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Cyberonics Beats on Q2 Earnings, Guides Up

Zacks Equity Research

Cyberonics’ (CYBX) second-quarter fiscal 2014 earnings per share (EPS) rose 13.6% to 50 cents from the year-ago adjusted EPS of 44 cents. The results also beat the Zacks Consensus Estimate by a penny. This marks the 10th successive quarterly earnings beat for Cyberonics.

Revenues increased 12.0% year over year to $70.1 million in the quarter, beating the Zacks Consensus Estimate by a whisker. Growth was aided by solid U.S. net product sales and unit sales.

Quarter in Detail

In the second quarter, worldwide unit sales increased 8.2% year over year to 3,496 units. On a geographic basis, Cyberonics recorded 12.4% growth in U.S. product revenues to $57.9 million and 8% unit growth in the quarter. According to the company, domestic product revenues reached a record high in the quarter on the back of generator ASP growth of 3.8% and increased lead sales.

International product revenues grew 8.5% at constant exchange rate with unit growth of 9.8%. Foreign exchange movements favorably impacted sales for the second quarter of fiscal 2014 by $200,000 on a year-over-year basis. The company witnessed healthy sales growth in Germany and the U.K., enhanced by solid performance in Eastern Europe. Among other international regions, performance in Latin America was also impressive.

During the reported quarter, the company made further progress with the European approval of its AspireSR generator. Keeping in line with its expectation, the company made the regulatory filing of AspireSR generator for European regulatory approval. With this submission, it anticipates European commercial sales to commence in a phased launch by the end of the current fiscal. In addition, the company continued to enroll patients in the first phase of E-37 U.S. clinical study for the AspireSR generator and expects to complete enrollment by the end of fiscal 2014.

Gross profit climbed 9.3% to $63.2 million in the quarter. However, gross margin contracted 167 basis points (bps) to 90.1%, impacted by the medical device tax and associated costs since Jan 1.

With a 7.5% increase in selling, general and administrative expenses to $29.6 million and a 16.0% rise in research and development expenses to almost $11.7 million, adjusted operating margin contracted 82 bps to 31.2% in the reported quarter.Although Cyberonics’ recorded higher expenditure due to product development activities, its focus on operating leverage supported the margin expansion.

The company exited the quarter with cash and cash equivalents and short-term investments of $122.6 million, compared with $135.8 million as of Apr 26, 2013. Cyberonics has no interest-bearing debt on its balance sheet. The company repurchased almost 0.48 million shares for $25 million during the quarter and is left with 0.26 million shares under its current buyback program for the ongoing fiscal.

Guidance Up

Cyberonics envisages revenues in the range of $281−$285 million from the earlier range of $279−$283 million. The current Zacks Consensus Estimate of $283 million remains within the company’s guidance. Cyberonics expects global unit growth of roughly 10% (unchanged from the earlier guidance).

Adjusted income from operations is expected in the range of $86−$88 million (from earlier $85−$88 million), resulting in net income of $54−$56 million ($53−$56 million) and adjusted EPS of $1.97−$2.03 ($1.93−$2.01) for fiscal 2014. The current Zacks Consensus Estimate of $2.00 for fiscal 2014 lies within the guidance range.

Our Take

Cyberonics reported strong second-quarter results, beating the Zacks Consensus Estimate on both fronts. The quarterly results successfully boosted market sentiments too as shares increased 7.5% after the earnings release on Nov 22. A possible explanation might be the robust growth trend over the past several quarters coupled with the improved guidance that reflects management’s optimism for the ongoing fiscal.

We are encouraged by Cyberonics’ solid foothold in the epilepsy market and its international business trends. Even amid a tough macroeconomic backdrop, the company posted strong growth in Europe. Meanwhile, Cyberonics continues to reward shareholders with attractive share repurchases.

Currently, the stock carries a Zacks Rank #2 (Buy). Other MedTech stocks such asNatus Medical Inc. (BABY), AngioDynamics Inc. (ANGO) and CryoLife Inc. (CRY) are also worth considering. While Natus Medical carries a Zacks Rank #1 (Strong Buy), the other two stocks hold the same Zacks Rank as Cyberonics.

Read the Full Research Report on ANGO
Read the Full Research Report on CYBX
Read the Full Research Report on BABY
Read the Full Research Report on CRY

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