Just like bad pizza, there's no such a thing as a bad revenue increase; they're just varying degrees of good. Medtronic's (NYSE: MDT) 7% increase in revenue during its first fiscal quarter was a lot closer to a plain cheese than a hefty deep-dish.
Most of the year-over-year increase came from currency changes; only 2% of the increase could be considered organic growth. And that growth came entirely from outside the United States. International sales were up 7% at constant currency, on the back of 25% growth in emerging markets, while U.S. sales dropped 1%.
But those international sales -- emerging markets sales in particular -- likely fetch lower prices; gross margins fell 118 basis points, contributing to an earnings drop of 1%, which grew to a 3% drop after adjusting for special items. The only thing saving the quarter was the share buyback program, which helped lower the effect on a per-share basis. Not so tasty now, is it?
But Medtronic is up 5% today. In this market, assigning a reason for a change is difficult at best, but my guess is it has to do with the new CEO Omar Ishrak's comments on the conference call about the company's research and development strategy.
The medical device business is constantly shifting as companies try to trump each other with better devices. And the market is always changing as doctors alter their preferences about whether to perform implants in the first place. Medtronic's U.S. sales declined this quarter, in part, because there were fewer cardiac-rhythm devices and spinal implant procedures performed.
In order to compete with Boston Scientific (NYSE: BSX), St. Jude Medical (NYSE: STJ), and others, Medtronic has to make smart choices of where to invest its research and development dollars. Johnson & Johnson (NYSE: JNJ), for instance, is pulling out of the drug-eluting stent market.
Ishrak seems to understand the need. Whether he can order up some high-margin growth remains to be seen.
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