FY 2010 Financial Results - Analyst Blog

Brian Marckx, CFA

FY 2010 Financial Results…

Revenue
Zynex Inc reported financial results for the twelve months ending December 31, 2010 on March 10, 2011. Fourth quarter revenue of $6.81 million was 5% below our $7.17 million estimate and was up 25.8% and 2.3% from the fourth quarter 2009 and the third quarter 2010 (i.e. – sequentially), respectively. The $6.81 million in total revenue consisted of $1.89 million (-30.8% y-o-y) in rental revenue and $4.92 million (+83.8% y-o-y) in product sales revenue.

Product revenue, broken out between sales of equipment and sales of consumables, came in about 8% lower than our estimate while rental revenue beat our number by 2%.

	Actual Q4 2009	Actual Q4 2010	Y-o-Y Change	Zacks Est. Q4 2010	Actual +/- Zacks est.
Consumables	$2,096	$2,556	+22%	$2,370	+8%
Equiptment Sales	$578	$2,360	+308%	$2,952	-20%
Total Product Sales	$2,674	$4,916	+84%	$5,322	-8%
Rental Revenue	$2,737	$1,894	-31%	$1,849	+2%
	$5,411	$6,810	+26%	$7,171	-5%

For the full year 2010 revenue came in at $24.09 million, an increase of 29% from fiscal 2009. Rental revenue fell 19% to $8.53 million while product sales increased 91% to $15.55 million.

The consumables portion of product revenue posted 45% growth for the full year while equipment sales were up by almost 250%.

	Actual FY 2009	Actual FY 2010	Y-o-Y Change
Consumables	$6,291	$9,101	+45%
Equiptment Sales	$1,856	$6,451	+248%
Total Product Sales	$8,147	$15,552	+91%
Rental Revenue	$10,534	$8,532	-19%
	$18,681	$24,084	+29%

EPS
EPS came in at $0.00 in Q4 2010 on net income of $19k, down from $0.01 and $264k in Q4 2009 and were shy of our $0.02 and $641k estimate. The difference compared to our estimate was from a combination of the lower than estimated total revenue number, SG&A expense at 65.8% of sales (versus 61.5% E) and an effective income tax rate of 97%, all partially offset by a stronger than estimated gross margin (77.1% A vs. 76.4% E).

Management noted in the earnings press release that income tax penalties and interest was the cause of the spike in the tax rate in the quarter. The company mentioned that they are working to reduce any further penalties and “does not expect to incur tax penalties and interest at these amounts in the future.”

For the full year 2010 EPS was $0.01 on net income of $350k, compared to $0.08 and $2,382k for fiscal 2009. The 29% revenue growth in 2010 was offset by higher lease facility expense (related to the new headquarters building), headcount additions (mostly related to sales), a $200k one-time charge taken in Q3 2010 related to the CFO transition and drop in GM from 79.7% in 2009 to 78.4% in 2010 (mostly related to the slide in rental revenue).

Cash
Zynex exited 2010 with $602k in cash and equivalents roughly flat from the end of Q3 2010 and down slightly from $863k at the end of 2009. Cash used in operations was $665k in 2010 but, stripping out changes in working capital, operating cash flow was positive $2,747k.

BUSINESS UPDATE / GUIDANCE

Following the earnings press release management held a webcast and in it provided a brief business update.

• New Business Units: While no additional details were provided regarding the products under development in the two new business units (Zynex Monitoring Solutions and Zynex Medical), management mentioned that they have been pleased with progress – and specifically with their blood volume monitoring device. Depending on progress including the to-be-planned clinical trials and eventual FDA marketing clearance, management hopes to see some contribution from new products under these businesses beginning sometime in 2012. As we noted in our initial report on Zynex, our model does not include any contribution from products from these new business units.

• New Electrotherapy Product: Zynex’s newest addition to its electrotherapy product line-up, called NexWave, is expected to launch later in 2011.

• Shareholder Lawsuit / Anthem: Management noted that they are still waiting for an answer from the courts regarding their motion to dismiss the shareholder lawsuit. Zynex filed the motion in May 2010. Zynex did not have any updates relative to the $1.3 million refund claim made by Anthem Blue Cross Blue Shield in April 2010. As a reminder, Zynex believes they have $1.5 million in “rebillings” that were not properly reimbursed by Anthem, more than offsetting the insurers claim.

• 2011 Guidance: Management expects revenue of $30 million – $32 million and EPS between $0.08 – $0.11. Management did not mention whether this guidance includes any provision for any potential future income tax penalties.

OUR 2011 OUTLOOK

While our initial investment thesis on Zynex remains intact, we have made some revisions to our model following the Q4 2010 results based on some revenue trends that may have emerged. In order to ask questions during the brief Q&A portion of Zynex’s earnings webcast conference call you had to type your questions into the webcast interface. The cumbersomeness of the process meant we were left without answers to a number of our “outlook”-themed questions. Notwithstanding the difficulty, we commend management for holding the call and for continuing to provide some financial guidance.

Revenue
We look for Zynex to post revenue of $29.96 million in revenue in 2011, compared to our pre-Q4 2010 estimate of $31.10 million. We now look for product sales revenue of $22.7 million, representing growth of about 76%. This is revised down from $23.7 million as we have trimmed growth of equipment sales (to $11.0MM or +70% from $13.3MM or +89%). At the same time, we have upwardly revised our consumables revenue estimate from $10.4MM to $11.8MM (+16% to +29%). We have also revised our rental revenue estimate from $7.4MM (y-o-y decrease of 12%) to $7.2MM (y-o-y decrease of 15%).

EPS
We now look for EPS of $0.09 in 2011, revised down from $0.10 prior to the FY2010 results. Our EPS estimate assumes Zynex does not incur any significant income tax penalties during the year.

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