Cyberonics Inc. (CYBX) reported third-quarter fiscal 2015 adjusted earnings per share (EPS) of 59 cents, reflecting an increase of 15.7% year over year. The adjusted results also beat the Zacks Consensus Estimate by a couple of cents.
The year-over-year improvement in earnings was primarily driven by strong revenue growth and a positive outcome on the overall margin front.
However, without taking into consideration the one-time items, Cyberonics' net income was $16.5 million or 62 cents per share, a jump of 19% or 21.6%, respectively, from the year-ago quarter.
During the earnings announcement, Cyberonics also highlighted the receipt of the CE (Conformite Europeenne) Mark approval for its VITARIA System, which has been specifically designed to treat patients suffering from moderate to severe heart failure. This system provides Autonomic Regulation Therapy (ART), thereby promoting improvements in a patient's heart function. The system is not available in the U.S. as yet.
In a separate development, Cyberonics has entered into a merger agreement with Italy-based global medical device company – Sorin S.p.A – for a combined equity value of approximately $2.7 billion. The merger aims at creating a new global leader in medical technology with the combined expertise and market leadership of the respective companies in neuromodulation and cardiac surgery.
Quarter in Detail
Coming back to the quarter's performance, revenues increased 5.7% year over year to $72.1 million in the third quarter and were almost in line with the Zacks Consensus Estimate of $72 million. The year-over-year improvement was aided by growth observed in net product sales as well as unit sales, both in the domestic and international markets.
On a geographic basis, U.S. net product revenues were up 8.6% at $57.6 million while unit sales growth was 5.9%. Notably, the company achieved record sales in its U.S. business in the third quarter. International product revenues grew 18% at constant exchange rate
to $14.5 million with unit growth of 18.1% amounting to 1,240 units. Foreign exchange movements adversely impacted international sales for the quarter by approximately $1 million on a year-over-year basis.
Cyberonics experienced impressive growth in all its international regions. Robust growth was observed in Europe, Latin America, Japan, and Asia Pacific regions. The company witnessed impressive unit sales growth of its AspireSR generator – a VNS Therapy System. During the reported quarter, sales of the AspireSR accounted for more than 21% of Cyberonics' unit sales in Europe and EMMEA, while market penetration of the device continued to increase.
Gross profit rose 6.1% to $65.5 million in the quarter. Consequently, gross margin expanded 40 basis points (bps) to 90.9% from the year-ago quarter, owing to rise in the quarter's revenues.
In the reported quarter, a 6.5% rise in selling, general and administrative expenses to $31.3 million and a 6% decline in research and development expenses to $10.5 million led to a 12.2% rise in operating income to $23.7 million. Consequently, operating margin expanded 190 bps to 32.8% on a year-over-year basis.
The company exited the quarter with cash and cash equivalents and short-term investments of $143.2 million, compared with $128.3 million as of Apr 25, 2014. Cyberonics has no interest-bearing debt on its balance sheet. The company repurchased 277,000 shares in the third quarter of fiscal 2015.
Guidance
Cyberonics reaffirmed its fiscal 2015 revenue guidance. The company continues to expect revenues in the range of $292–$298 million, reflecting annualized growth of approximately 7% (adjusting for the single country order of $4.7 million and license revenues of $1.5 million for fiscal 2014). The current Zacks Consensus Estimate of $295 million lies within the company's guidance.
Fiscal 2015 EPS projection has been reiterated in the range of $2.33 to $2.39, reflecting annualized growth of 16%. The current Zacks Consensus Estimate of $2.37 lies within the guided range.
Income from operations is expected to continue in the band of $96–$99 million in fiscal 2015, while adjusted net income guidance remains in the range of $62–$64 million.
However, management expects operating income, net income and EPS in fiscal 2015 to be impacted by transaction costs related to Cyberonics' expected merger with Sorin.
Our Take
Cyberonics reported a solid third-quarter fiscal 2015, registering a bottom-line beat and in-line revenues. Moreover, both earnings and revenues increased on a year-over-year basis.
We are also impressed with the receipt of the CE Mark for Cyberonics' VITARIA System, which will help the company tap the huge market potential with respect to heart failure patients. We believe this will result in further expansion of Cyberonics' market share in the drug-resistant epilepsy market.
Moreover, the recent merger of the company with Sorin is expected to enhance revenue growth, drive cash flow generation while also being accretive to cash EPS for all shareholders of the combined company from fiscal 2016.
Zacks Rank
Currently, Cyberonics carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical instruments industry include ABIOMED, Inc. (ABMD), Luminex Corporation (LMNX) and Edwards Lifesciences Corp. (EW). While ABIOMED and Luminex sport a Zacks Rank #1 (Strong Buy), Edwards Lifesciences holds a Zacks Rank #2 (Buy).
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