New Products Drive Medtronic’s Q2 2014 Results

by Trefis Team
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Medtronic Inc. (NYSE:MDT) reported its fiscal Q2 2014 earnings on November 19. The company reported an operational growth of 3.3%, in line with management’s full-year guidance and slightly better than last quarter’s performance. The growth rate increased as the company’s largest division, Cardiac Rhythm Disease Management (CRDM), returned to growth after remaining flat last quarter. Within the CRDM business, it was defibrillator devices and atrial fibrillation (AF) solutions that drove performance. Sales of defibrillators increased 3.5% year-on-year, compared to a 3% year-on-year decline last quarter, while the rate of growth in AF solutions increased from 16% last quarter to 43%. Some other divisions such as Neuromodulation and Diabetes also grew at a faster rate than Q1 due to new product launches, and contributed to the headline growth.

Overall, Medtronic’s growth in the quarter was well balanced and in line with our expectations. We have a revised price estimate of nearly $58 for its stock, which is about in line with its current market price. Below we discuss some of the major takeaways from the earnings release.

See our full analysis for Medtronic Inc.

New Products Have Started To Bring In Revenues

Medtronic’s sales in Q1 2014 were negatively impacted by a decline in bulk purchases of defibrillators and neuromodulation products. The decline was largely attributable to some new product launches by the company, which prompted hospitals to suspend their purchases of older products as they waited for the new products to became available. We discussed this event in our pre-earnings analysis, and mentioned that sales were likely to increase in Q2 as new products become available for purchase.

The Q2 report was in line with our expectations in this regard. Medtronic’s defibrillator sales in the U.S. increased year-on-year by 3.9% in Q2, whereas as they had declined by 4% last quarter. Growth in neuromodulation product sales was also around 4%, compared to the 0.7% decline last quarter. Going forward, we expect Medtronic to continue reporting sales growth in these segments as new products are being received well. However, growth is likely to be slightly lower than Q2; this quarter, sales figures were pushed higher due to the inventory replenishment at hospitals, but this is unlikely to repeat in subsequent quarters. [1]

However, They Are Likely To Pressure Margins

According to management, the launch of new products significantly reduces the demand for Medtronic’s older products, leading to higher obsolete inventory and write-offs. This increases the cost of sales, and puts pressure on gross margins. With several new products lined up for launch in the next few quarters, we expect Medtronic’s gross margins to remain under pressure. In Q2, the impact on margins due to new product launches was estimated to be around 20 basis points.

Medtronic’s Q2 gross margins were also negatively impacted by adverse foreign exchange movements and the reallocation of R&D resources to fix quality issues in the Neuromodulation and Diabetes divisions in Q2. The quality issues had prompted regulatory warnings, and required immediate attention. However, we do not expect these issues to have a long lasting impact on margins. Foreign exchange movements usually average out in the long term and we believe that Medtronic will try to quickly sort out its regulatory issues.

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Notes:
  1. Medtronic’s CEO Discusses F2Q 2014 Results – Earnings Call Transcript, November 19, 2013 []
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