Welcome to the 2nd Fiscal Year 2020 ResMed Earnings Conference Call. My name is Christine, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. Please note this conference is being recorded.
I would now like to turn the call over to Amy Wakeham, Vice President of Investor Relations and Corporate Communications. Amy, you may begin.
Good afternoon and good morning, everyone. Thanks for joining us, and welcome to ResMed's Q2 fiscal year 2020 earnings call. This call is being webcast live and the replay along with a copy of the earnings press release and our updated investor presentation will be available on the Investor Relations section of our corporate website later today. Joining me on the call today to discuss our quarterly results are CEO, Mick Farrell and CFO, Brett Sandercock. Other members of management will be available during the Q and A portion of the call.
During our call, we will discuss several non GAAP measures. For a reconciliation of the non GAAP measures, please review the notes to today's earnings press release. And as a reminder, our discussion today may include forward looking statements, including but not limited to expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ.
You are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward looking statements made today. With that, I'd like to now turn the call over to Mick.
Great. Thanks, Amy. And I'll go a little faster in my prepared remarks, so we still have time for Q and A despite the phone difficulties. Thanks, Amy, and thank you all our shareholders for joining us today as we review results for ResMed's Q2 of fiscal year 2020. On today's call, I will discuss our long term strategy.
I'll then review top level financial results, some business highlights from the quarter and a few key milestones. Then I'll hand the call over to Brett, who will walk you through our financials in further detail. Our team achieved another quarter of strong revenue growth across the portfolio, driven by superb performance in the mask category, particularly in the U. S. Market, with good performance across the 140 countries where we provide our solutions.
We continue to take market share with our software solutions that enable increased therapy adherence with resupply programs providing support to those who need it and with our innovative new products. Customers are voting with their wallets and they are voting for ResMed. As the world's leading software driven medical device company, we are using digital health technology to transform the industry. We have sold nearly 11,000,000 100% cloud connectable medical devices into the market and Air Solutions, our cloud based ecosystem manages more than 12,000,000 patients. In the last 12 months, we have changed over 15,000,000 lives by providing a person with a ResMed device or complete ResMed mask system to help them breathe better and live better lives.
In addition, our Brightree and MatrixCare software systems are helping to manage 90,000,000 more people outside the hospital. Digital health technology is an integrator across everything that ResMed does. AirView, MyAir, Propeller and a portfolio of other digital health solutions allow us to better engage with our customers and partners including patients, physicians, providers, payers and complete healthcare systems. We are investing in advanced analytics and expanding our capabilities in machine learning and machine intelligence so that we can grow this digital health ecosystem at double digits on a volume basis. We will grow from just over 100,000,000 lives improved with our healthcare products and solutions as we ended 2019 to our ambitious forward looking goal of improving 250,000,000 lives in 2025.
We now have over 5,500,000,000 nights of respiratory medical data in the cloud and we are analyzing these data to derive actionable insights for the benefit of patients, physicians, providers and healthcare systems. Our relentless focus on product and software innovation continues to set us apart from our competition. We have massive opportunities ahead in sleep apnea, in COPD as well as in outside the hospital software to help patients live better quality lives, to help patients and healthcare systems save money and to help achieve better management of chronic disease. We believe that the future of healthcare is outside the hospital. That's where ResMed competes today and that's where we are winning today.
We have the right elements in place to achieve our strategy and to drive financial success as we provide market leading value to customers. Let's now briefly review our top level financial results. We achieved another quarter of double digit revenue growth. We were up 14% in constant currency across our portfolio. This growth continues to be well balanced across our domestic U.
S. As well as our global product sales, as well as from our Software as a Service businesses. We continue to deliver operating leverage with non GAAP operating profit growth of 21% year over year and non GAAP diluted earnings per share of $1.21 I'd like to focus now on our core sleep apnea and respiratory care businesses. In the devices category, we delivered a good quarter with year over year constant currency device growth of 8% globally, supported by strong 9% device growth in the United States, Canada and Latin America geographies, as well as by improving Europe, Asia and Rest of World growth, which was at 6% constant currency in the device category. We continue to face headwinds for device growth in France as a result of the 2018 2019 digital health related fleet upgrades.
We expect that the headwinds will begin to abate in the upcoming European summer and we will start to return to market growth for devices in France during fiscal year 2021. Underlying patient growth remains healthy around the globe and we continue to benefit from strong market dynamics with over 900,000,000 people worldwide suffering from undiagnosed and untreated sleep apnea. Growth in the masks and accessories category of our business was incredibly strong during the quarter. We were up 16% constant currency globally in this category, well ahead of market growth rates indicating that we gained significant market share with our latest patient interface innovations. Removing the impact of some software within this category, we are still growing our global mask franchise in the mid teens.
Our flagship masks, the AirFit F20 and the AirFit N20 continue their growth across global markets. The success of these masks was augmented by continued good uptake of our more recent mask launches. We have launched a steady rhythm of mask innovation over the past 15 months. We have just lapped the successful launch of the F30 in the December quarter and we will lap the launch of the N30, the N30i and the P30i during the coming 12 months. The F30i was launched just over a week ago, combining the needs for patients in the Freedom and the Minimalist mask segments.
With our portfolio of solutions, we are ensuring that we have the right mask for every patient every time. We are innovating and expanding our mask portfolio to offer comprehensive options for physicians and home care providers and for the specific needs of the ultimate customer. That's the person who suffocates every night with sleep apnea. We remain focused on driving innovation to meet underserved customer needs. We are creating future products that are smaller, quieter, more comfortable and more customized to each person's needs.
