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ZB

ZIMMER BIOMET HOLDINGS, INC. (ZBH)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 revenue was $1.909B (+1.1% reported, +2.3% constant currency), with adjusted EPS of $1.81; GAAP EPS was $0.91 .
  • Zimmer Biomet raised FY25 reported revenue growth guidance to 5.7%–8.2% (from 1.0%–3.5%) and introduced a 5.7%–7.7% constant-currency range; adjusted EPS was lowered to $7.90–$8.10 (from $8.15–$8.35) to reflect Paragon 28, currency and tariff impacts .
  • Key operational positives: U.S. Hips +3.7% with strong uptake of Z1, HAMMR and navigation; S.E.T. +4.9% constant currency; free cash flow rose to $278.5M vs $90.9M in Q1 2024 .
  • Management expects second-half revenue and margin acceleration from new product launches (Oxford Cementless Partial Knee, Persona OsseoTi, Persona Revision in EU) and no selling-day headwind; tariffs (est. $60–$80M operating profit headwind) are largely offset via FX, discretionary spend and sourcing changes .
  • Potential stock catalysts: upward revenue guidance tied to Paragon 28 close, visible second-half new product ramps, and pricing stability; balanced by tariff uncertainty and near-term adjusted margin compression vs prior year .

What Went Well and What Went Wrong

  • What Went Well

    • U.S. Hips momentum: “We’re excited about the momentum in U.S. Hips… Z1 Triple-Taper… HAMMR… navigation capabilities,” contributing to U.S. Hips +3.7% .
    • S.E.T. performance: S.E.T. grew +4.9% constant currency; management expects Paragon 28 to add ~270 bps to 2025 growth and make S.E.T. larger than Hips .
    • Cash generation improved: Operating cash flow $383M; free cash flow $278.5M (vs $90.9M in Q1 2024) supported by inventory DOH reduction to ~370 days (down ~47 days YoY) .
    • Guidance raised for revenue: FY25 reported revenue growth lifted to 5.7%–8.2% with FX now flat to +50 bps tailwind .

  • What Went Wrong

    • Adjusted margins compressed: Adjusted gross margin 71.5% (vs 72.9% Q1 2024) and adjusted operating margin 26.2% (vs 28.6% Q1 2024), driven by higher capitalized COGS from 2024 and upfront investments for launches; FX was a ~$0.03 EPS headwind .
    • U.S. Knees underperformed: U.S. Knees +0.2% with management acknowledging needed commercial execution changes and expecting second-half acceleration as training and sets ramp .
    • FY25 adjusted EPS cut: Guidance reduced to $7.90–$8.10 to reflect tariffs and Paragon 28 dilution (<3% in year one) despite FX tailwind and cost actions .

Financial Results

MetricQ1 2024Q4 2024Q1 2025
Revenue ($USD Billions)$1.889 $2.023 $1.909
GAAP Diluted EPS ($)$0.84 $1.20 $0.91
Adjusted Diluted EPS ($)$1.94 $2.31 $1.81
Adjusted Gross Margin (%)72.9% 71.3% 71.5%
Adjusted Operating Margin (%)28.6% 30.8% 26.2%
Free Cash Flow ($USD Millions)$90.9 $402.8 $278.5

Segment and Geography

CategoryQ1 2025 Sales ($MM)YoY Reported %YoY Constant Currency %
United States$1,113.6 +1.3% +1.3%
International$795.5 +0.7% +3.7%
Knees (Total)$792.9 +0.6% +1.9%
Hips (Total)$495.8 +0.9% +2.4%
S.E.T.$470.5 +3.9% +4.9%
Technology & Data, Bone Cement and Surgical$149.9 -4.7% -3.5%

Estimates versus Actuals (S&P Global)

MetricConsensus Q1 2025Actual Q1 2025
Revenue ($USD Billions)$1.895*$1.909
Primary EPS ($)$1.770*$1.81
EBITDA ($USD Millions)$603.5*$595.2

Values marked with * retrieved from S&P Global.

Context and drivers:

  • Pricing +10 bps in Q1; guidance updated to roughly flat for FY25 as prior OUS tailwinds fade .
  • Adjusted EPS decline vs Q1 2024 reflects higher COGS capitalization from 2024, upfront investments for launches, higher net interest, and ~$0.03 FX headwind .
  • Strength in U.S. Hips driven by Z1, HAMMR and OrthoGrid; knees expected to ramp in 2H with Oxford Cementless and ascending cementless penetration .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Reported Revenue Change (%)FY 20251.0% – 3.5% 5.7% – 8.2% Raised
FX Impact (%)FY 2025(2.0)% – (1.5)% 0.0% – 0.5% Raised (tailwind)
Constant-Currency Revenue Change (%)FY 20253.0% – 5.0% 5.7% – 7.7% Introduced higher CC
Organic CC Revenue Change (%)FY 20253.0% – 5.0% 3.0% – 5.0% Maintained
Adjusted Diluted EPS ($)FY 2025$8.15 – $8.35 $7.90 – $8.10 Lowered
Free Cash Flow ($)FY 2025$1.1B – $1.2B (Feb call) $750M – $850M (May call) Lowered

Rationale:

  • Revenue guidance raised to reflect Paragon 28 contribution (~270 bps) and FX tailwind; EPS and FCF lowered due to tariffs ($60–$80M operating profit headwind, majority 2H) and one-time deal costs tied to Paragon 28 .

