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Volcano (VOLC) Posts Strong Q2 Earnings, Guides Low for 2014 - Analyst Blog

California-based medical instruments manufacturer Volcano Corporation ( VOLC ) reported second-quarter 2014 adjusted earnings of a penny per share, substantially ahead of the Zacks Consensus Estimate of loss of 4 cents. However, adjusted earnings experienced a significant year-over-year decline of 66.7% from the prior-year quarter's adjusted tally of 3 cents per share.

However, without these adjustments, the company reported net income $0.3 million or a penny per share, reasonably better than the year-ago net loss of $2. 4 million or loss of 4 cents per share.

Volcano Corporation - Earnings Surprise | FindTheBest

Revenues

Revenues climbed 1.2% year over year to $102.6 million. However, reported revenues missed the Zacks Consensus Estimate of $103 million by a whisker. On a consolidated basis, foreign currency exchange rates did not have material impact on revenues, in the reported quarter.

Year-over-year improvement in total revenue was driven by consistent growth of Volcano's IVUS (Intravascular Ultrasound) peripheral business in the U.S. and solid expansion of the FFR (Fractional Flow Reserve) disposable business in Japan and Europe. This offset the impact of the constant decline in the company's coronary IVUS disposable activity.

Geographic-region wise, Volcano experienced consistent strong growth in Europe, Middle East, India and Africa, with growth in IVUS and FM (Functional Measurement) disposal revenues. In these regions, FM disposable sales growth was 32% and 25% on a reported and a constant-currency basis, respectively.

Segment Analysis

Revenues from Volcano's medical segment increased 1.7%, up 2% in constant exchange rate (CER) to $100.7 million in the second quarter, driven by a solid 11.8% sales growth (up 11% in CER) in FFR single-procedure disposables offset by 3.2% decline (down 2% in CER) in sales of IVUS disposables and 11.3% decline (down 13% in CER) in sales of consoles.

FFR disposable sales increased 29% at CER in Japan, 25% in Europe, 2% in U.S., but declined a massive 33% in Rest of World. Revenues from IVUS disposables increased 10% at CER in U.S., 3% in Europe and an impressive 33% in Rest of World, while declining 19% in Japan at CER.

On the other hand, while console placement improved in Japan (up 20% at CER) and Europe (up 11%), it declined in the U.S. and the Rest of world (down 18% and 35%, respectively) compared with the year-ago quarter. Industrial segment revenue declined 17.4% (down 19% in CER) to $1.9 million in the reported quarter.

Margins

Gross margin contracted 120 basis points (bps) to 63.2% in the second quarter due to unfavorable manufacturing variances compared to the prior year, costs related to the ramp-up of manufacturing in Costa Rica and duplicate capacity, and a one-time charge to settle the royalty dispute.

Selling, general and administrative expenses spiked 7.9% year over year to $49.4 million, primarily driven by costs associated with the expansion of Volcano's U.S. sales force, litigation-related expenses, costs related to new headquarters and non-executive incentive compensation programs.

On the other hand, Volcano's research and development (R&D) expenditure fell 23.7% year over year to $13.7 million, reflecting the strategic prioritization initiative implemented last October. However, management expects a slight improvement in the R&D expenses in the second half of 2014, indicating the impact of AtheroMed-related activities. Adjusted operating income was $1.8 million in the reported quarter, compared with $1.6 million in the year-ago quarter. Consequently, adjusted operating margin improved 20 bps to 1.8% in the reported quarter.

Financial Position

Volcano exited the second quarter with cash, cash equivalents and short-term investments of $206.2 million compared with $338 million at the end of 2013.

During the second quarter, cash used in operations was $1.9 million, compared to cash provided by operations of $1.5 million from the prior-year quarter.

Outlook

For third-quarter 2014, Volcano expects revenues in the range of $95-$97 million and adjusted loss per share in the band of 4 to 6 cents. The Zacks Consensus Estimate of adjusted loss of 5 cents falls within the company's guided range. However, the Zacks Consensus Estimate of revenues of $104 million is pegged higher than the company's guidance.

For full-year 2014, the company has lowered its revenue expectation to the range of $397-$401 million (previous guidance: $413-$421 million) with revenues at CER expected in the range of $401-$405 million (earlier guidance: $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 in 2014 stands higher than the company's expectations for the year. Meanwhile, the Zacks Consensus Estimate for revenues of $414 million also lies above the company's guidance range.

Management has also lowered its projection for gross margin in 2014 to the band of 63-63.5% (earlier guidance: 64-65%) and operating expenses, including restructuring charges, in the range of 65.5-66.5% (prior guidance: 68-69%) of revenues.

Our Take

Volcano delivered mixed second-quarter 2014 financial results, beating the Zacks Consensus Estimate on the bottom-line front, but failing to top the comparable revenue estimate. Overall medical segment revenues increased in low single digits, with the company still loosing shares on account of challenging coronary imaging business in Japan. Unfortunately, the solid growth Volcano achieved in the FFR disposables business in Japan was not sufficient enough to outweigh the decline in imaging market share. 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 likely improve its position.

Zacks Rank

Volcano currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical instruments industry include Accuray Incorporated ( ARAY ), RTI Surgical Inc. ( RTIX ) and Edwards Lifesciences Corp. ( EW ). While Accuray and RTI Surgical sport a Zacks Rank #1 (Strong Buy), Edwards Lifesciences carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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