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Volcano Corporation (NASDAQ:VOLC)

Q4 2013 Earnings Conference Call

February 25, 2014 5:00 PM ET

Executives

John Dahldorf – CFO

Scott Huennekens – President and CEO

Analysts

Brooks West – Piper Jaffray

Chris Pasquale – JP Morgan

Amy Fawcett [ph] – Goldman Sachs

Chris Lewis – Roth Capital Partners

Imron Zafar – Jefferies & Co

Bruce Nudell – Credit Suisse

Ben Andrew – William Blair

Jason Mills – Canaccord Genuity

Michael Rich – Raymond James

Steven Lichtman – Oppenheimer

Operator

Good afternoon, and welcome to Volcano Corporation’s Fourth Quarter 2013 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Following our formal remarks, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded, Monday, February 24. A replay of the call will be available through March 3 by dialing (404) 537-3406, passcode 36718821 or via the company’s website at www.volcanocorp.com.

I would now like to introduce Mr. John Dahldorf, Volcano’s Chief Financial Officer. Please go ahead sir.

John Dahldorf

Thank you, and good afternoon. With me today is Scott Huennekens, Volcano’s President and Chief Executive Officer. Scott will review key events of the quarter and year, and provide our perspectives on 2014. I will follow with a review of our fourth quarter and year-end results as well as our guidance for 2014.

Before turning the call over to Scott, let me remind you that today’s discussion will contain forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those discussed in today’s call. These risks and uncertainties are outlined in today’s press release, in our filings with the Securities and Exchange Commission, including our 10-Q for the third quarter of 2013. We caution you not to place undue reliance on our forward-looking statements, and we disclaim any obligation to update these statements. Scott?

Scott Huennekens

Thank you, John, and [Technical Difficulty] takes us in the years ahead to our market penetration in share gain, product pipeline and operating margin improvement programs. On the top line, we recorded 6% growth in revenues on a constant currency basis for the quarter and 8% for the year overall.

We were particularly pleased with the continued escalation of our presence in the peripheral market, though not only our imaging products but also the PioneerPlus Re-Entry catheter and the initial rollout of the Crux IVC filter. Our continued success in the peripheral imaging market as well as the introduction of the Pioneer catheter drove a 15% increase in IVUS disposable revenues in the U.S. during the quarter.

In addition, we continued to generate solid revenue growth across all of our businesses. In EMEAI or European grew particularly in Eastern Europe and the Middle East, recording greater than 20% increase in our combined IVUS and FM disposable revenues year-over-year, as we benefited from enhancements to our sales and distribution strategies.

Our revenue growth occurred despite some difficult macro-environmental challenges during the year, many of which we expect will continue to impact our business in 2014. These include; the continued decline of stable coronary PCIs in the U.S. and Japan, along with constrained healthcare spending in the U.S., greater than anticipated FX headwind in Japan and a moderation of FFR growth rates, continued softness in Axsun telecom sector and product introduction delays by key Axsun Medical ophthalmology customers.

Besides from the solid top line performance, 2013 was marked by several important accomplishments. We continue to be the innovation leader with the rollout of iFR in Europe and Japan. The introduction of the Errata FFR wire, our fifth new wire in the last five years, the launch of our next generation core integrated system and the limited market released of the Crux IVC filter.

We acquired the PioneerPlus Re-Entry catheter and with now about five months of selling activity under our belt, are seeing market expansion at or above our expectations. We saw the release of two important studies, ADVISE II and ADAPT-DES at TCT. The outcomes from these studies will help drive our efforts to increase iFR and FFR adoption and IVUS penetration in more complex cases respectively.

Finally, we continue to position the company for improved gross margin and operating leverage and progress with our efforts to transition the manufacturing and disposables to our new Costa Rica facility. John will speak to this in greater detail later.

I want to spend the next few minutes outlining the key elements of our winning growth strategy that will facilitate the company’s growth during 2014 and beyond. The strategy is predicated on three key elements including; number one, growing our base business, FFR and coronary peripheral IVUS, through technology innovation and improved distribution to drive penetration, market share gains and expansion in new clinical education. We see the markets we currently serve with our base business, has grown at approximately 7% on a compound annual growth rate over the next four years, and we believe that during that period, we can grow faster than the market.

Despite the recent moderation of growth rates for FFR, we still believe in its long-term growth opportunities above current rates, and even though we have experienced dramatic growth in our IVUS peripheral business, we believe we have only scratched the surface in the U.S. and feel there is also significant opportunity in both Europe and Japan.

Second leg of our growth strategy is our emerging businesses, which are comprised of recently introduced products such as Crux and Pioneer and the near-term offering of Sync-Rx in the ramp-up of Axsun’s OEM ophthalmology business.

Finally, there is business expansion through targeted acquisitions, in-licensing and partnering and building out therapeutic solutions in targeted indications such as peripherals and other verticals.

Before speaking to each of these areas in more detail, I’ll take a moment to address the market environment. The trends we have seen over the past several quarters continued in the fourth quarter, and we would expect them to remain as headwinds in 2014.

PCIs in the U.S. declined approximately 4.5% in the fourth quarter and 3% for the year, with stable PCIs declining at a greater rate. And we are projecting a decline of 2.5% in 2014. PCI volumes in Europe were flat both in the fourth quarter and full year, and will continue to be so, with some growth in Northern and Eastern Europe and the Middle East, offset by softness in Southern Europe.

In Japan, we estimate that PCIs declined approximately 5% year-over-year and we are anticipating they will decline in the range of 3% to 3.5% in 2014. Factors impacting PCIs in Japan are increasing PCI deferral based on the use of FFR as well as other non-invasive imaging, and better outcomes with medical therapy and second generation drug eluting stents.

Also as a remainder, we are estimating a 7.5% reduction in reimbursement for our disposables beginning in April 1. Initial government indications of reimbursement reductions for Volcano products in Japan are in line with these estimates. At the same time, we continue to see the long-term benefit of the industry tailwinds we have discussed in the past, included the need for documentation, proof of necessity and the drive to reduce hospital readmissions and overall costs.

For example, on a recently CMS reimbursement guideline, there is increased emphasis on quality reporting, and we believe this can lead to increased utilization of FFR and IVUS, based on data demonstrating that these technologies improve clinical and economic outcomes.

