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CONX: Revenue Hits, Soft GM Impacts Income

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Q3 2012 Financial Results: Revenue Hits Our Number But Soft Gross Margin Impacts Income

Brian Marckx, CFA

Corgenix Medical reported financial results for the third fiscal quarter ending March 31, 2012 on May 14th.  While revenue of $2.7 million was a quarterly record (+49% y-o-y) and just about dead-on with our $2.8 million estimate, net income (-$190k A vs. $188k E) came in lighter than we expected due to a relatively weak gross margin.  Management again adjusted full-year revenue guidance downward, now looking for $9.1 million, revised down from $9.7 million three months ago, and $10.1 million issued with Q1 results.  In contrast to earlier expectations, international sales have yet to return to growth which is the major cause of the downward revision to revenue guidance over the last few quarters.  Management also noted that revenue from contract manufacturing, which can be highly irregular from q-to-q, is also expected to come in lower in Q4 than had been previously anticipated.    

Despite the disappointing international revenue and downward revenue guidance for the rest of the current year, Corgenix has seen very strong growth in domestic sales and still expects to show double-digit revenue growth for fiscal 2012.  The company also continues to make progress with development of new products for both the international and U.S. markets, some of which should reach commercialization in the near-term.  Recent and near-term new product launches remain the major catalyst to driving our modeled revenue growth over the next several years.  While we have made some downward revisions to our revenue estimates, the majority relates to the near-years (fiscal 2012, 2013) reflecting the drawn-out turn-around in international revenue and some delay with certain product launches.  The impact to our out-years estimates is much more modest.    

Following Q3 results we have adjusted our estimated current fiscal year (2012) revenue down from $9.7 million to $9.1 million.  Our out-year (2015) revenue has moved from $14.4 million to $14.0 million.  We are maintaining our Outperform rating on the stock and our $0.50/share price target.     

Q3 revenue was $2.72 million, up 49% y-o-y and in-line with our $2.78 million estimate.  North America sales were $2.46 million, up 59% y-o-y and dead-on with our $2.44 million estimate.  International sales were $253k, down 8% y-o-y and 21% below our $320k estimate.  We have adjusted our Q4 international sales estimate downward as traction in this business is clearly taking longer than management had previously anticipated.  We continue to model international sales to return to growth in fiscal 2013, fueled by new product launches.  We continue to believe that the automated version of AspirinWorks as well as other new product introductions, including those coming out of the ELITech joint product development agreement represent potentially significant growth opportunities for Corgenix's international business over the long-term.    

Meanwhile, the domestic business has been very strong with most of the recent growth coming from AspirinWorks (ELISA format), contract manufacturing and contract R&D which has more than offset relative softness in some of the older product lines, namely ELISA phospholipid and coagulation.  Contract manufacturing ($582k, +640%) in particular was a major catalyst to Q3 revenue growth as was AspirinWorks ($243k) which has seen sequential revenue growth every quarter since Q4 2011 and was up 167% y-o-y in Q3 2012.  Key to stable, long-term revenue growth in the domestic business is new product introductions as revenue from contract manufacturing and contract R&D, which have accounted for approximately 80% of the y-o-y revenue growth through the first nine months of fiscal 2012, can be highly variable.  

Net Income / EPS
Q3 net income and EPS came in at ($190k) and ($0.00), compared to our $188k and $0.00 estimates.  Operating expenses were largely in-line with our numbers with almost all of the miss on net income coming from lower than modeled gross margin (37.3% A vs. 46.9% E).  At least some of the relative weakness in GM (which had averaged ~ 47% in the first half of fiscal 2012) was a result of higher contract R&D and contract manufacturing revenue in the quarter, which are lower-profit segments.   
Corgenix exited Q3 with $1.0 million in cash and equivalents, up from $812k at 12/31/2011.  The sequential increase in cash came from 245k inflow from operations, $110k used in investing activities and net inflow of $66k in financing activities.  Excluding changes in working capital, operating cash flow was slightly positive for the nine months ending 3/12/2012.  Debt remained relatively insignificant at quarter end.      

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