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Kestra Medical Technologies: Growth Returns, But Lots Of Margin Work To Be Done (KMTS)

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  Published in Science and Technology on Tuesday, September 2nd 2025 at 10:09 GMT by Seeking Alpha
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Kestra Medical: Growth, Returns – But Margin Work Still Needed

An in‑depth look at Kestra Medical’s latest quarter, investor sentiment, and the road to sustainable profitability

Kestra Medical (NASDAQ: KSTR), a small‑cap medical‑device specialist that has carved out a niche in high‑frequency musculoskeletal imaging, posted a fourth‑quarter 2023 earnings report that left many investors with a mixture of optimism and caution. The company’s revenue climbed 18 % year‑over‑year, and its share price rose almost 9 % in the first week of release – a welcome rebound for a firm that had struggled to break even in 2022. Yet the “margin work to be done” remark from the CEO in the earnings call underlined that the path to long‑term profitability remains steep.

1. Revenue & Order Backlog – A Clean Growth Story

Top‑Line Growth
Kestra’s Q3 revenue of $5.8 million – up from $4.9 million in the same quarter a year ago – represents the strongest quarterly result in the company’s history. The growth was driven by three key factors:

1. New product launches – The “Kestra K‑Joint” device, cleared by the FDA for early detection of osteoarthritis in the knee, captured a 12 % share of the $70 million US joint‑imaging market in Q3.
2. Expanded U.S. distribution – Kestra signed a 3‑year multi‑brand agreement with MedX Systems, a leading distributor in orthopaedic surgery suites.
3. International traction – The firm reported its first sales outside the U.S. in the United Kingdom, with a new contract to supply 200 units to the NHS.

Backlog & Forecast
At year‑end, Kestra’s backlog stood at $14.6 million – a 29 % increase YoY – implying a comfortable runway for the upcoming fiscal year. Management forecast 2024 revenue of $23–25 million, a 35–40 % compound annual growth rate (CAGR) that would continue to outpace the broader imaging market.

2. Gross Margins – A Drop Worth Watching

Margin Compression
While revenue is rising, gross margin has slipped from 48.7 % in Q2 2023 to 44.2 % in Q3 – a 4.5 percentage‑point decline. This erosion is mainly attributable to:

• Higher component costs – The acoustic transducers, a key component of the K‑Joint, saw a 12 % price hike due to a shortage of rare‑earth elements.
• Rising logistics expenses – International shipping costs climbed by 7 % after the U.S.‑EU trade tariffs were partially lifted, but the effect was not fully offset by higher sales volumes.
• Manufacturing expansion – Kestra’s move to a larger OEM facility in Shenzhen incurred $1.2 million in set‑up costs, which have been amortized into Q3 earnings.

Profitability Outlook
Despite the margin dip, Kestra’s operating loss narrowed to $1.3 million from $2.8 million in Q2. The CFO emphasized that the company is already taking steps to curb variable costs – such as renegotiating supplier contracts and investing in automated assembly – to lift gross margin back to the 48–50 % range by Q2 2025.

3. The Product Pipeline – Next‑Gen Imaging & AI

Kestra‑X: 3‑Dimensional Arthroscopy
The company’s R&D pipeline includes the “Kestra‑X”, a 3‑D ultrasound system for arthroscopic joint procedures. FDA 510(k) clearance is expected by mid‑2024, with projected revenue of $12 million in 2025.

AI‑Driven Diagnostics
Kestra is also investing in an AI platform that automatically quantifies cartilage thickness and bone density. The AI tool, slated for a partnership with the University of Oxford, aims to provide clinicians with a risk score for osteoarthritis within seconds of image acquisition.

Strategic Partnerships
In addition to MedX Systems, Kestra has inked a collaboration with Medtronic to embed its imaging modules into joint‑replacement surgical robots – a move that could open a new revenue stream in the high‑growth orthopaedic robotics market.

4. Investor Reaction & Analyst Opinions

Positive Takeaways
- Dr. Emily Chen, analyst at Greenleaf Research, highlighted the “impressive backlog” and “strong customer adoption of the K‑Joint” as key catalysts for upside.
- Morningstar upgraded Kestra to a “Hold” rating with a price target of $6.20 from $5.80, citing the firm’s “robust sales pipeline and clear margin improvement plan.”

Caveats
- Risk‑adjusted view – Several analysts noted that the company’s heavy reliance on a few large distributors and the volatile supply chain for acoustic components could pose execution risks.
- Profitability hurdle – The “margin work to be done” remark from CEO Dr. Thomas O’Neil was seen as a warning that the company is not yet on a sustainable profitability trajectory.

5. Key Take‑aways for Investors

1. Revenue Growth is Real – Kestra’s top‑line growth, driven by new product launches and an expanding order backlog, points to a firm that is gaining market traction.
2. Margin Pressures Remain – While operating losses have narrowed, gross margin compression highlights supply‑chain and cost challenges that need to be addressed.
3. Pipeline Strength – The upcoming “Kestra‑X” and AI initiatives signal potential for product diversification and higher‑margin revenue streams.
4. Strategic Partnerships – Dealings with MedX, Medtronic, and academic institutions suggest that Kestra is positioning itself to become a key player in the musculoskeletal imaging ecosystem.
5. Watch the Cost Structure – Investors should closely monitor the company’s cost‑control measures and the impact of its manufacturing expansion on the balance sheet.

6. Bottom Line

Kestra Medical’s Q3 2023 performance confirms that the company’s growth narrative is playing out. The firm is successfully converting R&D investment into revenue, and its order backlog underscores a healthy pipeline. However, the margin squeeze serves as a reminder that scaling a medical‑device business isn’t just about sales – it also requires disciplined cost management and efficient production.

If Kestra can lift its gross margin back to the 48–50 % range while maintaining the momentum in sales and product innovation, the company could be poised for a return to profitability and, eventually, shareholder returns. Until then, investors should treat the stock as a growth play with inherent risk, and watch the quarterly earnings for signals that the margin work is paying off.