Cardiovascular Q2 Loss Narrower Than Expected; Sales Miss

Cardiovascular Systems Inc. CSII reported second-quarter fiscal 2016 loss per share of 47 cents, reflecting a deterioration of 63.8% from the year-ago quarter’s loss. The loss reported was however narrower than the Zacks Consensus Estimate of a loss of 50 cents as well as the company’s loss guidance of 49–51 cents for the quarter.

While the year-over-year deterioration in the loss figure was primarily due to increased expenses associated with the expansion of sales force, the loss was lower than expected, owing to successful execution of the company’s cost reduction initiatives.

 

Quarter in Details

Revenues declined 4% year over year to $41.4 million (excluding Asahi Guide wire sales last year), lagging the company’s revenue guidance of $42.5 million to $44 million. The top line also missed the Zacks Consensus Estimate of $46 million.

During the second quarter, Cardiovascular sold over 12,400 devices including over 2,100 coronary units. Coronary product revenues improved 33% to $8.6 million. Peripheral unit dropped 8% with product mix estimated to be about 57% below the knee and 43% above the knee. Customer reorder revenues were strong at 97% of total revenue, comparing favorably with the second quarter of last year (95%).

Margin

Gross margin in the reported quarter was 80.5%, up 139 basis points (bps) year over year primarily due to unit cost reductions.

Meanwhile, selling and administrative expenses increased 26.7% to $41.3 million, while research and development expenses dropped 10.8% to $7.2 million. The resultant operating expenses increased 19.4% to $48.5 million, owing to the company’s planned investments related to sales force optimization and expansion. Consequently, operating loss deteriorated 188.3% to $15.1 million.

Financial position

The company’s cash and cash equivalents were $65.3 million in the fiscal second quarter, compared to $76.7 million as of Sep 30, 2015.

Outlook

Cardiovascular has provided its third-quarter fiscal 2016 guidance. The company expects revenues in the range of $40.5 million to $42 million. The current Zacks Consensus Estimate for fiscal third quarter revenues is pegged at $48 million, significantly higher than the company-provided guidance range.

Moreover, the company expects gross margin of 80% in the third quarter.

On the bottom-line front, the company expects to deliver net loss in the range of $13.7–$14.6 million or loss per share of 42–45 cents, assuming 32.8 million average shares outstanding. The current Zacks Consensus Estimate of loss lies at 44 cents.

Our Take

Cardiovascular Systems ended the second quarter of fiscal 2016 on a disappointing note. Although loss incurred was narrower than expected, the year-over-year deterioration due to increased expenses was a major setback, severely impacting the company’s operating margin as well. The top line also lagged expectations.

However, we expect a slight improvement in this scenario in the third quarter based on management’s anticipation of a sequential 3% decline in operating expenses. Moreover, management is optimistic about engineering enhancements and higher production volumes, which can continue to reduce unit cost for the company in the quarters ahead. We believe this will result in higher gross margin realization for Cardiovascular Systems.

Zacks Rank

Cardiovascular currently has a Zacks Rank #3 (Hold). Some better-ranked medical products stocks are Abaxis, Inc. ABAX, Capricor Therapeutics, Inc. CAPR and LeMaitre Vascular, Inc. LMAT. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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