RESMED FY25 RESULT - GREAT NUMBERS CONTINUE EVEN ACCELERATE
RESMED FY25 RESULT
FY25 result was -2% below my expectations and NPAT +8% above, but there was a low tax rate the PBT was about 4% better. Indicating very strong GM and cost control. Tax expected to increase to about 22% in 2026.
Strong sold result and the guidance on GM into FY26 was very positive. 61-63% easily a record and a huge addition to earnings.
RMD strategy continues to be to make a smooth pathway for patients to CPAP usage and to reduce leakage and friction. That is by controlling the funnel pathway, and explicitly or implicitly favouring ResMed. The investments in agentic AI to support and embed patients are also critical to attempt to build a defence against others entering the space.
The threat of GLP-1 and other oral drugs to help with sleep apnea was talked down. These developments have to be watched, I have taken the position of waiting for negatives to show themselves in results before acting.
RMD continues to generate outstanding financial metrics, with now net cash and cash reconciliation back to over 100%, RMD is in a position to acquire growth again. The charts tell the story below these are amongst the best I look at.
A 10% return is generated at $38ps assuming a 25X exit PE and 11% eps growth. The intrinsic value continues to steadily climb with this one, maybe more than steadily climb!
Michael J. Farrell CEO
In our fourth quarter, we achieved 10% year-over-year reported revenue growth and 230 basis points of year-over-year gross margin expansion.
First, our fiscal year 2025 free cash flow was $1.7 billion, which provides ResMed with significant flexibility to both invest in our business and return capital to our shareholders. On the inorganic growth strategy front, we are focused on finding tuck-in size acquisitions that will help us accelerate towards our ResMed 2030 strategy.
Recent examples include Somnoware which is software for sleep physicians and pulmonary physicians. Ectosense, which has their product, the NightOwl, which is basically a wearable fingertip size sleep -- home sleep apnea test. And just last quarter, we completed the acquisition of VirtuOx. These businesses will help patients move through the sleep care funnel more efficiently. VirtuOx reduces diagnostic delays, it accelerates the rate of people moving from symptom recognition to home sleep apnea testing, and it keeps more patients on the path to treatment.
VirtuOx will continue to operate independently under its own brand, and there are no changes that we plan to help providers and physicians will interact with either VirtuOx or ResMed. In the U.S. health care system, physician prescriptions, payer requirements and the need for personalized setup and support make home medical equipment or HME providers, our essential partners in ensuring patients receive and stay on effective therapy.
We will be looking to expand the diagnostic funnel to keep up with new patient flow coming from 3 sources. One, and most importantly, our own ResMed driven demand generation efforts that I'll talk about later. Two, the greater awareness of sleep apnea that has been generated by the promotion of GLP-1 or GLP-1 medications, particularly to the specific primary care physician groups that they target and we can target as well with education. And three, the accelerating momentum in consumer wearables that are capable of sleep health monitoring as well as some with specific sleep apnea detection capabilities.
ResMed's very strong free cash flow affords us the ability to invest in the business through R&D and SG&A expenses but also to pursue our share buybacks and raise our dividend, as I just mentioned. But in addition to that, to also have significant funds available for strategic technology and I would call pathway -- seamless pathway type tuck-in acquisitions.
During the fourth quarter, we delivered very strong net operating profit growth even with the continued investment in both R&D and SG&A. We see these growing investments in innovative R&D as well as SG&A investments that are focused on demand generation, demand capture and demand curation as critical components to ResMed's long-term growth.
We also have a robust road map for incorporating AI and GenAI technology into our digital products. In June, we integrated our digital assistant that we call, Dawn into myAir in our Australia business to provide personalized 24/7 support to our local users. We plan to have a wider rollout of Dawn on the myAir platform, which is our app that sits on smartphones throughout fiscal year 2026 as we get regulatory approvals and move that technology to the various countries that we operate worldwide. Watch this space on that front.
Additionally, within the myAir app, our smart coaching feature uses machine learning combined with behavioral science-based interventions to enhance personalized PAP therapy outcomes.
ResMed is extremely well positioned to turn our over 23 billion nights of respiratory medical data as well as our 3-plus decades of sleep science and sleep medicine knowledge into personalized treatments and personalized insights that integrate seamlessly with wearable data, health data and virtual care. In addition to our products, we see multiple applications for AI and GenAI in our business processes.
