Welcome to the Q2 fiscal year 2019 ResMed Inc. earnings conference call. My name is Chris and I'll 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 second quarter 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 Sandercock, our CFO. Other members of management will be available during the Q&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. 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. Thank you to all our shareholders for joining us today as we review results for the second quarter 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. 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 four and a half 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 two to four weeks. Based on this customer value, we continued to grow our device market share in the quarter as healthcare 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 million patients within AirView, our cloud-based patient management system, and more than 8 million 100% cloud-connectable devices now in the market. Over the past 12 months, we have improved the lives of well over 14 million 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 3.5 billion 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 million people worldwide who suffocate every night with sleep apnea and the nearly 400 million 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 AirCurve devices for non-invasive ventilation and Astral 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 two and stage three COPD are very complementary to our existing suite of cloud-connectable ventilators for those patients with stage three and stage four 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 U.S., 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 third quarter. 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 two 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. 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 F20 and F30, as well as the N20 and N30i, 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 million 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 service software space, including skilled nursing facilities, senior living facilities, life plan communities, and beyond. We also completed a technology tuck-in acquisition called Apacheta, 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 a continued expansion of Brightree and the full quarter contribution from HEALTHCAREfirst, along with partial quarter contributions from MatrixCare and Apacheta. We have a vision to transform out-of-hospital healthcare. 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. We have demonstrated success and experience with Brightree these last three 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. It's up to our team to integrate our technology and business workflows, and ultimately, to execute and deliver on this promise. 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 sixth 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&A as well as in R&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 age 65 or older, and by 2050, that number will almost double to 17%.
That will be 1.6 billion people over age 65 around the world. We all know healthcare costs are growing, 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 healthcare crisis. 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 million 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 healthcare 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 million 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 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 and 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&A session. Brett, over to you.
Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2019. As Mick noted, we had a strong quarter. Group revenue for the December quarter was $651.1 million, an increase of 8% over the prior year quarter. 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 $358.5 million, an increase of 9% over the prior year quarter. Sales in Europe, Asia, and other markets totaled $229.4 million, a decrease of 2% over the prior year quarter. In constant currency terms, sales in combined Europe, Asia, and 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 $186.5 million, an increase of 7% over the prior year quarter. Masks and other sales were $172 million, an increase of 11% over the prior year quarter. The revenue in Europe, Asia, and other markets, device sales were $156.2 million, a decrease of 4% over the prior year quarter, or in constant currency terms, a 2% decrease. Masks and other sales were $73.2 million, 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 second quarter was $63.2 million, an increase of 63% over the prior year quarter.
This includes revenue from our Brightree, HEALTHCAREfirst, and MatrixCare businesses. Note that MatrixCare acquisition closed on November 13, 2018, so we have recognized MatrixCare revenue and 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 second quarter 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 2019 to be broadly consistent with our Q2 FY 2019 gross margin. Moving on to operating expenses. Our SG&A expenses for the quarter were $161.6 million, an increase of 6% over the prior year quarter.
In constant currency terms, SG&A expenses increased by 8%. Excluding acquisitions, SG&A expenses increased by 4% on a constant currency basis. SG&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&A as a percentage of revenue to be broadly in the range of 25% for the second half of FY 2019. R&D expenses for the quarter were $43.1 million, an increase of 6% over the prior year quarter, or on a constant currency basis, an increase of 9%. Excluding acquisitions, R&D expenses decreased by 1%, reflecting lower clinical trial expenses in the current quarter relative to the prior year period. R&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&D expenses as a percentage of revenue to be in the range of 7%-8% for the second half of FY 2019. Amortization of acquired intangibles was $15.8 million 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 $12.5 million. Non-GAAP operating profit for the quarter was $181.1 million, an increase of 15% over the prior year quarter, while non-GAAP net income for the quarter was $144.5 million, 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 second 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 $13.1 million 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 rates for the second half of FY 2019 will be in the range of 22%-24%. Cash flow from operations for the second quarter was $129.5 million, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $18.4 million. Depreciation and amortization for the December quarter totaled $36 million. During the quarter, we paid dividends of $52.8 million. 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 MatrixCare for consideration of $750 million. 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 2019.
