By Brian Marckx, CFA
Q1 Results: China Sales Plunge, Now Modeling More Elongated Resurgence to Prior Levels
Biomerica Inc (OTC BB:BMRA) filed their 10-Q for the fiscal first quarter ending August 31, 2013. For the third straight quarter sales to Asia came in well below our estimate which resulted in a sizeable miss to revenue and EPS relative to our numbers.
As a reminder, during fiscal Q4 (ending 5/31/2013) BMRA entered into an agreement with a new distributor for Asia and ceased its relationship with their prior Asian distributor. As a result of the switch, sales to Asia fell 56% yoy (52% sequentially) in Q4. Biomerica notes that this new distributor has indicated that they expect to increase sales to the same levels as that of the prior distributor, however. Following the abrupt drop in sales to Asia in Q4, we had made some downward revisions to our modeled revenue, which reflected the expectation that sales to Asia would continue to fall on a yoy basis through the first half of fiscal 2014 but then begin to exhibit growth in the second half of the year.
Sales to Asia in fiscal Q1 2014 fell 85% yoy to $136k, while we modeled $586k in sales to Asia in Q1, representing a 35% contraction. The $450k difference in actual vs. estimated sales to Asia accounted for all (and slightly more) of the $421k difference between our modeled ($1.45 million) and actual ($1.01 million) total revenue for Q1. While we still expect sales to the new distributor to meet and eventually exceed legacy levels, given the much more abrupt drop in recent sales than we had anticipated, we have now elongated this ramp which is reflected in the revisions to our model.
Meanwhile, sales in every other territory in which BMRA breaks out revenue (Europe, U.S., S. America, Middle East) were very much in-line with our numbers with the U.S. actually somewhat stronger ($255k A vs. $196k E) than anticipated.
Total revenue fell 40% yoy (down 28% sequentially) in Q1 to $1.0 million and was about 29% below our $1.4 milion estimate. As noted, the entire miss was a result of the lower than anticipated sales to Asia, partially offset by a slight beat in U.S. sales.
Gross margin was 25.7% which was also well below our estimate of 32.2% and is a direct result of the lower revenue number due to the fixed-cost portion of COGS. Operating expenses were right in-line with our number. Net income and EPS of ($168)k and ($0.02) were below our $29k and $0.00 estimates.
Despite the somewhat disappointing financial results over the past few quarters, BMRA's cash position and balance sheet in general remain in very solid shape. As we've alluded to in the past, book value should continue to put a floor on valuation of the company. Biomerica exited Q1 with about $2.1 million in cash and equivalents, down from $2.5 million at the end of fiscal 2013. Cash flow from operating activities was an outflow $376k in Q1 but excluding changes in working capital (which included a $214k increase in inventory in the quarter), cash from operating activities was an outflow of only $120k.
As a reminder, BMRA has fairly consistently generated positive cash flow, including $1.4 million in fiscal 2013. The company also remains debt free. Book value at the end of Q1 stood at $5.7 million or approximately $0.78/share.
Maintaining Outlook / Recommendation
As noted, we have again made some downward revisions to our modeled revenue - which reflects our updated supposition that sales to Asia may not reach legacy levels during the latter part of the current year - which had been our prior assumption. We now look for a somewhat longer ramp in sales to Asia. And while we expect to see near and long-term revenue growth from all of the company's other itemized geographic territories, some of which we think will come from new product approvals, we think the current fiscal year may show an overall contraction in revenue as the new Chinese distribution arrangement takes time to gear up.
We now look for 2014 revenue and EPS of $4.7 million (-27%) and ($0.03) and for this to grow to $10.8 million and $0.15 in fiscal 2017. The changes to our model has resulted in our valuation falling from $2.50/share to $2.15/share. The stock price has retreated to abut $0.78 following the earnings release which is approximately book value. We are maintaining our Outperform rating. Our price target has moved to om $2.50/share to $2.15/share. The stock price has retreated to abut $0.78 following the earnings release which is approximately book value. We are maintaining our Outperform rating. Our price target has moved to $2.15/share.
Over the mid-to-longer terms, however, we think Biomerica will be looking to further exploit their existing technology. We view management's priorities as such that they will be focused on accelerating growth through bringing higher potential and novel products to market - in this morning's earnings release the company alludes to a GI product which we think likely fits into this growth strategy. We note that our current model does not incorporate an assumed contribution from "home run" type products - although we think given the company's expertise in certain disease areas (including GI, foodborne, women's health, and infectious disease), along with patentable and perhaps underexploited technology platforms and management's renewed focus on accelerating growth over the long-term, that big-winner type products could very well materialize over the coming years.
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