In our R&D team, the use of agents in verification and validation can reduce development time to a fraction of our prior processes. We're using AI to write test scripts, to diagnose test failures, to write reports, as well as in verification of our product library.
Our SG&A investments have also continued to show a very strong ROI. Earlier this year, we announced a comprehensive ResMed brand evolution strategy and several targeted direct-to-consumer marketing campaigns to build brand awareness and really importantly, to drive undiagnosed patients to seek care. We launched a multi-market campaign targeting sleep health awareness, primarily in countries where we have significant direct market channels, including Germany, Australia, New Zealand, Korea and India.
Watch this space as we measure the ROI that we've had with these, I would say, relatively modest global marketing efforts, and we will pursue ongoing targeted additional phases of these initiatives in fiscal year 2026 with every investment based upon strong ROI and proven ROI targets coupled with disciplined spend of our valuable SG&A resources.
Let me make some brief comments about the competitive bidding program that CMS recently stated that it plans to resume. I simply cannot get too specific as CMS has not yet announced any of the details as to what product categories included nor the time frame that they plan for the next round. But during this comment period, I'll remind you of this ResMed has a long-standing track record of engaging constructively with the U.S. government policymakers and industry participants over more than a decade in this area.
Brett A. Sandercock CFO
We had strong financial performance in Q4. Group revenue for the June quarter was $1.35 billion, a 10% headline increase and 9% in constant currency terms. Revenue growth reflected positive contributions across our product and ReSupply portfolio.
Looking at our geographic revenue distribution and excluding revenue from our residential care software business, sales in U.S., Canada and Latin America increased by 9%. Sales in Europe, Asia and other regions also increased by 9% on a constant currency basis. Globally, on a constant currency basis, device sales increased by 8%, while masks and other sales increased by 11%.
Breaking it down by regional areas, device sales in the U.S., Canada and Latin America increased by 7%. Mask and other sales increased by 12%, reflecting continued growth in ReSupply and new patient setups as well as incremental revenue from 2 months of owning VirtuOx. In Europe, Asia and other regions, device sales increased by 10% on a constant currency basis, and masks and other sales increased by 7% on a constant currency basis.
Residential care software revenue increased by 9% on a constant currency basis in the June quarter, underpinned by robust performance from our MEDIFOX DAN and HME verticals.
Gross margin of 61.4% in the June quarter increased by 230 basis points year-over-year and by 150 basis points sequentially. These increases were primarily driven by procurement, manufacturing and logistics efficiencies as well as favourable foreign currency movements. Indeed, currency movements accounted for almost half the sequential improvement in gross margin. Changes in average selling prices had a minimal impact on our gross margin, both on a year-over-year and on a sequential basis. We've made considerable progress on our gross margin expansion objectives and continue to work diligently on our gross margin initiatives pipeline. We remain focused on making sustained long-term gross margin improvements. Looking forward and subject to currency movements, we expect the gross margin will be in the range of 61% to 63% in fiscal year 2026.
Looking forward and subject to currency movements, we expect SG&A expenses as a percentage of revenue to be in the range of 19% to 20% in fiscal year 2026.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue will be in the range of 6% to 7% in fiscal year 2026.
Operating profit for the quarter increased by 19%, underpinned by revenue growth and gross margin expansion. Our operating margin improved to 35% of revenue compared to 33% in the prior year period.
Our effective tax rate for the full year was 19.9% compared to 20% for the prior fiscal year. We estimate our effective tax rate for fiscal year 2026 will be in the range of 21% to 23%, with the uptick primarily due to the impact of tax legislation taking effect for certain jurisdictions beginning in fiscal year 2026.
Our net income for the June quarter increased by 22% and non-GAAP diluted earnings per share increased by 23%. Cash flow from operations for the quarter was $539 million, reflecting strong operating results and disciplined working capital management. At June 30, we had $668 million in gross debt and $541 million in net cash.
As Mick mentioned, we completed the acquisition of VirtuOx during the quarter for consideration of $140 million. VirtuOx has an annual revenue run rate of approximately $45 million. We have included VirtuOx in our financial results from the 1st of May. Overall, the results are not material to the group and were neutral to non-GAAP earnings per share for the June quarter.
