We recently upgraded our recommendation on Cyberonics ( CYBX - Analyst Report ) , a major neuromodulation company, to Outperform primarily based on its strong future growth prospects.

Over the last few quarters, Cyberonics has consistently delivered strong results through balanced sales growth worldwide. In the last-reported quarter, total sales increased a robust 15% year over year to $60.3 million with 40% rise in adjusted earnings to 38 cents per share.

The upside in revenues was primarily attributable to robust growth in U.S. epilepsy sales (increasing by 17%) and unit sales (by 13%). The redesigned AspireHC generator that received FDA approval in January this year contributed to 15% of the U.S. generator unit sales in the reported quarter. Over 80% of the U.S. generator sales came from Demipulse and AspireHC and all of the company’s U.S. leads came from its new perennial leads. We expect all these product lines to boost Cyberonics’ top-line performance in the upcoming quarters.

Although international sales were sluggish (up 2.2% year over year as a result of unfavorable foreign currency), growth was 9.8% year over year on a constant exchange rate or CER basis. We are also impressed with the company’s initiatives to invest in market development and achieve new patient and replacement cycle growth in Europe and Japan.

In Europe, the company’s increased investments and organizational changes have proved helpful, with overall performance in the region up double-digits on a sequential basis. Moreover, the company deployed senior sales and marketing teams from the U.S. in Europe and Japan in order to strengthen the organization. Cyberonics expects all these initiatives to improve its international performance for the rest of fiscal 2013.

Cyberonics is also focusing on strengthening its pipeline. The company is currently working on the development of future generations of Vagus Nerve Stimulation (VNS) Therapy System, including generators which utilize cardiac and brain-based seizure detection stimulation paradigms, rechargeable battery technology, wireless communication technology and improved lead technology.

We remain concerned about the challenging macroeconomic scenario and competitive pressures from Medtronic ( MDT - Analyst Report ) and St. Jude ( STJ - Analyst Report ) in the neuromodulation space. However, considering the advantages of the VNS therapy and the strong untapped potential in the epilepsy market, we are optimistic about the growth prospects of the company.