1Q beats top and bottom line
1Q adjusted earnings for ResMed Inc (RMD) were ahead of our and consensus expectations (US$116.3m, +23%; Morgans US$110m and consensus US$111m), equating to EPS of US$0.81 (+23%; Morgans and consensus US$0.80). Adjusted operating profit increased 26% to US$157m, with margins up 243bp year on year to 26.7%.
Revenue also surprised to the upside (US$588.3m, +12%) with strength across the product portfolio, and strength in the Brightree informatics platform (+25% to US$47.5m). Adjusted gross margins were stable (58.3%) and a tad above guidance of 58.1%, supported by ongoing manufacturing/procurement efficiencies, but partially offset by 'normal' ASP declines. Operating cash flow of US$48.1m was impacted by a US$125m tax payment, but supported c6% yoy dividend uplift (US$0.37).
Devices/masks solid; Brightree organic growth to pick up
Despite cycling a tough 1Q18 sales comp (12.3% ex-Brightree), product sales growth was solid in both Americas (US$373.9m +12%) and Rest of World (US$214.4m, +16% in constant currency), with mask and device sales in the former tracking above the market (+9% Americas and +11% Rest of World).
The US$126.3m acquisition of SaaS provider Healthcarefirst (for home health and hospice), supported Brightree's strong growth, with efficiencies /cost savings and new products (now launching an advanced data analytics platform and two new apps) likely to lift organic growth from the high single digits.
Leverage remains supported
The uplift from strong sales into underlying earnings remains impressive, with margins expanding 650bp over the last two years to 26.7%. We view the sustainability of leverage as likely given:
- an expanding mask/device portfolio supported by cloud-based connectivity, with upside from improving adherence and automated resupply;
- a "settling" reimbursement environment;
- stable gross margins;
- tech driven op efficiencies across systems and processes; and
- a growing connected-care offering with acquisition opportunities in the both the US and Rest of World.
ResMed Inc (RMD) remains well positioned, in our view, with continued growth across masks and devices, a solid pipeline of new products and an expanding digital platform helping to drive resupply, low setup costs and improve adherence rates.
We have made modest adjustments to our FY19-21 forecasts and maintain our Add recommendation.
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