Question-and-Answer Session
Strong ROW in devices in qtr
And yes, look, very good growth in our Europe, Asia and Rest of World devices, at 10%. But roughly, what we think is market growth for Europe, Asia and Rest of World for devices in the mid-single digits, so clearly, there's some fluctuations there.
GM improvements and guidance
the FY '26 guidance, 61% to 63% represents +200 bps year-over-year at the midpoint and +300 bps at the high end, so a pretty significant there.
Clearly, we had some benefit from foreign currency, particularly the euro during the quarter. So if you look at that sequentially, basically almost half that sequential improvement was FX. But that means that just over half was actually gains we made through efficiencies. Now some of the large components around that were component cost improvements that we've been making. We've got -- freight was also contributed because we've -- in terms of the sea freight to airfreight ratio now, that is actually back to pre COVID levels. So the logistics team has done a great job on that.
And so that gives us the confidence with that guidance to say actually, not only did we do really well in gross margin expansion in 2025. But as we look forward to '26, '27, '28 probably not at those levels because they're extraordinary in recovery from a supply chain crisis but we will be able to have sort of an ongoing pipeline of innovation that we can set up and tune up and turn on as we go towards our 2030 goal. And so it's not one and done. There was some good reset and some catch-up. But actually, there's some sustainable improvements that allows us to give that guidance
Acquisition strategy
Look, we're really excited about VirtuOx, but VirtuOx isn't an acquisition on its own. You've got to think about it as a portfolio. So we've -- if you look over the last 12, 18 months, you look at Ectosense and what we're doing with NightOwl.
This is taking it to the next level and sending out a challenge to say look, ResMed, we're the #1 in therapeutics in 140 countries. We don't need to be the #1 in diagnostics in 140 countries. But if there isn't -- if there are companies or there is an ecosystem of people driving home sleep apnea testing, smooth software and scalable home sleep apnea testing than ResMed is the global leader in this space has to step in. So we're doing that with that wearable home sleep apnea test from NightOwl. Then you add on Somnoware but we kept that greater operating opportunity. And as you look at our AirView software and our new software, watch this space as we start to bring those types of things together to create seamless and frictionless flow of patients through the funnel.
Then to your question, VirtuOx, that fits in at the next phase, which is, look, home sleep apnea testing is the scalable part. Our sleep labs are amazing partners, but they're full, they're full and hospitals are -- coming back post COVID and aren't expanding their in-lab testing capabilities. So we have to expand home sleep apnea testing, and we have to bring down those waitlists that went up very high during COVID and get that backlog down. And so we're doing that in the in-lab and we bought VirtuOx as the #1 provider to drive home sleep apnea testing to show it can be scaled. And so watch this space as we invest in our marketing and capabilities.
Obviously, look, our VirtuOx teams and our core sleep health teams are separate sales teams, but there can be partnerships where we see opportunities where waitlists are high and home sleep apnea testing can scale
But watch this space, we'll keep giving you updates every quarter on not just VirtuOx, but that ecosystem of Ectosense, Somnoware, VirtuOx and what ResMed is doing to free up the funnel and have more and more of the 1 billion people with sleep apnea worldwide get their way through the funnel, and we'll talk about insomnia and respiratory inefficiency, as we go as we look for ways to improve those pipelines as well.
US strong mask growth
They see how comfortable it is, many of them are patients as well and recommend it. So I think there is some share gains from the AirTouch N30i and the F40 (fabric masks), which is in our full face category or oronasal mask category those are doing really well. But look, it's a competitive space. There are competitors out there. So I think there's some element of that competitive share taking. But I think there's other elements.
As you said, it's ReSupply and frequency around ReSupply and contact around ReSupply and getting better at Brightree, getting better at ResMed ReSupply, getting better at contacting consumers through myAir and beyond so watch this space, I think you'll start to see us enhance our ReSupply approach.
And yes, I think the market growth rate is high single digits. We were ahead of it for the quarter...
Strategy to include oral drugs?
A one-stop-shop for sleep apnea. Yes, look, ResMed stands for respiratory medicine and residential medicine, it doesn't stand for just CPAP company. And we've had more than a decade of being the best provider of not just CPAP, APAP and bilevel which we've done for 36 years, but over a decade of providing mandibular repositioning devices, which is if CPAP, APAP and bilevel are the gold standard, which they are, I think Olympic medals, the silver goes to dental MRDs. And so ResMed is the #1 provider of 3D printed dental devices in Western Europe, Northern Europe and beyond and everywhere where there's a good economic model for the consumer to get access to dental care. That's where we participate.
