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Operator: Thank you for standing by, and welcome to the Cochlear Limited FY '25 Results Analyst and Media Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Dig Howitt, CEO and President. Please go ahead.
Diggory William Howitt: Good morning, everyone, and thank you for joining our results presentation. Let's get underway. And as always, we are starting with our mission. And our mission serves as a guide across the company. That it has 2 important points. One is that the purpose that sits in our mission enables us to attract outstanding people. And the other thing it reminds us of is the long-term nature of our business and the long-term nature of our strategy to help more people hear and be heard. And so I wanted to start the presentation today with a look at our '25 year financial history. And doing that to put in context the F '25. So as you've already seen, our sales were below our expectations for '25. And then it's really a question of how do we respond. And I want to put how do we respond to lower sales in the context of history. So if you look at these charts and starting on the left with our R&D. That investment in R&D, that's the most consistent chart on this page. So R&D has increased year-on-year. When sales have gone down, that R&D investment has continued to lift. So our first response when our sales are not where we expect them to be is to make sure that we protect R&D. And we do that because it's the core of the business. It enables us to retain our market leadership position, but it's also the performance of our products that sets us up to get the evidence to drive growth, and I'll come back to that. I mean think about Nexa, which I will also talk about being a 20-year development. It's that consistent investment in R&D over 20 years that enables us to produce a product like Nexa. Now OpEx after R&D is then the next least variable chart on this page. Again, pretty consistent growth. But you can see we do pull OpEx back further than we do R&D. And we lift OpEx more than we do R&D, too, when sales are going well. And I think you'd expect that. So when we do moderate our spending, but we do try to protect in the OpEx is the investment in growth. I say protecting that investment in R&D, protecting the investment in growth leads to the 2 charts in the middle, which is the long-run history of growth in cochlear implants and the long-run history of growth in revenue. Now the consequence of protecting the growth spending and the R&D spending are the charts on the right, where there is more variability in profit, which is what you'd expect, than there is in our spending and than there is in our sales. And so that response to lower sales, which we saw this year than our expectation, is to protect the investment in the core parts of our strategy that drive our long-term growth. And we do that because we've got a market that's less than 5% penetrated, but we do that because we have confidence in our future. And I want to talk to 2 key aspects of our confidence in our future before we get into the detail of '25. So the first of those is the Nexa system. So launching now around the world. It is -- we started the development of Nexa from concepts in 2005. That was early in Chris Roberts tenure. Janssen had just taken over R&D at that time and Jan who shepherded this product over the last 20 years. And it's absolutely a breakthrough product. The world's first and only smart cochlear implant. In our view, one of the most sophisticated neural stimulators in any therapy. What's it bring to our patients and our professional partners. We want to make sure we have benefits upfront as well as potential into the future. I'll get to the potential of the future in a minute. But right upfront, because we've been able to, with new electronics, make the power transmission more efficient, we can have a smaller battery on Nucleus 8, and that gives a full day battery life. So Nucleus 8 was already the smallest processor on the market by quite a margin. It's even smaller again. We know that consumers are very interested in cosmetics and the size of the processor, and we have extended our advantage in terms of having the smallest processor with a full day of battery life. Then the MAP on the implant, which we call Smart Sync, the ability to get back on air quickly, is important both for recipients and for clinics. So what happens up to now is if someone's processor breaks, they either need to schedule an appointment with the clinic, go into the clinic, they get a new processor. The clinician loads their MAP, and the MAP is the unique settings that encodes sound for their auditory nerve, and it's different for each person. They load that onto the processor, and the person goes away hearing again. Or in some parts of the world, we've got the MAP in the cloud. So they call us. We load the MAP in our warehouse onto a processor and ship it back out to them. But there is a process that takes recipient time, takes valuable clinic time. It is often not reimbursed. And if you think about this from when people go on holidays, for example, particularly with children, they're worried they processor could break. They could lose the processor. So they go into the clinic and they get a spare, they get a loaner just in case. So you think about all this clinic time that is taken up even when processes are reliable, but not billable and adds no value. Now with the MAP on the implant, all someone needs is a blank processor. So we can ship a blank processor, a clinic can ship a blank processor to them, no clinic time appointment time needed. People going on holidays can take a new spare with them. They've got an emergency, if they don't need it, they send it back afterwards. So savings in clinic time and savings for recipients. And one of the things being able to do with the amount of data that we now collect on clinical practices, we can see that over half the appointments that were made in clinic are for people after the first year of having their implant. And those appointments are really about just routine checking and maintenance. The more we can reduce them, the more clinic capacity we create for future growth. The other point I want to make on Nexa in the future, too, is -- we often talk about how full our R&D product pipeline is. Nexa is an example of this, a 20-year development that we didn't say anything about, I think, for obvious reasons until 2023, until we were getting very near the end of the development, we started to talk about new stimulation modes. And new stimulation modes to improve hearing outcomes is one of the potential future possibilities of Nexa. And the last one on the list on the right here. It's really one of the core reasons for developing Nexa with this upgradable firmware is to be able to now experiment with different ways of stimulating the auditory nerve, getting potentially more precise stimulation and therefore, better hearing outcomes. Over the last year, we have been running 4 small studies to experiment with new techniques. Those studies will wrap up over the next year, which will give us real insights into the possibility with this implant and then enable us to undertake further development. But some of the other future possibilities shown here, even more power efficiency, which could lead to smaller externals. Earlier activation. So with the MAP on the implant, we can actually load a MAP in surgery, and we're going to start running some experiments on this, which means that someone when they go home from surgery, once the bandages come off, they can put a processor on and they will be able to start hearing. Now it'd be some number of weeks later, they've got to come back to the clinic for another appointment or a set of appointments to get that MAP set up. So again, that's saving clinic time, easier for recipients. There's a whole bunch of potential for diagnostics. already some of those are active. There is