Welcome to the Q2 Fiscal Year 2019 ResMed Inc. Earnings Conference Call. My name is Chris, and I will be your conference operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.
Please note that this conference is being recorded. I will now turn the call over to Amy Wakeham, Vice President, Investor Relations and Corporate Communications. Amy, you may begin.
Great. Thanks, Chris. Good afternoon and good morning, everyone. Thanks for joining us, and welcome to ResMed's Q2 fiscal year 2019 earnings call. The 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.
Joining me on the call today to discuss our results are Mick Farrell, our CEO and Brett Sendercock, our CFO. Other members of management will be available during the Q and A portion of the call after our prepared remarks. During today's call, we will discuss some non GAAP measures. For a reconciliation of these non GAAP measures, please see the notes to the financial statements in 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, actual results may differ. Please refer to our SEC filings for a discussion of the risk factors that could cause the actual results to differ materially from any forward looking statements. I'd like to now turn the call over to Mick.
Thanks, Amy, and thank you to all our shareholders for joining us today as we review results for the Q2 of fiscal year 2019. On today's call, I will review top level financial results, some business highlights, our ResMed 2025 strategy and a few key milestones from the quarter. Then I'll hand the call over to Brett, who will walk you through our financial results in further detail. First, the top level financial results. We achieved another quarter of strong revenue growth, up 9% constant currency or up 10% on a non GAAP basis globally, Even as we absorbed the expected impact on European and Asian device sales as our customers completed their cloud connected device upgrade programs in France and Japan.
We delivered strong operating leverage and we achieved non GAAP operating profit growth of 15% year over year. We continue to maintain fiscal discipline and invest to grow the business for the long term. Let me provide a few highlights across our global sleep apnea and global respiratory care businesses. It has been nearly 4.5 years since we launched the AirSense 10 device platform and the Air Solutions cloud based software platform. As we've discussed before, we are upgrading the capability of our software systems including MyAir and AirView with new features every 2 to 4 weeks.
Based on this customer value, we continued to grow our device market share in the quarter as health care providers and physicians and patients are choosing ResMed due to the fact that these digital health solutions improve both business and patient outcomes. We are leading the industry with digital health technology, supporting well over 9,000,000 patients within AirView, our cloud based patient management system and more than 8,000,000 100 percent cloud connectable devices now in the market. Over the past 12 months, we have improved the lives of well over 14,000,000 people by delivering sleep apnea and COPD treatment products. We are pioneering the path forward as we utilize digital health technology to turn big data into actionable insights for patients, for physicians, for home care providers, for payers and beyond. We now have over 3,500,000,000 nights of sleep apnea and COPD treatment data in the cloud and that growth continues to be exponential.
Using advanced analytics, we are focusing on developing solutions to get optimal healthcare to the right patient when it is needed. Everything we do supports our ambition to help the more than 936,000,000 people worldwide who suffocate every night with sleep apnea and the nearly 400,000,000 people worldwide who suffer from chronic lung disease. As we expand our digital health platforms, one of our goals has been to take the success we have had with MyAir and AirView within our sleep apnea vertical and replicate that within our respiratory care business. We have made good progress with cloud connectable air curve devices for non invasive ventilation and Aspiral devices with cloud connectable options for life support ventilation. We needed to add digital health solutions for inhaled pharmaceuticals for COPD that are utilized in earlier stages of COPD disease progression than the medical devices and that also constitute more of the treatment cost than the medical devices.
To this exact point, during the quarter, we announced the acquisition of Propeller Health and the deal was closed just a few weeks ago. Propeller's digital health solution helps people and their doctors better manage COPD and asthma. Propeller has a sophisticated digital health platform that leverages small sensors that are attached to the pharmaceutical inhalers along with a cloud based software system and cloud based mobile app that automatically tracks medication use and provides personalized feedback as well as insights to the individual. Propeller has clinically validated solutions that have demonstrated a 58% improvement in medication adherence, a 48% increase in symptom free days and a 53% reduction in emergency room visits to the hospital. These are astounding data and we cannot wait to scale these solutions with our new pharmaceutical partners.
Propeller's ability to support people in Stage 2 and Stage 3 COPD are very complementary to our existing suite of cloud connectable ventilators for those patients with Stage 3 and Stage 4 COPD. The combination is powerful. We are now even better positioned to become the global leader in digital health for COPD and help people as they manage this important progressive and expensive chronic disease. Propeller has been an incredibly successful company to date and will continue to operate as a standalone entity. We've retained the extremely dedicated management team and we expect their momentum with pharmaceutical company customers to continue.
ResMed brings long term financial stability and has proven itself as a company that can operate digital health systems at scale and across a global portfolio of countries. Propeller and ResMed, we are going to be powerful partners together. This partnership completes an important piece of the puzzle for the ResMed 2025 strategy, providing a clear roadmap for global leadership in digital health for COPD. Switching back now to talk about our core operations. On the devices side of our business, we achieved 7% growth in the United States, Canada and Latin America.
