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Volcano Beats Earnings, Downturn Ahead

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Volcano Corporation reported adjusted earnings per share (EPS) of 2 cents in the first quarter of 2013. The result betters the year-ago break-even level as well as the Zacks Consensus Estimate of a loss of a penny.

On a reported basis, the company recorded loss of 6 cents per share in the first quarter of 2013, a downfall from the break-even level in the prior-year quarter.  

Quarter in Detail

Revenues in the quarter improved 3% year over year (up 8% at constant exchange rate or CER) to $93.2 million. However, the top line trailed the Zacks Consensus Estimate of $97 million.

Revenues in the Medical segment increased 4% (up 9% at CER) in the first quarter to $91.7 million, based on a robust 33% hike in FFR (Fractional Flow Reserve) single-procedure disposable business along with 10% rise in total consoles sales.

On a geographic basis, FFR disposable sales rose 17% in the U.S., 27% in Europe and 150% in Japan on a reported basis. On the other hand, console placement improved in the U.S. and Japan while placements in the European market declined compared with the year-ago quarter.

Nonetheless, intravascular ultrasound (IVUS) single-procedure disposables franchise revenues declined 10% on a year-over-year basis. The Industrial segment recorded revenues of $1.5 million in the quarter, down 25% year over year.

As per management, the first-quarter results reflect the softness in percutaneous interventional (PCI) volumes in the U.S. and weakening of the yen. Despite strong market trends across the globe, sluggish PCI volumes in the U.S. is a cause of concern as reflected in the management forecast of PCI volume decline in the range of 5%–7% in 2013. Moreover, the volume decline is expected to persist through 2014. Nonetheless, Volcano did not witness softness in PCI volume outside the U.S. market.

Volcano Corporation recorded a 270 basis points (bps) contraction in gross margin to 64.5% in the quarter on account of adverse product mix, currency headwinds and costs related to manufacturing transition to Costa Rica facility.

Selling, general and administrative (SG&A) expenses decreased 1.2% to $43.8 million while research and development (R&D) expenditure shot up 15.4% to $14.9 million. The company recorded a 240 bps drop in adjusted operating margin to 0.7% (excluding amortization of intangibles and acquisition-related expenses).

Volcano exited first quarter with cash, cash equivalents and short-term investments of $408.6 million compared with $471.6 million at the end of 2012.

Outlook Revised

Volcano revised its outlook for 2013. On a reported basis, it expects revenues in the range of $394.0–$400.0 million compared with prior outlook of $406.0–$412.0 million. The Zacks Consensus Estimate of $403 million remains outside the new guided range. The updated guidance is based on current foreign exchange rates and lower volume growth of PCI for Volcano. At CER, the company 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 6 cents is above the expected range. Moreover, gross margin is expected to remain in the range of 64.5%–65% (65%–66% earlier) and operating expenses in the band of 65%–66% (61%–62% earlier) of revenues.

Our Take

Volcano reported a mixed quarter in a challenging scenario. The weakness in yen and slowdown in PCI volumes were major headwinds in the reported quarter. Moreover, the company expects the challenges to persist through 2013 as reflected in the conservative guidance for the ongoing year.

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

As a result, we prefer to remain on the sidelines for Volcano. Accordingly, the stock carries a Zacks Rank #3 (Hold). Nonetheless, other medical stocks such as Accuray Inc. (ARAY - Free Report) , Intuitive Surgical Inc. (ISRG - Free Report) and Mindray Medical International Limited , carrying a Zacks Rank #2 (Buy) are expected to do well.

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