Additionally, on January 7, 2019, we closed on our previously announced acquisition of Propeller Health for consideration of $225 million. We now expect Propeller Health to have a dilutive impact on our quarterly non-GAAP earnings per share in the range of $0.02-$0.03 per quarter for the second half of FY 2019. Associated with these acquisitions, we also incurred acquisition-related expenses of $6.1 million in the December quarter. Our joint venture with Verily commenced operations during the quarter, and we contributed an initial $25 million in cash to the joint venture entity. We recorded equity losses of $3.4 million in our income statement in the December quarter associated with the joint venture. We expect to record approximately $7 million of equity losses each quarter in the second half of FY 2019 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 2019, we expect to record net interest expense of approximately $14 million per quarter, reflecting our increased debt position as a result of our recent acquisitions. At December 31, we have $1.2 billion in gross debt and $1.05 billion in net debt. Our balance sheet remains strong with modest debt levels. At December 31, total assets were $3.9 billion, and net equity was $2 billion. With that, I'll hand the call back to Amy.
Great. Thanks, Brett. We will now turn to the Q&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&A portion of the call.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. 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.
Yeah, David, that's a really good question. 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 about 15% of the total cost, and 85% of the cost is in the pharmaceutical side. Now, clearly, we're not getting into the manufacturing or distribution of pharmaceuticals, but what Propeller does allow ResMed to do is to 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. This gets us to a digital health portfolio that covers all the way from stage two lung disease through to stage 4 lung disease.
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 the patient in the home, and especially out of the hospital. You need to be across that whole portfolio. 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. 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. 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.
As we look forward to Propeller, over the coming year, two, three, 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. We're really excited to have them as part of the team.
Thank you.
Your next question is from Steve Wheen with Evans & Partners. Your line is open.
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 big shifts more recently. Previously, you have mentioned what sort of manufacturing efficiencies might be contributing to the gross margin. Any color there would be great.
Sure, Steve. I mean, FX for the quarter year-on-year was pretty small. It's probably in the range of 20 basis points. I mean, I've called out MatrixCare, and the other kind of contributors there of equally meaningful would be manufacturing efficiencies and also favorable product mix. We're starting to see that come through, particularly with outperformance in masks. That's certainly helping. On the manufacturing front, efficiencies, procurement, and so on, I think, well, the team's improving kind of cycle times and production efficiencies all the time. 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.
Combination of those factors, I think are leading to some good manufacturing efficiencies that have been flowing through over the last few quarters.
Okay. FX then going into future periods, is that likely to be a driver as well?
Currently where we are in terms of AUD/EUR, 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 10-20 basis point mark, unless you saw the Aussie obviously weaken from where we're at. Currencies where they are now, I would estimate it's probably sort of 10-20 basis point tailwind for us sequentially.
Okay. Got it, Just finally, just wanted some clarification on the equity accounted losses.
Yeah.
Could you just repeat the future quarter impact? I didn't quite catch that. Then where is that coming from? What particular acquisition is driving that equity accounted contribution?
Yeah. Sure. That's our Verily joint venture. We need to take up, in terms of GAAP accounting, losses associated with that equity. For this quarter was $3.4 million, and I estimate for the next few quarters, say Q3 and Q4, that'll be around $7 million per quarter.
Okay. Does that turn around, or what's driving that loss?
The JV at the moment is, think about it more of a kind of startup phase, if you like. There'll be kind of expenses that are coming through initially. 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 million patients out there. Think about it as kind of being able to identify the patients, engage with those patients, and then get those patients on therapy. Kind of think about it like that as pretty big opportunities there. At this stage, the JV is exploring those, and obviously that takes some money to do that initially. 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. Yeah, 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. 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. 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. Looking at our rest of world market growth, I just want to make this point right up front, 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. 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. As we said last quarter and the quarter before on this call and in Q&A, we expected that impact to change, and then that's present in those numbers.
We're saying for the next few quarters, France and Japan will be slow for a couple quarters, then we'll get back to market growth, 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. 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. We saw really good underlying growth on the device and the mask side. 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.
