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Cepheid (CPHD - Analyst Report) reported an adjusted loss of 10 cents per share in the second quarter of 2014, narrower than the Zacks Consensus Estimate of a loss of 13 cents by 23.1%. However, the number deteriorated from the year-ago quarter’s adjusted loss of 8 cents per share by 25%. Including one-time items, the company reported a loss of 14 cents per share, down 40% from the prior-year’s equivalent number.

 

Revenues in Detail

Cepheid experienced  robust 21.3% year-over-year growth in revenues of $116.5 million in the second quarter. Reported revenues also beat the Zacks Consensus Estimate of $115 million by 1.3% and was in line with the higher end of the company guided revenue range of $113-$115 million.

Growth in revenues was primarily driven by better-then-expected High Burden Developing Countries (HBDC) sales and improvement in commercial clinical business, which came at par with the company’s expectations with impressive growth in U.S. clinical reagents. A solid increase in Cepheid’s overall clinical business, which outweighed the expected decline in the company’s legacy non-clinical business of $3 million, also contributed to the year-over-year rise in the top line.

Segments in Detail

The Clinical segment which was up 27.2% year over year to $111.3 million, contributed approximately 95.5% to total revenue in the second quarter of 2014. The Clinical segment consists of Clinical Systems (up 69.5% year over year to $28.3 million) and Clinical Reagents (up 17.2% to $80.3 million). Cepheid expects Commercial Clinical revenues in the range of $340–$346 million in full year 2014, 16%–18% higher than 2013, and up from the prior guidance range of $335–$346 million at the lower end.

Cepheid’s Non-Clinical & Other business revenues declined 38.8% year over year to $5.2 million. The company expects non-Clinical business revenues to decline to approximately $26 million in 2014, down by $1 million from the company’s prior guidance.

During the reported quarter, Cepheid installed 158 GeneXpert systems in its commercial Clinical business and another 926 GeneXpert systems as part of its HBDC program. The total count of systems placed worldwide, including the HBDC systems, scales 7,096 as of Jun 30, 2014.

Operational Update

Cepheid’s gross margin (considering stock-based compensation as regular expense) improved 330 basis points (bps) year over year to 49.1% in the reported quarter, which reflects the company's consistent progress in its margin improvement initiatives within its operational segments.  Adjusted cost of goods sold during the quarter jumped 30.1% to $57.2 million.

In the reported quarter, adjusted operating expenses amounted to $61.4 million, up 31.1% year over year. Adjusted operating loss for Cepheid was $4.9 million in the reported quarter, up 12.8% year over year.

Financial Position

Cepheid exited the second quarter with cash and cash equivalents and short-term investments of $306.3 million compared with $74.9 million as on Dec 31, 2013. The company issued convertible Senior Notes in Feb 2014 thereby collecting net proceeds of $335.9 million.

In the quarter under review, Cepheid used $8.6 million in operating activities compared to $4.8 million cash flow generated from operations in 2013. Capital expenditure increased 35.7% year over year to $25.7 million.

Outlook

Cepheid has reiterated its financial guidance for 2014. The company expects total revenue in the range of $452–$461 million and an earnings loss of 51–54 cents per share in 2014. Earlier, the company was expecting a loss of 38–43 cents per share and revenues in the range of $446–$461 million.

Considering stock-based compensation as regular expense , the company expects adjusted loss in the range of 34–37 cents per share (earlier guidance:  adjusted loss of 22–27 cents per share).

The Zacks Consensus Estimate of $459 million lies within the revenue guidance range for 2014.

The company also provided its guidance for the third quarter of 2014. It expects total revenue in the range of $107–$110 million. Moreover, the company expects the adjusted bottom line to range from a loss of a penny to earnings of a penny per share.

The Zacks Consensus Estimate of $113 million exceeds the revenue guidance range for third quarter of 2014.

Our Take

We remain impressed by Cepheid’s stronger-than-expected second-quarter results. The company experienced record number of commercial placements in HBDC in the second quarter, particularly contributed by a large order of GeneXpert system placements shipped to China. Moreover, the launch of three products, namely Xpert HPV, Xpert Norovirus and Xpert CARBA-R, in the international market, contributed to the company’s second-quarter revenue growth and are expected to aid profits further in the future.

In addition, Cepheid’s Xpert CT/NG business continued to perform well in the reported quarter, attracting a high volume of customers. At present the company is engaged in the active development of 12 molecular diagnostics tests, including the Xpert FLU-RSV which is awaiting global release in 2014. This indicates Cepheid’s consistent efforts toward improvisation of new, innovative tests and thus bolsters our confidence in the stock’s long-term potential.

However, the poor performance of the Non-clinical business in the second quarter poses a major cause of concern for the company.

Zacks Rank

Currently, Cepheid carries a Zacks Rank #3 (Hold).

Some notable medical instrument stocks that warrant a look include Accuray Incorporated (ARAY - Analyst Report), Masimo Corporation (MASI - Analyst Report) and Heartware International Inc. (HTWR - Snapshot Report). While Accuray and Masimo sport a Zacks Rank #1 (Strong Buy), Heartware International holds a Zacks Rank #2 (Buy).  

 

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