The Cochlear Limited (ASX:COH) share price rose 4% to $147.93 this morning after the company released its annual results. Revenues rose 7% to $1,239 million, and net profit after tax (NPAT) rose 18% to $223 million. Earnings per share were 389 cents, and the company paid out 270 cents in dividends, up from 230 cents in the previous year.
Long term shareholders will know that Cochlear makes its money both on the initial sale of its hearing devices, as well as on the lifetime value of those customers returning for services and upgrades. It was pleasing to see both that the number of implants sold continues to grow, up 8% to 32,554 units this year. There are currently 450,000 Cochlear customers out there that will prove an important source of future business:
Cochlear has a rock-solid balance sheet, with ~$218 million in net debt and ~$90 million in cash. This allows the company to continue investing heavily in research & development, with around 12% of annual revenue – $150 million a year – spent on research. In the past, research has been effectively turned into sales and I'd expect this to continue in the future.
Management claims that hearing impairment is a widely under-treated condition worldwide, with Cochlear having less than 5% market penetration. However, Cochlear separately notes that Cochlear has "over 450,000 recipients and around 70% of the global implant recipient base" which suggests that Cochlear already dominates the hearing aid market.
Thus, the market penetration figure of 5% may be a bit too aspirational. Turned on its head it suggests that 95% of prospective customers are not accessing the hearing aid market, for whichever reason (undiagnosed, cannot afford, etc). Still, Cochlear is taking steps to increase its addressable market by expanding into emerging markets and hiring 100 new sales reps. Over time, this could continue driving the company's growth.
On the topic of growth, Cochlear forecast net profit of $240 million to $250 million in 2018, with stronger underlying growth masked by continued currency headwinds. That's not bad for a mature business. I think Cochlear is a high quality company and one well worth holding for the long term.