more to come. Again, we think about half of clinic appointments being routine maintenance and follow-up. The more we can do for -- on a diagnostic front saves clinical capacity into the future, but also gives both clinicians and recipients confidence in the performance of the system. And then the last one here is Neural Health. One of the biggest drivers of variability in outcomes for people with cochlear Implants is neural health, the quality or health of their auditory nerve. At the moment, that quality can only be inferred at some time after implant. We're very confident that what we can do with the implant is be able to measure that neural health, which will mean much more targeted expectations, setting a much more targeted rehabilitation or habilitation to enable people to reach their potential. So a very quick view of just some of the potential for Nexa. The second reason of my confidence. Nexa has a really strong competitive position. It's a significant step above our competitors and based -- and those benefits come from the Slim Modiolar Electrode, which is also unique to us. Second reason for being confident in the future is the work that is going on across the world to explore the link between cognition and hearing loss. This is all about medicalizing hearing loss. We talked about this a lot. Hearing loss is one of the most prevalent medical conditions in the world, and it's one of the least treated. And it's one of the least treated because people don't see it as a medical condition. They don't see that there is other health consequences from not treating it. And so they don't see the need to treatment. And through our -- we have awareness campaigns because people actually don't know what the potential solutions and their effectiveness. So what we've seen and we've talked about over the last 5 or 6 years is a whole range of studies, starting with frankly, naturally in 2011, showing the correlation between hearing loss and cognitive decline. The Lancet publishing that hearing loss was the single biggest modifiable cause of mid-life modifiable cause of cognitive decline. And study in Melbourne, showing people with cochlear implants cognition improved after getting a cochlear implant. And then on the right here, there are several more studies coming over the next few years, looking at hearing loss and cognitive decline, looking at the different treatments between CI and hearing loss and effectiveness, both in terms of hearing and to some degree, effectiveness in terms of cognition. And it's this emerging data that gives us growing pool of data on this link that gives us confidence of medicalizing hearing loss and the increasing motivation for professionals to refer the people who want to treat their hearing. I wanted to just call out one study in particular. This comes from Korea. It's just published a couple of months ago. And this study -- and in Korea they've got population-wide data from people's health records. So this study tracked over 50,000 people with severe and profound hearing loss for 14 years. It was an observational study. So it didn't track them. It looked back at their medical records. And then what it looked at was the incidence of dementia across these 50,000 people over 14 years and then looked at that incidence by type of treatment. So if we go to the chart here, the black line there is the incidence of dementia from people with normal hearing. And there was over 1 million people that they tracked over those time. The blue line is the incidence of the metric for people with severe to profound hearing loss who got a cochlear implant. It's about 640 people. So a reasonably significant number for us. There is no statistical significance. The study concluded in the incidence of the metric for people with cochlear implant versus people with normal hearing. I then go to the green line and the red line. The green line is people with hearing aids. The red line is people who had no treatment for their severe to profound loss. What that shows is that for people with -- used hearing aids, the incidence of dementia was significantly higher than those with the cochlear implant and those with normal hearing, but it was better than people with severe to profound hearing loss, who didn't have any treatment. This is an observational study. There are some limitations on it, but it is evidence like this that gives us confidence of our future growth because of this growing link between hearing loss and cognitive decline. And that being the motivation for people to refer -- for professionals to refer, but in time for people to get their hearing loss treated as well. Okay. So let's move -- now let's move into the detail of the results. You will have seen the headlines already that 4% revenue growth, 1% net profit and the dividend. So let's get into the detail. So first into cochlear implants. And so cochlear implant, the result overall is a pretty good result, 9% growth in cochlear implant; revenue, 12% growth in systems. We saw stronger growth in the systems in the second half, which is one of the things we said would happen at the half. We look into developed markets first. Their units were up 6%. And also senior is growing around 10%, again, pretty slight we've seen in the last 2 years, but still pretty strong growth. And the key bit there is we continue to see ways for us to activate people on their hearing loss journey. We've collected a lot more data over the last year on referrals, on what happens to the referrals. For instance, we know now that about -- people actually get referred for cochlear implant, only about 1/3 are actually getting to get an implant. And there's a whole bunch of reasons that they drop out along the way. But by us understanding those reasons, it's the opportunity for us to go into help those people back into their funnel because only a small number of dropping out because they are not in indications. Most it's about not enough information or conflicting information or just not sufficient follow-up. So we've learned a lot more about that path. I talked about the medicalization of hearing loss and cognition. That all helps us build confidence into the future. And our DTC programs continue to be a very important part of our growth around the world. We did lose a little bit of share. We think through that half in a couple of countries and coming into the product launch. Our competitors know that's coming. They have responded as you'd expect. They are very good companies. We expect to more than regain any share that we have lost with the launch of Nexa. And a slight decline in children. Again, we said at the half was surprised children was continuing to -- we wouldn't be surprised by a decline in children just because we have seen such strong growth, which we knew was out of line with the rate of incidence that there should be a reversion to the more normal rate. And I think that's what we're seeing. Very strong growth in emerging markets, so up over 20%. And remember, we had sort of 2 different halves on emerging markets. In the first half, we had a smaller volume but a very strong mix towards the premium tier, which lifted our overall ASP on lower volumes. In the second half, we had far more volume going through, but it was low tier volume. And that was across a range of countries. Obviously, the volume-based pricing in China, which started in March has been a factor in this. And it's been -- we are seeing strong growth there, but that growth is in the lower priced, lower tier. And that -- given the comparison between '26 and '25, the VBP in China will be a headwind for us, both on revenue and on profit. Okay. Let's move on to services. Services for us is -- the down 10% is obviously the most disappointing part of the result. We talked about this at the half. We've seen some stabilization of our services sales, and we do expect to see growth going into '26. But then there does remain some uncertainty because there's a few factors