STJ ST. Jude Medical, Inc.

Cyberonics (CYBX) reported first quarter 2012 adjusted EPS of 28 cents, surpassing the Zacks Consensus Estimate of 26 cents per share and 12% higher than the year-ago quarter’s adjusted EPS. The results include pre-tax charges of $1.28 million associated with the product withdrawal as announced on August, 2011.

During the quarter, Cyberonics reported revenues of $52.7 million, up 18% year over year and ahead of the Zacks Consensus Estimate of $51 million. The year-over-year growth was based on higher sales in the U.S (up 8% to $43.8 million) and a 34.8% increase in international revenues to $8.9 million. At constant exchange rate (CER), total sales increased 22% year over year.

Increased investment in the European market along with changes in the organizational structure, which took place earlier this year, enhanced the company’s performance in this region. The company reported solid results in the US based on an increase in new patients and replacement generators. Revenues from AspireHC (Model 105) generator contributed around 9% of worldwide sales in the reported quarter.

Earlier this month, Cyberonics discontinued shipment of two models of its Aspire platform generators. The company has also suspended enrollment in its E-36 clinical trial pending resolution of this hardware related design issue. Its decision was based on the realization that stimulation output current delivered to patients can be less than the output current programmed by a physician.

Cyberonics believes that the withdrawal of AspireHC and AspireSR generators will be a set back for the company’s growth. However, it remains hopeful about further improvement in product development under this segment.

Gross margin for the quarter declined 100 basis points (bps) to 86.8% due to a 26.7% rise in cost of revenue. Operating margin contracted 456 bps year over year to 25.2% due to higher selling, general and administrative expenses (up 22.8%) and research and development expenses (up 27.1%).

Cyberonics exited the quarter with $81.6 million in cash and cash equivalents compared with $89.3 million reported in the year-ago quarter. During the reported quarter, Cyberonics repurchased approximately 500,000 shares, of which 346,000 shares were repurchased since the Board authorized a program for buying an additional 1 million shares on June 7, 2011.

Guidance

Cyberonics reaffirmed 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 $214 million).

Recommendation

Although Cyberonics witnessed an expansion in the top line attributable to the company’s strong position in the US and international epilepsy market, we remain concerned about several headwinds including withdrawal of shipment of the AspireHC and AspireSR generators. We are also 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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