Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cyberonics Inc. (NASDAQ:CYBX)

Q4 2014 Results Earnings Conference Call

June 4, 2014 9:00 AM ET

Executives

Dan Moore - President and CEO

Rohan Hoare - Chief Operating Officer

Greg Browne - Chief Financial Officer

Analysts

Matthew O'Brien - William Blair

Kyle Rose - Canaccord Genuity

Charles Haff - Craig-Hallum

Matthew Dodds - Citigroup

Brooks West - Piper Jaffray

Suraj Kalia - Northland Securities

Jim Sidoti - Sidoti & Company

Operator

Good day, ladies and gentlemen. And welcome to the Cyberonics Fourth Quarter Fiscal Year 2014 Earnings Conference Call. My name is Saeed, and I will be your operator today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

And as a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Dan Moore, President and Chief Executive Officer. Sir, you may begin.

Dan Moore

Thank you, Saeed. And welcome to Cyberonics fiscal 2014 year end conference call. Joining me today are Rohan Hoare, our Chief Operating Officer; and Greg Browne, our Chief Financial Officer. Greg will summarize the Safe Harbor statement and provide detailed financial information later.

Greg Browne

Thank you, Dan. Our earnings call and the accompanying press release and presentation include forward-looking statements. Forward-looking statements maybe identified by the use of forward-looking terminology, including may, believe, will, expect, anticipate, estimate, plan, intend and forecast, or other similar words.

Statements on the call and in the 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 on this call and in the presentation include statements concerning building stockholder value; achieving consistent sales and profitability targets and growth worldwide; achieving clinical, regulatory, product development and product manufacturing milestones; evaluating and advancing other medical device and neuroscience opportunities; completing the previously announced stock repurchase program; and fiscal guidance for fiscal year 2015.

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 annual report on Form 10-K for the fiscal year ended April 26, 2013.

With that, I'll turn the call back to Dan for a business update.

Dan Moore

Thanks, Greg, and good morning. Our worldwide Cyberonics team has again achieved record financial results during both fourth quarter and fiscal 2014. We also have significantly advanced a number of important development projects during the last 12 month, as well as strengthened the organization.

Financial highlight for fiscal 2014 include, record worldwide sales of $282 million, record worldwide unit sales of 13,982 unit, record adjusted income from operations of $87.5 million, record adjusted income from operations margin of 31%, EBITDA reached $104.3 million for the fiscal year, exceeding $100 million for the first time and affording the company extraordinary flexibility as we continue to build a world-class and growth-oriented medical devices company.

Financial highlights for the fourth quarter of fiscal 2014 also included a number of record achievements. We had record worldwide net product sales of $74.8 million, record worldwide unit sales 3,723 units, record international net sales of $16.7 million, an increase of 37% on a constant currency basis, and income from operations increased to a record $23.4 million.

Other operational highlights in fiscal 2014 included, completion of two clinical studies reporting the AspireSR generator, regulatory submission and approval of the AspireSR generator in Europe, limited commercial release of the AspireSR generator.

We completed the ANTHEM-HF clinical study using Autonomic Regulation Therapy, chronic heart failure. We also completed construction and regulatory filings for the new manufacturing facility in Costa Rica.

On that note, during the last six years our operations team has consistently performed well, manufacturing world-class products that help us maintain strong gross margin. Over the last couple of years, this team has led the Costa Rican project and prepared our new facility for approval, a process is to support later stages of production are underway and we expect to begin shipments from Costa Rica in the second half of this fiscal year.

Product development update, we continue to make progress on our new product pipeline. Here are few of the highlights by project. First, ProGuardian system, we are excited to report the submission of the first product of the ProGuardian platform for regulatory approval in Europe. We expect to submit to the FDA shortly, likely in a month or two.

Consistent with our normal practice, regulatory approvals will be followed by limited market launches. ProGuardian system is our in-home monitoring system designed to aid in the detection, recording, notification of seizures, accompanied by heart rate changes or movement.

The AspireSR generator, U.S. clinical and regulatory plans, following E-37 enrollment completion, we begin interactions with FDA regarding the path to regulatory approval. We expect to be able to report on progress with FDA on our next call. If another study is required by the FDA, we plan to use the results of E-36 and E-37, optimize as study design.

Centro generator is formally referred to as the Relay generator. This generator is the third important new product platform of focus after successfully submitting AspireSR and ProGuardian regulatory approval. Development of the wireless enabled VNS Therapy generator continues to progress. The Centro generator platform along with the RF enabled tablet programmer facilitates faster communication in more efficient and convenient programming during the implant procedure and in routine follow-up sessions.

We estimate this submission will likely occur towards the end of the first half of fiscal ’15. Autonomic Regulation Therapy for chronic heart failure. As announced in our press release earlier today, the ANTHEM-HF pilot study assessing the safety of Autonomic Regulation Therapy, ART has been completed as planned. Our investigators have submitted an abstract of the initial results of the pilot study for presentation at the European Society of Cardiology meeting in early September.

We are planning a stage submission for regulatory approval in the next several quarters and if approved, we plan for a limited commercial launch. We are increasing our investment in this area in fiscal 2015, where we consider partnership opportunities.

Depression and TRD, in the fourth quarter, we estimate the 24 generators when planted for TRD, highest numbers since the second of quarter fiscal 2009. We believe that many of these implants were replacement generators for Medicare patients. We are encouraged to see patients with TRD, continuing with VNS Therapy when the battery is depleted and also to see CMS providing coverage for some replacement treatment.