In this environment, we believe that a compelling point of differentiation for Volcano is choice and compared to our current competition, we offer a wide array of diagnostic and therapy options. Today, we offer multiple solutions with 13 modalities on our integrated systems, seven imaging, five physiology and one combo product, the Pioneer catheter, and we believe that will grow to 17 modalities over the next two years.

Today our competitor, St. Jude and Boston Scientific offer five and three modalities respectively. We’ve always believed that our multi-modality platform is critical to wining the land grab war and that has proven out by the results in the last two years in which Volcano has won 92% of imaging system placements against Boston and over 70% of FFR placements against St. Jude in the U.S. This kind of success is critical as disposables follow console placements.

Turning specifically to our FFR strategy. Volcano offers the broadest physiology product portfolio to meet all clinical needs. Today the penetration of FFR is about 16% of PCIs. Yet the data supports utilization more than double that or approximately 37%. Factors that we believe will drive expansion include continued innovation in clinical education, an elevation in the U.S. practice guidelines and coverage decisions that require to use of FFR to prove ischemia prior to doing PCI.

Beyond the markets being served today, we believe the long-term market opportunities for FFR could be addressable markets over multiple billions of dollars with its migration through indication such as acute coronary syndrome patients, the peripherals and mapping the coronary artery bypass procedures.

As I mentioned earlier, we are now in full U.S. market release of Verrata, our new everyday FFR wire, which facilitates faster and easier FFR. The market response to the Verrata has been very positive and it is positioning us to achieve market share gains. Additionally, we have just initiated a rollout for Verrata in Europe.

Similarly, our iFR rollout in Europe and Japan is going very well, and we now have the technology of more than 200 accounts. iFR is being very well received by the clinical community because the use of adenosine is not required and iFR reduces per procedure timing costs and makes physiology guidance fast and routine during multi-vessel disease cases.

We are seeing a higher utilization rates overall at centers with iFR as well. Our 510-K for approval in the U.S. is tracking to expectations and we believe we will have approval and be able to initiate commercial sales in the U.S. in the second half of this year.

The data from ADVISE II shows that the hybrid iFR FFR approach correctly matched an FFR-only approval in more than 94% of coronary stenoses and successfully avoided the use of adenosine in 65% of patients. We believe the ADVISE II data are helping to foster significant adaptation in Europe.

Beyond technology innovation, we will support our FFR growth strategies with expanded clinical education programs and clinical trials to generate data to support current and new indications and drive clinical awareness of the improved patient and economic outcomes that FFR provides.

To that end, during the fourth quarter, the SCAI or the Society for Cardiovascular Angiography and Interventions issued new recommendations regarding the use of FFR. These include that FFR should be used not only in cases where there is 50% to 70% lesion as outlined in current guidelines, but also recommended its use up to 90% lesions in stable ischemia heart disease. The authors also recommended the use of FFR in combination with non-invasive stress tests in multi-vessel disease patients.

As I mentioned earlier, we are very pleased with our ongoing success in the peripheral market, with both our imaging and therapeutic products.

For the year, our IVUS peripheral business grew greater than 30% and represented approximately 20% of our U.S. IVUS business. We’ve captured the leadership position with an 80% plus market share by offering a broad product line that includes four IVUS catheters suitable for the peripheral market, the PV .035 IVUS catheter for use in the AAA and often in DS applications, the IVUS PV .018 and .014 catheters for use in highly stenosed peripheral lesion, and the Pioneer Therapeutic Re-Entry catheter.

As a reminder, we are the only company to offer IVUS catheters designed specifically for the use in the peripherals. In addition, our peripheral product portfolio includes; Crux IVC filters and Valet Microcatheters.

In the U.S., we are also supporting our product offerings with a more focused peripheral-only sales force and implementing physician education and clinical trial programs. We believe that for the foreseeable future, the peripheral IVUS business can grow in the high teens, as we believe that the current penetration of IVUS and the peripherals is around 2% while the data support penetration rates more than double this.

There were more than an estimated 3.1 million global peripheral procedures in 2013 with an estimated annual growth rate of 8%. In the near-term, we are focusing our efforts on five indications including; EVAR/TEVAR, FFA, IVC filter placement, AV Fistula graft revascularization and vein compression.

Within these five areas worldwide, IVUS penetration is no more than 10% in any category. And in any individual indication typically in the low-single digits. We also believe that with our peripheral emphasis and knowledge of IVUS, we can accelerate market adoption of Pioneer.

With respect to the Crux IVC filter, we believe it addresses the market opportunity today that is approximately $280 million. We believe that we can achieve 30% plus share of the IVC filter market over the next several years by commercializing, number one, the best-in-class Crux IVC filter, followed by number two, by securing a bed-side indication for the use of IVUS in the second half of 2014. And third, bringing to market a device that combines IVUS and the Crux filter on a single delivery catheter.

While our traditional IVUS coronary activity has been negatively impacted by the ongoing softness and stable PCI volumes, we continue to believe and invest in that business including product development initiatives such as Sync-Rx.

Sync-Rx which is a technology we acquired at the end of 2012 has potential applications with both our IVUS and FFR technologies. Our initial effort is the development of co-registration with IVUS in angiography, for which we have now regained 510-K approval. The initial clinical experience with Sync-Rx co-registration has been very positive.

We plan to initiate a limited market release in all of our geographies during the course of the year, beginning with the U.S. and Europe in the first half and Japan in the second half.

I also want to mention the U.S. sales force reorganization that we discussed in our last call is well underway. By later this year, we will have added approximately 20 sales reps, for total of just under a 170, with specific groups focused on systems, coronary disposables and peripheral disposables.

Our plan calls for our peripheral group to increase from 11 at the end of the year to nearly 40. As we indicated last time, we believe these changes will better align our U.S. sales force with our focused priorities and targeted resources, while we believe are higher return opportunities in the market.

Lastly, I want to address the third leg of our growth strategy through business expansion opportunities. As we have discussed with you over the past several months, we have a disciplined capital allocation strategy in place to drive shareholder value. We understand the need to invest our cash, such that our returns will be greater than our weighted average cost of capital, and have a process in place to ensure this.

We remain conscious of the key risks of M&A, i.e., overpaying dilution and integration and we’ll continue to look for opportunities that can generate near-term returns through our manufacturing, distribution and clinical expertise.

