LivaNova Earnings: Favorable Conditions Push Quarterly Results Ahead of Our Expectations

LivaNova’s LIVN second-quarter performance demonstrated a continuation of the strength seen in the first quarter, and after adjusting our full-year estimates upward, we plan to raise our fair value estimate modestly. The 16% organic revenue growth seen in the second quarter was broad-based both in terms of product lines and geography. Though we anticipate some factors contributing to the outsized performance in the first half of 2023 to moderate—such as easy comparable quarters, the temporary absence of an oxygenator competitor on the market—we think underlying demand should remain solid thanks to the resumption of the procedure referral pipeline, the rollout of Essenz heart-lung machine in Europe and the U.S., and the replacement cycle for its vagus nerve stimulation to address treatment-resistant epilepsy. We saw little to change our view of LivaNova’s narrow economic moat in second quarter.

The quarter can be summed up with impressive growth—cardiopulmonary and neuromodulation rose 21% and 14%, respectively, in constant currency. We expect cardiopulmonary to pull back in the second half of 2023 now that the missing competitor has returned to shipping its oxygenators. Nonetheless, Essenz remains early in its adoption curve, and the process of vetting the new technology followed by procurement procedures can also lengthen that curve, which would provide steady demand through the midterm as hospital customers replace their aging heart-lung machines.

Finally, the board remains in the relatively early stages of its search for a new CEO, with the first slate of candidates under review. We believe someone with a strong operations background could make a substantial impact on improving execution at LivaNova. Nonetheless, we still think the firm’s resources and bandwidth to support development programs remain key constraints on the firm’s potential, unless it finds a runaway hit that catapults a product into hypergrowth. We have low expectations on that front.