Carl Zeiss Earnings: Strong Top Line but Poor Product Mix and Pricing Pressure Lead to Mixed Results

Narrow-moat Carl Zeiss Meditec AFX reported second-quarter earnings that were in line with our expectations. Total sales were up 13.3% year over year driven by double-digit growth in ophthalmology, or OPT, and microsurgery, or MCS. We expect near-term challenges, including supply chain disruptions, inflationary pressures, and an unfavorable product mix, to persist throughout the year. We maintain our fair value estimate of $90 per share after slightly subdued second-half of 2023 projections were offset by time value of money.

OPT was up 12.7% driven by strong devices business. Notably, U.S. sales grew 23% and Latin Americas was up more than 50%, attributed to successful conversion of high backlog. While its operating margin improved more than 400 basis points sequentially, to 14.4%, it is still well below the last year’s 22.0%. Two factors are at play here: muted sales of high-margin surgical instruments due to weak procedure trends in COVID-19-induced China and the price increase that went effect at the beginning of the fiscal year not having fully materialized yet. While we foresee these challenges to prevail throughout the year, we see their impacts slowing given the quarter-over-quarter improvement and expect margin improvements in the latter half of 2023.

MCS delivered strong results as robust device sales, favorable foreign exchange impact, and manufacturing efficiency drove the top and bottom lines. Sales were up 15.1% year over year and operating margin continues to improve sequentially, despite rising input costs.

This quarter was the first full quarter after a launch of CT Lucia, a monofocal intralocular lens, or IOL, in the U.S. This was Zeiss’s first entry into the IOL space in the U.S., and we see this as yet another step to increase its consumables sales. While adoption may be slow at first given the high switching cost environment of the IOL space, we believe Zeiss can reach doctors given its strong base of current users and its premium brand name.