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Volcano Corporation (VOLC - Analyst Report) reported adjusted net loss of 29 cents per share in the fourth quarter of 2013, wider than the Zacks Consensus Estimate of a loss of 24 cents per share. The result was also way below the year-ago quarter’s reported earnings of 4 cents a share. On a reported basis, the company recorded a loss of 38 cents per share in the fourth quarter of 2013. Full year 2013 adjusted net loss came in at 31 cents per share, deteriorating significantly from the year-ago reported earnings of 15 cents per share.

Quarter in Detail

Revenues in the fourth quarter inched up 1% year over year (up 6% at constant exchange rate or CER) to $103.3 million, on account of modest contribution from sales of the Pioneer device. The figure remained in line with the Zacks Consensus Estimate. For full year 2013, revenues grossed $393.7 million, up 3% (up 8% at CER) from the 2012 figure.

Revenues in the Medical segment increased 1% to $100.8 million. The improvement was attributable to a robust 10% (at CER) growth in FFR (Fractional Flow Reserve) single-procedure disposable business, along with a 5% increase in intravascular ultrasound (IVUS) single-procedure disposables. Total consoles sales remained unchanged year over year. The Other sub-segment of the medical segment increased 12% at CER during the quarter.

FFR disposable sales increased 4% at CER in the U.S., 16% in Europe, with a 9% decrease in Rest of World. Japan registered growth of 13% at CER. During the quarter, Volcano Corporation continued to witness share gains in Europe, where it realized more than 20% increase in its combined IVUS and FFR disposable revenues. Also, during the fourth quarter, the company rolled out a number of new products like the Pioneer Plus, Verrata FFR wire and the Crux IVC (inferior vena cava) filter. The company is also progressing well on its limited market release of iFR (Instant Wave-Free Ratio) FFR technology in Europe and Japan.

The Industrial segment recorded revenues of $2.5 million in the quarter, declining 2% from the prior-year quarter.

Operational Update

Total cost of revenues (excluding amortization of intangibles) amounted to $40.7 million in the reported quarter, up 19.2% year over year.  Accordingly, Volcano Corporation recorded a huge contraction of 609 basis points (bps) in gross margin to 60.6% in the quarter.

Selling, general and administrative (SG&A) expenses increased 5.3% on a year-over-year basis to $48.2 million, while research and development (R&D) expenditure shot up 27.1% to $18.9 million.

Adjusted operating loss in the fourth quarter was $4.5 million, considerably lower than adjusted operating income of $7.7 million as reported in the year-ago quarter. Adjustments exclude restructuring, amortization of intangibles and acquisition-related costs.

Financial Update

Volcano Corporation exited the fiscal with cash, cash equivalents and short-term investments of $339.0 million compared with $471.5 million at the end of Dec, 2012.

Guidance

Volcano Corporation provided its fiscal 2014 guidance in the range of $413.0–$421.0 million (growth of 4.9% to 6.9%) on reported basis and $417.0–$425.0 million (growth of 5.9% to 7.9%) at CER. Notably, in January, the company lowered its initial revenues expectation to the range of 4% to 6% on a reported basis and 6% to 8% at CER, from the earlier guided range of 9% to 11% on a reported basis and 8% to 10% at CER.The Zacks Consensus Estimate for 2014 is pegged at $415 million for revenues. On an adjusted basis, net loss is estimated at 16–19 cents per share. The Zacks Consensus Estimate for earnings of 6 cents a share remains way ahead of the guided range.

Gross margin is expected to range between 64%–64.5% on a reported basis and operating expenses, including restructuring charges, are likely to constitute 68%–69% of revenues.

The company also provided its first-quarter 2014 guidance. The company currently expects adjusted net loss of 11−12 cents per share on revenues of $94.0–$95.0 million on a reported basis and $98.0–$99.0 million at CER.

Our Take

Amid a challenging macro-economic scenario, Volcano Corporation posted disappointing results for the fourth quarter of 2013 combined with an unimpressive outlook for 2014. Reimbursement reduction in Japan and soft PCI volume continues to pose challenges for the company going forward.

Favorable industry trends should lend positive momentum to Volcano Corp. We are also encouraged by the FFR revenues which increased across all geographic regions. While we are optimistic about the company’s pipeline development program, weaker guidance remains a major downside.Nonetheless, commercialization of new offerings is likely to garner revenues further in 2014.

The stock currently carries a Zacks Rank #3 (Hold). Well-placed medical stocks worth considering include Natus Medical Inc. (BABY - Snapshot Report), ABIOMED, Inc. (ABMD - Analyst Report) and AngioDynamics Inc. (ANGO - Analyst Report). While Natus Medical carries a Zacks Rank #1 (Strong Buy), ABIOMED and AngioDynamics hold a Zacks Rank #2 (Buy).

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