NxStage Has Third Beat in a Row as Initiatives Are Paying Off

NxStage reported strong second quarter 2014 earnings on August 7, 2014, with a top-line beat driven by continued growth in the home segment and betterthan- expected contributions from other parts of the business. Revenue of $74.1 million (growth of 13.2%) was $3.5 million higher than our estimate and $3.6 million better than the consensus. The loss per share of $0.12 matched our estimate but was $0.01 less than the Street consensus of a loss of $0.11.Home revenue growth has accelerated from 5.5% in third quarter 2013 to 18% this quarter.

Management has now exceeded our estimates for three quarters in a row, driven by strong domestic patient adds. The combination of its direct-to-patient marketing, NxStage Kidney Care clinics, and new product offerings drove the growth. We believe that these initiatives remain in the early stages and midteens growth is sustainable in the home segment over the next several years. We highlight the specific opportunities and upside drivers in the discussion section below. International was also a contributor to growth this quarter.

With three quarters of solid results, we believe that management’s move to direct sales is beginning to play out. It is important to note that the move has stabilized results in the home business to its durable midteens range. Gross margin for System One was up 200 basis points year-over-year, to 47%, and management expects margins to keep improving toward its longer-term goal of over 50%. While the total gross margin for NxStage declined, this was largely due to the investments in its Kidney Care clinics.

With three consecutive quarters of solid beats, we believe that the company’s strategic initiatives are paying off. We expect the company to continue its investments in driving HHD adoption and sustain midteens growth over the next several years. At 3.1 times our new 2015 home revenue estimate, we rate the stock Outperform.

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