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Cyberonics’ (CYBX) fourth-quarter fiscal 2013 adjusted earnings per share (EPS) rose 21.1% to 46 cents, surpassing the Zacks Consensus Estimate of 43 cents. This represents the eighth successive earnings beat for Cyberonics, largely benefitting from a lower tax rate in the quarter.

Net income shot up 8.1% on a year-over-year basis to $11.5 million in the fourth quarter of fiscal 2013.

Adjusted EPS in fiscal 2013 was $1.74, up 31.8% year over year. The result beat the Zacks Consensus Estimate of $1.71 as well as the company’s expectation of $1.66−$1.72.

Revenues jumped 19% year over year to $68.3 million in the quarter, well ahead of the Zacks Consensus Estimate of $64 million. Fiscal 2013 net sales were $254 million, up 16% from fiscal 2012. The fiscal revenues surpassed the Zacks Consensus Estimate of $249 million and the company’s previously guided range of $248−$250 million.

Quarter in Detail

In the fourth quarter, worldwide unit sales surged 15% year over year to 3,436 units. On a geographic basis, Cyberonics recorded 17% growth in U.S. revenues to $56.1 million and 10.5% unit growth in the fourth quarter. International sales, representing roughly 18% of the company’s revenues, grew a robust 24% on a reported basis (or 27% at CER basis) to about $12 million with unit growth of 22%. Growth in the overseas market was led by healthy European unit sales growth with higher replacement activity in U.K., Norway and Sweden.

In the reported quarter, the company witnessed higher utilization and adoption for its VNS Therapy generators, as reflected in the record high quarterly sales. AspireHC – Cyberonics’ newest VNS Therapy generator – gained traction, representing 19% of total generator sales in the domestic market. Further, average selling price improved 4.6% from the prior-year quarter for the company.

Gross profit climbed 16.7% to $57.3 million in the quarter. However, gross margin contracted 74 basis points (bps) to 90.7%. The impact from the medical device tax and associated costs since Jan 1 accounted for the decline.

With a 15.1% increase in selling, general and administrative expenses to approximately $30 million and a 26.5% rise in research and development expenses to $11.5 million, operating margin contracted a significant 130 bps to 29.9% in the reported quarter. This is mainly due to the expansion of Cyberonics’ marketing team, higher expenses associated with the E-36 clinical study and other costs related to the groundwork of the facility in Costa Rica.

The company exited the fiscal with cash and cash equivalents of $120.7 million, up 24.9% from fiscal 2012. Cyberonics has no interest-bearing debt on its balance sheet. The company repurchased 0.27 million shares during the quarter and is left with 0.945 million shares under its current buyback program.

Guidance

Taking into account the solid financial results of fiscal 2013, Cyberonics provided avid outlook for fiscal 2014. The company envisages revenues in the range of $279−$283 million. The current Zacks Consensus Estimate of $279 million hovers around the lower end of the company’s guidance. Cyberonics expects global unit growth of roughly 10%.

Income from operations is expected in the range of $85−$88 million resulting in net income of $53−$56 million and adjusted EPS of $1.93−$2.01 for fiscal 2014. The current Zacks Consensus Estimates of $1.93 for fiscal 2014 tallies with the lower end of the outlook.

Update on VNS-TRD

The decision of Centers of Medicare and Medicaid Services (CMS) of non-coverage of VNS Therapy for patients with treatment-resistant depression (:TRD) was a setback for Cyberonics. While the company is seeking options for obtaining a review on CMS decision, it will continue to work with other interested parties for the TRD indication.

Our Take

Cyberonics has consistently delivered strong quarterly results in the recent past, topping expectations. The company continues to rein in soaring demand for its VNS Therapy for the treatment of refractory epilepsy. The second successive fiscal year of solid overseas growth, amid several macroeconomic uncertainties in the European market, was encouraging. Further, the guidance for fiscal 2014 reflects accelerating growth for Cyberonics.

However, contributions from Japan lagged the company’s expectations for another quarter. Moreover, gross margin pressure remains an overhang. Considering the ongoing costs associated with the development of the Costa Rican facility and product development initiatives, Cyberonics expects the margin pressure to continue in fiscal 2014.

Nonetheless, we are optimistic about Cyberonics’ growth prospects on the back of strong untapped growth potential of the epilepsy market. Further, the company’s effort to extend VNS Therapy treatment for other indications like Obstructive Sleep Apnea (:OSA) and Chronic Heart Failure (:CHF) is impressive.

Given the consistent strong performance and several upsides, this Zacks Rank #1 (Strong Buy) stock warrants a look. Other Zacks Rank #1 medical stocks are Haemonetics Corporation (HAE), Myriad Genetics Inc. (MYGN) and Conceptus Inc. (:CPTS).