Acquisitions Cause ResMed's Profit Growth to Stall

ResMed (RMD -0.20%), the pioneer of continuous positive airway pressure technology used to treat breathing disorders, reported its fiscal second-quarter 2019 results on Thursday.

Acquisitions and new product launches helped sales grow at a moderate pace, though the growth rate decelerated on a sequential basis and came in below Wall Street's expectations. Higher spending on a series of acquisitions also took a toll on the company's reported profitability. The net result was single-digit revenue growth and flat adjusted profits.

ResMed's fiscal second-quarter results: The raw numbers

Data source: ResMed. GAAP = generally accepted accounting principles.

Image source: Getty Images.

What happened with ResMed this quarter?

• Top-line growth was led by a 9% jump in the Americas and a 1% bump in international sales. Management blamed sluggish international growth on the company's device upgrade program.
• Software revenue rose 63% thanks to growth in its Brightree business and the recent acquisitions.
• ResMed closed its acquisition of MatrixCare during the quarter for $750 million. The company expects the deal will add $0.01 to its non-GAAP earnings per share in the second half of the year.
• The company closed on its acquisition of Propeller Health in early January. The deal cost $225 million and is expected to dilute non-GAAPs earnings per share by two to three pennies per quarter for the second half of the fiscal year.
• ResMed booked a $6.1 million charge during the quarter related to acquisitions.
• Gross margin expanded 70 basis points.
• Selling, general, and administrative expenses rose 6%, partially attributable to the recent acquisition spree.
• Non-GAAP operating income rose 15% year over year. However, certain acquisition-related expenses caused RedMed's non-GAAP net income and earnings per share to look like they held steady when compared to the year-ago period. 
• The company stated that is suspending its share buyback program because of all the recent spending on acquisitions.
• The company's joint venture with Alphabet's Verily business started during the quarter. ResMed contributed $25 million to the entity during the period and booked a $3.4 million charge to net income during December. Another $7 million in charges are expected to be incurred in the back half of the fiscal year.

What management had to say

CEO Mick Farrell called the company's quarterly results "solid" and credited the growth to strong demand for the company's new AirFit masks.

"The continued traction of our diversified and growing mask and device portfolio along with an expanded and expanding pipeline of new products and enhanced digital health solutions to sleep apnea, COPD, and the out-of-hospital medical software markets give us confidence in ongoing momentum for our business."

Farrell also expounded on the company's rationale for buying up a number of software-as-a-service (SaaS) businesses: "We have a vision to transform out-of-hospital healthcare and these acquisitions have established ResMed as a strategic player in the best position to do so. We have a proven track record of transforming our market through SaaS-based software and solutions and we have demonstrated success and experience with Brightree these last three years."

Looking forward

Wall Street wasn't happy with ResMed's quarterly results and investors sold off shares hard in response. The most likely cause of the sell-off was that total revenue came in about $20 million short of expectations. 

In spite of the short-term hiccup, Farrell did his best to reassure investors on the company's conference call that ResMed is being managed with the long term in mind: "We have positioned the company for the long term, driving top- and bottom-line growth into 2025 and beyond. By enabling better care, we are improving quality of life, reducing the impact of chronic disease, and lowering the costs for consumers and healthcare systems around the world."

Check out the latest ResMed earnings call transcript.