Abaxis (ABAX) Q2 Earnings & Revenues Miss, Margins Slide

Abaxis, Inc. (NASDAQ:ABAX) – a global provider of point-of-care blood analyzers – reported second-quarter fiscal 2017 adjusted earnings per share (EPS) of 34 cents, which missed the Zacks Consensus Estimate by 5.5%. However, adjusted EPS was flat with the year-ago figure.

The bottom-line miss can be primarily attributed to a 20% increase in operating expenses, a result of management’s decision to increase investments in research and development (R&D) and international sales and marketing (S&M).

Reported EPS from continued operations was 51 cents, up 50% year over year.

Total Revenue

In the fiscal second quarter, Abaxis recorded revenues of $58.6 million, reflecting a 4.6% year-over-year increase. The top line however missed the Zacks Consensus Estimate of $61 million.

Notably, the mid-single-digit growth witnessed in medical market and the double-digit growth in veterinary market collectively drove the year-over-year upside in Abaxis’ overall revenues.

Foreign currency exchange rate fluctuations had a negligible impact on Abaxis’ top line as currencies dented total revenue by only 0.5% in the quarter.

Segments in Detail

In the quarter, on a geographic basis, revenues from North America (accounting for 80.2% of total revenue) grew 4% to $47.0 million, while revenues from the international market (accounting for the rest) rose 7% to $11.5 million.

Abaxis operates under three main segments, namely, Veterinary, Medical and Other. In the reported quarter, Veterinary sales accounted for 82.4% of total sales; Medical sales contributed 16% while the remaining 1.5% was generated from ‘Other’.

Veterinary market revenues improved 4% year over year to $48.3 million, driven by an 8% improvement in veterinary consumable revenues, offset by a14% decline in veterinary instrument revenues. Revenues from the medical market grew 9% year over year to $9.4 million, on account of a 19% increase in medical rotor revenues while Piccolo instrument revenues dropped 22%. Revenues from the Other segment increased 18.3% to $0.88 million.

Abaxis also exhibited strong consumable growth, up 9% year over year to $45.5 million, accounting for approximately 77.6% of the company’s total worldwide revenues in the quarter.However, total Instruments sales decreased 15% to $9.8 million.

Operational Updates

Fiscal second-quarter gross profit rose 0.9% to $32.3 million.However, gross margin contracted 201 basis points (bps) to 55.1%.

Research and development expenses increased 4.6% year over year to $4.9 million, while Sales and marketing expenses rose 4.3% to $11.2 million. General and administrative expenses escalated 21.5% to $4.35 million. Although the resultant operating income was almost flat at $11.7 million forthe quarter, operating margin declined 168 bps to 20.1% owing to higher operating expenses.

Financial Update

Abaxis exited fiscal second quarter with cash, cash equivalents and short-term investments of $145.5 million, up from $129.7 million in the prior quarter.

Our Take

Abaxis’ second-quarter fiscal 2017 results failed to impress with the company squarely missing the Zacks Consensus Estimate. However, on a year-over-year basis, global sales improved across all segments as well as geographical bases. Moreover, global sales of medical rotors crossed the 1 million unit threshold for the first time, which marks a major milestone.

Abaxis faced challenging year-over-year comparisons in North America in terms of veterinary rotors this quarter. Meanwhile, for the remaining quarters of fiscal 2017, management offered an improved outlook for veterinary rotor sales in the region. Also, Abaxis strong cash position buoys optimism on the stock.

Zacks Rank & Key Picks

ResMed currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical sector are GW Pharmaceuticals plc (NASDAQ:GWPH) , Quidel Corp. (NASDAQ:QDEL) and Boston Scientific Corporation (NYSE:BSX) . GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), while Quidel and Boston Scientific carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 69.6% year to date compared to the S&P 500’s 4.7% over the same period. The company’s four-quarter average earnings surprise is 41.6%.

Quidel rallied 23.5% in the past one year, above the S&P 500’s 2.4%. Over the next five years, the stock is estimated to record earnings growth of 20%, higher than the industry average of 14.8%.

Boston Scientific recorded 20.1% gain in the past one year, higher than the S&P 500’s 2.4%. The company has a trailing four-quarter average earnings surprise of 6.3%.

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