For the Bronze medal, for sort of third-tier therapy, if you can't tolerate CPAP, APAP, bilevel can't tolerate dental, which both of them are relatively noninvasive, relatively affordable and use natural things like air and water., very much in line with the sort of make America healthy again and actually European sort of naturalist approaches and cost-effective approaches of any payer, then you might end up if you can't tolerate those on the third-tier therapy.
And I think there's a range there. there's GLP-1s for pharmaceuticals. I think they've taken the wind out of the sales of Apnimed, frankly, because the GLP-1, not only half treats, I'll say half treats because it's about an AHI reduction of 50%, some of the apnea, it leaves a lot of residual and should be used in combination with gold standard and physicians know that. But it does that and some diabetic improvements in cardiovascular and all those. And so I think it's more likely that Zepbound or that type of a drug would be used as that third-tier versus an Apnimed, which only half treats the apnea. But we'll watch this space. We're invested there.
the one-stop shop thing for me, is about ResMed keeping a relationship with the person who suffocates. And if they are on CPAP, APAP, or bilevel, we've got an intimate relationship. They're on dental. We've got an intimate relationship. If they're on those third-tier therapies, whether it's a drug or hypoglossal nerve stim, I want to still have that relationship because, guess what, those drugs may not be inherent for life. even an implant might not be something they want to keep turning on because of side effects or whatever. I want to have a relationship, so I can bring them back and get them a chance to get the gold standard. And so I want to keep that relationship.
GLP-1 impacts
But it's really -- it's sort of well north of 10% increased rate. I think it's now 11% increased rate of a patient with a GLP-1 prescription starting CPAP, APAP or bilevel versus those who don't have the code that they have had a prescription for GLP-1.
So that's strong and just getting a little stronger of that, I'm a motivated patient, I've come in for this new pharmaceutical capability which has the cardiovascular promise, the diabetes promise, the half treating of sleep apnea promise in this, I don't know, I'll call it the Kim Kardashian or Botox effect, right, this aesthetic effect. And so they come into the primary care position wanting that the GP wanting that.
But then when the PCP when the GP sees, they have apnea, they're writing a prescription for CPAP, like it's happening because in the U.S., there's -- you'll get sued if you don't give gold standard therapy if you don't offer the standard of care but also there's the hypocratic oath and they know that this is completely reversible, very cost effective and 100% effective if used as directed. And so that's why we're seeing that. I think that 11% start rate. And you look at 1 year and 2 year end, those are unchanged. They're north of 3% higher ReSupply rate for GLP-1 prescribed patient versus control for 1 year and then north of 5% higher ReSupply rate at 2 years, and those numbers are steady.
Competitive bidding
I think when this sort of started around 1 round 2, Medicare reimbursement was very significantly above private payout reimbursement. And so you really couldn't argue the justification of not doing the program because government was paying a lot more than private payers.
As I look at it now, Medicare and private payers are very much in sync, the private payers, there's lots of them, and there's 50 states and the it's like a 250 data point matrix with 5 payers in 50 states, but they mark-to-market on a very regular basis, annually or even quarterly in some and they're there, and the government is right in line with them.
And as you saw in the last round that round 4 in 2021, and we've got a very mature HME provider population who looked at their costs and looked at the capabilities and bid appropriately, and it was slightly above the rates that were previously there. And so then the private went back to what I call just CPI or inflation-based adjustment with some efficiency measures these last 4 years. I think as I look at the rules and I look at all the stuff that we've seen so far, it looks pretty similar to that last round.
There's some justifications of different percentiles and different averages and some questions we have that we'll get sorted out. But it's really -- it's not that different to what we've seen before, and the rates aren't that different from Medicare to private payers. So I think -- I won't say it's going to be a nonissue. I think for our HME customers, we want to work really closely with them, help them and through our industry associations and so on, we will, and we're going to support them through this.
But look, ResMed doesn't bid directly, so we're not directly involved program, but all I can say is it's pretty benign. I don't think there's going to be any major perturbations. And as you said, we got through what was pretty dramatic changes, 15 years ago and 10 years ago, very well.
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