Thoratec Q3 Earnings & Revenues Lag Estimates, Down Y/Y

Zacks

Thoratec Corp. (THOR) posted adjusted earnings of 8 cents per share in the third quarter of 2014, missing the Zacks Consensus Estimate by a penny. Earnings declined nearly 80% on a year-over-year basis, owing to a 16.3% fall in revenues.

The revenue drop was primarily due to the decline in HeartMate II sales, partially offset by continued double-digit revenue growth in the CentriMag business. Third-quarter revenues of $105.8 million also lagged the Zacks Consensus Estimate of $108 million.

Following the earnings release, shares of Thoratec declined approximately 3.5% to close at $26.10 yesterday.


Quarter Details

Revenues from the U.S. went down 14% year over year to $85.7 million while the same from international business slid 25% to $20.1 million. The decline in international revenues was led by weakness across Japan, where the company did not sell any HeartMate II units in the quarter.

Revenues from the flagship HeartMate product line decreased 18.8% year over year to $91.6 million, as shipments of HeartMate pumps fell 14% in the quarter.

Revenues from the CentriMag business increased 8.7% year over year to $11.3 million, driven by healthy double-digit worldwide unit growth, particularly in Europe. The company continues to expand its CentriMag business, with 11 new U.S. centers and nine international centers added during the third quarter.

However, revenues from PVAD and IVAD fell 7.7% to $2.4 million in the quarter while revenues from Other business dipped 16.7% to $0.5 million.

Adjusted gross margin contracted 800 basis points (bps) year over year to 61%, primarily due to incremental warranty-related expenses associated with the HeartMate II Pocket Controller. In addition to the introduction of a new version of the Pocket Controller, the company accrued incremental expenses of approximately $10.7 million as it decided to make the new version available to customers as a replacement for the previously purchased versions.

Adjusted operating margin contracted to 5.1% from 23.3% in the year-ago quarter owing to higher operating and clinical trial expenses and increased personnel costs.

Thoratec had cash and investments of $253 million as of Sep 27, 2014, down from $295.5 million as of Jun 28, 2014.

During the quarter, the company utilized $30 million in cash to fund accelerated share repurchase activity and approximately $35 million for the acquisition of Apica Cardiovascular.

Guidance

For fiscal 2014, Thoratec lowered its revenues guidance to the range of $450 to $460 million from the prior range of $455 to $470 million due to lower assumptions for HeartMate II product line owing to apprehensions of near-term challenges. The current Zacks Consensus Estimate of $462 million lies above the revised guided range.

Adjusted gross margin is now expected in the range of 68.5% to 69%, compared with the prior view of 70.5% for the year. Thoratec anticipates higher operating expenses in the fourth quarter of 2014 due to accelerated clinical trial activity, targeted commercial investments, as well as product development project expenses.

The company also lowered its adjusted earnings per share (excluding stock based compensation) guidance to$1.20–$1.30 from the prior band of $1.25–$1.35 for the year. The current Zacks Consensus Estimate of 85 cents lies way below the guided range.

Our Take

We are disappointed with the company's year-over-year decline in earnings and revenues, both of which missed the Zacks Consensus Estimate. The company also slashed its adjusted earnings and revenue guidance owing to lower assumptions for HeartMate II product line on the back of near-term challenges. Also, 2015 is anticipated to be a transition year for the company as it seeks to reaccelerate market growth.

Currently, Thoratec carries a Zacks Rank #4 (Sell). Better-ranked stocks in the medical instruments sector include AngioDynamics (ANGO), ABIOMED, Inc. (ABMD) and Cynosure Inc. (CYNO). While AngioDynamics sports a Zacks Rank #1 (Strong Buy), both ABIOMED and Cynosure carry a Zacks Rank #2 (Buy).

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