COH - FY21 Results
Cochlear (COH), the leading hearing implant manufacturer reported revenue of $1.493 billion (growth of 10% on FY20) and underlying net profit of $236.7 million (growth of 54% on FY20). The company generated strong free cash-flows, and held $564.6 million in net cash at 30 June 2021. Cochlear implants are a cost effective solution for individuals of all ages with hearing loss, but despite the effectiveness, the awareness amongst patients is still low with less than 5% penetration rate. As the market leader in this space, the company has approximately 60% share, and has an unrivalled commitment to innovation and new products. We are attracted to the business because of their leadership, high margins (gross profit margins to reach 75%) and growth potential while also delivering tangible social impact. The company also has a growing annuity income stream from servicing their recipient base.
During the year, the company sold 36,456 units of cochlear implants, which was up 15% on last year, and up 9% on FY19, the year before COVID. The company’s FY20 results were greatly affected by COVID as hospitals and the entire healthcare system directed their efforts to treating patients affected by the pandemic. It was therefore pleasing to see cochlear implant sales exceed the level reached in FY19. The company generated $899 million in cochlear implant sales.
The Services segment includes the sales from processors, accessories, batteries etc. to recipients of their cochlear implants. During the year this segment generated sales of $439 million. The growth of this division depends on the installed base of cochlear implant recipients, which grows every year as the company implants more units. It also depends on new processors and accessories the company launches in any given year and a new processor (Kanso 2) was in fact launched in October. Given the recurring nature and embedded growth of this revenue stream, we think it is reasonable to ascribe a high multiple to this revenue and income stream.
The company’s profit guidance of $265m-$285m for FY22 disappointed investors, and the stock was subsequently sold off. Given the continued impact of COVID especially in emerging markets, cochlear implant growth may be muted in FY22. However given the large addressable market, long term growth potential and positive social impact, we remain invested in the company. Furthermore, given the company’s innovative culture and research capabilities, we think they are well placed to maintain their leadership over competitors and take market share.
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