I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.
Good morning, everyone. Thank you for joining us. Let's get underway. In FY 2026, as always, our mission is central to what we do, and we enabled over 55,000 people to hear for the first time or to regain their hearing. More than 50,000 of our over 800,000 recipients received a new speech processor last year, giving them access to better hearing.
I'll give an overview of the year and then focus on actions to drive growth in the developed adults market. In FY 2026, sales revenue grew 2% in constant currency to AUD 2.3 billion, and underlying net profit was AUD 322 million. These results were below the expectations we set last August, but they were at the upper end of the guidance we revised in April. Revenue in the second half was up 6%.
During the year, we advanced our strategic priorities, including successfully launching the Nucleus Nexa system, which I'll cover in more detail later. When market growth slowed, we acted quickly to optimize our cost base, lowering fixed costs to fund investment in growth programs, and Sarah will talk to this later.
We accelerated work to medicalize hearing loss, and we are working to make adult cochlear implantation the standard of care for people with severe to profound hearing loss by building clearer treatment pathways and expanding medical referral channels. Despite lower sales growth, we increased R&D investment to support our innovation agenda, and we're strengthening our implant portfolio by building on the Nexa platform. Now I'll spend some time on cochlear implants.
I'll talk through last year's performance by region and then share the insights we gained into market growth and how our growth strategy addresses these insights to drive growth into the future. The long-term opportunity has not changed. The clinical need is significant, the outcomes from our products very good, and adult penetration remains low.
In FY 2026, overall cochlear implant systems were up 5%, and revenue was flat in constant currency. This was due to a high mix of lower price sales in emerging markets, especially in China. We'll talk a bit more to that.
First, to developed markets, where cochlear implant revenue was up 1%. The launch of the Nucleus Nexa system, the world's first and only smart cochlear implant system with upgradable firmware, was very well received. Adoption has been strong, with the Nexa system accounting for more than 95% of our implant sales across developed markets by June. Feedback has been positive, and an average 3% price increase was achieved.
In the U.S., revenue increased 4%. Market share was maintained across the year, and growth remained strong in DTC and for clinics with established referral networks. There were clear headwinds that slowed growth overall. These included a higher rate of insurance delays and broader economic pressures, which made people more hesitant to proceed with surgery.
In Western Europe, revenue declined 8%. Financial and demand pressures on healthcare systems constrained capacity in major countries last year. While these pressures have existed for some time, it is very unusual for them to apply across all major markets at one time. There is a number of examples I could give, but I am only going to give a few.
This includes the U.K., where referrals were up, but surgery rates did not increase due to NHS waiting lists and temporary clinic closures. Industrial action in Spain significantly lowered access to operating theaters. We lost some market share in Germany, largely the result of implementing a price increase with Nexa shortly before reimbursement rates were lowered. Asia Pacific grew 7%, a strong performance across the region, particularly in Australia and Korea.
In Australia, where we have built out referral pathways, surgeries grew 15% in private hospitals where we helped candidates navigate around public system waiting lists. We also generated significant referrals to the public system. Those referrals led to an increase in waiting lists rather than more surgeries as the public system was capacity constrained. We are working hard, obviously, to reduce those waiting lists. In Australia, Singapore, Korea, and Japan, we increased market share with the launch of Nexa.
In Korea, we also expanded our professional customer base, which added to growth. Now on to emerging markets, where revenue declined 2%. Strong performance in Latin America and Eastern Europe was offset by declines in the Middle East as a result of the conflict that started in March and also in China from a full year of volume-based pricing. In China, there was also an unexpected reduction in reimbursement in the special zones in the second half, which reduced our sales in the premium segment.
Now I want to move on to looking at detail about adult growth with a focus on the U.S. to illustrate the sources of growth and how our strategy addresses these. There are broadly two ways in which candidates get to surgery. There is growth driven by actions we take to lead people to surgery, primarily through our direct to consumer activity. There is an underlying level of market growth driven by aging population and increasing awareness of the importance of treating severe to profound hearing loss.
Over more than a decade, our direct to consumer campaigns and concierge services have driven strong double-digit growth, expanding to roughly one-third of surgeries in the U.S. These Cochlear-supported surgeries grew 10% in FY 2026, below our historical average, but still strong growth in a more challenging environment.
In what we might call the self-navigated pathway, the referral path is inconsistent, and the majority of people who get surgery find their own way to a Cochlear implant clinic. A small number get a direct referral to a CI clinic. Self-navigated pathway has historically provided mid to high single-digit growth, and it actually declined in FY 2026. Our experience in the U.S. tells us three things.
First, there were genuine referral and capacity headwinds last year that slowed down both pathways. Second, our DTC programs work even when market conditions are challenging. Third, the self-navigated pathway was significantly more affected because it is not driven by consistent medical referrals. Our growth strategy addresses both pathways to surgery. Our DTC programs work, and we continue to grow them. We have evidence that targeted interventions in the self-navigated pathway can drive growth at a lower cost than DTC alone.
The growth in private surgeries in Australia was largely a result of building referrals in this self-navigated pathway. In the U.K., educating referring audiologists through direct engagement has doubled high-quality referrals to cochlear implant clinics over the last four years. These referrals have not yet converted to a proportional surgery growth due to NHS bottlenecks, but the referral increase demonstrates this education works.
In the U.S., clinics with established referral networks continued their strong growth in FY 2026, while those without them did not. To improve referrals in the self-navigated pathway, we now have pilot programs in four U.S. cities working directly with ENT doctors who do not perform cochlear implant surgery, educating them on clinical practice guidelines and appropriate candidacy criteria. We know the path forward. We will keep expanding Cochlear-supported DTC programs, which are effective at driving growth.
