Angeion Corp. (ANGN) reported financial results for its fiscal 2011 second quarter ending April 30th on May 26th.  Revenue and EPS both came in below our estimates.  In contrast to Q1 2011 results, which also missed our top and bottom line estimates but which we characterized as not overly disappointing (as there were some highlights within the numbers), we don't see much in Q2 results to be excited about. 

The company's press release noted that as a result of the recent management transitions (CEO departure and permanent CFO hired), they would not hold their previously scheduled earnings call.  As a result, we have a number of unanswered questions.  These questions include where did the revenue momentum go that started during the second half of 2010 (which management had partially attributed to more hospital spending), why has international sales growth seemed to have dried up, what's behind all the executive turnover and what happened to the services margin in Q2 (39% vs. 80%+ historically).


Q2 2011 revenue was $6.80 million, 6% below our $7.23 million estimate and down about 1% from Q2 2010.  In the earnings release management attributed the lackluster revenue to economic softness.  The difference compared to our estimate is almost entirely a result of international sales coming in $366k lower than where we had them modeled ($1.32MM vs. $1.69MM).  International sales fell 9% y-o-y while domestic sales grew 1% to $5.48MM (compared to our $5.54MM estimate).  International sales growth has been anemic since Q4 2010 (Q4 2010 -9%, Q1 2011 +2%, Q2 2011 -9%).   

The $6.80MM revenue in Q2 consisted of $5.81MM in equipment/supplies (vs. our $6.32MM estimate) and $987k in services (vs. our $903k estimate).      

Gross Margin

Gross margin came in at 57.3%, slightly better than our 56.4% estimate.  Equipment/supplies margin was 60.3% (vs our 52.5% estimate) with services margin at 39.4% (vs. our 83.5% estimate).  Both these margins differ significantly from history.  While equipment margin has shown a nice consistent uptrend since late 2009 as a result of manufacturing efficiencies, it's never been better than 54.1% (Q3 2010).  Services margin has never dipped below  80% (save for the 79.8% in Q4 2010).

Operating Expenses

Operating expenses (ex amortization) were $3.92MM which is about $100k (2.5%) higher than our estimate.  Operating expenses equaled about 57.6% of total sales compared to our 52.9% estimate.  The difference between actual and our estimates is mostly due to R&D coming in higher than we anticipated, slightly offset by small favorable differences in S&M and G&A.  We think operating expenses will continue to climb throughout the remainder of the year.  Angeion hired a permanent CFO and created (and filled) a V.P. of engineering position in May which will likely add incrementally to operating expenses.


EPS was ($0.04) on net income of ($138k) compared to our $0.04 and $148k estimates. 


Angeion exited the quarter with $9.51MM in cash and investments, down from $10.1MM at the end of Q1 2011.  Cash used in operations was $373k in Q2.  Ex-changes in working capital, cash used in operations was $120k.  Angeion used $156k for purchases of PP&E (investing activities) in the quarter.

In April Angeion announced a new $2MM stock buyback program which expires in April 2012.

Phil Smith Steps Down

After only about 5 months on the job, Angeion's CEO announced his resignation.  Angeion's May 25th press release notes that, "Philip I. Smith has resigned as the Chief Executive Officer of Angeion Corporation following the mutual decision of Mr. Smith and the Company’s board of directors.   Mr. Smith became President and CEO of the Company effective January 1, 2011 pursuant to a letter agreement that provided for at-will employment.  Consistent with his decision, Mr. Smith has withdrawn his name for re-election as a director at the Company’s 2011 Annual Meeting of Shareholders to be held on May 26, 2011."

Phil Smith had replaced Rod Young as CEO after Angeion's largest shareholder, Blue Line Partners, demanded changes be made to the direction of the company.  We have no insight into what is behind Phil Smith's departure.

Gregg Lehman was named as interim CEO.  Lehman had been CEO of Health Fitness when the company was bought by Trustmark Mutual Holding Company in February 2010 for a 22% premium.  Health Fitness provides fitness program services to corporate and individual customers.  Angeion's current chairman, Mark Sheffert, and former CEO, Rod Young, also have affiliation's with Health Fitness - both served on the company's board when it was bought by Trustmark.     


Our Revised 2011 Outlook

We have again revised our 2011 outlook for Angeion.  We now model revenue of $29.4MM (down from $30.1MM prior to Q2) and EPS of $0.01 (down from $0.17 prior to Q2).  As we have noted in the past, it is inherently difficult to forecast Angeion's sales - as there is little to anchor on each quarter and management does not provide guidance.



As we now model Angeion to post EPS of only $0.01 in 2011, valuing the company on a near-term P/E multiple is no longer appropriate.  As a result we use price/book comparables to value Angeion. Average P/B of competitors currently sits at 1.6 which values Angeion at $22.4 million or approximately $6.00/share.  We are moving our price target from $6.50 to $6.00.  Angeion currently trades at about $4.40/share, representing a significant discount to where we value the company - as a result, we are maintaining our Outperform rating on the stock.


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