Cyberonics (CYBX) reported third quarter 2012 EPS of 34 cents, surpassing the Zacks Consensus Estimate of 30 cents and was 36% higher than the year-ago quarter’s adjusted EPS.

Revenues increased 16% year over year (same at constant exchange rate or CER) to $54.5 million and surpassed the Zacks Consensus Estimate of $53 million. The growth was based on higher domestic sales (up 15% to $45.2 million) and a 24% increase in international revenues to $8.7 million,reflecting strong performance in Europe.  

Earlier in January, Cyberonics received approval from the US Food and Drug Administration (FDA) for its re-designed AspireHC (High Capacity) generator whose shipment was discontinued by the company earlier. The FDA approval of AspireHC is expected to pave the way for the Aspire SR seizure response system generator, which is the subject of the E-36 clinical trial in Europe. Cyberonics plans to submit the re-designed AspireSR generator to the ethics committee and competent authority approvals for the E-36 clinical trial by the end of fiscal 2012.

Cost of sales during the reported quarter declined 29.4% year over year and led to a 490 basis points (bps) expansion in gross margin to 92.5%. Selling, general and administrative (SG&A) expenses and research and development (R&D) expenses during the quarter increased 12.9% to $24.9 million and 21.4% to $9.1 million, respectively. Operating margin during the quarter was up 520 bps year over year to 30.1%.

Cyberonics exited the quarter with $78.1 million in cash and cash equivalents compared with $89.3 million at the end of fiscal 2011. Operating cash flow during the quarter increased 59% year over year to $21.1 million. During the reported quarter, Cyberonics repurchased approximately 178,000 shares.

Guidance

Cyberonics increased its revenue outlook for fiscal 2012. The company expects revenues and income from operations in the range of $215–$217 million (previous range was $213–$216 million) and $58–$60 million ($55–$58 million) respectively. The current Zacks Consensus Estimate for fiscal 2012 stand at $216 million.

Recommendation

Cyberonics witnessed an expansion in the top line on the back of its strong position in the US and international epilepsy market. Additionally, the company’s effort to expand in Europe, Japan, Latin America, China and India is encouraging. The company’s investment in these countries should boost its international performance for the rest of fiscal 2012. Also, the re-designed product approval of Cyberonics is a relief for the company.

The company faces mounting third-party reimbursement issues along with stiff competition in the neuromodulation space from players such as Medtronic (MDT) and St. Jude Medical Inc. (STJ).

Presently, Cyberonics retains a Zacks #2 Rank (Buy) in the short term. However, over the long term, we maintain a Neutral recommendation on the stock.


 
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