EnteroMedics, Inc. :ETRM-US: Earnings Analysis: Q3, 2016 By the Numbers : November 11, 2016

EnteroMedics, Inc. reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of EnteroMedics, Inc. – LivaNova Plc, Boston Scientific Corporation, NeuroMetrix, Inc., St. Jude Medical, Inc., Johnson & Johnson, Natus Medical Incorporated and Abbott Laboratories (LIVN-US, BSX-US, NURO-US, STJ-US, JNJ-US, BABY-US and ABT-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 0.30 million, Net Earnings of USD -6.52 million.
  • Gross margins widened from -12.94% to 50.59% compared to the same period last year, operating (EBITDA) margins now -1,491.28% from -9,315.11%.
  • Earnings decline largely a result of non-operational activity, pretax margins improved from -6,485.42% to -2,197.89%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-09-30 2015-12-31 2016-03-31 2016-06-30 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 0.06 0.15 0.07 0.28 0.3
Revenue Growth (%YOY) 0 0 0 249.37 363.69
Earnings (mil) -4.15 -6.77 -7.41 -5 -6.52
Earnings Growth (%YOY) 27.36 -9.55 -3.27 32.53 -57.14
Net Margin (%) -6485.42 -4544.3 -10289.95 -1809.84 -2197.89
EPS -0.6 -0.95 -0.94 -0.49 -0.17
Return on Equity (%) -361.95 -474.5 -2455.1 N/A N/A
Return on Assets (%) -145.04 -203.66 -224.15 -133.91 -204.12

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Market Share Versus Profits

Revenues History
Earnings History

ETRM-US‘s change in revenue this period compared to the same period last year of 363.69% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that ETRM-US is holding onto its market share. Also, for comparison purposes, revenues changed by 7.52% and earnings by -30.58% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from -12.94% to 50.59%, while operating margins improved from -9,315.11% to -1,491.28% over this period. For comparison, gross margins were 43.73% and EBITDA margins -2,398.21% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ETRM-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 1,943.22 days from 7,319.84 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Margins

The company’s earnings decline is largely a result of non-operational activity. As a matter of fact, the company showed increases in operating (EBIT) and pretax margins. EBIT margins improved from -9,391.21% to -1,504.53% and pretax margins widened from -6,485.42% to -2,197.89%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

EnteroMedics, Inc. is a clinical development stage medical device company that engages in the design and development of devices that use neuroblocking technology to treat obesity, metabolic diseases and other gastrointestinal disorders. Its proprietary neuroblocking technology is designed to intermittently block the vagus nerve using high frequency, low energy, electrical impulses. Its initial product Maestro System, which uses VBLOC therapy to affect metabolic regulatory control, limit the expansion of the stomach, help control hunger sensations between meals, reduce the frequency and intensity of stomach contractions and produce a feeling of early and prolonged fullness. The company was founded by Mark B. Knudson, Robert S. Nickoloff, Timothy R. Conrad, Katherine S. Tweden and Richard R. Wilson on December 19, 2002 and is headquartered in St. Paul, MN.

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