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CASM: Q4 Revenue Growth of 14%, Further Acceleration in 2H 2017

By Brian Marckx, CFA


Q4 2016 Revenue Preannouncement

CAS Medical (NASDAQ:CASM) preannounced Q4 and full year 2016 revenue and provided general guidance for 2017.  While the Q4 numbers were slightly below what we had been looking for, the revision implies FY2016 revenue growth will still be a relatively beefy 14% and driven by 17% growth of the company’s flagship FORE-SIGHT tissue oximetry segment.  The revision also has no impact on our forecasted EPS or calculated per-share price target.

Much of the difference relative to our prior revenue estimate relates to a greater number of monitor returns in Q4 (37 A vs. 21 E) – but despite this, CASM was still able to ship a record number of monitors to U.S. customers.  We remind investors that a certain number of monitors are regularly returned each quarter as lower utilization sites are weeded out – Q4 was somewhat of an anomaly due to the loss of a top-50 account which resulted in greater than usual returns and what we expect to be a short-term hiccup in net monitor placement growth.  While as of the Q3 call (mid-November) management was still guiding to hit their goal of 400 monitor placements in 2016, the Q4 preannouncement implies total placements will come in about 5% shy of this, or 380.

Fundamentals, particularly relative to adoption (i.e. growth of the installed base) and utilization (growth in sensor sales) of FORE-SIGHT, remain solid as evidenced by the;

- 4% and 22% growth of the FORE-SIGHT monitor installed base in Q4 and FY2016, respectively.  The U.S. installed base grew 23% in 2016
- 15% and 22% increase in FORE-SIGHT sensor sales in Q4 and FY2016, respectively.  U.S. sensor sales increased 16% in Q4
- 2017 Guidance: management is guiding for 20% growth in sensor sales and 20% growth in the U.S. installed base in 2017

Growth in sales of the tissue oximetry segment continue to come at the expense of competitors’ market share as well as from an overall expansion of the cerebral oximetry market.  The former has been and continues to be driven by the technological and clinical advantages of FORE-SIGHT as compared to competing technologies while the latter largely relates to new customers’ initial adoption of tissue oximetry as a result of the growing body of evidence supporting its benefits, including significantly improved patient outcomes.

As noted on the Q3 call, CASM is looking to further exploit their technological-leading position and growth of the overall market by increasing the size of their sales force.  As a reminder, management noted that they believe their growth is only constrained by the size of its direct domestic sales force.  The company expects FORE-SIGHT growth to accelerate in 2H 2017 as a result of increased size of the sales force as well as greater productivity from the more recently hired reps.

And while the company’s non-invasive blood pressure segment (“Traditional monitoring”) has been largely deprioritized, this business has held up better than what had been expected.  Early in 2016 management had guided for revenue in this business to experience an approximate decline of about 10%, while it now looks like it will actually post growth of about 3% for the year.  While FORE-SIGHT remains the catalyst to CASM’s revenue growth, continued outperformance of the non-invasive blood pressure business could provide upside to our out-year estimates.

We reiterate our $4/share price target. See below for access to our Investor Note which includes our valuation methodology and financial model.


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