No. of Recommendations: 2
The headline numbers here are quite poor. 12% sales growth and a huge eps miss of -0.39. Don't read too much into that...there is a lot of noise masking some generally good results.

Press release: http://investor.insulet.com/releasedetail.cfm?ReleaseID=8056...

Link to webcast: http://investor.insulet.com/eventdetail.cfm?eventid=136400

Transcript of webcast: http://seekingalpha.com/article/1821092-insulets-ceo-discuss...

Management Q3 guidance:
Revenue: 60-64 million

Analysts were expecting:
Revenue – 62.01 MM
Earnings per share – (0.16)

Results:
Revenue: $ 61.1 MM (miss) (+12% year over year)
Earnings per share – (-0.39) (big miss)


Just like last quarter, there is a lot of noise in these readings. Upgrading patients to the new OmniPod system for free and loss of low margin revenue from CMS/Neighborhood put a serious dent in revenue. That’s why revenue was only up 12% year over year, and gross margins remain muted.

Now, lets dig in to Duane’s (CEO) prepared comments. I’ll just hit the high points:
- New patient starts more than 40% higher than a year ago
- 90% of our existing direct customer based to the new OmniPod
- Capacity to produce nearly a million OmniPods per month.
- Positive cash flow for a second consecutive quarter as our cash balance increased to $154 million from $151 million.
- Commence the transition to the new OmniPod in Canada this quarter
- Doubled production from a level of 20,000 OmniPods per day in July, to current levels of approximately 40,000 OmniPods per day
- Left the quarter with more than $4 million of distributor orders unfulfilled (i.e. sales would have been higher if we had not had a inventory bottleneck)
- Patent Infringement Law suit with Medtronic settled
- Hired Dr. Howard Zisser as the company’s first medical director
- CGM & Lily/U500 partnerships progressing

Now, Brian (CFO) gets on the call for the in depth financial notes
- 61.1 MM in revenue, included a 4 MM reduction in revenue from Medicare/Neighborhood
- Growth would have been 20% if you adjust for that impact
- 4 MM of unfilled orders from distributors
- OmniPod growth would have been 35% YOY (year over year)
- Reorder disruption persisted throughout the quarter, but has normalized in September
- $178.6 MM in rev YTD, up 16% from $153.5 MM last year
- Gross profit up 12% to 27.4 MM
- Operating expenses up $11.8 MM from Q2, but that included a $10 MM charge to settle the Medtronic suit
- Operating expenses will return to Q2 levels in Q4
- Operating loss of $17.3 MM for quarter, would have been $6 MM without the charge
- $4 MM in interest expense, of which $2.6 MM was non-cash
- Total net loss of $21.3 MM or -$0.39/share
- Cash flow positive for the quarter
- 54.5 MM shares outstanding

Guidance:
Q4 revenue of $65 to $71 MM (analysts right now are at $67.62 MM)
Full year revenue of $244-$250 (analysts are at $247.25 MM)
Q4 Gross margin near 50%

OK, now comes question time from the analysts.

1) Would sales have been $4MM higher this quarter if you could fill the distributor order? More noise than that due to stocking vs. new shipments plus Neighborhood loss of Medicare/Neighborhood. Would have been $69-$70 MM if you exclude all that noise, but can’t say for sure.
2) Sensor update? Still in the research phase. Working through sterilization issue.
3) 50% GM in Q4? Driving towards 50% on consolidated basis. Implies US core OmniPod gross margin of 63-65%. Potential to expand that higher.
4) 3 lines capable of supporting 100,000 users? More like 85,000. Adding in 4th line in 3rd quarter 2014.
5) Territory expansion? Hiring 15-20 people in Q4/Q1 to expand.
6) Thoughts on Neighborhood? Caught off guard by how low competitive bidding was. Mainly bought them for back office. This quote from Duane made me laugh “So I’m not going yell uncle yet. I would tell you it has been more complicated than we thought.”
7) Attrition holding at 9%? Noisy, but looks that way.
8) Oncology submission? Perhaps this year/early next year.
9) Fertility drug? 6-8 weeks will make an announcement.
10) EBIT positive by year end? Yes.

=========================================================================

So, where does that leave us?

Overall, the long term bull case for PODD remains on track. Now that the upgrade cycle is largely in the past and the 3rd line is up and running the near term future looks quite good. There was a lot of noise in this report, just like the last one, which is probably why you are seeing such whipsaw action in our stock price today. The headline numbers look quite bad….only 12% growth and a much bigger than expect loss. However, once you dig a little deeper and realize that combination of Neighborhood & inventory problems put some serious pressure on our revenues, and mix in an unexpected $10 MM charge to settle the patent litigation with Medtronic…the story looks much better.

In summary, things are on track. Next year we can look forward to record revenue, better margins, and the squeeze that Neighborhood is putting on our top line growth stopping (by the end of Q2).

Brian
SA/RB Welcome Fool
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