Cyberonics (CYBX) reported earnings per share of 25 cents for the third quarter of fiscal 2011, beating the Zacks consensus estimate by a penny while falling behind the year-ago earnings of 29 cents. Despite higher sales and a roughly 68% reduction in interest expense, the decline in the bottom line was attributable to significant increase in effective tax rate.
Results in Detail
Cyberonics reported revenues of $47.1 million, up 15.3% year over year, exceeding the Zacks Consensus Estimate of $46 million. Sales reflect strong U.S. revenues which climbed roughly 24% year over year to $39.6 million. However, this was partly offset by lower international revenue which declined 15.4% year over year to $7.05 million.
In spite of several good performances, the international sales suffered primarily due to the execution difficulties and the macro economic crisis faced by some European Union markets. However, Cyberonics is taking several initiatives to tide over the current weakness. Additionally, the company is progressing well in the Japanese market, which holds potential.
Revenues from the U.S. epilepsy business increased 24% in the quarter. Growth was boosted by higher volume and increased average selling prices. Cyberonics recently received approval from the U.S. Food and Drug Administration (“FDA”) for AspireHC, a fifth generation generator to be used in vagus nerve stimulation therapy.
Gross margin for the quarter declined by 10 basis points (bps) to 87.7% due to a 17.3% rise in cost of revenue. A 4% increase in selling, general and administrative expenses coupled with a 33.5% rise in research and development expenses led to a 10.2% rise in operating expenses. Operating margin expanded 273 bps year over year to 24.9%.
Cyberonics exited the quarter with $85.3 million in cash and cash equivalents, up 55.9% year over year 25.6% sequentially.
Guidance
Cyberonics has raised its outlook for fiscal 2011. The company now expects revenues and income from operations in the range of $189 – $191 million (versus previous guidance of $187 – $190 million) and $47- $50 million (compared with the earlier forecast of $45 – $48 million), respectively.
Recommendation
We are encouraged by Cyberonics’ strong position in the epilepsy space, its increased focus on the lucrative Japanese market and an expansion in operating margins.
However, we are concerned about the competitive pressure in the neuromodulation market from larger players such as Medtronic (MDT) and St. Jude (STJ), current softness in several key markets including the UK and Germany and the reimbursement issues, which may affect the company’s performance moving forward. Currently, we have a long-term Neutral recommendation on Cyberonics.
CYBERONICS INC (CYBX): Free Stock Analysis Report
MEDTRONIC (MDT): Free Stock Analysis Report
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
Zacks Investment Research
