The Cooper Companies Inc. COO reported adjusted earnings of $2.05 in the second quarter of 2016, beating the Zacks Consensus Estimate by 13 cents and improving 19% on a year-over-year basis. The upside was driven by robust revenue growth.
Revenues increased 9% year over year (including constant currency and including acquisitions in both periods) to $483.8 million and beat the Zacks Consensus of $465 million.
Adjusted gross margin contracted 20 basis points (bps) on a year-over-year basis to 63.2% due to lower CooperVision (CVI) margin (down 50 bps). Stronger Asia Pacific sales (which is lower margin) and charges related to idle equipment and legacy hydrogel inventory hurt the CVI gross margin. CooperSurgical’s (CSI) gross margin expanded 130 bps in the quarter.
Selling, general and administrative expenses (SG&A), as a percentage of revenues, declined 180 bps, while research & development expenses (R&D), as a percentage of revenues, fell 40 bps.
Adjusted operating margin expanded 200 bps on a year-over-year basis to 24%.
Segment Details
CVI revenues increased 9% (also up 9% at constant currency) on a year-over-year basis to $391.2 million. The growth was driven by robust performance in Toric (31% of CVI revenues, Multifocal (11% of CVI revenues) and Single-use sphere lenses (25% of CVI revenues).
While Single-use sphere revenues increased 14% to $97.6 million, both Toric and Multifocal revenues rose 13% each to $120.5 million and $42.5 million in the reported quarter. Non-single-use sphere (33% of CVI revenues) lense sales inched up 2% from the year-ago quarter to $130.6 million.
Management noted that Single use silicone hydrogel lenses (Clariti and MyDay lenses) sales grew 52% while two week and monthly silicone hydrogel lense (Biofinity and Avaira) sales rose a combined 14%, at constant currency.
Altogether, silicone hydrogel lenses now represent 60% of the company’s total revenues, highlighting 20% growth at constant currency. Regarding single-use silicone hydrogel lenses, the company stated that it is following a two-tier growth approach with Clariti positioned as the mass market offering and MyDay as a premium one.
Geographically, CVI revenues in the Americas increased 9%, in Europe, Middle East and Africa (EMEA) rose 5% while the same in Asia Pacific surged 18% year over year.
The growth in Americas was driven by strength in multiple categories led by silicone hydrogel products. Adoption of enhanced Clarity lens and MyDay continues to be strong. Further, Toric and Multifocals posted strong growth driven by the Biofinity family.
In EMEA, growth was driven by strong sales of Biofinity, Clariti, MyDay and Avaira products. During the quarter, Cooper Companies launched Avaira and Vitality in EMEA.
Avaira Vitality is a new two week silicone hydrogel lens which is an enhanced replacement for the original Avaira lens. It was developed using improved manufacturing processes resulting in a higher quality product at a lower cost per unit. The company expects to launch this lens in the U.S. later this year subject to the FDA approval.
The strong growth in Asia Pacific was driven by strong growth in Japan, where Biofinity and ProClear 1 day reported robust performance. The company launched MyDay in Japan during the quarter.
CSI revenues surged 23% on a year-over-year basis (up 6% at constant currency) to $92.6 million. Revenues from the office and surgical business (56% of CSI revenues) climbed 5% year over year to $52.3 million, while the fertility business (44% of CSI revenues) grew 8% to $40.3 million in the quarter.
Long-term Outlook
Cooper Companies expect the overall contact lens market to continue growing at 4% to 6% range over the next five years. The growth rate is expected to be closer to 6% driven by shift to dailies', geographic expansion and an expansion of the wearer base. Management expects to continue grab market share led by its strong silicone hydrogel portfolio.
Guidance
Cooper Companies raised its projection for fiscal 2016. Adjusted earnings are now projected in the band of $8.20–$8.50, as compared with the previous guidance of $8.00–$8.30.
The company forecasts total revenues in the range of $1.93–$1.96 billion, as compared with the earlier range of $1.87–$1.90 billion.
CVI revenues are now estimated in the band of $1.55–$1.57 billion. Meanwhile, CSI revenues are now expected at around $384–$393 million.
Management expects adjusted gross margin to be around 63% for full-year 2016, lower than 64% provided earlier due to charges related to idle equipment and legacy hydrogel inventory at the CVI business. Moreover, lower gross margins from CSI related to recent acquisitions are likely to impact gross margin in full-year 2016.
Operating expenses, as a percentage of revenues, are expected to be almost 39%, while operating margins are still projected at around 24%.
Capital expenditure is expected to be around $200 million, while adjusted free cash flow is still estimated at roughly $300 million.
Zacks Rank & Other Key Picks
Currently, Cooper Companies carries a Zacks Rank #2 (Buy).
Other favorably ranked stocks in the medical sector are Halyard Health HYH, CryoLife CRY and Masimo Corporation MASI. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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