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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 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.
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 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. 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 observed the expected impact on European and Asian device sales as our customers completed the 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 continue 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 improved 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 40 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 homecare 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 then 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 pharmaceutical for COPD that are utilized in the earlier stages of COPD disease progression in 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 solutions 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 the 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 critically 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 relations with our new pharmaceutical partners.
Propeller's ability to support people in Stage II and Stage III COPD are very complementary to our existing suite of cloud connectable ventilators for those patients with Stage III and Stage IV 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 we continue to operate as a standalone entity. We have 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 in 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 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 the 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 homes. 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 a quite a while for this business category to be material next to our core sleep apnea in ventilation device businesses.
The masks and accessory 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 and 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 that tube-up design nasal mask category.
With the N30i, we have further expanded our mask portfolio to offer even more options to homecare providers and ultimately for the varying needs of individual therapy uses. 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 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 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 and these acquisitions have established ResMed as a strategic player in the best position to do so. We have a proven track record of transforming our market through SaaS-based software and solutions and 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 low cost, higher quality care setting, often in their own home.
Together with our customers and partners, we are revolutionizing how our 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 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 a 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. 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%. So, that will be 1.6 billion people over age 65 around the world. We all know healthcare costs are growing and there aren't enough doctors to treat the people who need to be treated today.
Couple of 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 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 expanded and expanding pipeline of new products and enhanced digital health solutions to sleep apnea, COPD, and the out-of-hospital medical software markets give us confidence in ongoing momentum for our business.
We're 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 line for 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 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 $358.5 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 or in constant currency terms, sales in combined Europe, Asia, and other markets increased by 1% over the prior 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.
For 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 $63.3 million, an increase of 63% over the prior quarter. This includes revenue from our Brightree, HEALTHCAREfirst and MatrixCare businesses. Note that MatrixCare acquisition closed on November 13, 2018. So, we had 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 preferred revenue, and tax-related expenses associated with U.S. tax reforms.
In the prior year comparable, this excludes amortization 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 December quarter was 68.9%. 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 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 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 fiscal year 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 was 6.6% compared with 6.8% in the prior year quarter.
Looking forward, subject to currency movement and taking into account our recent acquisitions, we expect R&D expenses as a percentage of revenue to be in the range of 7% to 8% for the second half of fiscal year 2019.
Amortization of acquired intangibles was $16.8 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 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 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 our higher than usual tax benefit of $13.1 million associated with employee share-based payments 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 2019 will be in the range of 22% to 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. And 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 acquisition, 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 to the second half of FY 2019.
Additionally, on January 7, 2019, we closed on our previously announced acquisition of Propeller Health in consideration of $225 million. 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 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.
And with that, I will 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 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. [Operator Instructions]
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 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 then outline and give a little bit more color, please. Thank you.
Yes, David, it's a really good question. So, as I said in the prep remarks, Propeller is really 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 costs 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.
So, this gets us to a digital health portfolio that covers all the way from Stage II lung disease through to Stage IV 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 patient in the home, 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 are 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 have 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, and we're going to help Propeller with that. And we're really supportive of the management team. They are very linked to ResMed's culture, which is focused on patient, keeping them out of hospital and improving care.
So, as we look forward to Propeller over the coming a year, two or 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 of hospitals and healthcare systems, and particularly, for the patients themselves. And -- so we're really excited to have this part of the team.
Thank you.
Your next question is from Steve Wheen with Evans & Partners. Your line is open.
Yes, good morning. This is for Brett. Just wanted to talk about the gross margin and trying to break 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 the quite of big ships more recently?
And then previously you have mentioned what sort of manufacturing efficiencies contributing to the gross margin, so any color there would be great.
Sure Steve. I mean FX for the quarter year-on-year was not -- was pretty small, it's probably in the range of 20 basis points. I'm going to call that MatrixCare and the other kind of contributed equally meaningful will be manufacturing efficiencies and also favorable product mix. So, we're starting to see that come through particularly with our performance in masks. So, that's certainly helping.
On the manufacturing pharm efficiencies, procurement, and so on, I think things are improving kind of cycle-times and production efficiencies over time, but I think we're also benefiting now from pretty good volumes coming through and pretty good recoveries on the production side of things, incremental volumes kind of hitting up to Singapore as well and we're getting some scale benefits there. The 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 FX then going into future periods, is that likely to be a driver as well?
So, currently where we are in terms of euro, if I look forward and just look at it sequentially, I think we still get a small benefit; it's probably only going to 10 to 20 basis point mark unless you saw obviously waiting from wherever at. The currency wherever they are now, I would estimate probably sort of 10 to 20 basis points tailwind for us sequentially.
Okay, got it. And just finally on the -- just wanted some clarification on equity accounted losses. Could you just repeat the future quarter impact, didn't quite catch that? And then where is that coming from? What particular acquisition is driving those debt equity?
Yes. Sure. That's our Verily joint venture. So, we need to take out in terms of debt accounting losses associated with debt equity. For this quarter, it was $3.4 million and I estimate for the next few quarters, I would say, Q3 and Q4, that will be around $7 million per quarter.
Okay. And does that turnaround or what's driving that loss?
The JV at the moment is thing about more of a kind of a startup phase if you like. So, it will be kind of expenses that are coming through initially. Obviously, that JV was quite pretty high, I guess, in terms of what it can do; particularly being able to, let's call it, the $936 million patients out there. I think about it is as being able to identify with those, information is engaged with those patients, many of those patients on therapy. So, kind of think about it like that as pretty big opportunities there, but at this stage, the JV is exploring those and obviously, they will pay some money to do that initially. Yes, ultimately, we expect that to turnaround for sure.
Your next question is from Margaret Kaczor with William Blair. Your line is open.
Hey, good afternoon folks. Thanks for taking my 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 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 the world market growth, I just want to make this point right up front. 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 be continued in strong growth as we look forward throughout FY 2019 and beyond. So, patient growth is really strong.
We did have well above market growth in 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&A, we expect that that impact to change and then that's present in those numbers.
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 are 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 on the masks side. So, look we are very excited about our global growth in devices as we look forward not just rather fiscal year, but into next fiscal year.
And any specific commentary as it relates to the growth profiles in the next year, two years, where excluding the tax that can help accelerate the growth or whatever have it go down? Thanks.
Yes, we don't see it's going down. I mean look, we know the global growth in this market is in the mid to high-single digits. ResMed has never really excited that. As you saw over the last fiscal year or two, rest of the world market, we're driving digital market; 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 and where we get a chance to upgrade platforms towards a 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 identifying guidance people to bend that growth curve to a higher and higher grade, and we've got multiple investments, Sleep School Labs, Verily, and a number of other partnerships with payers, providers, even governments to drive that forward.
So, Margaret in 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-service-Side, can ResMed drive well above that market growth, absolutely, we have 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 just Software-as-a-Service business and I know you mentioned there was something like 60% growth overall business. Can you sort of shed some color on the underlying Brightree growth? And what are your expectations going forward into subsequent quarters?
Yes. Thanks. That's a good question. Yes, clearly, the 63% growth for the quarter included 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 Brightree along with HEALTHCAREfirst, MatrixCare, and Apacheta. So, very solid growth. Within each of those businesses, they had different organic growth profiles. Without going into very, very low levels of detail, the Brightree core business grew in that sort of mid to high single-digits area and obviously with the Brightree management team.
We had a Board meeting earlier, this week and we are looking throughout the next four, six, eight quarters and they have a very strong path way back to double-digit growth of their business, leveraging the Apacheta technology, but also some really innovative solutions.
They have a new apps for patients that they lines around the conference call with 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 really a 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. May be just staying on Software-as-a-Service, 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 actually give the kind of contribution on the MatrixCare and Apacheta 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 core Brightree is notable. So, can you give maybe a little bit more color on how to layer those two in as we progress through fiscal 2019? And then I have a follow-up.
Yes. Sure. Yes, clearly, that 63% number is inorganic and organic. Anthony, we don't give detailed guidance across our home businesses. So, therefore, we are not going to give detailed guidance within that sector.
But as you're thinking sort of across 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. 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 the 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 manage good individual double-digit growth, high-margin growth businesses, but something that ResMed managing now is 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 there.
Your next question is from Gretel Janu with Credit Suisse. Your line is open.
Thanks very much. So 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, like, you have given slightly higher guidance going forward than previously, is that because of the data spend?
Brett, do you want to have a first go at that and I can cover up on maybe some of our -- the strategically where we're investing in those funds?
Yes, sure. Yes, so, I mean, we wouldn't flag it across the whole portfolio, Gretel, but we, obviously, we've been in quite a bit in the SaaS area as well and R&D there. And if you look at the guidance where I push that R&D as a percentage of revenue, it's going up a little bit. That really reflects the acquisition and reflects really the percentage of revenue. Typically the SaaS businesses would spend more on R&D as a percentage of revenue. So, I did that to take 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 and 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 masks side as 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 Deakin-Bell with Citigroup. Your line is open.
Good morning. My question is just on the U.S. mask growth, plus 11% is quite a strong quarter. You didn't talk about the -- on a ReSupply contract that you put 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 on a mask launches that have given such a strong U.S. mask 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. Do you want to talk about mask growth in the U.S., Canada, and 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. So, the new launch is doing very well.
And then ReSupply continued at a very healthy clip. We don't break up 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.
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 say we earned the pilot that you were looking at warranty and finance options?
Yes, Andrew. So, look, we launched Mobi, a full product launch, really excited about the business. Rob, do you want to talk a little about -- Rob, our COO.
Yes. So, Andrew, we ran the controlled product launch for a fair bit at the back end of last year. January 8, we announced a 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 there. But we probably wouldn't put them out on the call. That will be developed and build 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 the world mask. I was wondering, have the new mask 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 the world market or is there still markets to release those mask 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 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 a 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 payers on that.
I think when you said existing mask; maybe you're referring to the N20 and F20 masks that I also talked about in my prep 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 launched and they're driving up in those markets, but it's progressing at scale as they get introduced to distributors, to doctors and to 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 along growth within those geographies for different reasons and a different, sort of, flap speeds.
Your next question is from Chris Cooper with Goldman Sachs. Your line is open.
Yes, good afternoon. Thanks for taking my questions. So, can I just come back to Brightree, please? So, 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.
But if anything, it does sound like you've kind of slowed sequentially down to, sort of, this mid to high-single-digit level that you talked about. So, not really clear from your comments today what's been developed proprietary on an organic basis in the way that you talked last quarter. Can you just help us understand that?
Yes, Chris. And so what we expected last quarter -- so you show modules, so I think during the last quarter we were at MedTrade and so we were showing models to people. They get experience with them. They've got to be adopted by the respiratory therapist. They've got to be adopted by the doctors. If it's on the GoScript 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-digit 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 day that'll happen, but December 31st, 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 term.
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 years -- three-plus years, you'll have spent close to $2 billion. And that is approximately give or take $250 million in topline 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 look on your acquisition strategy? When does the law of diminishing return set in? And what metrics are you using internally to say, you know what we have packed 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 questions, Suraj. Yes, clearly, we've invested, including Brightree and MatrixCare line, $1.5 billion of investment into our Software-as-a-Service vertical and we're actually really excited about that.
The acquisition is driven by three things. Number one is our strategy to be the world leader in digital health in 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 launch 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 of COPD side. If you're the CEO of hospital or you are the Health Minister looking at your top five diseases, COPD is number one, two or three 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 there, 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 to 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 to say, okay, we invested $1.5 billion, that's enough. We'll get the return on that. We say, have we built the world's best digital health solution for sleep apnea? Yes. Let's keep driving that and keep growing that. Can we build the world's best digital health solution for COPD with Propeller in our core ventilation cloud connected assets? Yes. So, Richie and his team is going to execute on that.
And can we, in the Software-as-a-Service side, be able to have the world's -- at least for now, the U.S. is best system, software system for out-of-hospital software care? Yes. And so we're driving growth on that. We are going to get a strong financial return from those. And I think you've seen that over the last three years. With Brightree, we've done well, and we've got a position to grow that Core growth back. We're going to even add on to that with MatrixCare and with Propeller and with Apacheta.
Your next question is from David Low with J.P. Morgan. Your line is open.
Thanks very much. Just, look, my question is really along the same lines, but could you talk a little bit about what Apacheta is? And then sort of a bigger picture perspective, do you have plans to -- for further acquisitions or are you really in a digestion stage now? Thanks.
So, I'll hand to Rob to talk about the functionality of Apacheta within -- and how it drives Core Brightree growth. And then, Brett, you can maybe answer the other part of David's question.
Well, so, just a bit of background. Apacheta 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 our people into the right environment in the home, and just that part of the HME business has a real support. And so that becomes a very good module of Brightree.
And we felt that having Brightree being able to control the development agenda in that business, 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. So, that's an exciting add-on module, if you like, for Brightree. Brett, in terms of scope and the size of it?
Yes, I mean, it's a kind of a classic within the SaaS business on that stage. So, it's pretty deminimus 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 from those classic assets, it's worth much more in our hands rather than standalone. So, we think, yes, a really good type of technology capability acquisition for us. But in terms of revenue profit, it'd be pretty deminimus at the moment.
Our last question comes from Sean Laaman 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 can give us a bit of color around pricing in the market and where you think ultimately Fed rates will go with the new rules in place? Thanks.
Yes, thanks for the question Sean. And yes, the new U.S. bid rates in there and they actually had a Consumer Price Index increase, the 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 in a very steady and stable environment. We are 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 U.S. geography.
And therefore, we've been able to have a much steadier pricing environment this last year or two than the year or two 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 one-hour mark, so I'll turn the call back over to Mick Farrell.
Great. Well, thanks, Chris and thanks to our global team, 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 second quarter of fiscal year 2019 earnings live webcast. You may now disconnect.