In addition, we will seek opportunities to build our product portfolio, particularly therapeutic offerings that complement our platform technologies.

In closing, we are continuing to build a strong and durable company. It is leading through innovation and execution on a strategy that will drive long-term revenue growth, increasing gross margins and expanding profitability.

As we discussed today, we have a number of new products either entering the market or planned for introduction over the next 12 months that will further our market penetration and market share gain strategies.

We believe that our revenue growth, expanding margins with cost reduction programs and disposable manufacturing in Costa Rica, and expanding operating margins with increased operating leverage will enhance shareholder value in the short and long-term.

Thank you again for joining us and we look forward to reporting on our progress during the year. I’ll now turn the call over to John. John?

John Dahldorf

Thank you, Scott. Revenues on a reported basis for the fourth quarter of 2013 were $103.3 million versus $102.5 million in the fourth quarter a year ago. Our results for the quarter included modest contribution from sales of the Pioneer device, which we did not have a year ago.

Foreign currency exchange rates had a negative impact of approximately $5.5 million. On a constant currency basis, revenues in the quarter increased 6% year-over-year. Total revenues for 2013 on a reported basis were $393.7 million versus $381.9 million a year ago. On a constant currency basis, revenues for the year increased 8% versus a year ago, as foreign currency exchange rates had a negative impact of approximately $20.6 million.

Medical segment revenues, primarily Systems, FFR and IVUS disposables and Axsun Medical in the quarter increased 1% on a reported basis and 6% on a constant currency basis. Axsun Medical revenues were $3 million versus $2.7 million a year ago. As we discussed in our last call, we had some ophthalmology orders shift from the second half of 2013 to 2014. Revenues from Axsun Industrial were $2.5 million, consistent with the fourth quarter a year ago.

Consolidated sales of multi-modality systems and related equipment in the quarter were $12.2 million consistent with a year ago. Total console placements in the quarter were 204 versus 247 a year ago, including 79 in the U.S. versus 109 last year. In Japan, we had 26 placements versus 43 last year, and 63 in Europe versus 54 last year. We placed 36 consoles in the rest of the world versus 41 a year ago. Excluding our legacy IVG systems, we now have 7,000 consoles placed worldwide versus approximately 6,100 a year ago.

A couple of highlights from our top line results include: IVUS disposable revenue growth in the quarter was solid in the U.S. and Europe at 15% and 24% respectively. In the U.S., the growth driver was our peripheral business which grew approximately 40% year-over-year, while in Europe, we benefited from continued growth in select Northern and Eastern European countries and in the Middle East as well as gaining market share.

Other elements of our business in Europe also demonstrated growth in the quarter including a 53% increase in console sales and 22% increase in FFR disposables. For the year, our U.S. IVUS disposable revenues increased 5% driven by greater than 30% increase in IVUS peripheral revenues. Additionally, our European business was strong during the year with a 57% growth in console revenues, 15% growth in IVUS disposables and a 25% increase in FFR disposable revenues.

Gross margins for the quarter were 60.6% versus 66.7% in the fourth quarter a year ago. Gross margins in the quarter were impacted by the declining value of the yen, higher manufacturing costs as we continue to operate with duplicate capacity between our Costa Rica and Rancho Cordova facilities and product mix. Gross margins for all of 2013 were 53.6%.

I’ll discuss our outlook for gross margins in 2014 shortly.

Operating expenses in the fourth quarter were $84.2 million versus $63.3 million a year ago. Year-over-year SG&A increased by approximately $2.4 million due primarily to additional sales force headcount, increased marketing costs associated with the launch of Pioneer and Crux and facility costs associated with our new headquarters in San Diego.

R&D expenses increased by approximately $4 million year-over-year, reflecting costs associated with new product development including Sync-Rx and Crux, and clinical trial programs. These increases were offset in part by decline in expenses related to the strategic reprioritization program we announced last quarter. As we indicated in our last call, this increase versus the prior quarter is anticipated due to the timing of product development and clinical trial programs.

Restructuring charges of $14.5 million were related to the strategic reprioritization we implemented last quarter and within the range we provided in our last call.

With respect to other expense categories, acquisition-related items were related to the Crux and Pioneer transactions and consistent with recent quarters. The increase in amortization expense in the quarter reflects the initiation of the commercial sales of the Crux filter and Pioneer catheter, which triggered the amortization of developed technology intangibles related to those products.

Interest expense for the quarter was $7 million, of which approximately $2.2 million was cash expense. In terms of the income taxes, during the fourth quarter we determined that our State and a portion of our foreign deferred tax assets would likely not be realizable and we recorded a valuation allowance against them. As a result, our annual tax benefit is approximately 32% for the year.

For the fourth quarter of 2013, we reported a net loss on a GAAP basis of $20.5 million or $0.38 per share versus net income of $2.5 million or $0.04 per diluted share in the fourth quarter a year ago. Basic weighted average shares were $53.9 million during the quarter. Excluding acquisition-related items, amortization of intangibles and non-cash interest expense on convertible notes, net of tax, we’ve reported a non-GAAP net loss of $0.29 per share.

With respect to guidance for 2014, based on FX exchange rates of 102 to 103 for the yen and 1.35 to 1.37 for the euro, we expect reported revenues to be in the range of $413 million to $421 million. This represents an increase of approximately 100 basis points on both the low and high-end of our guidance provided in January, due to changes in the valuation of the yen.

Revenues on a constant currency basis will be in the range of $417 million to $425 million as per our earlier guidance. For 2014, we anticipate that approximately 25% of our revenues will be in Japanese yen and 19% in euros. The key assumptions behind our revenue guidance include, approximately 200 basis points of revenue contribution from new products such as; Crux, Pioneer and Sync-RX, and expectations will be to slightly down approximately 2.5% in the U.S., flat in Europe and down 3% to 3.5% in Japan.

In addition, we are anticipating a reimbursement reduction of approximately 7.5% for all of our disposable products in Japan beginning in second quarter of the year. For all other items on a reported basis, we expect gross margins will be in the range of 64% to 64.5%. We anticipate completing the transfer of all disposable manufacturing to Costa Rica by the end of the year.

