The market isn't impressed with Nanosonics' latest half-yearly numbers -- shares are down 12% at the time of writing and now sit at their lowest level since 2019. In fact, shares are down roughly 50% from their all time high of $8.25 reached at the start of last year.
I think this is mainly due to valuation concerns, and let's face it, shares aren't that cheap according to traditional measures. At the current price of $4.15 (a market cap $1.25b), the company trades on over 10x sales (trailing 12m basis), or a trailing PE of 111x. And this is after a 50% fall from all time highs!
But let's put valuation aside for now, and see how the underlying business is doing.
The installed base of Trophon units continues to grow -- up 12% in the past 12 months and up 5% in the last 6 months.
The pace of growth here has clearly slowed. The company highlighted a 14% improvement from Q1 to Q2, as covid impacts waned, but compared to the first half of last year you're looking at only a 2% lift in new installed units added. Given the circumstances, i think that's far from terrible, but we certainly need to see improved new installed unit growth in the coming periods.
Covid likewise had an impact on ultrasound volumes, so little surprise to see consumables revenue (the juiciest, high-margin revenue) down 3% on the preceding half. Still, compared to the prior corresponding first half you're looking at a very decent 23% lift.
Add to that a very decent doubling in capital revenue, which was also 10% higher from the preceding half and you're left with a overall top line result that came in at $60.6m -- 41% higher than the pcp (but essentially flat from the preceding half).
A big part of this was the upgrade cycle of customers switching to the new and improved Trophon 2 unit. More than a 1/4 of their fleet represents units that are over 7 years old and will need to be replaced in coming years. That's about 7000 units.
So at this stage, although there was a loss of revenue momentum from H2 FY21 to H1 FY22, which i think is reasonably explained by the delta and omicron impact, i think the result is pretty good. But things look worse as you move down the income statement.
Operating expense increased 29% over the year, and R&D costs were up by 41% as the business continues to develop new products and build out its team. Added with some expenditure on the new corporate digs, and free cash flow dropped into the red by $3.8m. That's dropped the cash balance to $92m -- but, let's be honest, there are few ASX companies of this size that can boast such an impressive war chest.
Still, combine it all together and net profit was down 45% from the previous first half. And the market is also still not impressed with the revised sales agreement with GE (but I think it's actually a very good thing in the long run) -- that's going to have a $13-16m impact in the next half.
When I stand back, i see a market leader with a lot of runway, a very attractive "razor & blade" revenue model with super high customer retention, new products on the way, a fortress balance sheet and (eventually) improved operating margins.
Yes, there's a lot of uncertainty with their new product roll outs. They could well flop. But the new areas build on their core skillset and have a lot of parallels with the trophon product.
Yes, the transition to a direct sales model is going to have a nasty one off hit, and perhaps they'll be less effective with direct sales. But they know have enough important reference sites and relationship (especially for consumables sales) that make me optimistic they'll be better off long term here.
Yes, the price multiple is still eye watering, but added growth investments are depressing this. They could step back massively on this expenditure and the multiple would correspondingly drop rapidly, but that'd be a mistake longer term in my opinion.
Nevertheless, while i understand the need for added costs, i also want to see this expenditure justified by accelerating sales. It's definitely one of the main things to watch.
So it's really just about valuation -- something i need to revisit -- and not quality to my mind.
Full results presentation is here
While the pandemic probably helps Nanosonics longer term (increased awareness of infection control), it did knock the business around in the first quarter of FY21, sending revenue for the half down 11%.
In part, GE Healthcare (a major wholesaler) reduced purchases due to "impacts of covid on its inventory", which basically says lower sales through that channel. And that's due to a big drop in ultrasound proceedure volumes, with hospital resources -- particularly in US -- focused on the Covid-19 response.
Most of the damage was borne in the first quarter, though, with the company bouncing back strongly in the last few months of 2020.
The much stronger AUD also had an impact.
Geographically, it was North America that really floundered, with revenue dropping 38% in the first quarter, before largely recovering in the next. Interestingly, Europe & Middle East and Asia PAcific both saw growth over both quarters, with revenue in these regions up 50% and 8%, respectively, for the entire half. (though these segments represent only ~14% of total revenue.)
