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Innovex Q3 Earnings
by Jeff Fischer (TMF Jeff)

1313 Fifth St. South
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ALEXANDRIA, VA, (July 15, 1997)/FOOLWIRE/ -- Before the market opened INNOVEX (Nasdaq: INVX) announced record earnings of $0.72 per share, or $10.9 million, beating estimates of $0.70. Earnings per share climbed 188% from the $0.25 achieved last year in the same quarter.

Third quarter revenue climbed to $41.9 million from $19.2 million, an increase of 118%. One company goal for this fiscal year had been to top $100 million in sales. After nine months, Innovex has $109 million in sales, compared to $47 million for the first three quarters of the prior fiscal year, and $69 million for that entire year.

As previously reported, management doesn't expect any sequential earnings growth in the current quarter. The per share estimate stands at $0.69, flat with the $0.72 earned this quarter. The disk drive industry (especially on the high-end) has recently seen slower orders. Innovex -- though not as impacted as others because it sells to all drive makers -- has still been affected. If the industry slows while Innovex only remains flat, though, that arguably bodes well for the company, especially when the industry accelerates again.

Innovex shared -- based on the long-term forcecasts that Innovex is receiving from its large customers -- that it expects to see "significant sequential growth" in its next fiscal year, beginning October First. The current estimate for fiscal 1998 stands at $2.93 per share.

The company has made forecasts of "significant growth" in the past, and management is respected in its ability to track orders and guide analysts, but their "bullish" predictions usually don't cause analysts to substantially raise estimates right off the bat, and shouldn't now, either. It's better that the company and analysts manage expectations and wait for quantifiable numbers before altering estimates.

Innovex's current run-rate (the latest results multiplied by four) would result in $168 million in revenue over the next four quarters and $2.88 in earnings per share. These "conservative" numbers assume no sequential growth. On current estimates, the company's annual earnings growth is expected to be in the 19% to 25% range. The estimated five-year annual growth rate is 22%, slightly above the industry growth rate.

The stock rose $2 on the bid today, to $30 3/8, on more than twice average volume of 1.1 million shares. At $30 the stock trades at 12 times estimates for the year ended in September, and now trades at 14.5 times the trailing earnings of $2.07 per share.

In the conference call Innovex stated confidence that the December quarter (which is usually a slower quarter) would be larger than the current quarter. Though unusual, this is the second year in which this has happened. The company also stated the Iconovex -- it's software division, and the only part of the company not yet profitable -- would be surrendered if a partner wasn't found. This has been part of the strategy for the past few quarters.

Management ended the conference call with a response to the possible future threat posed by HUTCHINSON TECH (Nasdaq: HTCH). Hutchinson is working on new technology that could replace Innovex's lead-wire technology (this threat has been addressed and considered for the past few years). Innovex stated that Hutchinson has an eloquent product, however it doesn't offer any benefits above and beyond Innovex's products, while the cost is significantly higher. In the disk drive business low component costs are essential.

The Innovex conference call summary will be available on the Fool within the next two days.


Let's look at a few numbers, good Fools, as taught in the Fool's School on How to Value Stocks.

The profitability of operations at Innovex has improved significantly over the past year.

Just ended Q3, 1997 Last Year, Q3

Gross Margin 43.8% 37.9%

Operating Margin 37.3% 26.4%

Net Profit Margin 26.1% 18.5%

Return on Equity (ROE) soared in the latest quarter, to 64% from 37% last year. The Dow stock with the highest ROE is COCA-COLA (NYSE: KO) at 57%. Return on Equity is a measure of the company's ability to create shareholder value through asset management, financial leverage and overall profitability. Return on Equity is figured by:

                 One year's earnings
ROE = -----------------------------
                Shareholders Equity

Also taught in the Fool's School are the following three measures of corporate performance. Innovex improved on all counts, showing that management is running a tighter ship:

Just ended Q3, 1997 Last Year, Q3

Asset turnover 1.9 1.5

Inventory turns 15.8 13.2

Days Sales Out 46.7 53.2

Innovex's cash and equivalent position increased to $37 million from $17 million last year, while long-term debt decreased to $1.2 million.

We'll look at and discuss more numbers in the coming Fool Portfolio recaps. Fool on!

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