Cyberonics (CYBX) reported an EPS of 88 cents for the second quarter of fiscal 2011 compared to $1.73 in the corresponding period of last year. However, both the periods were impacted by significant tax benefits. Excluding these benefits, the EPS came in at 25 cents, meeting the Zacks Consensus Estimate although lower than 33 cents in the corresponding period last year.
Cyberonics reported revenues of $47.5 million, exceeding the Zacks Consensus Estimate and 17% higher than $40.7 million in the second quarter of fiscal 2010. Despite the increase in revenues and a 77.6% reduction in interest expense, EPS came down due to higher “other expenses”. While net product sales in the US increased 20% year over year to $40.1 million, sales in the international market increased 3% to $7 million.
Gross profit during the quarter increased by 90 basis points to 88.3% due to higher prices, greater proportion of US sales, increased production volumes and improved manufacturing efficiencies. A 3.5% rise in selling, general and administrative expenses coupled with a 37% rise in research and development (R&D) expenses led to a 9.8% rise in operating expenses. Based on higher expenses related to epilepsy, Cyberonics expects the R&D expense margin to rise to 15% for 2011 from 14.8% for the second quarter. Operating margin increased 460 basis points to 26.9%.
Sales related to epilepsy units increased 14% in the US and 6% in the international market. Cyberonics is adopting several strategies to tide over the current weakness in several key markets including the UK and Germany. Additionally, the company is targeting the Japanese market, which holds potential. In another development, Cyberonics has submitted its AspireHC generator for regulatory approval in both the US and EU.
Cyberonics exited the quarter with $67.9 million in cash and cash equivalents, up 14.6% from $59.23 million at the end of fiscal 2010. During the previous quarter, the company repurchased $8.4 million of its outstanding convertible debt, thereby reducing the debt burden to $7 million.
Debt burden of the company at the end of the second quarter remained unchanged at $7 million. As a result of the reduction in debt burden, interest expenses came down by 77% to $0.096 million. At the end of October 2010, the company had repurchased 287,000 shares pursuant to the buyback program of 1 million shares announced earlier in the calendar year.
Based on a strong quarter, Cyberonics raised its outlook for fiscal 2011. The company now expects revenues and income from operations in the range of $187-$190 million, (previous guidance of $184 – $188 million) and $45- $48 million ($42 – $45 million), respectively.
Cyberonics witnessed an expansion in margins attributable to the company’s pioneer product, the VNS Therapy System, especially for epilepsy treatment. A significant reduction in the debt burden and share repurchases have further improved the company’s bottom-line. However, we remain concerned about competitive pressures from players such as Medtronic (MDT) and St. Jude (STJ) in the neuromodulation space, reimbursement issues and weakness in the international market.
For the long term, we have a Neutral rating on Cyberonics. The stock retains a Zacks #3 Rank (Hold) for the short term.