Zimmer Biomet's Q1 Earnings: Innovating Through Challenges

Zimmer Biomet Holdings (NYSE: ZBH) has long been a titan in the orthopedic device space, but its Q1 2025 earnings call revealed both opportunities and hurdles. Let’s break down the numbers and what they mean for investors.

The Good: Growth Drivers Are Firing on All Cylinders

First, the positives. The company’s U.S. hip segment surged 4%, fueled by its Magnificent Seven product lineup—specifically the Z1 hip stem and OrthoGrid AI guidance system. These innovations are converting competitors’ customers at a 50% rate, a strong indicator of brand loyalty and technological edge.

The S.E.T. (spine, extremities, trauma) segment is now the company’s largest growth engine, thanks to the $285 million Paragon 28 acquisition. This deal added $270 million in annual revenue, making S.E.T. a 270 basis point driver for 2025 sales. Meanwhile, the Oxford partial cementless knee, approved by the FDA in Q1, offers a 93% 10-year survivorship rate—a stat that could accelerate adoption as surgeons seek durability.

The Not-So-Good: Tariffs and Margin Pressures

Now, the challenges. Despite strong sales, adjusted EPS dropped to $1.81, a 7% decline from last year. The culprit? A $60–80 million tariff headwind on U.S.-produced goods exported to Europe, compounded by rising interest expenses and upfront costs for new product launches.

Margins are under pressure too. Gross margin narrowed to 65.5%, while operating margin dipped to 26.2%—both below prior-year levels. Management expects tariffs to hit harder in H2, but they’re fighting back with country-of-origin shifts and dual-sourcing strategies to mitigate costs.

The Data Says: Hold the Fort for Now

Zimmer Biomet isn’t without hope. Its free cash flow hit $279 million in Q1, up from $228 million last year, thanks to inventory days dropping to 370 from 417. This is a critical win, as overstocking plagued the company in 2024.

Long-term, the WEMGAR (weighted average market growth rate) target of 5% by 2027 (up from 4.25%) suggests confidence in its innovation pipeline. The Persona Osteotomy knee and iodine-surface-coated implants (which reduce prosthetic infections) are game-changers.

Risks Worth Watching

• Tariffs: The EU’s 90-day tariff stay expires in late 2025, and the full-year impact could push costs even higher.
• Currency Fluctuations: A weaker dollar is a 50–100 basis point tailwind, but it’s no cure-all.
• Competition: While ZBH leads in hip implants, rivals like Smith & Nephew and Stryker are closing gaps in S.E.T.

Verdict: Buy the Dip, But Stay Vigilant

Despite the EPS hit, ZBH’s organic sales growth of 2.3% and S.E.T. dominance are reasons to stay invested. The Paragon 28 integration is smooth, and the Oxford knee’s FDA win opens a $2 billion addressable market.

Investors should watch for Q3 execution—when the Oxford knee’s adoption rate becomes clearer—and tariff mitigation progress. If ZBH can stabilize margins near 26% and hit its WEMGAR target, this stock could rebound.

Final Take

Zimmer Biomet isn’t just surviving—it’s innovating. The company’s focus on AI, infection prevention, and S.E.T. expansion positions it to thrive in the long run. For now, it’s a hold, but a buy the dip opportunity if shares slip further. The bones of this business are still strong.

Bottom Line:
- Growth Drivers: S.E.T., Z1 hip stem, Oxford knee.
- Risks: Tariffs, margin pressures, competition.
- Key Stats: Free cash flow up 22%, inventory days down 11%, WEMGAR target of 5%.

Stay tuned to this story—it’s far from over.