By Brian Marckx, CFA
CAS Medical (CASM) reported financial results for Q1 2018. It was an extraordinarily strong showing across their FORE-SIGHT franchise with sensors revenue in both the U.S. and international markets jumping double-digits yoy, pushing total sensors sales almost 10% higher than their prior record (in Q4 ’17). Meanwhile, monitor shipments continue to trend higher - 72 shipped in the U.S., which is the second highest level on-record (80 shipped in Q4 ’17) and 39 OUS, which is the highest since Q4 ’16. Pricing and sensor sales per installed unit were also highlights in Q1 – with sensors revenue per installed unit at the highest level since Q4 ’16 and buoyed by relatively strong metrics in both the U.S. and OUS – this, in our opinion, is particularly encouraging given that it may suggest accelerating utilization.
CASM’s U.S. segment continues to gain strength with domestic sales jumping 21% yoy to a record $4.5M. Per comments on the Q1 call, the pediatric channel was a significant contributor to U.S. FORE-SIGHT growth – responsible for ~one-third of the 15% yoy U.S. sensors sales growth. Expect this to be a channel that CASM looks to further leverage. Total U.S. FORE-SIGHT sales increased 4% sequentially - which is noteworthy given that Q4 ’17 was a tough comp. As a reminder, the prior period set records in the U.S. on monitor shipments (80), sensor sales and FORE-SIGHT revenue. All but the monitor shipments were beat in Q1. As we noted in our prior update (following Q4 ’17 results), the recent pick-up in U.S. sales is highly encouraging given that domestic revenue seemed to have stalled at around the $3.7M mark from mid-2016 to mid-2017. Since then, U.S. FORE-SIGHT sales set new consecutive all-time highs and averaged $4.2M over the last three consecutive quarters.
Much of the reason for the prior lack of domestic sales traction was due to disruptions caused by restructuring of the sales force as well as new competitor pricing pressures. CASM addressed both – the sales team was rebuilt with highly-experienced personnel and additional sales strategies were implemented, including the use of IDN/GPO channels and targeted campaigns focused on large hospital networks. These seem to already be making a positive impact with productivity gains and initial sales to two new large hospital customers both cited as main catalysts to the recent U.S. sales growth. Most recently, management noted (on the Q1 ’18 call) that they won a contract with one of the largest GPOs in the U.S. (which represents ~200 hospitals) – CASM expects to begin targeting those accounts in the summer. And, in terms of the sales team – 14 of CASM’s current 16 territories are now detailed with reps which have at least one year under their belt with the company – and growth in the average tenure has turned into more contract wins.
And while the international segment performed relatively very poorly as of late, with OUS FORE-SIGHT revenue dropping 35% from 2H ’16 to 2H ’17 and was down 22% for the full year 2017, it showed signs of life in Q1. With what management cited as demand in Europe and Japan, international FORE-SIGHT revenue jumped 31% (+24% qoq) to $833k in Q1 ’18 – which is the highest level of international FORE-SIGHT revenue since Q3 ’16. Sensor sales were also the catalyst to the international sales growth – up more than 40% yoy.
And while we think the international segment will remain somewhat variable, the domestic business is where CASM has hands-on involvement and success on their initiatives is showing up in sensor sales – an important metric given that it’s a proxy for utilization and these consumables represent more margin than does system shipments. Lack of sensors sales growth had been a concern of ours given that it was constraining total revenue growth (sensors account for ~90% of total FORE-SIGHT revenue) and because of the implication that utilization may have stalled. For context, total sensor sales were $4.05M (including $3.47M in U.S.) in Q2 ’16 and just $3.90M (including $3.45M in U.S.) in Q3 ’17 (with little interim variability) – over the same period the total installed base grew 22% (1,871 – 2,279). The U.S. installed base accounts approximately 55% of the total and also grew 22% over that period.
But, recent performance has been much more encouraging with FORE-SIGHT sensors revenue posting strong growth in Q4 ‘17 (+7% yoy, +11% qoq) and again in Q1 ’18 (+18% yoy, +10% qoq). As we noted in our Q4 ’17 update (March 26), we think the recent strength may be a harbinger of even stronger sensors growth (and potentially higher utilization) to come as management continues to guide for U.S. sensors sales to grow in the mid-teen percentages in 2018. And, following the strong international sensors revenue in Q1, management revised previous issued international sensors revenue growth guidance from a low double-digit % decline (prior) to high single-digit % growth (current).
