Brian Marckx, CFA

We initiated coverage of Zynex in February of this year.  The shares are up just over 50% since we started covering the company but we think there remains some upside in the stock.  We continue to value Zynex at $1.40 per share.  See below for access to a free copy of our updated report on the company.    

Q1 2011 Financial Results

Revenue

Zynex (ZYXI) reported financial results for the three month period ending March 31, 2011 on May 5, 2011.  First quarter revenue of $6.63 million was 5% below our $7.01 million estimate and was up 36% from the first quarter 2010.  Sales fell about 3% sequentially from Q4 2010 but, as management explained on the call, Q1 equipment revenue is typically soft as a result of insurance deductibles being reset at year end and not yet met early in the new year. 

The $6.63 million in total revenue consisted of $2.49 million (+8% y-o-y) in rental revenue and $4.19 million (+148% y-o-y) in product sales.  Rental revenue handily beat our $1.83 million estimate while product revenue came in significantly lower than our $5.18 million number.  We clearly underestimated the insurance-related seasonality in the industry.    

Gross Margin

Gross margin came in at 78.2%, better than our 76% estimate.  The better gross margin was due to a combination of a higher than modeled percentage of revenue coming from rentals (which carry a higher margin than product sales) along with product margins coming in very strong (73.5% versus 71.6% estimate).

Net Income / EPS

Net income and EPS were ($110k) and ($0.00) compared to our $528k and $0.02 estimates.  The difference compared to our estimates was due to the lower revenue figure and significantly higher than modeled SG&A expenses, slightly offset by the higher gross margin.

SG&A expense was $5.33 million.  We were looking for this to come in at about $4.4 million.  Management noted a charge of roughly $100k was taken in the quarter related to the retirement of the VP of Billing (announced earlier in the year).  Management attributed the majority of the significant increase (+19% sequentially) in SG&A expense in the quarter to recruitment of additional sales reps and build out of the billing and collections departments in anticipation of greater demand.  As we noted in our initiation report on Zynex (2/14/2011), management will have to be diligent in controlling SG&A expense in order to maximize earnings.  Management noted on the Q1 call that they are prepared to adjust expenses to the level of revenue growth and expect growth in revenue to outstrip that of operating expenses for the remainder of the year.  

Cash

Zynex exited the first quarter 2011 with $646k in cash and equivalents, up slightly from $602k at the end of fiscal 2010.  Cash used in operations was $646k.  Zynex drew $1.05 million on their revolver during the most recent quarter.  Total borrowed under the line of credit stood at $2.3 million at March 31, 2011.  The revolver is capped at $3.5 million but certain covenants can restrict total borrowing availability (based on collateral coverage, etc.) – this amount was $2.6 million at 12/31/2010.  Zynex did not disclose the amount available for borrowing at the end of Q1 2011 but we assume that cash needs can be met through operating cash flow (and possibly borrowing – assuming availability remains).  

BUSINESS UPDATE / GUIDANCE

  • Blood Monitoring Device Development:  In April 2011 Zynex announced they had signed an agreement with OmniaVincit, LLC to conduct the first clinical evaluation of    the company’s blood volume monitoring device which is being developed in Zynex’s new Monitoring division.  Zynex hopes to use data from the evaluation for the design       of clinical trials for the device.  Our model does not currently incorporate any revenue contribution from Zynex’s new Monitoring and Diagnostics businesses.   
  • Expanding Sales Force:  Management noted that 18 sales reps were added during Q1 and they continue to expect to bring on additional reps throughout the year as they expand their domestic footprint.
  • International Sales:  Zynex expects to place a greater emphasis on expanding its international presence through signing new distribution contracts.  
  • NexWave Launch:  NexWave, Zynex’s newest addition to their electrotherapy business, is expected to launch around mid-year 2011.
  • Shareholder Lawsuit / Anthem:  Management did not provide an update to the shareholder lawsuit and noted that there was nothing material to report 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 reiterated its previously issued guidance of revenue of $30 million – $32 million and EPS between $0.08 – $0.11.

 OUR 2011 OUTLOOK

While our initial investment thesis on Zynex remains intact, we have made some revisions to our model following the Q1 2011 results.

Revenue

We look for Zynex to post revenue of $29.6 million in 2011, compared to our pre-Q1 2011 estimate of $30 million.  We look for product sales and rental revenue of $21.6 million and $8.0 million, representing growth of about 39% and (7%), respectively.  

EPS

We now look for EPS of $0.07 in 2011, revised down from $0.09 prior to the Q1 2011 results.  Our revision reflects the $0.02 lower than modeled EPS figure in Q1 (i.e. – our quarterly EPS estimates for the remainder of 2011 remain intact).  We note that we have made only very minor adjustments to our SG&A expense estimates (despite this coming in significantly higher than modeled in Q1) and have slightly tweaked our gross margins upwards.  We believe Zynex may need to find areas to trim operating expenses in order to hit their EPS guidance of $0.08 – $0.11. 

For a copy of the full research report, please email scr@zacks.com with the ticker ZYXI as the title

 
ZYNEX INC (ZYXI): Free Stock Analysis Report
 
Zacks Investment Research