in '25 which are unique to '25, and then there's some ongoing factors. So one thing unique to '25 is we are cycling, particularly second half of '25, the impact of COVID. And we know the biggest driver of services over time is a growth in the recipient basin, particularly the eligible recipient base. I mean, 5 years ago in COVID, we saw a reduction in sales and a reduction in upgrades, and we are starting to cycle that, and we can see that in the eligible base. Now that eligible base grows again as we go into '26 and particularly in into the second half of '26. The other thing that we talked about at the half that we have not seen for -- over time is the impact of cost of living, and particularly in the U.S. where there's just significant economic and consumer uncertainty. We look at some of what the hearing aid companies are saying. I think they're seeing something similar to this. But that's where we do have an out-of-cost payment. The U.S. was the largest fall in upgrades over the last year. We talked about putting payment plans in place which we have done. And even that, we are seeing is not, at this stage, sufficient to get people to take upgrades. And we do know upgrades are discretionary. So if someone's process that was broken out of warranty in the past 5 years, they'll get an upgrade. If it's discretionary, then we do see people delaying. So again, at some point, those people will upgrade. But right now, we are seeing more hesitancy, particularly in the U.S. Part of that is Nucleus 7 is a fantastic product. And people saying, my Nucleus 7 is pretty good. Why would I switch? We've got really good clinical evidence that shows that Nucleus 8 is better. The other thing that we have done through the half is survey people who have gone from Nucleus 8 to Nucleus 7. 9 out of 10 of them are saying that they would recommend switching. And 7 out of 10 are saying they're hearing better. We will use that evidence to promote, along with upgraded marketing capabilities to promote upgrades in the half -- sorry, through '26. And we have Kanso 3 as well, which will help us get modest growth in upgrades into '26. And then finally, Acoustics, 6% revenue growth, so slower than we expect the long-run trend for Acoustics. Osia growing 30%, very happy with the Osia growth. It was really Baha 7 coming and Baha 7 being visible later in the half. We saw a pullback on Baha 6. We expect to pick that back up this year with both Osia continuing to grow in countries and with more geographic expansion and Baha lifting Baha plus upgrades through the year. I'll do our strategy. Now our strategy is unchanged. I'm going to move pretty quickly through and over the other strategy because I did talk about our strategy upfront. As we go into a lifetime hearing solutions, our product portfolio, our investment in R&D continues, like I said, the Kanso -- sorry, Nexa, it's a whole system, new software as well as Kanso 3 and the drug-eluting electrode trials. Two pivotal studies are well underway, recruiting well, this important product for our future portfolio. Moving on to thriving people. Again, people -- 2 parts to this. Our people and our leadership development is one of the key enablers of our growth. We continue to work hard to leadership development, particularly in the lifting capabilities of our leaders, so they are capable to lead in a growing and larger organization and the investments in replacing our core systems. We are in the final stages with the replacement of our core ERP. And what we will get here with both new data, new systems that will automate many processes, giving us some efficiencies. But more importantly than that, data and clean data and consistent data, which will enable us to be making better decisions and enable us to be able to use AI as we look forward. And then a picture of Stephen, one of our first Nexa recipients meeting people in manufacturing. I just want to -- one of the things Stephen said we talked about our mission and hearing solutions. One of the things he said is this is not a hearing solution, it's a living solution, and a good reminder of the impact of what we do and again, reinforcing our confidence for growth. And then on environmental responsibility. We continue to meet our targets. We're a very small emitter, and we continue to reduce our emissions. And with that, I am going to hand over to Sarah to take us through the P&L and balance sheet in more detail.
Sarah Thom: All right. Thanks, Dig, and good morning, everyone. Let's go through the numbers. So we'll start with P&L. You can see on there, sales revenue was up 3% in constant currency. Now Dig's taking you through that, so I won't go through those details. You see the gross margin declined by 1 percentage point to 74%. There are 2 parts to this. First, there's a shift to lower margin emerging markets in the second half. And second, we started to scale up production at the Chengdu manufacturing facility. Until December last year, we'd only been manufacturing sound processors. Now we have regulatory approval for implants, and we have started to increase production rates. That site will continue to be a gross margin headwind for another year or so. Operating expenses increased 5% for the year, just a little ahead of revenue growth. We continue to invest in activities to support long- term sustainable growth and in R&D. We moderated the rate of growth in the second half. With softer sales, we prioritized our growth investment on the highest value activities. Total operating expenses also includes an approximately $50 million reduction in the employee short-term incentive provision. This was a result of below-target revenue and profitability outcomes. Our cloud computing-related investment was around the same levels as last year at $33 million. We continue to expect our overall transformation investment to be about $250 million total. The final phase of that program focuses on our core ERP, our underlying data and our manufacturing systems. The balance of approximately $130 million will be incurred in FY '26 and FY '27. Given the materiality of this investment, we'll report it as a significant item from FY '26. Now the increase in other income is primarily collaboration income from our innovation fund investments and revenue from various government grants. And then the final thing to note on here is the net margin pre-cloud was 18%, in line with last year. All right. Let's move on to the balance sheet on the next page. Key change to the balance sheet that you'll see is the increase in working capital. That was up around $200 million on last year. A big part of that was inventory levels, which increased $108 million ahead of major new product launches and to build higher safety stock levels for critical components. We expect inventory to sales levels to start to moderate by December. The $90 million increase in trade receivables are relatively stronger fourth quarter sales that we had, including in emerging markets. You can see property, plant and equipment increased $28 million, and this is mainly investment in capacity expansion at our Lane Cove and Kuala Lumpur manufacturing facilities. You see the $50 million increase in intangible assets. That reflects increased IT system development, acquired technology and software development and some impact of foreign exchange. An increase in the other net liabilities includes the approximately $50 million reduction in the employee short-term incentive provision that I mentioned before. All right. On to the cash flow on the next page. You'll see operating cash flows declined $150 million on last year. That's driven down by the working capital which we just went through and a bit on higher income taxes paid. And that's due to timing of tax installment payments. Finally, the CapEx of $103 million includes the capacity expansion that I mentioned, that investment in Lane Cove and Kuala Lumpur and our stay-in business CapEx. Right. Now back to Dig for the outlook.
