Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated
Reason for Report: Flash Update: 2Q13 Earnings.
Prev. Ed: Jun 10, 2013, 2Q13 Earnings Update. (brokers’ material considered till Apr 2, 2013)
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Flash Update
Volcano's Earnings & Revenues Beat Estimates- Aug 5, 2013
Volcano Corporation reported adjusted (EPS) of $0.03 in 2Q13, 50% lower than the year-ago EPS. However, it was well ahead of the Zacks Consensus Estimate of a loss of $0.01. On a reported basis, the company recorded loss of $0.04 per share in 2Q13.
Quarter in Detail
Revenues in 2Q13 improved 6% y/y (up 12% at constant exchange rate or CER) to $101.3 million. The top line also surpassed the Zacks Consensus Estimate of $98 million.
Revenues in the Medical segment that increased 7% y/y (up 13% at CER) in 2Q13 to $99.0 million, based on a robust 29% hike in FFR (Fractional Flow Reserve) single-procedure disposable business along with a 7% rise in total consoles sales and 5% increase in intravascular ultrasound (IVUS) single-procedure disposables.
FFR disposable sales increased 19% at CER in the U.S., 24% in Europe, 63% in Rest of world and a stupendous 71% in Japan on a reported basis. Console placement improved in the U.S. (up 5% at CER) and Europe (up 46%), while placements in Japan and the Rest of world declined (60% and 4%, respectively) compared with 2Q12.
IVUS single-procedure disposables franchise revenues increased 5% on a y/y. The Industrial segment recorded revenues of $2.3 million in 2Q13, down 28% y/y.
Volcano Corporation recorded a 203 basis points (bps) contraction in gross margin to 64.4% in 2Q13. The contraction was led by adverse product mix, currency headwinds, duplicate capacity costs and costs related to the transition of manufacturing facility to Costa Rica.
Selling, general and administrative (SG&A) expenses increased 8.9% to $45.7 million, while research and development (R&D) expenditure shot up 29.4% to $17.9 million. The company recorded a 630 bps drop in adjusted operating margin to 1.6% (excluding amortization of intangibles and acquisition-related expenses).
Volcano exited 2Q13 with cash, cash equivalents and short-term investments of $408.6 million compared with $437.9 million at the end of FY12.
Outlook
Volcano reaffirmed its outlook for FY13. On a reported basis, it expects revenues in the range of $394.0–$400.0 million. The Zacks Consensus Estimate of $396 million remains within the guided range. At CER, the company still expects revenues in the band of $418.0–$424.0 million.
In addition, the company expects adjusted EPS in the range of $0.03–$0.05 for FY13 (excluding a one-time tax benefit of $0.20). The Zacks Consensus Estimate of$0.05 is at the higher end of the expected range. Moreover, gross margin is expected to remain in the range of 64.5%–65% and operating expenses in the band of 65%–66% of revenues.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON VOLC
Portfolio Manager Executive Summary
Volcano Corporation (VOLC) engages in the development, manufacture, and commercialization of a broad suite of precision guided therapy tools including intravascular ultrasound (IVUS) and fractional flow reserve (FFR) products. During an IVUS procedure an imaging catheter is placed inside an artery to produce a cross-sectional image of the artery.
Of the 14 firms covering the stock, 57.1% (8 firms) assigned Positive ratings, 42.9% (6) rendered Neutral ratings and 0.0% (0) of the firms assigned a Negative rating to the stock.
Buy or equivalent outlook (8/14 firms): In spite of posting mixed numbers for 1Q13, the positive firms are encouraged by the revenue drivers of the company, which are fractional flow reserve (FFR) and growth in peripheral. The firms believe that the lower guidance issued by the company does not reflect that the company will be performing poorly. Additionally, they believe that guidance was lowered on account of headwinds which are likely to be caused in future, especially, from Japan. They also expect the company’s precision-guided therapy products to benefit from the increasing scrutiny of over-stenting of percutaneous coronary intervention (PC) patients. They are impressed with the increasing penetration of FFR along with Volcano’s share of the market as it offers the only integrated imaging-FFR approach. The firms consider Volcano to be well placed in the field of intravascular imaging based on new product launches and strong product pipeline. Moreover, the firms expect the company to be benefitted from the recent acquisitions of Sync-Rx and Crux. These firms expect better operating margins going ahead on the back of improved scale and manufacturing outside the U.S. The firms also believe that the company is well placed to benefit from the current healthcare environment. A contributing factor is that payer focus should eliminate unnecessary PCI procedures. While these firms expect the recent developments to negatively affect margin, they are bullish on Volcano’s growth prospects through FY14.