Now back to epilepsy market development, since fiscal 2008, when the company refocused on epilepsy, more than 35,000 people worldwide chose for the first time VNS Therapy helped them control their epilepsy. In addition to reducing their seizure burden, VNS Therapy allowed these patients to lead more productive and enjoyable life.

Additionally, during this period, approximately 25,000 people chose to continue with VNS Therapy after battery depletion. In fiscal 2014 and included in the above numbers, we estimate that 6,000 patients opted for VNS Therapy for the first time and a similar number chose to receive a replacement.

Having recently heard several patients directly relate how VNS Therapy changed their lives, we reminded as a potential for VNS as a foundational therapy. We are proud of what we as the company develop, make and sell, even more proud of what VNS Therapy provides for patients.

As mentioned in our recent press releases, we have taken steps to strengthen our management team around the epilepsy business with two significant additions. Rohan Hoare assumed operational responsibility for all aspects of the epilepsy business from the first day of fiscal 2015, with a particular focus on increasing growth in all geographic areas. He will also ensure that our product development along with the associated clinical and regulatory activity continues to be appropriately focused on the underserved patient population.

The second addition, Dr. O'Neill D'Cruz, Chief Medical Officer, is a senior clinical executive who has extensive epilepsy clinical industry experience. Dr. D’Cruz was involved in the early VNS Therapy trials. We look forward to their contributions for our continued success.

As we discussed on our last call, over the last six years, our U.S. sales team has regularly exceeded expectations. After a weak finished fiscal third quarter and the slow start to the fourth quarter, U.S. epilepsy sales recovered strongly through the fourth quarter to achieve another record.

In the last two months of the quarter, new patient activity rebounded strongly, resulting in estimated growth of more than 10% over the third quarter. If we look at the last four years since fiscal 2010, estimated U.S. new patient implants have increased by almost 30%. After a long period of decline, we are pleased with the overall results of our focus in this area.

Recently, by publicity for alternate treatments for epilepsy by invasive neuromodulation involving brain surgery and medical marijuana has increased. This publicity provides our sales team with another opportunity to discuss the relative merits and value of VNS Therapy as a foundational treatment for people with drug-resistant epilepsy.

We firmly believe that the case for VNS Therapy has never been stronger. The recently published whole study demonstrated significant improvements in quality of life, measures and reduce seizure frequencies in patients receiving VNS Therapies compared to patients receiving best medical practices along.

Also, we have substantially increased our investment in new sales and marketing initiatives for fiscal 2015, including increased our customer facing sales team by 10%, most of whom are now in place. We’ve expanded the breadth of the U.S. sales management team by adding two new regional managers, taking the number of regional managers from 9 to 11.

We increased our marketing and sales efforts to a broader audience of physicians, surgeons and epilepsy monitoring unit around the country. We are expanding our presence in social media. We continue to reinforce our marketing campaign to position and expanded the patient awareness and patient ambassador program on epilepsy connections.

For many years, we have consistently maintained our commitment to expanding VNS Therapy globally. Our international revenue accounts for approximately 20% of total revenue. Today, nearly 30% of units sold are solid in international market. And almost 40% of all new patient implant are in international markets.

Our international business now accounts for more than $50 million on an annual basis. Important milestone has nearly doubled over the last three years. International growth has been fueled by Europe. Our European unit growth was approximately 18% for both the fourth quarter and fiscal 2014 as a whole, an excellent performance, particularly as this growth was widespread across most countries including U.K., Germany, Italy and France.

A limited market launch of AspireSR generator began in Europe and EMEA, Eastern Mediterranean, Middle East and Africa. During this last fiscal quarter, SR orders already exceeding 20% of total units ordered in certain accounts, we will continue to expand the planned launch activity.

In other international markets, Latin America had an excellent year with volumes increasing by more than 25%, despite more publicized problems in Venezuela, traditionally one of the best markets for Cyberonics in that region. Significant opportunities remain in several areas, most notably Japan and Asia-Pacific. Our expansion plans for Japan are now underway. We expect to have our first direct employee in Japan in the second quarter of this fiscal year.

Guidance, we have established a consistent track record of achievements over the last seven years. The approximate double-digit revenue growth inspired by our guidance for fiscal 2015, after normalizing for the single country and license revenue for fiscal 2014, demonstrates our commitment to and confidence in market opportunity along with our ability to realize this opportunity.

Greg will now take us through a discussion of our financial results and guidance in more detail. Greg?

Greg Browne

Thank you, Dan, and good morning, everyone. Product sales in the fourth quarter of fiscal 2014 were $74.8 million, representing growth of 9.5% over the fourth quarter of the prior year. U.S. unit sales increased by 9.9% as in the third quarter, representing a good recovery and by 2% over the fourth quarter fiscal 2013, along with generator ASP growth of 2.9%, this resulted in overall increase in U.S. product revenue of 3.7% for the fourth quarter. Excluding the 126 units delivered as the second part of a single contract, international units increased by 11.3% to a record 1,115 units, and revenue by 18.2% to a record $14 million. This increase was 14.2% on a constant currency basis.

For fiscal year 2014, worldwide sales increased by 10.9% to record $282 million and unit volume by 8.1% to 13,982 generators. Again excluding the net sales as part of the single country order, it was unusual. Sales in fiscal ’14 totaled $277.3 million, an increase of 9% over the prior year. Foreign currency movements when compared to the fourth quarter of last fiscal year had a positive impact on international revenue to this quarter of approximately $400,000, and for fiscal 2014 as a whole it was a positive impact of approximately $1 million.