Diggory William Howitt: Thanks, Sarah. So on to the outlook, you can see that the numbers here, a guidance range of $435 million to $460 million. That's 11% to 17% reported. But when we take out cloud out of '25, that's between 5% and 11%. Going into the detail on that, which we really talked through on the way. We expect a strong performance in developed markets through this year on the back of the launch of the Nexa systems. We're expecting over 10% unit growth will be weighted second half because we are rolling out Nexa with FDA approval at the start of July. In the U.S., for example, we then got to work through contracting because we are seeking price increases in our whole range of markets for Nexa and software installation. So the launch is still coming in the U.S. so weighted to the second half. In emerging markets, we do expect strong unit growth, but it will be in high mix in this -- in the low-end tier. That means modest growth. And as I said, China is a headwind for us in terms of both revenue and profit into '26 compared to '25, particularly because we had a strong first half, very strong first half in emerging markets in '25. Services, as I've talked about, we're expecting to see growth there. It's modest growth, but it's really that eligible base growing; will help us. And there does remain some uncertainty there, particularly over just the sentiment that we see, particularly in the U.S. Acoustics, I've talked about the gross margin at around 74%, around 74%. Now R&D is slightly higher this year, and that's a factor that I talked about upfront. We haven't slowed down our R&D pipeline with the lower sales this year. So as the sales catch back up, we're preserving that R&D spending, which means it lifts as a proportion of sales. So our net profit margin heading towards 18%, but will be a bit below. That's reflecting the R&D and just reflecting to make sure that we continue to invest in both our R&D and our growth as our sales grow, and Sarah has talked to cloud. Okay. So let's move on, and we'll talk to questions. I kind of stopped sharing the screen so that I think you can see Sarah and I.
Operator: [Operator Instructions] Your first question comes from David Low from JPM.
David A. Low: Dig, if I could start with guidance. Can I get you to talk a little bit more to how second half weighted it will be? And then just also on the same topic, they're a little bit below 18%. How much is a little bit? And why the decision to do that? I mean it seems such a long-standing strategy. I mean I heard the explanation on R&D, but if I could get you to elaborate on that as well, please.
Diggory William Howitt: Yes. Okay. So our sales will be pretty significantly weighted to the second half. For -- as I said, Nexa is rolling out. So we won't -- we don't get a full 6 months in all of our countries of Nexa in the first half. And equally, with people knowing Nexa coming, we expect to see now it's imminent surgery holds, and we are seeing some of that in the U.S. Now they'll come back pretty quickly, but some of that will flow to the second half. And similarly, on upgrades, had said that eligible base rises in the second half. And also in the U.S., we have the retirement of Nucleus 7, which comes into effect in the second half. So pretty strong weighting. And if you saw this year, obviously, we had more profit in the first half than the second half. So that -- obviously, this year is going to be the other way around. And so that contrast will also play when you look at it on a comparable basis. And then the second half of your question, David...
David A. Low: How much below.
Diggory William Howitt: Yes, yes. So okay, so it is -- so we're going to be above 17.5%, which is why we say 18%, but we want a bit of flexibility there. And we are rebuilding that the SGI division. As I say, that was a significant piece of our costs that didn't happen because of performance in this year. We expect to perform and get that back next year. So rebuilding that and making sure that we are still investing in R&D and investing in growth. And given a long run out, look, we think it makes much more sense to smooth that path back to 18% and to jump straight back up there at the risk of compromising the future.
Operator: Your next question comes from Andrew Goodsall from MST Macquarie -- MST Marquee.
Andrew Goodsall: And maybe just continuing on from your comment around the Nexa launch. Could you just give us a sense of what sort of response you are getting in the market you have launched? And I mean is that what's supporting your sort of 10%-plus growth outlook? Is that giving you that sort of confidence?
Diggory William Howitt: Yes, Andrew, yes. So we're seeing a very, very positive response. Surgeons was quite a conservative. Surgeon saying this is a game changer in terms of the industry and in terms of patient selection and implant selection. We have consistently heard those sorts of messages as we roll the product out and being through launch event. It is genuinely new technology and different technology with more potential. And just given the -- what people are recognizing is that people have the -- whatever age, the implant for the rest of their life, the potential for that -- for the implant to be a benefit from technology over that time as they do from sound processes now is really important. So that gives us confidence with new technology. We are pushing for price increases across a range of markets. So part of that lift is both -- we will get share gains, we'll get some ASP gains, and we've got an underlying market growth and all those things give us confidence in that developed market CI outlook.
Andrew Goodsall: And just a second part of my question, just for Sarah. Can I just get you to clarify what you expect the post-tax cloud spend will be? And then just for the basic guidance where you've given the 5% to 11%, is that just -- can you just also clarify the base that we should be using to understand that 5% to 11% growth?
Sarah Thom: So the post-tax cloud is expected to be around $80 million. And then the second part of your question was around the base for the 5% to 11%. Is that right? Yes, that's off of our numbers from this year as usual.
Diggory William Howitt: So it's a pre-cloud to -- it's exclusive in cloud to -- the 5% to 11% -- sorry, excluding cloud to excluding cloud.
Sarah Thom: Now I guess...
Andrew Goodsall: Yes. So if I use of your -- you've given us sort of an 18% margin in the P&L for this year or ex cloud. So if I use that to get the NPAT come up with about 4 2 4 , then the 5 to 11 on that number. Is that right?
Sarah Thom: Yes, it's all the underlying basis.
Diggory William Howitt: Yes.
Andrew Goodsall: Excluding cloud?
Diggory William Howitt: So if you take guidance range and back out 5%, 11%, you'll get to that number.
Sarah Thom: Yes.
Andrew Goodsall: Okay. Got it. Got it. Okay. And the $80 million is the first tax number. Just to clarify?
Sarah Thom: Yes.
Operator: Your next question comes from Saul Hadassin from Barrenjoey.
Saul Hadassin: Dig, I guess a question on the services and particularly upgrades and the commentary gained about that U.S. consumer, which I think hasn't really been a feature in upgrades in the past. I know you're expecting improvement because of the increase in the size of the installed base from 5 years ago. You seem to be a bit cautious about the commentary just then about the outlook for '25. So I guess just your -- yes, some comments around why you think services should see solid growth? And maybe also could you give us a sense of what does solid actually mean? Is that a mid-single-digit revenue growth number? Is it high single digits? Any color around the word solid, please?
