patients in for assessment for all the comorbidities that are associated with a patient that might have been severely overweight and now likely on the other side of these will still be overweight, including sleep apnea, COPD and other cardiovascular diseases and beyond. So we're watching that really closely. Look, we've consistently over decades that we've been in business, not just accepted mask growth rates from the market, we said, let's drive it higher and higher. The 23% is extraordinary and very strong in a highly competitive market. But I look at what we're doing with resupply, I look at what we're doing with new product launches, I look at what we're doing to drive patients into the funnel. And I think we can meet and beat that high single digits that the market would grow at. And with us being such a strong share, we get to -- when we do demand gen, we get to get a very good share of those patients through the funnel. So there's more of an incentive for ResMed to drive demand gen initiatives when we get such a good share of it on the device and mask side, and we're seeing that in many of the markets we operate in worldwide. But it's a great question.

Operator: Next question is coming from Sean Laaman from Morgan Stanley.

Sean Laaman: Mick, really good OpEx control in the quarter. And I think Brett mentioned, if I pick it up correctly, 18% to 20% as a guide on revenue going forward. I'm just wondering if there is more restructuring to done or to be done or you think you're rightsized at the moment?

Mick Farrell: And as I said in the prepared remarks, stuff that impacts our people are the toughest decisions to make, and we did this week, have a change in 5% of our global workforce reduction of 5% of our global workforce and tough decisions to make. I really think that, that is -- if you think about it, that is the restructuring. There are some changes I'm looking at it in the operating model, sort and roles and responsibilities and a focus on a more product-led and brand-led company that will come over time, but they're not massive restructures. And I think what that 18% to 20% revenues that Brett talked about in SG&A is indicative of the change that we've made here and reestablished a new base and a push for, as you said, really strong profitable growth across our business. But look, the world has changed. We are already a product led organization but our brand has increased in its value across the world, and we need to document and understand that and understand how to engage people in nonreimbursed markets as consumers into the funnel. And we've already invested in a number of our D2C markets in that, and we're driving that. And in our B2B and B2B2C markets, we're also working with our healthcare partners and distributors in the channel to work out how to best get patients into the funnel. So we're sort of, if you like, we're freeing up cash to reinvest in demand gen, reinvest in getting patients into the funnel. And we think there's a billion reasons in terms of the patients that need our help to get out there and do it. And that's going to be there for decades and we've got to find better ways to do it. But to answer your question directly, yes, that restructure is done and we're now focused on moving forward.

Operator: Your next question is coming from Margarette Kaczor from William Blair.

Margarette Kaczor: I wanted to focus on the quarter as well. You guys talked about this all time high patient flow number, which is notable. When you said the channel, I guess, were you referencing those are CPAP prescriptions or folks getting tests? And any color you can give us on how that growth profile compared to recent quarters, and anything kind of on the US device growth this quarter as well?

Mick Farrell: So look, we have a relatively low share of the diagnostic space in home sleep apnea testing with our ApneaLink Air product. So we are tracking that,those are up. The best data we have is through Air Solutions System. So we talk about the 22.5 million patients on our Air Solutions platform and almost 7 million patients that we now have on myAir patients directly engaged in. So we watch those starts very closely. We also do have de-identified and objective data from Brightree showing across the whole industry, patients coming into the funnel in sleep apnea but also across other home medical equipment categories. And I can tell you the patients are getting engaged and finding their way into the to the primary care treatment funnel and specifically in sleep apnea. And we believe it's not short term that this is a sustainable rate of growth for patients coming in, and I think it's really exciting to see that. To your question specifically about device growth, yes, so it's 8% globally. I mean I got to say I'm incredibly proud of our Europe, Asia and rest of world markets growing 20% this quarter year-on-year, that's where we're competing directly with our competitor that was out for their recall. They're back in many countries, in Europe, Asia and rest of world, and meeting and beating them head-to-head, I think, proves out the thesis that ResMed has the best-in-class products, but services and solutions, not just the hardware but the software and the capability we've been investing in that for a long period of time. This period a year ago, the September quarter 2022, we had just unleashed card to cloud on an unallocated basis, and it took off despite usually what is quite a low growth quarter in September, given that summer here in the US. We had incredible growth last summer with our card to cloud solutions, so we're lapping that growth. I think the team with that device growth of 2% is building on what was an extraordinary uptick from card to cloud. But when we look at the number of patients coming through, the diagnostic funnel and the setups coming into AirView and the setups of the patients coming into myAir, the growth rate of patients is mid single digits plus and with recap really up there. And so I think that's why I can say that I think it's sustainable for us to meet and beat sort of the pre-COVID 2019 earlier CAGR of mid single digit growth for devices, we can meet and beat that throughout demand gen and high single digit growth in masks. We can definitely meet and beat that through our work and experience and expertise now on resupply, engagement with patients and the changes that happen during COVID are focused on respiratory health and respiratory hygiene. So I hope that answers your question, Margaret. Thanks to that.

Operator: Next question is coming from Steve Wheen from Jarden.

Steve Wheen: Just a question back on to the gross margin. When we think about fourth quarter's growth margin, it went down largely because of FX and mix and yet we've got that going in your favor in this quarter. I'm just curious as to really what is holding that gross margin back when you do have such a strong mix geographically with devices in rest of world up but also masks as a category overall up and you've got the FX tailwind as well? And just to clarify, the Astral field safety notice cost is not in the 56% gross margin from what I can work out, if that's correct as well?

