Cyberonics Beats, Guides In Line

Cyberonics ( CYBX - Analyst Report ) , a neurological device maker, reported earnings per share (“EPS”) of 38 cents in the fourth quarter of fiscal 2012, up 46% year over year and surpassing the Zacks Consensus Estimate of 35 cents. For the full year, EPS came in at $1.28, a penny short of the Zacks Consensus Estimate but ahead of the previous year’s adjusted EPS of $1.01.

Revenues increased 13% year over year during the quarter to $58 million, marginally beating the Zacks Consensus Estimate of $57 million. Cyberonics recorded robust growth in US epilepsy sales (up 10% to $48 million) and international sales (up 33% at constant exchange rate or CER to $9 million). The company provides vagus nerve stimulation (“VNS”) therapy for the treatment of refractory epilepsy. During the fiscal revenues were up 15% to $219 million, ahead of the Zacks Consensus Estimate of $217 million.

The company successfully launched the new AspireHC (High Capacity) generator witnessing positive initial demand. The re-designed device received US approval in January this year. Besides, key studies were presented during the year validating the clinical efficacy and economic value of the VNS Therapy for epilepsy.

Adding to the 13% revenue increase in the quarter, improved margin performance had a positive effect on the bottom line. Gross margin expanded 440 basis points (bps) to 92.2% during the quarter. Despite a 7.2% rise in selling, general and administrative expenses to $26 million and a 20% rise research and development expenses, operating margin increased 570 bps to 31.2% during the reported quarter.

Cyberonics also benefited from a 53% year-over-year reduction in interest expense to $46.4 million. We believe the drop in interest expense was possible because of the $7 million retirement of debt. The company exited the fiscal with cash and cash equivalents of $96.6 million, up from $89.3 million at the end of fiscal 2011. Approximately $50 million of shares were repurchased during the year.

Guidance

Cyberonics unveiled its guidance for fiscal 2013. The company expects to report revenues of $241−$244 million and $70−$72 million of income from operations resulting in EPS of $1.49−$1.59. The current Zacks Consensus Estimates of $242 million in revenues and EPS of $1.52 for fiscal 2013 are in line with the guidance.

The company noted that the anticipated amount of medical device tax, scheduled to be implemented from January 1, 2013, has not been considered in the guidance for income from operations but included in the EPS forecast.

Recommendation

Cyberonics witnessed an expansion in the top line on the back of its strong position in the US and international epilepsy market. Additionally, the company’s effort to expand in Europe, Japan, Latin America, China and India should further boost its international performance.

The company faces mounting third-party reimbursement issues along with stiff competition in the neuromodulation space from players such as Medtronic ( MDT - Analyst Report ) and St. Jude Medical Inc. ( STJ - Analyst Report ) .

Over the long term, we have a Neutral recommendation on Cyberonics. The stock retains a Zacks #3 Rank (Hold) in the short term.