Cyberonics Beats, Raises Outlook

Cyberonics, Inc. (CYBX - Analyst Report) reported second quarter fiscal 2010 earnings per share of 32 cents, beating the Zacks Consensus Estimate of 20 cents and the year-ago earnings of 14 cents.
 
Sales
Net sales in the reported quarter increased 13.0% year over year to $40.7 million. Of this, net product sales in the domestic market increased 15.1% year over year to $33.5 million. Growth was due to higher average selling prices (ASPs) and sales volume. ASPs and sales volume increased 10.0% and 5.1% year over year, respectively.
 
International sales increased 4.3% year over year to $6.8 million. Growth can be attributed to higher sales volume made through distributors, which was partly offset by lower ASPs. Licensing revenues constituted the remaining $0.4 million.

Margins
Gross margin increased 180 basis points (bps) year over year to 87.4%. Growth can be primarily attributed to higher sales volume, greater manufacturing efficiencies and higher ASPs due to a favorable product-mix.
 
Selling, general and administrative (SG&A) expenses as a percentage of sales declined 730 bps year over year to 52.5%. Research and development (R&D) expenses as a percentage of sales declined 70 bps year over year to 12.6%. 

As a percentage of sales, higher gross margin coupled with lower SG&A and R&D expenses resulted in an increase in operating margin by 980 bps year over year to 22.3%.
 
Balance Sheet & Cash Flow
Cyberonics ended the reported quarter with cash and cash equivalents of $60.5 million, a decline of roughly 9% in the first six months of the fiscal year. Cash flow from operations was $12.9 million for the quarter.
 
Recent events
Cyberonics repurchased $7.5 million of outstanding convertible debt for a total of $6.7 million and recorded a net gain of roughly $0.7 million in the second quarter of fiscal 2010. Convertible debt outstanding was $39.2 million at the end of the second quarter.
 
Of this, the company repurchased an additional $8.3 million of outstanding convertible debt after the completion of the second quarter for a total of $7.6 million and will likely report a net gain of approximately $0.5 million in the next quarter.
 
Cyberonics reported a non-cash tax benefit of $40.5 million in the reported quarter due to reversal of its tax-valuation allowance related to net operating losses.
 
Outlook
Cyberonics raised its sales and operating income outlook for full fiscal 2010. For the year, it expects net sales in the range of $159 million to $162 million, compared to the prior guidance of $157 million to $161 million. Operating income is expected between $28 million and $30 million, versus the previous outlook of $24 million to $27 million.
 
Cyberonics reaffirmed its long-term goal of maintaining annual unit growth of 10% to 20% in the epilepsy business and achieving an operating margin of 25% by fiscal 2011.
 
Cyberonics is a neuromodulation company that develops and markets the VNS Therapy System for the treatment of refractory epilepsy and treatment-resistant depression. The VNS Therapy improves the patient’s quality of life by minimizing seizure reduction

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