As a result, we expect our gross margins in the first three quarters of the year will be in the range of 63% to 64% and we expect to exit the year with margins at 65%. We expect operating expenses will be 68% to 69% of revenues. Key components around our assumptions for operating expenses during the year versus a year ago include; SG&A will increase approximately 14% year-over-year. Major components include the expansion of our U.S. sales and marketing teams as mentioned earlier, increased litigation expenses, increased incentive compensation for non-executive employees to promote retention and productivity, and finally, increased expenses related to our new corporate headquarters in San Diego.

In addition our outlook for litigation expenses reflects our expectations that would be involved in two to three trials during the year.

Finally, we believe that the investments we are making in our sales force are non-executive incentive compensation programs in our corporate headquarters are highly leverageable over the next few years. Offsetting these increases, will be an expected decline in R&D, spending of about $5.5 million, reflecting our strategic reprioritization programs.

Some of these savings will be invested in higher return product development programs as well as to fund our sales force reorganization and expansion.

Acquisition-related items which reflects Crux milestone accretion will be comparable to a year ago while amortization of intangibles will increase approximately $3.5 million versus 2013, as we continue to amortize to develop technology intangibles related to the Pioneer and Crux product lines.

We also expect restructuring costs of approximately $2.8 million related to the rationalization of our Rancho Cordova facility, net interest of expense of approximately $28 million, of which approximately $20.3 million is non-cash. And we’re assuming tax benefit of approximately 35% for the year.

On a GAAP basis, we expect a net loss of $0.57 to $0.60 per share. On a non-GAAP basis, we expect a loss of $0.16 to $0.19 per share. Non-GAAP results exclude acquisition-related items, amortization of intangibles and non-cash interest expense. We expect the weighted average basic shares in 2014 will be approximately $51.2 million, reflecting the impact of the share buyback we announced in December.

For purposes of this guidance, we are not factoring in the execution of the second $100 million tranche, however I’d like to remind you, we continue to take the capital allocation process very seriously, and our board and management continue to evaluate this opportunity in context what is best for the company and our shareholders in the long run.

Beginning with this quarter, we’ll be providing guidance for revenue and GAAP and non-GAAP EPS on a quarterly basis. Today, we’ll also be providing revenue guidance for the second, third and fourth quarters of the year. In the past, we’ve provided how we anticipate our revenues would track by quarter for the year, but now we’ll be providing specific ranges for each quarter. In future calls for this year, we’ll continue to provide revenue and EPS guidance for the subsequent quarter, as well as updating annual guidance as necessary.

For the first quarter of 2014, we expect revenues on a reported basis will be in the range of $94 million to $95 million. And on a constant currency basis, we expect revenues to be in the range of $98 million to $99 million. Our revenue assumptions for the quarter reflect in part, the impact of the severe weather in the Midwest and on the East Coast had on our customers, as well as some modest impact from our sales force reorganization which should be behind us by the end of the first quarter.

On a GAAP basis, we expect a loss per share of $0.20 to $0.21 per share and 11% to 12% on a non-GAAP basis in the first quarter of 2014.

With respect to the balance of the year, our expectations for revenue on a reported basis include: for the second quarter, revenues of $104 million to $106 million; for the third quarter, revenues of $103.5 million to $105.5 million; and for the fourth quarter, revenues of $111 million to $114 million.

I want to note that our expectations for 2014 revenues are a little bit more back-loaded than what we’ve experienced in prior years. The primary drivers for this includes the changes in our U.S. sales force, which we believe will provide us increasing benefits as we go through the year. In addition, we believe our new products such as iFR, Crux, Sync-Rx and Axsun ophthalmology will also provide increasing contributions to revenue as they gain traction during the course of the year.

In closing, before our next planned conference call, we will be appearing at the Barclay’s Healthcare Conference on Tuesday, March 11. And again, thank you again for joining us today. And we’ll now open the call to your questions. In the interest of time, we’d ask that you limit yourself to one question and a follow-up. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Brooks West from Piper Jaffray. Your line is open. Please go ahead.

Brooks West – Piper Jaffray

Thanks for taking the questions guys. Can you hear me?

Scott Huennekens

Sure, we can, Brooks.

Brooks West – Piper Jaffray

Great. Thanks Scott. Scott, can you go over your assumptions for PCI volumes again? I was confused. You said your expected volume is down. Is that for all PCI volumes, or is that just for stable disease?

John Dahldorf

Brooks, this is John. They are for all PCIs, although we do – as we have seen in the past couple of years, we do expect stable, probably be a little bit greater rate than unstable. So again in the U.S. they are down – we’re projecting them to be down about 2.5%, Europe flat and Japan about 3% to 3.5%.

Brooks West – Piper Jaffray

Okay. And then I guess two quick ones if I could. How long is it going to take to penetrate the ACS population with IVUS, and kind of what’s the physician education needed there? And then can you give us just what your share is in IVUS versus Boston Scientific, U.S. and Japan? Thanks.

Scott Huennekens

So Brooks, as it relates to the ADAPT-DES data and the like, we don’t have any significant increase in penetration built into our model for this year. We treat that as upside. And so we have different training that’s going on of physicians at different conferences. We have – our sales reps were trained on all the ADAPT-DES data that are focused on coronary at our sales meeting we just had in San Diego, as well as the one we had in Europe and in Japan.

So in Japan, they already do it. There is not much beginning there. It’s more of a U.S. and Europe strategy. So I think it will take a little bit of time, but we see that as something that’s going to accelerate IVUS use more in 2015 than 2014. 2014 is more laying the groundwork.

Brooks West – Piper Jaffray

And then just quick thoughts on where are you guys with IVUS share?

Scott Huennekens

Yes. On the share side, in Japan, we’re in the mid-30s. And in the U.S., we are over 70 now. And in Europe, we’re in the high 40s.

Brooks West – Piper Jaffray

Thanks so much.

Scott Huennekens

And that’s for all intravascular imaging, not just IVUS. So that combines IVUS and OCT.

Brooks West – Piper Jaffray

Okay, perfect.

Scott Huennekens

In the one category of intravascular imaging.

Operator

Thank you. Our next question comes from Chris Pasquale from JP Morgan. Your line is open. Please go ahead.