At the same time, we are scaling interventions in the self-navigated pathway, building sustainable referral networks. We have evidence these interventions work from Australia, the U.K., and the U.S., and we are now implementing them systematically across major developed markets. Turning this self-navigated pathway into a professionally supported pathway is a critical outcome of medicalizing hearing loss. Let us go on to look briefly at the process of medicalizing hearing loss.
Our objective is to build a professionally supported referral program. We have seen medicalization fundamentally transform treatment patterns in other conditions. As an example, obesity shifted from being viewed as a lifestyle issue to a recognized medical condition with clear treatment pathways and therapeutic interventions. Closer to home, pediatric cochlear implants became medicalized nearly 20 years ago. In the 1990s, parents of children born with hearing loss only had a self-navigated pathway to get access to cochlear implants.
Today, they are the standard of care. Over 80% of children in most developed countries will get one or two cochlear implants by the time they are 12 months old. We are now doing the same for adult hearing loss, following a clear roadmap based on actions that have worked in other therapy areas. We have made substantial progress over the past decade building the foundations to do this.
Global consensus statements and clinical practice guidelines have been established, and these are being adopted country by country to guide clinicians on appropriate candidacy criteria and referral pathways. The clinical evidence connecting untreated hearing loss to dementia and falls continues to strengthen. It provides the medical rationale for treatment rather than treating hearing loss as being considered only a quality-of-life enhancement. We continue to progress on elements of medicalization that you can see on this slide.
We are working with partners to have hearing loss defined as a medical condition and establishing a vital sign for hearing loss, a simple, standardized measure that helps both clinicians and patients understand severity and appropriate treatment pathways. This creates a common language between primary care physicians, audiologists, and specialists. We are building integrated care pathways that connect audiologists, ENT specialists, and implant programs into seamless referral systems.
These pathways reduce friction in the patient journey and ensure candidates who meet criteria are directed to treatment. We are working with policymakers and payers to ensure appropriate reimbursement as hearing loss becomes recognized as a treatable medical condition rather than an inevitable part of aging. This medicalization work directly supports the referral pathway development I described earlier. When referring clinicians understand candidacy criteria and benefits, the patient pathway becomes more consistent.
Instead of patients navigating complex decisions alone, they are guided by medical professionals through established protocols, and this creates sustainable, scalable growth. Now let us move on to Nexa. A major achievement for FY 2026 was the successful launch of the Nexa system, our next generation implant platform. Nexa offers benefits today to improve power efficiency, means that the Nucleus 8 sound processor is even smaller, extending our advantage in cosmetics. A smaller processor is more comfortable.
We actually are seeing an increase in the time per day people wear their processor with Nexa compared to previous implants, and we know this leads to better hearing outcomes. SmartSync provides both recipients and audiologists with a better experience. SmartNav R3 reduces surgery time and provides more information to surgeons. There are benefits for all of the stakeholders from the Nexa system up front. Nexa builds on our long-standing advantage in electrode design.
Our Slim Modiolar electrodes sit closer to the auditory nerve with more electrode contact points than competitors' devices. Clinical evidence demonstrates this gives better hearing outcomes faster than other electrode designs. Nexa has the potential to take this further in two ways. First, it can measure the health of an individual's auditory nerve, and second, it can use that measurement to customize stimulation patterns to each patient.
In clinical studies, recipients using new coding strategies showed significant preference for music quality compared to traditional cochlear implants. This combination of neural health measurement and flexible stimulation has the potential to enable personalized outcomes for every recipient, extending our competitive advantage. Nexa is the platform for two very important implant developments that will drive growth.
Drug-eluting electrodes aim to preserve residual hearing, removing a barrier to surgery, and totally implantable devices address cosmetic concerns and, more importantly, enable 24-hour hearing, benefits that are clearly resonating with patients based on recruitment rates that we see in our clinical studies. Both of these programs made significant progress over the last year. Now let us move on to services and then acoustics. Services grew 6% in constant currency, with very strong performance in developed markets, which were up 13%.
This was a result of the retirement of the Nucleus 7 sound processor in the U.S. Across the world, we improved marketing of the benefits of Nucleus 8 over Nucleus 7 based on direct feedback from customers who had made that transition. In emerging markets, revenue declined due to disruption in the Middle East and lower pricing in China. Continuing growth in the recipient base, as always, provides the foundation for services revenue growth.
In the year, acoustics revenue grew 1% in constant currency. We had a better second half than first half. We did lose some market share in the year due to increased competitive activity. However, the launch of the next generation Osia processor in FY 2027 will enable us to regain that share and drive market growth.
The new processor has FDA approval and CE mark, and it has market-leading features, including a rechargeable battery, improved connectivity, and most importantly, improved power output, enabling a wider fitting range and improved sound quality. The new processor also opens up the opportunity for Osia recipients to buy replacement processors. It is the first upgrade opportunity for Osia recipients, building our services revenue for acoustics. Now I will hand over to Sarah to go through the financial results.
All right. Thanks, Dig. Good afternoon, everyone. Let us go through the financial statements, starting with the P&L. Sales revenue was up 2% in constant currency. Dig has taken you through that, so I will not go through the details. The gross margin declined three percentage points to 71%. Let me talk through why it changed from original guidance and what we are looking at for FY 2027.
At the start of FY 2026, our gross margin assumptions incorporated three known headwinds. First, the introduction of VBP in China. That is a structural headwind we are working to address over time. Second, being early in the Nexa manufacturing experience curve, which typically takes 18 to 24 months to reach full efficiency at commercial volumes. Third, the continued ramp-up of the Chengdu facility to full utilization in FY 2027. These three factors were all built into our original budget and guidance assumptions of 74% gross margin.
A couple of changes happened in the year that we had not anticipated, and these reduced sales of top-tier products, specifically weaker developed market sales growth and the second half removal of China special zone reimbursement. These changes affected our gross margin in two ways, through product mix and through manufacturing overhead absorption. First, on product mix. The weaker top-tier demand meant a greater proportion of our sales came from lower margin products than budgeted. This mix reduced gross margin by 1.5 percentage points versus expectations.
