Tariff Uncertainty Negates ResMed’s Q1 Positives

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ResMed's first-quarter result broadly met market expectations, though rising margins and potential for further capital management have been negated by US import tariff ambiguity.

• ResMed updates with strong September quarter performance (but largely in line) 
• Gross margin surprised, device revenues outperform expectation
• Uncertainty about US import tariff exemption weighs on share price
• Expects share buybacks of US$150m in each quarter of FY26
• Ord Minnett sees scope for additional capital management initiatives

By Mark Woodruff

First-quarter operating earnings and gross margin for healthcare devices and digital health solutions provider ResMed ((RMD)) exceeded market expectations, driven by broad-based growth across sleep apnoea devices, masks, and the software portfolio.

Margins outperformed forecasts, while the SaaS segment proved slightly softer but continues to represent a relatively small share of group earnings. Management’s outlook guidance is unchanged.

Overall, ResMed delivered a quarter in line with consensus forecasts for revenue and earnings, posting year-on-year core EPS growth of 16%.

US device sales (previously a key area of market concern, according to broker Citi) proved solid, while mask sales outside the US rose by mid-single digits in constant currency terms. Management remains confident of a swift recovery to high-single-digit growth.

UBS believes investors are likely to be encouraged by three key factors: sustained strength in the US, obstructive sleep apnoea (OSA) new patient starts and re-supply activity, continued gross margin expansion, and the potential for ongoing exemption from negative US import tariffs impact.

Up until now, ResMed’s products, chiefly for sleep apnoea and other chronic respiratory conditions, have been covered by a duty-free exemption under the Nairobi Protocol.

A report in The Australian Financial Review today notes management, via a submission to the US Commerce Department, has urged the Trump administration to exclude its devices from tariffs, warning higher costs would ultimately burden hospitals and harm vulnerable patients.

The company emphasised its supply chain is anchored in trusted ally Australia, reinforcing the proposed tariffs would unfairly impact essential medical equipment and care delivery.

Management plans to expand its US manufacturing footprint with a new facility in Indianapolis, scheduled to open in 2027, partly in response to President Donald Trump’s push for greater domestic production of medical devices.

Returning to the quarterly results, total revenue of US$1,336m rose 9.1% year-on-year, or 8.0% in constant currency, while net income rose 12% to US$348.5m.

Non-GAAP gross profit of US$829m increased 14.3% year-on-year, while non-GAAP operating income reached US$482m. GAAP is the accounting standard for US companies and stands for generally accepted accounting principles, while non-GAAP often excludes one-off or non-cash items to highlight underlying performance.

Citi feels over-delivery on gross margin, 62% versus the consensus estimate of 61.5%, possibly sets up for consensus upgrades later in the year. Margin improvement was predominantly due to manufacturing and logistics efficiencies and component cost improvements, RBC Capital points out.

Listed on both the ASX and the Nasdaq, ResMed conducts business in over 140 countries. The US is its largest market, but the company maintains significant operations across Europe, Asia-Pacific, and Latin America, often partnering with local healthcare providers to distribute its products.

In the obstructive sleep apnoea (OSA) treatment market, ResMed holds an over 50% global market share, making it the dominant player. Its closest competitor, Philips Respironics, saw its share drop to around 10% after a 2021 recall of millions of CPAP devices, which boosted demand for ResMed’s offerings.

Other competitors like New Zealand-based Fisher & Paykel Healthcare ((FPH)) and DeVilbiss Healthcare in the US are smaller niche players.

Devices and masks

ResMed’s core business model revolves around medical device sales, notably CPAP and bi-level breathing devices for sleep apnoea therapy, plus life-support ventilators for conditions like chronic obstructive pulmonary disease (COPD).

Patients typically replace masks and consumables regularly, and healthcare providers subscribe to ResMed’s software platforms.

Recurring revenue also derives from disposable masks and accessories, and an expanding portfolio of digital health services.

For the September quarter, devices outperformed Macquarie’s expectation by 1%, supported by strong rest of world (ROW) demand, partly offset by softer growth in masks and accessories (-1% versus forecast) and residential care software, which proved a -3% ‘miss’ against the broker’s estimate.

All new company devices are cloud-connected, feeding data into platforms for remote patient monitoring (the AirView clinician portal and myAir patient app) to improve therapy adherence. This ecosystem approach, combining hardware and software, differentiates ResMed in the market.

The myAir mobile app and web portal empower patients to track their sleep therapy and receive coaching; notably, ResMed has integrated myAir with wearable devices (Apple Watch and Samsung Galaxy Watch) so users can view sleep and therapy metrics on their wrists.

AirView allows physicians and homecare providers to remotely monitor patients’ nightly data, and adjust therapy.

Americas device revenues increased by 7.5% year-on-year and RoW constant currency devices revenues increased 7%, both ahead of consensus forecasts.

