Brian Marckx, CFA
On December 15th Angeion Corp (ANGN) reported financial results for the fourth quarter and full year ending October 31, 2010. For the third consecutive quarter revenue and EPS both came in better than our forecast. While maybe still a little too early to make any concrete conclusions, it appears that investments in sales staff, marketing and product development earlier in the year are starting to pay some very significant dividends.
Revenue
For the full year 2010 total revenue was $29.041 million, up 14% from 2009. The majority of the growth came from Q3 (+14.2%) and Q4. Equipment and supplies revenue increased by 15.1%, with services revenue up by 6.4%.
Q4 revenue of $8.452 million increased by 27.9% y-o-y and consisted of $7.564 million (up 30.6%) in equipment and supplies and $888k (up 8.7%) in services revenue. Domestic sales accounted for all of this growth, increasing 39%. International sales were $1.414 million, down 9.3% and accounted for 16.7% of total revenue, compared to 23.6% of total sales in Q4 2009.
Total revenue in the quarter came in 15% ($1.113 million) ahead of our $7.339 million estimate. Equipment and supplies revenue topped our estimate by $1.171 million ($7.564 million actual vs. $6.393 estimated) while services revenue actually came in slightly lower than our figure ($888k actual vs. $946k estimated). Angeion’s management attributed the especially robust domestic revenue growth to new marketing programs, increased commissions paid to their sales force and a slight improvement in hospital capital expenditures. Also noted were continued strong sales of the Ultima product line as well as pricey plethysmographs. International sales, while benefitting from strong sales in Europe, fell on both a y-o-y and sequential basis due to some softness in Latin America and the Far East. Management sounded optimistic on the call that overseas revenue would again rebound in the coming year.
Gross Margin
Gross margin came in at 56.1% in Q4 with product margin at 53.4% and service margin at 79.8%. For the third straight quarter service margin has trailed the historical norm of about 85% – 88%. Management noted earlier in the year that retrofitting of certain products would cause service margin to contract, with the expectation of it returning to the mid-to-high 80% range within about 6 – 9 months. Despite the relatively weak service margin, the 56.1% overall gross margin is the highest in Angeion’s recent history, save for the 57.8% in Q3 of this year. Manufacturing efficiencies and economies of scale from higher production volumes could continue to expand equipment and supplies margins going into 2011. We also expect service margin to gradually come back to about 85%. We model full-year 2011 gross margin of 56.7% but note that this could end up being conservative as we have included little incremental improvement in the equipment margin from that posted in the most recent quarter. With equipment and supplies accounting for approximately 88% of total revenue, even a slight improvement in the equipment margin can have a relatively dramatic effect on earnings.
Operating Expenses
Operating expenses were $4.215 million in the quarter. This is equal to 50% of revenue compared to the 52% that we had modeled. $118k worth of R&D was capitalized in the quarter. As noted in Q3, Angeion began capitalizing some expenses related to the development of certain software that will be used on the MedGraphics products.
Selling and marketing expenses of $2.257 million equaled 26.7% of total revenue in the fourth quarter – this is down considerably y-o-y (28.2%) as well as sequentially (27.6%), despite Angeion sweetening some sales commission rates in the quarter. Selling and marketing expenses have fallen every quarter throughout 2010. For 2011 we have modeled only a slight improvement in selling and marketing expense as a percent of revenue (from 27.8% in 2010 to 27.5% in 2011). This, again, may prove to be conservative.
General and administrative expenses were $1.219 million in Q4, above our $950k estimate mostly as a result of a $205k one-time charge related to the 13D filing in August for a proposed shareholder meeting. Important is that Angeion is seeing some very significant leverage on the G&A line – and we expect this to be a major catalyst in driving more revenue to the bottom line in the years to come. Operating margin came in at 5.0% in the quarter, pro-forma for the $205k charge and operating margin was 7.5%. This 7.5% operating margin is the highest since Q3 2006 when Angeion posted an 11.0% operating margin.
EPS
EPS came in at $0.10 and ($0.20) for Q4 and the full year, compared to ($0.14) and ($0.39) for the prior year periods. Q4 2010 EPS came in well ahead of our $0.03 estimate due to significantly higher than forecast revenue, 100 basis point beat on gross margin and operating expenses 200 basis points lower as a percent of revenue.
Pro forma for one-time charges ($245k in Q3 and $205k in Q4) in G&A expense, Q4 and full year 2010 EPS were about $0.15 and ($0.10).
Cash
Angeion exited the fiscal year with $10.4 million in cash and investments roughly flat sequentially and down slightly from the $11.2 million at the end of fiscal 2009. Operating cash flow was $1.695 million for the full year 2010 and was $1.609 million in Q4. Ex-changes in working capital these figures are $625k and $717k. The balance sheet remains debt free. Angeion bought back about $1.7 million worth of stock in the quarter (~401k shares).
2011 Forecast
We have dramatically raised our 2011 EPS estimate mostly as a result of margins widening farther and faster than we had previously anticipated. Our 2011 EPS estimate of $0.28 (up from $0.08 prior to Q4 2010) reflects our expectations that Angeion is able to gain some meaningful leverage from G&A expense, gross margin continues to improve and revenues grow 12.8% to $32.768 million.
As management does not provide any financial guidance it is difficult to determine whether the revenue growth posted in Q4 of this year may be an indication of what to expect for 2011. Similarly the recent margin improvement may not continue – although we think a trend has emerged and believe this will continue throughout 2011. Our estimate for revenue growth is based on the expectation that Angeion’s domestic business benefits from the head count additions made during 2010, market share gains, increased hospital capex and some pricing increases. And while international revenue was somewhat soft in Q4, we think this may rebound throughout 2011 with an overall improvement in global economies.
For Q1 2011 we model revenue of $8.253 million (+24.8%) and EPS of $0.06.
We also note that our model incorporates only a modest amount of additional share repurchasing activity during the coming year and does not include any contribution from a potential acquisition. With the recent board and management changes the big cash balance may now be used more aggressively to accelerate EPS growth. This could add some upside to our EPS estimates.
Valuation
We have changed our valuation methodology to what we believe is more appropriate, based on the fact that we believe Angeion will now continue to generate positive net income. We use the industry average long-term PE/G ratio of 0.88x. Applying this to our 3-year expected annual EPS growth rate of 29% and estimated 2011 EPS of $0.28 for Angeion, results in a current valuation of approximately $7.00 per share.
We are maintaining our Outperform rating on Angeion and are raising our price target from $6.00 to $7.00 per share
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