It’s rare that 20% growth becomes run-of-the-mill for a company, but that’s exactly the feeling we get from SomnoMed. The final quarter of the financial year was another strong one for the maker of mouthguards that alleviate the symptoms of mild sleep apnea.
The company sold a record 14,965 units in the three months to June, up 21% compared to the same period last year. Sales were strong in North America and Europe – rising 26% and 23% respectively – but Asia Pacific sales grew a paltry 2.5%. Total revenue increased 29% in the quarter, while revenue for the year to June rose 28% to $44m.
US and European sales growth robust
Licensee sales continue to decline
Take profits to maintain portfolio weighting
Management didn’t put a lot of colour around why Asia Pacific sales were poor, though we’ll hopefully hear more when the full-year results are released next month. Newer Asian markets continued to see robust growth, with an 18% increase in sales in Japan and 28% growth in South Korea.
We were particularly pleased to see quarterly sales growth of 26% in the US, as the out-of-pocket expense for treatment went up in January this year due to an increase in US private health insurance premiums and deductibles. The US accounts for nearly half of total sales.
‘Sales in the fourth quarter and especially June indicate that the impact of insurance reimbursement issues generally experienced at the beginning of the new calendar year have been overcome and patient demand is back to normal. This augurs well for the second half of this year,’ said executive chairman Peter Neustadt, who will hand over executive duties to Derek Smith in September (see SomnoMed gets a new chief).
Licensee sales shrink
The company sold a total of 55,975 units direct to customers throughout the year, up 23% compared to 2015. Licensee sales, however, fell 47% to 3,008 units as SomnoMed continues to concentrate on direct sales, rather than licensing its SomnoDent device to third parties. Licensee sales now represent only 5% of global sales, compared to 11% a year ago.
SomnoMed has successfully made the change from a licensee-based business model to a direct-to-customer focus without disrupting sales growth. However, the next phase in its plan could be more challenging.
SomnoMed intends to open five US-based sleep centres in 2017 and 10 more in 2018, which will allow the company to use in-house dentists to diagnose patients and fit its mouthguards, as well as provide other functions, such as help patients with insurance questions. Management has done a commendable job moving the company from licensee to direct sales, but running brick-and-mortar sleep clinics is a large and untested shift in the company’s business model (see SomnoMed’s shifting business model).
Add to this a new chief executive starting in September and a share price that has risen 153% since we upgraded the stock in SomnoMed: A future mini-ResMed? on 5 Feb 14 (Speculative Buy – $1.33). We’re not predicting disaster – far from it – but it’s clear that the balance of risk and reward is shifting.
The rapid increase in SomnoMed’s share price means that the stock may have become a larger part of your portfolio than is warranted for what is still a risky stock. We’re happy with the company’s progress and expect sales growth to continue, but we highly recommend locking in profits if and as the share price rises so that you keep your portfolio weighting below 2%. HOLD