Any specific commentary as it relates to the growth profile of the next year or two years where, excluding the impact of France and Japan, as you guys can help accelerate that growth or, for whatever reason, have it go down? Thanks.
Yeah, we don't see it going down. I mean look, we know the global growth in this market is in the mid to high single digits. ResMed's never really accepted that. I mean, as you saw the last fiscal year or two in rest of world markets, as we're driving digital health country by country, we've seen some great growth within those countries. 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. 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 rate. We've got multiple investments, SleepScore Labs, Verily, and a number of other partnerships with payers, providers, even governments, to drive that forward. 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, 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 five 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 service business, and I know you mentioned that there was something like 60% growth in the overall business. Can you sort of shed some color on the underlying Brightree growth and what your expectations are going forward into subsequent quarters?
Yeah, thanks. That's a good question. Yeah, clearly the 63% growth for the quarter included both organic and inorganic growth in those businesses. 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. I'm happy to talk about it in a little more detail. Yeah, 63% growth for the quarter, including Brightree, along with HEALTHCAREfirst, MatrixCare, and Apacheta. Very solid growth. Within each of those businesses, they have different organic growth profiles. Without going into very low levels of detail, the Brightree core business grew in that sort of mid to high single digits area. I was with the Brightree management team.
We had our board meeting earlier this week, and we're looking throughout the next four, six, eight quarters, and they have a very strong pathway back to double-digit growth of their business, leveraging the Apacheta 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. 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, good evening, and good afternoon, everyone. Maybe staying on Software as a Service, a couple of questions there, then just one on France and Japan. On Software as a Service
I guess, is there any way to just actually give the contribution on MatrixCare and Apacheta in the quarter? More importantly, as we look into 2019, the remainder of the year, obviously, that 63% overall versus mid-single digit for core Brightree is notable. Could you give maybe a little bit more color on how to layer those two in as we progress through fiscal 2019, then I'll have a follow-up.
Yeah, sure. Clearly that 63% number is inorganic and organic. Anthony, we don't give detailed guidance across our whole business, therefore, we're not going to give detailed guidance within that sector. 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 four quarters. 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 could model out a very strong growth of that whole portfolio. Our goal is actually not just to have these businesses managed as they are, which are great, separate entities growing well organically.
Some of the best benefits are going to come from interoperability of people moving from care setting to care setting, 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. We don't expect to just have these entities managed as good individual double-digit growth, high margin growth businesses, something that ResMed managing now as 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 Jennew with Credit Suisse. Your line is open.
Thanks very much. Just a question on the R&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 You have given slightly higher guidance going forward than previously. Is that because of the data spend?
Brett, you want to have a first go at that, and I can cover up on maybe somehow strategically we're investing those funds?
Yeah, sure. We wouldn't break out across the whole portfolio, Gretel, but obviously we've been in quite a bit in the SaaS area as well, and R&D there. If you like the guidance where I've pushed that, R&D as a percentage of revenue has gone up a little bit. That really reflects the acquisitions and reflects really as a percentage of revenue, typically, the SaaS businesses would spend more on R&D as a percentage of revenue. I've 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?
Joanne, market growth is mid to high single digits for the global sleep apnea business. We don't split that out country by country. We do sort of talk about the devices side are towards the mid-single digits part, and the mask side is towards that high single digit part. 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. We plan to beat that in every country we're in. 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.
Oh, good morning. My question is just on the U.S. mask growth at plus 11% is quite a strong quarter. You didn't talk about the kind of resupply contracts 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 kind of mask launches that have driven such a strong U.S. mask growth?
Yeah, look, it really was great growth across U.S., Canada, and Latin America. I'll hand Jim Hollingsworth, the President of our sleep business. You want to talk about mask growth in the U.S., Canada, Latin America?
John, thanks for the question. Mask 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 healthcare provider customers globally and also from patients. The new launch is doing very well. 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 Marquee. Your line is open.
Well, 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're going to use there. We heard in the pilot that you were looking at warranty and finance options.
Yeah, Andrew. Look, we launched Mobi in full product launch. Really excited about the business. Rob?
Yeah.
Do you want to talk a little bit? Rob, our COO.
