Tariff Uncertainty Negates ResMed’s Q1 Positives

Australia | 1:15 PM

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.

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