Here goes...
First and foremost lets look at the earnings expectations. Yahoo has .46 and MSN has .45. MSN is done by Zack's and is usually more reliable. So let's look for .45 for Q3. Note that CMED will post both GAAP and non-GAAP numbers. The analysts have been looking for GAAP numbers for CMED in the past and will likely be doing so again tomorrow. So look for GAAP to at least meet .45.
The major points on GAAP and non-GAAP...
It is important to understand the difference between the GAAP and non-GAAP numbers and what that means for CMED both tomorrow and long-term. The primary difference is "amorization of FISH assets". This is akin to depreciation and does not affect cash flow. The important thing here is that it should also not significantly affect earnings growth (on a yoy bas) after Q1 of FY 08. This is because FISH first went on the books in Q2 of FY 07 and so starting in Q2 of FY 08 the quarterly earnings on a year over year basis will be able to compare apples to apples. Currently, the amortization is new compared to last year and this decreases GAAP earnings relative to last year. This is a large reason that even though GAAP earnings last quarter were only 8% greater than Q2of last year the five year projected growth rate (see yahoo) matches the calculated non-GAAP growth rate of about 34% from last quarter (and the last few quarters for that matter). Note also that for this year yahoo shows a growth rate of around only 9%. This again is largely due to the new amortization charge not reflected on last yrs earnings.
Here is the table of calculations I made after the earnings report last quarter and shows all of these numbers...
http://spreadsheets.google.com/pub?key=p
Ok... now for going forward... estimates for tomorrow...
It is important to note that even though yahoo has a net margin of 43% for CMED for last year it was lower in the last quarters because of the amortization of FISH. The margins before FISH were around 50%. In fact, last quarter they corrected the amortization of FISH and on a GAAP basis got a net margin of 36% (see the calculations posted at the link above). I will use this figure in my calculations.
To make the estimate I have come up with conservative revenue estimates for each of the three products (HIFU, ECLIA, and FISH), take a net margin of 36%, divide by the number of outstanding shares and factor in currency conversion (yahoo currency converter). I also came up with a slightly less conservative estimate. All the numbers are listed in a table at the end of this blog.
1. HIFU.
First let it be noted that HIFU sales are seasonal and that it is not practical to compare it to last quarter. Only quartely data yoy makes sense. Last quarter HIFU revenue was up 14%. It has declined over time partly due to the fact that some of the hospitals within China already have one (so don't need more right now) and possible because of other factors. HIFU is still experimental and although I believe it may have a very important role in the future based on my science background this is not at all certain. CMED has said that in the near term they expect HIFU to slow a bit while the other revenue streams accelerate. The very conservative estimate models 8% yoy growth in HIFU sales. This does not include possible sales in Korea as the management said at the last CC that it was not modeling in any sales there for this quarter. The less conservative estimate uses the same as last quarter's yoy growth of 14%. In Q3 of FY 06 the revenue was 106.1 M RMB. Eight % growth would put it at $114.59 million. Fourteen % growth would put it at 21.0 M RMB.
Next, by employing the yahoo currency converter as of the end of Q4 (12/31) of .1365 USD/RMB we get $15.64M with 8% growth $16.51 M with 14% growth for HIFU.
2. ECLIA.
ECLIA sales grew 80% last quarter on a y/oy basis. They grew 15% over Q1 of this year (FY 07.) This "exceeded management's expectations." To be very conservative let's say that ECLIA hits 67% on a yoy basis from Q3 of fy 06. This would be 92.5 million RMB and represent essentially no change from the 92.6 million RMBs of ECLIA revenue in Q2 of 07. Less conservatively we can look at 80% yoy growth which is 99.7 M RMB. This would be 7% growth over Q2.
Now, by employing the yahoo currency converter as of the end of Q4 (12/31) of .1365 USD/RMB we get $12.63M with 8% growth $13.61 M with 14% growth for ECLIA.
3. FISH.
Since this has only been in place for two quarters now it is more difficult to estimate FISH revenue. However, the management has been traditionally conservative and has repeatedly asserted that they will achieve $20 million (USD) for FY 07. They have already achieved $1.9 + $4.1 = $6.0 million. This means they need to generate $14 million in the next two quarters. This is a lot but may be reasonable because the first quarters involve primarily getting machines in place. Assuming an incremental rise it may be reasonable to expect $6 million in sales in Q3 and $8 million in sales in Q4. To be (relatively) conservative let's use the 6 million figure for FISH revenue.
Now add up all the revenues.
Lower end: = 15.64 + 12.63 + 6 = $34.3 M
Higher end:= 21.0 + 13.61 +6= $36.1 M
Next, by employing the yahoo currency converter as of the end of Q4 (12/31) of .1365 USD/RMB , then multiplying by .36 (net margin) and dividing by 27.4M shares we get the following earnings per share:
Lower end: (34.3M*.36 )/27.4M = .45
Higher end: (36.1M*.36 )/27.4M = .474
Here are the estimates (on the bottom below the black line). Tomorrow after the ER I will add the real numbers to make this more complete...
http://spreadsheets.google.com/pub?key=p
These numbers are conservative and there are certainly assumptions built in to the model (but so too for the analysts making the predictions). The major point here is that even with quite conservative projections based on previous performance the lower end .45 metric would be met.
On the plus side the ECLIA estimates may be quite low. Also any HIFU sales in Korea would bring upward movement on the earnings.
Alternatively, if HIFU sales are lower than expected or FISH does not meet expectations these numbers could be overstated. However, the management has done well in this regard in the past.
Note that using the non-GAAP margins from Q2 of 49% we get .613 and .646 respectively compared to .42 in Q3 of FY 07 , which represents about 50% earnings growth yoy. This circumvents the amortization expense. Of course, the extra revenue had to paid for by buying FISH and such revenues were 0 last year so somewhere in between these GAAP and non-GAAP figures would tell the most likely 5yr growth story. A good target remains 30-35% in my op.
There is one other major factor that must be at least considered:
At the end of Q2 it was thought that CMED will continue to be taxed as a high tech company at 15% tax rate. If this changes and they fall into the 25% bracket either in this quarter or in their future guidance this could have a substantial impact.
Also the BBE acquisition is not factored in here.
Hopefully these figures are informative and/or lead to further discussion.
Best,
Jon
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