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The CogState Limited share price rebounds on profit report

This morning cognitive testing business CogState Limited (ASX: CGS) posted a net loss of $0.56 million on revenues of $28.96 million for the financial year ending June 30, 2018 (all figures in US$). The net loss was a marginal improvement on last year’s results, with total revenue climbing $2.56 million or 10% over the year. Before tax the group booked a profit of $0.1 million.

The group also lost a couple of important clinical trials contracts in July 2018 related to cognitive testing for Alzheimer’s research over what has been a mixed year for CogState.

In response to the operational performance CogState’s management today announced a plan to take $5 million in costs out of the FY 2019 budget, with some 30 full time staff roles axed, which represents 17% of the headcount.

As a result of the savings the group expects to deliver profit growth in FY 2019 (inclusive of costs related to redundancies) while still investing in what it describes as clinical trials and sales resources.

It would be preferable if they group’s operational performance delivered revenue growth to translate into profit growth as CogState maintains that by 2021 the market for cognitive testing will be worth $4.1 billion, with a 33.8% compound growth rate out until then.

These addressable market forecasts are all well and good, but CogState will not be able to cut its way to growth over the medium term, with management uncertain if last year’s 10% revenue growth rate will be beaten in FY 2019.

The stock is up 12% to 57 cents today as investors vote for the cost-cutting plan. Importantly the disappointment over its recent performance looks reflected in a valuation less than $60 million or only just over 2x sales.

As an alternative to CogState you could consider a healthcare junior growing profits and revenues at blockbuster rates….

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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