Nanosonics: Interim result 2017

The first half of the 2017 financial year was another cracker for Nanosonics. Sales were up 132% to $36m for the six months to December, while the company made its first operating profit of $10.3m. Free cash flow was a healthy $8.2m, up 19% on the prior half. The result depicts a growth company in the early stages of a long-term roll out.

With the result already foreshadowed in Nanosonics posts strong sales, let's instead recap the company's strategy, which is like the razor/razor blade model pioneered by Gillette.

The first step in this approach is to establish a large installed base of razors (or Trophon units in Nanosonics' case), which locks the customer into ongoing purchases of consumables.

Nanosonics is doing exactly that with great success. Its installed base increased by 60% over the year to reach 12,300 units. North America has been the first target with 87% of the current installed base, but now the company is increasingly focusing abroad. Next on the hit list is the UK, Germany, and France, followed by Japan and the Middle East. In these new markets, Nanosonics is in various stages of building awareness and establishing its sales channels, which will form the basis of its medium-term growth aspirations.

Trophon units are a decent outlay for the medical department, costing around USD$13,000 depending on the sales channel. Nanosonics currently derives around two-thirds of its revenue from these one-off sales, a high yet normal proportion for a company early in a roll out.

As the installed base grows, we expect the proportion of sales from consumables to increase. This provides greater levels of recurring revenue. But with global adoption still in its infancy, it will be a slow road.

Nanosonics continues to trade at lofty multiples, but that might be justified given its potential for growth. We continue to recommend you take profits if and as the share price rises to a keep a maximum portfolio weighting of 2%. HOLD.

Note: The Intelligent Investor Growth Portfolio owns shares in Nanosonics. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.