ResMed: managing costs to stay ahead

Technologies tend to get cheaper over time, and that goes for assisted breathing technologies too. We've lost track of how many ResMed results have included the line 'gross margin was slightly lower than the prior year quarter mainly due to declines in average selling prices, which were partially offset by manufacturing and procurement efficiencies.' The company's gross margin fell slightly from 58.4% to 58.3% in the three months to September, compared to the prior year.

This tells us a couple of things: the first is that ResMed is pretty good at cutting operating costs and taking advantage of operating leverage. In fact, the company's net profit margin is slightly better today than it was 10 years ago, despite the gross margin falling from 62% to 58%. The losses here, however, were more than offset by keeping a lid on general and administrative expenses, which have fallen as a proportion of revenue from 33% to 25%. 

The second thing management's repetitive statement tells us is that competition continues to be intense, even though the industry is dominated by a few large firms. Declining average selling prices suggest that no matter how many touch screens and comfort options ResMed adds to its continuous positive airway pressure (CPAP) machines and masks, customers are still price conscious. Competitors are adding bells and whistles too, so offering the lowest price is often what makes the sale. 

Top line growth

Revenue rose 13% to US$588m in the September quarter, while net profit increased 23% to US$106m due to administrative and research expenses being relatively unchanged from last year. This was a strong result, particularly because the growth was across all product categories and in all geographic markets. Sales were up 16% in Europe and Asia, compared to 10% growth in North and Latin America.

Some highlights of the quarter include the $US$126m purchase of Healthcarefirst, a software maker for home health and hospice agencies. ResMed also formed a joint venture with data analytics provider Verily to study the health and financial impacts of untreated sleep apnea and to build software to help diagnose sleep disorders.

Both of these partnerships should support the company's strategy to offer the best software for patients and providers, rather than drive sales solely by hardware improvements. ResMed's customers come in two varieties - the sleep apnea patients themselves, and the home care providers who deliver medical treatment and support in the patient's home. Home care providers act as 'gatekeepers' and have a significant influence on which brand of CPAP machine and mask a patient uses. Management knows that if it can improve the experience of the gatekeeper, the patients will follow.

ResMed trades on a forward price-earnings ratio of 28 based on consensus estimates for 2019 earnings. We're happy with the revenue and earnings growth this quarter and glad to see cost-cutting measures more than offsetting falling average selling prices. HOLD