Second, lower sales volumes meant we reduced production rather than building excess inventory. This was the right operational decision, but it meant lower absorption of our fixed manufacturing overhead costs. That created a 1.2 percentage point manufacturing variance. We have now reduced our fixed overheads to align with the FY 2027 plan. In addition, the stronger Australian dollar reduced gross margin by 0.6 percentage points.
Based on FX rates at the start of FY 2026, we budgeted for a tailwind, and we got a headwind, because most of our revenue is in foreign currencies, while a large share of our manufacturing cost base is Australian dollar denominated. Looking ahead, FY 2027 guidance has gross margin staying flat. There are two reasons for that. First, we assume the FY 2026 sales mix persists without a net shift toward higher margin top-tier products in this year. While stronger developed market growth would help, we have assumed the current mix for this year.
Second, while we are cycling the FY 2026 manufacturing variants and we are moving further up the Nexa manufacturing learning curve, this is offset by annualizing that China special zone reimbursement change, plus the FX headwinds we see. Over the medium term, as developed market growth lifts and as we benefit from COGS improvement programs underway, we expect gross margin to improve.
Now, operating expenses. Comparable operating expenses were down 1%, reflecting cost management across the organization, while continuing to invest in R&D and growth initiatives. Reported operating expenses increased 5%, as this includes AUD 32 million in restructuring costs from fourth quarter organizational changes, and AUD 37 million in STI provisioning following the low payout in FY 2025 and a partial payout in FY 2026. R&D expenses increased 15% to AUD 323 million, which is 14% of sales revenue up from 12% in FY 2025.
This reflects our commitment to key R&D projects and to development of our product and services pipeline, which underpins our competitive position and growth opportunities. This investment this year supported the progress that Dig mentioned on the development of the drug-eluting electrode and the totally implantable cochlear implant. Our cloud computing investment to modernize core systems and improve scalability was AUD 66 million post-tax, taken below the line in FY 2026.
This is an increase from the prior year, reflecting the delivery stage of the current program, which introduces new ERP and manufacturing execution systems. We've completed the first go-lives. All manufacturing lines at both Sydney sites and in Malaysia now use the new system. That's the majority of our manufacturing volume. In-year expenses were AUD 15 million post-tax, lower than expected for this, due to final phasing of milestone payments.
There'll be approximately AUD 60 million after-tax spend in FY 2027 to complete the program, which remains on track for FY 2027 completion. Total cost for completing the six-year cloud program is just over AUD 200 million post-tax. That's higher than originally expected due to scope expansion. We remain on track to deliver scalability, data capability, and operating efficiency benefits, and that's built into our guidance.
Fair value losses on investment and share of losses on equity accounted investments was AUD 109 million, mainly driven by the non-cash write-down of our investment in Epiminder. Underlying net profit of AUD 322 million reflects a net profit margin of 14%, below our medium term 18% target. About half this outcome was driven by reduced developed market sales impacting across revenue COGS and tax lines, and half by the AUD 69 million in transitional costs. That's the restructuring and STI provision replenishment, which will largely not repeat.
We've managed costs carefully to deliver free cash flow. On the P&L side, we've reduced recurring costs by updating our operating models and using the cloud technology platforms we've invested in, plus AI capability. These changes are permanent, not once-off. As a result, we've cut fixed costs two percentage points as a share of revenue, increasing our flexibility to respond when market conditions vary.
Changes to date deliver around AUD 40 million in run rate impact from FY 2027. We have work ongoing in FY 2027 and FY 2028, with overall cost improvements expected to deliver about 50/50 margin improvement and reinvestment in growth. We've also reallocated AUD 25 million into growth initiatives, including direct to professional referral programs such as Dig talked about, digital and AI tools that support candidates through their journey, and evidence generation to develop the standard of care for adults.
While making these changes, we still invested over AUD 40 million more in R&D than in FY 2025, and we're committed to keeping R&D at least 12% of revenue, the engine of our growth and market leadership. On the balance sheet, you'll see tight working capital management cut inventory AUD 75 million, 13% in the second half, as planned following the Nexa rollout.
Inventory unwind will continue over this year, although we expect to see an increase at the half before decreasing over half two. That's so we support readiness for the remaining go-lives of our manufacturing and ERP systems. We also made sure receivables normalized following the Nexa launch that was at the end of FY 2025, and as a result, we've more than doubled free cash flow compared to last year.
Specifically on the balance sheet, you can see working capital reduced to AUD 789 million, reflecting lower trade receivables and inventory following Nexa launch and first half rollout. You also see the change to investments in other financial assets, which reflects changes in the value of our innovation fund investments, with the write-down in Epiminder being the largest contributor.
On cash flow, operating cash flow improved AUD 130 million on last year, driven by better working capital, which we just covered, and lower income taxes paid due to reduced profitability. You can also see we invested CapEx of AUD 91 million, covering both stay-in-business CapEx and productivity-improving CapEx. That's mainly at our Lane Cove and Macquarie manufacturing plants. Now, let's talk about FX a little bit and the impact on net profit. In FY 2026, foreign exchange contract gains gave an after-tax benefit of AUD 9 million versus an AUD 12 million after-tax loss in FY 2025.
Taken together, that makes AUD 21 million year-on-year movement that you see here, which helped offset spot exchange rate movements. Overall, the constant currency outcome was pretty flat compared to FY 2025. On hedging, our approach reduces but does not eliminate the impact of short-term currency fluctuations on earnings. It mainly protects cash flow.
Our hedging policy's been largely unchanged for years, and we review it regularly. We take out forward exchange contracts on currencies we have key exposures to in six-month tranches over two years, weighted toward the first 12 months. We disclose the contracts held for the next 12 months in our annual report each year. These are summarized in the table at the bottom of this slide.