Chris Pasquale – JP Morgan

Thanks. Scott to start off with, can you elaborate a little bit more on what you’ve seen in the earlier part of this year from a procedure volume standpoint? And to the extent you can as you talk to customers, how much of that do you think is due to the tough weather versus cases getting pulled forward into 4Q as a result of the ECA or just increased seasonality in general?

Scott Huennekens

We’ve seen nothing outside of the U.S. that was unusual. And I would say in the U.S., specifically in those geographies affected by weather, there has been a significant hit. So if you think in terms of 60-plus days of selling days and you’ve got five to six days that reflected significantly bad weather, those are the kinds of impacts that are occurring out there.

Now, it’s not going to be the level of 10%, but I think procedure volumes have been affected by weather. And we haven’t heard a lot from our customers relative to ECA or pulling procedures forward to any significant level.

John Dahldorf

Yes. In the U.S. Chris, we see PCIs were down 4.5% in Q4. And that doesn’t tell us that anything was accelerated.

Chris Pasquale – JP Morgan

Okay. And then I just want to dig into the gross margin commentary a little more, because the piece of the 2014 outlook was below where we were thinking. So how much of your manufacturing on the disposable side today is in Costa Rica? What are the milestones over the course of this year that we’ll see as you make that transition and what’s your confidence that late this year, we’re finally going to start to see that inflection point and that upward lift in gross margin?

John Dahldorf

Yes. So today I would say that we’re probably in the mid-70s in terms of total volume that we’re transferring to Costa Rica. Some of the complicating factors as you get towards the end is you get smaller product line, the smaller runs and so. You have just as much work to do on the smaller lines like some of the PV catheter lines than you do on the bigger Eagle Eye Platinum lines.

Also due to the introduction of the Verrata wire, which we’re really starting for capacity reasons, we’ve started that wire both in Costa Rica and Rancho Cordova. That is adding another kind of complicating layer to the whole transfer as well. So I think that by the middle of the year, we pretty much should have Costa Rica ramped up to where they could absorb the rest of the transfers that will be happening by the second half of the year.

So we feel very confident that by the time we’re entering into the fourth quarter, a majority or substantially all of the disposables are in Costa Rica. And that’s what gives us the visibility to little bit of choppiness around 63% to 64% in the first three quarters of the year, but I feel fairly good that we’ll be exiting the year at 65% gross margins, again assuming the FX rates that we discussed earlier.

Chris Pasquale – JP Morgan

And I know you’re not going to want to look out beyond 2014, but in the past you’ve talked about gross margins once Costa Rica was fully up and running north of 70%. I mean is that still an achievable goal overtime?

John Dahldorf

Yes, the original 70% was really kind of thrown out there when the yen was in the high 70s, low 80s. I think if you adjust for the yen today, the same goal is kind of between 68.5% and 69%. So we definitely do believe that it’s still very achievable. The real benefit of going to Costa Rica is the labor rate differential between Rancho Cordova and Costa Rica and that differential is still there and is still very real.

Chris Pasquale – JP Morgan

All right. Thank you, guys.

Operator

Thank you. Our next question comes from David Roman from Goldman Sachs. Your line is open. Please go ahead.

Amy Fawcett [ph] – Goldman Sachs

Hello, this is Amy Fawcett in for David Roman.

John Dahldorf

Hi Amy.

Amy Fawcett [ph] – Goldman Sachs

Hi how are you? So I just had two sort of quick questions. The first one is on iFR. And I know in your prepared remarks, you gave a little bit of color around the FFR market penetration, as well as the total addressable market. And I was just wondering if you could provide a little bit more detail on whether iFR expands this market or how you’re looking at the penetration ramp with that technology versus just the regular FFR?

Scott Huennekens

Yes. Thank you, Amy, this is Scott. So iFR does a number of things we believe. Number one is that it protects an account. And so an account of ours that gets iFR, starts to use it, what we’re seeing is they are using approximately 20% more wires. They also get comfortable using it. There is a cost benefit to not having to buy adenosine that also gives you pricing protection to a degree.

St. Jude has been more of a price leader than Volcano in reducing price. So we think in a dropping [ph] market that doesn’t make sense. We’re bringing more value now by eliminating adenosine, so both from a market share gains, pricing power, does not reduce price. That’s what iFR brings initially. It also then expands the market opportunity because you can use it more easily in multi-vessel disease cases as well as the whole ACS patient population where you can’t give someone adenosine.

So those are things where we’re developing the clinical data to expand the market. iFR just will make FFR faster, simpler and easier to use. But there will be a role for FFR. There will be a role for CFR, which is flow. And for iFR, we’re the only company that has all of them.

Amy Fawcett [ph] – Goldman Sachs

Okay, great. And then if I could ask just one follow-up. I know you also mentioned that you were maybe kind of pushing back or delaying the $100 million in share repurchase. And I was wondering if you could give a little bit more color on how you are thinking about balancing with the commitment to the share repurchase with maintaining strategic investment and growth opportunities both internal to the business and also externally given your cash flow situation?

Scott Huennekens

So let me first say, nothing has changed relative to our messaging on what we have said in the past relative to the $200 million buyback, and breaking it to the two stages, the initial $100 million and the second $100 million which we’ve indicated we would evaluate. So John, do you want to…

John Dahldorf

Yes. And again Amy, nothing has really changed as we said in our remarks because we kind of anticipated this question is that we have a pretty rigorous process that we go through. We are looking at a number of different BD types of initiatives. And we and the board spend quite a bit of time balancing the two, again with the goal in mind of maximizing shareholder returns.

Amy Fawcett [ph] – Goldman Sachs

Okay, great. Thank you so much for taking the questions.

Operator

Thank you. Our next question comes from Chris Lewis from Roth Capital Partners. Your line is open. Please go ahead.

Chris Lewis – Roth Capital Partners

Hi guys, good afternoon.

Scott Huennekens

Hi Chris.

Chris Lewis – Roth Capital Partners

First, just on the sales force restructuring. I appreciate the color there, but hoping you could just talk a little bit more about just the initial feedbacks you are getting from the reps in the field, now that the new structure has put in place. And I guess how has that changed the sales process interaction between the different selling groups within the Volcano sales organization on a rep-by-rep level?

