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Cyberonics (CYBX - Analyst Report) first-quarter fiscal 2014 adjusted earnings per share (EPS) rose 26.3% to 48 cents, surpassing the Zacks Consensus Estimate by two cents. This marks the ninth successive earnings beat for Cyberonics.

The reported net income improved 7.4% on a year-over-year basis to $8.7 million (or 31 cents per share) in the first quarter of fiscal 2014.

Revenues shot up 14.2% year over year to $68.9 million in the quarter, beating the Zacks Consensus Estimate of $68 million. Growth was aided by solid international sales. The top line in the reported quarter included $1.5 million of license revenues against $0.4 million in the year-ago quarter.

Quarter in Detail

In the first quarter, worldwide unit sales increased 9.8% year over year to 3,354 units. On a geographic basis, Cyberonics recorded 10.8% growth in U.S. product revenues to $56.4 million and 6.2% unit growth in the quarter. According to the company, domestic product revenues reached a record high in the quarter on the back of new patients and higher replacement activity. Domestic growth was in line with Cyberonics’ expectations.

International product revenues, representing roughly 16% of the company’s revenues, grew 22% on a reported basis (same at constant exchange rate) to about $11 million, with unit growth of 21%. Growth in the overseas market was mainly led by healthy sales in Europe, especially Eastern Europe, along with higher revenues from U.K. and Germany.

In the reported quarter, the company witnessed higher utilization and adoption for its VNS Therapy generators, as reflected in the strong quarterly sales. Further, average selling price for generators improved 4% from the prior-year quarter for the company. AspireHC – Cyberonics’ newest VNS Therapy generator – gained further momentum, representing 26% of total generator sales in the domestic market.

Gross profit climbed 12.7% to $62.3 million in the quarter. However, gross margin contracted 120 basis points (bps) to 90.5% impacted by the medical device tax and associated costs since Jan 1.

Despite a 3.5% increase in selling, general and administrative expenses to $29.3 million and a 23.2% rise in research and development expenses to almost $12 million, adjusted operating margin expanded a significant 200 bps to 30.6% in the reported quarter. Although Cyberonics’ recorded higher expenditure due to product development activities, its focus on operating leverage led the margin expansion.

The company exited the quarter with cash and cash equivalents and short-term investments of $131.7 million, compared with $135.8 million as of Apr 26, 2013. Cyberonics has no interest-bearing debt on its balance sheet. The company repurchased almost 0.21 million shares for $13 million during the quarter and is left with 0.74 million shares under its current buyback program for the ongoing fiscal.

Guidance Maintained

Cyberonics envisages revenues in the range of $279−$283 million. The current Zacks Consensus Estimate of $282 million hovers around the high end of the company’s guidance. Cyberonics expects global unit growth of roughly 10%.

Adjusted income from operations is expected in the range of $85−$88 million resulting in net income of $53−$56 million and adjusted EPS of $1.93−$2.01 for fiscal 2014. The current Zacks Consensus Estimate of $1.99 for fiscal 2014 lies within the guidance range.

Our Take

Cyberonics reported strong first-quarter results as having beaten the Zacks Consensus Estimates. However, the quarterly results failed to boost market sentiments as shares tanked 3.11% (or $1.72) after the earnings release on Thursday, Aug 22. A possible explanation might be that considering the robust growth trend over the past several quarters, the reiterated guidance reflects management’s conservatism for the ongoing fiscal.

Nonetheless, we are encouraged by Cyberonics’ solid foothold in the epilepsy market and international business trends. Even amid a tough macroeconomic backdrop, the company posted strong growth in Europe. Meanwhile, Cyberonics continues to reward shareholders with attractive share repurchases.

Currently, the stock carries a Zacks Rank #2 (Buy). Other Zacks Rank #2 stocks such as Luminex Corporation (LMNX - Analyst Report), Given Imaging Ltd. and Techne Corp. (TECH - Snapshot Report) are also worth considering.

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