Abaxis' Fiscal Q4 Earnings, Revs Disappoint Again - Analyst Blog

On Apr 24, 2014, Abaxis, Inc. ABAX reported a disappointing fourth-quarter fiscal 2014 with earnings per share of 17 cents missing the Zacks Consensus Estimate of 20 cents. The adjusted earnings in the reported quarter also lagged the year-ago earnings of 30 cents by a massive 43.3%. For fiscal 2014, the company reported adjusted earnings of 63 cents per share, significantly down from fiscal 2013 earnings of $1.23 per share.

However, the 5.2% rise in share price since the earnings release does not give a true reflection of the company's performance in the fourth quarter. Abaxis' shares closed at $40.82 as on April 28. We believe the rise in the stock price could be on the back of two reasons. Firstly, positive investor reaction based on the management conviction that the company is likely to achieve double-digit growth in fiscal 2015 may have boosted the share price. Secondly, the initiation of quarterly dividend of 10 cents per share on the back of strong cash flow and expected healthy financial performance also may have led to the upside.

Total Revenue

Revenues in the quarter were down 15.8% to $42.0 million which lagged the Zacks Consensus Estimate of $46.0 million as well. The company had generated revenues of $49.9 million in the prior-year quarter. For fiscal 2014, Abaxis earned revenues of $171.9 million, down 7.6% as compared to fiscal 2013.

On a geographic-region basis, revenues from North America during the quarter (accounting for 78.1% of total revenue) were down 21.6% to $32.8 million, while the same from the international market (remaining 21.9%) increased 14.3% to $9.2 million. Sales in Europe grew 13.0% to $7.0 million while the same in Pacific Rim increased by 18% year over year to $2.2 million.

Segment in Detail

Abaxis operates in three main segments, namely Veterinary, Medical and Other. In the reported quarter, vet sales comprised 81.4% of total sales, 16.8% was contributed by medical sales and the rest 1.8% came from Other.

Veterinary market revenues shrunk 20.3% year over year to $34.2 million. However, service revenues from Abaxis Veterinary Reference Laboratories (AVRL) of $2.8 million were up 55% over last year's comparable quarter.

Sales in the Medical market increased 12.6% year over year to roughly $7.1 million. Moreover, Medical reagent disc sales of 740,000 units recorded during the fourth quarter increased by 37% over fourth-quarter fiscal 2013.

Operational Updates

Owing to a disappointing top line, fiscal fourth-quarter gross profit went down 19.7% to $21.0 million. Consequently, gross margin also contracted 250 basis points (bps) year over year to 49.9%.

Research and development expenses were $3.5 million, up 7.2%. Selling and marketing expenses amounted to $8.7 million, down 23.0%. General and administrative expenses, however, increased 12.9% year over year to $3.0 million. Accordingly, operating margin during the quarter contracted 400 bps to 13.9%.

Financial Update

Abaxis exited the fiscal with cash, cash equivalents and short-term investments of $102.7 million versus $78.3 million as on Mar 31, 2013.

 Our Take

Abaxis continues to fall short of expectations, as it has missed the previous four quarterly estimates as well. According to the company, this weak performance reflects Abaxis' inability to make a smooth transition from a direct sales approach to a largely distributor model. This resulted in imbalances in field inventory and disruptions in field sales organization. Subsequently, all these factors had a cascading effect causing inefficiencies at the factory, leading to higher factory cost and lower gross margins. Moreover, the consistent downfall in margin is a serious cause of concern as it might have an adverse impact on the bottom-line performance of the company in the long run.

Nevertheless, we are upbeat on the fact that Abaxis has already cleared up distributor inventory and renewed distributor partners relationships in the North American Veterinary market. Hence, the next fiscal onwards, we expect Abaxis to gain traction with improvement in its topline and bottom-line performances, thereby reporting double-digit growth as claimed by management.

 Currently, Abaxis carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader healthcare sector that warrant a look are Enzymotec Ltd. ENZY, Myriad Genetics Inc. MYGN and Natus Medical Inc. BABY. Enzymotec and Myriad Genetics sport a Zacks Rank #1 (Strong Buy) while Natus Medical carries a Zacks Rank #2 (Buy).