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Volcano Corporation (VOLC - Analyst Report) reported adjusted net loss of 8 cents per share in the third quarter of 2013, wider than the Zacks Consensus Estimate of loss of 2 cents per share and way below the year-ago earnings of 4 cents per share However, on a reported basis, the company recorded a loss of 15 cents per share in the third quarter of 2013.

Quarter in Detail

Revenues rose 2.2% year over year (up 8% at constant exchange rate or CER) to $95.8 million, on account of modest contribution from sales of the Pioneer device. The figure however, was slightly below the Zacks Consensus Estimate of $96 million.

Revenues in the Medical segment increased 3% to $93.7 million. The improvement resulted from a healthy rise of 13.4% in FFR (Fractional Flow Reserve) single-procedure disposable business, along with a 13% increase in total consoles sales. These positives were partially offset by a 5% decline in sales of intravascular ultrasound (IVUS) single-procedure disposables sales.

FFR disposable sales increased 10% at CER in the U.S., 27% in Europe, with a 9% decrease in rest of world. Japan registered a growth of 7.5% on a reported basis. Strong adoption of the iFR technology in Europe and Japan was mainly responsible for the growth. On the other hand, console placement improved in the U.S. (up 5% at CER) and registered a record rise of 78% in Europe, while placements in Japan and the rest of world declined (25% and 6.6%, respectively) compared with the year-ago quarter.

IVUS single-procedure disposables franchise revenues were $46 million, down 5.3% on a year-over-year basis. The Industrial segment recorded revenues of $2.1 million in the quarter, declining 30% from the prior-year quarter.

Operational Update

Total cost of revenues (excluding amortization of intangibles) amounted to $33.5 million in the reported quarter, up 0.63% year over year.  Volcano Corporation recorded an expansion of 60 basis points (bps) in gross margin to 65.1% in the quarter as compared with 64.5% in the year ago quarter.

Selling, general and administrative (SG&A) expenses fell 11.8% on a year-over-year basis to $45.5 million, while research and development (R&D) expenditure shot up 27.4% to $16.6 million.

Adjusted operating loss in the third quarter was $0.26 million, considerably lower than $6.67 million as reported in the year-ago quarter. Adjustments exclude restructuring, amortization of intangibles and acquisition-related costs. Adjusted operating margin was 0.27% of revenues as compared with 7.12% of revenues in the prior year quarter.

Financial Update

VOLC exited the third quarter with cash, cash equivalents and short-term investments of $400.1 million compared with $471.5 million at the end of Dec, 2012.

Guidance

VOLC confirmed 2013 revenue guidance provided on October 28, 2013. It expects revenues on a reported basis of $391-$395 million. On a constant currency basis, revenues are estimated to vary in the range of $411-$415 million. The Zacks Consensus Estimate for 2013 is pegged at $394 millions for revenues and for EPS stands at $0.03.  In the Medical segment revenues are likely to increase within 9% to 10% on a constant currency basis.

Gross margin is expected to range between 64%-65% on a reported basis and operating expenses, including restructuring charges, to constitute 71%-72% of revenues. On an adjusted basis, the net loss is estimated at $0.27-$0.25 per share.

The company provided an initial update on revenue guidance for 2014. Revenues are expected to increase in the range of 9-11% on a reported basis and 8-to-10% at CER, mainly driven by growth in FFR. The Zacks Consensus Estimate for 2014 revenues were $432 millions.

Our Take

As expected, Volcano Corporation reported disappointing results in the third quarter. Though revenues improved, the bottom line failed to match expectations. The company has now adopted a strategic reprioritization program to optimize reallocation of resources. We are optimistic that expanded distribution in the peripheral market and the commercialization of new offerings, including Crux IVC filter, the Sync-Rx platform technology, PioneerPlus and Verrata are likely to garner revenues in FY14.

Moreover, further penetration of the iFR offerings in Japan and Europe, and commercial launch of iFR in the U.S. are some of the key drivers that can maximize revenues in the forthcoming quarters.

Currently the stock carries a Zacks Rank # 3 (Hold). A better-performing stock in the medical instruments that are worth a look include CryoLife Inc. (CRY - Snapshot Report) and Cynosure, Inc. (CYNO - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy) and Echo Therapeutics, Inc. (ECTE - Snapshot Report) carrying a Zacks Rank #2 (Buy).

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