Infection control company Nanosonics (ASX: NAN) today released its first half results for the 2020 Financial Year. Nanosonics sells the Trophon EPR device for disinfecting ultrasound probes, as well as the consumable capsules required for each disinfection cycle. This can be thought of as a razor + blade business model.
The bad news was that profit before tax was down to $6.7 million for the half, as the company ramped expenditure on R&D and expansion into new markets, such as Japan and China. On top of that, there was an increase in selling expenses related to the new deal with their US distributor. That deal saw revenue from consumables skyrocket about 41%, half on half, but did involve some additional selling costs.
Overall, the 19% revenue growth to just over $48 million might seem decent, but it would have been better if the company hadn’t suffered from a 24% reduction in capital equipment sales to its North American distributor. As you can see in the chart in this A Rich Life article on Nanosonics, the company has not always grown revenue every single half, due to the lumpiness of distributor destocking and restocking. On the bright side, destocking events have historically been followed by re-stocking events, which boosts sales in a future period.
Importantly, the company continued to grow its installed base, reaching nearly 50% of the addressable market in the US. As the installed base grows, the company builds its quasi-recurring revenue from consumable sales. On that front, the company reported growth in all regions. Particularly exciting for long term shareholders was the news that it had installed its first units in Japan, which is promising given it has spent several years building the ‘fundamentals for adoption’ (such as regulatory guidelines) in that market. Next stop, China.
Finally, the company is suggesting its next product — with a similar business model and addressable market to the Trophon — will begin commercialisation in FY 2021. That could be an important step change for the company in the long term. For now, though, shares are trading on a high multiple of earnings, indicating the market is pricing in plenty of growth.
Check out what other members’ are saying on the Nanosonics Company Page.
Claude Walker is the founder of A Rich Life, an online periodical that covers investing, art, culture & philosophy. Claude is a highly experienced private investor with a very successful long-term track record. He owns shares in Nanosonics, but reduced his holding on the day of publication.
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