ResMed's Revenue Jumps, but Higher Costs Keep Profits in Check

By Brian Feroldi Markets Fool.com

Roughly one out of every five adults suffers from sleep-disordered breathing. Left untreated, this condition can greatly increase a patient's chance of developing diabetes, heart disease, obesity, and more. Decades ago,ResMed(NYSE: RMD)pioneered a treatment called continuous positive airway pressure, or CPAP, which utilizes a pump and mask to keep a patient's airway open during the night. ResMed's sales and profits have consistently grown ever since.Coming into Monday night's earnings report, investors were expecting more of the same.

Continue Reading Below

Let's take a closer look at the company's second-quarter performance to see how it fared during the period.

Image source: Getty Images.

ResMed fiscal year 2017 Q2: The raw numbers

Metric

Q2 2017

Q2 2016

Change (YOY)

Sales

$530.4 million

$454.5 million

16.7%

Net income

$76.7 million

$95.6 million

(19.7%)

Non-GAAP net income

$103.3 million

$102.5 million

0.8%

Non-GAAP EPS

$0.73

$0.73

0%

Data source: ResMed. YOY = year over year.

Continue Reading Below

What happened with ResMed this quarter?

  • Revenue rose by nearly 17% during the quarter to $530 million. However, a sizable portion of the increase camefrom last year's acquisition of Brightree, a medical software-as-a-service business. Excluding Brightree, revenue grew by 9% in the Americas and by 13% on a constant currency basis overseas.
  • Gross margin for the period was 58.3%. That was up 0.2 percentage points over the year-ago quarter. Management credited the gains tothe Brightree acquisition plusmanufacturing and procurement efficiencies. However, those gains were partially offset by product mix and declines in average selling prices.
  • Spending on SG&A and R&D outpaced revenue growth during the quarter. Management said the increase was due to highermarketing expenses associated with new product launches, higher legal costs, and the Brightree acquisition.
  • Non-GAAP net income came in at $103.3 million while diluted EPS was $0.73. These figures were basically flat year over year. However, the year-ago quarter benefited from a tax benefit of $5.1 million. If you adjust for this impact, then non-GAAP earnings per share would have increased by 6%.

Looking beyond the numbers, ResMed also strengthened its product lineup during the quarter. The company announced FDA approval of the AirMini, which is a tiny CPAP machine designed to be used while traveling. The company also launched two new masks during the quarter -- AirFit F20 and AirFit N20 -- which utilize the company's new sealing technology. Demand for these new masks is outpacing supply, so the company is working hard to ramp up production.

What management had to say

CEO Mick Farrell expressed his enthusiasm for the company's quarterly performance and new product offerings:

We continue to pioneer game-changing products and create value with our solutions. This quarter we announced:FDAclearance for the world's smallest travel CPAP; the creation ofSleepScore Labsto focus on consumer sleep wellness; reaching the milestone of one billion nights of sleep data; and new research demonstrating that the use of myAir significantly improves patient adherence to sleep therapy inEurope.

He also reminded investors that the company remains well positioned to deliver on its longer-term goals, noting:

We are focused on our goal of changing the lives of 20 million patients by 2020, and we continue to lead the industry through an exciting pipeline of new products and connected care solutions that improve patient outcomes, create efficiencies for our homecare customers, and help physicians and providers better manage chronic disease and lower healthcare costs.

Looking forward

ResMed's headline numbers compared favorably to Wall Street's expectations. In response, shares rose by almost 10% on Tuesday. Given the strong demand for the company's new products and management's laser-like focus on increasing awareness of sleep disorders, ReMed continues to look well positioned to deliver sales and earnings gains from here.

10 stocks we like better than ResMed
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and ResMed wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017.

Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends ResMed. The Motley Fool has a disclosure policy.