Cyberonics (CYBX), a neurological device maker, reported earnings per share (“EPS”) of 29 cents in the first quarter of fiscal 2013, up 20.8% year over year. However excluding the impact of $2.5 million (9 cents per share) write-down associated with certain impaired investments in the reported quarter and $0.8 million (3 cents) product withdrawal charge in the year-ago quarter, the adjusted EPS came in at 38 cents, up 40% from the year-ago quarter earnings and surpassed the Zacks Consensus Estimate by 2 cents.
Revenues increased 15% year over year during the quarter to $60.3 million, ahead of the Zacks Consensus Estimate of $58 million. Cyberonics recorded robust growth in U.S. epilepsy sales (up 17% to $50 million), a 13% increase in unit sales to over 2,300 units. International sales on the other hand grew a mere 2.2% year over year to $9.1 million, mainly impacted by unfavorable foreign exchange headwind during the quarter. At constant exchange rate or CER, there was a robust 9.8% increase in total international sales.
Cyberonics primarily provides vagus nerve stimulation (“VNS”) therapy for the treatment of refractory epilepsy. In the reported quarter, there was growth in both new patients and replacement activity in the domestic market leading to a 15% increase in unit sales of the company’s AspireHC generator (launched in the previous quarter).
In the international market, the company witnessed double-digit growth in European unit sales. However, this was somewhat offset by slower-than-planned activity in Japan and other international markets.
Adding to the 15% revenue increase in the quarter, improved margin performance had a positive effect on the bottom line. Gross margin expanded 480 basis points (bps) to 91.7% during the quarter. Despite an 8.8% increase in selling, general and administrative expenses to $28.3 million and an 18.3% increase in research and development expenses to $9.7 million, operating margin increased 680 bp to 28.6% during the reported quarter.
Cyberonics also benefited from a 68.4% year-over-year reduction in interest expense to $28.7 million. We believe that the drop in interest expense was possible because of the $4.5 million reduction in the company’s total Convertible notes and Long-term liabilities over the past year. The company exited the quarter with cash and cash equivalents of $102.3 million, up from $96.7 million at the end of fiscal 2012. During the quarter, Cyberonics repurchased approximately 185,000 shares in the open market, and 115,000 shares pursuant to a program to permit employees to meet statutory withholding tax obligations on vesting of restricted stock.
Guidance
Cyberonics reiterated its guidance for fiscal 2013. The company expects to report revenues of $241−$244 million and $70−$72 million of income from operations resulting in EPS of $1.49−$1.59. The current Zacks Consensus Estimates of $243 million in revenues and EPS of $1.56 for fiscal 2013 are in line with the guidance.
The company stated that the anticipated amount of medical device tax, scheduled to be implemented from January 1, 2013, has not been considered in the guidance for income from operations but included in the EPS forecast.
Recommendation
Cyberonics witnessed an expansion in the top line due to its strong position in the U.S. and the international epilepsy market. Its solid position in the epilepsy market is evident from a consistent increase in patients over the last three years. Additionally, the company’s investments in market development in Europe are encouraging. In order to expand its international base, Cyberonics is strengthening and also investing in sales and marketing.
However, we are apprehensive of the ongoing macroeconomic headwinds. The company also faces increasing third-party reimbursement issues along with stiff competition in the neuromodulation space from players such as Medtronic (MDT) and St. Jude Medical Inc. (STJ).
Cyberonics retains a Zacks #2 Rank (Buy) in the short term.
CYBERONICS INC (CYBX): Free Stock Analysis Report
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