Including the impact of the completion of digital health upgrade systems in France and Japan, our global growth in devices was 3% on a constant currency basis. While we have been thrilled with the digital health reimbursement changes in France and Japan during 2018 and they will have great long term benefits of increased adherence and mask sales in those geographies, we expect that the impact in France and Japan will be present for the next few quarters. We will then return to market growth in devices within France and Japan and above market growth within those geographies after that. Outside of these two countries, our device growth was strong during the quarter and we expect that to continue as we move forward. Last quarter, we discussed that Mobi, our new portable oxygen concentrator would move to a full product launch sometime in our Q3 and we made that official launch just earlier this month.
We are working in full partnership with our home medical equipment customers to help grow this category and we are excited to bring a product to market that optimizes the balances of key features such as size, weight and oxygen output. We believe that this product best meets the needs of oxygen users who want to be more mobile and enjoy healthy active lives outside their home. Customers will vote with their wallets and we expect that not only this POC category will grow, but also ResMed will grow its share within the POC category. Although it will take quite a while for this business category to be material next to our core sleep apnea and ventilation device businesses. The masks and accessories side of our business grew at 10% in constant currency on a global basis during the quarter.
The U. S, Canada and Latin America geographies grew at 11% in masks and accessories. We are continuing to see great traction with 2 of our flagship products in this category, the AirFit F20 in the full face category and the AirFit N20 in the nasal category. We are seeing strong growth across all geographies for these two masks. Last quarter, we also launched the AirFit F30, an exciting innovation in what we are calling the minimal contact full face mask category.
Initial customer feedback on the F30 is incredibly positive and we have a lot of runway ahead for this product. Earlier just this week, we announced the broad availability of our newest mask, the AirFit N30i. This is an important addition to our portfolio in what we are calling the tube up design nasal mask category. With the N30i, we have further expanded our mask portfolio to offer even more options for home care providers and ultimately for the varying needs of individual therapy users. We remain focused on driving innovation to meet underserved and unmet customer needs.
The F-twenty and F-thirty as well as the N-twenty and N-thirty I form a powerful portfolio to address these customer needs. Let's turn now to a discussion of our software as a service business. We announced and closed the $750,000,000 acquisition of MatrixCare during the quarter. MatrixCare is an incredibly fast growing and profitable business that brings ResMed into a number of new verticals within the out of hospital healthcare software space, including skilled nursing facilities, senior living facilities, life plan communities and beyond. We also completed a technology tuck in acquisition called Appacheta which will help drive increased growth in our core Brightree software business.
The software as a service portfolio continues its trajectory of excellent growth with revenue up 63% year on year driven by continued expansion of Brightree and the full quarter contribution from Healthcare First along with partial quarter contributions from MatrixCare and Apicheta. We have a vision to transform out of hospital healthcare and these acquisitions have established ResMed as the strategic player in the best position to do so. We have a proven track record of transforming a market through SaaS based software and solutions and we have demonstrated success and experience with Brightree these last 3 years. We now offer software solutions across an even broader portfolio of out of hospital healthcare settings from home medical equipment to home health to hospice to skilled nursing facilities to senior living to private duty and beyond. We are helping our customers in each of these care settings to be the most efficient that they can be, to ultimately better serve people and keep them out of hospital and in a lower cost, higher quality care setting, often in their own home.
Together with our customers and partners, we are revolutionizing how healthcare is delivered and received, leveraging an ecosystem of integrated digital solutions and services. The ultimate goal is to help the person seamlessly move between care settings so that they can have optimal care and optimal quality of life wherever they're living. In parallel, to help individuals, we will drive superior outcomes for their physicians, payers and their providers. We have built the portfolio. Now it's up to our team to integrate our technology and business workflows and ultimately to execute and deliver on this promise.
Now I'd like to spend a little time talking about our global business excellence programs. We have a dedicated team of over 6,500 ResMedians that delivered another quarter of double digit net operating profit growth. This is now the 6th quarter in a row of driving operating leverage. A key benefit of this operating leverage is that it provides us the flexibility to invest money back into our innovation teams so that they can help us drive sustainable long term revenue growth. Non GAAP income from operations improved 15% in the quarter combining revenue growth and expanded gross margin with disciplined investments in SG and A as well as in R and D.
We are taking a controlled and thoughtful approach to manage the business for the long term. We continue to invest in our business to deliver strong organic growth. Before I turn the call over to Brett, I'd like to discuss briefly the ResMed 2025 strategy. As we look at the macroeconomic environment in healthcare, the burden of chronic disease is increasing. We have an aging population nearly 9% of the world's population is aged 65 or older.
And by 2,050, that number will almost double to 17%. So that will be 1,600,000,000 people over age 65 around the world. We all know health care costs are growing and there aren't enough doctors to treat the people who need to be treated today. Couple these data with issues such as the pain points of getting the right care to the right patient at the right time, delivering care in lower cost settings and challenges with interoperability, documentation and data availability. It's a global health care crisis.
But on the microeconomic side and within our sphere of influence, which is in digital health for sleep apnea, digital health for COPD and out of hospital healthcare software, we believe these are problems that ResMed can help solve. At the highest level, the mission of our ResMed 2025 strategy is to impact and improve 250,000,000 lives in out of hospital healthcare. Our purpose is to empower people to live healthier, happier and high quality lives in the comfort of their own home. Our advantage comes from our focus on tech driven integrated care from sleep apnea and COPD awareness to diagnosis to treatment and then ongoing therapy and health care management with digital health solutions. Our joint venture with Verily is an example of partnering to drive identification, engagement and enrollment of sleep apnea patients early in their journey.
We will help more and more of the 936 1,000,000 people worldwide who suffocate with sleep apnea each night to find a better pathway to therapy leveraging partners and partnerships such as this. Let me close with this. We have delivered another solid quarter and we are well positioned for continued success throughout 2019 and beyond. The continued traction of our diversified and growing mask and device portfolio along with an expanded and expanding pipeline of new products and enhanced digital health solutions for sleep apnea, COPD and the out of hospital medical software markets give us confidence in ongoing momentum for our business. We are applying ResMed's growth and innovation in the key chronic diseases of sleep apnea and COPD as well as innovation in software for out of hospital healthcare.
We have positioned the company for the long term driving top and bottom line growth into 2025 beyond. By enabling better care, we are improving quality of life, reducing the impact of chronic disease and lowering the costs for consumers and healthcare systems around the world. With that, I'll turn the call over to Brett for his remarks and then we'll open up the lines for a Q and A session. Brett, over to you.
Right. Thanks, Mick. In my remarks today, I will provide an overview of our results for the Q2 of fiscal year 2019. As Mick noted, we had a strong quarter. Group revenue for the December quarter was 6 $151,100,000 an increase of 8% over the prior year quarter or in constant currency terms revenue increased by 9%.
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 American countries were $358,500,000 an increase of 9% over the prior year quarter. Sales in Europe, Asia and other markets totaled $229,400,000 a decrease of 2% over the prior year quarter. Or in constant currency terms, sales in combined Europe, Asia other markets increased by 1% over the prior year quarter. Breaking out revenue between product segments, U.
S, Canada and Latin America device sales were $186,500,000 an increase of 7% over the prior year quarter. Masks and other sales were $172,000,000 an increase of 11% over the prior year quarter. For revenue in Europe, Asia and other markets device sales were $156,200,000 a decrease of 4% over the prior year quarter or in constant currency terms a 2% decrease. Masks and other sales were $73,200,000 an increase of 4% over the prior year quarter or in constant currency terms an increase of 8%. Globally in constant currency terms, device sales increased by 3%, while masks and other sales increased by 10% over the prior year quarter.
Software as a Service segment revenue for the 2nd quarter was $63,200,000 an increase of 63% over the prior year quarter. This includes revenue from our Brightree Healthcare First and MatrixCare Businesses. Expenses in Q2 FY 2019 from this date. During the rest of my commentary today, I will be referring to non GAAP numbers. The non GAAP measures adjust for the impact of amortization of acquired intangibles, acquisition related expenses, a purchase accounting fair value adjustment to MatrixCare's deferred revenue and tax related expenses associated with U.
S. Tax reforms. In the prior year comparable, this excludes amortization of acquired intangibles and tax related expenses associated with U. S. Tax reform.
We have provided a full reconciliation of the non GAAP to GAAP numbers in our Q2 earnings press release. Our gross margin for the December quarter was 58.9%. Excluding the MatrixCare purchase accounting deferred revenue fair value adjustment, our gross margin for the December quarter was 59.1% compared with 58.2% in the prior year quarter and 58.3% in Q1 FY 2019. Compared to the prior year, our adjusted gross margin increased by 90 basis points, predominantly attributable to manufacturing efficiencies, favorable product mix and the MatrixCare acquisition, partially offset by typical declines in average selling prices. Excluding the deferred revenue fair value adjustment, the MatrixCare acquisition was accretive to our gross margin by approximately 30 basis points.
Assuming current exchange rates and likely trends in product and geographic mix, we expect gross margin for the second half of fiscal year twenty nineteen to be broadly consistent with our Q2 FY 'nineteen gross margin. Moving on to operating expenses. Our SG and A expenses for the quarter were $161,600,000 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 4% on a constant currency basis.
SG and A expenses as a percentage of revenue improved to 24.8% compared to the 25.2% that we reported in the prior year quarter. Looking forward, subject to currency movements and taking into account our recent acquisitions, we expect SG and A as a percentage of revenue to be broadly in the range of 25 percent for the second half of fiscal year twenty nineteen. R and D expenses for the quarter were $43,100,000 an increase of 6 percent over the prior year quarter, but on a constant currency basis an increase of 9%. Excluding acquisitions, R and expenses decreased by 1%, reflecting lower clinical trial expenses in the current quarter relative to the prior year period. R and D expenses as a percentage of revenue were 6.6% compared with 6.8% in the prior year quarter.
Looking forward, subject to currency movements and taking into account our recent acquisitions, we expect R and D expenses as a percentage of revenue to be in the range of 7% to 8% for the second half of fiscal year twenty nineteen. Amortization of acquired intangibles was 15 point $8,000,000 for the quarter, an increase of 40% over the prior year quarter, reflecting the impact from our recent acquisitions. Stock based compensation expense for the quarter was $12,500,000 Non GAAP operating profit for the quarter was 181,100,000 dollars an increase of 15% over the prior year quarter, while non GAAP net income for the quarter was $144,500,000 consistent with the prior year quarter. Non GAAP diluted earnings per share for the quarter were $1 consistent with the prior year quarter, while GAAP diluted earnings per share for the quarter were $0.86 Foreign exchange movements positively impacted 2nd quarter earnings by $0.01 per share, reflecting the favorable impacts from the weaker Australian dollar, which were however substantially offset by the weaker euro. On a GAAP basis, our effective tax rate for the December quarter was 14.5%, while on a non GAAP basis, our effective tax rate for the quarter was 14.9%.