Scott Huennekens

Yes. So let me start with the vice president and the regional managers, which you’ve got 15 of them. And their feeling is very much more that they can deliver on our plans and exceed our plans with this structure. And why do they believe that is because now they’ll have 31 territory managers that are focused primarily on selling systems. They’ll have the 80 people or so that are the coronary people that are focused exclusively on growing FFR in the coronaries, growing IVUS – to Brooks question earlier on ADAPT.

Then you have this additional roughly 35 to 40 – close to 40 peripheral sales reps, who are going to be focused exclusively on peripheral imaging, Crux, Pioneer. So you’ve got sales people who are focused versus – otherwise you have someone who could make plan by hitting our peripheral growth number but not focusing on FFR or not focusing on coronary IVUS. So I think in that regards, they are very positive.

At the rep level, I think our reps, because our product portfolio has expanded and our number of call points has expanded, it was becoming a very difficult job to have to call on the different parts of the hospital as well as outpatient and even physician offices. So I think they’ve welcomed the opportunity to have focus and where they feel like they could be confident and so, because we have best-in-class of products and technologies with number one or number two market share positions in these products with the exception of Crux which we’re just launching. So they feel confident.

Chris Lewis – Roth Capital Partners

Okay, great. And then on the FFR side, can you just go through what’s embedded in your guidance for FFR growth breaking it out between U.S., Japan and Europe?

John Dahldorf

Yes. So overall, I think as we kind of talked about previously, we expect that FFR will kind of grow in the 11% to 13% range, which is consistent with where we see the market. In the U.S., I think we’ll see it in the 8% to 10% range. In Japan, you’ll see kind of the same thing, 8% to 10%. We’ll see a little bit more growth in Europe in the 15% to 18% range. And rest of world, very small but in the mid-teens as well.

Chris Lewis – Roth Capital Partners

Okay. And then just one more. Could you elaborate on the peripheral IVUS sales strategy OUS, and I guess how that layers into the growth outlook this year and then 2015 and beyond? Thanks.

Scott Huennekens

Yes, I’ll let John give the specific numbers if he has in there, but if you look at it from our standpoint, it’s probably 60% opportunity U.S., 30% opportunity Japan, 10% opportunity Europe as we talk about this year and next year. We do have significant revenue from peripheral imaging in Japan. We have less so in Europe. If you talk about Crux, that’s the bigger opportunity in U.S. 75%, 80% and then Europe being next there at about 20% of the totality of our opportunity of those two product categories. John, anything else to…

John Dahldorf

Yes, I would just say, because I know that we’ve talked to lot of people about peripheral disposables and especially around imaging, and then again like, Scott said, our two biggest opportunities are really the U.S. and Japan. And collectively, we expect to see in the high-teens growth throughout 2014.

Chris Lewis – Roth Capital Partners

Great. Thank you.

Operator

Than you. Our next question comes from Imron Zafar from Jefferies. Your line is open. Please go ahead.

Imron Zafar – Jefferies & Co

Hi, good afternoon. Thank you for taking my question. I wonder if you can just comment a little bit more on the market share and competitive dynamics in FFR. It seems that historically that’s been one of your biggest growth drivers is share gains, and that seems to have reversed coursed a little bit the last couple of quarters. First, correct me if in your view that statement is wrong, that you’ve lost some share. And if you have, how do you think you can reverse that? Is it on pricing? You said St. Jude has been wrestling on pricing, is it following suit on that. Is it iFR and other new technologies. Just sort of give us some sense on how you view the competitive landscape? That would be helpful. Thanks.

Scott Huennekens

Yes, so our view of – I’ll just give you the numbers here is that, in the U.S. we have about 53% share, St. Jude 47%. In Europe, 48%, St. Jude 52%. In Japan, 38% for Volcano, 62% for St. Jude. And in overall, probably 47% to 48% for Volcano, 52% to 53% for St. Jude. And I would say in the third and fourth quarter, we lost a little bit of share in the U.S. and a little more in Japan.

As you look forward, as we move forward, the ways we will continue to gain share – well first and foremost, the biggest competitor is non-U.S. [ph] it’s not St. Jude. And we along with St. Jude I think realize that in order to grow this market, it’s not going to be from growing share from each other, it’s going to be by growing the market overall. And that includes driving the penetration from mid-teens where it is today. So the mid-30s, where it belongs upon the clinical data.

So anything outside of that is not going to be beneficial in the short-term or the long-term. That’s the biggest competitor. So I think that’s where more of our effort is going into is the clinical data to support that, the technologies, whether it’s Verrata in its quick disconnect or better driven performance or better handling. It’s iFR, not having to have adenosine. It’s our new hardware system that we’re bringing out. It’s our new co-registration that we’re bring out that will have IVUS first and FFR later.

So we want to continue to make FFR faster, simpler and easier to use for the current indications and expand indications as we go forward. But I think I laid down in my prepared remarks, our multi-modality platform have 13 modalities grow into 17 here over the next two years, St. Jude has five. They’ve announced having some form of co-registration with OCT. That would make six. So we’ll continue to drive on technology, expanded and focused distribution, all of these things will – as well as all of our physician education programs around the world.

Those are the things that are going to continue to grow the market first and foremost, and second most and third most, as well as allow us to compete effectively and grow shares versus St. Jude.

Imron Zafar – Jefferies & Co

Okay, thank you. And then a couple of other really quick ones also on competition. Do you have any thoughts on the non-invasive CT-based FFR technology? I know it’s still early there, but any thoughts on the potential for that to capture some share on the market overtime?

Scott Huennekens

Yes. Again, it really depends on what you’re talking about. And things can get complicated depending on how you want to define markets and what are you talking about. If you’re talking about proof of ischemia for a diagnostic, then I think heart flow is very competitive and very compelling to displace a lot of nuclear cardiology procedures. My previous company, I worked for Digirad was a next generation nuclear cardiology company. So I’d be very worried if I was in nuclear cardiology based upon the data that is being generated by heart flow and as well as other platform technology like this, but heart flow is very exciting in that regard to improve patient outcomes and decrease costs and find more people to bring to the cath lab. So I think that’s number one.

Number two is that, it can be as you get into guidance of PCI in a cath lab environment as well as proof of ischemia by lesion, not by the heart, but by specific lesion, then I think FFR wire has significant advantages, but I think heart flow is going to eliminate some cases that go to cath lab. It’s going to add some cases that go to the cath lab and then you’re going to use FFR and mapping things to determine which lesions you treat.