With respect to U.S. lead sales, quarter-to-quarter variations will occur for a variety of reasons and may not be indicative of underlying activity. For example, physicians replace some leads each quarter. For the fourth quarter of fiscal 2014, U.S. epilepsy lead sales are estimated at 1,168 compared with 1,243 in the previous year, a decrease of 6% and may not be indicative of underlying new patient activity. The trailing 4-quarter growth rate in U.S. leads was 5.4%.

For fiscal year 2014, we guided growth for U.S. replacements in the mid-single digits. And although the fourth quarter provided a record number of replacements, our estimate for the growth rate of replacements for the fiscal year is between 100 and 200 basis points below the rate in our original guidance. Overall, in the U.S., we estimate that more than 5,000 patients in fiscal ’14 opted to continue with VNS therapy after the battery was depleted.

The AspireHC generator again accounted for approximately 30% of U.S. unit sales in the most recent quarter, same as in the third quarter. DemiPulse generator remained at 58% of unit sales, and the pulse generator at 12%. Internationally, AspireHC generator accounted for 16% of unit sales, resulting from wider regulatory approval. And as Dan mentioned, the AspireSR unit sales accounted for approximately 20% of sales in those accounts in which the device was offered to sale.

The reported gross profit of 90.1% in the fourth quarter was marginally lower than in the previous quarter. The full year gross profit was 90.3% and somewhat higher than our original guidance.

For the fourth quarter of fiscal 2014, operating income was a record $23.4 million or 31.3% of sales, an increase of 14.4% and compared to the $20.5 million or 30% of sales in the fourth quarter of fiscal 2013. The increase in operating income this quarter was achieved despite the completion of the recognition of license revenue in the first quarter of fiscal 2014.

For the full year adjusted operating income was $87.5 million, an increase of 11.6% over the prior year. Operating expenses were higher than the third quarter’s expenses primarily due to higher selling and compensation.

In line with our expectations for fiscal 2014, research and development spending was at 16.5% for the full year, though the number was large in the fourth quarter at 16.7% as a result of certain projects reaching later phases of development. As stated, at our recent Investor Day, generating operating leverage continues to be a key objective. We are pleased that operating income represented 31.3% of sales during the quarter and as adjusted 31% for the fiscal year as a whole. The adjusted operating margin for fiscal 2014 represented a record level.

Please note that variations in the operating income percentage are likely to occur from quarter to quarter.

Earnings before interest, depreciation, amortization, equity compensation expense and other adjustments totaled $27.7 million in the fourth quarter, an increase of 14.4% over the fourth quarter of fiscal 2013. As Dan mentioned, for fiscal 2014, EBITDA reached more than a $100 million for the first time.

For the fourth quarter of fiscal 2014, we had an adjusted effective tax rate of 36.2%. This was marginally higher than prior quarters due to the reduced impact of research and development tax credits. As a result, continued strong growth in profitability in Europe would reverse the remaining reserves established against the FX losses in the year. Our adjusted tax rate for fiscal 2014 as a whole is 35.7%.

Stock repurchases in this quarter reduced the number of shares included for the purposes of diluted earnings per share calculation is 7.1 million, approximately 3% lower than in the fourth quarter of the prior year. As stated in our press release, we repurchased 190,000 shares in the fourth quarter and we expect to complete purchase of the remaining balance of the share authorization by the end of fiscal year 2015.

Adjusted income per diluted share of $0.55 increased by 19.6% compared to an adjusted $0.46 per share in the fourth quarter of fiscal 2013. The fiscal 2014 as a whole, adjusted income per diluted share was $2.04, an increase of 17.2% over the adjusted $1.74 in the prior year.

Days sales outstanding were 62 days, up from 56 days at the end of the prior quarter, driven in part by the increase in international revenue, particularly the single country sale. We are pleased to report that 40% of the sale has now been collected.

Our balance sheet remains strong. After spending $69 million repurchasing shares on the open market during the fiscal year, stockholders' equity was approximately $260 million. We have over $128 million in cash and short-term investments and no interest-bearing debt.

Worth pointing out, Cyberonics profitability over the last six years has now offset all losses accumulated since the company’s founding and our year end balance sheet reflects positive retained earnings at year end for the first time in the company’s history.

Fiscal 2015 guidance, Cyberonics is providing guidance for fiscal 2015 as follows. Net sales are expected to be in the range of $300 million to $307 million. In both the press release and in the investor presentation posted on our website this morning, we have provided more detailed guidance around both U.S. and international revenue growth.

The assumptions used in setting this range include normalized revenue growth of approximately 10% over fiscal 2014, after adjusting for the single country order and the license revenue, but no license revenue is anticipated to be recognized in fiscal 2015. Worldwide unit growth of approximately 7% again normalized for the single country order. Mid-to-high single-digit growth in U.S. new patient implants, mid-single-digit growth in U.S. replacements, continued international growth in the low-to-mid teams and Euro/Dollar exchange rate of $1.35.

Gross profit is expected to be between 90% and 91% for the full year. Income from operations is expected to be in the range of $96 million to $99 million after taking into account increased investment in sales and marketing activity offset by a largely flat investment in research and development. Research and development expenditure is expected to be approximately 15.5% of revenue.

The company anticipates an effective tax rate of approximately 35% for fiscal 2015. This number assumes the renewal of the research and development tax credit. We do expect to pay significant cash taxes for the `first time in fiscal 2015, and this number is expected to be between 20% and 25% of the income before tax.

Capital expenditure is expected to be approximately $10 million in fiscal 2015. Net income for fiscal 2015 is expected to be in the range from $62 million to $64 million. The company expects the diluted earnings per share will be in the range from $2.33 to $2.39.