Through digital health technology such as the MyAir app, we are driving patient engagement with our therapy so that people can enjoy the benefits of better breathing and better sleep. We have well over 2,000,000 patients using MyAir and leveraging its insights and personalized feedback through coaching algorithms. In parallel, we are also ensuring that the cost of sleep apnea as a chronic disease can be better managed by physicians, providers, payers and healthcare systems. Our digital end to end solutions combined with available 100% cloud connectivity as well as information provided to patients on their own smartphones are all leading to significant improvements in cost, improvements in healthcare outcomes and improvements in quality of life. We believe cloud based software combined with world leading medical devices can add value and improve both clinical outcomes as well as the patient experience.
On the partnership front, our joint venture with Verily is creating software solutions to help identify and engage and enroll people with sleep apnea on a journey to better sleep and better breathing. We have commenced pilots in a handful of U. S. Cities to improve awareness, identification and engagement with the importance of good sleep and breathing to overall health. Our philosophy is this, the more a person knows about how much they suffocate every night and the consequences of that suffocation on their overall health outcomes, the more likely they will seek solutions.
At its simplest level, this partnership will drive incremental growth in our core sleep apnea business. Over the longer term and on a deeper level, this partnership will also allow ResMed to participate in a broad chronic disease management platform covering sleep apnea, cardiovascular disease, diabetes, mental health and beyond. I'd like to now focus on our business in respiratory care. There are nearly 400,000,000 people suffering from chronic obstructive pulmonary disease or COPD worldwide. We don't believe these people are well served by global healthcare systems today and many COPD patients are frequent visitors to hospital emergency rooms with admissions and frequent readmissions.
We have a vision to better manage COPD patients through the use of technology with digital end to end solutions. Technology such as our Propeller platform helps how patients are communicated to, it helps how they are encouraged in their medical care and it helps how folks are looked after as an individual person. We believe that technology combined with world leading medical equipment can add substantial value to improve both clinical outcomes and the patient experience. We plan to offer a portfolio of solutions through all stages of COPD progression. We will be there with Stage 1 and Stage 2 COPD patients as they commence inhaled pharmaceutical therapy managed by the Propeller platform.
We will be there with Stage 2 and Stage 3 COPD patients as they add portable oxygen therapy to their care. We will also be there with Stage 3 and Stage 4 COPD patients as they commence non invasive ventilation therapy and ultimately life support ventilation therapy. We will manage the person on 1 end to end digital health COPD platform, helping the patient, helping their caregivers and loved ones as well as helping their physicians and providers so that they have the right information at the right time, lowering costs and improving outcomes. Our team at Propeller continues to progress their business as we move along the path from pilot trials to commercial partnerships with both pharmaceutical partners and healthcare systems. The digital health opportunity with inhaled respiratory medicine adherence will take time to build and we are making good progress.
In December, Propeller was included as the only chronic respiratory disease solution in Express Scripts first formulary for digital health solutions. In November, access for Propeller users was expanded to pharmacy services from CVS, from Walmart, from Kroger and from Rite Aid. This was accessed directly from the Propeller app via the My Pharmacy feature within that smartphone application. We will update you on the milestones for Propeller with partners in both pharma as well as healthcare systems as we move forward throughout 2020. Finally, I'd like to focus on our Software as a Service business.
We continue to integrate and optimize the out of hospital SaaS portfolio for long term growth. We are focused on leveraging our competitive advantage as the only strategic player competing with leading software solutions focused on home medical equipment providers, skilled nursing facilities as well as home health and hospice providers. Our SaaS portfolio revenue grew 37% year on year this last quarter, benefiting from the MatrixCare acquisition that we lapped during November. We estimate that the weighted average market growth rate of these sectors we compete in is in the high single digits. Excluding the timing benefit of the MatrixCare acquisition and on a pro form a basis, our SaaS portfolio grew in line with market in Q2.
Our plan is to beat that market growth rate over the medium to long term. As we reach the 4th anniversary of our Brightree acquisition here in 2020, we are achieving strong in our home medical equipment or HME sector with our Brightree team in Atlanta. We just passed the 1 year anniversary with our MatrixCare acquisition in the quarter, and we are increasing our investments in our MatrixCare team up there in Minneapolis. This investment is focused on new module introduction for our MatrixCare platform so that we can ensure that we are able to grow and share in our skilled nursing facility as well as home health
and hospice sectors as we move forward.
We are doing the hard work to make MatrixCare as successful as Brightree is in the ResMed portfolio and we have all the elements in place to do that. It took around 24 months to see strong sustainable returns from our investments in R and D and our management team at Brightree, we think we can meet or beat that timeline for strong and sustainable returns from our MatrixCare investments that we are currently making. Last quarter, we announced a collaboration with Surna as the new preferred partner for home health and hospice software for Surna's customers. It is early days in that partnership and things are going very well. We've started to migrate existing home health and hospice customers to our MatrixCare solution.
Our sales team is actively engaged with Surna's sales team, with customers learning of the benefits of our MatrixCare home health and hospice software. We are excited to drive growth from this partnership. The rich interoperability between our two solutions will provide value for both Cerner and ResMed customers as well as their patients and residents. I would like to take a moment to announce an exciting technology tuck in acquisition that we are just in process of completing. Just this week, Brightree signed an agreement to acquire a company called Snapworks.
Snapworks is a privately held software company that provides patient contact management and workflow optimization for sleep apnea resupply. The combination of Brightree's technology and live call services with this new Snapworks technology creates the largest resupply base in the industry with end to end workflow automation. For our HME customers, the combination of these two technologies Brightree and Snapworks will increase patient adherence and increase operational efficiency. We expect the transaction to close very shortly. The acquisition of Snapworks is expected to be neutral to our non GAAP ResMed earnings per share initially.
