Cepheid Posts Mixed 2Q, Cuts View - Analyst Blog

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Cepheid ( CPHD ) reported net income of $1.13 million or 2 cents per share in the second quarter of fiscal 2012, lower than net income of $1.82 million or 3 cents per share in the year-ago quarter. After adjusting for amortization expense, the earnings per share (EPS) came in at 3 cents, a penny ahead of the Zacks Consensus Estimate but behind the adjusted EPS of 4 cents in the second quarter of the previous fiscal.

Revenues during the quarter increased 20.9% year over year to $81 million, missing the Zacks Consensus Estimate of $83 million. Currency headwinds had an adverse impact of over 200 basis points on growth. The upside was driven by 22% growth at the Clinical segment attributable to strong sales of reagents.

Among the segments, the Clinical segment consisting of Clinical Systems (up 5% year over year to $13.9 million) and Clinical Reagents (up 27% to $55.8 million) contributed about 86% of the total sales during the quarter. Cepheid's Non-Clinical business increased 40% year over year to $8.8 million. Product sales from North America and the international market recorded a respective year-over-year increase of 14% (to $54.4 million) and 52% (to $24.1 million).


Cepheid made placements of 133 GeneXpert systems in the quarter (122 in the first quarter of 2012) in its commercial business. The company's High Burden Developing Country ("HBDC") Program continues to gain traction with 138 system placements (151 in the first quarter of 2012, 181 in the fourth quarter of 2011 and 141 in the third quarter of 2011).  Including the HBDC systems, a cumulative 3,350 systems have been placed worldwide as of June 30, 2012.

Revenue associated with the HBDC business was roughly at par with the preceding quarter belying expectations. While some systems revenue could not be recognized due to a change in customer agreement, many customers delayed orders anticipating possible reduction in the price of the test following an announcement by UNITAID. These factors negatively impacted total revenue by approximately $3 million in the second quarter

Gross margin on product sales increased to 57% in the reported quarter from 55% in the year-ago period primarily due to initiatives undertaken in the logistics and manufacturing operations at the end of the first quarter. Operating expenses amounted to $42.2 million, up 21.7% year over year, driven by higher research and development (15.8% annually to $16.1 million), sales and marketing (27.2% to $15.1 million), and general and administrative (23.6% to $11.0 million) expenses. The company reported $2.06 million as income from operations compared with $1.98 million in the year-ago period.

Amidst continued economic uncertainty in Europe and renewed concerns in the US regarding the potential impact of healthcare reform, some significant  developments on the company's front include the clearance of GeneXpert Infinity-80 system in the US and CE Mark approval of the Xpert CT/NG test. While the test is commercially available in Europe since mid-June, the test has already been submitted for approval to the US Food and Drug Administration ("FDA") with a targeted commercial release before year end.

Outlook

While the revenue outlook for 2012 was unchanged at $333-$347 million, the EPS guidance was lowered for the second time in the year to 0−4 cents from the previous level of 12−17 cents. At the end of fiscal 2011 Cepheid had projected EPS of 17−24 cents for 2012. The current Zacks Consensus Estimate of $342 million in revenues is within the company's guidance range but the EPS consensus of 18 cents is way above the company's estimates. On an adjusted basis, the EPS guidance for 2012 comes to 1−5 cents.

The earnings guidance has been adjusted largely to reflect changes in the company's outlook for gross margin for the HBDC business and a less favorable currency movement. Cepheid's HBDC reagent growth has slowed somewhat awaiting the availability of a lower-priced test. In addition, a lower-than-targeted gross margin contribution from Infinity family of systems also led the company to lower its guidance.

Recommendation

With a broad portfolio of tests, Cepheid is one of the leading players in the healthcare associated infection ("HAI") market. The company is working on test menu expansion to further expand system placements to compete with players like Qiagen ( QGEN ).

We are also encouraged to note the initiatives undertaken by the company yielding the desired gross margin expansion. However, we are disappointed with the company slashing its earnings guidance for the fiscal the second time in a row. Besides, rise in operating expenses continue to affect the bottom line .

We have a Neutral recommendation for Cepheid. The stock carries a Zacks #3 Rank (Hold) in the short term.


 
CEPHEID INC (CPHD): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CPHD , EPS , QGEN

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