Both our GAAP and non GAAP effective tax rates benefited from a higher than usual tax benefit of $13,100,000 associated with employee share based payment transactions during the quarter. Excluding this benefit, our non GAAP effective tax rate for the quarter would have been 22.4%. We continue to estimate that our effective tax rate for the second half of fiscal year twenty nineteen will be in the range of 22% to 24%. Cash flow from operations for the 2nd quarter was $129,500,000 reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $18,400,000 Depreciation and amortization for the December quarter totaled 36,000,000 dollars And during the quarter, we paid dividends of $52,800,000 Our Board of Directors today declared a quarterly dividend of $0.37 per share.
Given our recent acquisitions, we have suspended our share buyback program. Consequently, we did not repurchase any shares in the December quarter. During the quarter, we completed our acquisition of Matrix Care for consideration of $750,000,000 The acquisition is accretive to non GAAP earnings per share with an initial quarterly incremental benefit of approximately $0.01 per share for the second half of FY twenty nineteen. Additionally, on January 7, 2019, we closed on our previously announced acquisition of Propeller Health for consideration of $225,000,000 We now expect Propeller Health to have a diluted impact on our quarterly non GAAP earnings per share in the range of $0.02 to $0.03 per quarter for the second half of FY twenty nineteen. Associated with these acquisitions, we also incurred acquisition related expenses of $6,100,000 in the December quarter.
Our joint venture with Verily commenced operations during the quarter and we contributed an initial $25,000,000 in cash to the joint venture entity. We recorded equity losses of $3,400,000 in our income statement in the December quarter associated with the joint venture. We expect to record approximately $7,000,000 of equity losses each quarter in the second half of FY twenty nineteen associated with the joint venture operations. Given the recent acquisition activity, I would like to update you on our expected increase in net interest expense. For the second half of FY twenty nineteen, we expect to record net interest expense of approximately $14,000,000 per quarter, reflecting our increased debt position as a result of our recent acquisitions.
At December 31, we have $1,200,000,000 in gross debt and $1,050,000,000 in net debt. Our balance sheet remains strong with modest debt levels. At December 31, total assets were $3,900,000,000 and net equity was $2,000,000,000 And with that, I'll hand the call back to Amy.
Great. Thanks, Brett. We will now turn to the Q and A portion of the call. I'd like to remind everyone to limit yourself to one question. If you do have additional questions, please feel free to get back into the queue.
Chris, we are now ready for the Q and A portion of the call.
Thank you. We will now begin the question and answer session. Your first question is from David Stanton with CLSA. Your line is open.
Thank you very much and thanks for taking my question. I guess, I just wanted to talk a little bit more about the acquisition of Propeller Health and just run through the synergies between Propeller and the base business. I know you talked to that to some extent. I wonder if you could outline it and give it a little bit more color, please. Thank you.
Yes, David, that's a really good question. So as I said in the prep remarks, Propeller really is that missing puzzle piece. When you think about digital health for COPD, for lung disease, medical devices in total constitute Now clearly we're not getting Now clearly, we're not getting into the manufacturing or distribution of pharmaceuticals, but what Propeller does allow ResMed to do is participate in the digital health that every time someone clicks and takes a puff on their inhaler, a sensor sends data to the cloud that either chronic or acute medicine has been taken for that COPD patient. So this gets us to a digital health portfolio that covers all the way from Stage 2 lung disease through to Stage 4 lung disease. And as we build and we've talked about building a digital health portfolio to the true aim here is to improve quality of life, keep a patient in the home and especially out of the hospital.
You need to be across that whole portfolio. So we're just really excited. Propeller Health has relationships with GSK, with Boehringer Ingelheim and they're working on all the major COPD pharmaceutical companies and forming partnerships with them. And ResMed brings to the party a number of things. We've operated digital health at scale across our sleep business and we're going to do that here in Respiratory Care.
We operate in 120 countries worldwide and have digital health in many, many countries worldwide. So we can help Propeller with that. And we're really supportive of the management team there. They're very linked to ResMed's culture, which is focused on that patient keeping them out of hospital and improving care. So as we look forward to Propeller over the coming year 2, 3, you're going to start to see ResMed create digital health solutions for COPD that are going to change and bend the cost curve for hospitals and healthcare systems and particularly for the patients themselves.
And so we're really excited to have them as part of the team.
Thank you.
Your next question is from Steve Wein with Evans and Partners. Your line is open.
Yes. Good morning. This is for Brett. Just wanted to talk about the gross margin and to try and break that down a bit. Obviously, lots of moving parts here.
You gave us the MatrixCare contribution. Are we able to try and take out the different components? In particular, I wanted to look at FX in the quarter and what that might look like going forward given there's been quite a big shift more recently? And then previously, you have mentioned what sort of manufacturing efficiencies might be contributing to the gross margin. So any color there would be great.
