This article first appeared on GuruFocus .
Release Date: August 27, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
Positive Points
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Revenue increased 20% year-over-year to $10 million, with all three sales channels contributing to growth.
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Gross margin improved significantly to 67.2% from 46.5% a year ago, driven by higher-margin vascular sales and a favorable comparison.
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Adjusted EBITDA more than tripled to $3.0 million, reflecting efficient scaling with operating expenses up only 1%.
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The contamination protection solution saw strong growth, with US revenues up 68% year-over-year and 34% sequentially.
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Customer retention is high, with 100% of top 50 hospital system customers retained and 58 new hospital locations added in nine months.
Negative Points
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The company's first quarter of fiscal 2026 was soft, which still impacts year-to-date results.
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Operating expenses increased 8% year-to-date, partly due to higher product testing and amortization costs.
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The company's growth is concentrated in the US vascular access channel, which may pose a risk if that market slows.
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Despite strong growth, the company's market penetration remains low, with only a couple hundred of 6,000 US hospitals using its solution.
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The company's reliance on a few large accounts for significant revenue growth could be a concentration risk.
Q & A Highlights
Q: What drove the significant gross margin improvement in Q3 fiscal 2026, and how much was impacted by one-time items? A: Brent Ashton, CEO, explained that the gross margin of 67.2% was driven primarily by the acceleration of the high-margin US vascular access business and a favorable comparison to last year's inventory write-down. On an adjusted basis, gross margin was 66.4% versus 55.6% a year ago, representing a more than 1,000 basis point improvement, which highlights the underlying operational efficiency gains.
Q: Can you provide more detail on the 51% growth in the US Vascular Access and Surgical Consumables channel and its sustainability? A: Brent Ashton, CEO, attributed the growth to the contamination protection solution, which grew 68% year-over-year and 34% sequentially. He emphasized that this growth is 10 times the underlying market rate, driven by strong adoption in large hospitals like Mayo Clinic and Texas Children's, and the company's ability to expand within existing accounts, making the growth durable and sustainable.
Q: What is the significance of the growth in the top five hospital customers, and what does it indicate about the business model? A: Brent Ashton, CEO, highlighted that four of the top five accounts grew over 50% year-to-date, with the largest account up 54%. He noted that these are mature accounts, collectively on track to generate over $2.5 million in revenue this year, and such compounding growth is rare in the MedTech industry. This indicates deep product adoption and expansion across multiple units and service lines, which is the most durable form of growth.
Q: How is the company balancing its investment in growth with its financial performance? A: Brent Ashton, CEO, pointed out that revenue was up 20%, gross profit up 73%, and operating expenses up only 1%, demonstrating efficient scaling. The company generated $7.4 million in cash from operations, funded a $4.1 million dividend, invested over $1 million in capital expenditures, and still ended the quarter with $19.4 million in cash, up from $17.4 million at fiscal year-end, showcasing strong financial flexibility.
Q: What are the key metrics for the US vascular access sales channel, and how are they performing? A: Brent Ashton, CEO, shared that the company retained 100% of its top 50 hospital system customers from fiscal 2025. Revenue from this group grew 46% year-over-year in Q3, and the company added 58 new hospital customer locations in the past nine months. These metrics underscore the effectiveness of the "retain, grow, add new" strategy and the strong clinical value of the products.
Q: Can you elaborate on the customer feedback and its impact on product adoption? A: Brent Ashton, CEO, shared quotes from nurse leaders, including "please, please, please stock these" and "I am glad you're addressing contamination because now I can actually do something about it." He emphasized that this feedback reflects a long-standing unmet clinical need, and Covalon's products are finally providing a solution, which is driving rapid adoption and expansion in hospitals.
Q: What is the market opportunity for the contamination protection solution, and how much room is there for growth? A: Brent Ashton, CEO, noted that the solution is currently in a couple hundred of the approximately 6,000 US hospitals. Even the largest account is on track to spend over $600,000 this year, leaving significant room for expansion. He emphasized that the company is "barely scratching the surface" and is focused on getting the products into every patient who can benefit.
Q: How did the nine-month year-to-date performance compare to the prior year, and what were the key drivers? A: Brent Ashton, CEO, reported that nine-month revenue was almost $26 million, up 6%, with all three sales channels growing. Gross profit was $16.1 million, up 23%, and adjusted EBITDA was $4.7 million, up over 50%. He noted that despite a soft Q1, the strong Q2 and Q3 results demonstrate the company's broader operational strength and momentum.
Q: What is the company's strategy for expanding within existing hospital accounts? A: Brent Ashton, CEO, explained that growth often starts with one product or one unit and expands to more products and departments. He cited examples of hospitals starting with orders over $100,000 for house-wide implementations, and the consistent pattern of customers extending their use of Covalon's products across multiple service lines, which is driving the impressive growth in top accounts.
Q: Can you provide more color on the adjusted EBITDA and net income performance for the quarter? A: Brent Ashton, CEO, stated that adjusted EBITDA was $3.0 million, more than triple the prior year, and net income was $2.8 million versus $65,000 a year ago. Earnings per share were 10 cents, which is more than the sum of the last five quarters combined, marking a significant step forward in profitability and shareholder value creation.
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
