This Post Market Wrap is presented by KOSEC – Kodari Securities

• Revenue up by 12 percent to US$864 million and income from operations up by 5 percent to US$253 million

• Revenue and income results miss Bloomberg consensus estimates

• Gross margin down by 1.4 percent

• Selling, general and administrative expenses up US$22 million, or 14 percent to US$182 million

• Cash flow impacted by US$285 million ATO settlement

•  Balance sheet remains strong with US$1.9 billion in cash and drawdown availability  

• Management confident that incremental revenue growth will recover in FY23.  

ResMed Inc (‘ResMed’ or the ‘Group’) is a global medical device business that develops, manufactures, distributes and markets medical devices. ResMed  also develops cloud-based software applications that diagnose, treat and manage respiratory disorders, including sleep disordered breathing, chronic obstructive pulmonary disease and neuromuscular disease. Resmed’s comprehensive out-of-hospital software platforms are designed to assist caregivers and healthcare professionals keep people healthy in the home or care setting of their choice. The product suite includes air flow generators, diagnostic products and mask systems which are expected to help 250 million lives across 140 countries in 2025. 

Soft Gross Margin in March quarter FY22

ResMed increased revenue by 12 percent to US$864 million for the quarter, compared to the March 2021 quarter, and income from operations increased by 5 percent to US$253 million. Non-GAAP diluted earnings per share was up modestly from US$1.30 per share to US$1.32 per share. These numbers came in below market expectations, based on the important Bloomberg consensus estimates. The market was expecting stronger revenue growth, on the basis that ResMed would benefit from the recall of a competitor product in the US non-invasive ventilator market segment. This market share gain was less than anticipated by investors and can be attributed to ongoing semiconductor supply shortages. Semiconductors or micro-chips are an essential component of ResMed’s medical devices, including ventilators.  

The other disappointing aspect of the March quarter result was the 1.4 percent gross margin contraction to 56.8 percent at March 2022, from 58.2 percent at March 2021. The margindecline is attributable to higher freight and manufacturing costs, partially offset by an increase in average selling prices. A US$12/Euro12 device surcharge introduced in January 2022 has not been enough to offset the cost inflation and higher freight imposts that have emerged since the onset of the global COVID pandemic. Selling, general and administrative expenses increased by 14 percent to US$182 million, compared to the March 2021 quarter.This is an increase of US$22 million from a year ago. Clearly ResMed has not been able to avoid the input cost inflation pressures faced by manufacturers in all parts of the world in recent times.

US$285 million ATO settlement impacts cash flow

Cash from operating activities of US$272 million, for the 9 months to 31 March 2022, represents a decline of US$238 million from US$510 million generated in the previous corresponding 9 months.  The significant decline is primarily due to a US$285 million cash settlement with the Australian Taxation Office in the March quarter. This is the final instalment due to the ATO and follows payments of US$97 million in prior reporting periods, bringing the total amount to US$382 million. The settlement relates to transfer pricing irregularities between 2009 and 2018. The profit impact had previously been recognised in the prior financial year.  

ResMed retains a strong balance sheet and at 31 March had US$1.6 billion available for drawdown plus cash and cash equivalents of US$295 million. 

Looking Ahead

Management continues to refer to the extraordinary demand for sleep and respiratory care products around the globe with double-digit top line revenue growth expected for respiratory care products and high single-digit growth in its software-as-a-service business segment.

Despite the industry-specific and macro-economic environment uncertainty in recent times, demand from patients and healthcare providers remains resilient. Management remainsconfident that as supply chain logistical constraints, including semiconductor component shortages are overcome, lost incremental revenue will be recovered in FY23 and beyond.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.