Cochlear (ASX:COH) executives told investors the company’s first-half performance was shaped by the global rollout of its Nexa cochlear implant platform, which management described as a “very successful launch” that nevertheless contributed to a shortfall versus internal expectations due to timing, contracting, and software installation delays.
CEO and President Dig Howitt said first-half sales revenue declined 2% in constant currency, with underlying net profit of AUD 195 million. He attributed the miss to the pace of Nexa implementation and the timing of price increases, noting the company does not expect to fully recover the first-half shortfall in the second half.
Nexa rollout: strong adoption, but timing weighed on first-half results
The company pursued price increases in markets where reimbursement systems allow for new-technology pricing, but management said negotiations often occur hospital-by-hospital, including in Germany and the US. Howitt said the company achieved the targeted price increases, though in some cases it took longer than expected. He also noted competitive responses during negotiations, including discounts for bulk purchases by competitors, which contributed to some short-term market share losses on a hospital-by-hospital basis.
Despite those challenges, management highlighted several indicators of traction:
- By December, over 80% of developed market sales were Nexa, with further increases expected as additional country registrations and contracts are completed.
- In November and December, Cochlear implant unit sales in key developed markets increased 10% year-over-year, which Howitt described as evidence of Nexa’s impact once installed.
- The company achieved a low single-digit overall price increase, with Howitt noting that higher increases were sought in certain markets but not achievable everywhere.
Howitt said developed markets were “a little bit up” while emerging markets posted good volume growth but lower revenue due to China’s volume-based pricing (VBP), resulting in overall cochlear implant sales down 2% in constant currency for the half.
Segment performance: services grew in developed markets; acoustics hit by competition
Management said the services business performed in line with expectations, with developed markets up 4% in constant currency. Howitt attributed growth to strengthened digital marketing, improved targeting of upgrade-eligible recipients, messaging around Nucleus 8 (including waterproofing), and the launch of Kanso 3. He said the second half is expected to be stronger, driven in part by the retirement of Nucleus 7 in the US, adding that inquiries about upgrades have risen in recent weeks.
In acoustics, sales declined 3% in constant currency. Howitt said underlying market growth remained strong—particularly for Osia in Western Europe and Australia—but a competitor product launched about 12 months earlier began to affect share, especially in the US and UK. He said Cochlear remains confident in Osia’s hearing outcomes and MRI indications and expects to regain share over time, alongside market growth and upgrades supported by the availability of Baha 7.
Margins, spending, and balance sheet: mix shift and launch costs pressured gross margin
Finance executive Sarah said gross margin declined two points to 73%, which she said was “largely expected.” She cited three primary drivers:
- Mix shift toward lower-margin emerging markets, including the ongoing effect of China VBP.
- Nexa launch costs, with higher initial cost of goods sold expected to improve as volumes rise and the company moves up the “experience curve.”
- Chengdu facility ramp-up, which she said will remain a small headwind for another year or so.
Operating expenses declined 2% as the company continued to invest in growth initiatives and R&D but deliberately phased some costs into the second half to align with the revenue weighting, and cycled prior-year one-off projects. She reported an underlying net profit margin of 17%.
Below the line, Sarah highlighted AUD 24 million of cloud computing-related expenses reported as a significant item, and fair value losses on investments of AUD 9.6 million related to Soluta following its listing in December.
On the balance sheet, Sarah said working capital increased AUD 48 million, driven mainly by “fairly conservative safety stock” during the rollout of Nexa, Kanso 3, and Baha 7, and additional inventory in anticipation of a “big second half.” She said inventory is expected to moderate in the second half. Net cash decreased AUD 103 million due to working capital, a AUD 34 million cloud investment, higher tax payments due to timing, and first-half bonus payments. Capital expenditure totaled AUD 40 million for expansion in the Leaden Cove and Malaysia facilities.
Outlook: guidance shifts to the lower end; FX a key variable
Howitt said Cochlear now expects to land at the lower end of its original guidance range of AUD 435 million to AUD 460 million (prior to currency effects), citing the first-half shortfall and the view that it will not be fully made up in the second half. He reiterated expectations for stronger second-half performance across cochlear implants and services and anticipated some lift in acoustics.
Foreign exchange remains a significant swing factor. Howitt said if the Australian dollar stays near current spot rates, the impact would be approximately a AUD 30 million net profit hit across the second half. Management provided sensitivity metrics: roughly AUD 3 million per one-cent move against the US dollar and AUD 4 million per one-cent move against the euro for the half, reflecting hedging coverage. Howitt also clarified that the company’s hedging program is designed to partially hedge cash flow repatriation rather than fully hedge net profit.
Strategy: cloud migration, R&D restructure, and seniors growth efforts
Howitt said Cochlear has been undertaking restructuring across the company, with the costs taken through operating expenses rather than treated as separate restructuring charges. He described three strategic focus areas:
- Cloud transition, including aligned processes and data architecture to improve scalability and enable future AI use cases.
- R&D reorganization into a more modular structure to improve accountability and ensure capability “concentrations” for future technology development.
- Growth programs targeted at adults and seniors, including experiments to expand referrals from the medical channel and new messaging on cognition and hearing loss, supported by independent study results discussed on the call.
In Q&A, Howitt said referrals from hearing aids were “a little bit softer” during the half, potentially consistent with slower hearing aid unit growth, while direct-to-consumer efforts showed “good progress.” He also said pediatric developed market volumes were broadly flat, with some unexpected declines in certain areas including the US.
Howitt added that the company’s share losses tied to Nexa contracting were viewed as short-term, and said the company remains focused on driving sustainable market growth over time.
About Cochlear (ASX:COH)
Cochlear Limited provides implantable hearing solutions for children and adults worldwide. It offers cochlear implant systems, sound processor upgrades, bone conduction systems, accessories, and other products. The company was founded in 1981 and is headquartered in Sydney, Australia.
