“When COVID-19 hit, we needed to make sure we kept our customers on air,” Mr Howitt said in an interview.
“We deliberately built up our inventories as a buffer to any shortages, but it’s also meant we have run the supply chain more efficiently which has helped us expand the gross margin.”
The healthcare company beefed up its stock of components, bought raw materials and made a series of “life-time purchases” of components that manufacturers might stop producing in the short term.
As such, the gross margin has returned to around 75 per cent, a more comfortable level than during the pandemic when it dipped to 72 per cent.
Hospitals stretched
Hospitals throughout the United States, Cochlear’s largest market for implants, ran operating theatres below capacity over the half, as they grappled with the delta and omicron variants and widespread staffing shortages, weighing on performance, said the company.
In developed markets, hearing implant volumes slid by 2 per cent, though Mr Howitt pointed out volumes overall were tracking ahead of pre-COVID-19 levels despite variability across different countries.
Overall, total sales revenue jumped 10 per cent to $815 million, and Cochlear lifted the interim dividend by 35 per cent to $1.55 a share, representing a payout of 65 per cent of underlying net profit.
Sales of Cochlear implant units bumped up 7 per cent to 18,598 units over the half, with the bulk of gains in emerging markets.
Services revenue grew strongly in the first half, with revenues up 21 per cent in constant currency terms to $256.5 million.
“This was impressive growth, which we weren’t anticipating,” Steve Wheen, an analyst at Jarden, wrote in a note to clients.
Moving to the cloud
Cochlear is also undergoing a seismic digital transformation and is shifting from on-premise data operations to the cloud. During the half, Cochlear started a four to five-year cloud transition which will cost the company between $100 million to $150 million.
Traditionally, many companies such as Cochlear have managed their own data centres and their growth was often limited by how much capacity they physically had to manage and store information.
The advent of cloud-based services means operations like Cochlear can have flexibility around how much storage they have, paying cloud-providers like Amazon or Microsoft for what they use. Cloud-based operations also give employees across many jurisdictions internet-based access to the company’s data.
“This is a really important company-wide transformation that will really enable us to get more scale, better data, and be more agile,” Mr Howitt said.
“It involves replacing our underlying platform through cloud-based platforms, and it means quite a bit of work on our internal processes and digital offerings.”
Cochlear maintained its full-year underlying net profit guidance of between $265 million and $285 million, a jump of between 13 per cent to 22 per cent from last year.
Mr Howitt confirmed the new cloud computing costs were included in this figure, effectively lifting forecasts of 5 per cent.
Jarden’s Mr Wheen pointed out that Cochlear had “gone lightly on its reinvestment mantra”, adding this is likely to step up over the coming half and keep profits within guidance.
“Further to that, trading to date highlights operating theatre capacity is continuing to be affected by hospital staffing shortages, an issue that emerged during the second quarter, and which may impact capacity for the balance of the half,” Mr Wheen wrote.
Cochlear shares have not managed to escape the widespread equity sell-offs, triggered by inflation fears and the threat of rising interest rates in developed economies.
The stock is off nearly 14 per cent over the past 12 months.
Cochlear also booked an $11.8 million after-tax gain from its innovation fund, which invests in early stage companies with a view to enhance or leverage the global giant’s intellectual property.
As it stands, Cochlear is invested in several early stage companies including Saluda, Nyxoah, EpiMinder, Precisis and Seer Medical.