Brett Sandercock: Yes, that's correct, that's excluded as a non-GAAP item from 56%. But if you're talking year-on-year on the gross margin, really the biggest impact coming through was component cost increases that we're still cycling through and working through inventory. So that was the biggest factor. We did see some product mix favorability there, but not enough to offset those component cost increases, for example. That was the biggest impact on the year-on-year reduction in GM.

Operator: Next question is coming from Saul Hadassin from Barrenjoey Capital.

Saul Hadassin: Mick, you've kind of commented on sustainability of US flow gen growth. I just wanted to ask you, so the growth rate based on revenues this quarter implies about a 17% CAGR going back to 1Q fiscal '20, so the September '19 quarter. So I'm just wondering if you think you can sustain sort of the dollars of flow gen sales that you reported this quarter, or if you think sales are going to step down as we work through the rest of fiscal '24? Just wondering if you can sustain the level of sales in dollar terms?

Mick Farrell: It's a good question, but it's a complicated answer, because there's so many moving pieces between that baseline you took there for that CAGR number '19 and '20 with the COVID shutdowns, our spin-up on ventilators with 150,000 vents at the start 2020 and then the slowdown and the restart-up of the sleep apnea funnel and the shift that happened through 2020, 2021. And then, of course, the perturbation that made it a perfect storm of a competitor with a recall of 5.5 million devices and '21 through '23 and ongoing. So with all that, I'll just talk to the market growth rate that we saw stable pre-2019, right, of that mid single digit growth of devices and high single digit growth in masks. We think that where we're at now taking our baseline of now we can meet and beat that growth rate, right? And so that definitely doesn't mean going backwards. You can take what we've got now, which is, I believe, a very strong share of the US market and in the 140 countries we're in competition, but it's a good place for us to be. We are looking at from where we are achieving mid single digit plus growth in our devices and high single-digit growth on our masks. And no, we don't intend to go backwards at all. In fact, we intend to not only go forward but go forward strongly. And I think what was shown up in the numbers this quarter is our incredibly strong growth. I talked earlier that our incredibly strong growth in devices of 20% in Europe, Asia and rest of world. We had 15% growth in masks in Europe, Asia and around the other countries. And so I think what it's shown is that ResMed is going to go head-to-head with full competition out there and be able to meet and beat the competition, because we've got the smallest, quietest, most comfortable, most connected and the most intelligent health systems, and it's that whole combination of not just the product, but the solution, the service and how it's embedded in the healthcare system to the patient to the physician that allows us to achieve that. So we're not going backwards, we're going forward, Saul, and we're going to grow at or ahead of market. And in many countries, we're going to drive demand gen to increase the whole aggregate market growth rate and pull more patients into the funnel, because now we've got a greater incentive than ever to do that. Thanks for the question.

Operator: The next question is coming from Matthew Chevrier from Citi.

Matthew Chevrier: One on SaaS, please. So what will drive the SaaS revenue to now grow double digits from high single digit previously?

Mick Farrell: Thanks for the question, Matthew, and welcome to covering ResMed. Yes. So look, what's going to happen is with our organic SaaS business, as you saw in the quarter, we had good high single-digit growth at 7%. And we've sort of been in that sort of 7% to 8% in our organic growth across our US franchise really MatrixCare plus Brightree. And with the MEDIFOX DAN group, we haven't sort of been breaking out organic growth within that. But it is going to be incremental to that group. But in addition to that, there's a great product pipeline at both Brightree and MatrixCare that I feel confident and some portfolio focuses on the high growth parts of their portfolio and moving out or backing up with some of the low growth areas in that portfolio of MatrixCare that gives me great confidence as I look forward over the fiscal year and beyond that we're going to turn organic growth from sort of where it is now in the high single digits to double double digit growth on a stable organic basis across that SaaS business. So Matthew, it's a combination of MEDIFOX DAN increase in the group but also some great product pipelines in the current business to be able to get us there. And the final punchline I'll put there is, in addition to that, driving that better top line growth, we're working -- we restructured as well on SG&A and some R&D in our SaaS business this week, this quarter. And that will allow us to get good leverage on the net operating profit bottom line. And I see that moving closer and closer to the ResMed group and even being a strong contributor, an even stronger contributor for us as we look to maximize our long term EPS and return on invested capital across our group. So great question, Matthew, but we're very confident we can achieve that as we go through fiscal year '24, '25 and beyond in our SaaS business.

Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mick for any further or closing comments.

Mick Farrell: Well, thanks, everybody, for attending this call and for the great detailed questions. And thanks, Kevin. Yes. Look, I'll close with this. ResMed is well positioned for ongoing future success and accelerated profitable growth. We're taking actions to prioritize on the right initiatives and we're optimizing costs to fuel our long term growth. The opportunity in front of us is huge and largely untapped and it's an incredible runway. We see more and more people coming into the healthcare system every quarter and we'll benefit and help them sleep better, breathe better and live better lives in 140 countries. And we'll keep proving it to you every quarter as we go forward. Thanks to all the 10,000 ResMed-ians, many of whom are also shareholders, for all that you do today and every day. And with that, I'll hand the call back to you, Amy, to close us out.

Amy Wakeham: Great. Thank you, Mick. Thanks, everyone. We appreciate your interest and your time. As always, if you have any additional questions, please don't hesitate to reach out to us directly. This does conclude ResMed's first quarter 2024 conference call. Kevin, you can now end the call.

Operator: Thank you. You may now disconnect your lines, and have a wonderful day. We thank you for your participation today.