Cyberonics reports 16% increase in net sales for first quarter 2011

Cyberonics, Inc. (Nasdaq: CYBX) today announced results for the quarter ended July 30, 2010.

Quarterly highlights

Operating results and other achievements for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 include:

• Net sales of $44.8 million, a 16% increase from $38.5 million;
• Year-over-year worldwide net product sales attributable to the epilepsy indication increased by more than 15% for the eleventh consecutive quarter;
• U.S epilepsy unit sales increased by an estimated 13%;
• Income from operations of $11.7 million, an increase of 80%;
• EBITDA of $13.7 million, an increase of 47%;
• Income per diluted share of $0.25 cents, an increase of 67% from non-GAAP income per diluted share of $0.15 cents.

As discussed below under "Use of Non-GAAP Financial Measures," the company presents in this release certain non-GAAP financial measures: non-GAAP net income, non-GAAP income per diluted share and EBITDA.  Investors should consider non-GAAP measures in addition to, and not as a substitute for, or superior to, financial performance measures prepared in accordance with GAAP.  Please refer to the attached reconciliation between GAAP and non-GAAP financial measures.

Net sales

Worldwide net sales for the first quarter of fiscal 2011 were $44.8 million compared to $38.5 million in the comparable period of fiscal 2010, an increase of 16%.  On a constant currency basis, the year-over-year sales increase was approximately 17%.

U.S. net product sales increased to $37.8 million compared with $30.9 million in the comparable period of fiscal 2010, an increase of $6.9 million or 22%.

International unit sales increased by 3% in the first quarter of fiscal 2011, and international net sales decreased by 9% to $6.6 million, due to economic factors in some countries, the increased proportion of sales made through distributors and the negative impact of foreign currency movements.  On a constant currency basis, international net sales decreased by approximately 4%.

Gross profit

The gross profit for the first quarter of fiscal 2011 was 87.8% of net sales, compared to 86.1% in the first quarter of fiscal 2010.  This increase is primarily a result of higher prices, increased production volumes and improved manufacturing efficiencies.

Operating expenses

Operating expenses increased by $1.0 million to $27.6 million for the first quarter of fiscal 2011 from the $26.6 million recorded in the comparable period of fiscal 2010 but were lower than the $30.0 million in the fourth quarter of the recently completed fiscal year, which included an extra week.

Product development expenses related to epilepsy have continued to increase in accordance with our plans, and we expect this trend to continue throughout fiscal 2011.  Total research and development spending increased by $1.4 million from the first quarter of fiscal 2010 to $6.5 million, and represented 14.4% of net sales.

Expenses for the quarter ended July 30, 2010 included $1.3 million for stock-based compensation, a reduction of $0.8 million from the comparable period of fiscal 2010.  We estimate that stock-based compensation expense for fiscal 2011 will be approximately $6.0 million.

Income from operations

The company reported income from operations of $11.7 million during the first quarter of fiscal 2011, which was 26.1% of net sales, compared with operating income of $6.5 million, or 16.9% of net sales, in the comparable period of fiscal 2010.

Net income

The company reported net income of $7.2 million, or $0.25 per diluted share, for the first quarter, compared with net income of $7.9 million, or $0.23 cents per share, in the first quarter of fiscal 2010.  On a non-GAAP basis, net income for the comparable quarter of fiscal 2010 was $4.1 million, or $0.15 cents per diluted share.  The effective tax rate recorded in the first quarter of fiscal 2011 was 38.3% compared with less than 3.0% in the comparable period in fiscal 2010.  We continue to expect that cash payments for taxes will not exceed 3.0% of income before tax during fiscal 2011.

Balance sheet and cash flow

The company reported operating cash flow of $7.5 million for the quarter ended July 30, 2010.  Available cash balances were $56.7 million at quarter end and debt outstanding was $7.0 million.  During the recently completed quarter, the company repurchased $8.4 million of its outstanding convertible debt for total cash consideration of $8.2 million and recorded a net gain of approximately $0.1 million, including the impact of tax and the accelerated amortization of deferred issuance costs.  

Stock repurchase update

Through July 30, 2010, the company has repurchased approximately 217,000 shares of Cyberonics, Inc. common stock pursuant to the program announced earlier this calendar year whereby the board of directors authorized a repurchase of up to 1.0 million shares.

Results and objectives

"Fiscal 2011 has begun on a very positive note, with another double-digit sales increase," commented Dan Moore, Cyberonics' President and Chief Executive Officer.  "We continued to achieve strong growth in operating income, with our operating margin exceeding 25% this quarter.  The U.S. epilepsy team recorded one of our best quarters, which, following a strong fourth quarter of fiscal 2010, reinforces our optimism for fiscal 2011.

"Following reimbursement approval and physician training, patient implants have begun in Japan, a market vital to our international expansion.  Unit sales in Europe were weaker than in recent quarters, particularly in Germany and Scandinavia, and to a lesser extent in the U.K.  We are making adjustments based on specific market conditions and anticipate improvements later in the fiscal year.

"Product development is at the core of our plans to bring expanded device technology to patients with epilepsy, and as announced on our last call, we are committed to achieving several key product development milestones by the end of the current fiscal year.

"We announced recently that our co-founder and longest serving director, Reese Terry, will not stand for reelection to the Board of Directors at our Annual Meeting in September.  Reese served as a leader and provided technical inspiration for the company for more than 20 years.  We thank him for his valuable contributions to the company."

Fiscal 2011 guidance

Cyberonics is increasing its net sales guidance to the range of $184 million to $188 million on a constant currency basis, as opposed to the previously provided range of $182 million to $187 million.  In addition, based on the results of the first quarter, the company now expects that income from operations will be in the range of $42 million to $45 million, as opposed to the previously provided range of $41 million to $44 million.

Additional details will be provided during the upcoming conference call and in the accompanying presentation slides, as described below.

Use of Non-GAAP financial measures

Management has disclosed financial measurements in this press announcement that present financial information that is not in accordance with Generally Accepted Accounting Principles (GAAP).  These measurements are not a substitute for GAAP measurements, although company management uses these measurements as aids in monitoring the company's on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against other medical technology companies.  Non-GAAP net income and non-GAAP income per diluted share measure the income and income per share of the company excluding the gain on early extinguishment of the company's convertible debt, which is considered by management to be outside of the normal on-going operations of the company, as well as presenting fiscal 2010 comparisons as if the company had an effective tax rate consistent with that in the first quarter of fiscal 2011.  Management uses and presents non-GAAP net income and non-GAAP income per diluted share because management believes that in order to better understand the company's short and long-term financial trends, on-going operating activities should be considered to understand the impact of these unusual items.  Management also uses non-GAAP net income to forecast and to evaluate the operational performance of the company as well as to compare results of current periods to prior periods on a consistent basis.  Earnings before interest, tax, depreciation and amortization ("EBITDA") measures the income from operations of the company and excludes the aforementioned items, as well as non-cash equity compensation.

Non-GAAP financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.  Investors should consider non-GAAP measures in addition to, and not as a substitute for, or superior to, financial performance measures prepared in accordance with GAAP.