A customer that makes up 9 per cent of Somnomed’s (ASX:SOM) US revenue has gone out of business, leaving the Aussie sleep device company facing sizeable losses.

But as one analyst says, the US isn’t where Somnomed’s future lies; that’s Europe.

Somnomed, which sells mouthguard-like devices to fix sleep apnoea, says it’ll probably not see between $560,000 and the full $1.1 million it’s owed by Simple Sleep Services (S3).

Neil Verdal-Austin, Somnomed CEO, told Stockhead S3 hadn’t gone bankrupt but had simply closed its doors because it wasn’t able to continue trading.

Texas-based S3 was the company’s only remaining direct-to-customer seller in the US, having shut down its own in-house director-to-customer arm Renew Sleep Solutions (RSS) at the start of January.

It is now relying on its “traditional” network of dentists to sell the devices.

SomnoMed says its EBITDA guidance of $5m to $5.5m will drop by however much they can’t extract from S3.

Mr Verdal-Austin said S3 faced the same headwinds as RSS did but he thought they’ be able to trade it out, as they’d been successfully working the direct-to-customer market for six years.

“S3’s closure came as a surprise to us,” he said in a statement.

“S3’s unit sales in November and December 2018 were good but further changes in regulations and reimbursement amounts introduced in Texas at the beginning of the 2019 insurance year changed the economic viability of its business.”

Taking a Eurotrip

Morgans analyst Iain Wilkie says increases in out-of-pocket deductibles — the amount people have to pay for a service before their insurance kicks in — hit in January in Texas.

But he says the S3 loss isn’t as bad as it looks.

S3 made up a declining chunk of Somnomed’s business, and Europe has been the growth driver for the last few years.

Mr Wilkie says Europe accounts for 60 per cent of the company’s business, compared to the US with 34 per cent, and his positive view of the core business remains unchanged.

“That $US805,000 ($1.1m) only accounted for 9 per cent of North America and was declining, so it’s really 3 per cent of the whole business,” he told Stockhead.

“With Neil at the helm now, being an accountant he’s probably erring on the side of caution most of the time.”

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