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Abaxis Inc. (ABAX - Analyst Report) reported first-quarter fiscal 2014 earnings per share (EPS) of 14 cents, a miss of 9 cents over the Zacks Consensus Estimate. However, the result was a cent higher than the year-ago EPS.

Revenues improved 3% year over year to $43.2 million, trailing the Zacks Consensus Estimate of $49 million in the quarter.

Quarter in Detail

On a geographic basis, revenues from North America (accounting for 80% of total revenues) rose 4.5% to $34.7 million, while revenues from the international market (representing 20%) decreased 3.8% to $8.5 million. However, excluding the impact of the CRO deal that was closed in the first quarter of fiscal 2013, overseas revenues improved 17% year over year.

Within the customer group, Veterinary market revenues grew 12% year over year to $36.4 million, while sales in the Medical market declined 29% year over year to roughly $6 million. Excluding sales to the U.S. government, worldwide Medical sales decreased 27% year over year to $5.7 million.

The overall disappointing performance in the Medical business during the quarter was primarily due to decline in Piccolo instrument sales and the transition from a direct sales model to a distribution model with Abbott Point of Care under Abbott Laboratories (ABT - Analyst Report). Sales from the Other customer group declined 22% year over year to approximately $0.8 million.

Total consumable sales increased 4% from the prior-year quarter, while instrumental sales decreased 12% on a year-over-year basis. Sales of medical and veterinary reagent discs declined 3% to $22.8 million in the quarter. Moreover, service revenues from Abaxis Veterinary Reference Laboratories (AVRL) maintained its growth momentum and recorded significant upside of 157% year over year to $2.2 million.

With an 8.6% downfall in the first-quarter gross profit to $20.9 million, gross margin contracted a massive 600 basis points (bps) to 48.4%. The decline was attributed to lower margin of medical products sold to Abbott, higher sales of other low-margin consumables and instruments under the Vet market and a tough comparable quarter.

The company recorded higher research and development expenses (up 7% to $3.2 million) but lower sales and marketing expenditure (down 14.8% to $10.0 million) and general and administrative expenses (down 8% to $3.1 million) on a year-over-year basis. Despite the lower operating expenses (down 10% to $16.3 million), operating margin contracted 70 bps to $10.7% in the quarter.

Abaxis exited the quarter with cash and cash equivalents and short-term investments of roughly $85.5 million, up 9.3% on a sequential basis.

Our Take

Abaxis reported a disappointing quarter to begin fiscal 2014 on a dismal note. Barring growth in the veterinary market, the overall quarterly performance was weak. Although the distribution relationship with MWI Veterinary Supply (MWIV - Analyst Report) is yielding positive outcomes, the same with Abbott in the medical market is yet to pay off. The considerable margin downfall was another cause of concern. Furthermore, the sluggish international performance remains an overhang.

Nonetheless, low worldwide penetration provides further scope for substantial growth in the niche industry which Abaxis serves. The company is well poised to gain positive momentum on the heels of strategic initiatives.

The stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for Abaxis, Alere Inc. (ALR - Snapshot Report), carrying a Zacks Rank #2 (Buy) is worth considering.

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