Cepheid Reports 2012 Third Quarter Results

Excluding the litigation settlement, employee stock-based compensation and amortization of purchased intangible assets, non-GAAP net income for the third quarter was $0.9 million, or $0.01 per share.  This compares to non-GAAP net income of $7.6 million, or $0.11 per share, in the third quarter of 2011.

"Our third quarter revenues were consistent with our preliminary announcement, although the backorder level for clinical reagents was higher than expected at almost $7 million, reflecting increasing test demand," said John L. Bishop, Cepheid's Chief Executive Officer.  "As previously disclosed, the backorders resulted from intermittent interruption in availability of certain plastic parts used in the production of our Xpert^® cartridges, which prevented the fulfillment of all test cartridge orders in the quarter and negatively impacted our financial results."

Continued Bishop, "In the first few weeks of October, we have already shipped substantially more than the $6.7 million in backorders from the third quarter.  We believe that we have a firm handle on the situation and expect it may take us through the first few weeks of November before all products are no longer on allocation, and we can fulfill customer demand with immediate shipments.  In the meantime, we are diligently working to minimize any potential customer disruption."

Operational Overview

• Total product sales of $78.1 million in the third quarter of 2012 compared to $67.3 million in the third quarter of 2011.  By business, product sales were, in millions:

• By geography, product sales were, in millions:

• During the quarter, Cepheid installed a total of 115 GeneXpert^® systems in its commercial Clinical business.  Additionally, the Company placed a total of 149 GeneXpert systems as part of its High Burden Developing Country (HBDC) program.  Including the HBDC systems, a cumulative total of 3,614 GeneXpert systems have been placed worldwide as of September 30, 2012.
• Impacted by the manufacturing challenges during the third quarter, GAAP gross margin on product sales was 49%, which compares to 56% in the third quarter of 2011, and non-GAAP gross margin on product sales was 51%, which compares to 57% in the third quarter of 2011. 
• Cash and cash equivalents were $103.5 million as of September 30, 2012.
• DSO was 35 days.

Business Outlook

For the fiscal year ending December 31, 2012, the Company expects:

• Total revenue to be approximately $333 million;
• Net loss per share in the range of $(0.42) to $(0.40), which includes a charge of approximately $15 million associated with a litigation settlement; and
• Non-GAAP net income per share in the range of $0.21 to $0.23. 

Expected non-GAAP net income per share excludes the effect of approximately $26 million related to stock-based compensation expense, approximately $15 million related to a litigation settlement, approximately $2.8 million related to the amortization of acquired intangibles, and a $1.8 million tax benefit related to an intercompany intellectual property transaction.  The share count for the year is expected to be approximately 66 million on a GAAP basis, and approximately 70 million on a non-GAAP basis.

The following table reconciles net income per share to the non-GAAP net income per share range:

Accessing Cepheid's Third Quarter Results' Conference Call

The Company will host a management presentation at 2:00 p.m. Pacific Time on Thursday, October 18, 2012 to discuss the results.  To access the live webcast, please visit Cepheid's website at http://ir.cepheid.com at least 15 minutes before the scheduled start time to download any necessary audio or plug-in software.  A replay of the webcast will be available shortly following the call and will remain available for at least 90 days.

About Cepheid

Based in Sunnyvale, Calif., Cepheid (Nasdaq: CPHD) is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests.  By automating highly complex and time-consuming manual procedures, the company's solutions deliver a better way for institutions of any size to perform sophisticated genetic testing for organisms and genetic-based diseases.  Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer. For more information, visit http://www.cepheid.com.

Use of Non-GAAP Measures

The Company has supplemented its reported GAAP financial information with non-GAAP measures that do not include litigation settlement expenses, stock-based compensation expense, amortization of acquired intangible assets and a tax benefit related to an intercompany intellectual property transaction.  The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP.   The Company's management uses the non-GAAP information internally to evaluate its ongoing business, continuing operational performance and cash requirements, and believes these non-GAAP measures are useful to investors as they provide a basis for evaluating the Company's cash requirements and additional insight into the underlying operating results and the Company's ongoing performance in the ordinary course of its operations.

