Solid 1Q for Abaxis Despite EPS Miss

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Abaxis Inc. (ABAX) reported a 30% year-over-year increase in EPS to 13 cents in the first quarter of fiscal 2013, but missed the Zacks Consensus Estimate of 17 cents.

Revenues during the quarter increased 17% year over year to $42.0 million, and surpassed the Zacks Consensus Estimate of $40 million. The growth was based on higher sales in both North America (up 12% to $33.2 million) and in the international market (up 41% to $8.8 million).

Within the customer group, Veterinary market revenues witnessed an upside of 17% in the reported quarter to $32.5 million while Medical Market sales delivered 18% year-over-year growth to $8.4 million. However, sales from the Other customer group declined 6.4% year over year to $1.1 million. Excluding sales to the US government, worldwide Medical sales escalated 27% year over year to $7.8 million.

Total consumable sales climbed 10% year over year or $2.8 million while instrumental sales increased by $2.4 million or 31% year over year.Moreover, sales from medical and veterinary reagent discs increased 14% to $23.6 million. Total medical and veterinary reagent disc unit sales during the quarter were up 9% year over year to 1.7 million. Moreover, service revenue from Abaxis Veterinary Reference Laboratories (:AVRL) continued with its growth momentum and recorded sales of $861,000, up 83% sequentially.

Gross profit in the quarter increased 18.8% year over year to $22.8 million, leading to a 100 basis points (bps) increase in gross margin to 54.4%. The company also witnessed a 14.2% dip in research and development expenses (to $2.9 million), 2.8% decline in general and administrative expenses ($3.3 million), offset by a 28.5% rise in sales and marketing expenses ($11.8 million). Operating income during the quarter increased a robust 49.9% to $4.8 million, leading to a 250 bps expansion in the operating margin to 11.4%. The company also recorded $230 million in interest expenses during the quarter compared with gain of $294 million in the year-ago quarter.

Abaxis exited the first quarter with cash and cash equivalents and short-term investments of $78.1 million, up from $67.5 million at fiscal 2012 end.

Abaxis operates in a niche market of portable medical and veterinary blood analysis systems. Low worldwide penetration provides scope for substantial growth in this niche industry. Alongside, we are further impressed with the newly-formed Abaxis Veterinary Reference Laboratories’ encouraging performance in its third full quarter and is complimenting well with the growth of the company’s veterinary segment.

Moreover, we note that the company is taking initiatives to expand in the international medical market. The recent contract with a leading international biotechnology company to deliver 300 Piccolo Xpress instruments is a big step in this regard. However, the competitive landscape is tough with the presence of big players like Alere (ALR) in the human and veterinary diagnostic market.

Currently, Abaxis carries a Zacks #1 Rank (short-term ‘Strong Buy’ rating). Over the long term, we maintain our ‘Outperform’ recommendation on the stock.

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