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Cochlear (ASX:COH) share price on watch after FY20 profit takes a hit

The Cochlear Limited (ASX: COH) share price will be on watch today after the company released its full-year financial report.

Cochlear is one of the world’s leading medical businesses. The company designs, manufactures and supplies the Nucleus cochlear implant, the Hybrid electro-acoustic implant and the Baha bone conduction implant, amongst others.

Cochlear’s FY20 report

Cochlear reported that its sales revenue declined by 6% to $1.35 billion, or 11% in constant currency. Like many other companies, Cochlear’s financial year was a tale of two halves – first-half revenue climbed 9%, partially offsetting a 22% fall in the second half of FY20.

Services revenue fell 7% (or 12% on a constant currency basis) to $395.5 million and now represents 29% of the company’s sales mix. Cochlear implants accounted for 61% of sales, achieving revenue of $817.9 million, down 3% or 8% in constant currency. The remaining 10% of sales came from the acoustics line (e.g. bone conduction and acoustic implants), which saw a 20% fall in revenue to $138.9 million.

As announced in a trading update in May, cochlear implant unit sales across developed markets declined by around 80% as most elective surgeries were postponed. Surgeries recommenced across many markets across mid-May and by the end of June, the company said more than 80% of cochlear implant surgical centres in developed markets had recommenced surgeries.

Turning our attention to services, Cochlear said this business was materially impacted by COVID-19 in the fourth quarter of FY20. The services business generates revenue when, for example, a patient comes back for a sound processor upgrade or improvement to their device. The company noted that while some recipients have been able to access sound processor upgrades remotely, clinic closures have delayed access to these upgrades for many people.

Cochlear reported a 42% decline in underlying earnings before interest and tax (EBIT), which came in at $206.9 million. Underlying net profit suffered a similar fate, also falling 42% to $153.8 million.

However, including $11 million of innovation fund gains and $416 million of patent litigation expenses, Cochlear reported a statutory loss of $238.3 million. The patent litigation expense relates to an adverse judgement in the long-running AMF patent infringement case, which Cochlear provided an update on yesterday.

Cochlear ended the period with $930 million cash on its balance sheet, bolstered by its $1.1 billion capital raising announced in March. Factoring in $473 million of debt, the company ended the financial year in a net cash position of $457 million.

Cochlear’s dividend

Back in March, Cochlear suspended its dividend until trading conditions improve. This sentiment was reiterated today, with Cochlear deciding not to pay a final dividend. The company did, however, pay an interim dividend of $1.60 per share earlier in the year.

The board expects to resume paying dividends once a clear and sustained improvement in sales revenue has been established and cash flow generation is sufficient to support its resumption.

What happens next?

Looking forward, Cochlear said unit volumes were at 50% of last year for the June/July trading period in emerging markets. While surgeries in China are growing quickly, surgeries in other markets like India and Latin America have remained low as COVID-19 cases continue to grow.

Cochlear also said its services business continues to be impacted by lower clinic capacity, with June/July revenue at around 70% of last year’s levels. However, the company expects the launch of the Kanso 2 Sound Processor, the growing recipient base and the adoption of remote care tools to underpin demand for upgrades over the longer term.

Due to the uncertain timing of a global recovery from the pandemic, Cochlear held off from providing earnings guidance. It will provide a trading update at its annual general meeting in October.

One question for investors now is whether or not Cochlear’s customers can rely on government and health insurance funding for its expensive devices post COVID-19. I’m not a buyer of Cochlear shares today, I’d rather invest in the growing health technology share profiled in the free investment report below.

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Disclosure: At the time of publishing, Cathryn does not have a financial or commercial interest in any of the companies mentioned.

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