We will now open up the call for questions. Operator, first question?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Matthew O'Brien from William Blair. Your line is open, sir. Please go ahead.

Matthew O'Brien - William Blair

Morning, thanks for taking the question. So was hoping to start up with your -- Greg your commentary around the U.S. business. There is a little bits and pieces of it, I didn’t quite catch, but I think you said overall the U.S. lead business was down about 6% in the quarter. And then replacements while the record number were I think still little bit softer than you have been seeing from that business. Can you just talk a little bit about some of the key drivers there? Was this some spillover from some of the factors that were affecting Q3, be it insurance or weather, something along those lines?

Greg Browne

As Dan mentioned in his remarks, we finished slowly if you like at the end of the third quarter and we started a bit slow in the fourth quarter, which for us was February. We recovered strongly as the quarter went on. As far as lead sales are concerned, they were down for the fiscal fourth quarter, as I said, by 6%. I would focus as I stressed over the last few years on the fourth quarter growth rate in U.S. leads at over 5%.

I think that’s a better measure. And if you recall that for our first quarter, we had actually a high number of leads and their replacements was somewhat low as measured by the generator minus lead numbers. So I think the averages are a better guide there in the fourth quarter averages. We finished the year strongly in the last couple of months of the fiscal fourth quarter and that gives us confidence going into the new fiscal year.

Matthew O'Brien - William Blair

Okay. So tell me if I’m splitting hairs here but at your Analyst Day about six months ago, you talked -- you given us a number and it was kind of closer about 12% growth on annual basis on the top line going-forward. The first -- in the last couple of years now, we’ve seen something more like 9%, maybe closer to 10% on an adjusted basis.

Is that -- is there something that’s a little bit different as far as what you’re seeing in the business now versus what you saw few months ago? Is that more function of just doing some near-term disruption, still very confident in the longer term outlook for the business and this is likely just more of a flip than anything else?

Greg Browne

I think it’s the ladder that you mentioned. First when we talk about fiscal ‘17 in Analyst Meeting, those are goals, those aren’t our guidance and putting 12% growth out there over three year period, I think we fully expect to hit that to your point on the board as we did an analyst meeting in December. Sales as we know in the last month or so of Q3 weren’t strong and the same things for the first month of Q4 but then we came back nicely. So when we think about our global business, we still expect to be able to deliver double-digit growth over that three-year period.

Matthew O'Brien - William Blair

Okay. And then just one more last one if I may. NeuroPace receiving its approval several months ago, have you guys seen anything in the way of trialing affecting your business?

Dan Moore

There is obviously some interest out there. I mean, you can see it in the news, makes good new stories and you can see in hospital magazine publication. You’ll see some of it there. But we’ve not seen any material impact on our business overall.

Matthew O'Brien - William Blair

Great. Thank you.

Operator

Thank you. And our next question comes from William Plovanic from Canaccord Genuity. Your line is open. Please go ahead.

Kyle Rose - Canaccord Genuity

Great. Thanks. This is actually Kyle on for Bill. Can you hear me all right?

Dan Moore

Yeah, we can.

Kyle Rose - Canaccord Genuity

Great. So just a few housekeeping questions here. First off, I wonder if you could break out lead and the service sales internationally and then as well as the direct versus distributor sales for the international business?

Dan Moore

Yeah. The international unit sales, we went second on that. On the international generators and I’m just excluding for those purpose the single country border but we deliver the 1,115 generators as I said and 769 leads internationally. The distributors accounted for 48% of our sales in international in the last quarter.

Kyle Rose - Canaccord Genuity

Great. And then just as we get closer to I’m going to see in the data on the chronic heart failure in September. It sounded like you had talked or you mentioned the partnership opportunity there. I wonder how you could -- what if you can just breakdown, how you view that opportunity just overall broadly in the heart failure area? And then how do you evaluate partnership versus going in alone and building the market?

Dan Moore

Well, I think, we need to provide caution because it is very early in this technology that we’ve enrolled a pilot study. And as we’ve said, we expect the results of that pilot study to be shown at presentation in early September providing that abstract is accepted. So we continue to progress in that sense. We got the trial enrolled. We’ve seen the result.

Our investigators have submitted for a paper and we’ll see if they are able to get those things presented. And Dan has mentioned, we plan to continue -- as our base case, we’re continuing forward on a go-alone basis, because that’s the case that we can control. So we spent that we plan to submit and hopefully get a CE Mark and then that will be followed by limited launch in Europe.

In the meantime, we remain open to any partnership as we’ve always been in our seven-year history for everything we’re doing. So we’re open to those partnerships but our base cases that go along.

Kyle Rose - Canaccord Genuity

Great. And then just lastly on -- in these sales reputations in the U.S., can you just remind historically that how long it’s typically taken your reps to get up-to-speed and become productive? And that’s all I’ve got. Thank you.

Dan Moore

Yeah, it generally takes one to two quarters for them to hit their stride. And we did get into these in the fourth quarter. I have mentioned we’ve increased the customer-facing personnel by approximately 10% and almost all the guys are already onboard and have completed their training. So we’d expect that to have an impact in probably the second quarter of our fiscal ‘15.

Kyle Rose - Canaccord Genuity

Okay. Thanks a lot.

Dan Moore

Welcome.

Operator

Thank you. And our next question comes from Charles Haff from Craig-Hallum. Your line is open. Please go ahead.

Charles Haff - Craig-Hallum

Hi. Thanks. Can you hear me okay?

Dan Moore

Yeah, Charles.