Diggory William Howitt: Definitely single digit growth in services, our expectation. I don't want to go too much further than that. Yes, look, we are a little bit cautious on the outlook. And so you're quite right. It -- this is not something that we have seen before is as caution around the co-pay in the U.S. Now we're trying to sort of triangulate that. It is -- I've just been to the U.S. pretty recently, and we hear from our team there a lot. There is a bunch of uncertainty in the U.S. at a sort of a consumer level. And we look back over our history, we haven't seen that level of uncertainty at the same time, apart from COVID, at the same time as actually our services business has been quite significant. We're probably going back to the GFC, where services have got much, much smaller, we would sort of see those impacts. So we are trying to understand unravel. We are a little bit cautious on the outlook, certainly in the short run. But over the long term, remain confident because this is -- and this tracks well over time. It's driven by the growing recipient base. And while upgrading is discretionary, it's discretionary within a point -- within a time window. Our processes do wear out. You just can't make a piece of consumer electronics that sits in that sort of environment where a processor sits and have it last forever. But sort of short =is it uncertainty -- uncertainty versus a long-term remain confident that the underlying conditions for services are intact.
Saul Hadassin: That's very, very comprehensive. And just one more, Dig. This commentary around slower market growth in some of the developed markets that I think was referenced during this fiscal year as well and maybe some expectation that, that growth might improve. Can you talk what it is that is going on potentially in some of these markets? And are you able to call out which of the developed markets that you've seen this? I assume it's not necessarily the U.S.A., but maybe some of the Western European markets. And any idea? I guess the question is, what do you think market growth -- what is a sustainable rate of market growth considering the slowdown in some of those markets that you compete in?
Diggory William Howitt: Yes, yes. So it has been a bit slower partially in Western Europe. And it is also coming off some really strong years of growth, particularly in the adults and seniors. And then getting to around 10% this year is not -- it's clearly not a bad outcome. It's just not at the level we've been. What gives us confidence is that of this growth, the growth picking back up, is that we are seeing our growth programs getting traction. As I said, we've done a good job this year of getting more insight into the referral path and the points at which people will drop out. So we've got better metrics, we got better measures, and that will help us target our -- where we invest in our growth programs. And Nexa, to a degree, is also just help for in the shorter run from growth because there's -- we have contact with a lot of people who are in indications of whatever reason I've decided just not to go ahead now. A new product is the opportunity to reengage into -- and for all these people, they're hearing will -- certainly will have deteriorate over time as well. So long run, again, what I talked about this links to cognition, and you see the growing evidence there. That gives us a lot of confidence that -- both for referring and a candidate perspective, we'll see more motivation to have a nice trend again in some of our surveys now of people who further got implants, and we asked them what motivated them. Cognition is one of the things that is rising in terms of people's reasons to act.
Operator: Your next question comes from Steve Wheen from Jarden.
Steven David Wheen: I just wanted to touch on the cloud costs. At the interim, you increased your guidance is to how much you're going to spend to $40 million, and I think you've done $32.7 million. Just what happened in the last few months that made you not spend what you thought you're going to spend?
Sarah Thom: Yes, I can take that one. So when we indicated at the half we were spending more, we had not yet fully done the planning for exactly what we would be doing when during this half and then going into next year -- to the year we're in now. We did that planning during Q3 of the year. It became very clear exactly what we want to do when and why. And so it's a timing effect. We will still spend the money. It's just -- we didn't end up actually doing exactly the things we were kind of thinking we would once we firmed up those plans more. So it's a timing effect on that.
Steven David Wheen: And just a bit of a follow-on from that, just the staff STI provision release of this year of $50 million, I heard your comments that you're going to be rebuilding that provision in the FY '26 year. Can you give us an indication as to, are you going to get -- reverse the $50 million back into the FY '26 year? Or is it a figure less than that? And then as part of this, I'm just trying to understand the guidance. Your other income included some -- certainly larger than I was expecting, but where -- what was the composition of that? And will any of that continue into FY '26 as well?
Diggory William Howitt: I'll answer the first part. Sarah can do that other income. So yes, on that -- the $50 million, it will go -- we do expect to land on our -- the targeted outlook. And if we land on our total outlook and we delivered well on our programs, we'd expect to have the STI going broadly across the company next year. And therefore, we've got to rebuild that provision. And that goes through into our OpEx for the year. Sarah, you can just talk on the other income.
Sarah Thom: Other income. Yes, sure. Look, in the other income, about half of that is grant income from government grants. We know those come and go in different years. If we could predict the grants the government were giving us, so I would love to do that. So I can't guarantee you that, that all sustains at exactly that level into the next year. There is also some income from collaborations that we have and a little bit of that, that is related to the Oticon acquisition, just as that got wrapped up.
Steven David Wheen: Okay. Sarah, so you aren't putting any of that continuation into FY '26 guidance?
Sarah Thom: It will be lower in FY '26. I wouldn't expect it would stay quite at that level.
Operator: Your next question comes from David Stanton from Jefferies.
David Andrew Stanton: Look, just to maybe beat a dead horse a little bit. Can you give us an idea of what you think market volume growth is for cochlear implants at present?
Diggory William Howitt: Well, I think, David, on this one, it always depends on which segment are we talking about. So...
David Andrew Stanton: Primary -- just primary...
Diggory William Howitt: We've seen very strong volume growth in emerging [indiscernible] to seniors. So look, we think it's -- we saw around -- we saw around 10%, and we probably lost a little bit of share. So we think that segment, therefore, the market growth is a bit higher, probably low single digits in the year. We didn't leave much share, so probably just over 10%. That's about -- and that's a bit lower than we saw in '24. But we're expecting that segment to get -- to grow again this year, that growth lift as we go into '26.
David Andrew Stanton: Understood. So that's that 10% number, just to make it absolutely clear for the dummies on the call like me. That is the overall number -- global number? Or is that just to developed markets or I think...
Diggory William Howitt: So developed market adults and seniors. Yes. No, important to clarify.
David Andrew Stanton: Okay. And then overall number, would you hazard a guess at that?
Diggory William Howitt: Not really because it is this mix of pretty different things. Obviously, developed markets have got children, which is about 1/4 of the implants. In developed markets, we should come back to around 2% normal run rate. And then emerging markets, we've seen over time, putting a number on it in a single year is just guaranteed to be wrong. It's always going up, but it moves around quite a lot.
