ANALYST’S NOTE

Nanosonic (NAN) reported as expected FY18 results.

Key results highlights were: 1. Total sales of $60.7m were down -10% (-7.8% in constant currency). Sales of consumables and service were up 25% (28% in constant currency) to $35.2m ($36.0m in constant currency) reflecting the increasing installed base. 2. Operating profit before tax was $5.6m, compared with $13.9m in the prior year. 3. strong balance sheet with cash reserve of $69.4m, up from $63.0m at FY17. 4. global installed base (IB) grew 25% to 17,740 units with North American IB growing 26% to 15,620 units and Europe up 49% to 730 units.

NAN is no doubt a quality business with solid management team but in our view, NAN is more than fairly priced relative to our DCF valuation and is more of a 2020 story where we see earnings uplift.

• New Trophon2… according to management, “trophon2 reflects a completely new mechanical and software design that delivers… new functionality including AcuTrace™ for paperless traceability and documentation, and capabilities for it to be seamlessly integrated with hospital IT systems… [and] new features to further optimise point of care usage and clinical workflow. trophon2 was made commercially available in North America and Europe from mid-August”.
• North America… Revenue of $54.4m was down from $62.3m in FY17 as a result of “transitionary reduction in capital revenue due to earlier than anticipated regulatory approval of trophon2 and subsequent run down of trophon EPR inventory by distributors, [and some] customers deferring purchase, pending the release of the new model”. Revenue from consumables and service was up +22% to $30.3m, reflecting strong ongoing growth in installed base (IB) (which increased +26%, from 12,400 units to ~15,620). According to management, “trophon has now been adopted in all of the top 50 hospitals in the USA and in ~5,000 hospitals and clinics”.
• Capital Reseller agreement with GE Healthcare… Early in FY18, NAN entered into a new Capital Reseller agreement with GE Healthcare in North America, which comes into effect in FY20. On the analyst call, management noted that new three-year agreement provides “GE Healthcare customers with ongoing access to trophon through the GE Healthcare sales channel [and] under the terms of the new agreement, NAN will gain a material increase in both consumables sales and margin in North America from July 2019”.
• Europe/Middle East… Revenue of $3.0m ($2.9m in constant currency), was up +76.5% from $1.7m in FY17 driven by increase in revenue from consumables and service which was up to $2.2m compared with $1.1m in FY17. IB increased from 490 to 730 units mainly driven by the UK where “Managed Equipment Service (MES) program resulted in strong growth with the installed base of MES units increasing 146%” in FY18. According to management, “under the MES program, trophon capital equipment owned by NAN is placed in hospitals and the facility pays an all-inclusive price for consumables in return for the use of the fully maintained Trophon”.
• Asia Pacific… Revenue of $3.3m, was down -6% from $3.5m in FY17 due timing of the purchase of trophon units. However, sales in consumables and service increased +21.7% to $2.8m, up from $2.3m in FY17. Australia and New Zealand (ANZ) remain primary markets in the Asia Pacific region for NAN. Trophon has ~70% market penetration. IB grew by 9% to 1,390 units, reflecting the already highly penetrated market in ANZ.
• FY19 management expectations. Key points highlighted by management include: 1. in July 2019, NAN’s distribution agreement with GE Healthcare in the U.S. will change to a Capital Reseller model, “which will result in a material increase in both sales and margin from consumables in North America from 2019”. 2. Continued growth in installed base in North America with FY19 adoption like FY18. 3. Regulatory approval of trophon2 in Japan expected FY19-end. 4. MES program in UK is expected to see growth in FY19, targeting new unit growth of 75% to100% over FY18 of which 90% will be under the MES model. 5. Continued investment in growth with FY19 expenses expected to be ~$53m including ~$13m in R&D.