However, we expect this acquisition will be accretive to non GAAP earnings per share during fiscal year 2021. In summary, we have the vision to transform and significantly improve software solutions across outside the hospital healthcare sectors. We see a future where patients seamlessly transfer from HME to skilled nursing facilities to home health providers to hospice providers and beyond with reduced costs and increased efficiency resulting in better system outcomes as well as a higher quality of life for the person in out of hospital care. Before I turn the call over to Brett, let me close with this. The first half of fiscal year twenty twenty was strong and we are well positioned to grow through the second half of fiscal twenty twenty and beyond.
The continued success of our mask and device portfolio along with a solid pipeline of new products and new digital health solutions covering sleep apnea, COPD and out of hospital software gives us confidence in continued growth as we move through the year. We have positioned ResMed for the long term as the global leader in digital health, driving top line and bottom line growth as we execute toward our 2025 strategy. We are focused on our triple aim. 1st, to slow chronic disease progression 2nd, to reduce overall healthcare system costs and 3rd, to improve quality of life for the ultimate customer, the patient. With that, I'll hand the call over to Brett in Sydney for his remarks and then we'll go to Q and A.
Brett?
Great. Thanks, Mick. In my remarks today, I'll provide an overview of our results for the Q2 of fiscal year 2020. As Mick noted, we had a strong quarter. Group revenue for the December quarter was $736,000,000 an increase of 13% over the prior year quarter.
In constant currency terms, revenue increased by 14%. Excluding revenue from acquisitions, group revenue increased by 11% on a constant currency basis. Taking a closer look at our geographic distribution and excluding revenue from our Software as a Service business, our sales in U. S, Canada and Latin America were $408,000,000 an increase of 14% over the prior year quarter. Sales in Europe, Asia and other markets totaled $242,000,000 an increase of 5% over the prior year quarter.
However, in constant currency terms, sales in combined Europe, Asia and other markets increased by 8% over the prior year quarter. Breaking out revenue between product segments. U. S, Canada and Latin America device sales were $204,000,000 an increase of 9% over the prior year quarter. Masks and other sales were $204,000,000 an increase of 19% over the prior year quarter.
For revenue in Europe, Asia and other markets, device sales were $162,000,000 an increase of 4% over the prior year quarter or in constant currency terms an increase of 6%. Masks and other sales in Europe, Asia and other markets were $79,000,000 dollars an increase of 8% over the prior year quarter or in constant currency terms an increase of 11%. Globally, in constant currency terms, device sales increased by 8%, while masks and other sales increased by 16% over the prior year quarter. Software as a Service revenue for the Q2 was $87,000,000 an increase of 37% over the prior year quarter. During the rest of my commentary today, I'll be referring to non GAAP numbers.
The non GAAP measures adjust for the impact of amortization of acquired intangibles, the purchase accounting fair value adjustments to MatrixCare deferred revenue, litigation settlement expenses and acquisition related expenses. We have provided a full reconciliation of the non GAAP to GAAP numbers in our Q2 earnings press release. Note that this quarter, for GAAP reporting purposes, we are now reflecting the portion of amortization of acquired intangibles attributable to developed technology in our cost of sales rather than being allocated to operating expenses. We've made this change to align with the SEC disclosure guidance. This will mean we will disclose both GAAP and non GAAP gross profit measures going forward.
We have included reconciliation of both GAAP and non GAAP gross profit and gross margin in our press release. Going forward, I will reference this non GAAP metric as I believe it is the best measure our underlying gross margin. Our non GAAP gross margin improved to 59.7% in the December quarter compared to 59.1% in the same quarter last year. Compared to the prior year, our non GAAP gross margin increased by 60 basis points. This was predominantly attributable to favorable product mix and manufacturing efficiencies, partially offset by typical declines in average selling prices.
Moving on to operating expenses. Our SG and A expenses for the Q2 were 171,000,000 dollars an increase of 6% over the prior year quarter. In constant currency terms, SG and A expenses increased by 8%. Excluding acquisitions, SG and A expenses increased by 2% on a constant currency basis. SG and A expenses as a percentage of revenue improved to 23.3% compared to 24.8% that we reported in the prior year quarter.
Looking forward, subject to currency movements and taking into account recent acquisitions, we expect SG and A as a percentage of revenue to be in the range of 23% to 25% for the remaining 2 quarters of fiscal year 2020. R and D expenses for the quarter were $50,000,000 an increase of 16% over the prior year quarter, while on a constant currency basis, an increase of 18%. Excluding acquisitions, R and D expenses increased by 4% on a constant currency basis. R and D expenses as a percentage of revenue was 6.8% compared to 6.6% in the prior year. Looking forward, subject to currency movements, we expect R and D expenses as a percentage of revenue to be in the range of 7% to 8% for the balance of fiscal year 2020.
Total amortization of acquired intangibles was $20,600,000 for the quarter, an increase of 30% over the prior year quarter, reflecting the impact from our recent acquisitions. Stock based compensation expense for the quarter was 14,100,000 dollars Our non GAAP operating profit for the quarter was $218,500,000 an increase of 21% over the prior year quarter, while non GAAP net income for the quarter was $176,300,000 an increase of 22% over the prior year quarter. On a GAAP basis, our effective tax rate for the December quarter was 10.2%, while on a non GAAP basis, our effective tax rate for the quarter was 11.6%. Our tax rate was favorably impacted by a tax benefit of 20,300,000 dollars associated with the vesting of employee share based compensation, in particular, the tax deduction associated with the vesting of executive performance stock units in November. Excluding the impact from this benefit, our GAAP effective tax rate would have been 21.6% and our non GAAP effective tax rate would have been 21.8%.
