Cochlear Downgrades Ahead Of New Launches

This story features COCHLEAR LIMITED. For more info SHARE ANALYSIS: COH

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A decline in Services revenue had led to another profit downgrade from Cochlear, but brokers look ahead to new product launches.

-Decline in Services revenue leads Cochlear to downgrade FY25 guidance
-Nucleus 8 upgrade cycle disappoints due to cost of living
-New smart implants announced
-Improvement expected in FY26

By Greg Peel

Hearing device specialist Cochlear ((COH)) has downgraded FY25 profit guidance to $390-400m from a prior $410-430m and compared to consensus of $411-413m, representing a -3.7% downgrade at the midpoint. It’s the company’s third consecutive earnings miss.

Over the last few months, Cochlear’s downgrade appeared to be well anticipated, Jarden suggests, but could have been worse, had the Aussie not weakened against the euro post the US Liberation Day tariff announcement.

The downgrade was prompted by declining market share in various developed market geographies (including the US) at the same time that market growth slowed. In the US, market share was lost to Advanced Bionics and Med-El as both competitors became more aggressive given the delay in the availability of Cochlear’s new product.

As developed markets lost momentum, emerging markets filled the void with some lumpy sales that enabled Cochlear to maintain its circa 15% implant unit growth in the second half.

This introduced some unexpected gross margin deterioration, Jarden notes, as a result of the step-up in tender units. The upgrade cycle of the Nucleus 8 failed to improve as management had guided for in the second half, which management blames on cost of living pains, especially as insurers increase “out of pocket cost” which saw a spike in upgrade cancellations.

The upshot was a greater than expected decline in Services revenue, albeit Ord Minnett notes two prior years of strong growth. Services revenue is now expected to fall by a low double-digit percentage versus previous guidance for a single-digit percentage decline.

New Products

At the same time, Cochlear launched its new Nucleus Nexa System, a smart cochlear implant (CI) system that allows firmware to be upgraded via both the implant and sound processor, with internal memory that can store patient information allowing easy switching to new sound processors.

Management notes the system offers direct streaming from smartphones and would eventually allow streaming from smart TVs and laptops. It is also the smallest sound processor on the market and has an all-day battery life.

Nucleus Nexa, Cochlear’s next generation CI portfolio, set to launch mid-June in Europe and Asia Pacific, incorporates a full product system upgrade with a new CI with three electrode designs, plus associated behind-the-ear (BTE) and off-the-ear (OTE) sound processors. Key features include internal CI memory, upgradeable CI firmware, and –as pointed out by management– it’s the smallest BTE sound processor with the longest battery life available.

Conservatively, UBS has assumed Nucleus Nexa lifts Cochlear’s global CI market share by 3% to 63% by FY28 based on previous CI product releases.

Separately, the sound processor replacement rate should recover over the next two years, UBS suggests, mainly driven by better marketing into an aging installed base with the replacement/upgrade point reaching around nine years, and Cochlear ending support for older models over the next six months. UBS’ analysis also points to a modest boost in replacement rate from new Kanso 3 OTE sound processor, which incorporates the latest sound technology from the Nucleus 8 BTE.

Ongoing work to identify and connect with recipients, combined with the introduction of the new OTE Nucleus Kanso 3 Sound Processor, is expected to lift Services revenue in FY26.

Morgans nonetheless notes the new Kanso 3 Sound Processor is launching outside the typical three-to-five year cost reimbursement cycle for upgrades, and appears to be an OTE equivalent of the BTE Nucleus 8 sound processor, launched in December 2022, a more commonly used option, so may be construed as being more about convenience than medical necessity from a cost reimbursement point of view.

While the Cochlear Nucleus Nexa introduces several enhancements, it is based on the existing Nucleus 8 platform, Morgans notes, with improvements appearing incremental and more about refining the user experience, as opposed to technological advancements in hearing capabilities that Nucleus 8 introduced over the Nucleus 7, potentially limiting gains compared to prior launches.

Morgans anticipates the release of Nucleus 9 in 2027.

Looking Ahead

Despite management’s guidance downgrade, Jarden is feeling more optimistic on Cochlear now the negative market update is behind us. As a result, the broker forecasts an underlying profit compound annual growth rate (CAGR) of 17.7% over the next three years after rebasing FY25 profit to 2.3% growth.

The company has a net-cash balance sheet and a US tariff exemption which helps support the stock. Considering the raft of new product launches, Jarden is encouraged by the ability for the launches to reignite growth for the company. The broker had already anticipated earnings upside from these launches and has moderated its expectations, especially now FY25 earnings have been rebased.

Jarden has revised down underlying profit forecasts in FY25-27 to reflect the downgrade. While this still represents a favourable backdrop, a rebound in first half FY26 earnings is not guaranteed, Jarden warns.

Notwithstanding, Jarden has lifted its price target to $270.28 from $264.71, retaining Neutral.

While new CI system launches tend to precede re-rates, Morgans remains cautious, given an out-of-cycle launch and user-focused enhancements increasing cost reimbursement risk. Morgans rates Cochlear Hold with a target of $281.36, down from $285.55.

Cochlear’s business is in a strong position, Ord Minnett believes, bolstered by a total addressable market for cochlear implants that is expected to hit almost US$5bn by 2030, high barriers to entry due to technology requirements and the industry’s oligopolistic structure, plus the company’s competitive advantage in terms of product.

These appealing attributes have nevertheless been priced in, Ord Minnett suggests, leading the broker to maintain a Hold recommendation and target of $285.00.

In line with guidance, UBS has lowered its FY25 profit forecast due to reduced Service revenue. However, forecast profit is unchanged in FY26 and increases in FY27, underpinned by a faster recovery in Services revenue as the sound processor replacement rate lifts, on top of slightly stronger CI revenue from global market share gains.

UBS’ forecast earnings CAGR lifts to 14% from 10% versus the ten-year median (excluding covid impact) of 15% per annum. The broker also expects Services revenue to lift by 40% over the next three years underpinned by CI installed base unit growth of 26% and a recovery in the sound processor replacement rate, helped by upgrades to the new Kanso 3 OTE sound processor.

UBS’ higher earnings growth profile lifts its target to $325.00 from $285.00 and suggests Cochlear can support a one-year forward PE in the low 40x. UBS has thus upgraded to Buy from Neutral.

On the flipside, Morgan Stanley has issued only a brief update on Cochlear’s announcements, and retains an Underweight rating and $267.00 target.

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