ResMed Inc. (RMD), a pioneer in sleep and respiratory disorder related medicines, reported first-quarter fiscal 2015 (ended Sep 30, 2014) earnings per share of 58 cents, in line with the Zacks Consensus Estimate. Results, however, exceeded the prior-year quarter's earnings of 56 cents per share, registering an increase of 3.6% year over year.
The year-over-year improvement came as solid sales growth made up for weaker margins.
Following the earnings release, ResMed's share price rose 9.1% to close at $52.02 on Friday.
Revenues were Strong
Revenues in the reported quarter rose 6.4% year over year to $380.4 million, surpassing the Zacks Consensus Estimate of $376 million. On a constant currency basis, revenues increased 6% year over year driven by new product launches. ResMed successfully launched products in both the sleep disorder breathing and respiratory care markets..
All the regions – Europe, Asia-Pacific as well as in the Americas, recorded strong revenue growth.
On a geographic basis, revenues in the Americas grossed $207.2 million, up 2.8% from the year-ago quarter, while sales outside the Americas increased 11% year over year (up 11% at constant exchange rate or CER) to $173.2 million.
The flow generator category recorded 12% sales growth at CER while masks and other were flat compared with the prior-year quarter. In the Americas, flow generator sales were $95.3 million, up 8% year over year on account of U.S patient volumes growth. Masks and other sales were $111.9 million, down 1%, reflecting a competitive environment.
For revenues outside the Americas, flow generator sales were $119 million, up 15% year over year at CER. Masks and other sales were $54.2 million, up 2% at CER.
Margins Decline
ResMed's gross margin was 62.4% in the quarter, down 130 basis points (bps) year over year, on account of decline in average selling prices and an unfavorable product mix, partially offset by manufacturing and supply chain improvements.
Research and development expenses totaled $30 million, up 9.7% year over year, driven by the company's incremental investment in healthcare informatics and cardiology.
Selling, general and administration expenses amounted to $110.5 million, up 9.1% year over year, owing to higher marketing costs associated with recent product releases, additional headcount to support ResMed's commercial activities and an increase in variable employee compensation costs.
Accordingly, adjusted income from operations (excluding the impact of amortization expense) came in at $96.7 million, reflecting a downside of 2.5% from the prior-year quarter. Consequently, the company recorded an operating margin of 25.4%, down 240 bps from first-quarter fiscal 2014.
Financial Updates
ResMed exited the quarter with cash and cash equivalents of $881.7 million compared with $905.7 million at the end of fiscal 2014.
The company generated $77.7 million in cash flow from operations in the first quarter, reflecting strong underlying earnings and effective working capital management. Moreover, capital expenditure was $20.7 million.
During the quarter, ResMed repurchased 835,000 shares at a cost of $42.9 million, as part of its ongoing capital management program.
Our Take
We are satisfied with ResMed's first-quarter fiscal 2015 financial results, whereby the top line beat the Zacks Consensus Estimate while the bottom line met the same. The company has started investing toward its growth initiatives in Asia with particular focus in China and India, including the emerging markets of Brazil and Eastern Europe.
Also, in the quarter, ResMed launched innovative products for the sleep-disordered breathing market, including the new AirSense 10 platform, as well as a new life support ventilator for the U.S. respiratory care market – the Astral platform. We believe such innovations will help expand the company's share in the core sleep apnea market and consequently contribute to its profit.
However, management anticipates product price to adversely affect year-over-year revenue numbers until the third quarter of fiscal 2015.
Zacks Rank
ResMed currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks that warrant a look in the medical products sector are GW Pharmaceuticals plc (GWPH), ZELTIQ Aesthetics, Inc. (ZLTQ) and Abaxis, Inc. (ABAX). While GW Pharmaceuticals and ZELTIQ Aesthetics sport a Zacks Rank #1 (Strong Buy), Abaxis holds a Zacks Rank #2 (Buy).
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