Cochlear FY20 Results (ASX: COH)

Cochlear FY20 Results (ASX: COH)

Cochlear (ASX: COH) has reported its full-year results for FY20. We take a look at the company’s headline figures, key commentary and guidance outlook, plus review the share market’s reaction across the trading day.


Headline result

With sales revenue falling 6% to $1.4 billion, Cochlear swung to a sharp net loss of $238.3 million as the impact of litigation expenses took hold.

Underlying net profit fared better, but still showed a 42% drop to $153.8 million.

The company has decided not to declare a final dividend. Management has indicated that payment of a dividend will be suspended until “a clear and sustained improvement in sales revenue has been established and cash flow generation is sufficient to support its resumption”.

Shareholders bought into the company’s somewhat positive trading update since the close of EOFY, as Cochlear shares surged 9.8% to close on $217.74.


Key commentary

Patent litigation expenses were the biggest drag on Cochlear’s statutory reports, with an impact of $416.3 million. This expense was responsible for the company’s swing to a net loss, however, the underlying business was also hit by a slowdown in operations throughout the second-half of the financial year as COVID-19 spread throughout the world.

Cochlear implant units declined 7% across the financial year, with a 26% drop in the second-half of the year proving insurmountable. The first half of FY20 recorded a 13% increase in implant units. This was largely reflected in the company’s overall sales revenue performance, where a 9% increase in H1 was outweighed by a 22% slump in H2. In constant-currency terms, Cochlear’s sales revenue was worse than the -6% headline result, instead coming in at -11%.

While COVID was the predominant force in suppressing sales, and in turn pushing profits lower, this can be tied to the fact that there was a marked rise in deferrals of cochlear impact surgery, particularly in the US and Western Europe. By the end of June, 2020, surgery has recommenced in over 80% of its cochlear implant surgical centres, however, the extent of the recovery and market conditions have varied significantly from one region to the next. The UK, Spain and Italy are among those where the recovery has lagged. China continues to be a bright spot for the business, contrasting conditions in Cochlear’s other emerging markets.

Services revenue fell 7% and 12% in constant-currency terms, with a material impact in the fourth quarter of FY20 as clinic closures delayed access to sound processor upgrades for individuals. Acoustics revenue dived 20% and 24% in constant-currency terms with elective surgery deferrals once again proving stifling to the company. However, competitor product launches also weighed on the result. The US market for acoustic implant surgery has improved since May, but the UK market has not yet restarted.

The company acted to strengthen its balance sheet and liquidity position through corporate action, raising $1.1 billion from the market in the second half of FY20, in addition to a $225 million increase in its debt facilities. Nonetheless, investment in R&D remains a priority for the business, with $185 million spent during the year to entrench the company’s leadership position in the global market.


Guidance outlook

No net profit guidance has been provided by the company given the uncertainty surrounding its revenue for FY21. A trading update will be provided at Cochlear’s October AGM. Although no revenue forecast has been put forward, management expect operating expenses to increase by 4% in FY21, while investment in R&D is set to increase to $190-195 million.

Cochlear implant revenue recovered to 85% of the prior year’s total in June and July as surgeries recommenced across most markets. There have been some market share gains in developed markets, however, the company is cautious of the risks associated with a ‘second wave’ of COVID in regions that have reopened. Many clinics are still running below capacity, even in light of postponed demand from earlier this year only being serviced now. This is expected to have an impact on cochlear and acoustic implant volumes.

With the exception of China, emerging markets have proven more slow to rebound, with cochlear implant revenue in June and July sitting at 50% of the prior corresponding period.

Operating cashflow across the group is now currently around breakeven, largely thanks to the gradual improvement in trading.


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