At current rates, this would provide about AUD 25 million to AUD 30 million in gains to help offset the FX impact of a currently stronger Aussie dollar versus the FY 2026 average rates. The FY 2027 guidance that Dig will take you through next is based on the US dollar at $0.70 and the euro at EUR 0.61 versus the Aussie dollar. A stronger Australian dollar than the FY 2026 average.
Net of the foreign exchange contract gains just discussed, this is expected to reduce FY 2027 underlying net profit by about 10%, and it's factored into our guidance. We have a net profit sensitivity of around 2% for every one cent change in the US dollar or the euro. All right, back to Dig for the outlook.
Thanks, Sarah. Before I get into the outlook, we obviously remain confident of our long-term opportunity to grow the cochlear implant market, and we look at FY 2027 in that context. In FY 2027, we expect to see low single-digit constant currency revenue growth and an underlying net profit of between AUD 330 million and AUD 350 million. We expect modest revenue growth in developed markets, supported by DTC programs and referral pathway activity. We have assumed that underlying market growth does not rebound in FY 2027.
In emerging markets, we expect low growth with a decline in the Middle East as a result of ongoing instability, and we expect China sales to be in line with FY 2026. Services growth will be slightly lower than FY 2026, reflecting that we are later in the cycle with Nucleus 8.
Acoustics, we expect growth to be driven by market expansion and the launch of the new Osia 3 Sound Processor that I mentioned earlier. Sarah said gross margin will be between 70% and 71%, with improvements in manufacturing costs and overhead recovery offset by FX and the annualization of lower China pricing.
There will be a small decline in operating expenses, and this includes a lower level of restructuring costs in FY 2027, the benefit of cost reduction activities, and enables investment in growth and margin expansion, and increasing the STI pool to 100%. Sarah mentioned the impact of FX on profit in FY 2027.
Over the next few years, we expect to see developed market growth rates lift, tight management of OpEx, along with continued investment in R&D and in growth programs. All of this is expected to result in profits growing faster than revenue and should see us return to our 18% net profit margin target over the medium term. Thanks for listening, and now let's open up to Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star. Please pick up the handset to ask your question. Your first question comes from David Low from UBS. Please go ahead.
Thanks very much. The medicalization of hearing loss, can I get you to talk to over what time period do you think these programs can address this issue? Because it feels like it has come on quite quickly. We haven't spoken, I didn't hear you speak about the hearing aid channel at all, whereas what you've set out is something that's going to take quite some time to deliver a benefit that shareholders would see.
Yeah, David, good questions. The medicalization of hearing loss does take some time, that's for sure. We've been working on it for nearly 10 years now, and we expect it to continue to take longer. It's a gradual improvement. It's not something that we just work on, then all of a sudden, it's done, and then you see a sort of rapid increase in the growth rate. The work that we do year on year will improve referrals.
W e're also conscious that given our market penetration for adults and seniors is under 5%, we've got a long way to go before we get there. It is a long-run program, but it has year-on-year benefits. We haven't mentioned the hearing aid channel. Hearing aid channel referrals remain important for us.
Our referrals from the hearing aid channel in the U.S., for example, were flat year on year, when we look at 2026 versus 2025. I think that reflects some of the headwinds we've seen. Very importantly, what we're doing with the work in what we're calling that self-navigated channel is to expand beyond just hearing aids and actually get into the medical channel, where we're already seeing referrals come through. T hat's without us directly intervening.
The examples I gave show that when we do intervene in that medical channel, when we do educate, we do see an increase in referrals, and it's the right time in terms of our development of the execution of our strategy to be expanding that presence in the medical channel and getting those more medicalized referrals, which again, is a step on the path to medicalization.
Great. Thank you very much. The other question, at the trading update, we heard a lot about the market not growing, particularly the U.S. market. I think Western Europe had some explanation with U.K., Spain, et cetera. I f I could get you to focus a little on the U.S. and what you think the dynamics are that are causing market growth to be so slow. What should we, as investors and outside the company, be looking for as signals that things are starting to improve?
Yeah. As I said, in the U.S., where we are working through our direct-to-consumer activities or the work we are doing this cycle, we are seeing growth in referrals, we are seeing growth in surgeries. Clinics that have established referral networks continued to grow. Where the growth didn't come was in the other parts in that self-navigated channel where there has always been an underlying level of market growth. That didn't occur this year. It actually declined slightly, as I said. What we see going on there is a couple things.
One is that the insurance pre-authorization denials, which lead to delays in surgery. We continue to hear, as I talked about in the trading update, we continue to hear from clinics that sort of sentiment, broadly macroeconomic conditions, is having some people more hesitant to go through to surgery. Clearly not all, because there is lots of surgery still happening, but it has been enough to take the edge off that growth.
Okay. Thank you very much.
Perhaps, David, just the last point on that is what we see is when it is one of the reasons that where we intervene grows faster is because we are able to provide people with information on will this be covered by insurance, what will the level of out-of-pockets be? I think what we see in that self-navigated pathway is people, particularly in the U.S., used to paying $5,000 for a pair of high-powered hearing aids, assume this is going to cost more.
Without getting a strong referral and getting that information, they are more likely to pull out along the way. Again, go out to medicalization, getting clarity on the treatment, the treatment pathway, and the costs will help people move through that pathway, in a more seamless manner.
Are these pathways really clearly distinguished in your mind? It seems like quite a change from what we have heard in the past. I hear the DTC channel has been talked up for quite some time and seems to be going well. Now we seem to be talking about other channels that are not growing and probably a little bit less observable from the outside.
Yeah, look, we have obviously been aware of this for quite a while. We have spoken about DTC. What we have been talking about for the last two years now is research we did into these surgeries that happen where we do not have any contact with the people beforehand. We have talked about that in these calls before, to say that there are about 70% of surgeries, depending on the market, where the first thing we know about this person is when we get their implant registry.
