STJ ST. Jude Medical, Inc.

Cyberonics (CYBX) reported fourth quarter 2011 EPS of 26 cents, which missed the Zacks Consensus Estimate of 29 cents and were far behind the year-ago quarter’s adjusted earnings (excluding the impact of gain on early extinguishment of debt) of 40 cents. Despite higher sales and a roughly 50.6% reduction in interest expense, the decline in the bottom line was attributable to significant increase in income tax expense ($5.5 million in the reported quarter compared with the year-ago quarter’s $.03 million). Fiscal 2011 earnings were $1.63 per share, beating the Zacks Consensus Estimate of $1.04 but trailing the previous year’s EPS of $ 2.62.

During the quarter, Cyberonics reported revenues of $51.1 million, up 7.1% year over year but marginally missing the Zacks Consensus Estimate of $52 million. The growth was based on 13% higher sales in the U.S ($44 million), partly offset by lower international revenues ($7.01 million), but was in line with the past two quarters. For the full year, revenues increased 14% to $190.5 million compared to the Zacks Consensus Estimate of $191 million.

In spite of increased investment in the European market, the international sales suffered primarily due to the negative impact of the Japan crisis and related uncertainty in that market. However, the company expects international growth to resume in fiscal 2012.

Cyberonics’ strong sales performance in the U.S was on the back of robust growth in the company’s epilepsy business driven by higher volume and increased average selling prices.  Several physician education programs, recently published data and effective sales force execution resulted in a successful quarter. Moreover, the company’s initial demand for the AspireHC generator, in limited commercial release, was also encouraging.

Gross margin for the quarter declined 60 basis points (bps) to 87.9% due to a 12.7% rise in cost of revenue. A 2.3% increase in selling, general and administrative expenses coupled with a 21.3% rise in research and development expenses led to a 6.3% rise in operating expenses. As a result, despite a 6.3% rise in income from operations to $13.0 million, operating margin contracted 14 bps year over year to 25.4%.

Cyberonics exited the quarter with $89.3 million in cash and cash equivalents, up 50.8% from $59.2 million reported in the previous quarter.

Guidance

Cyberonics provided its outlook for fiscal 2012. The company expects revenues and income from operations in the range of $212 – $215 million and $54 – $57 million, respectively (the Zacks Consensus Revenue Estimate for fiscal 2012 was $216 million). In addition, the company also expects the effective tax rate to be approximately 40% in fiscal 2012 while cash payments for income taxes will not exceed 3% of income before tax in fiscal 2012 and 2013.

Recommendation

Although Cyberonics witnessed an expansion in the top line attributable to the company’s strong position in the US epilepsy market we remain concerned about several headwinds faced by the company while establishing its foothold in international arena. We are concerned about the competitive pressure in the neuromodulation market from players such as Medtronic (MDT) and St. Jude (STJ). Currently, we have a long-term Neutral recommendation on Cyberonics.

 
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