Over the past several days, investors have thoroughly considered ViaCell's
Time for a second opinion
Expected to report $13.2 million in sales and a $0.12-per-share loss, ViaCell announced last week that it actually exceeded sales estimates with its reported $13.5 million; unfortunately, it missed earnings estimates by a wide margin, reporting an $0.18-per-share loss -- half again as bad as expected.
But enough about Wall Street's earnings game. In my opinion, ViaCell missed estimates pretty badly, but if Mr. Market wants to let this one slide, bully for him. More interesting to this Fool -- and to long-term investors everywhere, I expect -- is what last week's news tells us about the company's long-term prospects.
If you recall from last week's Foolish Forecast, I was looking for a couple of things out of ViaCell in this most recent quarter: a moderated rate of stock dilution, and sales growth justifying last quarter's outsize growth in selling, general, and administrative expenses (SG&A). First, let's give credit where credit is due: ViaCell's weighted average shares outstanding increased just 2% over the last year. But on the other issue, the firm continues to invest heavily in SG&A -- yet receive diminishing returns on that investment in the form of greater sales.
Sales for the quarter came in 19% higher than this time last year. Unfortunately, to reach that level, the company had to ramp its SG&A spending by 55%. Breaking that into its component parts, general and administrative expenses climbed 39%; meanwhile, the selling and marketing costs incurred to drive ViaCell's 19% sales growth leapt an entirely disproportionate 64%.
Ouch. But it's getting better soon, right?
I fear not. According to ViaCell, its return on its marketing investments will begin to manifest in 2H of this year. The company predicts 20% year-over-year sales growth, and marketing costs that "reasonably approximate" the marketing costs we saw in Q2. At first listen, that sounds like marketing costs will stay flat as sales rise, but that's really not what the company is saying at all. Consider that if marketing costs continue at their Q2 rate, the firm will spend $20 million in H2 trying to drive 20% sales growth. But in last year's H2, ViaCell spent only $13.2 million. In other words, the firm intends to spend 52% more on marketing to grow its sales 20%.
Doesn't sound like a healthy business plan to me.
Is there still hope for ViaCell? Of course! Hope springs eternal. If ViaCell can just tighten its purse strings, investors may yet find a way to save blood and make money.
Looking to invest in the stem-cell sector, but worried ViaCell might not be the right horse to back? You might want to examine a few of its competitors as well. But beware -- in this market, there be dragons:
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Fool contributor Rich Smith does not own shares of any company named above.