And then after you’ve treated them with things like iFR, you’ll be able to validate that you actually eliminated the ischemia. So I think they’re a little bit competitive, but they are definitely complimentary, and they are all part of better future paradigm, where ischemia is front and center to determining who we should treat, then secondarily which lesion should we treat and how – and then thirdly, did we actually fix them. So hopefully that answers your question, because it’s multi-factorial.

Imron Zafar – Jefferies & Co

No, that was really helpful. And then John, one very quick question for you. On the U.S. side of this business, what is the approximate contribution of Pioneer profit? I’m just trying to understand where that 14% growth came from?

John Dahldorf

Yes, in Q4 it was approximately $1.7 million.

Imron Zafar – Jefferies & Co

Okay. All right, thank you very much.

Operator

Thank you. Our next question comes from Bruce Nudell from Credit Suisse. Your line is open. Please go ahead.

Bruce Nudell – Credit Suisse

Thank you. Good afternoon. I was just wondering what your expectations for coronary IVUS market will be next year by major geography?

John Dahldorf

Yes, so the coronary IVUS market is – we believe that the markets are going to pretty much follow the PCI forecast that we gave. So we see coronary IVUS in the U.S. flat to – as far as revenue for us, flat to down a couple of points. Japan is going to be down somewhere between 4% to 5%.

Europe, we do see some growth in Europe in the 8% to 10%. And rest of world again very small, but in the 15% to 20% range.

Bruce Nudell – Credit Suisse

Okay, great. And just with regards to new competitors, Boston seems to have revitalized their IVUS catheters and they are entering FFR. How does that refocus on the part of that company, figure into your planning or not at all?

Scott Huennekens

Well, we always take competitors very seriously. Boston has their new IVUS catheter out. We don’t see it as much of a threat to us from a market share standpoint. It’s like someone coming out with a little bit better Excel and you change off a Microsoft Outlook, where you have seven different modalities. You got to understand somebody has bought Volcano because we have three peripheral catheters, now four with Pioneer. We have three coronary catheters with rotational and phased array and the like.

We have five or six modalities on FFR. So making a little bit better coronary rotational product is only a threat to our coronary rotational business, but someone is not going to change and have to change all those other things when Boston doesn’t even have all those other things. So it’s a little more threat in areas that are isolated like Japan, where you have given capital away and people roll machines in and out, but we haven’t seen it be anything meaningful and not a significant change in product capabilities.

I would say if they introduce FFR, which we anticipate sometime, we would put in the early part of 2015 I guess. We haven’t seen anything I guess in the market, let’s say clinical trial-wise and the like, but that’s when we anticipate. I think it’s more of a threat to St. Jude for the exact reasons I just mentioned relative to multi-modality.

We typically have the imaging and the FRR business, whereas a lot of time Boston has the imaging business and St. Jude has the FFR business in a particular account. So Boston Scientific, I would integrate FFR on all my integrated systems and you’d have a FFR built in, and that would be more of a threat to St. Jude than Volcano per se in the initial phase. But it would make them more competitive for labs that are turning over equipment or building new labs, but still four modalities with FFR versus ours – at that point in time when they launch are anywhere from 15 to 17 modalities.

Bruce Nudell – Credit Suisse

I guess kind of just sneak one more in, the FFR and STEMI is still an issue, clearly not being able to take advantage of it. And I think there is a trial called FAMOUS–NSTEMI. Do you have any insight – I think its St. Jude sponsored, but do you have any insight as to when that might appear?

Scott Huennekens

I don’t.

Bruce Nudell – Credit Suisse

Thanks so much.

Scott Huennekens

I think John can look into with our FM team and provide you, Bruce, with any feedback that we find out.

Bruce Nudell – Credit Suisse

Thank you.

Operator

Thank you. And our next question comes from Ben Andrew from William Blair. Your line is open. Please go ahead.

Ben Andrew – William Blair

Good afternoon guys. Just looking over the quarterly guidance, maybe just give us a little bit of insight to what level of rep productivity you are assuming. So you’ve increased the size of the sale force, you’re kind of breaking up in pieces here to get greater focus. Typically we would see a little bit bigger sequential decline in Q3. So what sort of magnitude of productivity gains are you building into guidance for the year?

Scott Huennekens

Yes, so in Q1 really nothing, because you’re adding the headcount, some modest amount in Q2. Q3 and Q4, there is some continued increases then but it’s more that we have Verrata fully rolled out, iFR is rolling out, Crux is rolling out. Sync-Rx is rolling out. Those are the bigger drivers, the new products on top of more focused by the reps and in the additional reps. So we haven’t split into increased productivity, increased headcount and new products, but all three are significant. And the effect is more on the second half thus the numbers, John, gave in his prepared remarks on the quarter revenue guidance. John, anything to do add?

John Dahldorf

No. You’re right. There is kind of synergy of everything that Scott and we cited in our remarks that kind of helps us kind of move through the year, but some of the trends that we’ve seen in the past.

Ben Andrew – William Blair

Okay. And then maybe talk a little bit about the ramp in the Verrata wire, and what percentage of docs are using that, how that’s trending? And obviously, you gave us the part of the answer there with later in the year, but talking about your expectations for the kind of sheer magnitude of that product as a percent of your total over the next 12 to 24 months? Thanks.

John Dahldorf

Yes, well I would say that within the next 12 months, Verrata will be almost 100% of our FM wire. So again think of Verrata as kind of the next generation wire. And so I mean we will have it all the three of our major geographies by the second half of the year, and I think we’ll see conversions happen as we have the capacity to manufacture the product.

Ben Andrew – William Blair

Any margin impact to that, John?

John Dahldorf

Not any margin impact that’s substantive, no.

Ben Andrew – William Blair

Okay, thank you.

Operator

Thank you. And our next question comes from Jason Mills from Canaccord. Your line is open. Please go ahead.

Jason Mills – Canaccord Genuity

Thank you for taking the question. Good afternoon, Scott and John. First question, just following up several on the estimate assumptions for PCI volumes. Scott, fourth quarter trends relative to the guidance you gave in ‘14 suggests that you’re expecting us to be a little less bad. Maybe you could give us a little bit more color around the puts and takes that give you confidence that we’re going to see I guess a bit of modest improvement in PCI volumes both in Japan and the U.S. and in 2014, again especially given the first quarter seems to be effected by high weather?