Two years ago, that led us to go and do research into where are these people coming from, how are they finding their way? Out of that, we learned a lot about the ad hoc nature of many of those people's journeys, and we hear that directly when we talk to recipients.
We also learned there was a significant number of medical channel referrals occurring, despite us actually never going into that channel to stimulate those referrals. That led us to build this program in the U.S., where we have now got four cities up and running, and we are going to take that to 12 cities over the next six months, where we have got people on the ground working in that medical channel.
Yeah, we have not talked about it for a while, but we have certainly been aware of it, and we have been working on both the research and then the programs to drive growth. For a while, and I will come back to the Australian example, in Australia, being our home market, it is an easy one for us to experiment in. We have been working for a while in Australia on expanding the referral network and working out what is it that drives referrals and what is the education that helps make a difference.
Okay, thanks. You have been very generous.
Thanks, David.
Thank you. Your next question comes from Andrew Goodsall from MST Marquee. Please go ahead.
Yes, good afternoon, and thanks for taking my questions. You have talked a lot about the volumes and so on, but I wondered where you sort of see the opportunity to get price. I think you sort of talked about China, you have taken price and then just that you had some plans there and I guess finally, if you are not getting it back through Nexa, can you get price up with TIKI?
Yeah, Andrew, thanks. Thanks for your question. First of all, we did get average price increase of about 3% with Nexa, which was good to see. As we've said before, one of the things we were doing with Nexa is testing our ability to get a price increase, because we hadn't gone to put a price increase through at this level for quite a long time.
Cognizant of TIKI coming, we wanted to both understand how the market worked when we put a price increase through and improve our ability. All of that said, as we look forward, with TIKI, we are thinking very carefully about the commercial strategy, about the pricing that we'd like to achieve, about how we realize growth with TIKI. We're certainly seeing from our market research and the clinical studies, there's a lot of interest in TIKI.
Interestingly, from our market research, we're seeing it's potentially a different patient cohort too we're getting now. It's an extra patient cohort. W e're building a commercial strategy, I'm not going to go into the detail of that today, that looks at how do we drive growth, how do we work within the reimbursement parameters that they have around the world, what's the right level of pricing and lifetime value that we can get?
Maybe just to torture that a little bit more just on price, obviously there's some markets where it's a lot lower, and we know that with China and so on, but even the sort of developed markets, your constant currency implant revenue is still quite a way below your total units. Just trying to understand, I think there's some markets where you lost a bit of share and maybe that was price driven, but overall, you're saying that you are holding price, but maybe if I can just ask for a bit more color.
Yeah. N ow, we are holding price. In developed markets, we are holding price. The difference between that 5% volume growth and flat constant currency is emerging markets, and it's largely China and the shift to volume-based pricing. As we've talked before about the volume-based pricing, the goal in China for in dealing with pretty much all medical therapies, is to lower the price and significantly expand access. T hat's what we've seen in China.
We've seen a significant lift in volume, but that has happened at a lower price, and that's the single biggest driver of that 5% volume growth and flat revenue in constant currency. It's not a decline in average prices in developed markets.
Okay. Appreciate it. Thank you.
Thanks, Andrew.
Thank you. Your next question comes from Davin Thillainathan from Goldman Sachs. Please go ahead.
Yes, afternoon, Dig and team. Dig, maybe just the comments that you've made on the U.S. market about insurers pushing back, initiating more prior authorizations. I guess, what's within your control to help with that dynamic and some changes that you've put through to address?
Yeah. We are certainly seeing that pushback. As we have talked about before, where someone is getting an upgrade, we are often managing the insurance processing part for them. Where they are getting an implant, the vast majority of those pre-authorizations are sought by the hospital.
It is actually then up to the hospital to, if they get a denial, to appeal, because most times when there is an appeal, that denial gets overturned. We do not have a direct role in that. If it is a candidate we are working with through our DTC, and we see that, then we can talk to the clinic about getting the clinic to appeal. If it is from that other side, then we do not get that visibility. I think what we will see there is these denials are not just Cochlear implants, obviously. It is across a whole range of surgery areas.
The primary impact of these denials are actually on hospitals and on hospital revenue, and that is where we think the hospitals are actually going to take the lead here, and lift their work in terms of challenging, appealing the denial, and seeing that overturned. I think we will see that change over time, the work that the hospitals do to get those denials through. It is exactly the response we had when, two years ago, we saw insurers pushing back harder on replacement processes. We lifted our game on the documentation we provided to insurers.
We appealed when there were denials in place, and we saw the result with stronger growth in services that, while there is still plenty of tension there, we have improved our ability to get insurance. We think hospitals will do the same with respect to surgeries overall.
Yep. Great. Thanks. My next and final one is just thinking about the NPAT guidance into 2027, and also your, I guess, longer term guidance in terms of lifting the NPAT margin back to 18%. In a situation where your revenue does lift above the low single digit guide, do you expect that to all flow through to the bottom line, or do you step up the rate of reinvestment into the business as well?
Well, Sarah provided a good guide on, as we reduce our costs, we will put some in the margin and some in growth. If we see extra growth, we would have that same consideration of do we have a priority growth program that we want to invest more in, or would we restore the margin? D efinitely, a good part of that will go into the margin. We have got that 18% target, and we want to lift back to that.
Thanks, Dig.
Thanks, Davin.
Thank you. Your next question comes from Saul Hadassin from Barrenjoey. Please go ahead.
Hey, thanks for taking my questions. I will stick to two. The first one, Dig. There is a comment between the talks to the developed market implant growth and says revenue is expected to grow modestly. From the release, though, it looks like you have got a price increase on average of 3% from Nexa. Most implants, if not all, are being implanted are Nexa. You are also talking to share gains on the back of the Nexa.
My question is: Is this set therefore just a function of market growth effectively being soft in those developed regions? I guess in that same comment, it says current trading conditions remain mixed, and the measures being taken now, or the actions being taken now, will take time to translate to more consistent growth.