Looking forward, we estimate our effective tax rate for the second half of fiscal year twenty twenty will be in the range of 19 percent to 21%. Non GAAP diluted earnings per share for the quarter were $1.21 an increase of 21% over the prior year quarter, while GAAP diluted earnings per share for the quarter were $1.10 Our diluted earnings per share were also favorably impacted by the tax benefit that I've just discussed. Excluding the impact of this gain, our non GAAP earnings per share would have been $1.07 Cash flow from operations for the Q2 was $69,900,000 reflecting robust underlying earnings, partially offset by the timing of tax payments with $111,000,000 in tax paid in our 2nd quarter. Additionally, we made the payment for our settlement to the U. S.
Department of Justice of $40,600,000 this quarter. Capital expenditure for the quarter was $25,100,000 Depreciation and amortization for the December quarter totaled $45,500,000 During the quarter, we paid dividends of $56,100,000 dollars We recorded equity losses of $6,900,000 in our income statement in the December quarter associated with the Verily joint venture. We expect to record approximately $6,000,000 equity losses each quarter for the balance of fiscal year 2020 associated with the joint venture operations. Our Board of Directors today declared a quarterly dividend of $0.39 per share. At December 31, we had $1,300,000,000 in gross debt and $1,100,000,000 in net debt.
Our total assets were $4,400,000,000 and our balance sheet remains strong with modest debt levels. Finally, to recap, our top line revenue was strong this quarter with growth across all major categories. Gross margin expanded and our operating costs remain well controlled. As a result, we are continuing to drive operating leverage with Q2 non GAAP operating profit up 21% year on year. We are focused on driving operating results, integrating our SaaS acquisitions and ensuring we continue to invest in our strategic long term opportunities.
And with that, I'll hand the call back to Amy.
Great. Thank you, Brett. We will now turn to the Q and A portion of the call. I would like to remind everyone to limit yourself to one question. And if you have additional questions, please feel free to return to the call queue.
Christine, we are now ready for the Q and A portion of the call.
Thank you. We will now begin the question and answer Your first question comes from the line of Margaret Kaczor from William Blair. Your line is open.
Hey, good afternoon, guys, and good morning to Brett out in Australia.
Thank you.
Maybe the first one for me is on mass growth. Obviously, you guys continue to do very, very well from that perspective. And so as we look at the last maybe 12 to 18 months, can you give us a sense of the relative impact of new product launches, especially in white spaces, new that you weren't in before, the resupply agreements that you kind of referenced a little bit at JPMorgan market growth and general share taking. And the idea is, as we look forward, how are the moving dynamics between those categories? And how do you kind of adjust your strategy to keep performance high?
Thanks.
Yes. Thanks for your question, Margaret. And as you noted, there's a number of factors contributing to this very strong mass growth that we had 16% constant currency on a global basis and even taking out some of the software just well up there in the mid teens. You hit on pretty much all of them. There's an increased adherence that we're driving through our digital health solutions.
When we're achieving 87% adherence when the doctors using AirView and the patients using MyAir and all the digital techs in play that drives up our mask growth. Secondly, when there's resupply and patients have the opportunity if they want to participate in getting a fresh mask as their old mask becomes used. And we are partnering with Brightree, Connect and with ResMed Resupply to provide that and the acquisition of Snapworks will help. And then thirdly and really importantly, these last 15 months, the steady flow of 4 really exciting new mask innovations. Interestingly, these mask innovations aren't to replace a previous product, but to go after underserved or under met customer needs.
And we call the minimalist category and the freedom category where people move through different positions during sleep, prone, left, right sleepers want a freedom mask and people who have some claustrophobia or want small lighter masks go for the minimalist category and the F30 that we just launched is right in the heart of both of those. So it's all the above contributing to this really strong growth. We still think that the market growth rate is in the high single digits for masks and we took really good share during this December quarter. Our job and challenge is to keep driving all those things, resupply, adherence and mask innovation, and we plan to do just that.
Thanks, guys.
Thanks, Robert.
Your next question comes from the line of Matthew Mishan from KeyBanc. Your line is open.
Great. And thank you for taking the questions. Just to follow-up on that mark on the market share gains in masks. Are you winning new patients at a higher market share clip? Or are you able to convert existing sleep apnea patients from competitors and getting them to switch?
Yes, Matthew, that's a really good question. I'll hand that to Jim Owenshead, the President of our, Slick division to walk through that.
Good morning, Matthew. I'm down in Australia, so I hope you can all hear me as well. Yes, I can hear you just fine. Yes, it's a combination of both. We feel very confident in our overall position with mask that we've had so many mask launch.
As Mick referenced, we've had several mask launches in the last 15 months. All of them have been successful launches. And we now have a very wide portfolio. It's the widest portfolio offering of masks on the market. So we continue to take new patient share across all three mask categories.
And I'm sure we're likely to also be getting competitors switching and there's less market data available on that dynamic, but we're very confident we're taking new patient share pretty successfully.
Thank you.
Your next question comes from the line of Sean LeMann from Morgan Stanley. Your line is open.
Good morning, Mig. Hope you're well. My question relates to something you announced last quarter. I'm wondering if you could give an update on how this Novartis deal with Propeller, if there's any update there and how that might be tracking? Thanks.
Thanks, Sean. Well, we don't talk in our core business or in our new software businesses about individual customers or partners until things are public and moving along, but there was public data last quarter from our work with pilot trials with both GSK and Novartis in the propeller area looking at inhaled pharmaceutical medicines. Look, the beauty of as I sort of described in the opening remarks, the beauty of Propeller is it provides an end to end platform to help us take care of people with chronic obstructive pulmonary disease. And so stage 1, 2, we Propeller and take care of the patients, ensure they have the medicine that their doctor prescribed for them, but also engage with that person because they're going to it's a progressive disease. They're going to move from stage 1 to stage 2 and stage 3 and stage 4 COPD.
