Analyst Note
BMRA: Revenue Dips But Positive Outlook Intact
04/16/2013
By Brian Marckx, CFA
Q3 Results: Revenue Dips On Soft Sales To Asia But Positive Outlook Remains Intact…
Biomerica Inc. (OTC BB:BMRA) filed their 10-Q for the fiscal 2013 third quarter ending February 28, 2013 on April 15th. Revenue fell 6.5% yoy to $1.42 million and was about 20% below our $1.77 million estimate. Over 70% of the miss relative to our number was due to relatively soft sales in Asia with U.S. sales also coming in lower than our estimate and accounting for almost all of the remaining 30% difference. As sales to Asia have accounted for 40% or more of BMRA's total revenue and have been the major catalyst to the company's sales growth over the better part of the last two years, the relative weakness in Asian sales in Q3 ended up breaking the company's streak of sequential revenue growth, which had stood at six straight quarters. We do not expect this revenue contraction to be extended, however, and continue to model double-digit revenue growth for the full fiscal year 2013, including 40% growth from sales to Asia.
In the earnings release management acknowledged that Q3 revenue was a disappointment but also noted that they remain positive about their outlook. Just two weeks prior, the company announced that they entered into a distribution agreement with a new distributor in China and terminated the agreement with their former China distributor. The new distribution agreement provides for greater minimum sales volumes than the prior agreement. This also presumably suggests that the relatively soft sales in Asia in Q3 is not indicative of a long-term trend.
Gross margin of 31.4% was below our 41.1% estimate, which we attribute mostly to the lower revenue number. Operating expenses of $509k were largely in-line with our $472k estimate.
Net income and EPS were ($36)k and ($0.01) compared to our $240k and $0.03 estimates. The difference due to the lower revenue and gross margin compared to our estimates.
Cash
Q3 cash from operating activities was an inflow of $1.1 million which benefitted from a $996k reduction in accounts receivable. Despite the (slightly) negative net income in Q3 and even excluding the benefit from changes in working capital, cash from operating activities still managed an inflow of $23k. For the nine months ending 2/28/2013, cash flow from operations and free cash flow was $1.5 million and $1.3 million, respectively. BMRA exited Q3 with a very healthy cash balance of $2.3 million (up from $1.2 million at the end of Q2) and with no debt.
Maintaining Outlook / Recommendation
We have made no material changes to our model following Q3 results and are maintaining our outlook, our Outperform recommendation and our $2.70/share price target. Our full BMRA report which includes our financial model and valuation methodology is available here.
A copy of the full research report can be downloaded here >> Biomerica Report
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