Regarding the outlook for 2027, how much line of sight do you have as to unit sales growth through those developed markets, considering when we had the downgrade in April or May, it seemed to come very suddenly. How much confidence do you have that the trends that you saw, say, in June can be extrapolated into the current fiscal year? Thanks.
Yeah. I will answer the first part of that, and Sarah can talk to what we are doing on that from a visibility perspective. Yeah, look, our outlook is a combination of the price increase, some share gains on improvements with Nexa in some markets. Not all. Some markets have already got the share gains, and some market growth. It is a combination of those and a combination of how we think those factors will play out across the different markets that leads to our outlook. I will let Sarah talk to what we are doing on visibility.
Sure. Look, when we think about that outlook, we consider not only the historical trends that we have seen, but more importantly, what we are seeing in the market. Working closely with the sales teams, because that is actually one of our best sources of intel. Seeing where those outlooks look like from a customer perspective, understanding quite deeply where there are capacity constraints at the micro level, or where there are bigger trends that we are hearing from our customers.
We also look at the data that we have available to us as proprietary data, so what is going on with our DTC, our direct-to-consumer data, where that is available to us. Also, the broader market trends, whether that is information about the hearing aid channel that we can get through our cycle data or broader, more publicly available data sets.
We look across all of those things when we combine together what do we think those forecasts are. Of course, we have got a range for different sub-segments, but then overall combine that into the outlook we have given for our developed markets.
Thanks, Sarah. Can I just follow up with one other question, Dig? Historically, Cochlear has said that on the services revenue, it was the intention to smooth that revenue and the rate of growth. It still seems to be quite volatile as you go through the various years of the life cycle of an upgrade. Do you think it is going to be possible to smooth that revenues, or do we just have to live with the fact that the first couple of years you get significant growth in that revenue line, and then ultimately it declines as you get to the outer years of that upgrade cycle?
Yeah, I think it will certainly still remain lumpy to a degree. As we've said before, adding off the ear processor, and that typically being sort of a mid-cycle launch, does help smooth that out. I think the other factor that will help is, we do have to retire older processors because we just are unable to supply the electronics to keep them running.
U s staging that retirement across countries to sort of help manage the demand and the run in, the run out, all of that will help provide some smoothing. W e're always going to see a lift on a new processor launch. There are people who are tuned in to waiting for these. We've got a track record of delivering significant benefits from these launches, and there'll be people who are always going to jump at that chance.
Great. Thanks, Dig. Thanks, Sarah.
Thanks, Saul.
Thank you. Your next question comes from David Stanton from Jefferies. Please go ahead.
Good afternoon, team, and thanks very much for taking my questions. Just to ask Saul's question in a different way. The pipeline in the U.S., how many months ahead can you see volume and scheduled surgeries? Just follow up from when we heard from you last period. Like Saul said, it seemed that it was shorter than I'd previously thought. If you could give us some color on that'd be greatly appreciated.
Yeah. First of all, on scheduled surgeries, that typically looks out a couple of months. It does vary by clinic, but it is only a few months into the future. When we look at our pipeline of candidates through the areas where we have visibility, that can give us a 12-month view, but it is a mix of candidates who move with quite different velocities. W e can run some averages over that, and that gives us an indicator.
T hat, as we've said, that's about a third of our sales. A gain, that pipeline is typically more concentrated in the next six months and less concentrated in the 6- 12 months. I t helps gives visibility, but it's certainly not perfect visibility.
Understood. Very clear. Thank you. Could I trouble you for an estimate for CapEx for FY 2027, please? Or have I missed that?
Yeah, no, that will still be around AUD 100 million, pretty consistently.
Okay. For my final question. Any updates for trial results from your TIKI, please? Any kind of timeline or further color would be greatly appreciated.
Yeah, so we have two studies there. One in Europe, which has finished recruiting, and recruited ahead of schedule. The one in the U.S. is still recruiting, but it is running a few months ahead of schedule, largely because it is very easy to find candidates. O bviously after the study is finished recruiting, there is then a 6- 12-month follow-up and a regulatory approval path that comes under that, after that.
Very clear. Thank you.
Thanks, Dave.
Thank you. Your next question comes from Steve Wheen from Jarden. Please go ahead.
Thanks very much. Dig, I wonder if we could touch on the Nexa, and if you could provide any sort of guidance as to when we could expect some of these new features to be announced or launched with that Nexa.
The overwhelming sentiment from surgeons and audiologists is, they're looking forward to it, but nobody seems to know when that is coming. You don't need to say what it is, but just some timing so we can sort of get some feel for it, because that'll be when your price increases might resonate a little bit more.
T hen the second part of the question is, associated with the launch, there was some problems around the map transfer. Just wondering what timeframe you've been able to get that reduced to, and the SmartNav changes, when would they be able to be relaunched to bring those surgeons back to the tools that they were used to when implanting an implant?
Yep.
Thanks.
Y eah, that's a good question. I'll do the software first. In the next few months, we'll have a software release that will improve the range of programming parameters that some audiologists talk about, that will reduce the time for the map transfer to the implant, plus a range of other improvements. T hat's a few months away. SmartNav, I think there's some people who would like access to some of the research tools that we have developed over 20 years with the previous systems. We're working on those research tools.
They are not too far away, but I don't want to give an exact date on them. T hen on the Nexa features, that's one we are working. We have plans on what we're going to do, but I'm not going to put a date publicly on that for a whole range of reasons, including competitive ones.
I know, as you talk to our surgeons and as we talk to them, they eagerly await, and audiologists, to get some insight into what Nexa can do. The people who've been involved in the clinical studies have already seen some of that and are excited by the opportunity to do more, but we're not going to publicly put out and put a date on when that will be available. W e do have a multi-step plan of improvements and access to new features.
