Medtronic (NYSE:MDT) today reported first-quarter results that beat The Street by a whisker, sticking to its full-year guidance amid a tough economic environment.
The medtech giant’s management has increasingly faced questions from analysts who wonder if they can execute through an unpredictable macroeconomic environment that includes a strong dollar (which impacts the ability of U.S companies to sell outside the country), inflation, supply chain disruption and more.
In this morning’s news release, CEO Geoff Martha insisted that company leadership can get the job done: “The company continues to execute in a challenging environment, delivering organic revenue above our guidance.”
MDT shares were down slightly to $93.09 apiece at the start of trading. At the midpoint of the day, shares had dipped 3.3% at a price of $90.03. MassDevice’s MedTech 100 Index — which includes stocks of the world’s largest medical device companies — was down 2.8%.
Can Medtronic accelerate growth?
Martha has had ambitious goals since he took over Medtronic’s corner office in 2020. That included engaging in a major reorganization to make the $32-billion-a-year company more nimble and competitive. Medtronic, however, has suffered a series of setbacks over the past year. There were delays in the company’s pivotal ON MED study of its renal denervation system, supply chain challenges around the rollout of its Hugo surgical robotics system, and regulatory troubles for its Diabetes business.
Martha said during the Q1 earnings call that full Spyral HTN-ON MED results will come out in the coming months. It’s the final piece in Medtronic’s FDA submission for its Symplicity Spyral renal denervation system. The hope is that the results will demonstrate that renal denervation is efficacious as a hypertension treatment. Martha claimed that data so far has been robust and that the technology could have a “profound effect on public health.”
When it comes to Hugo, Medtronic reports that it has addressed key supply challenges. It’s scaling manufacturing production with robot inventory building ahead of installs. There’s a healthy Hugo order book in Europe and Asia. Hugo is near the start of a U.S. IDE clinical trial for a urology indication, with physician training at clinical sites underway. The Hugo system matters because it represents Medtronic’s bid to take on Intuitive in the robotic surgery space. Martha said Medtronic wants to be a “major player for the long-term.”
The Diabetes business has focused on resolving the FDA warning letter. Martha said that the company has achieved 90% of the FDA’s action items. Medtronic Diabetes is also focused on achieving U.S. approval of its next-gen MiniMed 780G + Guardian 4 sensor and advancing its next-generation portfolio.
Martha said: “As we look ahead, our supply chain is improving, we have several near-term pipeline catalysts approaching, and we are confident in our ability to accelerate growth.”
He repeated past mentions of portfolio management, which includes both potential tuck-in acquisitions and divestitures of businesses. (Analysts have mentioned the Diabetes and Spine businesses as potential targets for divesture.) Martha said the portfolio management process will be continuous, with a focus on driving growth.
Working through supply chain challenges
During the earnings call, Martha said Medtronic maintains a robust balance sheet. He said there’s a strong and growing dividend and a leadership position in many medtech markets. Chip shortages linger, but the company is working with suppliers to minimize the impact.
Supply Chain EVP Greg Smith overall has been driving changes with a team that is mostly new to the company. It has co-located over 100 Medtronic employees with top suppliers and worked directly with commodity and raw material suppliers, Martha said. Backorders are coming down.
“We’re starting to put the most acute piece of this behind us,” Martha said.
Healthcare labor shortages are meanwhile hindering demand for certain products and services.
Medtronic earned $929 million, or 70¢ per share, off $7.4 billion in revenue for the quarter ended July 29, 2022. The bottom-line was up 22%, while the top-line was down 8%.
Adjusted to exclude one-time items, earnings per share were $1.13, a penny ahead of The Street. (Medtronic said the adjusted EPS was in-line.) Analysts polled on Yahoo Finance expected earnings per share of $1.12 on revenue of $7.22 billion.
Looking to offset the effects of foreign exchange headwinds
Medtronic is sticking by its 2023 organic revenue growth forecast of 4–5%. It’s reiterating revenue guidance even as management said present foreign exchange rates would negatively affect revenue growth by $1.4–1.5 billion. (They previously predicted a $1-$1.1 billion impact.) The company also continues to expect non-GAAP EPS in the range of $5.53–5.65, with an estimated 17–22¢ negative foreign currency impact.
“While our markets are facing macroeconomic challenges, we’re focused on identifying ways to offset their impact to our financials,” said CFO Karen Parkhill. “Looking ahead, we expect organic revenue growth to improve each quarter, with the second half of the fiscal year much stronger than the first. We are optimistic about our future, as we create markets and realize new opportunities.”
Martha insisted during the earnings call that the company’s efforts are “positioning us to deliver on higher-level growth that can be sustained.”
However, Mike Matson, senior research analyst at Needham & Co., described the fiscal year second-half ramp-up goal as challenging, keeping his hold rating on MTD shares.
BTIG analyst Ryan Zimmerman maintained his neutral rating on Medtronic despite favorable performances across most segments as MDT continues to navigate a myriad of headwinds, including supply chain and inflation issues.
“The worst appears to be behind MDT as sequential improvements in procedures, easing comps, and improving margins take hold through the balance of FY23 and supply chain pressures dissipate,” Zimmerman wrote. “Despite the more positive tone, investors may look at the FY2H23 ramp and remain cautious.”
