Sonova Earnings: Weak Markets, High Costs, and Sennheiser Drag Down Fiscal 2022-23 Margins

We are maintaining our fair value estimate of CHF 268 for narrow-moat Sonova SOON following the publication of 2022-23 fiscal year earnings. Reported EBIT came in under consensus expectations, CHF 746.7 million versus CHF 781 million, as market growth remained slow, with continuing economic uncertainty delaying hearing aid replacement cycles. We currently view shares as fairly valued.

The loss of the Costco contract renewal in the U.S. weighed on Sonova’s total growth in the year, resulting in 2.3% organic growth for the group while the Hearing Instruments business roughly broke even. Without the loss of Costco, management estimates organic growth for the subsegment would have been approximately 4.6% for the year. Audiological Care fared better, up 4.5% organically, and expanded its clinics through both Alpaca Audiology and HYSOUND to reach 15.7% growth versus fiscal 2021-22. Implants was also hit with weaker markets, as supply and hospital staff shortages persisted in addition to the MED-EL injunction filed in Germany at the end of fiscal 2021-22 until its preliminary suspension in October.

EBIT margins took a hit in the year, falling to 20% from 22.6% as Sonova integrated lower-margin Sennheiser, saw weak markets both for hearing aids and implants, and experienced continuing heightened freight and supply costs compounded with exchange rates. Management indicated that the higher costs experienced in fiscal 2022-23 were lessening, taking some pressure off margins in fiscal 2023-24.

Combined with Sonova’s cost-cutting measures, our model anticipates margin expansion in fiscal 2023-24. We continue to forecast revenue growth in the mid-single digits through our explicit forecast period. Sonova’s guidance for fiscal 2023-24 included sales growth of 3%-7% in local currencies, while adjusted EBITA growth is anticipated to be 6%-10%. Midterm targets remain at 6%-9% and 7%-11% annual growth for sales and adjusted EBITA respectively.