Sirona Q2 Earnings Meet, Revenues Lag; View Maintained - Analyst Blog

Sirona Dental Systems Inc. SIRO reported adjusted earnings of 76 cents in the second quarter of fiscal 2015, which matched the Zacks Consensus Estimate. However, adjusted earnings per share (EPS) declined 5% on a year-over-year basis.

Revenues

Revenues declined 9% year over year to $257.3 million and also missed our estimate of $282.7 million. On a constant currency (cc) basis, revenues were up 2% year over year, driven by expanded global sales and services infrastructure.

U.S. revenues increased 8.6% driven by strong demand for the company's imaging products and continued growth in CAD/CAM new user sales. International revenues decreased 15.3% on a year-over-year basis (0.4% at cc) primarily owing to sluggish growth in Japan.

CAD/CAM revenues declined 6.6% (up 2.9% at cc) to $101.7 million. The year-over-year growth at cc came on the back of higher demand from new users.

Imaging Systems revenues declined 8.2% (down 0.7% at cc) to $80.7 million due to lower Orthophos revenues. During the quarter, Sirona introduced a new Orthophos SL 2D-3D product line to the market, the shipment of which will start in June and the consecutive launch in major markets will follow.

Instruments revenues decreased 10.8% (up 6.1% at cc) to $32.8 million. The year-over-year cc growth was mainly supported by strong demand for the company's high-end handpieces and hygiene products in international markets.

Treatment Centers' revenues stood at $54 million, down 13.8% on a year-over-year (up 2.2% at cc) basis. Treatment Centers benefited from strong demand especially in Europe as well as the rollout of Sirona's new products - INTEGO and SINIUS - which continue to gain traction.

Operating Performance

Gross margin expanded 230 basis points (bps) on a year-over-year basis to 55.9%. The upside was mainly led by favorable foreign exchange in the Imaging segment owing to the weakening of the Euro. The expansion was also supported by reduced amortization and depreciation expenses resulting from the step-up to fair values of tangible and intangible assets.

Selling, general and administrative (SG&A) expenses, as a percentage of revenues, increased 1100 bps to 31.9% year over year, driven by continued investments in the company's sales and service infrastructure.

Research and development (R&D) expenses, as a percentage of revenues, decreased 30 bps on a year-over-year basis to 5.5%.

Operating margin expanded 160 bps on a year-over-year basis to 19.4% on the back of gross margin expansion.

Financial Position

As of Mar 31, 2015, cash and cash equivalents were $400.3 million, up from $368.1 million as of Dec 31, 2014 and $382.8 million as of Sep 30, 2014.

Guidance

Sirona reiterated fiscal 2015 revenue growth projection at 6%-8%, at cc. Adjusted EPS is expected in the range of $3.95-$4.05, reflecting growth of 8%-10%. Segment gross margin is forecasted to increase 50 to 100 bps on a year-over-year basis.

For fiscal 2015, SG&A expenses, as a percentage of sales, are projected between 28.5% and 29.5%. R&D expenses, as a percentage of sales, are forecasted between 4.5% and 5.5%.

Sirona believes that growth opportunities for its digital technologies are quite significant. The company expects a strong second half of 2015, which will help it to clock double-digit earnings growth.

Our Take

We are particularly encouraged by Sirona's innovative product pipeline which is expected to open up new avenues. The company's extended relationship with Henry Schein HSIC in overseas markets and Patterson Companies PDCO in the U.S. will continue to ramp up penetration going forward.

However, the company has significant exposure to foreign currencies, particularly the Euro, which is a headwind. Furthermore, as Sirona continues to make planned investments in its sales and product management infrastructure, we believe that this will hurt the bottom line in the near term.

Stocks to Consider

Currently, Sirona Dental carries a Zacks Rank #3 (Hold). A better-ranked stock in the medical instruments industry is RTI Surgical RTIX with a Zacks Rank #1 (Strong Buy).

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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 Nasdaq, Inc.

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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 Nasdaq, Inc.

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