Revenio Q3 on Thursday: Backward steps ahead

Translation: Original comment published in Finnish on 10/23/2023 at 7:27 am EEST.

Health technology company Revenio will publish its Q3 report on Thursday at around 9.00 am EEST. We expect the company's net sales to decline year-on-year, as demand for Revenio's devices, especially in opticians’ stores, is clearly under pressure after the earlier COVID acceleration. Because of declining net sales and cost inflation, we also expect the result to deteriorate significantly from the strong level of the comparison period. In particular, the report focuses on outlook developments in different sectors and estimates of the duration of the downturn and the depth of the hole. In particular, we are looking for building blocks for the expected earnings growth next year.

We expect the reported net sales to have decreased slightly

We expect Revenio's net sales to decrease by about 3% to EUR 23.4 million in Q3. The decline is due to a clear weakening of demand, especially in optician chains owned by private equity investors, who are significantly reducing their investments. In previous years, Revenio's net sales were boosted by the COVID pandemic, and 2022 net sales landed at around 59% higher than in 2020. Now the company is facing a hangover, which in Revenio's case is presumably more of a normalization. The temporary weakening of demand led to an exceptional profit warning for Revenio in the summer and the situation looks set to remain challenging for at least the rest of the year. Although volumes of iCare tonometers are likely to decline, we expect a stable development on this side, supported by probe sales and the HOME product family. In contrast, we expect the net sales of imaging devices that have been growth drivers in recent years (in particular iCare DRS+ and EIDON Ultra-Widefield) to have fallen significantly year-on-year, due to, e.g., their higher sensitivity to interest rate changes (more expensive investments for customers) and fewer continuous elements (probes). Almost half of Revenio’s net sales come from the United States. Although the dollar has strengthened significantly during Q3, at the end of Q3'22 the EUR/USD ratio was well below parity. Thus, the dollar has weakened significantly since a year ago, and we expect this to cause at least a slight headwind to the figures reported by Revenio.

More pronounced level adjustment in earnings expected

We estimate Revenio’s Q3 EBIT to land at EUR 5.6 million (Q1’22: 7.7 MEUR) which would mean an EBIT margin of 24% (Q3’ 23: 31.7%). In other words, we expect a significant year-on-year decline in absolute and relative profitability, driven in particular by the decline in net sales and continued cost inflation. The company has high gross margins (over 70%), which means that the fall in net sales is also directly reflected in profitability. Due to cost inflation and the company's own investments, we believe that the company's fixed costs are still under upward pressure. With the slowdown in the market, Revenio has probably taken a firmer line on its own costs, but at the same time pricing is likely to have come under additional pressure. However, we believe that growth investments in digitalization (ILLUME and Oculo) have continued as normal. As for the result, uncertainty is caused by sales volumes in the US, where profitability is stronger due to own direct sales (better margin compared to distribution channels). Thus, the weaker dollar is also putting pressure on profitability. Our own earnings forecasts are lower than the Bloomberg consensus forecasts.

Focus on the market outlook

We expect Revenio to reiterate the guidance that it issued in the summer earnings warning. The company expects currency-adjusted revenue to grow by 1-5% year-on-year and profitability to be at a good level excluding one-off items. Our current forecasts expect reported net sales to decline by 1% to around EUR 96 million in the current year, reflecting the slight headwind we expect from the US dollar (guidance is FX-adjusted). We expect EBIT to decrease to EUR 24.3 million (2022: 29.7 MEUR), which would mean an EBIT margin of just over 25%. We expect this to be a "good level", despite a sharp decline from the previous year (2022 EBIT margin of 30.6%). Our own forecasts for 2023 are clearly more negative than the consensus forecast, which raises concerns about our view.

Revenio's summer profit warning put a dent in the company's excellent investment story as growth stalled after three years of exceptionally strong growth. Our current estimates suggest that the market slowdown will last around 12 months, but both the duration and depth are still guesses. We will try to clarify this situation for the different sectors in connection with the Q3 report. This is also linked to pricing, which we believe is generally tightening. There is also interest in the weak state of the Chinese healthcare sector amid the corruption scandal, but the impact on Revenio should be moderate (China's share of net sales is quite small). Although growth is weak in the short term, we do not see any material change in the competitiveness of the company or its products. After the market's sudden slowdown, we expect the company to return to its previous trend of growth next year.