Neutral and Negative or equivalent outlook (6/14 firms): The neutral firms remain on the sidelines with Volcano’s in-line EPS results and lower-than expected revenues in 1Q13. The firms believe that revenue of the company was adversely affected by currency headwinds, especially from Japan, as these constitute one-third of the company’s revenue. Additonally, the company lacks near-term catalysts which can push the company’s financials on the positive side. Additionally, the firms believe that low guidance issued is a result of currency headwinds and lost market share in the IVUS and FFR. However, some of the firms are also confident that the company would be able to leverage its existing IVUS client base to drive FFR sales. Though these firms are confident that the core FFR and IVUS franchisees would continue on the growth path, the outlook is moderate. Moreover, they consider the shares of the company to be fairly valued. The financials of the company was also impacted owing to the litigation expense which took place with St Jude Medical.
Jun 10, 2013
Overview
Volcano Corporation engages in the development, manufacture, and commercialization of a broad suite of precision guided therapy tools including intravascular ultrasound (IVUS) and FFR products. These products augment the diagnosis and treatment of vascular heart disease by improving the efficiency and efficacy of existing PCI procedures in the coronary or peripheral arteries. While FFR technology is used to determine whether or not a stent is necessary, IVUS is used to guide stent placement and optimization. The company markets its products to physicians and technicians who perform PCI procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals.
Further information on the company can be found at its website: www.volcanotherapeutics.com.
The firms identified the following issues for evaluating the investment merits of VOLC:
Key Positive Arguments / Key Negative Arguments· Volcano’s technology and products have the necessary competitive advantages to gain market share in the IVUS and FFR markets.
· Volcano possesses the ability to sustain its strong revenue growth, which appears promising as a result of expected market share gains, successful execution of its growth strategies, and strong R&D emphasis.
· The firms believe that, with initiation of manufacturing in the Costa Rica facility, gross margin is likely to improve in the long term. / · The company faces competition from existing as well as new market entrants
· On Apr 16, 2013, VOLC accused St. Jude for infringement of cardiac pressure sensing guide wire products. Volcano's complaint also accuses the Accused Guide Wires of infringing the patented device claims of United States Patent No. 8,419,648.
Note: Volcano’s fiscal references coincide with the calendar year.
Jun 10, 2013
Long-Term Growth
Volcano Corporation derives a majority of its revenues from IVUS product portfolio. The company has designed its IVUS console offerings in such a manner that they can be easily integrated into existing or newly constructed cath lab facilities. IVUS technology is widely used for determining the placement of stents in patients with coronary disease. Given that the penetration rate for IVUS is Japan is higher than that in the U.S. and Europe, the company will have more opportunities to expand in these markets.
Over the long term, the firms expect Volcano Corporation to benefit from the changing healthcare environment. They believe that some favorable trends in the industry in the form of greater clinical and economic pressure endorse the benefits of PCI procedures and should benefit the company. Apart from favorable guidelines in the U.S. and Europe, economic factors in healthcare reform have increased the necessity for the kind of technology that is provided by the IVUS and FFR offering.
The firms believe that the FFR business should benefit from increased PCI scrutiny. In the long-term perspective, the firms expect Volcano to maintain robust growth as increasing contribution from FFR business and intriguing pipeline should offset continued moderation in IVUS growth.
The firms have high expectations from the company’s iFR, (instant wave free ratio FFR) which on approval could expand the addressable FFR population to include those patients who cannot withstand adenosine. Use of adenosine increases procedural time and increase the cost by about $200 to $250 per case. iFR will not only reduce the time and cost associated with the procedure but result in share gain compared with its peer St. Jude Medical. The product pipeline intends to launch FL.IVUS and FL.ICE in order to expand the company’s addressable market.