Sure, Steve. I mean, the effects for the quarter year on year was not was pretty small. It's probably in the range of 20 basis points. So I mean, I've called out metrics here and the other kind of contributors there of equally meaningful would be manufacturing efficiencies and also favorable product mix. So we're starting to see that come through, particularly with outperformance in masks.
So that's certainly helping. On the manufacturing front efficiencies, procurement and so on, I think the well, the team is improving kind of cycle times and production efficiencies all the time. But I think we're also benefiting now from some pretty good volumes coming through and pretty good recoveries on production side of things, incremental volumes kind of heading up to Singapore as well and we're getting some scale benefits there. So a combination of those factors, I think, are leading to some good manufacturing efficiencies that have been flowing through over the last few quarters.
Okay. And so FX then going into future periods, is that likely to be a driver as well?
So currently where we are in terms of AUD Euro, if I look forward and just look at it sequentially, I think we'd still get a small benefit, but it's probably only again sort of that 10 to 20 basis point mark, unless you saw the Aussie obviously weaken from where we're at. The currencies where they are now, I would estimate probably sort of 10 to 20 basis point tailwind for us sequentially.
Okay. Got it. And just finally on the just wanted some clarification on the equity accounted losses. Could you just repeat the future quarter impact? I didn't quite catch that.
And then what where is that coming from? What particular acquisition is driving those that equity kind of
Yes. Sure. So that's our Verily joint venture. So we need to take up in terms of GAAP accounting losses associated with equity. For this quarter was $3,400,000 And I estimate for the next few quarters, I'd say Q3 and Q4 that will be around 7,000,000
dollars
per quarter.
Okay. And does that turn around? Or what's driving that loss?
The JV at the moment is thinking about a more of a kind of startup phase, if you like. So there will be kind of expenses that are coming through initially. Obviously, that JV we've got pretty high hopes for, I guess, in terms of what it can do, particularly around being able to, let's call it, the 936,000,000 patients out there. Think about it as being able to identify with those identify the patients, engage with those patients and then get those patients on therapy. So kind of think about it like that is pretty big opportunities there.
But at this stage, the JV is exploring those. And obviously, they'll take some money to do that initially. But yes, ultimately, we expect that to turn around for sure.
Your next question is from Margaret Kaczor with William Blair. Your line is open.
Hey, good afternoon, folks. Thanks for taking the question. I wanted to follow-up a little bit on some of the growth outside of the Americas and specifically maybe outside of France and Japan. So if you guys can provide any kind of color of underlying demand, any potential competitive changes, any catalysts that maybe we should look out for? And then as you kind of look at that growth outlook going forward, what could drive it above or below the results that you guys reported this past quarter in total?
Thanks.
Thanks, Margaret. That's a good question. So looking at our rest of world market growth, I just want to make this point right upfront that the patient growth in terms of the growth in both France and Japan and all the other countries we do business in has been very good during this quarter and we expect to be continued in its strong growth as we look forward throughout FY 2019 and beyond. So patient growth is really strong. We did have well above market growth the last number of quarters as we had the digital health and connected health upgrades in France and Japan.
And as we said last quarter and the quarter before on this call and in Q and A, we expected that impact to change and then that's present in those numbers. And so we're saying for the next few quarters France and Japan will be slow for a couple of quarters and then we'll get back to market growth and then ahead of market growth through the fact that we now have an installed base of digital health devices out there that should drive greater adherence and therefore greater use of masks and accessories within France and Japan and beyond. So in terms of the other during the quarter, the growth in other markets outside France and Japan and U. S. And Canada, we saw excellent growth.
We're not going to go through individually exactly what we saw in different countries in Western Europe and Asia Pacific, but we saw really good underlying growth on the device and the mask side. And so look we are very excited about our global growth in devices as we look forward not just throughout the fiscal year but into next fiscal year.
And any specific commentary as it relates to kind of the growth profile of the next year or 2 years where excluding the impact for infantipam that you guys can help accelerate that growth or for whatever reason have it go down? Thanks.
Yes. We don't see it going down. I mean, look, we know the global growth is in the mid to high single digits. ResMed has never really accepted that. I mean, as you saw the last fiscal year or 2 and rest of world markets will be driving digital health country by country.
We've seen some great growth within those countries. So what happened in France and Japan, we hope to happen to the other 120 countries we are working in where we can get a chance to upgrade platforms towards the digital health side because it's a real step change for the industry. But no that mid to high single digit global growth we expect to continue for the future and for ResMed to not just accept that but to drive ahead of it. Brett was just explaining the investments in Verily. Well, that's about finding ways to identify engage people to bend that growth curve to a higher and higher grade.
And we've got multiple investments SleepScore Labs, Verily and a number of other partnerships with payers, providers, even governments to drive that forward. So Margaret, the global growth is in that mid to high single digits, but our goal just within sleep is to drive ahead of that. As we add on digital health and COPD and then you add on the software as a service side, can ResMed drive well above that market growth? Absolutely. And we've proven that over the last 5 years and we'll plan to do that as we go towards our 2025 strategy that I outlined in the prep remarks.