Charles Haff - Craig-Hallum

So on the AspireSR, you mentioned that it was being used in about 20% of all the accounts that it was offered to. How many accounts is it being offered to or how many units did you sell for SR in the quarter?

Dan Moore

Charles, I think you may have slightly misunderstood what we said. What we said was, we opened it up to a very limited number of accounts in Europe during the fourth quarter. And what we tried to get across was that from the orders -- the orders in those accounts, AspireSR accounted for 20% of the orders on those accounts rather than 20% of the total accounts.

So we were pleased with the initial response. It will start to be distributed to more accounts than in this quarter and in coming quarters. And we’ll be out to report on that prices in the next couple of quarters. But we’re very pleased by the response so far.

Charles Haff - Craig-Hallum

And as a follow-up to that, do you expect that 20% to kind of be where the mix will fall out for SR in Europe once you kind of get it going or do you think it’s going to increase or decrease from that level?

Dan Moore

Over time, I think we would expect it to increase. That is the best technology going forward. What we’ve seen when we bought new technologies in the past, whether it was Demipulse, you saw that grow to a majority of our business over time. Coming with the AspireHC although it’s not a majority, accounted for about 30% of sales in the U.S. and then the European theater announced that over 15% of sales continues to progress there. But I would think overtime the AspireSR will continue to grow beyond 30% numbers.

Charles Haff - Craig-Hallum

Okay. And…

Dan Moore

I could just add one thing to that.

Charles Haff - Craig-Hallum

Sure.

Dan Moore

In Europe, because of the regulatory and reimbursement, the conditions vary country by country. It takes somewhat longer to reach a higher level of penetration for a new product than it would have been.

Charles Haff - Craig-Hallum

Okay. And could you remind us the ASP differences between SR and HC in Europe?

Dan Moore

That’s part of the limited launch and the reason we started couple of countries in a couple of accounts because as you’ve seen with us going all the way back to Demipulse and then we did the same thing for AspireHC. What we’re doing is out there looking at price and what we can get with a price premium in a specific market. So at this point, we’re into double digit price increases but we’re still testing to see how much we can get for the product.

Charles Haff - Craig-Hallum

Okay. And my last question is on you recently purchased an intellectual property from Apnex Medical. What did you buy there and can you reiterate or help us understand your strategy in OSA and what this IP does for you there?

Dan Moore

Charles, as you know, we’ve been interested in practice sleep apnea for some time. We have an investment in ImThera Medical and there has been some developments in that area from another company in this space. We saw an opportunity to purchase some assets from Apnex Medical when they discontinued operations because that a couple of quarters ago. It strengthens our intellectual property, portfolios and testings in other clinical results that we have.

We’re not planning to reinitiate that clinical study or develop the products that they chose or unable to do. But it does strengthen our overall portfolio, contributes to our areas of interest and we may be out to utilize it at a later date if the other areas of investment either develop or don’t develop as we expect.

So we’ve an investment in ImThera that you see a basic approach. When we look at Apnex, they use responsive stimulation similar to the other company that’s in that space. So I think although we don’t own ImThera, we just have an investment in Imthera. It has the basic approach of stimulation there and with something like Apnex that you get is the benefit of being able to do responsive stimulation if you wanted to pursue that path as well.

Charles Haff - Craig-Hallum

Great. Thank you very much.

Operator

Thank you. And our next question comes from Matthew Dodds from Citigroup. Your line is open. Please go ahead.

Matthew Dodds - Citigroup

For the one-time order, you got less fiscal year now. Are you certain it won’t come back in fiscal ‘15 and is this something that’s like biannual order. How would you define this order and how it shaped out?

Dan Moore

Matt, we’re unfortunately sure that it won’t reoccur in fiscal ‘15. This is an order that has been worked on for number of years. We did have a smaller order from the same place back, I think four or five years ago now. And they take a long time to come to fruitions. So we’re not anticipating something similar in fiscal ‘15.

Matthew Dodds - Citigroup

And then looking into U.S., January and now February, is it your take weather was most of this because it rebounded in March and April. And then can you say anything about May and if the trends have continued at least through the first month in the quarter?

Dan Moore

February was definitely slower. There was no doubt we got off to a slow start in the first month. And as we said, we did recover and had a better March and even a better April. So we like how the quarter shaped up despite the slow start. As far as commenting on the current quarter, we won’t do that until next quarter.

Matthew Dodds - Citigroup

Okay. And then just one last one, on the sales force, was the plan to expand by that amount in the fourth quarter, did you accelerate that?

Dan Moore

Some of both, I mean, we’re looking for continuous expansion of our sales force. You can see that over the years. And if we see an opportunity to move and do the hiring in anticipation of our fiscal year, we’ll do it. That allows us not only to hire the people but to bring them into training.

So I believe we bought the first group of those training through in April in the fourth quarter and we’ve got the second group of them here finishing up now. So we do -- it's part of our planned expansion but if we can pull this forward because we have the bandwidth due to the training at that time, get the hires done, we’ll do it that way, it was what we did.

Matthew Dodds - Citigroup

And then just one more quick one, on the replacements coming below, you expected to start the year. I would have assumed if the replacements would be stickier, do you have any idea what might have caused that. Do you think that replacement percents drop because I wouldn’t expect that?

Dan Moore

Matt, we did as I mentioned about the 5,000 replacements during the fiscal year which was roughly in line with the graphical representation we gave at the Investor Day within 1%, maybe 2% of that number. We were doing 100 and 200 basis points below but the fiscal year as a whole. But as I also mentioned we had a record number of replacements in the fourth quarter. And we see no reasons to deviate from the longer term forecast we have given on replacements at the last few Investor and Analyst Day’s. So we feel good about that.

