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TMFPostOfTheDay (< 20)

Reading the Q3 Tea Leaves

Recs

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October 15, 2012 – Comments (7) | RELATED TICKERS: MAKO.DL

Board: MAKO Surgical

Author: ultimatespinach

After consecutive precipitous declines in MAKO's stock price following consecutive disappointing system sales totals in Q1 and Q2, I started wondering what to look for out of Q3.

First, I looked at the history of system sales, as reported by company.

[See Post for Tables]

Next, I looked at what percentage of total system sales per year each quarter has represented (note: percentages may add up to 99 or 101 for a year due to rounding), and then calculated the average each quarter has represented over the first three years of the RIO system.

Obviously, this remains a small sample size, so take the results with a grain of salt, but it's interesting to note that the proportion of average system sales from Q1 to Q2 (14/21) is exactly the proportion of system sales in Q1 and Q2 of this year (6/9).

So the results of Q1 and Q2 both predict the same total system sales for the full year 2012 if the proportions of the past three years apply: 43 (actually 42.8).

Full-year sales of 43 would be at the lower end of the lowered guidance of 42-48, and would represent a decline from 2011. That's the bad news. Without proportional representation from Q3 and Q4 greater than the historical average, MAKO will have an indisputably disappointing result in new system sales in 2012, which will have at least three possible explanations five years from now:

-- The predicted hiccup in the technology adoption curve.

-- The beginning of the end of a medical device company that never made it to mass adoption.

-- The result of poor internal sales execution addressed by the company at mid-year when it fired its director of sales.

If system sales in Q1 and Q2 represent roughly the historical averages of those quarters over the past three years, and sales in Q3 represent roughly its historical average, sales in Q3 will be 11.6 Since you can't sell six-tenths of a RIO system, that rounds to 12. Sales in Q4 would be 16 (16.3).

So the number I'm looking at as sort of an over/under for system sales in Q3 is 12.

If that's the number, MAKO is on track for 43 for the year, a disappointing result but one which the market has arguably priced in. The stock is down about 60 percent since the first of the two quarterly reports this year.

If the number is greater than 12, it might signal that sales execution was indeed the issue, which would be the least profound and therefore most bullish explanation for the declines in Q1 and Q2.

If the number is less than 12, the prospect for further downdrafts in the stock becomes very real as it would suggest that even the reduced annual guidance might prove too high.

Lastly, I wondered if there were any clues that might suggest any action with reference to the stock -- long or short -- in anticipation of Q3 earnings, which MAKO has announced historically within the first 10 days of the second month following the end of the quarter. This would put the Q3 earnings announcement sometime between Nov. 1-10. Yahoo has it on Nov. 1. I don't know if Yahoo actually knows that or if it's guessing based on Q2 results, which were announced Aug. 1.

We can probably conclude that MAKO does not intend to warn again. In Q2, it warned on July 9, so one would think a warning would have come within the first two weeks of October. Of course, the failure to warn doesn't necessarily tell us anything. They may be tired of watching the stock get hammered. They may be afraid of what a warning would do in the context of the considerable short interest, although bad results would have their effect soon enough in any case.

But if we assume that the absence of a warning means they are at least on track to meet their reduced guidance, then 11 or 12 system sales would be pretty much the minimum requirement. Any number greater than this would move the projection up into the middle of the reduced guidance at a minimum and might signal a reversal in momentum for the stock.

If you believe in analyst mid-term reports, which I generally don't, MAKO will at least meet expectations:

http://www.streetinsider.com/Analyst+Comments/Analysts+See+P......

Finally, there is the greed/fear factor. Both the stock price and the short interest tell you that the crowd hates MAKO right now, for obvious reasons. It has underperformed in two consecutive quarters. But the reason the crowd is often wrong is because it always expects whatever has happened recently to continue happening. Sometimes it does, but whenever it doesn't, the crowd will be on the wrong side of the trade. It will take some nerve to buy in advance of earnings this quarter, but if it turns out the problem in Q1 and Q2 was internal execution, it could be a propitious moment to be greedy while others are fearful.

7 Comments – Post Your Own

#1) On October 15, 2012 at 12:13 PM, maniladad (< 20) wrote:

Does anyone know an orthopedist who has actually used the system? Feedback of that type would give me more useful information than knowing the level of sales. If the system is good and the physicians and patients like it, the company is most likely worth buying into. If not, if it's too bulky, too unreliable, too complicated, makes too much noise, scares the patients, or whatever, new sales managers are not going to make any difference and the company is facing the second of your three possible outcomes.

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#2) On October 15, 2012 at 1:29 PM, Mega (99.96) wrote:

"If that's the number, MAKO is on track for 43 for the year, a disappointing result but one which the market has arguably priced in."

After falling 60%, MAKO still trades at generous multiples - 6.6x sales and 7.4x tangible book. I don't think mediocre performance over the next 2 quarters is priced in.

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#3) On October 15, 2012 at 3:32 PM, dnelsch (< 20) wrote:

For what it is worth, my orthopedic surgeon says he can do the surgeries faster the "old" way as opposed to setting up the computer and doing it the new way.  He does over 300 knee replacements per year and I am sure if it was easier and faster, he would use it.  He is not afraid of technology. 

When I looked for Doctors that used the machine in the N.E. Ohio area, I was only able to find one.  Does MAKO have a sales staff?  I was surprised when I didn't see Cleveland Clinic on MAKO's user list!  If the machine is so good, why aren't more Orthopedic Centers using them?

I'm afraid I'm on the bleeding edge of this stock, and it is really starting to hurt!

 

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#4) On October 15, 2012 at 3:45 PM, Deathscythe22 (< 20) wrote:

The surgerys are faster by hand yes, but the idea behind it is with smaller incisions and better precision with the Rio, this will lead to faster heal times, less malpractice suits.

  (I personally have not spoken with a surgeon that has used a rio, but from my understand alot of them that do use it generally dont want to perform it by hand anymore.)

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#5) On October 16, 2012 at 11:12 AM, L0RDZ (82.15) wrote:

I'm not sure if this is the same medical surgical device, but from what i'm told a lot of the  doctors  simply say they utilize the newer technology when in fact they are simply only partially using it and are really doing it more by the hand.

Padding the bills.

Some many just aren't as comfortable with the technology.

 

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#6) On October 16, 2012 at 11:18 AM, kthor (70.94) wrote:

dnelsch sounds like your doctor is going for quantity over quality work

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#7) On October 18, 2012 at 7:13 PM, Dawgpac (< 20) wrote:

The Hospital for Special Surgery (HSS) in NY recently bought two MAKO units after evaluating a demo unit for a couple years. HSS is the #1 Ranked Hospital for Orthopedics (2012 US News Best U.S. Hospitals). Mayo Clinic uses the MAKO at their Florida hospital. 

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