Your next question is from Lyanne Harrison with Bank of America Merrill Lynch. Your line is open.
Hi. Thank you for taking my question. I just wanted to understand a little bit about your software as a Can you
sort of share some color
on the underlying
Brightree Can you sort of share some color on the underlying Brightree growth and what your expectations are going forward into subsequent quarters?
Yes. Thanks. That's a good question. Yes, clearly the 63% growth for the quarter included both organic and inorganic growth in those businesses. And we are now moving towards the point where software as a service has become big enough to become a segment that we're going to talk about going forward.
So I'm happy to talk about it in a little more detail. So yes, 63% growth for the quarter including Bright Tree along with Healthcare First, MatrixCare and Apicheta, so very solid growth. Within each of those businesses, they have different organic growth profiles. Without going into very, very low levels of detail, the Bright Tree core business grew in that sort of mid to high single digits area. And I was with the Bright Tree management team.
We had our board meeting earlier this week and we're looking throughout the next 4, 6, 8 quarters and they have a very strong pathway back to double digit growth of their business leveraging the Apiceta technology, but also some really innovative solutions. They have a new app for patients that they had lines around the conference hall at Medtrade and some of these improvements lead to incredible benefit for our home medical equipment customers and therefore allow Brightree to grow not only their share, but their share of accounts within that share. So I see a really good profile of double digit growth across our software as a service platform on an organic basis as we look forward over the coming fiscal years.
Your next question is from Anthony Petrone with Jefferies. Your line is open.
Thanks and good evening and good afternoon everyone. Maybe staying on Software as a Service, a couple of questions there and then just one on France and Japan. So on software as a service, I guess, is there any way to just actually give the contribution on MatrixCare and Apicheta in the quarter? But more importantly, as we look into 2019, the remainder of the year, obviously, that 63% overall versus mid single digit for Brightree is notable. So can you give maybe a little bit more color on how to layer those 2 in as we progress through fiscal 2019?
And then I'll have a follow-up.
Yes, sure. So, yes, I mean, clearly that 63% number is inorganic and organic. Anthony, we don't give detailed guidance across our whole business and so therefore we're not going to give detailed guidance within that sector. But as you're thinking sort of across it and modeling out that portfolio, it's going to be solid double digit growth in that software as a service entity throughout the coming 4 quarters. And then as you get to an organic basis and you look at just very solid double digit and very high margin growth from new additions like MatrixCare, I think you can model out a very strong growth of that whole portfolio.
And our goal is actually not just to have these businesses managed as they are, which are great separate entities growing well organically. But some of the best benefits are going to come from interoperability of people moving from care setting to care setting and that we'll be able to get benefit from customers who have people who are in skilled nursing facilities then move to home health and hospice and back and forth. And so we don't expect to just have these entities managed as good individual double digit growth, high margin growth businesses. Is, but something that ResMed managing now is a strategic, the biggest portfolio of out of hospital software that we will be able to grow across that portfolio. We've got really strong plans as I outlined towards our 2025 strategy to be the global leader in that.
Your next question is from Gretel Genoe with Credit Suisse. Your line is open.
Thanks very much. So just a question on the R and D spend. I was wondering if you can split out how much of that is for data and improving that cloud connected offering? And if you expect it to like you have given slightly higher guidance going forward than previously, is that because of the data spent?
Brett, you want to have a first go at that and I can cover up on maybe somehow the strategically we're investing those funds?
Yes. Sure. Yeah. So I mean, we wouldn't break out across the whole portfolio accretive, but we obviously, we're getting quite a bit in the SaaS area as well in R and D there. And if you look at the if you look at the if you look at the guidance where I pushed that R and D as a percentage of revenue has gone up a little bit, that's really reflects the acquisition and reflects really as a percentage of revenue typically the SaaS businesses would spend more on R and D as a percentage of revenue.
So I'll just uptick the guidance to reflect that.
Your next question is from Joanne Wuensch with BMO Capital Markets. Your line is open.
Hi, good afternoon. A couple of questions. When you say that Japan and France is going to continue to be a headwind for the next couple of quarters and then the segment will return to market growth, What's market growth?
So Joanne, market growth is mid to high single digits, right, for the global sleep apnea business. So we don't split that out country by country. But we do sort of talk about the devices side towards the mid single digits part and the mask side is towards that high single digit part. And that's market growth if you just wait for these patients to show up at a doctor's clinic or a sleep lab. As you know Joanne you've been following us for a number of years.
We're investing very heavily in geographies for identification, engagement and enrollment not just through our new partnerships but through our awareness programs and driving patients in. And so we plan to beat that in every country we're in, but market growth is in that mid to high single digits if you just wait for the patients to show up.
Your next question is from John Deacon Bell with Citigroup. Your line is open.
Good morning. My question is just on the U. S. Mass growth at plus 11% is quite a strong quarter. You didn't talk about the kind of resupply contract that you've got in place, which we spoke about last quarter.
Can you just give us an update on whether there's been an expansion of that in the last quarter or whether it's really just the on a mass launches that have given such a strong U. S. Mass growth?
Yes. Look, it really was great growth across U. S, Canada and Latin America. I'll hand Jim Hollingshead, the President of our Sleep business. You want to talk about mass growth in the U.