Earnings Call Themes & Trends

TopicQ3 2024 (Prev-2)Q4 2024 (Prev-1)Q1 2025 (Current)Trend
Pricing3rd consecutive positive pricing quarter; FY flat to +50 bps Positive 60 bps; LRP assumes ~100 bps erosion +10 bps; FY now “roughly flat” Moderating but stable
U.S. KneesERP and sets constrained pull-through Stronger exit; launch cadence in 2025 +0.2% in Q1; reorg and specialization, 2H acceleration expected Improving 2H
U.S. HipsZ1/HAMMR early momentum Offense strategy; complete portfolio U.S. Hips +3.7%; conversions ~50% new accounts Strengthening
Robotics (ROSA)#1 in Europe; new indications coming Pipeline updates; shoulder early use at Mayo ROSA V15 510(k) submitted; user experience, balance features; Think Surgical partnership optionality Expanding capabilities
TariffsN/AEarly assumptions embedded in FY25 guide $60–$80M OP headwind; mitigation via origin, sourcing, FX, discretionary spend Manageable headwind
ASC StrategyBuilding partnerships and portfolio ASC near 20% of U.S. sales; 40–60% shift in 3–5 yrs Debuted ZBX ASC offering; Paragon 28 to expedite ASC penetration Accelerating
Inventory/DOHERP headwind; working capital targeted DOH ~375 days, -50 days YoY DOH ~370 days; target “much lower” over coming quarters Improving

Management Commentary

  • “We’re excited about the momentum in U.S. Hips… Z1 Triple-Taper… HAMMR… and navigation capabilities… early enthusiasm for Oxford Cementless Partial Knee positions us well to accelerate growth in the second half” — CEO Ivan Tornos .
  • “Adjusted EPS of $1.81 and free cash flow of $279M… pricing +10 bps… SET continues to outpace knees and hips… Technology & Data, Bone Cement and Surgical declined on tough comps and mix shift toward ROSA placements” — CFO Suketu Upadhyay .
  • “We anticipate Paragon 28 to contribute about 270 bps to growth in 2025… reported sales growth 5.7%–8.2%… EPS $7.90–$8.10… FCF $750M–$850M” .
  • “We anticipate a $60–$80M headwind to operating profit in 2025 [from tariffs]… impact in Q2 quite small; over half in Q4… mitigations include country of origin optimization, transfer pricing, dual sourcing, and discretionary spend moderation” .

Q&A Highlights

  • Tariffs mitigation and cadence: Team expects $60–$80M OP headwind, most in 2H, with offsets from FX tailwind, sourcing and discretionary spend; Q4 should not be used as 2026 run-rate .
  • Knees trajectory: U.S. Knees +0.2% in Q1; leadership and incentive changes underway; Oxford Cementless training and set deployment to drive 2H acceleration .
  • Robotics competitiveness: ROSA V15 submission aims to enhance accuracy, workflow and speed; Think Surgical partnership offers CT-based optionality; management downplays robot as sole cause of knee share differences vs peers .
  • ASC penetration: ~20% of U.S. sales now; significant growth expected; Paragon 28 improves channel and cross-sell opportunities in ASC .
  • Oxford Cementless ramp: Several hundred surgeons trained; target >1,000 trainees by year-end; increasing contract penetration to 70–80% by 2H 2025 .

Estimates Context

  • Q1 2025 actuals modestly beat revenue and EPS consensus and missed EBITDA consensus: Revenue $1.909B vs $1.895B*, EPS $1.81 vs $1.77*, EBITDA $595M vs $603M* .
  • Street likely to temper near-term margin expectations given adjusted margin compression and tariff headwind, while raising revenue trajectories to reflect Paragon 28 and FX tailwinds; second-half ramps in knees/hips and SET support upward revisions to H2 growth.
    Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

  • Revenue outlook improved materially (5.7%–8.2% reported) on Paragon 28 and FX, but EPS/FCF headwinds from tariffs and integration costs weigh in 2025; focus on 2H acceleration from Oxford Cementless, Persona OsseoTi, Persona Revision EU .
  • U.S. Hips strength confirms efficacy of the “Magnificent 7” portfolio (Z1, HAMMR, navigation); expect continued competitive conversions through 2025 .
  • U.S. Knees underperformance is being addressed via sales force optimization and robotic/product pipeline; track contract penetration and training milestones for Oxford Cementless .
  • Pricing environment stabilizing at roughly flat for FY25, supportive to margins amid volume growth; monitor FX tailwinds vs tariff timing .
  • Working capital discipline is driving cash conversion improvement (DOH down ~47 days YoY, FCF up), providing balance sheet flexibility despite one-time deal and tariff impacts .
  • Near-term trading: watch tariff execution timelines (Q3/Q4 impact), Oxford adoption pace, and Paragon 28 integration updates; medium-term thesis rests on diversified growth (SET/ASC), robotics advances (ROSA) and product cycle leverage .