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Civitas Solutions (CIVI) Q3 Earnings Beat, Revenues Miss

Civitas Solutions, Inc. CIVI reported third-quarter fiscal 2017 adjusted earnings per share (EPS) from continuing operations of 20 cents, surpassing the Zacks Consensus Estimate by a penny. Adjusted earnings improved 53.8% year over year, primarily on strong sales growth from the company’s Post-Acute Specialty Rehabilitation Services (SRS) and Adult Day Health (ADH) services.

Revenue Details

Civitas Solutions’ third-quarter revenues rose 5.2% year over year to $372.3 million. The figure, however, lagged the Zacks Consensus Estimate of $379 million by 1.8%.

The company gained $11.7 million from organic growth and $6.7 million from acquisitions in the third quarter.  Per management, organic growth was largely driven by strong performance by Intellectual and Developmental Disabilities (I/DD). Also, the company acquired seven companies in the reported quarter with total annual revenues of $23.2 million. Moreover, the deals mostly covered I/DD, SRS and ADH service lines.

Segmental Details

For the third quarter, the company reported I/DD revenues of $243.5 million, reflecting 4.1% growth from the prior-year quarter. 

SRS service revenues in the quarter totaled $77.8 million, up 5.8% from the prior-year quarter.

At-risk youth (ARY) servicesrevenues came in at $35.4 million in the reported quarter, flat with the third-quarter 2016 level. 

Civitas Solutionsreported ADH revenues of $15.7 million, reflecting 39.7% growth over the prior-year quarter.

Margin Details

In the reported quarter, Civitas Solutions registered a gross margin of 21.4%, down 100 basis points (bps) on a year-over-year basis owing to a 6.5% rise in cost of revenue to $292.5 million.

General and Administrative expenses declined 5.8% to $40.4 million led by enhanced cost efficiencies under the company’s cost restructuring program. Accordingly, adjusted operating margin in the quarter expanded 30 bps to 10.6%.

Guidance

Civitas Solutions lowered the high end of its fiscal 2017 revenue guidance.

The company projects revenues in the range of $1.48–$1.49 billion, lower than the previous range of $1.48–$1.52 billion. The current Zacks Consensus Estimate for revenues is pegged at $1.49 billion, at the high end of the company’s updated guided range.

Our Take

Civitas Solutions exited the third quarter on a mixed note with better-than-expected earnings and a revenue miss.

Nonetheless, we are encouraged by the company’s progress in SRS and ADH, two of its fastest growing businesses. Moreover, the company is witnessing steady contributions from its strategy to grow organically and through acquisitions.

However, a tweaked fiscal 2017 guidance raises concern. Also, even though the company seems to be implementing its cost restructuring program efficiently, weak margins may continue to mar its financials.

Peer Earnings Performances

Medical stocks that have performed well this earnings season are Edwards Lifesciences Corp. EW, Steris Plc STE and Align Technology, Inc. ALGN.

Edwards Lifesciences’ second-quarter 2017 adjusted earnings improved a stupendous 42.1% year over year, primarily driven by strong sales growth at the company’s transcatheter heart valves business. The stock has gained around 0.9% over the last three months.

Align Technology’s second-quarter 2017 adjusted EPS of 85 cents were up a substantial 37.1% year over year. Revenues grew 32.3% year over year to $356.5 million. The stock has rallied roughly 25.4% over the last three months.

Steris reported first-quarter fiscal 2018 adjusted earnings per share of 85 cents, up 7.6% from the year-ago quarter. Also, adjusted gross margin improved 410 bps year over year to 42.3% in the reported quarter.  The stock has gained 13.1% over the last three months.

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