S, Canada and Latin America?
John, thanks for the question. Mass growth, I think, is driven by a couple of things. One is the new product launches are very strong, doing very well everywhere we launch them and we're getting great feedback both from our HME and health care provider customers globally and also from patients. So the new launch is doing very well. And then resupply continues at a very healthy clip.
We don't break out those numbers and we don't talk about specific resupply contracts for example, but we're happy both in new product and in ongoing resupply.
Your next question is from Andrew Goodsall with MST Marquis. Your line is open.
Thanks very much for taking my question. Just obviously post quarter you've launched Mobi. Just trying to understand the go to market strategy you said in the pilot you were looking at warranty and finance options?
Yes, Andrew. So look we launched Mobi in full product launch. Really excited about the business. Rob, do you want to talk a little bit Rob, our COO.
Yes. So Andrew, we ran the controlled product launch for a fair bit of the back end of last year. On January 8, we announced full market launch. So it's early days in terms of the full market launch. Our go to market strategy as we said, we think the best way to go to market is utilizing the capabilities of our existing partners, the home medical equipment providers in the industry.
They're the ones with the close contacts with the patients and access. And we continue to work closely with those players in the market. And we think that, as we said, will be an excellent approach. We're actually not copying anyone else's strategy to market. We do have ideas around the challenges around reimbursement and the challenges around funding these products that are there, but we probably wouldn't put them out on the call.
They'll be developed and built through the relationships that we have in the market. But in summary, we're very happy with the early days and we're happy with the product performance as well.
Your next question is from Craig Wong Pan with Deutsche Bank. Your line is open.
Hi, there. My question is on rest of world masks. I was wondering, have the new masks that you released last year, so it's not the AirFit M30i, have those masks released last year been launched in all your rest of world markets? Or is this still markets to release those masks in?
Yes. Thanks for the question, Craig. And yes, every geography is different in the speed and rate at which the product is approved and released and passed on to distributors, presented to patients, doctors and the whole ecosystem. And so in the U. S, it tends to be a little faster.
So we literally just launched the product I think you're talking about the N30i. That press release went out this week. So we just launched that within the U. S. And so that has had zero traction in the other countries around the world.
It's just out. And so we'll start to see that pick up over time in terms of a material impact on ResMed over the coming quarters. But you'd expect to see in the U. S. Some early phases on that.
I think when you said existing masks, maybe you're referring to the N20 and F20 masks that I also talked about in my prepared remarks. Yes, they are available globally and have had traction and they led to contributed to that 10% global growth within the masks category that we saw on a constant currency basis. It was 11% within U. S, Canada and Latin America. It was also a very strong 8% within the other markets.
But you don't have every country in the world at full speed on the N20, the F20 and the F30 as yet. They're launched and they're driving up in those markets, but it's a progressive scale as they get introduced to distributors to doctors into the market. So look the way I'd summarize it there Craig is that there's a long runway ahead for our growth in markets outside the U. S, Canada and Latin America and also a long growth within those geographies for different reasons and a different sort of clock speeds.
Your next question is from Chris Cooper with Goldman Sachs. Your line is open.
Yes, good afternoon. Thanks for taking my question. So can
I just come back to proprietary, please? So if I understood you correctly, last quarter, you'd launched a set of new modules and functionality and you had expected Briatry to pick up in the second quarter. But if anything, it does sound like it's kind of slowed sequentially down to sort of this mid- to high single digit level that you talk about. So I'm not really clear from your comments today what didn't develop proprietary on an organic basis in the way that you'd hoped last quarter. Can you just help us understand that?
Yes, Chris. And so what we expected last quarter was so you show modules. So I think during the last quarter we were at Medtrade and so we were showing modules to people. They get experience with them. They've got to be adopted by the respiratory therapists.
They've got to be adopted by the doctors if it's on the Go script side. They've got to be adopted by patients for this new app that we have for patients. And so it's not an immediate effect. And so if you introduce a product this quarter, you don't get an immediate bump next quarter. This is a monthly recurring revenue, quarterly recurring revenue business.
So it's once you have a customer, it's very easy to keep them. Once you have a new product, you've got to take time to get customers to adopt it. And so there's an adoption cycle there. So what I said earlier in the prep remarks and in previous questions is that I think to get from that sort of single digits back to strong double digits growth within core Brightree business is something that the team has a plan and they're going to execute to it. And I have strong confidence in it.
I'm not saying March 31 is the date that will happen, but December 31 absolutely we'll start to see those products be adopted and put through there. So it's sort of the speed at which these things get adopted in software as a service isn't a 90 day cycle. It's more a 180 or 365 day cycle. And then you increase the users, the number of users and you increase the cost per user and the revenue comes along with that. But it all comes with the value of those products.
And the reason it's a long sales cycle is you've got to get the solution in there, you've got to prove the value to customers and then they have to increase the number of users and grow their share. So it's maybe a longer cycle than if
you thought we were talking
about a 90 day turn for a new product. It's more on the 180, 360 day turn.
Your next question is from Suraj Kalia with Northland Securities. Your line is open.
