Mindray Medical Misses Q4 Earnings Due to Lower Margins - Analyst Blog

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Medical devices maker Mindray Medical International Ltd.MR posted adjusted earnings per share (EPS) of 47 cents in the fourth quarter of 2014, which fell shy of the Zacks Consensus Estimate by a penny. Adjusted EPS plunged 20.3% on a year-over-year basis.

Quarter Details

Fourth-quarter net revenue came in at $399 million, up 8.3% year over year. Meanwhile, China revenues (representing 45.8% of net revenue) grew 14% from the year-ago quarter to $182.7 million, while international revenues were up nearly 4% at $216.2 million.

Revenues were driven by double-digit sales growth in China and Western Europe during the quarter. However, the company experienced a tough operating environment across other major markets.

Revenues from In-Vitro Diagnostic Products (IVD) went up 7.7% to $103.4 million, driven by robust reagents sales which accounted for 48.2% of the segment's net revenue.

Revenues from Patient Monitoring & Life Support Products Systems increased 5% year over year to $149.8 million. Medical Imaging revenues inclined 11.9% from the year-ago quarter to $108.6 million.

Revenues from Others (including sales from the orthopedics business, service revenues from extended warranties, sales of accessories and repair service revenues for post-warranty period) surged 13.5% to $37.2 million in the quarter under review.

Adjusted gross margin contracted 70 basis points (bps) from the year-ago quarter to 55.7%.

Adjusted general and administrative (G&A) expenses, as percentage of sales expanded 20 bps year over year to 9.7%, whereas adjusted research and development (R&D) expenses expanded 110 bps to 12.2%.

Adjusted operating margin contracted 490 bps to 14.6%, primarily on the back of higher operating expenses.

Financial Position

As of Dec 31, 2014, Mindray Medical had $1.1 billion in cash, cash equivalents and short-term investments, compared with $972.9 million as of Sep 30, 2014.

Net cash provided by operating activities amounted to $140.7 million in the fourth quarter of 2014, compared with $85.5 million in the previous quarter.

2015 Outlook

Mindray Medical estimates net revenue for 2015 to grow in mid-single digits over 2014 levels. The company also expects its full-year 2015 net income to decline in high-single digits The company expects capital expenditure for 2015 around $150 million. Management remains upbeat about its IVD business, primarily based on the ramp up of higher-end products and the company's ability to offer total solutions to its customer base.

Our Take

Western Europe was a growth driver for Mindray Medical as the previous investments bode well for the company. However, most of the markets provided significant challenges, reflected by a tough operating environment.

Mindray Medical rolled out eight new products along with several reagents in 2014, including the first cellular analysis line in hematology and a new portable color ultrasound system. Although we are impressed with the company's continued focus on R&D to propel innovation, the declining operating margin remains a major concern over the near term.

Zacks Rank

Mindray Medical currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the medical sector at the current moment include Affymetrix AFFX , Luminex LMNX and Abaxis ABAX . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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