From the ABMD conference call

Investment Analysis Clubs Saul’s Investing Discussions
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Here is my summary of some of the CFO’s remarks.
Saul

Revenue up 47% to a record $76 million.
U.S. Impella revenue rose 59% to a record $67 million.
Patient Utilization up 48%.
Gross margin was 84.1%.

We were pleased with this year-over-year and sequential growth, especially considering the significant summer slowdown in U.S. cath labs during July and August. Outside the U.S., Impella revenue totaled $5 million on a constant currency basis, this was up 20%. Worldwide service revenue of $3.9 million was up 18%.

Impella 2.5 has been placed at 1,000 of 1,400 targeted hospital sites for a penetration rate of 71%.
Impella CP has been placed at 739 hospital sites for a penetration ratio of 52% of total hospitals.

Our primary focus is increasing usage at existing sites. However, adding more Impella 2.5 sites and adding Impella CP 5.0 and RP to existing Impella sites will add to future growth.

We have a disciplined approach to establishing new Impella programs, focused on training and achieving quality patient outcomes. Reorders are the driving force behind our growth. U.S. reorders were $59.3 million, up 62% over last year. Our reorder rate was 100%.

Average Impella 2.5 and Impella CP inventory at hospital sites was 2.82 units per site versus 2.73 in the prior quarter, and 2.6 units in the prior year. So inventory growth is far below the growth in usage. These inventory levels are appropriate, reflecting hospitals’ reliance on Abiomed for rapid restocking. But customer inventory levels are expected to slowly grow as utilization increases and new products are introduced.

R&D expense was $11.6 million and was about 15% of revenue. It includes
the submission of the PMA supplements for Impella CP and 5.0,
the ongoing Japanese PMDA submission,
investment in the global cVAD Registry,
and new product development

These investments could lead to R&D expenses for the next two quarters that are slightly higher than our Q2 rate.

SG&A expense for the second fiscal quarter totaled $39.8 million, up 35% from the prior year. There are a number of investments that will boost SG&A for the balance of the year. Some of these investments are in continuing expansion of our commercial team where 15 heads were added this quarter to a total of 189 professionals. And we have made further investments in marketing and infrastructure.

Operating profit for the second fiscal quarter was $12.8 million, or 16.8% of revenue, up over 200% from $4.2 million in the prior year.

GAAP net income was $7.7 million, up over 100% from $3.8 million. GAAP Earnings per share were 17 cents, up from 9 cents.

Although we are recording a GAAP income tax provision at 41%, our actual cash tax payments are negligible due to the application of net operating loss carry forwards from our balance sheet. The company has approximately $70 million additional NOLs remaining.

The balance sheet remains in excellent shape and we ended the quarter with cash up about $19 million to a balance of $176 million.

One final note from the quarter, our past, present and future intellectual property and know-how holds an enormous position in the world of percutaneous circulatory support. In the past, Thoratec attempted to invalidate certain Impella patents in Europe and failed. During this quarter, we responded to further challenges and filed our own case in Germany against Thoratec, now St. Jude, for patent infringement.

Abiomed had invested over $300 million in research and development on percutaneous high pump technology, and we hold 211 patents and have 223 patents pending. This patent portfolio and our strong financial position make us well prepared to assert our pattern right.

Turning to guidance. As noted in our earnings release, we have increased the full year fiscal 2016 revenue guidance and the new range is now $305 million to $315 million, representing growth of 32% to 37% from the prior year. This new range compares to the range noted on our last conference call of $300 million to 310 million, which had been 30% to 35% growth from the prior year.

The company is updating its fiscal year guidance of GAAP operating income to a range of 15% to 17%. This new range compares to 14% to 16% previously guided. These margin ranges incorporate the R&D spend level increase previously mentioned.

In summary, Q2 was a very strong quarter, demonstrating that we are the standard of care. These results validate our business strategy to-date and enable us to make the disciplined investment needed to help Abiomed achieve our long-term vision.

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Saul,

First off, I admit that ABMD is one of your stocks that I haven’t been watching … in fact, I’ve purposely skipped over all of the recent posts because it wasn’t on my radar and because I have limited time to keep up with as many boards as I try to follow. However, now that I’m trying to learn more about it, I’m struggling to reconcile its recent growth rates with “the market” expectations for its future growth rates.

