Cochlear (ASX: COH) Targets FY27 Profit Recovery After FY26 Earnings Fall

Cochlear Limited expects underlying net profit to recover in FY27 after weaker margins and higher investment weighed on its FY26 result.

The hearing-implant maker forecast underlying net profit of $330 million to $350 million. It also expects low single-digit constant-currency sales growth.

That compares with FY26 underlying net profit of $322.4 million, which fell 22% from the prior year. The result reached the upper end of revised guidance issued in April.

Sales revenue was $2.34 billion, down 1% on a reported basis but 2% higher in constant currency. Second-half constant-currency revenue increased 6%.

Margin Pressure Drives Profit Decline

Cochlear’s gross margin fell three percentage points to 71%. Lower-than-expected developed-market revenue accounted for 1.5 percentage points of the decline.

A shift toward lower-tier sales in China also contributed. Reduced production following softer demand cut another 1.2 percentage points from the margin.

Underlying earnings before interest and tax dropped 22% to $432.6 million. The underlying EBIT margin contracted to 18% from 24%.

Statutory net profit fell 62% to $147.3 million. Significant items included $66 million of after-tax cloud expenses and $109.1 million of investment-related losses. The latter was primarily driven by a non-cash Epiminder write-down.

The annual dividend declined 20% to $3.45 per share.

Nexa Uptake Supports Implant Volumes

Cochlear implant revenue was flat in constant currency at $1.44 billion. However, implant units sold increased 5%.

The Nucleus Nexa platform represented more than 95% of the developed-market implant mix by June. Cochlear also achieved an average 3% price increase.

Regional performance varied widely. US implant revenue rose 4%, while Asia-Pacific revenue increased 7% with market-share gains.

Western Europe revenue declined 8%. Cochlear cited UK elective-surgery backlogs, industrial action in Spain and market-share losses in Germany.

Services revenue increased 6% in constant currency to $635 million. Acoustics revenue grew 1% to $273 million.

Services account for 27% of group revenue and provide sales from replacement sound processors and related products. That installed-base model partly offsets volatility in new implant procedures.

Cash Flow Improves Despite Lower Earnings

Free cash flow more than doubled to $263.5 million from $122.4 million. Operating cash flow increased to $368 million as working-capital movements improved substantially.

Cochlear reduced second-half inventory by 13% following the Nexa launch. The company also reallocated $25 million toward growth initiatives and lowered fixed costs relative to revenue.

Research and development spending increased 15% to $323.2 million, representing 14% of sales. Investment covered key projects and the broader product and services pipeline.

Currency Headwind Shapes FY27 Guidance

Cochlear expects a FY27 gross margin of 70% to 71%. Operating expenditure should decline slightly, while research and development investment is expected at 13% of sales.

The guidance includes a stronger Australian dollar, which is expected to reduce underlying profit by about 10% against FY26 average rates. Foreign-exchange contract gains should partly offset translation effects.

Services growth should ease as the current sound-processor replacement cycle matures. Meanwhile, acoustics growth is expected to benefit from the Osia 3 Sound Processor launch in the first half.