Matthew Dodds - Citigroup

Thanks, Greg. Thanks, Dan.

Greg Browne

Welcome.

Dan Moore

Welcome.

Operator

Thank you. And our next question comes from Brooks West from Piper Jaffray. Your line is open. Please go ahead.

Brooks West - Piper Jaffray

Hi. Thanks for taking the question. I just wanted to go back to the U.S. guidance, maybe one more time, if we could. The -- just looking at the trend of that business in the second half of ’14, in this, kind of, 4%, 5%, growth range, and Dan, I appreciate your comments kind of coming out of Q4? But how should we think about the cadence throughout the year of the U.S. and again, could you just kind of walk through some of your supporting confidence points on getting that business back up toward the 10% growth rate -- 9%, 10% growth rate?

Dan Moore

Yeah. As we know -- as we said in the past, Q3 was not our best performance. So we attributed that to the end of the quarter, then fourth quarter we didn’t like our first month of the quarter, we maintained our guidance for the year because conversations with our sales team, they were confident that they were going to bring the business back in March and April and that’s what they did.

And I think that’s where the confidence for our guidance for fiscal ’15 begins with our trend of doing the right things in March and doing right things in April. So, overall, and I did pointed out, Q3 was not our best quarter, but we had a very nice rebound with approximately 10% growth over Q3 -- Q4 over Q3. So we are happy with that.

Also when we think about what we are doing in the market development side, we continue to not only do the things we have done in the past that have worked like the territory meetings where we will have on average around the world we’ll have a couple of those a day. We have regional meeting somewhere in the U.S. to the tune of about one a week. We do the (indiscernible) courses. We had key opinion leaders here with VIP tours. So we do all of that.

One of the reasons we have expanded our sales force since we look out to what do we do next in the area of market development. We always get the question about, you call on more physicians, are you going deeper, are you going broader? Answer to that is, no.

And we haven’t spent a lot of time in the past actually getting data -- pharmaceutical data to look at prescribing trends. I think we have done one at the times since I have been here.

But late last year we pursued some pharmaceutical data and prescribed some prescription trends that would point to new potential prescribers. I think we approach that in a pretty unique way.

So part of adding those sales people and going into the fiscal year about -- with about 10% more people than we had in fiscal ’14 and going after some new targets. On the prescriber side, we are going to be going broader. We have already started that effort.

On the surgeon side, we know, based on other businesses that many of us who have been involved in. The surgeons drive procedures as well. But we are taking the more active role in going to those major medical meetings where the surgeons have their meetings and then hearing specific education to those surgeon implanters, because we know that they can play a role in bringing more patients to the therapy as well.

And speaking of patients, we’ve revamped all of our educational material. But I think we have a pretty good internet site now, a good social program, where we are going out and bringing more people to the therapy. The EMU and the physician offices, we have revamped our materials for both of those as well.

So we are going a lot deeper. We talked last year about creating the patient ambassador program. So whether it’s prescribing physicians or implanting surgeon or speaking more to patients, I think we are hitting all three of those fronts with more people and the trends coming out of Q4 allow us the optimizing to guide to that roughly 10% adjusted double-digit growth for fiscal ’15 out of ’14.

Brooks West - Piper Jaffray

Okay. Thanks. And then maybe just on AspireSR and the heart failure product, thoughts on the U.S. market? Can you go over again your appetite for maybe running larger trials for those projects, if necessary or how you might think about if FDA ask for more data, how you might approach that?

Dan Moore

Well, let's start with the easier one of the two, the AspireSR. We’ve got patients that have been through the E-36 and we have shown those results at AES last year. We've got another cohort of patients fully through the E-37 trails. So we’ve got two datasets on SR patients already and it’s our position that we should need to do another trail at this point, of course, FDA may have another view on that that’s to be seen, to be determine.

But if there is a trail there, I wouldn’t envision that that’s a hundreds of patients trail, given that we are basically automating a feature. We're automating the magnet mode. So, although, we’d take time to do that trail, I wouldn’t anticipate a big expense to the tune of bigger than anything we’ve done.

So if that ones more about timing, just getting the AspireSR to the market as quick as we can for U.S. patients, so that they can benefit on the enhanced therapy as well like European patients are able to today. So something like chronic heart frailer.

We’ve got the first trail enrolled in Europe and you are right, if you go to a U.S. trail that can go into the tens of millions of dollars. You guys can do the math. You can look at our P&L. You can look at what the -- where the operating income is 31% today. We’ve got a goal out there of 33% by fiscal ’17. Could you do 35%? Could you do 30%?

If you take $300 million and you multiply it by 3% a year that gives you roughly $10 million per year to work with, if you wanted to do a chronic heart failure study on your own in the U.S. But I don’t think that anything that’s going to hit us in this fiscal year, anything that we need to be considered.

But the point is, as Greg pointed out, not only from a cash standpoint, with the P&L where your operating income is over 30% heading up, there is opportunity for a lot of flexibility as we want to take on that trail by ourselves.

Brooks West - Piper Jaffray

Thanks, Dan. I appreciate the extra color.

Dan Moore

Welcome.

Operator

Thank you. Our next question comes from [Imran Jaffer] (ph) from Jefferies. Your line is open. Please go ahead.

Unidentified Analyst

First question on margin and the impact of Costa Rica, I think, Greg, you mentioned that that manufacturing facility will be online starting in the back half of the year? So given that, can you just talk about the quarter-to-quarter trends on gross margin, in terms of whether there will be step down in the back half or we see some benefit beginning in fiscal ’16 and beyond, and sort of what that roughly order of magnitude for annual improvement thereafter?