When I do the lazy thing of looking it up on Yahoo, I see the “current” P/E (for the 12 months ending 6 months from now) at 25.44 and the “expected” P/E for the following year listed as 65.19. Given that “P” is a constant, that implies that analysts are expecting the earnings to fall by 61% from FY2016 to FY2017. To what extent is that discrepancy between your 1YPEG and the Yahoo earnings estimates due to a difference of opinion about the likelihood that the current growth will continue versus a different definition about what “earnings” measurement is appropriate?

Can you suggest where I start to look (other than the obvious of reviewing posts related to ABMD on this board over the past month or so) to get a better feel for this apparent contradiction?

as always, i am full of carp

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When I do the lazy thing of looking it up on Yahoo, I see the “current” P/E (for the 12 months ending 6 months from now) at 25.44 and the “expected” P/E for the following year listed as 65.19. Given that “P” is a constant, that implies that analysts are expecting the earnings to fall by 61% from FY2016 to FY2017. To what extent is that discrepancy between your 1YPEG and the Yahoo earnings estimates due to a difference of opinion about the likelihood that the current growth will continue versus a different definition about what “earnings” measurement is appropriate? Can you suggest where I start to look (other than the obvious of reviewing posts related to ABMD on this board over the past month or so) to get a better feel for this apparent contradiction?

Hi Fullofcarp, When I looked at YHOO I saw those same crazy figures and wondered “Where in heck did they get $2.90 in earnings???” Then I realized they must be using crazy GAAP numbers. Sure enough, I looked back through my notes and discovered that ABMD reported $96 million of GAAP income for their fourth fiscal quarter, of which $84 million was a release of valuation tax adjustment (meaning of course that they are taking a bunch of NOL’s at once).

Here are my notes from July which will fill you in. You can get the last two quarters from the press releases. I hope that this helps.
Saul

July 2015 - I got this stock from Keith’s screen. It had earnings like this:


2013:   XX  -04   03   11
2014:   09  -04   09   30
2015:  224

That $2.24 jumped out at me. Quarterly earnings of $2.24 or something, up from 30 cents sequentially and 9 cents the year before. You don’t have to be a genius to realize that something must be wrong with a figure like that! Sure enough, those were silly GAAP earnings instead of real adjusted earnings

They reported $96 million of GAAP income for their fourth fiscal quarter, of which $84 million was a release of valuation tax adjustment (meaning they are writing off their past tax losses).

Their real operating earnings were $12+ million, which when divided by the number of shares gave the real earnings per share of 28 cents. Still very good, but not ridiculous.

However my research on this led me to read in their transcript that they had 22 quarters in a row of double-digit revenue growth. That sounded pretty impressive. Here are the last three years plus.


2012:   37  39   37   38  =  151
2013:   44  43   44   46  =  177
2014:   50  49   52   62  =  213
2015:   68

The last four quarters revenue were $231 million, the four quarters before that were $183 million, so trailing revenue was up 26%. That’s not bad for revenue growth! And, revenue for the last six months was up 35% (130/96), so revenue growth is even accelerating.

So I looked at adjusted earnings, which was a bit hard to find. Sometimes they gave stock-based comp and sometimes not, so I had to track it down in the 10-Q’s. Taking this much trouble meant I was serious about the company. Also sometimes the legal expenses from the DOJ investigation were broken out and sometimes not. Here’s what adjusted earnings looked looked like, as close as I could figure:


2013:   XX   11   10   15
2014:   15   11   19   42
2015:   36

The last four quarters adjusted earnings were $1.08, the four quarters before that were 51 cents, up 112%. The last six months adjusted earnings were up 160%, so earnings growth is accelerating too.

Here’s a business summary: ABIOMED, Inc. was founded in 1981 and is headquartered in Danvers, Massachusetts. It researches, develops, and sells medical devices for circulatory support and care during heart recovery for acute heart failure patients. The company offers:

Impella 2.5 catheter, a percutaneous micro heart pump with integrated motor and sensors for use in interventional cardiology;
Impella CP that provides partial circulatory support using an extracorporeal bypass control unit;
Impella 5.0 catheter and Impella LD, which are percutaneous micro heart pumps with integrated motors and sensors for use primarily in the heart surgery suite; and
Impella RP, a percutaneous catheter-based axial flow pump.

It also manufactures and sells AB5000 circulatory support system for temporary support of acute heart failure patients in profound shock, including patients suffering from cardiogenic shock after a heart attack, post-cardiotomy cardiogenic shock, or myocarditis.

In addition, the company provides Symphony, a synchronized minimally invasive implantable cardiac assist device designed to treat chronic patients with moderate heart failure by improving patient hemodynamics.

Further, it’s working on a percutaneous expandable catheter pump, which enhances blood circulation from the heart with an external drive shaft.

