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Volcano Beats on EPS, Guides Low

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Volcano Corporation (VOLC) reported EPS of 54 cents in the fourth quarter of fiscal 2011 compared with a net loss of 3 cents per share in the year-ago period. However, after taking into account the benefit of 40 cents per share (related to the release of a portion of the company's deferred tax valuation allowance) in the reported quarter, EPS came in at 14 cents, way above the Zacks Consensus Estimate of 4 cents. For the full year, the company reported adjusted EPS of 30 cents, ahead of both the Zacks Consensus Estimate of 20 cents and 10 cents in the previous year.

In line with the preliminary results reported last month, revenues for the quarter climbed 14% year over year to $92.7 million. For the full year, revenues were up by 17% to $343.5 million.

Revenues in the Medical segment increased 20% during the quarter to $91.2 million on the back of 37% growth in FFR (Fractional Flow Reserve) disposable business and an in-line performance in the IVUS (intravascular ultrasound) business. However, performance of the Industrial segment remained challenging due to softness in telecom infrastructure spending in key international geographies. This resulted in a 70% year-over-year decline in Industrial revenues to $1.5 million in the fourth quarter.

Management is impressed with the overall performance despite the challenging economic environment that has affected procedure volume, particularly in the IVUS business. Volcano Corporation benefited from a growing volume of data depicting improved patient outcomes and economic benefits from the use of Functional percutaneous interventional (:PCI) and the use of intravascular guidance to optimize and confirm the therapy during the procedure.

The US market recorded a growth of 4% in IVUS disposable sales, with Europe and Japan recording growth rates of 3% and 40%, respectively. The robust growth in Japan, the largest IVUS market in the world, is gratifying as Volcano Corporation has been trying to increase its penetration in the country through direct sales program and/or introduction of new products.

Volcano Corporation recorded gross margin of 67.3% in the quarter compared with 64.1% in the fourth quarter of 2010. With both selling, general and administrative, and research and development (R&D) expenses remaining almost unchanged, the company recorded operating margin of 10.3% (excluding amortization of intangibles and in-process R&D expenses) compared with an operating loss in the year-ago quarter.

Volcano Corporation’s bottom line also benefited from a 37% drop in interest expense to $1.2 million in the quarter. Besides, the company recorded an exchange rate gain of $184 million compared with a loss of $269 million in the year-ago period.


Volcano Corporation provided its outlook for fiscal 2012. The company expects to report revenues of $392–$399 million (growth of 14–16% or 15–17% at constant currency) and EPS of 21–24 cents. While the Zacks Consensus Estimate of $399 million in revenues is at the high end of the company’s guidance, the consensus EPS of 31 cents is more optimistic than the guidance. Gross margin is expected around 64–-65% with operating expenses coming in at 57−58% of revenues.


Volcano Corporation continues to execute strategies to drive sales in the IVUS/FM markets backed by new product launches and product enhancements. The company has been expanding its presence in Japan through a direct sales program and introduction of new products. The recent transition of the distribution agreement with Johnson & Johnson (JNJ) would allow Volcano to address 100% of the business on a direct basis. Over the long term, the company should benefit from this move as Japan has the largest IVUS market in the world.

However, capital spending by hospitals has been affected by the weak economy. Moreover, the company witnesses stiff competition from players such as St Jude Medical (STJ) and Boston Scientific Corporation (BSX). The stock carries a Zacks #3 Rank (“Hold”) in the short term. Over the long term, we maintain our Neutral recommendation on Volcano Corporation.

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