Medtronic today announced its second quarter fiscal 2023 financial results, reporting it delivered better than expected earnings but saw disappointing revenue numbers. The company reported worldwide revenue of $7.585 billion in Q223, a decrease of 3% as reported and an increase of 2% on an organic basis. The organic comparison excludes a $457 million negative impact from foreign currency translation and a $25 million contribution from Medtronic’s Q123 acquisition of Intersect ENT, reported in the company’s specialty therapies division in the neuroscience portfolio.

The company explained that the Q223 revenue results “reflect slower supply recovery or lower than anticipated underlying market procedure volumes in certain businesses and the pricing impact of volume-based procurement in China,” according to the company press release. However, it was noted that the supply and underlying market procedure volume issues were somewhat offset by certain product line strength, including transcatheter aortic valves (TAVR), cardiac pacing, core spine — specifically in the United States, and diabetes — internationally.

Q223 GAAP net income and diluted earnings were $427 million or $0.32 per share, which was off $7.585 billion, resulting in a decrease pf 67%. Additionally, the top line was down 3% compared with Q221. Non-GAAP net income and earnings were reported as $1.725 billion, or $1.30 per share, a respective decrease of 4% and 2%. Much like other companies recently reporting financial results, Medtronic noted that the continued macroeconomic impact of inflation on materials, direct labor, freight, and utilities had cause in its earnings decline.

The company’s US revenue saw a 3% as reported and 1% organic increase equaling $4.069 billion, representing 54% of its revenue. Internationally, however, Medtronic developed market revenue of $2.157 billion — 28% of company revenue — which was a 13% decrease as reported and 3% increase organic. Emerging markets revenue, which represents 18% of company revenue, was reported as $1.359 billion and decreased 1% as reported and increased 4% organic.

"Slower than predicted procedure and supply recovery drove revenue below our expectations this quarter,” said Geoff Martha, Medtronic chairman and CEO. “We continue to take decisive actions to improve the overall performance of the company, including streamlining our organizational structure, strengthening our supply chain, driving a performance culture, and strategically allocating capital to support our best growth opportunities with the investments they deserve. We're seeing the benefit of these changes — along with new incentives and strong execution — in certain businesses, and we're focused on ensuring these efforts translate into improved performance across the company.”

As for individual portfolios, its cardiovascular revenue for Q223 saw a 2% decrease reported, 4% increase organic, at $2.773 billion. The medical surgical portfolio reported a revenue of $2.070 billion, a 10% decrease as reported and 3% organic. Excluding the impact of ventilator sales due to COVID-19 related demand in the prior year, medical surgical revenue decreased 1% organic.

The company’s neuroscience portfolio revenue came in at $2.186 billion, an increase of 2% as reported and 5% organic. Diabetes revenue of $556 million saw a decrease of 5% reported and 3% increase in organic. US revenue declined low double digits, according to Medtronic, due to the absence of new product approvals, but was offset by mid-teens growth in internationally developed markets and low-double digit growth in emerging markets.

Medtronic also announced an updated fiscal year 2023 earnings per share guidance range. As the company now expects a stronger dollar to negatively effect its full year results more than expected, the fiscal year 2023 second half revenue growth guidance range has been updated to 3.5% to 4.0% with a full year adjusted earnings per share of $5.25 to $5.30. Previously, Medtronic predicted non-GAAP earnings per share in the range of $5.53 to $5.65. If foreign currency exchange rates as of the beginning of November hold, the company said that the fiscal year 2023 revenue growth would be negatively affected by about $1.740 billion to $1.840 billion. This is compared to Medtronic’s previous prediction of a $1.4 billion to $1.5 billion negative impact.

"We continue to expect organic revenue growth acceleration, with the second half growing faster than the first,” said Karen Parkhill, Medtronic chief financial officer. “However, given a slower pace of market and supply recovery, we're reducing our revenue expectations for the remainder of the year. On the bottom line, we are driving expense reductions throughout the company to help offset the lower revenue and the effects of cost inflation. We are also committed to investing appropriately for the long-term, allocating capital to our most promising growth drivers and executing tuck-in acquisitions, all designed to reach more patients and create greater value for our shareholders."

After the release of its Q223 results, Medtronic saw a share drop of more than 5% ($78.15 per share) in Tuesday’s premarket trading. Additionally, BTIG analysists Ryan Zimmerman and Sam Durno reaffirm their neutral recommendation, noting that the guidance cut was expected, but its magnitude was higher than expected.

“We left MDT's last quarterly call assuming that the worst was behind MDT, but were wrong,” they wrote in the analysis. “The combination of a more challenging supply environment, China VBP, and slower procedural recovery is hampering growth more than peers. In order to stem the impact, MDT is cutting OpEx, which should help to cushion EPS (coupled with Fx hedges). Even when adjusting the top-line for updated guidance, we land above MDT's implied EPS range ($1.25 - $1.27) suggesting that mgmt. has set an achievable floor (at least in 3Q). However, as we move further through the year, the implied step-up in 4Q and concerns around EPS leverage entering FY24 exist and make it hard to see upside to numbers (even at current valuation). We view shares as fairly valued given the lower expected growth both on revenue and EPS in FY23.”