The company sells its products through direct sales and clinical support personnel in the US, Germany, France, Canada, Japan, and the UK.

Gross Margins are 84% and rising.

Operating Margins last quarter were 18%, up from 7% the year before. For the fiscal year they were 12.4%, up from 4.6% the year before.

The PE is 61. Their rate of earnings growth is 112%. Their 1YPEG is 0.54.

Cash of $146 million. No Debt.

Recurring Income - I presume all these little catheters and minipumps are one-time use.

Moat - First mover and need for complicated FDA approvals.

They recently got important FDA approvals, AND the Dept of Justice closed an inquiry about labeling (I think), without bringing any charges, which ends a lot of distraction and a lot of legal expenses which have been impacting GAAP earnings, but which it’s been hard to keep track of. These two developments should transform and accelerate the company and revenue and earnings should increase even faster.

Please remember that the above is as of July.

And, fullofcarp, if you are really considering putting your own real money into a stock, I’d never rely on the YHOO computer, or the Fidelity computer, or any other computer for my statistics. It’s worth the effort to get them from the press releases and filings.
Best
Saul

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Thanks Saul. I guess what throws me off, and what is obvious but I’m resisting doing, is that it takes a fair amount of digging to get to the details. What confuses me is not the absolute or relative differences between the GAAP values and your adjusted earnings calculations.

Instead, what has me thrown off is why there is such a divergence between your backward-looking numbers and what the GAAP forecasts show in terms of trends over time. Is this due to some one-time issue that is built into GAAP forecasts that throws off FY2016 values relative to the year before and after, but that gets cleaned up by your approach? If so, that would imply that your numbers are more consistent (and more valid?). But if it’s because of some change in the real expectations about the upcoming company performance, then that’s a concern, because it would imply that your assumption that recent growth should be expected to continue into the near future.

It’s clear that the only way to know that will be to dig into those GAAP forecasts to find out why they are dropping, whether due to “extraordinary” factors or an anticipated drop in actual performance (e.g., due to loss of a key patent).

as always, i am full of carp

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It’s clear that the only way to know that will be to dig into those GAAP forecasts to find out why they are dropping, whether due to “extraordinary” factors or an anticipated drop in actual performance (e.g., due to loss of a key patent)

Is it clear what GAAP forecasts are? I often see “average” forecasts that include some known “one time” charges going forward. So is that GAAP or non-GAAP. If a computer is just averaging together forecasts and one analysts includes a charge that another does not, how do you know? Is it generally accepted (no pun intended) that estimates of analysts are GAAP?

Finviz looks as “wrong” as Yahoo, but at least it puts all its numbers in one place, including a nice chart, a table up coverage changes and a long list of news articles. Very efficient.

http://finviz.com/quote.ashx?t=abmd&ty=c&ta=1&p=…

They had EPS growth over last 5 years at 48% but estimated growth over next 5 years at 17%. I don’t know how different that was since before the recent earnings report.

There were a cluster of analyst upgrades in August (with new price targets ranging from $80 to $130. On 10/30 Raymond James upgraded from market perform to outperform, so they like the new low price.

We humans tend to look for that data that confirms our biases. Just sayin’

Pete.

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Instead, what has me thrown off is why there is such a divergence between your backward-looking numbers and what the GAAP forecasts show in terms of trends over time. Is this due to some one-time issue that is built into GAAP forecasts that throws off FY2016 values relative to the year before and after, but that gets cleaned up by your approach?

I’d guess that it’s not really a decrease in the forward looking estimates. They didn’t really make $2.90 in trailing earnings. That’s that recognition of NOL. So next year isn’t a drop off of earnings, it’s just that the large false earnings that GAAP forces (from the recognition of NOL), drops off trailing earnings once you get four quarters in the future.

Best

Saul

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Pete, thanks for that pointer, I haven’t used finviz before. But a couple of numbers that it shows seems to amplify the inconsistencies:


EPS (ttm)  2.81     EPS growth this year 20.60%
EPS next Y 1.09     EPS growth next year 48.23%

Something seems a bit odd there, but without knowing where they’re getting those numbers, it’s hard to know whether they make any sense.

Saul, the point that I was trying to make (apparently not clearly) is that if the adjustments between your earnings measure and GAAP are relatively consistent over time, this sort of inconsistency shouldn’t happen. It can only happen if either the consensus forecast is for a dramatic fall-off in business, or else if there is some GAAP adjustment that is expected to be very different in the next couple of years versus the past year or two.

as always, i am full of carp

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