CAS Medical Systems, Inc. (NASDAQ:CASM) Reports Financial Results for the Third Quarter Ending September 30th, 2016. How Will the Market Respond?

Medical provider, CAS Medical Systems, Inc. (NASDAQ:CASM), releases Q3, 2016 financial results.

CAS Medical (CASM) reported financial results for the third quarter ending September 30.  Revenue was just about dead-on with our estimate and continues to reflect the company’s transition from a medical capital equipment company to one which primarily provides disposables to an installed base.  Monitor placements were particularly strong and set a new quarterly record.  And the growing installed base continues to benefit sensor sales, with Q3 marking the 26th quarter of double-digit yoy U.S. sensor sales growth.  And while gross margin dipped slightly from Q2 (which was the highest in at least 15 years), it remained well above 50% and, combined with cost-efficiency measures which helped keep OpEx relatively lean, resulted in the lowest operating loss in recent history.

Total revenue increased by $814k yoy, or almost 17% which was catalyzed by 22% growth (+$850k) of the tissue oximetry segment (i.e. FORE-SIGHT).  Meanwhile, traditional monitoring sales, as expected, contracted by 17%, reflecting CASM’s de-prioritization of this segment and their focus on exploiting the high growth potential of FORE-SIGHT and the tissue oximetry business.

While revenue ($5.8M A vs. $5.7M E) was very much inline with our estimate, gross margin was slightly weaker (52.9% A vs. 54.4% E) and operating expenses meaningfully better ($4.0M A vs. $4.5M E) than what we modeled.  This “miss” on gross margin is of no concern as it still came in well above historical average (for context GM averaged 51.2% in 2015) and GM can be somewhat variable q-to-q.  We think GM has some incremental room to widen further as sensors continue to grow as a percent of total revenue as well as from product upgrades and benefits from additional scale in production.

FORE-SIGHT sensors, which posted 20% growth (+$668k) including 23% in the U.S., continue to be the main impetus to top-line growth, accounting for 79% and 82% of growth of the tissue oximetry segment and total revenue, respectively.  Revenue from these high margin FORE-SIGHT sensors also continue to account for a greater percentage of total sales which has been the tailwind to CASM’s improved operating results.  Sensors accounted for 71% of total sales (from continuing operations) through the first nine months of 2016, up from 67% in the comparable prior year period.

CASM booked sales of a record 129 monitors in the quarter, up from 103 in the year-earlier period and from 83 in Q2 of this year, pushing the total installed base up to 2,000.  The current quarter benefitted from strong international monitor placements (73), particularly in China and Japan.  Meanwhile, the domestic installed base increased by 56, ending the quarter with a total of 1,075 monitors in the U.S.

But while the installed base has experienced rapid growth and has benefitted from customers switching from competing technologies as well as expansion of the overall market for tissue oximetry, management noted on the Q3 call that the recent loss of a top-50 account is expected to result in a short-term hiccup in net monitor placement growth.  While the company is still guiding for a net addition of 400 monitor placements in 2016 (including 292 through Q3), management indicated that monitor returns from this customer may mean that realizing that goal is now somewhat more difficult.  As a result, we have made a moderate downward revision to our full year tissue oximetry revenue estimate.

Management noted that loss of this customer, which switched to a competing technology, was essentially due to insufficient hand-holding or account maintenance on their part during the transition from their legacy tissue oximeter to FORE-SIGHT.  While we view the loss as unfortunate, management indicated it was a learning experience and informative in shaping improvements in customer care policy.

We reiterate that our investment thesis hinges in large part to FORE-SIGHT’s clinical superiority being able to drive rapid revenue and profitability growth through a combination of expanding the overall market for cerebral oximetry and taking market share from less capable (i.e. lower accuracy) technologies.  By all accounts that appears to continue to be the case.  Much of the revenue growth continues to be driven by market share gains against competitors as FORE-SIGHT’s performance-leading message is resonating with hospitals.  Approximately 40% of U.S. monitor sales over the past 12 months were to customers switching from competitors’ technology.

The other 60% relates mostly to new customers which had not previously been using tissue oximetry.  This expansion of the overall market represents an enormous opportunity, in our opinion.  As we have detailed in our coverage of CASM, it is important to understand that while cerebral oximetry has been around for decades, adoption had been fairly low, perhaps due to a lack of accuracy in historic monitors and lack of data supporting its utility.  This has only recently started to change and is evident in CASM’s success in expanding the overall market.  Most or all of the tissue oximeter manufacturers continue to sponsor or otherwise support additional clinical studies, case reports and white papers aimed at further broadening the supporting evidence of the clinical utility and effectiveness of cerebral oximetry.  On the Q3 call management alluded to a recent large retrospective study by Medtronic (manufacturer if INVOS) which showed cardiac surgery patients that were monitored for cerebral oximetry had much better outcomes as compared to those that were not monitored.  This is just the latest of many studies with similar results which we think will drive further adoption of cerebral oximetry in general, expand use in surgeries such as CABG and draw greater interest in others.

Outlook

The aforementioned update to our Q4 estimate resulted in a change to our 2016 total revenue growth from 17% to 15%.  We think tissue oximetry revenue grows 19% and traditional monitoring contracts by less than 1% for the full year 2016.  We have gross margin expanding from 51.2% in 2015 to 53.3% in 2016, facilitated by growth of the higher margin sensors as a percentage of total sales as well as some efficiency gains.  Operating leverage should also continue to improve on growing revenue and productivity gains from the sales force.  This is an area that CASM has seen significant benefits and which management believes there is additional room for growth.

Management believes that their growth is only constrained by the size of its direct domestic sales force and noted on the Q3 call that they expect to hire around four additional (net) direct reps by the end of 2017.  This, along with increased productivity from recently hired reps, is reflected in our 19% modeled growth of the tissue oximetry segment in 2017.

Original Source

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CAS Medical Systems, Inc. (NASDAQ:CASM) shares are moving -1.16% on the news today and have traded in the range of $1.56 – 1.70 during the current trading session. A number of brokerage analysts have recently weighed in on the stock, providing price target projections. The covering firms currently have a consensus one-year price target of $4.00 on the stock.  This is according to brokerage analysts polled by Thomson Reuters First Call.  This is the average number from the individual targets provided by the firms.  Analysts are projecting earnings per share of $0.00 for the next fiscal quarter.  For the current year, analysts are predicting earnings of $-0.20 per share according to First Call.

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In looking at where CAS Medical Systems, Inc. (NASDAQ:CASM) is trading on a technical level, the stock is trading -0.26% away from its 50-day moving average of $1.70.  Based on the most recent available data, the equity is -20.93% off of its 52-week high of $2.15 and +33.86% away from its 52-week low which is $1.27.

Today, the stock opened at $1.70 and the last bid at the time of writing stood at $1.70.  During the session thus far, the equity dipped down to $1.56 and touched $1.70 as the high point.  CAS Medical Systems, Inc. (NASDAQ:CASM) has a market cap of $45.61M and has seen an average daily volume of 22,435 over the past three months.

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Disclaimer: The views, opinions, and information expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any company stakeholders, financial professionals, or analysts. Examples of analysis performed within this article are only examples. They should not be utilized to make stock portfolio or financial decisions as they are based only on limited and open source information. Assumptions made within the analysis are not reflective of the position of any analysts or financial professionals.

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