Cochlear’s Future In Nexa’s Hands

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Following a weak FY25, and weak FY26 guidance, Cochlear’s outlook rests on the success of its new Nexa implant and other products. Is the market too confident?

-Cochlear's FY25 and FY26 guidance underwhelm
-Cost of living impacts upgrade demand
-Launch of Nexa implant in the US critical to earnings growth
-Valuation and earnings risks dominate the debate among analysts

By Greg Peel

Despite Cochlear ((COH)) downgrading its FY25 underlying profit guidance to $390-400m in June, the actual result still came in at the bottom end of the guidance range at $391.6m, -2% below consensus.

Perhaps more surprising, Jarden suggests (and is not alone), were the unexpected one-off items that helped Cochlear reach guidance (just).

These items included: (i) a deferral of -$7.3m in cloud costs despite management increasing guidance around this spend in the first half; (ii) a $50m unwinding of staff bonus provisions (given growth targets were not met) and (iii) higher-than-anticipated “other income” from government grants.

Without these largely one-off items, Jarden believes Cochlear’s result would have come in more than -10% below the bottom end of FY25 guidance.

FY25 revenue was in line with expectations. Stronger cochlear implant (CI) unit sales and better-than-expected Services growth were offset by negative geographic mix and lower Acoustics revenue. Gross margin declined -140bps year on year, -80bps below Macquarie’s expectations, driven by a negative mix-shift to CI and overhead recoveries at the new Chengdu facility in China.

FY26 underlying profit guidance has been set at a $435-460m, which represents 5-11% growth on a cloud-adjusted basis but still -3% below consensus, and notably includes a rebuild of the staff bonus provision that was reversed in FY25.

Revenue has become particularly unpredictable for FY26, Jarden suggests, given Cochlear’s inability to market its latest innovation of focused multi-polar stimulation (Nexa) as it is yet to be approved by the US Federal Drug Administration (FDA). In the meantime, the acceptance of the latest implant will rest on the upgradeable chip which essentially future-proofs the device.

This is a compelling proposition for patients, Jarden believes, but Cochlear recognises its success will ramp up over time as FY26 guidance relies on earnings that will be back-weighted to the second half, following new product launches in the first half, increasing the risk of another earnings miss come August next year.

All Rests on Nexa

Cochlear Implants gained in FY25 on the launch of the new Nucleus Nexa system in Europe and Asia-Pacific, with FDA approval pending, although developed market growth slowed. Services fell on waning Nucleus 8 sound processor upgrades, which is blamed on the cost of living, while Acoustics surprised to the upside.

Cochlear will launch its new Nexa implant, and new sound processors, including the Kanso 3 off-the-ear processor, in the US market by September end. While some US patients are delaying upgrading their sound processor, which is discretionary in the near-term, they will inevitably upgrade over time, Citi believes, as the processors eventually break.

The payments plans put in place by Cochlear have not been enough to reverse the trend. Citi expects the launch of Kanso 3, the growth in eligible recipients, and the retirement of the Nucleus 7 will drive upgrade growth in FY26.

UBS sees new product releases supporting higher-than-expected earnings growth over the medium-term. UBS thinks Cochlear’s next generation CI portfolio should boost its global market share and lift three-year CI revenue growth to 10% per annum.

UBS also expects Services revenue to lift by 50% over the next four years, underpinned by CI installed base unit growth of 36% and a recovery in sound processor replacement rate, helped by upgrades to the new Kanso 3 processor.

Citi agrees, suggesting the launch of the Nexa CI and associated sound processors should allow Cochlear to win market share in implants over the next few years after a stabilisation in FY25 (in which Cochlear’s market share was greater than 60%).

Cost of living pressures in the US have delayed the upgrades of new sound processors in FY25, but Citi believes the launch of the new Kanso 3 by September end will help drive growth again.

Not All Are Convinced

While Nexa’s US launch should support CI demand through FY26, Morgans cautions against assuming uplift similar to prior product transitions, as Nexa is aimed at workflow efficiency and patient convenience rather than a step-change in hearing performance, so more of an “evolutionary” not “revolutionary” refinement that may take time to translate into material volume or margin gains.

While management’s FY26 CI growth target of 10%-plus looks reasonable, Morgans remains cautious on market expectations for a repeat of the mid-double-digit growth seen in prior product cycles.

While acknowledging the technological advancements of Nucleus Nexa, Macquarie remains cautious on the near-term outlook.

Management highlighted ongoing uncertainty in Services revenue (upgrades) due to out-of-pocket payments and cost of living pressures, while margins are expected to be impacted by volume-based pricing in China and the rebuild of bonus provisions in FY26.

Further, first half FY26 CI revenue may be impacted by delayed surgeries in the lead-up to Nexa’s US launch, Macquarie warns.

The encouraging aspects for Wilsons of the second half FY25 were: a) three Services downgrades over the last year have “done the work” in resetting reliable expectations; b) fundamental device demand across both CI and Acoustics look as strong as Wilsons has ever seen them; and c) as “cool” as Nexa’s “smart” features and peripherals are, the broker sees the new implant as a compelling development.

If that proves true, Wilsons believes Nexa will take more CI share than the market currently has in its models. Having seen nothing sinister in recent Services misses and with a Nexa launch imminent, this broker has removed the -15% discount it had been applying to valuation.

However, on earnings, Wilsons could not develop conviction above the bottom end of guidance. The risk of further misses and/or downgrades keeps the broker on the sidelines.

Mixed Views

Citi expects Cochlear’s new product launches in the first half FY26 to fuel growth in in the second half and beyond. UBS sees CI market growth, CI share gains and a recovery in Services. Both retain Buy ratings on Cochlear, but among the eight brokers cited in this report, these are the only Buy or equivalent ratings.

While noting the technological benefits of the Nexa system, Macquarie sees Cochlear’s current share price as fair, with near-term downside risk from Services revenue and negative geographic mix. Macquarie retains Neutral.

Ord Minnett is wary of how constrained US consumers will affect Cochlear’s Services revenue, but suggests the end-of-life of its N7 processor towards the end of this calendar year should boost upgrades in the second half of FY26.

Ord Minnett maintains a Hold recommendation. The company possesses investment attractions, the broker notes, eg an oligopolistic market dominated by Cochlear, a large addressable market, and technological advantages, but these are already priced into the stock.

While new CI system launches tend to precede re-rates, Morgans remains cautious, given an out-of-cycle launch and user-focused enhancements increasing reimbursement risk. Morgans has downgraded Cochlear to its new inter-tier rating of Trim from a prior Hold.

To justify Cochlear’s current share price, Morgan Stanley estimates CI unit sales would need to increase by some 13.5% pa, which implies a market share of around 90% by FY35. The conclusion is the current share price implies substantial long-term share gains and/or limited competitive response, hence an Underweight rating is retained.

That equates to two Buy or equivalent, two Hold and two Sell ratings among the six brokers monitored daily by FNArena covering Cochlear. The consensus target price among them has risen to $311.74 from $290.98, on a range from $280 (Morgan Stanley) to $350 (UBS).

As noted, the risk of further misses and/or downgrades keeps Wilsons on the sidelines, with a Market Weight rating, albeit the removal of Wilsons’ -15% valuation discount leads to a target increase to $330 from $286.

Jarden also declares itself to be on the sidelines. The market seems willing to give Cochlear the benefit of the doubt at this point, Jarden suggests, despite earnings uncertainty. The stock remains expensive, carrying earnings risk despite the promise of earnings growth in FY27 – based largely on the success of the Nexa implant.

Jarden retains Neutral, lifting its target to $278.51 from $270.28.

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