Okay, thanks. Just a quick clarification. When you say you're holding price, does that mean holding it flat, or the increase that you're putting through was held? Or are you referencing different markets that you increased? I'm just thinking, is it overall across everything?
The price increases we put through on Nexa; they are holding. When we say holding price, that means that the price we got, whether it was unchanged or whether it was increased, we are holding those in developed markets. In emerging markets-
Okay.
-there is obviously a whole mix about different volumes and different tiers, and the dynamics there are quite different.
Yep, got it. Final one for you, Sarah. Just on the STI provision that had in previous year, once you had released it, could you just give me a quick refresher on what you are doing this year? Does that mean you have built it back up, and there has been no sort of release again into this current half?
Right. Let me just refresh you. From the beginning of the year, we expected we would need to build back up about AUD 50 million following the low payout in FY 2025. We built up AUD 37 of that in the end because we did not have a full payout in this year, in FY 2026. Then in FY 2027, we have about AUD 15 million of that we have to build back up. Does that help?
Great. Thanks.
AUD 15 million. One, five?
Yes, one, five. Yes.
Yes. Thank you.
Thanks, Steve.
Thank you.
Thank you. Your next question comes from David Bailey from Morgan Stanley. Please go ahead.
Yeah, thanks. Afternoon, morning, Dig. Just the commentary there about the economic sensitivity in the U.S., and you kind of alluded to it, I think, but I just wanted to understand it. Is it more of a perceived out-of-pocket expense as opposed to an actual out-of-pocket expense? Is it more the perception that you are going to have a big out-of-pocket payment as opposed to actually having one? Is that the impediment you are seeing or the economic sensitivity you are referring to?
Yeah, it is actually a bit of both. People who are less well aware and earlier in their journey, just particularly in the U.S., think $5,000 for a pair of hearing aids, this is clearly more complicated technology. It is going to cost me more. We see and hear of those sorts of experiences.
Then there are some people who get all the way to the end, and then they have an out-of-pocket, which is much less than that $5,000, but some are choosing to say, "Not just now." We do see both occurring, and that is, particularly the second one, because the out-of-pockets are not that big, are much more about the macroeconomic impact on household budgets, particularly in the U.S. at the moment.
Is there any change in policies that are driving more out-of-pocket expenses, so Medicare Advantage versus Medicare? Or is there anything going on in terms of how people are covered such that the out-of-pocket component has been increasing relative to what you have seen before?
Not really. I think it is the sort of the macro picture. There has been a trend over the last number of years in the U.S. for annual deduct plans, where there is an annual deductible for that deductible to go higher. Typically, that deductible might be for the family, and that might be the first $ 5,000 or in some cases $10,000 of costs they have got to pay themselves, and then insurance covers everything else. T hose deductibles have been rising for the last few years for people on those plans.
Yep. Okay, just quick final one. You mentioned it again, just want to confirm this, but the TIKI, do you feel like it is going to expand the market as opposed to cannibalize the existing technology? Do you think there are candidates out there that would not consider a cochlear implant in its current form but would potentially consider a TIKI going forward?
There definitely are. There are actually two forms of those, or more than two, but two examples. One is, and I know a number of people who fit in this camp, who have one cochlear implant. They have no hearing in both ears. They have one cochlear implant now. They are saving their second ear for a TIKI.
The second is our market research, and confirmed by the work we have done on the feasibility studies and the trials, there are people out there who absolutely do not want a cochlear implant now, but would jump from a high-powered implant to a TIKI because of the 24-hour hearing, because it is invisible, and because of the ease of use there. It is absolutely a growth product, and the more we look, and the more we hear, and the more research we do, the more confident we get of the significant growth opportunity there.
Understood. Thanks, Dig.
Thanks, David.
Thank you. Your next question comes from Sacha Krien from Evans & Partners. Please go ahead.
Thanks for taking my questions. Dig, it looks like you finished at the top end of the sales growth range for the second half, I think about 6%, and that does look like you've had a better fourth quarter. I am just wondering if you can give us a bit of color around the shape of implant sales growth across the half, developed market in particular.
Yeah. Sarah, do you want to take?
Yeah, why don't I take that? Q4 was stronger than Q3. Coming into our expectation when we talked at the trading update, we had ranges across the different segments. Overall for developed market CI, we were at the lower end of that range, but we were at the upper end of the range for services where, as Dig said earlier, that was a bit stronger in developed markets.
We were at the upper end of the range, in the Middle East, and acoustics was a bit below. It ended up a bit below where we expected. We were tracking in the range we thought through mid-Q4, but June saw word get out about Osia coming, and we saw a bit of holds coming in in June. Overall, acoustics didn't quite land where we wanted. A cross all of those, when you combine those together, that does put us in that overall range, at the top end as you said.
Yep. I am just wondering how the exit run rate in FY 2026 differs to what you are forecasting within guidance into FY 2027. Am I thinking about that the right way, or are sales quite lumpy across the year?
Both are true. You are thinking about it the right way, and in particularly in emerging markets, sales can be quite lumpy. From a developed market's perspective, it is reasonably consistent going forward, within the bounds within what we have guided.
There is nothing that is really dramatic assumed going into the next year. W e will see over the year, improvement through the year. It is not strongly second half weighted, but there is some improvement builds through the year as the programs that Dig has been talking about work more and more over time. As you said, it is gradual, but it does improve. In emerging markets, we definitely do see that some of those sales are lumpy. Bigger government tenders and contracts are the things that drives that, so that can kind of come and go a bit.
Yep. Okay. Second question, just on the margin outlook you spoke about, or Dig spoke about getting back to 18% in the medium term. Just wondering if you can provide any sort of outlook on gross profit margins. Should we expect a similar sort of recovery trajectory, or are you going to get to the bottom-line margin with a bit more OpEx this time, OpEx out?