David Andrew Stanton: Understood. And I'm interested to hear with the Nexa you've had initial feedback. Well, I'd like to hear your initial feedback on the potential from surgeons or the feedback from surgeons around more precise manipulation post surgery, whether that's a feature that the surgeons are very interested in.
Diggory William Howitt: Yes, that we're getting a lot of surgeons reaching to be interested in doing research, and this is on this -- the focus multipolar stimulation. I said we've got a couple of small studies going on that we've had going on for a year now. We're seeing some interesting results there. For example, just a small study, we are seeing with the new stimulations, people preferring music with the new stimulation modes over the over the existing ones, small numbers of people, but at this stage, but very encouraging results. And sort of the logic here is pretty strong, but we need to see that clinically. The logic here is if with the electronics, we can focus the charge more and therefore, be more precise in the stimulation of the auditory nerve. The logic says that should get better hearing outcomes. But only when you do this clinically do you -- do we see if that's the case. And some early indications, but it is early and more research to be done.
David Andrew Stanton: Okay. Sorry, second and last follow-up. And it sounds then like the surgeons are interest -- may be interested because it may correct for any issues that they have during surgery that can potentially fix it later.
Diggory William Howitt: Not so much the correct for issues in surgeries. One of the things -- separate that -- as well as being able to measure neural health, one of the other things that we think we'll be able to measure is electrode placement. And at the moment, when a surgeon puts the electrode into the cochlear, they're blind on exactly where in the cochlear is it and how close to the modiolus, the auditory nerve. Again, we are -- and we've done some studies on this at a small scale, but we're confident that we'll be able to actually measure that, which will enable the surgeon during surgery to ensure that the electrode is optimally placed and that will certainly help outcomes. The focused stimulation more -- is more about with the electrode optimally placed, how to maximize a person's potential by targeting the stimulation to their auditory nerve in a way that gives them the best perception of sound.
Operator: your next question comes from David Bailey from Morgan Stanley.
David Bailey: I just want to be clear on this one. The update you gave in June, you called out slower-than-expected market growth in developed markets. Can you just sort of talk through, following on from Saul's question, where that's occurring and the mix between adults and seniors, please? Sorry, adults and kids.
Diggory William Howitt: Kids. Yes, yes. So it was more in -- Western Europe was certainly slower than we had expected. And then that children -- the decline in children, we sort of anticipated it, I suppose, or we foreshadowed it might happen. But when it happens, it's different foreshadowing it's going to happen at some point. So on the adult and seniors get 10 is a pretty good number. We want it to be higher and it has been higher and we're confident we can get it get it back higher, but there's not -- I'd put it in that -- it's a modest decline in growth rather than a worrying decline in growth, and we're confident of the plans that we've got that we can lift it back up.
David Bailey: And is there any reimbursement pressure or just volume coming through. So the question is price versus volume in that mix.
Diggory William Howitt: No, we're not -- in developed markets, we are not seeing any increased or unusual reimbursement pressure. I mean, health care systems, there's always reimbursement pressure, but certainly wouldn't call that out as being a factor in '25.
David Bailey: Yes. Understood. And then you've talked to the VBP in China, a bit of a revenue hit and gross margin impact as well. Is there anything you can sort of quantify in relation to that? And maybe just more broadly, the dynamics there. I think there's pretty good private pay growth in those special zones. But the question is maybe quantifying '26 to the extent you can and then the dynamics in the Chinese market more broadly.
Diggory William Howitt: Yes, because -- can make a few comments there. So yes, you're quite right, the special zones are still there. And we are selling Nexa through one of those special zones now. We've seen a very strong uptake. So that good premium segment remains. In terms of the volume-based pricing, we're 5 months in. And there's definitely been a lift in overall volume. Still some uncertainty of the extent to which that will be maintained. We know the market potential is there, but we're also pretty confident that this was visible board happened. So there was a backlog of people to come through. So we want to just see that run a bit more. Overall volume is definitely up, and we think it will stay up, but it is through that low tier. And one of the things that's happening is that used to have a pretty good middle tier pricing in China, and that volume that was in the middle tier, most of that's moved into the low tier, and that's what brings this revenue headwind and that profit headwind as we go into '26.
David Bailey: Are you able to quantify either a gross margin impact or revenue impact?
Diggory William Howitt: No, I'm going to stay away from the specifics of this. There's still -- it is still moving around. So we just want to really be cautious about going beyond the dynamics to get to numbers.
Operator: Your next question comes from Davin Thillainathan from Goldman Sachs.
Davinthra Thillainathan: I appreciate the opportunity. Can I just get you to talk to the ability for the next implant to expand the market? Clearly understand the longer-term dynamics there with the process and mapping side of the equation where you can actually, I guess, expand the capacity in the channel. But if we think about nearer-term trends, could you give us a sense if you're seeing any leading indicators where the products is actually expanding the market?
Diggory William Howitt: Yes, good question. Too early to call on whether Nexa would expand the market. And we're certainly seeing some share already now, early days on that, but definitely seeing that happen. And you're right, one of the features in Nexa, some of those will take away -- take out clinical time, therefore, increasing clinical capacity to enable more people to get evaluated. So it's an enabler of growth. Looking forward, from a product perspective, we do think that drug-eluting electrode has the potential to expand the market, particularly -- and to do that, we want to be able to demonstrate that there's better hearing preservation because that is one of the barriers for people getting an implant now is that while there is hearing preservation, our labeling at the moment says you may lose your hearing. And we've seen some early indications that a drug-eluting electrode could help preserve residual hearing. And if people -- surgeons rather give people more confidence on the amount of hearing they've retained that would take away one of the barriers. I said we've done this analysis of where people drop out when they're referred, and that is certainly one of the points at which people who are in indications and we do better to pull out of the process.
Davinthra Thillainathan: And my next question is on the services part of the business. And in your FY '26 guidance, is there any expectation within services for a new process for the Oticon Medical recipients. Just thinking about that opportunity there?
