Earnings Updates: BioTelemetry (BEAT), Tactile Medical (TCMD) and Primo Water (PRMW)
BioTelemetry (BEAT) reported after the bell yesterday and results from the heart monitoring specialist were a little lighter than expected, largely due to weather-related disruptions in monitoring services in Florida and Texas, as well as acquisition-related charges. Revenue was up 53% to $81 million, largely due to the LifeWatch acquisition, and EPS of $0.16 declined from $0.21 last year, and missed by $0.09. The miss is largely attributed to $8.2 million in acquisition-related, restructuring and patent protection charges. On the flip side, adjusted EBITDA margins improved by 4% to 22%, a record high for the company. If you assume the acquisition didn’t happen, revenue was up around 7.5%. The revenue impact from storms was around $2 million as roughly 9% fewer physician office visits occurred in the affected areas.
Even though there was a slight miss, it wasn’t a bad quarter. MCT patient volume growth was almost 10% and is accelerating. Management says this momentum is a positive surprise, especially given the acquisition, which required sales people to get off the road for about a week in the quarter for training. It also pointed out that this patient volume growth is the best indicator of future revenue growth, and with pricing relatively stable, the company should be growing at about the same pace (i.e. 10% organic growth). Sales of CardioKey and the next-gen MCT product (which has a lead wire, as well as a patch form factor, which is critical from a competitive standpoint) are continuing to penetrate the market, with the patch set for a full launch with 100 sales reps in Q1 2018 (there are around 2,000 patients on it now, and feedback is positive).
The Research Services business appears to be steady, and there is a trend to see if cardiac monitoring trials can be conducted at patients’ homes, rather than in a clinic. BioTelemetry’s technology would be perfect for this. In the Personal Health Management business, the company landed a deal with Onduo to supply wirelessly connected blood glucose monitors for Onduo’s diabetes management program. This is an incremental positive, but not huge news.
Things appear to be tracking well with the LifeWatch acquisition (the CEO said “…better than any merger I’ve ever been part of in my entire career”). Management says it has retained all key customers (its 500 largest customers account for 50% of revenue, and not one was lost), and has realized around $3.5 million toward what should now be the high end of its anticipated $25 to $30 million in annualized synergy savings. Most acquisition-related charges should be done after Q4 (total costs expected at around $15 million, with roughly half of those behind us), setting BioTelemetry up for cleaner numbers in 2018.
Analysts on the call asked about competition, which has been a big topic of late. Management basically said, “Look, we have the biggest connected health business out there, our products are the most accurate, and yes, there is competition, but we’re not losing. Our client base values a full portfolio of products, not just a one-off approach, and given that, and our new product introductions, they’re sticking with us.” Management is looking for $283 to $284 million in revenue in 2017. That’s about $2 million less than expected, which is accounted for by the Q3 weather-related disruptions. And they are still planning on more than $380 million in revenue in 2018 (consensus is at $384 million).
I’ve had the stock at buy despite the downward trend in the stock. It’s trading down around 6% this afternoon with roughly 3X normal trading volume. There is clearly a battle being waged here between the bears and the bulls. And for the time being, the bears are winning. That said, I think it’s worth giving the stock a little more room (not too much). The selling seems overdone to me. That said, given the weakness I have to reduce my rating from buy to hold. I’ll provide another update in Friday morning’s Weekly Update. HOLD.
Tactile Medical (TCMD) reported a beat-and-raise quarter, but shares are down around 10%. I’ve spent a good deal of time on this one because the stock’s reaction is a bit of a head-scratcher (it spiked higher early, then tanked). But I may have figured out what’s going on.
The growth numbers look great. Revenue in Q3 was up 25% (beating by $710,000) while EPS of $0.07 beat by $0.03. The company continues to focus on selling Flexitouch (and not so much on its other two products, Actitouch and Entre), which grew by 35% in the quarter, mainly with the two biggest markets of Veterans Affairs hospitals and high-prescribing lymphedema clinics identified through claims data analysis. Management said the next-gen Flexitouch product, as well as the head and neck version, are on track to contribute meaningful sales in 2018. It also raised its revenue guidance figure for the full year by $1 million, to a range of $106 to $108 million.
