Under the hood of this superficially expensive business is a high-margin, recurring revenue machine with a cash-rich balance sheet and a very credible plan for growth.
The company makes infection prevention equipment—the sole product being sold at the moment is a device for hospital-grade disinfection of ultrasound probes. The Trophon system, a razor-and blade model, has steadily embedded itself in US healthcare settings. Over 35,000 units are installed globally with 87% of those in the US, where Nanosonics has now captured more than 50% of the available market. Quite an achievement for an Australian business based out of leafy Macquarie Park in Sydney.
Nanosonics captures recurring revenue each time a probe needs to be disinfected. And each time a new unit is sold the business seeks toattach a multi-year services contract. In the first half of the financial year, 74% of revenue came from these two revenue streams, with therest from the sale of new devices. The consumables are proprietary and essential to the system, and are sold at greater than 80% gross margins.
Nanosonics EBIT Contribution of Trophon and Coris
The core Trophon business grew revenue by 18% in the last half year, helped by more units in the field and healthy ultrasound procedure growth. With costs well controlled, earnings before interest and tax rose 43% as margins expanded. Longer term, revenue growth above cost growth will continue this margin expansion. When the Fund started buying Nanosonics at about $3 per share, the business was attractive on the value of the Trophon business alone.
Over the last few years profitability has been muddied by almost $100million spent on a new product—a device for the disinfection of endoscopes called Coris. This spend has not seen a dollar of revenue so far. Yet with the company’s technical expertise, distribution muscle and recent approvals, Coris has plenty of long-term value.
With the twin growth engines of consumables growth and services, supported by sales of Trophon hardware, the business should continue to grow strongly. Adding the long-term potential of Coris will supercharge growth.