Dan Moore

Yeah. So, I think, your comments are basically right. It was coming on in the second half of the fiscal year. It will be a slow -- slowest ramp if you will in production as we make sure that all the process are working the way we would expect them too. It will not have a material impact on the quarter-to-quarter gross margin, might even be a little, already in the back half of the year with the reduced volumes coming out of the production.

And in fiscal ‘16 as we look forward and I think, I commented on the last call, we don’t expect that Costa Rica will have a material impact on our gross margin, because the, as you may know, the labor component of our product is relatively small.

So it probably won’t have a significant impact on gross margin. We are in Costa Rica for a number of reasons, some are regulatory, some are business continuity and also tax planning, gross margin is not the highest priority.

Unidentified Analyst

Okay. And then, in terms of your OpEx and operating income guidance, have you assumed that you are going to have to do more clinical work for the AspireSR, in terms of your R&D spend and just how significant could that be for fiscal ’14 -- '16?

Dan Moore

We have made some provision in our plans for fiscal ‘15 for additional clinical work on SR in the back half of the year, fiscal year. And you know clearly as we spoke about today, if we get greater clarity one way or the other from the FDA in the next three or four months, we’ll be able to adjust as we go forward.

Greg Browne

Just the responsible way to budget. I’ll put it there in case we need it. And then if we don’t, we can do other things with that money or put it in the operating income.

Unidentified Analyst

Okay. Great. And then just lastly on Japan, Dan, is there any -- are there any metrics you can give us even just directionally in terms of unit trends in the quarter versus prior quarters in terms of progress, are you seeing any evidence of market development kind of picking up there relative to the prior quarters?

Dan Moore

No, not yet is the answer. It’s still about the size of the U.S. territory overall. So we don’t spend a lot of time talking about it. Although, I think, we’ve made progress on other fronts in our new relationships with Nihon Kohden and our new agreement with Nihon Kohden that allows us to begin putting some direct people in that market. So we’re excited by that.

We’ve taken Jason Richey who moved from U.S. over to Europe and is largely responsible for leading the success of our European operation. And I’ve given him -- giving him Asia so that he can work his magic in Asia and Japan as well. So although we’re optimistic, even a doubling of that business does not end up with any material increase through our overall business.

Unidentified Analyst

Okay. And then one last quick question on the AspireHC, it looks like the penetration of that is kind of flat-lined. Do you think that’s kind of peak at that 30% level or do you think it’s reasonable to expect that to move higher going forward?

Dan Moore

We think that’s about where it’s going to end up. I know we continue to creep that number up over time when we beyond 10 or 15, 5% to define but that’s 25 to 30 range is probably realistic and we’re able to do our jobs. The things that’s it’s going to stop the AspireHC growth penetration will be the AspireSR’s availability.

Unidentified Analyst

Okay. Great. Thank you very much.

Dan Moore

Welcome.

Operator

And our next question comes from Suraj Kalia from Northland Securities. Your line is open. Please go ahead.

Suraj Kalia - Northland Securities

Good morning Dan and Greg.

Dan Moore

Good morning.

Greg Browne

Good morning

Suraj Kalia - Northland Securities

Dan, maybe you already mentioned this but would greatly appreciate some color, what is the revenue recognition procedure with distributors internationally. And also -- I might have missed this, in Q4 specifically, was there one order from or large order from single distributor?

Greg Browne

Suraj, this is Greg Browne. I’ll answer that. We did report in the presentation and in the press release today that we did have a large bonus order of $2.6 million in the fourth quarter on the international side, which was the second shipment pursuant to that contract. So that was in their press release today. I didn’t quite follow your question on revenue recognition. Could you repeat that for me?

Suraj Kalia - Northland Securities

It varies by so many different companies and I’m just curios it’s basically, you will deliver the product and you will recognize revenues. Immediately, there are no credit terms per se, or any other specific conditions for revenue recognition. Is that a fair assessment?

Greg Browne

So as our revenue recognition, when title passes to the customer and that’s the time we recognize revenue, we clearly do give credit to customers all over the world. Those customers pay in accordance with their credit terms. We put in place what we think a prudent reserves around collectability of accounts receivable. I don’t think our practices, which by the way haven’t changed since I have been here in the last several years. I don’t think they are abnormal.

Suraj Kalia - Northland Securities

Fair enough.

Rohan Hoare

Just for perspective here as well. I ran a distributor business for a very large device company and whether it was that company or this company, it is not uncommon at all for distributors to order about once a quarter. Many distributors do that. They order once a quarter, company once it ships recognizes the revenue and as Greg said has credit terms, keeps appropriate reserves on their book and does all the right things around that distributor business.

Greg Browne

Fair enough.

Suraj Kalia - Northland Securities

One last question. Greg, and my apologies, I dropped off momentarily on the call. The implied numbers for FY ’15 indicates in the U.S., some level of ASP increase of roughly, at least our math is indicating 2% to 2.5% and maybe I got this wrong. I thought I heard a 2.9% ASP increase in the U.S. in Q4. If that is correct the 2.9%, I guess I’m just curios, should we start factoring in some level of step-down in ASP increases moving forward? I’m also curious what are the macro and micro level factors that would contribute to a slight step-down in ASP increases? Thank you very much for taking my questions.

