Volcano Corporation (VOLC) reported an EPS of 5 cents in the third quarter of fiscal 2011, a penny above the Zacks Consensus Estimate but lower than EPS of 10 cents in the year-ago period. Revenues increased 18% year over year to reach $85.8 million during the quarter and were in line with the Zacks Consensus Estimate.
The company’s two reporting segments, Medical and Industrial, booked respective revenues of $83 million (up 24% year over year) and $2.8 million (down 54%). As in the second quarter, the sharp decline in the Industrial segment was due to lower spending in the telecommunication sector.
Within the Medical segment, strong growth was witnessed across the board. Revenues from Consoles, Intravascular Ultrasound (IVUS) and Functional Measurement (FM) single-procedure disposables witnessed annualized growth of 19% (to $9.7 million), 17% ($49.8 million) and 48% ($16.7 million), respectively. Management is impressed with the overall performance despite the challenging economic environment that has affected procedure volume, particularly in the IVUS business.
The US market recorded a growth of 4% in IVUS disposable sales, with Europe and Japan recording growth rates of 27% and 24%, respectively. The robust growth in Japan, the largest IVUS market in the world, is encouraging as Volcano Corporation has been trying to increase its penetration in that region through direct sales program and/or introduction of new products.
Volcano Corporation recorded gross margin of 65.6% in the quarter, compared with 64.4% in the third quarter of 2010. Operating expenses (excluding amortization of intangibles) increased 25.7% to $49.9 million due to a 21.9% rise in selling, general and administrative expenses coupled with a 36.8% increase in research and development expenses. Consequently, operating margin shrunk 260 basis points to 7.3%.
Volcano Corporation’s bottom line was also impacted by higher interest expense, which was $1.8 million in the quarter compared with $249,000 in the year-ago period. This was due to a higher debt burden that went up to $94.5 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.
Outlook
Volcano Corporation revised its outlook for fiscal 2011 taking into account current procedure volume and telecom business sales. The company lowered the top end of its earlier revenue guidance by $2 million to $342–$345 million while its outlook for EPS remained unchanged at 19–21 cents. Gross margin is expected between 65–-66% with operating expenses of 58−60%. The company also noted that it is working on releasing a portion of its deferred tax valuation allowance that will result in higher net income of $25 million (45 cents per share) in the fourth quarter of 2011.
Recommendation
Volcano Corporation continues to execute strategies to drive sales in the IVUS/FM market backed by new product launches and product enhancements. Moreover, increased acceptance of the Vibe vascular imaging balloon catheter in Europe and product launches in Japan should provide further upside to the company. The stock retains a Zacks #2 Rank (Buy) in the short term.
However, tight hospital budgets could restrict growth in the near term. Besides, operating margin was under pressure due to higher SG&A expenses, possibly relating to its expansion in Japan. Moreover, the company witnesses stiff competition from players such as St Jude Medical (STJ) and Boston Scientific Corporation (BSX). We are Neutral on Volcano Corporation over a longer-term perspective, in line with our take on its peers.
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
VOLCANO CORP (VOLC): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment