Cochlear 1H25 Earnings Call Highlights

Cochlear (ASX: COH) shares are trading at the lowest level since December 2023 after the company reported a weaker-than-expected first-half and downgraded its full-year outlook towards the bottom end of its guidance.

Earnings Summary

• Revenue up 5% to $1.16 billion vs. $1.2 billion consensus (2.5% miss)

• Underlying net profit up 7% to $205.5 million vs. $275.9 million consensus (2.2% miss)

• Statutory net profit up 7% to $205.1 million

• Interim dividend up 8% to $2.15 per share vs. Morgans estimates of $2.18 (1.3% miss)

• FY25 underlying NPAT to be at the lower end of $410-430 million range vs. $426.6 million consensus (midpoint of $410-420m implies ~2.7% miss)

• Preparing for the release of a number of new products, including its next generation cochlear impact and off-the-ear sound processor

Earnings Call Highlights

The below topics have been answered by CEO Dick Howard, CFOs Stu Sayers and Sarah Thom.

1H25 earnings: “Strong Cochlear implant revenue growth at 13%, acoustics revenue very strong at 22%, and services declining by 12%, giving us a net sales increase of 6% in constant currency. Underlying net profit up 7% to $206 million.”

Unit sales outlook (Q2 and FY25): “We still aim to help over 50,000 people this year with one of our implants, Cochlear or acoustic implants. We expect to end up with a unit growth rate of around 10% for the year.”

China and Europe performance: “We saw good growth across the US and Asia Pacific in our developed markets, but lower growth in Western Europe. In China and India, we saw stronger growth in private pay and premium segments.”

US market and cost of living impact: “We are seeing a higher rate of cancellations or inquiries that don’t follow through when people see the out-of-pocket costs. Inflation and higher cost of living pressures in the US have led to deferrals of upgrades.”

New product launches: “We will be launching the next-generation Cochlear implant around the middle of the year, dependent on regulatory approvals.”

Service revenues and insurance trends: “Services revenue down 12%. A key barrier to upgrades remains awareness of eligibility, and we are implementing a new cloud-based marketing automation system to better segment and target customers.”

Gross margin and outlook: “Gross margin at 75%, slightly better than expected, supported by higher ASPs in emerging markets. We expect to be around 74.5% at the full year.”

Capex and inventory levels: “Inventory build-up of $69.5 million ahead of major new product launches and to maintain safety stock. Inventory is expected to stay at elevated levels through the end of the financial year and moderate towards the end of calendar 2025.”

Cloud investments: “We have increased our cloud spending as we move into the final phase of our cloud transition. We still expect to spend around $40 million for the full year.”

Analyst Q&A Highlights

You're expecting a 15% unit sales growth in the second half. What’s driving this momentum, and what trends have you seen so far?

• "Yeah, we do expect to get to around 10% and therefore a lift over the first half into the second half. And that's what we think is good momentum across key countries in Europe."

• "Europe always has a bigger second half than first half anyway just because of the Northern Hemisphere summer and impact through July and August."

• "On emerging markets with only 3% growth in the first half, we do expect significantly stronger growth there in the second half."

How will China’s volume-based pricing policy impact your business, and what is your outlook on this market?

• "The Chinese government have been doing this across a range of therapy areas and their goal is really to both lower price and expand access."

• "We are least exposed to China than any of the Cochlear implant companies around the world. China forms part of our Asia-Pacific region, which is less than 20% of our sales."

• "We will lose a little bit of volume in the short run. But as I said, the intent of this is actually to expand the volume significantly, and we think we're very well positioned to pick it up as that volume expands."

• "How this all plays out is still very uncertain. It hasn't been implemented yet, but we still believe in the significant long-run growth opportunity in China."

Some insurers are hesitant to cover the latest processor upgrades. Are you seeing this as a major factor, and what can be done about it?

• "We do get insurance rejections, but we are not seeing many for lack of benefit."

• "We've got some good clinical evidence showing the gains in hearing and noise on Nucleus 8 over Nucleus 7."

• "It's a core part of our design philosophy to improve hearing outcomes. We've done it with Nucleus 8 and we think there is clearly headroom to go further."

With a new product coming, are you expecting customers to delay purchases, impacting second-half sales?

• "We think that will be pretty muted. Most people who end up getting a cochlear implant have not heard anything about cochlear implants until they are struggling with hearing loss."

• "Hospital and audiological capacity is tight, and we’re just not seeing hospitals give up surgical slots in hopes of rescheduling later."

• "There is some risk there, but we don't see it as significant."

Looking beyond FY25, how do you expect the service revenue to recover, and will Nucleus 8 upgrades remain a drag?

• The opportunity to go from Kanso 1 or Kanso 2 to Kanso 3 is important for people, so we'll see an uplift there."

• "The biggest driver of our services over any cycle is the increasing number of people who are eligible for an upgrade."

• "As we look out over 2026 and beyond, we expect that lift in the eligible base to continue driving upgrades."

How is the company maintaining market share despite new competitor features? How will new implants impact market position?

• "We hold a very strong share across the world and certainly in developed markets... Competitors will have some successes here and there, but not at a material level."

• "One of our competitors is coming back from a significant recall... that certainly helps their share a little bit."

• "We are very confident that we will be able to not only hold our share but lift our share as we look forward, knowing what we have in the pipeline."

• "We spend a lot of money on R&D... we've got a full pipeline of products coming out over the next several years."

• "We don’t see that our competitors have the financial capacity to keep up with what we’re doing."

Why has cloud spending increased by $100 million, and what benefits are expected?

• "We initially expected to capitalise cloud computing investments, but a change in accounting laws required us to expense them instead."

• "We've implemented a new human capital management system, CRM, and supporting systems... now we're replacing our 20+ year-old ERP system."

• "The cost of implementation has increased due to inflation and additional manufacturing execution system requirements."

• "We are doing much more on data than initially planned, ensuring we are ready for AI-driven advancements."

• "Significant efficiency gains in manufacturing and transaction processing are expected once the new system is live."

This article was generated with the support of AI and reviewed by an editor.