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Volcano's Earnings & Revenues Beat Estimates

Zacks Equity Research

Volcano Corporation (VOLC) reported adjusted earnings per share (EPS) of 3 cents in the second quarter of 2013, 50% lower than the year-ago EPS. However, it was well ahead of the Zacks Consensus Estimate of a loss of a penny. On a reported basis, the company recorded loss of 4 cents per share in the second quarter of 2013.

Quarter in Detail

Revenues in the quarter improved 6% year over year (up 12% at constant exchange rate or CER) to $101.3 million. The top line also surpassed the Zacks Consensus Estimate of $98 million.

Revenues in the Medical segment that increased 7% (up 13% at CER) in the second quarter to $99.0 million, based on a robust 29% hike in FFR (Fractional Flow Reserve) single-procedure disposable business along with a 7% rise in total consoles sales and 5% increase in intravascular ultrasound (:IVUS) single-procedure disposables.

FFR disposable sales increased 19% at CER in the U.S., 24% in Europe, 63% in Rest of world and a stupendous 71% in Japan on a reported basis. On the other hand, console placement improved in the U.S. (up 5% at CER) and Europe (up 46%), while placements in Japan and the Rest of world declined (60% and 4%, respectively) compared with the year-ago quarter.

IVUS single-procedure disposables franchise revenues increased 5% on a year-over-year basis. The Industrial segment recorded revenues of $2.3 million in the quarter, down 28% year over year.

Volcano Corporation recorded a 203 basis points (bps) contraction in gross margin to 64.4% in the quarter. The contraction was led by adverse product mix, currency headwinds, duplicate capacity costsand costs related to the transition of manufacturing facility to Costa Rica.

Selling, general and administrative (SG&A) expenses increased 8.9% to $45.7 million, while research and development (R&D) expenditure shot up 29.4% to $17.9 million. The company recorded a 630 bps drop in adjusted operating margin to 1.6% (excluding amortization of intangibles and acquisition-related expenses).

Volcano exited the second quarter with cash, cash equivalents and short-term investments of $408.6 million compared with $437.9 million at the end of 2012.


Volcano reaffirmed its outlook for 2013. On a reported basis, it expects revenues in the range of $394.0–$400.0 million. The Zacks Consensus Estimate of $396 million remains within the guided range. At CER, the company still expects revenues in the band of $418.0–$424.0 million.

In addition, the company expects adjusted EPS in the range of 3–5 cents for 2013 (excluding a one-time tax benefit of 20 cents). The Zacks Consensus Estimate of 5 cents is at the higher end of the expected range. Moreover, gross margin is expected to remain in the range of 64.5%–65% and operating expenses in the band of 65%–66% of revenues.

Our Take

After a weak first quarter of 2013, Volcano’s decent results in the reported quarter were encouraging. The upside portrays satisfactory revenue growth at CER. FFR disposable revenues increased across all geographies. Further, the company’s penetration in the peripheral market and IVUS business showed signs of stability with Peripheral catheter revenues increasing 25% year over year at CER.

Favorable industry trends should lend positive momentum to Volcano. While we are impressed with the company’s pipeline development program, margins remain under pressure due to the duplicity of operations in its new facility with the existing one.

The stock carries a Zacks Rank #3 (Hold). Nonetheless, other medical stocks such as Affymetrix Inc. (AFFX), Hanger, Inc. (HGR) and Align Technology Inc. (ALGN), carrying a Zacks Rank #1 (Strong Buy) are expected to do well.

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