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Provider of portable blood analysis systems for human and veterinary patient-care, Abaxis Inc. (ABAX - Analyst Report) reported third quarter fiscal 2013 earnings per share (EPS) of 22 cents, a beat of 10% over the Zacks Consensus Estimate. The result also sailed past the year-ago EPS by 69.2%.

Quarter in Detail

Revenues soared 32% year over year to $49.8 million, surpassing the Zacks Consensus Estimate of $46 million in the quarter. On a geographic basis, revenues from North America (accounting for 84% of total revenues) were up 31% to $41.8 million while revenues from the international market (representing 16%) climbed 33% to $8 million due to robust growth across Europe and Asia.

Within the customer group, Veterinary market revenues witnessed a significant upside of 40% on a year-over-year basis to $39.9 million, while sales in the Medical market increased 10% year over year growth to roughly $9 million. Excluding sales to the U.S. government, worldwide Medical sales escalated 15% year over year to $8.6 million. However, sales from the Other customer group declined 22.3% year over year to approximately $1 million.

Total consumable sales increased 22% from the prior-year quarter while instrumental sales increased 54% on a year-over-year basis. Sales of medical and veterinary reagent discs surged 31% to $26.7 million in the third quarter. Total medical and veterinary instrument unit sales improved 52% to 1,818 units. Moreover, service revenue from Abaxis Veterinary Reference Laboratories (AVRL) maintained its growth momentum and recorded sales of $1.4 million, up 28% on a sequential basis.

With third quarter gross profit declining 27.3% year over year to $26.1 million, gross margin also contracted 170 basis points (bps) to 52.4%. The decline was attributed to the negative margin on AVRL and unfavorable product mix. The company recorded higher research and development expenses (up 46.2% to $3.8 million) and sales and marketing (up 25.3% to $12.4 million) expenditure. However, general and administrative expenses declined (down 31.3% to $2.2 million) on a year-over-year basis due to absence of legal expenses following Cepheid (CPHD - Analyst Report) lawsuit settlement. Despite the increase in operating expenses (up 16.5% to $18.4 million), income from operations surged 67.4% to $7.7 million, leading to a significant 330 bps expansion in operating margin to 15.5%.

Abaxis exited the third quarter with cash and cash equivalents and short-term investments of roughly $70 million, up from $67.5 million at the end of fiscal 2012.

Our Take

Abaxis posted a strong quarter with several takeaways. The company’s robust growth in the international market amidst the macroeconomic uncertainty is encouraging. The distribution relationship with MWI Veterinary Supply (MWIV - Analyst Report) and Abbott Point of Care should expand its market presence in North America as well as Europe.

We believe that Abaxis serves a niche market and is well poised to maintain its growth momentum. However, we are wary about the company’s increasing reliance on distributors to boost sales and the competitive landscape with larger players.

Abaxis carries a Zacks Rank #3 (Hold). While we have a neutral stance on the stock, medical stock like ResMed (RMD - Analyst Report), carrying a Zacks Rank #1 (Strong Buy) is expected to do well.

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