I had to listen to this conference call a couple of times to try and figure out what’s going on with the stock. What I’ve come up with is this, and it’s led me to decide to step aside from Tactile for now. Management said it hit its goal of growing the sales team by 20% this year. And that it plans to do so again in 2018. It also said the market should view the company as a better-than-20% grower. And that it feels it could add a lot more sales people if it wasn’t constrained by its ability to train them without getting too distracted.
The issue I have is that I would think the pace of revenue growth would be faster given how many sales people there are. I know it takes these folks time to get up to speed, but one might be able to make a case that productivity per rep is going down. That would be a bearish sign (you don’t want to have to keep adding 20% to the salesforce to maintain a pace of 20%, or a little more, growth). I know there is a drag effect from the intentional decline in sales of Actitouch and Entre, but still, Flexitouch is over 90% of revenue.
Whether or not I’m right is almost immaterial as the stock has now declined to a point where we need to step aside to limit losses. I’ll keep an eye on it and consider adding it back if this drop looks to be a head fake. For now, let’s just step aside. SELL.
Primo Water (PRMW) is finally on the move higher. Shares are up in the 6% to 10% range, and back above 12. I’ve already written about my perception of the issues at length, saying it looks to me like an extended consolidation period (in the context of a multi-year trend) with some uncertainty due to the Glacier acquisition and new debt load. We can also mix in some concern about retail consolidation, which is reducing Primo’s store count.
Well, the cork popped off today. The quarterly report was better than expected. Revenue of $82.2 million was up 132% (beating by $4.8 million) and EPS of $0.19 beat by $0.08, and was up from $0.13 a year ago. Those are sizeable beats. Refill sales were up almost seven-fold to $51.3 million (62% of revenue), largely due to the Glacier acquisition. Dispenser sales were up 12.4%, which is a huge number and shows that consumers are likely to keep buying Primo’s bottled water in the future (since they now have a dispenser). There was some impact from storms in Florida and Texas, and fires in California, but management said this probably pulled some purchases forward (i.e. it helped) as consumers stocked up in advance of the storms. Adjusted EBITDA (a measure of earnings) was up to $18 million from $6.7 million a year ago (that’s a big improvement). Management raised full-year 2017 guidance by about $1 million (to $283.5 to $287.5 million), which seems conservative.
At the moment, Primo is quite reliant on Wal-Mart locations. That’s a double-edged sword. While these locations generate around three times the sales of Office Depot and Kmart locations (which are dropping quickly, with roughly 1,000 left), there aren’t that many more Wal-Marts out there, relatively speaking (management thinks it can land about 200 more by the end of the year). In the quarter, Primo added 500 gross locations, 70% of which were Wal-Marts (i.e. about 350 of them). That brings up the year-to-date gross adds to 1,600 locations.
The next big opportunity appears to be in the grocery channel. Primo picked up some exposure here when it bought Glacier, but there’s a lot of room to run. I think the team will be attacking grocery stores in 2018, and you can bet they’ll promote their wins.
Management has talked about how it’s testing things in the market. I expect it will roll out a few meaningful initiatives in 2018. These will likely include packaging and pricing promotions when consumers buy a new dispenser, signage and promotional activities around refill locations, more integration of digital payment technologies around refill locations, and a roughly $0.05 price increase on refills (which would be a sizeable boost to revenue if rolled out nation-wide).
Part of the Glacier acquisition was paid for in stock. And that’s one of the reasons shares have been under pressure (Primo had to distribute some shares). Management said there are 1 million shares left to distribute, and that will happen around December 12. After that, the acquisition will be fully paid for. I’ve had the stock at hold due to the weakness. I’m going to give it a few days for this earnings report to marinate before I change my rating. For now, keep holding. If an uptrend starts to materialize, I’ll likely move to buy. HOLD.
Next Up…
Next up on our reporting schedule is our most recent addition, 3D printing specialist Materialise (MTLS). The company reports tomorrow after the bell. I’ll have the details for you in Friday’s Weekly Update.