And so our goal with Propeller is not just to have a partnership with pharma company AOB, but it's to really create a platform where we help end to end management of a person as they move through disease progression and it helps us engage with that person to help them adhere to their therapy whether that therapy is the pharmaceutical inhaler or that therapy is a portable oxygen concentrator or that therapy as they move forward is a non invasive ventilator or a life support ventilator. And so that's our goal with these partnerships. As we hit milestones during 2020 on the Pharmacyl side and as we hit milestones on the healthcare system side, we'll give updates on that. But look, yes, we did talk to the MAGNIFY trial that we are still enrolling patients for with Novartis. That's in its early days.
So we'll give updates on the clinical data, but also importantly commercial partnerships as they move forward through 2020. Thanks for your question, Sean. Yes. Thank you, Mick.
Your next question comes from the line of John Deacon Bell from Citigroup. Your line is open.
Good morning. My question just relates to the increase in the SG and A. Obviously, you've got fantastic leverage from that. And I think we've talked about it previously, but that 2% underlying seems I think that's a record low number for you. And just give us a sense perhaps of how that might look over the next 6 months and maybe going forward?
Or should it return back to those kind of mid single digit levels?
So I'll have that turn to break
Sanatok down in Sydney. Yes. Yes. Thanks. Hi, John.
Hi, John. Yes. It was low this quarter. We did benefit certainly from much lower litigation related expenses this quarter relative to last year. So that did certainly moderate that growth rate.
In my guidance, I said, I think, we'll revert back to the range of 23% to 25% for the second half, which would suggest that we will track higher in terms of growth rates for SG and A, at least in the back half, but certainly helped by some reduction or significant reduction in litigation costs coming through this quarter relative to last year. It was probably the single biggest driver, and that certainly moderated the growth rate. And try to adjust for that in that kind of range that I've given as a percentage of revenue going forward to be a better indicator, I think.
That's helpful. Thanks, Brett.
Your next question comes from the line of Saul Hadasani from UBS. Your line is open.
Saul, you may be on mute.
No, I'm not. Can you hear me?
We can hear you now, yes.
Great. Thanks. Yes, just a question for Brett. Brett, just on gross margin, just wondering if you can give some color on the underlying sleep and respiratory care business, so what the gross margin might have done ex acquisition contribution and usually provide an outlook for the rest of the fiscal year for gross margin as well. Can you just give us that some color there too?
Thanks. Yes. I mean, I think going forward in the second half, I think broadly consistent with where we are would be an estimate on the gross margin. As you know, a lot of moving parts on that, so that would be our expectation. If you look at the acquisitions we did, MatrixCare came in halfway through the quarter.
So fairly it's kind of a fairly minimal impact this quarter. The big drivers of that year on year growth in in or expansion of our gross margin around the product mix, and that's really being driven by that outperformance you're seeing in mass growth. And that's typically higher margins, what you would see on devices. So that's the biggest impact. And then we're still seeing manufacturing efficiencies, some around logistics and so on as well, and they continue to come through on gross margin.
So they're the 2 big drivers this quarter.
All right. Thank you.
Your next question comes from the line of Shane Story from Wilson HTM Limited. Your line is open.
Yes, hi, thanks. Just looking again back at the U. S. Mask business, if I can just from another angle. I mean, you spoke about the adherence and resupply, but have you measured the step up in the number of masks per patient per year, say, over the last 12 to 18 months?
I mean, the last reference point that I've got is maybe a tick under 2 per patient period. So any observations around that might be very useful. Thanks.
Yes, Shane. Thanks for your question. I think there's a whole portfolio of customers doing different levels of resupply in different countries around the world. If you take the example of France, there's a government mandated requirement that you provide 2 masks per patient per year. And it's different in all the 140 countries.
Yes, you're focused on the U. S. Growth, which was strong. And yes, the last public number we did talk about that was 1.9 masks per patient per year. But look over the 5,000 customers in the U.
S, there's a broad spectrum of adoption of Brightree resupply, Brightree Connect, ResMed resupply and technologies like Snapworks that we just acquired. And so there's a broad range. But Jim, do you want to Jim Hollingsen, do you want to provide any further color as to what you'd want to share on mask resupply metrics?
Yes. Thanks, Mick and thanks, Shane. I would just add to what Mick said, just say a couple of things. The first one is, the trend we don't talk about that number publicly. Obviously, the trend in the U.
S. Has been steadily, slowly but steadily tough over the last several years, and we attribute that both to the range of things Mick talked about earlier in the call. So better adherence tools that we're providing on our platforms, better masks lead to better adherence initially and therefore better long term adherence and also the adoption of resupply platforms by our H and E customers. So the trend is slowly and steadily up. It's still well below Medicare and commercial payer allowables.
And so it's a good trend and there's still a lot of opportunity. Okay, thanks.
Your next question comes from the line of Steve Wiehm from Evan and Partners. Your line is open.
Good afternoon, guys. My question is just on your SaaS businesses and the growth rate there. I was wondering if you could help us deconstruct that growth rate, particularly between MatrixCare and Brightree. And perhaps as part of that, to give us an update as to your understanding of how those businesses are performing since it's been acquired, I guess, with reference to the EPS outlook that you provided at the time of the acquisitions?
Thanks for the question, Steve. That allows us to talk to our investment in SaaS. And SaaS, this quarter was 12% of our global revenue. And so it's a sector that we're calling out and you'll see that in our financials. It's a very hyper competitive sector when you look at HME software, you look at skilled nursing facility software and you look at home health and hospice software.