Yeah. Andrew, we ran the controlled product launch for a fair bit of the back end of last year. On January 8th, we announced full market launch. It's early days in terms of the full market launch. Our go-to-market strategy, as we've 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. We continue to work closely with those players in the market. 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, 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. 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 N30i, have those masks released last year been launched in all your rest-of-world markets, or is there still markets to release those masks in?
Yeah, thanks for the question, Craig. Yeah, 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. In the U.S., it tends to be a little faster. We literally just launched the product, I think you're talking about is the N30i. That press release went out this week. We just launched that within the U.S., that has had zero traction in the other countries around the world. It's just out. 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 prep remarks. Yeah, they are available globally and have had traction, they 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. 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, they're driving up in those markets, it's a progressive scale as they get introduced to distributors, to doctors, and to the market.
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 at different sort of clock speeds.
Your next question is from Chris Cooper with Goldman Sachs. Your line is open.
Good afternoon. Thanks for taking my question. Can I just come back to Brightree, please? If I understood you correctly, last quarter, you'd launched a set of new modules and functionality, and you had expected Brightree to pick up in the second quarter. 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. I'm not really clear from your comments today what didn't develop for Brightree on an organic basis in the way that you'd hoped last quarter. Can you just help us understand that?
Yeah, Chris. What we expected last quarter was, you show modules. I think during the last quarter, we were at MedTrade, and 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 GoScripts side, and they've got to be adopted by patients for this new app that we have for patients. It's not an immediate effect. 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. 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 there's an adoption cycle there.
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 a strong confidence in it. I'm not saying March 31st is the date that'll happen, December 31st, absolutely we'll start to see those products be adopted and put through there. 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-day or 365-day cycle. Then, you increase the users, the number of users, and you increase the cost per user. The revenue comes along with that. It all comes with the value of those products.
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. 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-day, 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 three or three plus years, you'll have spent close to $2 billion, there is approximately, give or take, $250 million 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. 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. We need to digest it." If you could give us a sense of that would be greatly appreciated.
Thank you for taking my question.
Thanks for the question, Suraj. Clearly, we've invested, including Brightree and MatrixCare alone, over $1.5 billion of investment into our software-as-a-service vertical, we're actually really excited about that. The acquisitions are driven by three things. Number one 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 JP Morgan 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, 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. 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, the COPD side. If you're the CEO of a hospital or you're the health minister looking at your top five diseases, COPD is number one, two, or three in the chronic diseases you need to address. 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. The outcome that could happen for global healthcare systems and the savings we could have, is absolutely dramatic. We don't just look at it on a financial basis.
Low with JP Morgan, your line is open.
Thanks very much. Just, look, my questioning is really along the same lines. Brett, could you talk a little bit about what Apacheta is, and then sort of a bigger picture perspective, do you have plans for further acquisitions, or are we really in a digestion stage now? Thanks.
I'll hand to Rob to talk about the functionality of Apacheta within, and how it drives core Brightree growth. Brett, you can maybe answer the other part of David's question.
Yeah. Just a bit of background. Apacheta has been a long-time partner of Brightree, and they had been working closely together. 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. Just that part of the HME business was a real support. 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&D agenda in it and integrating it better with the other Brightree modules, we could incrementally add value to the whole Brightree offering. It's an exciting add-on module, if you like, for Brightree. Brett, in terms of scoping the size of it.
Yeah, it's a kind of a classic tuck-in within the SaaS business on that day. 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. I think it's one of those classic assets that's worth much more in our hands rather than standalone. We think, yeah, really good technology capability acquisition for us. In terms of revenue profit, it'd be pretty de minimis at the moment.
Our last question comes from Sean Laaman with Morgan Stanley. Your line is open.
Good morning. 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 pricing in the market and where you think ultimately our bid rates will go with the new rules in place. Thanks.
Thanks for the question, Sean. The new U.S. bid rates are in there, and they actually have a consumer price index increase of a couple 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. 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 two than the year or two maybe before that. 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 one-hour mark, I'll turn the call back over to Mick Farrell.
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, we look forward to continuing to do that. We'll talk with you again in 90 days, 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 second quarter of fiscal year 2019 earnings live webcast. You may now disconnect.