Volcano Corporation (VOLC) reported an EPS of 2 cents in the first quarter of fiscal 2011 compared to the year-ago quarter’s net loss of 8 cents per share. The earnings were better than the Zacks Consensus Estimate of a loss of 2 cents per share.

Revenues increased 22% annually to reach $81 million during the quarter with strong growth in Intravascular Ultrasound (IVUS) and Functional Measurement (FM) single-procedure disposables. Revenues were higher than the Zacks Consensus Estimate of $80 million.

The recent natural disaster in Japan negatively impacted revenues by $1 million during the quarter. Volcano Corporation expects an additional impact of $4 million in the next two quarters with normalcy expected to set in by the fourth.

However, based on a strong product portfolio and some recent approvals, Volcano Corporation is confident about its huge opportunity in the Japanese market. The company also announced a supply agreement with ev3, a Covidien (COV) company related to its IVUS technology to be used in the latter’s Plaque Excision Systems.

Medical segment’s revenue grew 26% to $77.1 million during the quarter driven by increased penetration of the IVUS and FM markets. Revenues derived from Consoles ($9.9 million), IVUS single-procedure disposables ($47.6 million), FM single-procedure disposables ($14.7 million) and Other business ($4.9 million) witnessed a growth of 15%, 24%, 39% and 26%, respectively. Industrial segment recorded a 24% decline in revenues to $3.9 million.

Growth in the Japanese market for IVUS disposables jumped 40% year over year. Japan is the largest IVUS market in the world and creation of a direct sales force should allow the company to provide more focused service and support to the market.

Meanwhile, the US market recorded a growth of 12% in IVUS disposable sales.  Europe and Rest of world (ROW) countries posted growth rates of 3% and 53%, respectively. However, FM sales in Japan declined 48% to $0.6 million, with strong growth recorded in the US and Europe. Revenues from ROW declined 23% to $1 million.

Gross margin of Volcano Corporation was 65.6% in the quarter, compared with 60% in the first quarter of 2010. This was primarily due to a 4.6% rise in cost of revenues, much lower than 22% revenue growth.

Operating expenses (excluding amortization of intangibles) increased 13.1% to $48.5 million due to a 7.2% rise in selling, general and administrative expenses coupled with a 32.8% increase in research and development expenses. The company reported operating income of $4.6 million compared to operating loss in the year-ago period.

Volcano Corporation’s bottom line was also impacted by higher interest expense, which was $2 million in the quarter compared to $7,000 in the year-ago period. This is due to higher debt burden of the company that went up to $92.3 million in the quarter. Earlier, in September 2010, Volcano had raised $100 million through the issuance of $115 million of 2.875% convertible senior notes due September 1, 2015.


Volcano Corporation updated its outlook for fiscal 2011. Due to the anticipated reduction in revenues due to the disaster in Japan, the company lowered its revenue guidance by $5 million to $342–$347 million.

Its expectation of gross margin of 64%-65% and operating expenses at 57%−59% of revenues remain unchanged. The Zacks Consensus Estimate of $349 million is higher than the guidance. Moreover, the company lowered its EPS guidance by 3 cents to 19-21 cents.


Volcano continues to execute strategies to drive sales in the IVUS/FM market backed by the new product launches and product enhancements. Moreover, increased acceptance of the Vibe vascular imaging balloon catheter in Europe and potential approval in Japan and the US should provide further upside to the company. However, the recent disaster in Japan will be a major blow for the company as this region contributed 27% of revenues in fiscal 2010.

We have a ‘Neutral’ recommendation on the stock.

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