These non-GAAP measures may be different from non-GAAP measures used by other companies.  In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles.  The Company believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with its results of operations as determined in accordance with U.S. GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures.

As described above, the Company excludes the following items from one or more of its non-GAAP measures when applicable:

Litigation Settlement Expenses. These expenses consist primarily of expenses related to the settlement of our previously outstanding litigation with Abaxis.  This allocation was determined in accordance with ASC 450, Accounting for Contingencies (formerly SFAS No. 5), and ASC 605-25 (formerly EITF 00-21) using the concepts of fair value based on the past and estimated future revenue streams related to the products covered by the patents previously under dispute.  Specifically, the amount recorded in the income statement as Litigation settlement in the three months ended September 30, 2012 represents the fair value of the royalty paid on past revenue streams and the residual amount after allocating value to the future revenue streams.  The Company excluded this item as it believes it is non-recurring in nature, and does not have a direct impact on the operation of the Company's core business. 

Employee Stock-based Compensation Expense. These expenses consist primarily of expenses for employee stock options and employee restricted stock under ASC 718 (formerly SFAS 123(R)).  The Company excludes employee stock-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses that the Company does not believe are reflective of ongoing operating results in the period incurred.  Further, as the Company applies ASC 718, it believes that it is useful to investors to understand the impact of the application of ASC 718 on its results of operations.

Amortization of Purchased Intangible Assets.  The Company incurs amortization of purchased intangible assets in connection with acquisitions.  The Company excludes these items because these expenses are not reflective of ongoing operating results in the period incurred.  These amounts arise from the Company's prior acquisitions and have no direct correlation to the operation of the Company's business.

Tax Benefit Related to Intercompany Intellectual Property (IP) Transaction.  The Company excluded a tax benefit related to an intercompany IP transaction from its results for non-GAAP net loss for the first quarter ended March 31, 2012 and for the nine months ended September 30, 2012.  The Company excluded this item as it believes it is non-recurring in nature, and does not have a direct impact on the operation of the Company's core business. 

Forward-Looking Statements

This press release contains forward-looking statements that are not purely historical regarding Cepheid's or its management's intentions, beliefs, expectations and strategies for the future, including those relating to projected future revenues, future net income per share and  future non-GAAP net income per share, product sales under the High Burden Developing Country (HBDC) program, commercial test and commercial system sales, resolution of manufacturing scale-up issues and backorder level for clinical reagents, and availability of parts supply.  Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the Company's current expectations. Factors that could cause actual results to differ materially include risks and uncertainties such as those relating to: our ability to secure sufficient cartridge parts and increase manufacturing throughput of our cartridge production; long sales cycles and variability in systems placements and reagent pull-through in the Company's HBDC program; our success in increasing commercial and HBDC sales and the effectiveness of our sales personnel; the performance and market acceptance of new products; sufficient customer demand and available capital budgets for our customers; our ability to develop new products and complete clinical trials successfully in a timely manner for new products; uncertainties related to the FDA regulatory and European regulatory processes; the level of testing at clinical customer sites, including for Healthcare Associated Infections (HAIs); the Company's ability to successfully introduce and sell products in clinical markets other than HAIs; the rate of environmental biothreat testing conducted by the USPS, which will affect the amount of consumable products sold to the USPS; other unforeseen supply, development and manufacturing problems; the potential need for additional intellectual property licenses for tests and other products and the terms of such licenses; lengthy sales cycles in certain markets; the Company's reliance on distributors in some regions to market, sell and support its products; the occurrence of unforeseen expenditures, acquisitions or other transactions; costs associated with litigation, including settlement costs; the impact of competitive products and pricing; the Company's ability to manage geographically-dispersed operations; and underlying market conditions worldwide.  Readers should also refer to the section entitled "Risk Factors" in Cepheid's Annual Report on Form 10-K, its most recent Quarterly Report on Form 10-Q, and its other reports filed with the Securities and Exchange Commission.

All forward-looking statements and reasons why results might differ included in this release are made as of the date of this press release, based on information currently available to Cepheid, and Cepheid assumes no obligation to update any such forward-looking statement or reasons why results might differ.

SOURCE Cepheid