Cyberonics Posts Strong 2Q

Cyberonics (CYBX">CYBX) reported second quarter 2012 EPS of 32 cents, surpassing the Zacks Consensus Estimate of 30 cents and was 28% higher than the year-ago quarter’s adjusted EPS.

Revenues increased 13% year over year (20% at constant exchange rate or CER) to $53.7 million, almost in line with the Zacks Consensus Estimate. The growth was based on higher sales in the U.S (up 11.3% to $45.1 million) and a 23% increase in international revenues to $8.6 million.

Despite withdrawal of two models of its Aspire platform generators, Cyberonics’ solid US epilepsy sales stemmed from strong performance of the sales team and market potential.  The company estimated that the average quarterly growth in new patients in the US exceeded 6% year over year.

The persistent rebound in Cyberonics’ overall international business was led by excellent performance in Europe. Increased investment in the European market along with changes in the organizational structure enhanced the company’s performance in this region.

Earlier in August, Cyberonics discontinued shipment of two models of its Aspire platform generators. The company also suspended enrollment in its E-36 clinical trial pending resolution of a hardware related design issue.

However in October, Cyberonics submitted application for approvals in both the US and Europe for redesigning its AspireHC generator. Additionally, the company expects to resubmit the AspireSR generator to the competent authority approvals for the resumption of the E-36 clinical trial in Europe by the end of fiscal 2012.

Further, in October, the US Food and Drug Administration (FDA) approved an expanded Magnetic Resonance Imaging (MRI) option, used by patients who have the VNS Therapy System.

Gross margin for the quarter expanded 396 basis points (bps) to 92.2%. Selling, general and administrative (SG&A) expenses as well as Research and development (R&D) expenses during the quarter increased 15.6% (to $25.6 million) and 26.5% ($8.9 million) respectively. However, operating margin was 28.1%, up 116 basis points year over year.

Cyberonics exited the quarter with $69.8 million in cash and cash equivalents compared with $89.3 million reported at the end of fiscal 2011. Operating cash flow during the quarter increased 33% year over year to $21.7 million.

During the reported quarter, Cyberonics repurchased approximately 654,000 shares, completing the repurchase of 1 million shares as authorized by the Board on June 2011. Additionally, the Board authorized the repurchase of an additional 1 million shares.

Guidance

Cyberonics increased its outlook for fiscal 2012. The company expects revenues and income from operations in the range of $213–$216 million (previous range was $212–$215 million) and $55–$58 million ($54–$57 million), respectively. The current Zacks Consensus Revenue Estimate for revenue in fiscal 2012 stand at $216 million.

Recommendation

Although Cyberonics witnessed an expansion in the top line attributable to the company’s strong position in the US and international epilepsy market, we remain concerned about several headwinds including withdrawal of shipment of the AspireHC and AspireSR generators.

Presently, Cyberonics retains a Zacks #2 Rank (Buy) in the short term. However, over the long term, we maintain a Neutral recommendation on the stock. The company faces mounting third-party reimbursement issues along with stiff competition in the neuromodulation space from players such as Medtronic (MDT">MDT) and St. Jude Medical Inc. (STJ">STJ). Both Medtronic and St. Jude Medical are Zacks #3 Ranked peers with Neutral recommendations.

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