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Volcano Slips into Loss, Misses Ests in Q1

Zacks Equity Research

Volcano Corporation's (VOLC) first-quarter 2014 adjusted loss per share of 12 cents was 9.1% wider than the Zacks Consensus Estimate of loss of 11 cents. The loss also deteriorated from the prior-year quarter's adjusted earnings of 2 cents per share. However, without these adjustments, the company reported net loss of 21 cents per share, significantly below the year-ago loss of 6 cents.

With a lower-than-expected first quarter performance, following the earnings announcement Volcano's share price dropped 0.2% to $17.5 on May 5.


Revenues of Volcano in the quarter climbed 1.4% year over year to $94.5 million. However, without considering a negative impact of $2.7 million due to unfavorable foreign currency, total revenue increased 4% at constant exchange rate or CER. However, reported revenues missed the Zacks Consensus Estimate of $96 million.

Year-over-year improvement in total revenues was driven by solid growth in the U.S. peripheral business, and FFR (Fractional Flow Reserve) and IVUS (intravascular ultrasound) disposables in Europe.

Geographic-region wise, Volcano experienced strong growth in Europe and the Middle East, with 21% year-over-year increase in total revenues. Moreover, apart from gaining traction in the emerging markets of Latin America and Asia-Pacific, console revenues escalated 52% year over year in Europe and the Middle East.

Segment Analysis

Revenues from Volcano's medical segment increased 1.4% (up 4% in CER) to $93 million in the first-quarter, driven by a solid 7.8% sales growth (up 9% in CER) in FFR single-procedure disposables offset by 3% decline (up 2% in CER) in sales of IVUS disposables and 4.5% decline (down 5% in CER) in sales of consoles.  

FFR disposable sales increased 14% at CER in Japan, 16% in Europe and an impressive 47% in Rest of World. Revenues from IVUS disposables increased 9% at CER in U.S., 10% in Europe and 22% in Rest of World, while declined 9% in Japan at CER.

On the other hand, while console placement improved in Japan (up 14% at CER) and Europe (up 46%), it declined in the U.S. and the Rest of world (down 25% and 9%, respectively) compared with the year-ago quarter. Industrial segment revenue growth remained flat at $1.5 million in the reported quarter.


Gross margin deteriorated 160 basis points (bps) to 62.9% in the first quarter due to unfavorable foreign exchange rates and costs related to the ramping up of manufacturing activities at Costa Rica. Management expects gross margin to fluctuate through 2014, until the company completes the transfer of all its disposable manufacturing to Costa Rica.

Selling, general and administrative expenses spiked 14.8% year over year to $50.3 million, primarily driven by increased sales force headcount, litigation expenses, an increase in incentive compensation for non-executive employees and increased facility costs related to Volcano's expanded San Diego headquarters.

On the other hand, Volcano's research and development expenditure fell 10.8% year over year to $14 million, reflecting the strategic prioritization initiative implemented by the company last October. However, this decline was partly offset by increased investments in high-priority pipeline programs.  Operating loss was $8.5 million in the reported quarter, compared to $1.8 million in the year ago quarter.

Financial Position

Volcano exited the first quarter with cash, cash equivalents and short-term investments of $345 million compared with $338 million at the end of 2013.

During the first quarter, cash used in operations declined 62% to $3.0 million from the prior-year quarter.


For second-quarter 2014, Volcano expects revenues in the range of $102-$104 million and adjusted loss per share in the band of 4 to 6 cents. The Zacks Consensus Estimate of adjusted loss of 4 cents falls at the low end of the company's guided range. However, the Zacks Consensus Estimate of revenues of $105 million is pegged higher than the company's guidance.

For full-year 2014, the company reiterated its revenue guidance at $413–$421 million, with revenues at CER expected in the range of $417–$425 million. Volcano still expects adjusted loss per share to lie in the range of 16–19 cents in 2014. The Zacks Consensus Estimate for adjusted loss of 20 cents per share is higher than the company's expectations for the year. Meanwhile, the Zacks Consensus Estimate for revenues of $415 million lies within the company's guidance range.

Management also expects gross margin in the band of 64–65% in 2014 and operating expenses, including restructuring charges, in the range of 68–69% of revenues.

Our Take

We are disappointed with the company's first-quarter 2014 results, which failed to beat the Zacks Consensus Estimate on both the top and bottom-line front. Although overall medical segment revenues increased, a challenging coronary imaging business adversely affected total revenue growth in Japan. However, management is positive that the company's new pipeline products will be able to drive growth through 2014 and the scheduled launch of Sync Vision Co-Registration System Technology in Japan in the second half  of 2014 will improve its position in Japan.

Zacks Rank

Volcano currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical instruments industry include Delcath Systems, Inc. (DCTH), RTI Surgical Inc. (RTIX) and Accuray Incorporated (ARAY). Delcath and RTI Surgical sport a Zacks Rank #1 (Strong Buy), while Accuray carries a Zacks Rank #2 (Buy).

Read the Full Research Report on ARAY
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