Volcano continues to expand its presence in Japan through direct sales and new product introduction. At present Volcano deals directly with all of its business in Japan. While the firms are encouraged to note that the company plans to go direct in Spain and other European countries gradually, these steps will have an adverse impact on the top line in the near term.
Moreover, the transition to Costa Rica manufacturing should boost gross margin to more than 70% by 2014, which in turn should improve the company’s profitability.
Jun 10, 2013
Target Price/Valuation
Rating DistributionPositive / 57.1%
Neutral / 42.9%
Negative / 0.0%
Avg. Target Price / $25.54↓
Maximum Target / $33.00↑
Minimum Target / $20.00
No. of Analysts with Target Price/Total No. / 13/14
Upside from Current / 32.2%
Maximum Upside from Current / 70.8%
Minimum Upside from Current / 3.5%
Risks to the target price include a significant decrease in PCI volume due to macro pressures and concerns about over-stenting, increased competition, adverse legal outcomes from ongoing litigation against St. Jude and pipeline delays.
Recent Events
On May 2, 2013 Volcano Corporation reported its 1Q13 results. Highlights are as follows:
Ø The company reported loss per share of $0.06 in 1Q13, lagging the EPS of $0.00 in 1Q12. On an adjusted basis, the company reported EPS of $0.02.
Ø In 1Q13, revenue climbed 3.2% y/y (up 5% at constant exchange rate or CER) to $93.2 million.
Ø Volcano lowered its outlook for FY13. On a reported basis, it expects revenues in the range of $394.0–$400.0 million ($418.0–$424.0 million at CER) compared with prior outlook of $406.0–$412.0 million. The depressed guidance was based on unfavorable foreign exchange headwinds and low PCI volume growth for Volcano. In addition, the company expects adjusted EPS in the range of $0.03–$0.05 for FY13 (excluding a one-time tax benefit of $0.20) compared to previous range of $0.08−$0.11.
Ø 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.
Revenue
Total revenue, including medical segment (consoles, IVUS single-procedure, FFR single procedure and other) and industrial segment in 1Q13 totaled $93.2 million, an increase of 3.2% y/y (up 5% at constant exchange rate or CER).
Region wise, in 1Q13, the U.S. recorded sales of $43.3 million, up 4.7% y/y. Japan recorded sales of $28.2 million, down 8.5% y/y. Sales in Europe surged 17.7% y/y to $16.1 million. Rest of World (ROW) recorded sales of $5.6million (up 23%) in 1Q13.
Direct in Spain
Having witnessed the benefits of transitioning to direct sales force in Japan in 3Q12, Volcano Corporation initiated direct sales effort in Spain. This process has resulted in accumulation of inventory at the distributor level. In the long term, the company will benefit from this transition as it will be able to sell FFR catheters at €750 (compared with the current price of €400) and IVUS catheters at €900 (currently €500). With five direct sales personnel in Spain, the company is on track with the transition.
The company has witnessed growth in utilizations in countries such as U.K., Germany and Netherlands in addition to the benefits the company expects to garner from the direct in Spain. The company has hired 10 peripheral sales specialists to boost growth.
Guidance: For FY13, the company has guided revenue in the range of $418.0 million and $424.0 million from previously projected $422 million and $428 million. These revenues are based on constant currency.
Assuming no improvement in the macroeconomic environment and procedural pressure at its current trend, in FY13 Volcano expects revenue growth in the range of 11%–13% at CER.
Segments
Volcano currently generates revenues from two reporting segments: Medical and Industrial (formerly telecom). The Medical segment includes the discovery, development, manufacture, and sale of precision guided therapy tools for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. It is the company’s core business with revenues derived primarily from the sale of multi-modality and FFR consoles and IVUS and FFR single-use disposables and others.
The Industrial segment includes the discovery, development, manufacture and sale of micro-optical spectrometers and optical channel monitors to telecommunications and other industrial companies. It derives revenues related to the sales of Axsun’s micro-optical spectrometers and optical channel monitors to telecommunication companies. Other revenues consist primarily of spare parts sales, service and maintenance revenues, shipping and handling revenues, and license fees from Medtronic.