So I'm going to be really hesitant to give detailed market share and or growth rates within each of those sectors. Look, what I said on the prepared remarks is true that across if you look at ResMed's weighted average revenue across HME, skilled nursing facility, home health and hospice as well as the others, private duty home care and life plan communities, the weighted average market growth rate in those sectors is in that high single digits. And during the December quarter, over that portfolio, we held share. We grew with the taking out the acquisition benefit that gave us 37% growth. We grew in that high single digits on our weighted average portfolio.
One thing I'll say is, when we hit April here in 2020, we will have owned Brightree 4 years. And as you guys remember, because you followed the stock for a long time, the first two years with Brightree, we were investing. We put some new management team leaders in there. We brought in a new CEO, new CTO and some skill sets in R and D. We're doing very similar things now in our MatrixCare journey.
And so I'm not going to break it out in detail, but qualitatively I'll say that the investments that we put in those first 2 years into Brightree are really starting to pay off. We've got new logos, new customers, new modules and we're taking share of that growth picking up. And at MatrixCare, we're making those investments today in more R and D, more management skills and capabilities and looking obviously at back end synergies across our portfolio. So I think we can meet or beat the timing of our Brightree Investments and the strong and sustainable growth that we're now getting out of that in our MatrixCare Investments.
Your next question comes from the line of David Lowe from JPMorgan. Your line is open.
Thanks very much. Just a quick one from me. You've mentioned that the mask sales included some software revenues. Just wondering if you could explain what that is and how much of a contribution that will make going forward?
Yes. There's a little bit of that. I'll hand it to Brett to go through the financial details on that.
Sure, Dave. Probably the bigger one there is the just through the software related to the or the platform related to Propeller acquisition. So that's kind of that's probably the biggest single delta. There'd be a few others in there, but that's probably the biggest one. Great.
Thanks very much.
Your next question comes from the line of Andrew Goodsell from MST Marquee. Your line is open.
Thanks very much. Just obviously looking at the current coronavirus issue and I think if we go away back to SARS, you made sales of about $5,000,000 of CPAP and bio levels into China. Just wondering if there's any flow through effect to yourselves from the current coronavirus?
Yes. Thanks, Andrew. It's Rob Rolfe speaking. There's pretty dynamic situation going on at the moment in China. And so tracking it's difficult, but we are tracking very closely.
In terms of our China business, we think obviously the hospital is going to be very busy on their respiratory. So there will be a lot of focus on that. We would expect to see increased demand for ventilators, whether it's of the same relative scale to SARS or not, we don't know yet. We're actually working hard on our local supply chain there. Remember, we've got a really good team in China, building good ventilators in China for China.
And so in fact some of our team have been working in some of these hospitals and Jason Sun, our Head China said they're their local heroes who are really staying on the ground there and helping look after patients in the face of this terrible disease. So I wouldn't be predicting exactly what the impact will be on an overall scale. There will be an offset as well. Likely the hospitals won't be looking at sleep patients for a while. So there may be some impact to our sleep in China, but it's unlikely all of that to be material.
Just one other point in terms of the overall business, we've mentioned many times that our supply chain isn't configured around China. Most of it's not in China, but there are some second and third tier suppliers in there and we're working closely with them at the moment. We wouldn't expect this to be a problem, but we'll have to keep a close eye on it.
Thank you very much.
Your next question comes from the line of Lane Harrison from Bank of America. Your line is open. Good morning, gentlemen, and thank you for taking my questions. Just to continue the discussion on the SaaS business and probably more specifically, previously we talked about resupply expansion and that given you're over about 6 months in, can you share how the resupply program outside of sleep apnea is tracking and what your expectations are for the remainder of financial year 2020?
Thanks, Nian. Yes, so you're talking about our expansion of our resupply capabilities. We went into some diabetic supplies and orthotics and urology products. And so those they're not a material part of ResMed's overall business, but they were a good expansion of ResMed's capabilities to look after the HME sector beyond just sleep apnea and CPAP supplies that we are very good at making sure that they work through. And so it's not material to our overall business.
So I'm not going to break out the specifics, Lianne, other than to say they're going well and customers are adopting them. And I'd love them to become a material part of our overall business to be able to break out like that. But it's early days and it's a good strategic play of Brightree to sort of expand their capability. With workflow automation and both the combination of live call and tech that we use on masks and CPAP supplies, it's the same technology used on those diabetics and those other areas of HME. And so we're just helping our customers grow their businesses and get appropriate resupply when customers are there and requiring full authorization for it as well.
So sorry, I can't get more specific than that, Leanne.
Thank you.
Thank you.
Your next question comes from the line of Gretel DeNuw from Credit Suisse. Your line is open.
Thanks. Good morning. So would you be able to give us an update on the outlook for competitive bidding? So what are your expectations in terms of reimbursement changes in 2021? And if there is potentially a decline in mass reimbursements, how is ResMed thinking about responding?
Thanks.
So I'll hand that question to Dave Pendarvis. Dave?
Yes. Thanks, Grenell. We continue to be at the same place we were last quarter. And that is we're awaiting along with everyone else in the industry what the results are, the competitive bids that are in. We expect them at the end of the North American summer, so sometime around August or September, and we'll know where the results are.
We are pleased with the efforts that we made and others in the industry made to educate bidders. So they understand the portfolio nature of the lead item pricing and the impact of bidding on CPAP reimbursement on mass reimbursement. We're comfortable that we conduct business with our customers now on a portfolio basis. And however reimbursement settles out in the Medicare space, we expect there'll continue to be strong demand for mask resupply. That'll continue to be important part of our customers' business and it'll be an important part for patients' long term adherence success.
So we don't see any significant changes in the trajectory going forward. But obviously, like with everyone else, we just have to wait and see what the actual reimbursement amounts come out to be.
Thanks very much.
Your next question comes from the line of David Bailey from Macquarie. Your line is open.
Yes, good morning guys. Just from me, Brett, cash flow looked a bit weak this quarter. Just wondering if you could talk through some of the moving parts there. You've called out the Department of Justice litigation settlement. Just talk us through what a normalized tax cash payment would look like and then also net interest on a cash basis for the quarter would be great.
Yes. So yes, it was impacted by timing of tax payments as well. If you look at it underlying, excluding those, I still think it's actually pretty strong on the cash flow front. Normalized, it's probably more like around the kind of 40,000,000 dollars a quarter. And I think going into Q3, it's going to be more like that.
So that's just impacted us for this quarter. Expect Q3 and Q4 to be too much better in terms of cash flow performance. And then the next one was was it on your interest was it, David?
Interest, yes.
Just interest expense or
Yes, it's an interest expense. Is it broadly in line with what the income statement like?
Yes, pretty close. You wouldn't that's a good proxy. It's not going to be far different to that.
Yes. Okay. Thanks.
Your next question comes from the line of Chris Cooper from Goldman Sachs. Your line is open.
Hi, thanks for taking the question. I just got a follow-up to one of the previous questions. So look, on competitive bidding, I know it's a bit early to speculate on the particular outcome. I just guess I'm more interested in how you expect to manage the discussion with the D and E partners yourselves. Would you expect positive and negative changes to be passed on to you 1 to 1?
Or is there an outcome here where, I guess, you bet more of the downside than the upside given there's a possible outcome here where some category is going to increase and some will decrease? Just any thoughts around how you're thinking about that would be helpful.
So I'll hand that question to Dave
and others. And then if Jim you want to add any color from the customer perspective as well. But Dave, you first and then Jim.
Sure. I mean we already have ongoing discussions with our customers. We view them as good partners with us and we have robust discussions where they would like to get the best prices they can. And we want to make sure that we serve them as best we can. That dynamic won't change with competitive bidding or anything else.
So we expect to continue to have good discussions with them. The environment for the last year and a half and for the balance of calendar year 2020 is that there's been about a 2% increase each year in the Medicare reimbursement. And so that's obviously contributed to a benign pricing environment that we've been experiencing for the last period of time. But we didn't participate with our customers in their bidding. Obviously, they made their own decisions.
We're confident that the bidding process will be a more fair one this time. And we're hoping it'll end up with a process that will be able to be good for the overall industry. But in terms of individual customer negotiations, Jim, you might want to comment on that. Thanks, Dave. I'll just add to that.
I mean, I think that's very well put. We do have very good relationships with all of our customers and with our key customers and we'll work through it together. The other thing I would just remind everybody is that Medicare fee for service is the minority part of the market. So it's an important part of the market, but it's a small percentage of the market.
And your next question comes from the line of Mike Matson from Needham. Your line is open.
Hi, thanks for taking my questions. Just have, I guess, one more competitive bidding question. So specifically with noninvasive ventilation, that's the first time it's been included, I think. So could see a fairly steep decline. So can you maybe comment on what you expect there?
And then also, I don't know if you could quantify how much of your sales are coming from non invasive ventilation in the U. S, but just to help us understand what the exposure is?
Dave and Jim, you Yes. Again.
Up again. So thanks, Mike. Non invasive ventilation obviously is in 2 different categories. One, what we would characterize as life support ventilation is the new category that's now going to be in competitive bidding. Our air curve range, the buy levels have previously been in competitive bidding.
So that's not changing. It's more on the life support side. And it is newly there, but there also have been reductions in that reimbursement over the past few years leading up to this. So it's not necessarily the case that you'll see the same kinds of reductions that you saw in the round 2 kind of range previously for the sleep products. Nevertheless, we think it's important that patients can benefit, particularly in state COPD patients can benefit from these devices.
They ought to get into the hands and that's of those patients. And it's certainly a device that requires a lot of service, a lot of people in the home, making sure the device is working appropriately. So you need to have a strong reimbursement for it. It's a smaller group of customers who actually do this kind of business, and they're probably likely to be focused on what their real cost of serving are. So again, we're optimistic that our customers are sophisticated customers.
They'll bid appropriately so that they can make an adequate margin to be able to provide that service that's really, particularly in this area, very well needed. So we'll wait and see how it goes, but we don't break out specifically our sales of life support anywhere in the U. S. Or otherwise. But thanks.
Okay, thanks. And then just with Snapworks, maybe just comment
on what that brings to
the table that you didn't already have with
Brightree? Thanks.
Yes. So SnapWorks is a technology that adds to Brightree. There's some end to end capabilities that Snapworks has to partner with the HME. So it goes beyond just the live call and technology capability. They have provided to a number of customers an ability to further reach out to customers.
And we had observed this software that was partnering with our Brightree platform and performing really well with those customers. And so we had a relationship with Snapworks over the last 12, 24, 36 months and we've seen them really grow into a really good technology tuck in and the Brightree team looked at the technology from the team there in Nashville, Tennessee that created this tech and the entrepreneurs that created it and we were really excited not only by what they're achieving in the market which is better adherence and better engagement with both the HME and really importantly with the end user customer. And what I bring it back which is the patient. What I bring it back to this some data, some clinical data that we presented from the 5,500,000,000 nights of data that show that as you increase adherence and as you engage with the patient in resupply, the 2 add to each other. And some data that we just released last quarter shows that for every hour of sleep, we reduced the total health care costs for inpatient by 8%.
So this is all tied together, right? So Brightree resupply, ResMed resupply and Snapworks will increase adherence, drive increased mass resupply and that will also through that increased adherence lower the costs of the total healthcare system by 8% for every hour of sleep up to those seven hours. And so I think that combination is really powerful of now Brightree Plus Networks. Now it's early days. We're just literally going through the final sign offs of this acquisition.
But watch us over the next 12, 24 months and we'll give you updates obviously every quarter as to how well that integration on that technology is going.
Thank you.
Your next question comes from the line of Suraj Kala from Oppenheimer. Your line is open.
Good afternoon and thanks for taking my question. This is Mike Ott on for Suraj. We read recently that Fitbit is adding an oxygen variation graph for select users with an FDA submission for sleep apnea diagnosis somewhere in the near term here. I'm just curious if you see that as longer term helping to increase the number of OSA patients treated?
Yes, Mike. Thanks for the question. And look, it's really interesting that tech companies are really getting involved in the field of, I'd call it health wellness and sleep wellness is a big part of that. Obviously, we have our partnership with Verily and they have the Google Watch as part of their baseline study and they're doing some identification I'd call it, you call it diagnosis, I call it identification of potentially at risk people for sleep suffocation or sleep apnea. I think what Fitbit has is along those same lines and what they're trying to do and that Fitbit is now part of the Google portfolio.
I believe there's an acquisition in line there. It will probably add on to that capability of if you see desaturations in the oxygen, there's a higher likelihood. There's other causes potentially of those desats, but there's a higher likelihood of sleep apnea. So I would call it more in the medical terms a screener that will then hopefully identify and engage a person that maybe I have a sleep issue, maybe I have a breathing issue and indicate to them they need to get on to the true diagnostic pathway. And then we can sort of bring them into the identification engagement enrollment capability that we're trying to perform.
But look, Jim, you run the Global Sleep business. Any further detail you think about some of these tech companies and the ability for them to identify more patients?
Sure. Yes, Mike, thanks for the question. I think it's an unreserved good that companies like Fitbit are putting in place technologies to help consumers understand how they're sleeping and whether they might have a sleep disorder. And we know that there's 936,000,000 people globally who suffer from sleep apnea and the vast majority of them don't know it. And, forever in the industry, one of the bottlenecks has been driving awareness on the one hand and then making objective screening and then diagnosis on the other hand easier.
And so when companies like Fitbit there's a whole range of companies that are now doing something like that in the space. When they decide to put that out in consumers' hands, it's fantastic for us and for those patients more important.
Great. Thanks, Mick and Jim.
Your next question comes from the line of Anthony Petrone from Jefferies. Your line is open.
So maybe just two quick ones. One just on local manufacturing just given bushfires obviously in Australia. So any update just on that manufacturing plant? And then just one on legislation in the U. S, HR-two thousand seven hundred and seventy one just to maintain the fifty-fifty blended rate in rural areas.
Is there any update on actually where that sits and the likelihood that it gets to Congress this year? Thanks.
Thanks for the questions, Anthony. I'll ask Rob to answer the first one around manufacturing and then Dave to answer the second one around the HR
Yes. Thanks, Anthony. As we said, the ResMed supply chain is configured around multiple sources. At this stage, most of our manufactured products come from our Singapore plant, but we have full capability in the Sydney plant that does often focus on newer and more complex products, but we have full process capability in both plants. The fire season in Australia has been devastating.
However, it hasn't actually gone into the outskirts of Sydney, which would actually make the whole thing a lot worse if it did. And to date, we haven't seen any interference with that at all. But if there was interference, it wouldn't overly affect us because of our ability to reconfigure.
Thank you.
And your last question?
And as to the I'm sorry, let me just keep going here. Just as to the bill, I mean, we certainly support that bill. Again, we think it's important that our customers receive the appropriate reimbursement and particularly in rural areas, it's difficult to do that. So we certainly support 2,701. I think it's, you may have noticed there's a lot going on in commerce these days.
So it's a little difficult to get anything through. But there is an opportunity in the middle part of the year, when I think some of the Medicare extenders come up for renewal, that there could be a push to get this, along with some of the other items the industry supports in place. So we'll have to wait and see. But we certainly support that and at a minimum Congress indicating their support
for the industry is positive. Thanks.
Your last question comes from the line of David Bailey from Macquarie. Your line is open.
Yes. Hi, guys. Just following up on Sol's question actually. Just wondering if you're able to quantify the contribution of those acquisitions to U. S.
All America's mask and accessories revenues for the quarter? That would be helpful.
Yes. I said in the prepared thanks for the question, David. I said in the prepared remarks, it's the so if you take that sort of global mask growth rate of 16% and you take out Propeller software, you're going to be in the mid teens. So maybe 100 basis points or something in non global. And if you take the U.
S. Growth where all the pretty much well most of the Propeller software is the U. S. Growth on masks was 19% on a constant currency basis. If you take out Propeller and the software, you're about 200 basis points.
You're probably around 17% growth in the U. S. Territory. 'sixteen becomes around 'fifteen and 'nineteen would become around 'seventeen. David, I think that answers both your questions.
And thanks to everyone for spending an extra 8 minutes as we were 8 minutes delayed due to the phone lines there, but appreciate that all.
And there are no further questions at this time. I turn the call back over to Mick Farrell.
Hey, great. Thanks, Christine. And thanks again to all of our shareholders for joining us on this call. I'd also like to take the opportunity to thank the 7,500 ResMedians,
many of
whom are also shareholders, for their dedication and hard work. You produce these great numbers that we get to report. You help people sleep better, you help people breathe better, you help people live better lives outside the hospital in 140 countries, which is pretty amazing. Thanks for all that you do today and every day. And we'll talk to all of you again in around 90 days.
Amy? Great.
Thank you all again for joining us today. And to echo Mick, thanks for bearing with us through the audio difficulties. If you do have any questions or additional questions, please don't hesitate to reach out. As previously mentioned, all the documents along with the transcript and hopefully a clean replay of today's call will be available on our website. Christine, you can now close the call.
This concludes ResMed's Q2 of fiscal year 2020 earnings live webcast. You may now disconnect.