Despite the challenging half, Nanosonics continued to invest in its growth strategy, with operating expenses up 8% to $33m in H1. For the full year they are expected to come in around $75-$78m -- a ~20% increase on 2020.
Combined with the lower revenue, pre-tax profit was all but wiped out, coming in at just $0.2m vs $6.7m in the previous corresponding half.
Free cash flow also took a hit, down $2.4m compared to an inflow of $10m in the last first half, due appraently to timing effects of payments and receipts. Still, the company has a genuine fortress balance sheet -- almost $88m in cash with no real debt.
Part of the added costs were associated with R&D, something the company has invested over $50m in since 2017. It was up another 12% this year. That's fine, but we've been waiting for new products for a while now and it would be good to see some more progress here. There's a lot of intangible value to write down if they dont get a good return on all that money.
At any rate, it's good to see the impacts of covid appear to have been short-lived. Total revenue grew 48% in Q2 relative to Q1, and i-MED's 200+ unit upgrade will occur in the current half. GE has also resumed purchases. Revenue from consumables was up 29% in the same period, and in constant currency terms was a new company record.
Importantly, the Global installed base was up 12%, and 6% in the last 6m to just over 25,000 units. Q2 installs were up 38% on the first quarter.
Consumables sales are, of course, the best margin sales, and they were essentially flat with a 2% decline in US revenue being partly offset by an 11% increase in consumables revenue for Europe& Middle East. As procedure volumes continue to track up, there should be a return to growth in the current half.
Loking ahead, the company didnt give any guidance, other than to say they expect market conditions to continue to improve, and that the company remained focused on its strategy of (essentially) new products and new geographies, and cementing Trophon as the standard of care in hospitals.
Bottom line, it was a disappoing result -- especially for a business that is trading at 20x sales (traling 12m basis).
That being said, you can hardly blame management for COVID, and that really does seem to have had a legitimate impact on non-essential ultrasound proceedures, as well as a big interuption to sales cycles. The business appears to have recovered very well in the second quarter and has good momentum going into the second half.
I expect Nanosonics to be around and much larger in another 5-10 years. The company has been very good to me over the years, and i think there's still some value to be had for long-term investors.
But I would like to see an acceleration in the pace of growth from the core offering, especially outside of the US, as well as the release of some new products. We need to see some jutsification for all that investment.
Disc: held
Results here
Nanosonics has reported the following results for FY20:
- a 19% lift in full year revenue to $100.1 million
- (revenue growth was 26% for the first 3 quarters, with covid impacts allowing only a 1% increase in the last quarter of FY20.)
- The installed base was up 13%
- Consumables and services up 36%, at 70% of total sales.
- again, a noticable impact to sales in the last quarter, but overall have held up relatively well in my opinion
- Capital revenue was 9% due to covid and impact of prior year inventory management from GE (a new version of their Trophon product was released)
- Operating expenses up 28%, including a 37% rise in R&D. Total operating expenses are expected to rise a further 20%-odd in the current year.
- As a result, operating profit was down 26% to $12.4 million. If costs had been steady, operating profit would have grown around 50% on prior year.
- Cash of over $90 million (massive)
- $20m in free cash flow
All told I'm pretty happy with these results, which highlight just how attractive the business model is. Despite the impact to capital sales, the higher margin consumables revenue growth was very solid in a tough environment.
The slow down in ultrasound examinations resultant from the impacts of covid will be temporary (are already recovering), and overall I dare say the entire saga will only heighten awareness towards infection control.
And it was great to see so much free cash flow and a growing mountain of cash, both of which hit record levels. Nanosonics really does have a fortress balance sheet with oodles of capital to support growth (or a cash return to shareholders).
The company reckons it has about 20% of the global addressable market, so there's a lot of runway ahead.
But some things are concerning.
Disappointingly, new products slated for release in the current financial year will now likely be delivered the following year (pending regulatory approvals and project milestones). With shares on 20x sales, i was hoping they could commercialise new product lines more quickly.
Also the cost base is expanding rapidly. A lot of this is R&D, but also a load in infrastructire and people. Whether or not this is a good thing all depends on what return they can get on this spend, and how effectively they can scale their resources. Nanosonics will need to grow sales by more than 20% this year just to record a flat operating profit given the increased cost base.
And there's no guarantee that new products or new geographies will emulate their earlier success.
