Cepheid CPHD reported adjusted loss (considering stock-based compensation expense as a regular spending) per share (EPS) of 27 cents in the third quarter of 2015, narrower than the Zacks Consensus Estimate of loss by 15.6%. However, the bottom line deteriorated from the year-ago quarter's adjusted loss figure by a massive 350%, hurt by a lower-than-expected gross margin.
Including one-time items, the company reported net loss of $22.9 million or 32 cents per share, representing a year-over-year deterioration of 218.1% or 220%, respectively.
Revenues in Detail
Cepheid experienced 9.8% year-over-year growth in revenues of $126.5 million in the third quarter. The top line, however, missed the Zacks Consensus Estimate of $127 million by a whisker, although it was within the company's guidance of $125–$128 million.
The top-line improvements primarily attributable to the strong performance of the company's Commercial Clinical business, which delivered strong growth of 11%.
Segments in Detail
Revenues from the Clinical segment, which grew 12.2% year over year to $120.2 million, contributed approximately 95% to total revenue in the third quarter. For the full year, Cepheid now expects Commercial Clinical revenues (which drive the clinical segment as a whole) in the range of $425–$428 million, representing annualized growth of 19–20% (lower than the prior guidance range of $432–$438 million, representing annualized growth of 21–23%) For the fourth quarter, Cepheid expects Commercial Clinical revenues in the range of $118–$121 million.
Cepheid's Non-Clinical & Other business revenues declined 22.2% to $6.3 million. The company now expects non-Clinical business revenues to reach approximately $28 million in 2015 (up from the previous guidance of $27 million) and $7 million for the fourth quarter.
During the reported quarter, Cepheid installed 204 GeneXpert systems in its commercial Clinical business and another 172 GeneXpert systems as part of its HBDC program. The total count of GeneXpert systems placed worldwide scaled 9,279 as of Sep 30, 2015.
Operational Update
Cepheid's adjusted gross margin contracted 380 basis points (bps) year over year to 47.1%, on account of lower revenue mix, higher scrap associated with the virology rent, unfavorable currency and other items.
In the reported quarter, adjusted operating expenses grew 27.5% to $77 million. Accordingly, adjusted operating loss incurred was $15.8 million, reflecting a massive deterioration from the prior-year quarter's adjusted operating loss.
Financial Position
Cepheid exited the quarter with cash and cash equivalents and short-term investments of $326.2 million compared with $293.4 million as of Dec 31, 2014. As of Sep 30, 2015, Cepheid generated $19.5 million in cash flow from operating activities compared to the equivalent figure of $4.8 million in the prior-year quarter. Capital expenditure declined 22.1% year over year to $29.1 million.
Outlook
Cepheid has lowered its financial guidance for 2015. The company now expects total revenue in the range of $537–$541 million, reflecting annualized growth of 14% to 15%, (as against the prior range of $544–$553 million reflecting annualized growth of 16% to 18%). The current 2015 Zacks Consensus Estimate of revenues of $541 million coincides with the higher end of the company’s guided range.
On the bottom-line front, however, Cepheid now expects adjusted loss of 50–52 cents per share (as against the previous projection of a loss of 25–29 cents per share). The current Zacks Consensus Estimate for the year is pegged at a loss of 60 cents.
Cepheid also provided its guidance for the fourth quarter of 2015. The company expects total revenue in the range of $146–$150 million and adjusted earnings per share of a penny to 3 cents (including stock-based compensation) for the period. The Zacks Consensus Estimate for fourth-quarter revenues is $146 million while the loss estimate is pegged at 11 cents per share, respectively.
Our Take
Cepheid delivered a mixed financial performance in the third quarter of 2015 outshining the Zacks Consensus Estimate on the bottom-line front, but missing the mark for revenues. However, on a year-over-year basis, the company’s massive slip on the loss front is highly disappointing.
Nevertheless, management’s expectation of a sequential improvement in gross margin in the fourth quarter of 2015 and confidence in the company’s ability to achieve its target of delivering adjusted gross margin of 60%, by 2017, lends optimism to the stock.
Further, we are encouraged to note that Cepheid’s latest strategy of investing aggressively to expand its test menu, extend geographic reach and enter new rapidly growing market segments like point-of-care; is expected to expand the company’s addressable market worth to more than $8 billion by 2020.However, the company’s reduced guidance for both the top and the bottom line discourages us, hinting at management’s anticipation of a lag on the growth trajectory.
Zacks Rank
Currently, Cepheid has a Zacks Rank #4 (Sell). Some better-ranked medical instruments stocks are Masimo Corporation MASI, EDAP TMS SA EDAP and Cesca Therapeutics Inc. KOOL. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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