COH’s FY22 net profit of $277 million was 18% ahead of last year’s adjusted $234 million figure. The adjustment relates to the accounting of cloud-based computing costs now being expensed rather than capitalised.
CI unit sales increased 5% in FY22, but it seems clear the market has not yet returned to normal. COVID continues to make interpretation difficult, but we note that developed market implants are 10% ahead of pre-COVID levels (US +20%, Europe mixed), while China and the Middle East are improving amongst the Emerging markets. India and Brazil are lagging.
Services (sound processor upgrades) revenue increased 15% leveraging off the installed base. Acoustics revenue increased 29% assisted by the launch of the Osia 2 system.
Gross margins lifted 200bp to 75% and COH believes it can remain at that level. Underlying EBIT margin gained 100bp to 23%.
Investment view
COH is about to step off the COVID-recovery implant raft and initiate a step change in new product launches beginning with the new N8 processor in 2Q23f. This will kick off a 3-year upgrade cycle.
Several new products are entering penultimate trials and OSIA has achieved regulatory approval - a consequence of COH’s heavy R&D program where the aggregate R&D investment has exceeded $2 billion since listing.
On a 3-5 year timeframe, the R&D pipeline could launch a game-changing multi current source focus electrode, likely driving market share gains. COH may soon launch final trials of a new totally implantable CI system (TICI) that embed the sound processor, battery and microphone under the skin. The TICI could be launched in FY24f.
The Oticon acquisition should complete by the end of 2023 and COH will integrate Oticon’s BAHA business. This will cost $30-60 million but COH has probably already gathered up most of Oticon’s CI business following its product recall.
Risks to investment view
If COVID restrictions persist, it could affect growth in industry implantation and other services. Two competitors have product recalls underway and any market share recovery might impact COH. There is always the presence of technology risk in this industry, so COH must maintain high standards in its product development.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: FY22 RESULT
FIGURE 2: CI SYSTEMS
FIGURE 3: REVENUE
FIGURE 4: GEOGRAPHIC REVENUE
FIGURE 5: EBIT