The company did not provide any guidance for FY21 due to the uncertainties of Covid, but the business expects an ongoing impact to capital sales.
All told, I really like Nanosonics and continue to hold a small parcel. My only issue -- as with so many of the good stocks right now -- is the valuation.
I'm not one to over think price for high quality, fast growing businesses -- especially ones that have a big market opportunity and attractive operating leverage. But at a PE of 200 and a P/Sales of 20 there's very little that can go wrong for shareholders to get an attractive return from here.
Results presentation here
Very strong numbers.
Total revenue climbed a full 39% higher to $84.3 million as the installed base of the company’s sole product grew across all regions. Average top-line growth over the past three years (which normalises the impact of deferred sales from the release of the Trophon 2 unit) works out to approximately 25% per annum.
The number of trophon units in operation increased by 18% globally, with North America again the biggest contributor with the addition of almost 3,000 new units -- in line with guidance provided at the first half.
Importantly, consumables and services revenue -- which is both higher margin and recurring in nature, and now accounts for over 60% of total revenue -- saw a hefty 47% improvement from the previous corresponding period.
Operating expenses grew by around 15% to just shy of $50 million, as telegraphed at the half year, due to a 27% lift in headcount and an increasing R&D spend. Nanosonics told investors that costs would increase significantly in the current year, saying it forecast $67 million in operating expenses (a 36% increase) for FY2020 as the business readied itself for its “strategic growth agenda”.
At the bottom line, excluding tax, Nanosonics registered $16.8 million in profit, or almost 20% of total revenue. That’s a 200% increase on FY18’s result. With prior year’s losses helping to reduce the tax burden, net profit came in at $13.6 million, or 4.53 cents per share.
It is however important to note the (significant) exchange rate benefit in these results. Revenue growth reduces from 39% to 29% on a constant currency basis. FX wont always be so favourable...
Looking ahead, Nanosonics told the market to expect continued growth, with FY20 adoption in the major North American market to be similar to that just reported. Meanwhile, new European regions and improved fundamentals would drive growth in that region.
The new GE Healthcare distribution agreement would see an improved consumables margin, the benefits of which would be most noticeable in the second half. On top of this, and pending regulatory approval, new product releases were also expected in the later half of the current year.
With over 30% of the current installed base due for renewal in the next two years, the replacement cycle should also help bolster capital sales.
Nanosonics estimates it has just 17% of the total addressable global market, so there’s clearly a long runway for growth. And as a profitable business with over $72 million in cash on hand, it has plenty of dry powder to prosecutive its strategy.
Shares (at time of writing) are now on a P/E of 134. The price to sales sits at ~21.3.
See my valuatiion for more.
FY presentation is here
A record first half for Nanosonics, with revenue up 36% to $40.7m.
All regions saw double digit gains in revenue with North America (by far the largest segment representing 91% of the total) saw the biggets lift of 37%.
That's a solid result, but bear in mind that the previous corresponding period (pcp) was depressed due to the immenent release of the Trophon 2 product, and resellers running down inventory and customers delaying purchase. If you compare to H1 2017, first half revenue was 12.7% higher, or 6.2% on an annualised basis.
Consumables growth was very pleasing too, up 26% from pcp or 11% from preceeding half. This represent ~60% of total revenue and will continue to grow.
The gobal installed base grew by 9% from the proceeding half, or 20% over the past 12 months, to 19,310 units. A great result, but that is a slow down from previous years. For example, this time last year, FY installed base was 13% higher over preceeding 6 months. And FY growth to the end of FY18 was 25%.
In FY18, Nanosonics increased North America installed base by 3,140. And they have today guided for a similar increase in FY19. That would give the total installed base of 18,760.
UK expecting a 50% growth in installed base, so that should bring it to around 1,000 units (although that is based of the total EMEA figure).
Operating expense forecast to be $50m for ther full year, whereas previously it was $53m.
Cash balance increased to $71.3m (about 6% of market cap). No debt.
I think this was a very sound result, and the future remains bright, but hard to get my head around the valuation.
Company on a P/S of 15x (ttm), or 13.5x pro rata. The PE is ~85 if you double the first half result. I'm not one to get too caught up on value metrics for super strong, fast growing businesses, but still...
Will have a think on the valuation and update shortly
Results presentation is here
