- ResMed, maker of sleep apnea and respiratory care devices, reported second-quarter revenue that missed analysts' targets, sending its shares plummeting more than 19% on Friday.
- Sales slowed due to the completion of connected device upgrade programs in France and Japan. On the company's earnings conference call, ResMed CEO Michael Farrell said the impact is expected to last for the next several quarters.
- Earnings, however, exceeded expectations, aided by a lower-than-expected tax rate and an acquisition strategy that will help the company diversify away from its core sleep business, analysts said.
ResMed has increased its focus on what it calls its home health software-as-a-service (SaaS) platform, with recent acquisitions in the area including Propeller Health, MatrixCare and HEALTHCAREfirst. Analysts expect the shift toward SaaS revenue to boost margins longer term.
"Though ResMed will need to prove out the synergies with these transactions, we believe the company is focused on adding new high-margin market opportunities for itself that extend its leadership position and breadth of products/services within respiratory care," William Blair analyst Margaret Kaczor said in a note to clients.
Kaczor, who has an "outperform" rating on ResMed's shares, said the impact of the reimbursement changes in France and Japan should be transient, with sales growth normalizing in fiscal 2020. She predicted other countries would implement similar telemonitoring incentives in the future.
San Diego-based ResMed said fiscal second-quarter revenue rose to $651.1 million, up 8% from a year ago, on strong sales across its mask and device portfolios. SaaS revenue climbed 63%, supported by continued growth in the company's Brightree service offerings and contributions from the MatrixCare and HEALTHCAREfirst acquisitions.
Net income of $124.6 million, or 86 cents a share, rose sharply from $9.5 million, or 7 cents a share, in the year-ago period, when a one-time transaction tax was recognized.
Jefferies analyst Anthony Petrone, who rates the stock "underperform," said ResMed's underlying sales growth decelerated to 9% on a constant currency basis, from 13% last quarter, while its core sleep business slowed to 4.5% from 11.4%, when adjusted for SaaS contributions.
Farrell, on the call, said the company expects to return to market growth rates for device sales in France and Japan after a few quarters and then to achieve above-market growth in those geographies after that. "Outside of these two countries, our device growth was strong during the quarter and we expect that to continue as we move forward," the CEO said.
During the second quarter, ResMed also launched a joint venture with Verily to combine the latter's advanced health data analytics with its sleep apnea expertise to develop software to enable better diagnosis and treatment of breathing-related sleep disorders. Through Brightree, it acquired Apacheta, a cloud-based SaaS provider of mobile applications.