ResMed (RMD) Beats Q3 Earnings, Misses Sales Estimates

ResMed Inc. (NYSE:RMD) announced third-quarter fiscal 2017 adjusted earnings per share (EPS) of 71 cents, up 2.8% from the prior-year quarter level. Earnings also beat the Zacks Consensus Estimate by a penny.

Including one-time items, ResMed reported EPS of 62 cents in the quarter, down 3.1% year over year.

Revenues in Details

Revenues in the reported quarter increased 13.3% year over year (up 14% at constant exchange rate or CER) to $514.2 million. The figure however missed the Zacks Consensus Estimate of $519.6 million.

On a geographic basis, revenues in the Americas rose 18% year over year to $332.1 million, which included Brightree revenues of $35.0 million. Excluding Brightree, revenues in the Americas totaled $297.1 million, reflecting a 5% increase over the prior year quarter. Revenues in combined EMEA and APAC were $182.1 million, highlighting a 9% rise at CER, compared to the same period last year.

Adjusted gross margin expanded 103 basis points (bps) year over year to 58.3% in the reported quarter. Selling, general and administrative expenses were up 15.5% year over year to $137.8 million, while there was a 24.9% increase in Research and Development expenses to $35.1 million. This led to a 17.3% rise in adjusted operating expenses, which amounted to $172.9 million. Accordingly, adjusted operating margin in the quarter contracted 13 bps to 24.6%.

Financial Update

ResMed exited third-quarter 2017 with cash and cash equivalents of $827.3 million, compared with $788.1 million in the second quarter.

Year to date, the company generated $273.7 million of cash flow from operations, down from the year-ago figure of $404.9 million, displaying weak underlying earnings and a decline in net working capital balances.

Concurrent to its third-quarter earnings release, ResMed announced a quarterly dividend of 33 cents per share, representing a 10% increase from the company’s prior payout. The dividend will be paid on Jun 15, to shareholders of record as on May 11.

As previously declared, ResMed temporarily suspended its share repurchase program due to recent acquisitions. However, the company still expects to recommence the buy-back program sometime in fiscal 2018.

Guidance

Management expects SG&A expenses, as a percentage of revenues, in the band of 26%–27%. R&D expenses, as a percentage of revenues, are projected at 7% for fourth-quarter 2017. This reflects marketing expenses associated with product launches along with the ongoing legal expenses.

Our Take

ResMed exited the third quarter on a mixed note with earnings beating the Zacks Consensus Estimate and sales missing the mark. Challenges like competitive bidding and reimbursement issues continue to plague the stock. Foreign exchange movements dented third-quarter earnings by a penny, thanks to the weaker Euro and stronger Australian dollar relative to the U.S. dollar.

On the bright side, the company achieved solid double-digit global revenue growth this quarter, led by sales from Software-as-a-Service businesses as well as its new mask products. The company also launched the ResMed AirMini during the reported quarter. All these factors boost investor faith in the stock.

Zacks Rank & Key Picks

ResMed currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the broader Medical space include Inogen, Inc. (NASDAQ:INGN) , ZELTIQ Aesthetics, Inc. (NASDAQ:ZLTQ) and Hill-Rom Holdings, Inc. (NYSE:HRC) . While Inogen and ZELTIQ Aesthetics sport a Zacks Rank #1 (Strong Buy), Hill-Rom carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen gained 53.4% in the last one year, compared with the S&P 500’s gain of 15.6%. The company reported a stellar four-quarter positive average earnings surprise of over 49.08%.

ZELTIQ Aesthetics surged 88.9% in the last one year, in comparison to the S&P 500. Its four-quarter average earnings surprise was a positive 12.03%.

Hill-Rom gained over 52.7% in the past one year, better than the S&P 500 mark. It posted a trailing four-quarter positive average earnings surprise of 3.1%.

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