Volcano Corporation (VOLC) reported net loss per share of 3 cents in the fourth quarter of fiscal 2010 compared to the year-ago quarter’s net loss  of 25 cents. However, on an adjusted basis (excluding one-time items and considering stock-based compensation as a regular item), the company reported break-even earnings during the quarter, compared to an EPS of 3 cents, according to the Zacks Consensus Estimate.

The adjusted EPS in the year-ago quarter was 9 cents. For 2010, the adjusted EPS was 14 cents, missing the Zacks Consensus Estimate of 16 cents. Volcano had reported loss per share of 23 cents in the previous year.

Revenues increased 14.4% annually to reach $81.2 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 $78 million. For the full year, revenues increased 29.1% to $294.2 million, beating the Zacks Consensus Estimate of $291 million.

Medical segment’s revenue grew 15% to $76.1 million during the quarter driven by increased penetration of the IVUS and FM markets. Barring revenues derived from Consoles ($13 million), which remained unchanged, sales from IVUS single-procedure disposables ($44.9 million), FM single-procedure disposables ($13.9 million) and Other business ($4.3 million) witnessed a growth of 15%, 36% and 15%, respectively. Industrial segment recorded a 2% growth in revenues to $5.1 million.

Growth in the Japanese market for IVUS disposables jumped 17% year over year. Japan is the largest IVUS market in the world and the establishment 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 15% in IVUS disposable sales.  Europe and ROW countries posted growth rates of 7% and 21%, respectively. In Japan, FM sales saw a whopping increase of 57% to $0.9 million, with strong growth recorded in other regions, barring ROW.

Gross margin of Volcano Corporation was 64.1% in the quarter, compared with 62.6% in the third quarter of 2009. This was primarily due to a 9.8% rise in cost of revenues, much lower than 14% revenue growth. Excluding one-time items, operating expenses increased 28.9% to $53.3 million due to a 27.2% rise in selling, general and administrative expenses coupled with a 34.9% increase in research and development expenses.

Apart from higher operating expenses, another factor that led to a decline in the company’s bottom line was higher interest expense, which was $1.9 million in the quarter compared to $1,000 in the year-ago period. This is due to the huge increase in its long-term debt level to $91.2 million in the quarter, compared to $0.1 million in the corresponding period of 2009.

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. Apart from working capital and general corporate purposes, a portion of the proceeds (approximately $35-$40 million) was to be spent to expand the company’s manufacturing capacity in Costa Rica.

Moreover, the quarter witnessed $269 million of exchange rate loss compared to a $166 million gain in the previous quarter. Last month, Volcano received a favorable court ruling regarding trademark infringement against LightLab Imaging, a subsidiary of St. Jude Medical (STJ).

Outlook

Volcano Corporation expects $347–$352 million of revenues in fiscal 2011 (representing growth of 18-20%) with gross margin of 64%-65%. The Zacks Consensus Estimate of $349 million is within this range. Moreover, the company expects to report GAAP EPS of 22-24 cents.

 
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