Medtronic tops profit estimates despite sluggish sales growth

Computer problems and surprisingly sluggish sales in key areas like heart valves have been tamping down revenue at Medtronic, as the global medical device maker faces a planned CEO transition and an unquantifiable impact from a major viral outbreak in China.

But efficiency improvements and tax-related benefits kept overall profits above expectations in the three-month fiscal period that ended Jan. 24. The company's adjusted earnings per share of $1.44 beat analysts' consensus estimate by 6 cents and were up from $1.29 during the same period a year ago. While profit grew by 11.6%, organic sales increased just 2.6% at the medical device maker, which is run from headquarters in Minnesota.

Medtronic President Geoff Martha, expected to take over as CEO on April 27, said the company is already making adjustments to improve consistency and smooth out the effects from "transitory" events that happen late in the quarter.

"We plan to discuss these and other changes during our investor day [in June], but I want to assure you of one thing — I'm on this," Martha said during the quarterly earnings call Tuesday morning. "And we are taking the appropriate actions to improve consistency and avoid future surprises."

Medtronic stock closed at $112.66 per share, down 4% on the day.

Unwelcome sales surprises included relatively sluggish revenue from popular aortic heart valves that are implanted via minimally invasive procedures. Sales of these TAVR devices rose 13% during the quarter, while the broader U.S. market galloped ahead more than 30% following a regulatory approval that greatly expanded the potential pool of patients.

Medtronic is training more sales reps to address the problem. At the same time, Medtronic's minimally invasive therapies group suffered a self-inflicted wound during the quarter after its conversion to a new enterprise computer system ran into problems, holding up some products and leading to lost sales.

In addition, sales declined for complex left-ventricular heart pumps called LVADs, for Medtronic's novel biologic drug Infuse, used to fuse vertebrae in the lower back, and for neurostimulation devices that treat chronic pain.

Analysts with CFRA maintained their buy rating on the stock, pinning lower-than-expected quarterly revenue primarily on "curbed customer spending" ahead of new product launches in the heart-device and restorative therapies groups.

There was also a question Tuesday about Medtronic's gross margin, which is a measure of the profit margin after accounting for manufacturing and sales costs. Medical devices tend to carry high markups over manufacturing costs, but Medtronic's gross margin has dropped to about 70% in recent months.

"One of the largest pressures that we've had on gross margins is the increase in China tariffs," Chief Financial Officer Karen Parkhill said Tuesday. "And as long as those stay, that will be a continued pressure. … As we introduce new products, that should help gross margin going forward."

Medtronic said it expects the coronavirus in China to negatively affect fourth-quarter results and plans a later update.

Joe Carlson • 612-673-4779