Cepheid Q3 Loss Narrower than Expected, Sales View Upped

Leading molecular diagnostics company Cepheid(CPHD) reported an adjusted loss of 6 cents per share in the third quarter of 2014, narrower than the Zacks Consensus Estimate of a loss of 16 cents. However, the number deteriorated drastically from the year-ago quarter's adjusted loss of a penny per share by 500%.

Including one-time items, the company reported a loss of 10 cents per share, representing a massive 400% decline from the prior-year quarter's equivalent number.

Revenues in Detail

Cepheid experienced a solid 15.1% year-over-year growth in revenues of $115.2 million in the third quarter. Reported revenues also beat the Zacks Consensus Estimate of $110 million by 4.7% and also exceeded the company's guidance of $107–$110 million.

The year-over-year growth in revenues is primarily attributable to the strong performance of the company's Commercial Clinical business, which delivered a robust 23% growth in the reported quarter. The strong performance of Cepheid's Commercial Clinical business represented progress across the company's three primary growth leads, namely test menu expansion, customer segment expansion, and geographic expansion.

Segments in Detail

The Clinical segment which was up 16.5% year over year to $107.1 million, contributed approximately 92.9% to total revenue in the third quarter of 2014. The Clinical segment consists of Clinical Systems (down 2.9% year over year to $17 million) and Clinical Reagents (up 21.1% to $90.1 million).

For full year 2014, Cepheid expects Commercial Clinical revenues (which drive the clinical segment as a whole) in the range of $347–$350 million, 18–19% higher than 2013, and up from the prior guidance range of $340–$346 million.

Cepheid's Non-Clinical & Other business revenues declined 1.2% year over year to $8.1 million. The company expects non-Clinical business revenues to decline to approximately $27 million in 2014, but remain up by $1 million compared to the company's prior guidance.

During the reported quarter, Cepheid installed 173 GeneXpert systems in its commercial Clinical business and another 284 GeneXpert systems as part of its High Burden Developing Country HBDC program. The total count of systems placed worldwide, including the HBDC systems, scales 7,553 as of Sep 30, 2014.

Operational Update

Cepheid's adjusted gross margin(considering stock-based compensation expense as a regular spending) improved 220 basis points (bps) year over year to 50.9% in the reported quarter, which reflects the company's consistent progress in margin improvement initiatives undertaken within its operational segments. Adjusted cost of goods sold during the quarter jumped 10.2% to $56.6 million.

In the reported quarter, adjusted operating expenses amounted to $60.1 million, up 26.8% year over year. Adjusted operating loss for Cepheid was $2.7 million in the reported quarter, a massive increase from the prior-year quarter's equivalent number of $0.05 million.

Financial Position

Cepheid exited the third quarter with cash and cash equivalents and short-term investments of $299.5 million compared with $74.9 million as on Dec 31, 2013. The company issued convertible Senior Notes in Feb 2014 thereby collecting net proceeds of $335.8 million.

As of Sep 30, 2014, Cepheid generated $4.8 million amount of cash flow from operating activities compared to $11.7 million cash flow generated in 2013. Capital expenditure increased 20.4% year over year to $37.3 million.

Outlook

Cepheid has revised its financial guidance for 2014. The company now expects total revenue in the range of $461–$465 million and a loss of 52–54 cents per share in 2014. Earlier, the company had been expecting a loss of 51–54 cents per share and revenues in the range of $452–$461 million.

The Zacks Consensus Estimate of loss of 54 cents per share coincides with the upper limit of the company's guided range for the full year.

Considering stock-based compensation as regular expense, the company expects adjusted loss in the range of 34–36 cents per share, narrower than the earlier guidance of adjusted loss of 34–37 cents per share.

Cepheid also provided its guidance for the fourth quarter of 2014. It expects total revenue in the range of $122–$126 million. On an optimistic note, the company expects adjusted earnings to range from 2–4 cents per share.

The Zacks Consensus Estimate for fourth-quarter revenues of $125 million lies within the company's guided range.

Our Take

We remain impressed by Cepheid's better-than-expected third-quarter results. The company continues to make strong progress in the international market, wherein Cepheid delivered a record 127 system placements. Moreover, Cepheid's latest tests – X pert HPV, Xpert Norovirus, Xpert Trich, Xpert Carba-R and Xpert Flu RSV – are experiencing healthy response in the overseas market. However, demand is yet to build up as the products are currently witnessing slow adoption.

At present, with more than 7,500 GeneXpert system placements and expected revenues approaching $0.5 billion a year, Cepheid targets at expanding its installed base, test menu, global footprint and technology lead. This indicates Cepheid's consistent efforts toward improvisation of new, innovative tests which bolsters our confidence in the stock's long-term potential.

Although the Non-clinical business suffered a decline in the third quarter, the extent of weakness in this business seems to have reduced. This poses a sign of encouragement for the company.

Zacks Rank

Currently, Cepheid carries a Zacks Rank #3 (Hold).

Some notable medical instrument stocks that warrant a look are AngioDynamics Inc. (ANGO), Viveve Medical, Inc. (PLCSD) and Alphatec Holdings, Inc. (ATEC). While AngioDynamics and Viveve sport a Zacks Rank #1 (Strong Buy), Alphatec holds a Zacks Rank #2 (Buy).

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