CYBX

Cyberonics, Inc. (CYBX)

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Cyberonics, Inc. (CYBX)

F3Q09 (Qtr End 01/23/09) Earnings Call

February 19, 2009 9:00 am ET

Executives

Daniel J. Moore – President & Chief Executive Officer

David S. Wise – Vice President, General Counsel & Secretary

Gregory H. Browne – Vice President, Finance & Chief Financial Officer

Analysts

Thomas Gunderson – Piper Jaffray

Steve Brozak – WBB Securities

William Plovanic – Canaccord Adams

Anthony Petrone – Maxim Group

Scott Gutterman

William Plovanic – Canaccord Adams

Presentation

Operator

Good morning. My name is [Nikisha] and I will be your conference operator today. At this time, I would like to welcome everyone to the Cyberonics Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Moore, you may begin.

Daniel J. Moore

Thank you, [Nikisha]. Good morning. Welcome to the investor conference call. I am Dan Moore. I will be joined this morning by our CFO, Greg Browne, and our General Counsel, David Wise. David would you please read the Safe Harbor statement.

David S. Wise

Thank you, Dan. This presentation includes forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, including may, believe, will, expect, anticipate, estimate, plan, intend, and forecast, or other similar words. Statements in this presentation are based on information presently available to us, and assumptions that we believe to be reasonable. Investors are cautioned that all such statements involve risks and uncertainties.

Forward-looking statements in this presentation includes statements concerning: achieving consistent annual unit growth of 10% to 20% per year, fiscal 2009 guidance for net sales, gross margin, and operating capital, equity compensation, depression, and R&D expenses. Achieving an operating margin of 25% by fiscal 2011. Growing our epilepsy sales including growth in Europe, Latin America, and Asia. DEMIPULSE generator market penetration, conducting and completing new clinical and R&D projects including projects relating to new stimulation parameters, seizure detection, and prediction, telemedicine, and efficacy prediction.

Securing regulatory approval in Japan, increasing R&D investment in fiscal 2010 and maintaining leadership in medical devices for epilepsy. Our actual results may differ materially. For a detailed discussion of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC, including our Form 10-K for the fiscal year ended April 25, 2008, and quarterly report on Form 10-Q for the quarterly period ended October 24, 2008.

Daniel J. Moore

Thank you, David. In this morning's call, we will be covering four areas. First, Cyberonics highlights, followed by an overview of our 3Q fiscal year 2009 results, specifically looking at sales and our financials. Those financials will be covered by Greg. And then I'll move into the epilepsy strategic focus before we enter our fourth area, which is the Q&A.

For those of you following on slide I am moving slide four, which gives an overview of the highlights for our quarter. Let's start with one of the most important profitability. The Cyberonics team delivered the highest operating income in the company's history in our third quarter. We had positive net income for the fourth consecutive quarter, while operating expenses remain stable. In the area of epilepsy, our main market, which as a reminder is a condition that affects some 3 million people in the U.S. and 50 million worldwide. Our Q3 net sales were up 22% over the prior year. The U.S. team produced unit sales growth of 19% while continuing to make progress with the conversion to the DEMIPULSE, which now stands at 43% and as expected we saw continued growth in our average selling prices.

Further another indication of our turnaround, in the area of debt management. If you go back five quarters ago, we owed more than a $130 million, a $132.5 million to be precise. Over the past five quarters, we have reduced that debt by more than $70 million to a very manageable balance of $62.3 million. Another highlight for the quarter, we continue to attract talent to our company and I am happy to report that we have found a very intelligent experienced leader to lead all of our R&D efforts.

Joining us as the Vice President of R&D is Milton Morris. Dr. Morris joined us earlier with this month and we have already seen contributions from what he has done for us. In the area of new business development, we signed our third R&D partnership for the important area of seizure deduction, and the team continues to execute on the strategic plan that we laid out last year that will maintain and grow our epilepsy device leadership.

Let's look at some of the specifics for Q3 in the area of sales. I'd move to slide seven, our quarterly net sales. We see once again continued strong U.S. epilepsy net sales growth, while overall sales grew at 20%, our epilepsy in the U.S. grew at 31%. International was disappointing down nearly 10%, but our overall epilepsy business grew at 22%. Depression is less than 1.3% of our sales now at less than a $0.5 million.

Moving to slide eight. On the unit side, we saw continued strong U.S. epilepsy unit growth. Overall unit growth for the company was double-digit at 11%, U.S. epilepsy units nearly 19% growth over Q3 fiscal year 2008. International down slightly, but we expect to see growth in that business in the longer term. Epilepsy total units again hitting that double-digit number of 13% that we're looking for.

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