Further enhancing ResMed’s strong position in the large full face mask category, suggests UBS, management announced the upcoming release of two variations of a new full face CPAP mask: the higher price point AirTouch F30i Comfort and AirTouch F30i Clear.

Morgans describes first quarter sleep and respiratory device sales as “solid,” delivering above-market growth in the Americas, noting growth in masks across ROW softened against a strong prior comparable period, while residential care software sales slowed amid challenges in skilled nursing.

Management remains confident of re-accelerating mask growth in the ROW to the high single digits, pointing to the upcoming launch of first-to-market fabric-based F30i full-face masks, which will be introduced in two variants.

Operating leverage

Highlighting improving operating leverage, Morgans points to gross margin gains driven by continued manufacturing efficiencies and operating margin expansion supported by disciplined cost control.

Also referring to this leverage, Macquarie notes constant-currency revenue growth of 8%, in line with the consensus forecast and a 15% year-on-year rise in net profit. Gross margins expanded by 20bps quarter-on-quarter and 60bps year-on-year.

The non-GAAP gross margin expanded 280bps year-on-year to 62.0%, reflecting manufacturing and logistics efficiencies and lower component costs, explains the latter analyst.

Non-GAAP EBIT margin improved 290bps to 36.1%, benefiting from tighter control on Selling, General and Administrative (SG&A) expenses.

Software-as-a-service

Facilitating patient record-keeping, billing, remote diagnostics, and care coordination outside the hospital, ResMed also has a software-as-a-service arm (SaaS) serving post-acute and home care providers.

This includes solutions like Brightree (management software for home medical equipment suppliers and sleep clinics) and MatrixCare (software for long-term care facilities), among others.

Within the Residential Care Software (RCS) division, a strong quarterly performance from Medifox Dan was partly offset by softer results in senior living and long-term care software, explains Macquarie, resulting in a -3% miss against the consensus estimate.

Morgan Stanley attributes the miss to a softer performance in the skilled nursing segment.

Management is conducting a review of investment priorities across the RCS portfolio but remains confident of achieving mid-single-digit revenue growth in the first half and mid-to-high single-digit growth in the second, equating to circa 4% and 8%, growth, respectively.

ResMed’s informatics initiatives also include data analytics and population health research e.g. leveraging the millions of nights of sleep data collected to derive insights on sleep disorders prevalence and outcomes.

Capital Management

Operating cash flow (OCF) rose 40% in the first quarter, while free cash flow (FCF) increased 35%. For the 12 months to September, FCF reached US$1.77bn, up 31% on the prior year.

Net cash stood at US$715m on 30 September, comprising US$1.38bn in cash and US$669m in debt, with a further US$1.5bn available for drawdown under existing credit facilities.

Management expects to undertake a share buyback of US$150m in each quarter of FY26, an increase from US$100m in the final quarter of FY25.

The board declared a quarterly dividend of US60c, in line with the previous dividend.

Ord Minnett expects ResMed will finish the fiscal year in a net cash position of about US$1.9bn, providing ample balance sheet flexibility and scope for potential additional capital management initiatives.

Factors weighing on earnings

Offset partly by a -US$16m currency tailwind, ResMed incurred -$15.8m in restructuring charges related to workforce planning, including severance and one-off termination costs.

The effective tax rate rose to 22.3% from 19.2% due to new global minimum tax legislation.

Net interest expense of about -US$9m exceeded Macquarie’s forecasts on higher short-term debt, and unrealised losses of -US$6m on minority investments equally negatively impacted on earnings.

Outlook

Morgans considers ResMed’s fundamentals robust, with profitability strengthening alongside expanding margins.

Macquarie points to medium-term demand catalysts, including GLP-1 therapies and wearable technology adoption, and expects continued margin expansion in the near term.

At around 23x the UBS FY26 core EPS forecast, ResMed trades at a -24% discount to its 10-year average multiple of 30x, as well as modestly below global medical device peers exhibiting comparable earnings growth.

The analyst at Ord Minnett expects further margin expansion supported by ongoing cost savings, manufacturing efficiencies, and an improving product mix, driven largely by accelerating mask sales in markets outside the US.

Supported by valuation appeal relative to Morgan Stanley’s broader sector coverage, a strong balance sheet, and attractive returns on invested capital, this broker maintains its Overweight rating (Buy equivalent).

There are four other Buy (or equivalent) ratings by daily covered brokers covering ResMed in the FNArena database, while Morgans has an Accumulate rating, midway between Buy and Hold.

The average target among these six brokers is $49.01, barely changed from $49.07 prior to the quarterly update, implying nearly 30% upside to the $37.77 closing share price on November 4.

Outside of daily coverage, RBC Capital keeps its Outperform rating after raising its target to US$303.00 from US$300.00 (ResMed’s US listed securities are the equivalent of ten listed on the ASX).

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