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Cepheid Earnings Beat, Retains Outlook

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Cepheid reported first-quarter 2013 adjusted earnings of 2 cents per share, significantly better than the Zacks Consensus Estimate of loss of 2 cents per share and loss of 10 cents per share in the year-ago quarter.

Adjusting for amortization expenses, Cepheid reported net income of $0.3 million (or break-even per share) in the first quarter of 2013, a massive improvement from net loss of $5.5 million (or loss of 8 cents per share) in the year-ago quarter.

Quarter in Detail

Revenues improved 19% year over year to $91.9 million in the first quarter, edging past the Zacks Consensus Estimate of $90 million. Growth was led by the Healthcare Acquired Infections (HAI) portfolio, Xpert Flu and Xpert CT/NG and ramp up in High Burden Developing Country (HBDC) countries.

Among the segments, the Clinical segment (up 19% year over year to $79.6 million) consisting of Clinical Systems (flat at $12.5 million) and Clinical Reagents (up 23% to $67.1 million) contributed about 86.6% to the total revenue in the quarter. Cepheid’s Non-Clinical business revenues increased 18% year over year to $12.3 million.

On a geographic basis, product sales from mainstay North American market grew 17% year over year to $63.6 million whereas the overseas market recorded a 24% year-over-year surge to $28.3 million.

Placements of Cepheid’s GeneXpert systems improved slightly with its commercial Clinical business placements of 125 systems (compared with 123 in the year-ago quarter). Placements as part of the HBDC program were higher at 157 systems (151 in the prior-year quarter). This is also a sizeable rise from 68 placements in the sequentially prior quarter. Including the HBDC systems, a cumulative 4,117 systems (compared with 3,079 systems in the year-ago quarter) have been placed worldwide as of Mar 31, 2013.

Gross margin was 53% in the reported quarter, down 100 basis points (bps) from the year-ago period. The margin contraction was on account of unfavorable mix.

Operating expenses amounted to $46.6 million, down 2.3% year over year, on the heels of lower research and development (down 19.9% year over year to $17.7 million) as well as general and administrative (down 11.7% to $9.8 million) expenditure partially offset by higher sales and marketing (up 31.7% to $19.1 million) expenses. Adjusted operating profit was $2.4 million in the first quarter.

Cepheid exited the quarter with cash and cash equivalents of about $102 million compared with $104 million in the prior-year quarter.

Maintains Outlook

Cepheid reaffirmed its guidance for 2013. It expects revenues in the range of $375–$385 million. The current Zacks Consensus Estimate is $381 million. The company expects 2013 adjusted earnings per share (considering the stock based compensation as a regular expense) in the range of 1–7 cents. The current Zacks Consensus Estimate of earnings per share of a penny, tallies with the lower end of the guidance range.

According to the company, its guidance reflects heavy caution related to choppy HBDC placements and contribution from newer products like Xpert CT/NG. It also takes into account the prolonged impact of Cepheid’s order backlog due to supply lag on account of manufacturing disruptions for most of the second half of 2012.

Our Take

We are encouraged with Cepheid’s second consecutive quarter of profitable growth. Another positive turnaround was the improvement in HBDC system placements. With normal manufacturing operations after a challenging 2012, we expect the company to benefit from the soaring demand for its offerings.

Among the new products, expectations from the Xpert CT/NG test are sky-high. Going forward, the test menu expansion is a major catalyst to enhance the company’s addressable market and fuel growth.

Currently, the stock carries a Zacks Rank #1 (Strong Buy). Another Zacks Rank #1 medical sector stock is Cyberonics Inc. . Other stocks like Abiomed Inc. (ABMD - Free Report) and Accuray Inc. (ARAY - Free Report) , carrying a Zacks Rank #2 (Buy) are also worth considering.

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