Yeah, look, the bottom line 18% NPAT margin in the medium term is going to be addressed by both growth and some gross margin improvement and some OpEx improvement. It's all three of those factors. As we've said g ross margin is flat going into next year, but we are working on that over time. What the real focus is making sure we get back to 18% in the medium term, and our programs have a plan to deliver that.
Yeah. Can you just confirm there's no fixed overhead absorption or under absorption in FY 2027? We're now past that.
The FY 2027 plan is set in such a way, and we've adjusted our overheads in such a way that that's right. Going into next year, we don't see that continued unrecovery of overheads as we saw this year.
Yeah. Okay. Okay, thank you.
Yep.
Thanks, Sacha.
Thank you. Your next question comes from Craig Wong-Pan from RBC. Please go ahead.
Great. Thanks for taking my question. At your trading update, there was a AUD 10 million provision for the Middle East receivables. I was wondering if any of that had been utilized or any written back.
Look, we took up some of that. We did not see the Middle East being quite as terrible as we pretty unclear in April. We took up some of that, but it is still pretty much within the normal range of our provisions.
Okay. Just the second question, on the market share losses in Germany, could you provide some more just kind of comments about that, and if that was actually much of an impact, and what you can do to address that market share loss?
Yeah. C ertainly, it did have an impact on our performance, right? Germany is the second biggest developed market, after the U.S. It is an important market for us. Certainly, disappointed to lose share through the year, but we are seeing some positive signs. Again, confident that we can regain that share over time, particularly with Nexa and what we have got coming in Nexa. Being through the launch and being able to focus on both market growth and talking about Nexa, what it delivers now and what it delivers in the future, we are confident that that can help us to get that share.
Okay. Thank you.
Thanks, Craig.
Thank you. Your next question comes from Chris Cooper from JPMorgan. Please go ahead.
Thanks very much. Sarah, thanks for walking through the gross margin drivers. I was furiously taking notes. Can I just confirm that, apologies if I missed it, but the guidance you gave in April was for 72%, and then you came in somewhere below that, I think 70.6%, with only eight weeks between periods. Could I just confirm what it was in that eight-week period that sort of went against you, given those drivers you outlined were known at the time of the update?
Yeah. It would have been a little bit of sales mix in there and probably a little bit of FX as well. As I said, when I was just talking through Q4, while we did come in toward the top end of the revenue guidance range we had given at 6%, we were a little bit lower than we expected in developed markets. That is part of what is influencing that sales mix that you see coming through in the gross margin.
Yeah, got it. Okay. Maybe I can just follow up on your answer to one of Sacha Krien's questions. Is it fair to assume that what you are saying here with the 18% NPAT margin is you can achieve that level over the medium term without necessarily needing gross margin to go back into the mid-70s that you were at in the last couple of years?
That is right. We do not have a hard assumption on that gross margin, but we are working toward improving gross margin from where it is now.
Okay. Y ou are not expecting it to get back into the mid-70s at this point?
We are not making a firm target on gross margin at this point.
Okay.
We are focused on that 18%.
All right. Thanks so much.
Thank you.
Thanks, Chris.
Thank you. Your next question comes from Laura Sutcliffe from Citi. Please go ahead.
Hello. Thank you for taking my questions. If I could just go back to the TIKI, please. Could you tell us if the trials that you have there are registrational or whether there's likely to be any other steps to generate the clinical evidence that regulators in key markets would need to approve these?
Yeah, Laura. These trials are to generate the evidence that we need for regulatory approval. In planning those trials, we have met with the regulators to understand what their requirements are, so we're confident that the way we've set these trials up, provided we get the results in line with our expectations, we'll have sufficient evidence for the regulators.
Okay. That's good news. Those populations that you have in those trials, I think they are adult populations, if I remember rightly.
They are.
Will you eventually be pursuing a label in the pediatric setting for the TIKI?
I think, yeah, with cochlear implants, if you look back at the history, look back to the original implants and even some of the improvements over time, it has always been adults that get approved first and children to follow. I think that is sensible from a health risk perspective. One of the things about TIKI is it is a bigger implant.
We are very pleased with how small we have been able to make ours, but it is still bigger than the existing implant. There is the microphone. For a baby, it is probably too big, until we get another generation in the future. F or older children, there is definitely potential. Our initial approval will be just for adults. We have a long-run technology plan for steps of improvement in the TIKI implant.
Thank you. If I could just squeeze one last one in. You mentioned that you are setting up programs in four cities in the U.S., which will go up to 12. Could you just tell us a little bit more about what that involves?
Yeah. Those programs are aimed primarily at ENT practices that do not do Cochlear implants. We know that those practices are seeing people with hearing loss. Many of them actually sell hearing aids. What we are doing is a combination of digital awareness work, whether that is on emails and webinars, but also people on the ground, who are going into these practices to educate on the clinical practice guidelines. It is an example where this long-run work on medicalization work helps. Because we had a consensus statement in the U.S. n ow.
The ENT society has adopted clinical guidelines for age-related hearing loss. Our people then take those guidelines into the ENT practices to say, "Are you aware of the latest guidelines that have been released? Approved and released that show the indications and the evidence for the indications for Cochlear implant, that show the treatment pathways.
Do you know who to refer to? Do you know the Cochlear implant clinics in your city or around your practice?" So it is both an overarching digital campaign with people on the ground, cold calling, going into practices to build referrals. We back that with data on referrals that we can buy in the U.S. that shows actually who is referring now, and their rates of referral, and that helps us target who we go and see there.
I t is a comprehensive campaign to activate that medical channel. It will include some work in the hearing aid channel as well, so that will remain an important part of referrals, but expanding it to the ENT medical channel is a real opportunity.
Thanks very much.
Thanks, Laura.
Thank you. There are no further questions at this time. I will now hand back to Dig Howitt for any closing remarks.
Well, thanks all for joining the call. Thanks for listening. Thanks for your questions. We will end the call.