Total revenue increased 20% yoy and was up 6% from Q4 ‘17 to $5.5M in Q1 ’18. U.S. FORE-SIGHT revenue was $4.5M, up 21% yoy and 4% sequentially and driven by growth of the monitor installed base (72 units shipped in Q1), higher average per-unit monitor pricing and growth of sensor sales. International FORE-SIGHT revenue was $833k, up 31% yoy and up 24% sequentially. Growth in international sales reflects 39 monitor shipments (vs 31 in Q1 ’17 and 30 in Q4 ’17) and strong sensor sales, partially offset by lower average per-monitor pricing.
Total FORE-SIGHT revenue increased 23% yoy and 6% sequentially to $5.3M. FORE-SIGHT sensors revenue, which accounted for 86% of total revenue (and 89% of tissue oximetry revenue), increased 18% yoy and 10% sequentially to $4.7M (vs. our $4.4M estimate). U.S. sensors revenue, which accounted for ~85% of total sensors revenue, increased 15% yoy and 6% sequentially. The pediatric channel was a significant contributor to U.S. sensors sales – accounting for approximately 35% of the growth in Q1. Meanwhile, international sensor sales increased 41% yoy and 31% sequentially. Per installed (monitor) unit, CASM sold approximately $3.0k worth of sensors in the U.S. and $600 worth internationally – a blended average of approximately $1.89k per unit. These compare to full-year 2017 averages of $2.9k (U.S.), $500 (int’l) and $1.81k blended. Growth (or even flattening) in this metric is particularly encouraging given that, intuitively, while we would expect aggregate sensors revenue to grow with growth in the installed base, sensors sales per unit would likely incrementally taper down over time.
Monitor (and related accessories) revenue grew 82% yoy and fell 15% sequentially to ~$833k. There were 111 monitors shipped in Q1, including 72 in the U.S. – the former is a new record, the latter is second only to Q4 ’17 (80 shipped in the U.S.). U.S. monitor revenue jumped 153% yoy – which is attributable to an increase in monitor placements but also due to what looks to be an almost 33% increase in average revenue per unit – this benefit appears to be explained by more units being sold versus placed. Management noted on the call that 40% of the monitors shipped in the U.S. in Q1 were sold, versus just 17% in Q1 ’17.
The U.S. and international installed bases stand at to 1,345 and 1,155, respectively. For context of the revived strength of CASM’s U.S. market, an average of 79 monitors per quarter were shipped in the U.S. over the last two quarters – more than double the average during the first three quarters of 2017. This, again, reflects benefits of the sales force and strategic changes.
Gross margin widened to 56.7% in Q1 – which compares to 54.6% in Q1 ’17 and 54.7% for the full year 2017. Margin improvement is coming from several areas including cost-savings initiatives, the recent introduction of lower cost sensors, more monitors sold versus placed and growth in sensors sales. The expectation is that GM will continue to widen – with Q2 seeing more benefits from the low-cost sensors and then Q3, per management’s comments, seeing the full benefit. Greater economies of scale from higher production volumes should continue to benefit GM. And, certainly, if a higher % of monitors are sold and sensors sales continue to trend upward that will also contribute. Management expects to see gross margins widen by as much as 400 basis points during 2018.
OpEx were just $4.2M in Q1, or 78% of total revenue – which compares to $4.4M (93% of total revenue) in Q1 ‘17 and $16.7M (89% of total revenue) for the full year 2017. Particularly encouraging is that OpEx as a percentage of revenue (analogous to operating leverage) has shown consistent sequential improvement over the last five quarters. OpEx has remained roughly flat since Q1 ’17 while revenue has grown 20% and gross margin widened 210 basis points. While we think sales and marketing expenditures will tick up as a result of the recent increase in the size of the sales force and higher revenues, we think SG&A as a percentage of revenue will continue to fall (although there may be some short-term volatility) as management has stressed that they are determined to improve the bottom-line and cash burn. Coupled with expectations of revenue growth and margin improvement, management has guided for reaching a level of positive EBITDA by Q4 2018 and positive cash flow by mid-2019.
In terms of cash…..cash used in operating activities was just $85k in Q1 ‘18 ($904k, ex-changes in working capital), compared to $776k in Q1 ’17 ($1.3M, ex-changes in working capital). PP&E-related CapEx, including capitalized monitors, consumed an additional $213k in Q1 ’18 and $186k in Q1 ’17. CASM exited Q1 with $4.8M in cash on the balance sheet and in May, refinanced their bank facilities (into $10M term, $2M currently untapped revolver) which increased their total borrowing capacity by $2M and slashed their interest rate 230 basis points. With the expectation that cash burn will decrease and CASM will reach EBITDA-positive in (or near) Q4 2018, their current cash balance (and revolver availability) should be sufficient to fund operations for the foreseeable future.
Our price target has moved from $3.50/share to $4.00/share. See below for free access to our updated report on CASM.
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