Good afternoon, everyone. Thanks for taking my question. Mick, quickly, let me ask a very high level question. The math indicates over the last 3 or 3 plus years, you'll have spent close to $2,000,000,000 and there is approximately give or take $250,000,000 in top line numbers that have been added on. I know some haven't been disclosed, but that's essentially what the rough math has indicated.
I guess my question is, the impact on growth, the impact on gross margins, we can decipher that. How do you all look upon your acquisition strategy? When does the law of diminishing returns set in? And what metrics are you using internally to say, you know what, we have tacked on enough, I think so we need to digest it. If you could give us a sense of that, that would be greatly appreciated.
Thank you for taking my question.
Yes. Thanks for the question, Suraj. Yes, clearly, we've invested including Brightree and MatrixCare alone over $1,500,000,000 of investment into our software as a service vertical and we're actually really excited about that. The acquisitions are driven by 3 things. Number 1 is our strategy to be the world leader in digital health for sleep apnea and in digital health for COPD and in out of hospital software and to be the best at all those.
As I said actually at JPMorgan earlier this month and have continued to talk about as we launched our 2025 strategy. I think we've assembled a very strong portfolio of out of hospital software assets. And so we do plan to drive more integration, leverage and interoperability to provide great value to customers in that out of hospital space to grow that business. So we're really excited about the growth of that business. What you didn't mention is the propeller investment, which actually isn't in that software side, but it's in the digital health for COPD side.
If you're the CEO of a hospital or you're the health minister looking at your top 5 diseases, COPD is number 1, 2 or 3 in the chronic diseases you need to address. And so I think that is a strategic investment that Propeller is not providing immediate revenue, right? They're working on their revenue models with the pharmaceutical companies and establishing what those are in terms of driving adherence to those medications. But the outcome that could happen for global healthcare systems and the savings we could have is absolutely dramatic. And so we don't just look at it on a financial basis.
Lowe with JPMorgan. Your line is open.
Thanks very much. Just look, my question is really along the same lines. Brett, could you talk a little bit about what Apicheta is? And then sort of a bigger picture perspective, do you have plans further acquisitions? Or are we really in a digestion stage now?
Thanks.
So I'll hand to Rob to talk about the functionality of Apicheta within and how it drives core Brightree growth. And Brett, you can maybe answer the other part of David's question. Yes. So just a
bit of background. Appreciate has been a long time partner of Brightree and they had been working closely together. And they had a really good solution, really supporting the logistics of the HME customers and how they manage deliveries and getting people into the right environment in the home. And just that part of the HME business was a real support and so that becomes a very good module of Brightree and we felt that by having Brightree being able to control the development agenda in that business and the particularly the R and D agenda and integrating it better with the other Brightree modules, we could incrementally add value to the whole Brightree offering. So it's an exciting add on module if you like for the Brightree, Brett, in terms of scoping the size of it.
I mean, it's a kind of a classic tuck in within the SaaS business on that day. So it's pretty I mean, it's pretty de minimis at the moment. But I think the real attraction for us is the capability enhancement for the Brightree offerings and really being able to run that kind of capability let's call it module through Brightree's potential customer base and existing customer base. So I think one of those classic assets is worth much more in our hands rather than standalone. So we think, yes, really good type of technology capability acquisition for us.
But in terms of revenue profit, it would be pretty de minimis at the moment.
Our last question comes from Sean Lamont with Morgan Stanley. Your line is open.
Good morning and thank you for taking my question. With the new U. S. Bid rates in place, I don't know, Mick, if you could give us a bit of color around our pricing in the market and where you think ultimately bid rates will go with the new rules in place? Thanks.
Yes. Thanks for the question, Sean. And yes, look, the new U. S. Bid rates are in there and they actually have a consumer price index increase of a couple of percentage points for our customers, which is really good relief for our U.
S. Customers after a number of years of different interactions with CMS. Look, the pricing environment is incredibly steady. It's at a very steady and stable environment. We're working with our large, small, regional and mom
and pop
customers. Having solutions like Brightree and working with our customers on scalable solutions to contact their patients, to deliver to their patients and to manage their businesses. I think we've been able to as an industry take a lot of cost out of the delivery of sleep apnea and COPD therapy within the U. S. Geography.
And therefore, we've been able to have a much steadier pricing environment these last year or 2 than the year or 2 maybe before that. And as we look forward, we expect that to continue or even get slightly better with for the first time in a decade really price increases for consumer price index within the CMS space.
We are now at the 1 hour mark. So I'll turn the call back over to Nick Farrell.
Great. Well, thanks, Chris, and thanks to our global team of 6,500 resmedians who sometimes listen to this call as well as our investors. You guys have been helping people with digital health solutions for sleep apnea, COPD and out of hospital healthcare that has just changed the market and we look forward to continuing to do that. We'll talk with you again in 90 days and I'll hand back to Amy.
Sounds good. Thanks, Mick. Thank you again, everyone, for joining us today. If you do have additional questions, please feel free to contact us directly. As mentioned at the beginning of the call, the webcast replay, along with the earnings release and investor presentation, will be available on the Investor Relations website.
Chris, you may now close the call.
Thank you. This concludes ResMed's Q2 of fiscal year 2019 earnings live webcast. You may now disconnect.