Diggory William Howitt: Not in '26, but it's something we're certainly working on. That recipient-based Oticon medical is relatively small. So when it does come in, you won't see a huge pickup in services. We are continuing to sell existing processes there. So it is -- it's a small number, but it's a small part of our services revenue.
Operator: Your next question comes from Marcus Curley from UBS.
Marcus Curley: Just a couple of questions on the Nexa platform. Could you talk a little bit about how you think the multiple stimulation differs from what's offered by Medel and Advanced Bionics.
Diggory William Howitt: Yes. Yes, Marcus, good question. So Medel don't have anything that is in any form of multipolar stimulation. Advanced Bionics have some capability, and they've had that for over 20 years. Being electronics over 20 years ago, it is far more rudimentary than we have. The other thing that's important and that we realized is partway through this development is you need to be really close to the hearing nerve, which is one of our motivations for launching the Slim Modiolar electrode in our 2016 is to -- be an effort from -- with the benefit from focus stimulation, you've got to be really close. Otherwise, that benefit of that focusing too far away still got a lot of channel interaction. So -- products don't have a sophisticated electronics, and they certainly don't have the electrode that would enable the benefits that were not certain.
Marcus Curley: And then secondly, you mentioned the future potential reduction in the size of the sound processor with this platform. Could you give us a better perspective in terms of how small future releases could get? We've had feedback to suggest that there could be quite large reductions in the size of the sound processor in the future with this type of platform.
Diggory William Howitt: Yes. So we've already seen a reduction upfront, and we do think there is more we can do on reducing power consumption with the electronics, and also it has potential with the drug-eluting electrode with lower impedance to reduce the power consumption again. So there is more room to go there. So the obvious, the ultimate on size reduction of the external is [indiscernible].
Marcus Curley: Okay. And maybe I can throw more in on products. Can you just talk a little bit to the response you're seeing on the Kanso 3 and sort of how big a contribution you think it makes to our services revenues in '26?
Diggory William Howitt: Yes, early days, but good response so far. It brings all of the Nucleus functionality into the Kanso form factor. Kanso is an important part of the market. On average, across the world, it's sort of around 20%. So there's a population people out there on Kanso 1 and Kanso 2 who will be eligible to upgrade for Kanso 3. So I think that's part -- certainly part of the services mix this year.
Operator: Your next question comes from Lyanne Harrison from Bank of America.
Lyanne Harrison: I'm going to come back to services for a little bit. You mentioned there were a number of reasons for softer services revenues this year. Can you put that in context for us? Which of those factors was the biggest drag and which had less of an impact?
Diggory William Howitt: Yes. Lyanne, good question. And it's actually really hard for us to disaggregate. There -- '25 is a difficult year because there's quite a for us to really understand every piece of what's going on because there are multiple factors, and it's just hard to just segregate those factors. I think the -- as I said, the U.S. was where we had to just fall, and that's the place where cost of living is -- there is the co-pay and that cost of living impact is there. So that certainly helps us conclude. And what we hear from directly from people as we're talking about the orders, is that was a piece of it -- the recipient base bit not growing. That's a contributor but actually disaggregating those into exactly of the reduction. This bit was due to this and this to that. We're not able to do at that level of granularity. But what that doesn't stop us doing though is still is not sure knowing that would change too much the actions we've already taken, which is about to promote what we have got better, we've got -- in the U.S., the retirement of Nucleus 7. And obviously, then we just have the eligible base increasing. And we got Kanso 3 launching as well. All of those things will contribute to a better outlook and result in '26.
Lyanne Harrison: Okay. Great. And just another question. You mentioned taking some price, particularly with the Nexa launches. How much price increase would you be thinking about there?
Diggory William Howitt: Varies by market, but that's certainly in single -- there's a range, but all in single digits.
Lyanne Harrison: Okay. And with those launch of new products and also you're expanding some of the processor launches across different markets as well. Why would we not expect gross margin expansion? Obviously, you're guiding it to being flat in '26, but -- and understanding some of the some of the headwinds there. But if you're taking some margin -- taking some price in launching a new market, surely, we should expect a little bit of gross margin expansion?
Diggory William Howitt: Yes. So in the developed markets, yes, we will. In the emerging markets, we're going to have a full year of the volume-based pricing in China, and that will put downward pressure on the gross margin.
Operator: Your next question comes from Andrew Paine from CLSA.
Andrew Paine: Just coming back to our services, obviously, calling out a small eligible base impacting that area. But just looking at the strong services growth that followed that initial code disruption. Do you think that's an indication of type of growth you'd expect as those headwinds easing maybe also including some of the product launches coming up?
Diggory William Howitt: So we're certainly -- and are not forecasting that sort of level of growth that we saw coming out of COVID. But I think that what that growth did show is that upgrading is discretionary in a time window. So if people are holding off upgrading now, they will upgrade at some point because at some point, they will realize the gap between the existing technology and potential technology or the process of just where we're at.
Andrew Paine: Yes. Okay. So if you're talking about, especially in the U.S., cost of living pressure, so there's holdouts there, plus you didn't have the kind of 5-year cycle through, let's say, this calendar year -- in -- for calendar year '26, it should -- there should be some reasonable demand for upgrades coming through? Is that correct?
Diggory William Howitt: Yes. So I think -- your point of -- some -- I think saying yes, look, some of those upgrades that would have happened in second half of 2020 were delayed into '21. So those 5 years for those people has moved out. But for some of them, they -- and that will happen in '26. And that's one of the reasons the eligible base grows in '26 compared to '25. It's reflecting that deferral that happened in COVID.
Andrew Paine: Okay. That's great. And then just also, just in relation to hold-outs waiting for the Nexa system. Is there any concerns around bottlenecks to surgeries or getting those patients through the channel? And in implanting devices, let's say, once the U.S. launches and into calendar year '26? Or do you think that's going to be a pretty smooth process?
Diggory William Howitt: I think, look, to the extent there's holds, we will get those surgery back through in '26. And surgeons are -- particularly the U.S. issue, where we've got the launch with the contractor, we haven't put the product out just yet. It's soon. And seniors are very conscious of their access to their surgical slots and don't want to give them up if they're not sure they can get them back. So that's moderating. While we're seeing some holds is moderating, the level.
