Cochlear Ltd (ASX: COH) shares are flying on Tuesday, jumping 7% to $140.90 in afternoon trade and extending their monthly gain to 17%.
Investors have welcomed the hearing-implant leader's FY26 results, with underlying net profit landing at $322 million — right at the top end of the company's revised guidance.
That's a dramatic change in sentiment from April, when Cochlear shares were crushed by around 40% after management slashed its profit outlook. Despite Tuesday's rebound, the shares remain down 46% year to date and 55% over the past 12 months.
So, what has changed?
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Cochlear delivers on revised guidance
Cochlear's FY26 numbers show a business still facing challenges, but one that's generating strong cash and continuing to invest heavily in future growth.
Sales revenue increased 2% in constant-currency terms to $2.343 billion. Underlying net profit, however, fell 22% to $322.4 million.
The pressure on profitability was particularly visible in gross margins, which declined from 74% to 71%. Cochlear blamed the deterioration on a less favourable sales mix and production variances.
Still, there were some significant positives.
Operating cash flow surged $130 million to $368 million, while free cash flow also improved substantially. The company continued to invest aggressively in research and development, lifting R&D spending 15% as it accelerated work on its product pipeline.
That investment is already producing results.
Nexa gives investors something to cheer about
Cochlear has launched the Nucleus Nexa System, which it describes as the first smart cochlear implant with upgradeable firmware.
The product has made an impressive start. It quickly accounted for more than 95% of Cochlear's implant sales across developed markets.
That kind of product momentum could be important as the company attempts to reignite growth in its developed markets.
However, Cochlear isn't escaping all the pressures facing the business. Gross margins have been squeezed by a greater proportion of lower-priced products being sold in emerging markets. Softer demand in Western Europe and parts of Asia has also weighed on performance.
The company has responded by maintaining tight control over fixed costs and freeing capacity for an additional $25 million of investment in FY27.
What's next for Cochlear shares?
Management isn't promising a dramatic recovery overnight. Instead, it expects low single-digit revenue growth in constant-currency terms during FY27.
Underlying net profit is forecast to land between $330 million and $350 million.
Cochlear wants to accelerate adult growth in developed markets by increasing medical engagement and expanding referral pathways. At the same time, it plans to keep investing in R&D and product innovation.
The dividend remains an important part of the shareholder return story. Cochlear declared a final ordinary dividend of $1.30 per share, 85% franked, taking total FY26 dividends to $3.45 per share. That's down 20% from the previous year.
The company will continue targeting a dividend payout ratio of 70% of underlying net profit.
Cochlear's balance sheet also gives investors something to watch. Net cash declined, partly because of continued cloud investment and dividend payments. With net cash below management's preferred level, the on-market share buyback remains inactive.
Gross margins are expected to remain around FY26 levels, while further restructuring costs will factor into the FY27 outlook.
