Our first quarter results reflect our continuing efforts on profitability focus and cost control. We dynamically adjusted our product mix to minimize the negative impact from the increased costs of certain raw materials and the government's price reduction on certain drugs. In addition, we believe our continued investments in CAPEX and R&D will give us a competitive advantage in for the long term, especially under the stricter regulatory environment.
Our growth in 2010 was consistent with our expectations and reflects our continued efforts on profitability focus and cost control. We dynamically adjust our product mix to minimize the negative impact from the increased cost of certain raw materials, as well as the government's price cut on certain drugs. In addition, our long-term investments in science and technology have achieved initial results, which were demonstrated by the strong sales from the new products supported by our R&D efforts. Overall, we remain enthusiastic about the tremendous opportunities in China's healthcare sector, and we are looking forward to more progress in the fiscal year ahead.
Revenue beat but EPS missed. 3Q10 revenue came in at $91.5 million (up 16.1% YoY), which beat the Street's $88 million and our estimate of $90 million. Net income of $5.3 million missed the Street's and our $6 million forecast slightly. EPS was $0.07, which missed the Street's and our $0.09 forecast. Higher-than-expected selling and marketing expenses (15.2% of revenue), advertising expenses (12% of revenue) and R&D investment (5.2% of revenue) dragged operating pro fit margin from 11.8% in 2Q10 to 9.8%. Management plans to continue the investment in selling & marketing, advertising and R&D for future revenue growth.
Revenue turning around: Healthy growth in all three segments. As we mentioned in our previous report, we believe the worst for AOB is over, and this quarter's revenue growth is impressive in a relatively unfavorable industry environment. The 16.1% YoY increase in total revenue was attributable to 16.9% YoY growth of pharmaceuticals sales (25.1% YoY growth in prescription and 10.1% YoY growth in OTC), 11.4% YoY growth in nutraceutical sales, and 14.4% YoY growth of its distribution business.
Margin pressure will exist. Gross margin of 51.7% is similar with 51.5% in 2Q10 but a 4.3% decline compared to 3Q last year, due to pricing pressure from healthcare reform, new GMP standard implementation and rising raw materials prices. Although investment in R&D and sales and marketing will likely continue to pressure margins in the future quarters, we think AOB is on the right track to keep building its brand awareness, broad and deep distribution network, and especially its strong prese nce in rural markets. We also view the margin pressure as an industry-wide problem rather than a company-specific problem. Although industry headwinds still persist, AOB's market share should increase and potential acquisition opportunities will likely surface as smaller players are struggling.
Compelling valuation might attract strategic investors. We now forecast FY10 revenue, net income and diluted EPS to be $330.7 million (11.7% YoY growth), $21.0 million and $0.26, respectively. The stock is trading at 9.9x and 8.3x our FY10 and FY11 diluted EPS estimates, respectively. On an EV/EBIDTA basis, the stock is at 4.7x our 2010 estimate and 4.4x 2011 estimates. In addition, EV/2011e revenue is close to 0.54 and EV/BV is at 0.34. We believe AOB's franchise is worth more than its cur rent market valuation, which could attract strategic investors who are interested in China's ever growing pharmaceutical market. We maintain our Buy rating.
AOBI is currently followed by 4 analysts. All 4 give the stock a neutral rating.