Operating Leverage Drives ResMed's Profits Higher

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ResMed (NYSE: RMD), a medical device company focused on sleep-disordered breathing, reported its fiscal second-quarter results on Monday, Jan. 22. Increasing popularity of the company's software solutions, masks, and sleep apnea devices helped drive double-digit gains in both revenue and profits.

ResMed's earnings results: The raw numbers

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What happened with ResMed this quarter?

  • Revenue grew 11% on a currency neutral basis.
  • Total device sales increased by 9% while masks and other revenue increased by 13% in constant currency terms.
  • Revenue from the company's Brightree software-as-a-service business grew 14% to $38.7 million.
  • Selling, general, and administrative expenses and research and development expenses grew by 9% and 6% year over year, respectively. That's consistent with the guidance that management laid out during its last earnings report.
  • The company repurchased 100,000 shares during the quarter a cost of $8.5 million.
  • The huge jump in non-GAAP EPS was driven in part by a lower tax rate. On a normalized basis, non-GAAP EPS would have grown 14% over the prior-year quarter.

What management had to say

CEO Mick Farrell commented: "Our masks have performed well around the world, device sales are solid, and our cloud-based software continues to grow rapidly. Our operating excellence initiatives are achieving leverage in the business with more runway ahead."

He also expressed his excitement for the company's first ResMed-branded portable oxygen concentrator. Called Mobi, management believes this new device will help the company better compete against the current market leader, Inogen.

Turning to reimbursement, CEO Farrel highlighted that France recently increased its reimbursement for telemonitoring of sleep devices. He believes that this will be a boon to the company's growth in the country, and he also affirmed that the company is in open dialogue with other governments in an effort to convince them to follow France's lead.

Looking forward

CFO Brett Sandercock spent a significant amount of time on the company's conference call discussing how the recent changes to the tax code in the U.S. and Australia are going to impact ResMed. Management estimates that the net result of all of those changes will lead to an effective tax rate in the range of 14% to 16%, which is much lower than its prior estimate of 22%.

Looking beyond the tax changes, Farrell reaffirmed his belief that the company's new products and software solutions position the company well for continued success, stating, "We are positioning the company for long-term top and bottom line growth for 2020 as we continue to execute on our strategy and action, implement operating excellence initiatives and lead the med tech field to unlock value with connected health as well as digital health solutions."

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

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