Resmed: Our 3 key takeaways

Medical device manufacturer and distributor ResMed Inc delivered their full-year result today. We highlight our three key takeaways from the report, share our view on the stock and focus on something that we feel the market has underappreciated.  

As has become custom over the years, the numbers make for good reading. The result was in line with analyst expectations delivering a 13% rise in full-year revenues to $2.34 billion, and 8% rise in profit to $US315.6m.

3 key takeaways from the report

1) Gross margin is a key metric analysts look for when analysing ResMed’s results and on this occasion the number came slightly weaker then many would’ve liked. Gross margins for the 4^th Quarter fell to 58.1%, down from 58.3% at the start of the financial year. The downward trend in gross margins experienced over the course of FY18 is expected to stabilise in FY19, with gross margins expected to be broadly consistent with 4^th quarter margins.

2) Pleasing for shareholders was the continued improvement in operating leverage.  Selling, general and administrative expenses (SG&A) as a percentage of Revenue fell to 25.1% down from 26.6% in the prior corresponding period. RMD has successfully managed to place downward pressure on costs through arguably the most benign pricing period since 2011, however further SG&A leverage will be required to maintain double digit earnings growth.

3) The operating environment globally remains competitive with the recent release of the Philips Dream Wear full-face mask likely have had an adverse impact on RMD’s results. Geographically and the 10% growth in 4^th quarter revenue to $US346.7 million for the Americas region was stronger than anticipated. Conversely, the combined Europe, Asia and other markets division was slightly softer than expected, growing 9% to $US236.5 million revenues. Nevertheless, the long-term favourable tailwinds remain intact as sleep apnoea awareness and diagnosis continue to grow. Brightree continues to solidify itself as a true success story for the business. After being much maligned at the time of acquisition, the SaaS business has gone onto deliver 12% growth for the year.

Neutral view on Resmed

ResMed is a business we like and have had clients invested into for many years in some cases. The long-term structural thematic remains for the industry and we believe RMD will maintain its position as the dominant player in what is undoubtedly a growth market.

The key statistic often referred to when looking at ResMed is the US National Heart Blood and Lung Institutes estimate that 12 million people suffer from sleep apnoea, yet only 4 million have been diagnosed. That statistic gives you a sense of the potential untapped market even before you take into consideration the increasing propensity for emerging middle classes to afford ResMed devices.

Nevertheless, although we are long-term bullish on the business, at these current levels given where the business is in the cycle with declining gross margins and unfavourable geographical mix we are neutral in our rating.

The market is underappreciating the shift toward cloud-based remote monitoring

Pricing conditions remain benign with increasing competition placing pressure on underlying gross margins for some time now. The signs are this might not necessarily pass in the near term. The release of the Philips Dream Wear full-face mask and with Fisher & Paykel expected to release a mask, competitive pressures are likely to persist. The risk is the competitive pressures are potentially more intense and last for longer than the market is currently anticipating whereby margins will increasingly become a handbrake on earnings growth.

Somewhat countering this is the underappreciated shift towards remote monitoring technology in which RMD is a clear leader. ResMed now has more than 5 million cloud-connected patient devices helping to develop a Software as a Service (SaaS) business with an accretive recurring revenue stream.

This enables RMD to improve;

• Doctor/Clinician and patient relationship
• Accuracy of data collection
• Diagnosis in a less invasive way to
• Willingness of the patient to seek help