Sirona Dental Lags Q4 Earnings by a Penny, Tops Revenues - Analyst Blog

Sirona Dental Systems Inc. (SIRO) reported adjusted earnings per share (EPS) of 90 cents for the fourth quarter of fiscal 2014, which fell shy of the Zacks Consensus Estimate of 91 cents. However, adjusted EPS grew 15.4% on a year-over-year basis.

Revenues

Revenues increased 4.1% (4.2% on local currency basis) to $290.0 million and beat the Zacks Consensus Estimate of $285.0 million.

Revenues in the U.S. were down 8.3% year over year, primarily due to order delays in the third quarter. However, revenues outside the U.S. improved 8.9% (9.1% on a local currency basis), owing to strong sales growth in international markets, especially in Germany and Asia-Pacific.

Segmental Results

Revenues in the CAD/CAM Systems segment declined 5% (4.9% on local currency basis) to $101.9 million. The decline was primarily owing to the company's extensive trade-up program last year.

Imaging Systems segment revenues decreased 0.2% (0.3% on local currency basis) year over year to $97 million. The downside can be mainly attributed to unfavorable order timings in the domestic market.

Instruments segment revenues increased 12.8% (14.5% on local currency basis) year over year to $28.5 million, owing to high demand for the company's high-end handpieces and hygiene products.

Treatment Centers' revenues increased a healthy 28.2% (27.8% on local currency basis) to $62.6 million. The improvement came on the back of high demand for the company's TENEO and SINIUS product lines.

Margins

Gross margin expanded 370 basis points (bps) on a year-over-year basis to 55.1% on product improvement, regional sales mix and cost curtailment.

Selling, general and administrative (SG&A) expenses, as percentage of revenues, increased 60 bps to 30.2% year over year, driven by planned investments in the company's sales and product management infrastructure.

Research and development (R&D) expenses, as percentage of revenues, increased 20 bps to 5.7%.

Adjusted operating margin expanded 290 bps on a year over year basis to 19.2% on the back of gross margin expansion.

Financial Position

Cash and cash equivalents, as of Sep 30, 2014, were $382.8 million compared with $297.0 million in the previous quarter. Total debt stood at $79.5 million, in line with the figure reported in the previous quarter.

Net cash provided by operating activities was $248.4 million, compared with $130.5 million in the last quarter.            

Guidance

Sirona Dental expects fiscal 2015 revenue growth of 6–8% in local currency. Non-GAAP adjusted EPS is expected in the range of $3.95–$4.05, reflecting growth of 8–10%. SG&A expenses, as a percentage of sales, are anticipated at around 29%. R&D expenses, as percentage of sales, are anticipated in the 5–6% band.

Management believes that the improvement in infrastructure will prove accretive to earnings going forward. Moreover, the company is planning on introducing a number of innovative products in the International Dental Show to be held in March. These products are expected to drive significant growth in the second half of the fiscal year 2015.

Our Take

Sirona Dental posted a decent fourth quarter. Improved performance by the Instruments and Treatment Centers segments managed to offset weak CAD/CAM Systems sales.

Meanwhile, the company extended its relationship with Henry Schein (HSIC) in France which is certainly going to help it to enhance its presence in Europe. Moreover, the distribution partnership with Patterson Companies (PDCO) in the U.S. will open up new avenues for Sirona Dental.

However, the U.S. market seems to be a drag at the moment with competition intensifying in the CAD/CAM market.

To add to the woes, the majority of revenues and expenses of Sirona Dental are dominated in Euros. Given a strong euro, increasing expenses thus offset the improvement in revenues and adversely affect the company's bottom line. Going forward, this is going to prove to be a major headwind for the company.

Currently, Sirona Dental carries a Zacks Rank #3 (Hold). A better-ranked stock in the medical instruments industry, that you can consider, is AngioDynamics Inc. (ANGO). It sports a Zacks Rank #1 (Strong Buy).

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