Q2 2011 Looks Good - Analyst Blog

Brian Marckx, CFA

Q2 2011 Looks Good

Electromed Inc. (ELMD) reported financial results for the second quarter on February 10, 2011. Results, both on revenue and EPS, were generally in-line but slightly ahead of our estimates. The company’s press release and earnings call also did not provide any surprises. As a result, our outlook, both in the near and longer term remains largely unchanged and while we have made some slight tweaks to our model, we are maintaining our previous recommendation and price target. We continue to like the company’s fundamentals and are encouraged by the consistent and strong revenue growth, especially since the August 2010 IPO.

Revenue
Q2 revenue of $4.69 million was up 45.4% y-o-y and consisted of $4.25 million (+39.5% y-o-y) from the Homecare segment, $199k (+172.6% y-o-y) from International and $241k (+127.4% y-o-y) from Government/Institutional.

Management did not go into detail regarding the source (i.e. – particular indications, market share gains, price increases, etc.) of the revenue growth, although they did note they continue to increase the size of their sales force (currently at 23, up from 19 at Q1 2011). We feel comfortable with our initial thesis that the vast majority of near-term revenue growth will come (and has recently come from) from deeper penetration of already well established (CF, bronchiectasis) indications and be facilitated by incremental expansion of the company’s sales force over the next 12 – 18 months.

	Q2 2010	Actual Q2 2011	Y-o-Y Change	Zacks Est. Q2 2011	Actual +/- Zacks Est.
Homecare	$3,044.0	$4,246.0	39.5%	$4,221.0	0.6%
International	$73.0	$199.0	172.6%	$110.0	44.7%
Gov’t / Instit.	$106.0	$241.0	127.4%	$215.0	10.8%
Total	$3,223.0	$4,686.0	45.4%	$4,546.0	3.0%

Total revenue in the quarter came in 3.0% better than our estimate, driven mostly by significantly better than expected Government/Institutional sales. Homecare segment sales, which account for over 90% of total revenue, were almost dead-on where we had it modeled.

While revenue from both the Gov’t/Institutional and International segments beat our respective estimates in the quarter, as we detailed in our initiation report (December 14, 2010) on Electromed, we expected sales from both segments to remain somewhat volatile from quarter to quarter. And as a result accurately forecasting short-term sales for both these segments will likely continue to be somewhat challenging. This will have a relatively insignificant overall impact on our model, however, as combined these segments account for only about 10% of total revenue.

Gross Margin
GM came in at 75.6% compared to our 72.6% estimate. While an upside surprise, again we would not read much into it and had expected to GM to be somewhat variable on a short-term basis. Gross margin moves around from quarter to quarter depending on average reimbursement rates (not all insurance reimburses at the same rate) and management noted in the earnings release and on the call that this was the reason behind the relatively rich GM in the quarter.

Operating Expenses
SG&A was $2.78 million (59.3% of sales) compared to our estimate of $2.64 million (58% of sales), the difference relatively minor. R&D was $219k, just about right on with our $223k estimate. We continue to expect operating expenses as a percent of sales to be higher in fiscal 2011 compared to the prior year as a result of head count additions and marketing initiatives. We think Electromed can begin to squeeze leverage from these “investments” during 2012 as newly hired sales reps become more seasoned and productive.

Net Income / EPS
Net income of $292k was 24% better than our $236k estimate. EPS came in at $0.04, $0.01 ahead of our $0.03 estimate.

Cash
Electromed exited the quarter with $5.16 million in cash and equivalents, compared to $6.02 million at the end of Q1 2011. Cash used in operating activities was $175k in the most recent quarter but, stripping out an $801k increase in A/R, operating cash flow was positive $626k. Relatively long collection times which are typical of the industry can cause intermittent spikes in A/R.

Electromed also used $452k in cash (investing activities) during Q2 related to settlement of the trademark lawsuit brought against the company by Hill-Rom. On October 1, 2010 Electromed announced the lawsuit had been settled – the terms of which were not disclosed.

On the Q2 call management noted that they extended the maturity date of their bank revolver to November 30, 2011 (initial due date was November 30, 2010).

Valuation and Recommendation
We are maintaining our Hold recommendation and $4.00 per share ear-term price target for Electromed. We use Hill-Rom’s long-term PE/G of 1.32 as a comp to calculate our value for Electromed. We model Electromed to post EPS of $0.35 in 2014, implying four-year CAGR of 23.3%. Backing this growth rate into the 1.32 PE/G results in a near-term P/E multiple of 30.8x. We look for Electromed to earn $0.13 per share in fiscal 2011 – which values the company at exactly $4.00 per share.

For a free copy of the full research report, please email scr@zacks.com with ELMD as the subject.

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