Cyberonics Posts Lower Than Expected Revenue in Quarter

Thursday morning, Cyberonics reported mixed fiscal third-quarter results, with revenue a bit softer than expected, while earnings per share exceeded estimates. Despite the revenue shortfall, management maintained its full-year sales guidance and lifted its earnings guidance for fiscal 2014 (ending in April), which signals management’s confidence in the underlying business. In addition, the company received approval for its AspireSR product in Europe, which is a notable regulatory milestone for the company.

Total third-quarter sales of $68.2 million (up 9.4%) missed the Street by $1.5 million. Adjusted EPS of $0.51 exceeded the consensus by $0.02.

U.S. product revenue grew 5% in the fiscal third quarter, to $52.7 million, which missed our estimate of $56.3 million, and served as the primary cause of the shortfall in the quarter. Regarding domestic epilepsy units, the company sold 2,245 generators in the quarter (inclusive of both epilepsy replacement and de novo generators), which was about flat year-over-year and compared negatively against our 9.0% unit growth target. The shortfall was slightly offset by better-than-expected pricing and mix.

While we understand investor frustration with the domestic softness in the quarter, we note that the issues here appear nonfundamental and not likely to affect the longer-term growth profile at the company, and we believe there is no evidence of a slowdown in the new patient business, which ultimately will drive revenue growth in the coming years. Rather, the issues during the third quarter as largely transient.

Specifically, with domestic lead sales up more than 10% during the third quarter (better than management has been guiding investors recently, though we acknowledge an easier comparison for Cyberonics this quarter), it implies a shortfall largely on the replacement side of the business. As shown in the exhibit on the following page, we estimate that if the weather and reimbursement issues had not surfaced late in the quarter, Cyberonics would have sold 1,214 replacement generators rather than the 1,047 that we speculate it sold (this number does not include depression sales in the United States).