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Abaxis, Inc. (ABAX - Free Report) reported a disappointing third-quarter fiscal 2014 with earnings per share of 14 cents missing both the Zacks Consensus Estimate and the year-ago earnings of 22 cents by a massive 31.8%.

Total Revenue

Revenues were down 18% to $40.8 million and also lagged the Zacks Consensus Estimate of $49 million. It generated revenues of $49.8 million in the prior-year quarter.

Segment in Detail

On a geographic-region basis, revenues from North America (accounting for 77.9% of total revenues) were down 24% to $31.8 million, while revenues from the international market (representing the rest) increased 13% to $9.0 million. Sales in Europe grew 16% to $7.2 million while the same in Pacific Rimincreased by 2% year over year.

Abaxis operates in three main segments, namely Veterinary, Medical and Other. In the reported quarter, vet sales comprised 79% of total sales, 19% were medical sales and 2% were from Other.

Veterinary market revenues shrunk 19.1% year over year to $32.2 million, while sales in the Medical market declined 12.5% year over year to roughly $7.9 million. Adjusting for prior-year quarter’s stocking order from Abbott Laboratories (ABT), worldwide medical sales were up 18%.

Notably, during third-quarter fiscal 2013, Abaxis had two stocking orders from partners. MWI Vet (MWIV) ordered about $6 million worth of Abaxis products and prepared for a Jan 2013 launch. Abbott ordered about $2.3 million in Abaxis medical products for a launch in the same month. While Abaxis recorded these sales, none of these products were sold by the partners to end-users in that quarter.

Operational Updates

Based on a disappointing top line, the fiscal third-quarter gross profit slashed 25.8% to $19.3 million. In terms of basis points (bps), it contracted a massive 499 bps to 47.3%.

Research and development expenses were $3.6 million, down 5.4%. Selling and Marketing Expenses amounted to $8.7 million, down 29.6%. General and administrative expenses, however, increased 8.9% year over year to $2.4 million. Operating margin during the quarter contracted 411 bps to 11.3%.

Financial Update

Abaxis exited the quarter with cash, cash equivalents and short- and long-term investments of $101.8 million versus $78.2 million as on Mar 31, 2013.

 Our Take

Abaxis continues to fall short of expectations, as it has missed the previous three quarterly estimates as well. According to the company, this weak performance reflects Abaxis’ inability to make a smooth transition from a direct sales approach to a largely distributor model. This resulted in imbalances in field inventory and disruptions in field sales organization. Subsequently, all these had a cascading effect causing inefficiencies at the factory, leading to higher factory cost and lower gross margins.

The consistent downfall in margin is a serious cause of concern as it might have an impact on the bottom-line performance of the company. Moreover, the company’s dependence on the distributors to sell its products has to be tactfully managed as smooth long-term relationships with the vendors ultimately ensure healthy business for the company. Low worldwide penetration rates and a tough competitive market further lower the confidence of the investors on the future growth prospects of the company.

Currently, Abaxis carries a Zacks Rank #5 (Strong Sell). Some better-placed stocks that are worth a look are Baxter International Inc. (BAX - Free Report) , Covidien plc and Stryker Corp. (SYK - Free Report) , with a Zacks Rank #2 (Buy).

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