Operator: Your next question comes from Sacha Krien from Evanson Partners.
Sacha Krien: Look, just another clarification question on developed markets. When you previously mentioned some market weakness, can you sort of clarify how much of that you think is attributable to patients waiting for Nexa versus other factors? Or are you seeing any potential cost of leading issues on the implant side as well?
Diggory William Howitt: Yes, Sacha. We don't see that cost of living has had an impact on the market growth. In terms of people holding for Nexa, we don't think it was significant. We're sure there was some because we announced a product in February. And we've got -- we certainly know through our consumer tracking of -- and a small number of holds, but it wasn't -- I certainly wouldn't hold that up as a significant factor impacting '25.
Sacha Krien: Okay. Got it. And services growth. I mean, you touched on a few different factors there, but you didn't mention payers. I'm just wondering how much the change in mix of your eligible base, so more seniors and more adults is pushing out that replacement cycle do pay as -- apply stricter criteria to adults and seniors upgrading their processor?
Diggory William Howitt: No. We don't see stricter criteria based on age. We certainly do see in places and payers as they always do, pushing back on upgrades and on procedures -- upgrades, but that's not unusual.
Sacha Krien: Okay. And then Medicaid changes, is that part of your uncertainty driven by potential changes for Medicaid?
Diggory William Howitt: So Medicaid changes. Look, like the -- there is still uncertainty there. I think the saying is that impact shouldn't have -- won't happen just yet. Now Medicaid is a small part of our sales in the U.S. But there is -- certainly is a level of uncertainty of just what impact that will have, probably not so much directly on us, but on hospitals. There are hospitals that have a level of Medicaid funding, which helps them with their profitability. And if that falls, what's the hospital response to that and what impact is there on us. So there is some uncertainty, but not -- we think that's more likely a bit later than '26 at the moment and still playing out.
Sacha Krien: Yes. Okay. Final quick question. Just emerging market prices. You talked a bit about the trends in China. I'm just wondering if you're seeing any more pricing pressure in other markets?
Diggory William Howitt: In terms of other markets, it can be pretty normal. Across emerging markets, there was always a range of prices. With Nexa that gives us a great opportunity to hold and even gain share in that premium segment across the world. And then at the lower end, yes, there is always a range, and the volume there is where it's more variable because there is -- more dependence on government funding and the timing of government funding, but not -- we're not seeing a trend that's different.
Operator: Your next question comes from Steve Wheen from Jarden.
Steven David Wheen: Sorry, just given you'd mentioned this historically that you were expecting Indian tender from the Indian government. Wondering if that appeared at all in '25? Or is that -- is there part of that, that you'd expect in FY '26?
Diggory William Howitt: We certainly -- we've got a bit of volume in '25. We expect to have, as always, some Indian tenders in '26. But in terms of the overall impact on the business, it's not a huge -- either way, not a huge impact. With these trends, we can see a lift in our volume, but not a huge revenue impact.
Steven David Wheen: So the government one tender that went missing in '24, you're not expecting that to come back?
Diggory William Howitt: No, no.
Operator: Your next question comes from Craig Wong-Pan from RBC.
Craig Wong-Pan: Just wanted to clarify, is the margin headwind from Chengdu manufacturing becoming larger in FY '26, given you're expecting to manufacture more implants there? And then is the amount of the overall margin headwind still thought to be around 50 basis points that should roll off somewhere throughout FY '27 and FY '28?
Sarah Thom: Yes. Look, we're not expecting that to get larger. Ramping up is helping us there. It will probably be a little bit less than that number you quoted, but it's still a headwind this year and next.
Diggory William Howitt: And the other thing I should have just mentioned earlier on Lyanne's question just on the gross margin is the Nexa being new, the new product, the cost to start and then they come down. So there's a partial impact there as well.
Craig Wong-Pan: Okay. And then just on Acoustics, you mentioned that with the launch of the Baha 7, that might have meant some upgrades were delayed. Given that it was only announced in June, I was just curious to when doctors or patients might have been aware of that. And is that a significant impact there around why that those revenues are declined in the second half?
Diggory William Howitt: So we actually, Craig, did see that was in the U.S. We did start launching in February with Baha 7 in Europe. So that's where we saw some delay, and we're seeing a good response on Baha 7 now.
Operator: Your next question comes from Christine Trinh from Macquarie Bank.
Christine Trinh: Just 2 quick ones from me. Just in terms of longer-term targets, are you still looking to target sales revenue growth of about 10% over the coming years? Or are you kind of expecting a significant uplift from that Nucleus Nexa system?
Diggory William Howitt: No, as a long-term target, that's one that we would maintain.
Christine Trinh: Yes. And just quickly on the cloud investment again, just confirming that $130 million over the next 2 years is post tax?
Sarah Thom: No, that $130 million over the next 2 years is a pretax number. That's our whole investment in that.
Operator: Your next question is from Lyanne Harrison from Bank of America.
Lyanne Harrison: I just had a follow-up question on the retirement of the Nucleus 7. Can you give us an indication of what proportion of your installed base are on the Nucleus 7? And when you say retirement, what does that mean in terms of patients who are currently on it? Do they have to switch? Or is it just that any support gets turned off?
Diggory William Howitt: Yes. Lyanne, good question. So retirement is part of managing the life cycle of each of our products. And the -- with these consumer electronics, there is a limited life that we can support them for. We also have different regulatory requirements in each country as to how long we need to continue to support. So we're going to manage -- so the retirement dates are different by country, be conscious of our regulatory obligations. And we're also very conscious of just our ability to continue to support a product with components. So the retirement that we're talking about is in the U.S. I won't go into what proportion of our recipient base because, again, it does vary by country. What it means for retirement is that we stopped providing repairs. So if someone's processor breaks, it's unable to be repaired. If we're going to repair that without replacing components by that, but it's not all repaired, then they need to get an upgrade.
Operator: There are no further questions at this time. I'll now hand the conference back to Mr. Howitt for closing remarks.
Diggory William Howitt: Okay. Thanks, everyone, for joining. Appreciate it. And no doubt see you again in 6 months, if not before.