Greg Browne

Welcome. So as you know, our ASP increase in the U.S., are driven really by two factors. One is being new product introductions and an increase in a, not from a product mix perspective. As Dan mentioned just a minute ago, our AspireHC penetration is roughly in that 25% to 30% range and expected to not go much higher at this stage.

If we look forward to fiscal ’15, our ASP assumptions are roughly between 2.5% and 3% overall. As you referred in the fourth quarter, the generator ASP improves to 2.9% over the fourth quarter of the prior year. You also know that we do make a price increase for our customers of approximately 3% on January the 1st of each calendar year would be our attention to continue with that practice. So there are two inputs if you will to ASP, one product mix, one price increase, and our assumptions going forward are roughly the same as they have been over the last year.

And the macroeconomic part of the question, we are very pleased to have economic studies that show the value of VNS therapy and using that therapy. So if when we are in the price discussions because there always is pricing pressure, it’s reassuring to know that with the product like ours, any system, any healthcare system that’s going to use it should be a nice breakeven, even though there is a high upfront cost at about the 18 month point. So it’s economically viable product and despite what’s happening in the macro environment, I think we are in a good position.

Suraj Kalia - Northland Securities

Thank you for taking my questions.

Operator

Thank you. And our next question comes from Jim Sidoti from Sidoti & Company. Your line is open. Please go ahead.

Jim Sidoti - Sidoti & Company

Good morning. Can you hear me?

Dan Moore

Yes.

Jim Sidoti - Sidoti & Company

Great. So on the last call when you talked about a little bit of slowdown, you talked about weather and then you also said there was some uncertainty regarding the implementation of affordable health. And I think there might have been a reimbursement issue in California. Do you think those issues are subsiding at this point?

Dan Moore

Jim, good morning. I think from the weather, weather is behind us. And as we talked about, we accelerated well in the fourth quarter after slow start. I think as far as insurance issues, our team had done very good job I think in working through the changes that have occurred as a result of directly or indirectly as a result of the Affordable Care Act. We talked about Medi-Cal impact in Q3. I think they have done a good job of working through those in terms of shortening up the time that it takes from patient identifications of authorizations through to implant. And that’s what really causes the delay there. And I wouldn’t say all of those issues are behind us in the fourth quarter. I think we’ve done a lot better but some of them probably linger.

Jim Sidoti - Sidoti & Company

And so when you give your guidance for fiscal ‘15, do you see those issues lingering through the rest of the year or do you think that they will subside further as we get through the year?

Dan Moore

No, I don’t think, they're going to linger and have a material impact on fiscal ’15.

Jim Sidoti - Sidoti & Company

Okay. And then the large order internationally, I thought you said there was going to be one small shipment in this first quarter of ’15. Is that still the case or did everything ship in the fourth quarter of ’14?

Dan Moore

No, you are correct. There is a very small shipment of, I think 10 units remaining to complete the order.

Jim Sidoti - Sidoti & Company

All right. And I’m sorry. Can you repeat the CapEx number for the year fiscal ’15?

Dan Moore

Approximately $10 million.

Jim Sidoti - Sidoti & Company

Great. Thank you very much.

Dan Moore

Thank you, Jim. I know we’re in overtime here. Still, we’ll take one more question.

Operator

Thank you. And we do have a follow-up from Charles Haff from Craig-Hallum. Your line is open. Please go ahead, sir.

Charles Haff - Craig-Hallum

Hi. Thanks for taking my follow-up. My question is regarding ProGuardian. I noticed in the press release you said that you submitted CE Mark for the first product of the ProGuardian family. Can you remind us or tell us what your strategy is for the family of products for ProGuardian and how this first product fits in with that?

Dan Moore

Well, I think, when we are investing in our product development, we are investing in platforms, whether that’s for things like wireless with the central product or having an external monitoring device with the ProGuardian. So, in its first iteration, it meant to monitor a patient during sleep, so that’s what it’s capable of doing and alerting a caregiver that there may be epilepsy type or seizure type activity for that patient.

When you think about being in the wireless and the ability to communicate through the Internet, you can imagine how many things you can do in the future. But we’re just starting with the ProGuardian platform. In its first iteration, you get it out commercially in a limited launch. If you just use that just to comment on the pipeline, we were able to get Aspire in earlier than planned and we took advantage of that in that regulatory submission and now it’s commercially available.

Our ProGuardian was a month or so late from where wanted to get it in, but overall we’re glad that that product has been in and now we’re on to central and really focusing on that product platform. But anytime, we have a product platform, we’re thinking about what we can do with that product platform overtime.

Charles Haff - Craig-Hallum

Okay. Great. Thanks Dan.

Dan Moore

So, I’m going to wrap up here because I know we’re in overtime and I just want to close by reminding everyone that this is a topline story. We recognized that going into fiscal ‘15 and on to fiscal ’17. We still feel very good about our ability to drive the topline over time. The bottom line is obviously impressive with, whether you look at it with, on EBITDA of over a $100 million or 31% operating income or 90% margins.

We like the bottom line as well. And on the pipeline as I just mentioned, I think we've made a lot of good progress on the pipeline in the last year. So, we truly believe that whether it’s just looking at epilepsy or some of the other indications where we're placing some bets, we think the company is positioned to continue to develop over time and really deliver additional shareholder value.

So we appreciate your support and just in closing here, I just want to thank the 650 people who come and work here each day, including 75 based in the international markets, who work to ensure that patients with epilepsy have access to our foundational VNS Therapy.

Again, thank them for their continued efforts on behalf of this underserved patient population. And thank all of you for listening today and for your interest in Cyberonics. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cyberonics' (CYBX) CEO Dan Moore on Q4 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts