Unmet demand

3Q23 RESULT

Need To Know

• Strong revenue growth of 29%YoY to US$1,117m, a ~7% consensus beat 
• Operating income growth of 27%YoY to US$321m also a ~5% consensus beat
• Expecting sequential gross margin improvement from 4Q23

RMD continues to deliver on the solid demand for its products, resulting in strong sales across all markets. It now has full global availability of its AirSense 10 platform, whilst it continues to ramp up production and availability across more geographies for the AirSense 11. RMD also experienced strong growth across its masks and patient interfaces. The outside hospital software-as-a-service business achieved high-single-digit-growth organically and had a first full quarter contribution from the MEDIFOX DAN acquisition that closed last November, which performed to expectations.

Gross margins decreased during the quarter as expected mainly due to unfavourable product mix and higher component costs, partially offset by an increase in average selling prices. During the earnings call, RMD noted that gross margin should begin to recover from next quarter, driven by geographic mix, average selling prices, and lower freight and inventory costs.

Will Philips returning to the market impact RMD?

The medical device industry expects Philips (PHS.EU) and the FDA consent decree to be signed soon, although the range of outcomes are vast. The reasonable ‘best case’ scenario for Philips (and our base case) would be a near term return to regular device sales whilst under supervision, and ramping towards full capacity over a year or more. This would likely block new mask launches, creating opportunity for both RMD and Fisher & Paykel Healthcare (FPH). It’s worth noting that the timing of a Philips return to market will have little impact on RMD as it is still producing for strong volume demand and global shortages which are expected to last into CY24.

Investment View

RMD has clearly proved it is able to continue to grow its volumes into significant unmet demand. Gross margins are set to improve and the ramp up of AirSense 11 should drive continued volume growth. Irrespective of a return to market from Philips, RMD can still deliver strong growth and cement itself as a market leader and we expect continued momentum into the full year result. The actual details regarding the Philips recall still present a future catalyst, although most scenarios still present a positive potential for RMD. We retain our Buy recommendation.