Scott Huennekens

Yes, again our numbers didn’t take into account weather obviously, Jason, as it relates to the U.S. But in building those numbers, we really tried to go out and get as much data as possible and that’s from third-party market research, that’s from talking with Abbott, Boston Scientific, Medtronic. It’s talking with a number of large hospital groups in the U.S. and also with talking with leading physicians and physician groups as well.

So it’s our best guess. I think a general feeling or a feedback was that there was anticipated to be some moderation in the decline that was starting to happen in the second half of the year and so the fourth quarter was a little worse than probably we or others would have expected, but I think we still feel comfortable with the numbers that we’ve projected for the year at this point.

Jason Mills – Canaccord Genuity

Okay. That’s helpful. And then just following on a question I think asked by Chris a little bit earlier, as you move into the back half of the year, you were commenting about expectations for better productivity from the sales force especially on the peripheral side. There are several new products. You’ve already given guidance that would contemplate it back-end loaded year. And then as we talk to investors, this sort of corresponds with questions we get more about 2015 and 2014. So I understand most companies including Volcano gives sort of guidance one year out. It seems like the focus as we hear from investors is on 2015. So with that in mind in given some of the trends that you’ve talked about lot of things being back-end loaded, could you give us a sense qualitatively for how you’re looking at 2015, both from a gross standpoint and call point [ph] but it seems almost more importantly as [indiscernible] questions about the financial leverage to the bottom line that we might be able to expect as you get to benefit of some of these programs hitting in the second half of the year?

Scott Huennekens

So, Jason, I don’t want to step on John’s toes here, the CFO, but I would point you back to our comments from the JP Morgan presentation where we’ve said, we’ve got a three-pronged strategy. Our base business to grow 7% to 9%, our emerging businesses which we’ve laid out on the call today, should add a couple of 100 basis points. That gives you to 9% to 11%. And then if you add any other small tuck-ins, they are going to be additive to that.

So I would expect the same thing in 2015. There are some things that could benefit us if there was further moderation of PCI volume declines, FX in Japan wasn’t as bad. You’ll have the annualization of price decline in Japan. So those things could benefit you slightly. Gross margins, as we said, we expect to continue to improve. I’ll let John put the basis point on to that. And we expect to continue to drive operating leverage improvement were our expenses are going to grow at a lower rate than our revenue growth.

And that means we’re going to leverage the sales expansion that we’ve done. We’re going to leverage our R&D dollars. And R&D I think would come down more so than the leverage we’d get from sales and marketing. And we would have G&A leverage as well. But John do you want to…

John Dahldorf

No. I guess I don’t want to get into too much detail in 2015 at this point in 2014, but I think the story, the theme is that we do expect to see accelerating revenue as we go through the year, and I think that will carry into 2015. We will see the gross margin pick up as we get into 2015 because quite frankly, Rancho Cordova won’t be there and that’s significant amount of expense that we’ll be carrying in 2014.

And as Scott talked about, I mean on a G&A perspective, we’re making some big kind of one-time – well not one time, but we’re making some big investments in the sales organization and marketing to a lesser degree and then as we kind of talked about litigation, we expect it will be half in 2015 of what we’re going to incur in 2014.

And then we’ve got some other programs that we’re investing in 2014 from an employee perspective. And so all those we believe are significantly leverageable. And we’ll obviously have more details for you as we kind of proceed through the year.

Jason Mills – Canaccord Genuity

That’s very helpful and I really appreciate the color. Just as a follow-up to that last comment, John, on litigation. Could you just help us understand the magnitude of what that litigation expense is in real dollars and sort of is that...

John Dahldorf

Yes, so this year we incurred about $7 million in 2014, because of the two or three trials that we’re looking at right now. We’re looking at somewhere between $11 million and $12 million. And in 2015 with those trials behind us, we think that the number will go down by at least 50%.

Jason Mills – Canaccord Genuity

Okay. Thanks guys, I appreciate the color.

Operator

Thank you. And our next question comes from Jayson Bedford from Raymond James. Your line is open. Please go ahead.

Michael Rich – Raymond James

Hi, this is Michael Rich calling in Jayson. Thanks for taking the questions. Can you hear me okay?

Scott Huennekens

Yes, Mike. Go ahead.

Michael Rich – Raymond James

Thank you very much. You gave some really good detail on iFR’s rollout in Europe. Can you give us an idea what the penetration is within those 200 centers? And then once it rolls into the U.S., do you expect that to penetrate all our U.S. centers and how long you think that might take?

Scott Huennekens

Yes. For competitive reasons right now we really don’t want to elaborate on our launch strategy in any particular geography. I think it serves to our benefit at this point in time, but we expect it to be a significant technology that’s adopted on a widespread basis in Europe, U.S. and Japan.

Michael Rich – Raymond James

Okay. You mentioned 10 peripheral reps going to 40. How many do you have now?

Scott Huennekens

Yes, so part of the program is taking our existing number of headcount which was roughly 146 and we’re growing it to 167. So we’re adding 21 people. So I think right now we’re down three or four people who moved between categories. So I think we’re roughly over half of that number in peripherals. We left the sales mainly based upon the reallocation, so there is probably somewhere between 10 and 15 peripheral reps to fill and probably around 10 coronary reps to fill.

Michael Rich – Raymond James

Okay, great. I think, Scott, gave us a number for the current percentage of peripheral in IVUS, and then what had grew in the fourth quarter but my phone kind of broke up. Can you repeat that?

John Dahldorf

In the fourth quarter, the peripheral IVUS business in the U.S. grew over 40%. And what was the other number you want?

Michael Rich – Raymond James

Percent of IVUS sales.

John Dahldorf

So in the U.S. it’s approximately 18% to 20%.

Michael Rich – Raymond James

Okay, great. And lastly from me, I think you gave a range of high-teens for peripheral growth in 2014. Is that market Volcano or is it the same because you have most of the share with?

John Dahldorf

It’s basically the same.

Michael Rich – Raymond James

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Steven Lichtman from Oppenheimer & Company. Your line is open. Please go ahead.

Steven Lichtman – Oppenheimer

Thank you. Hi guys. I was wondering if you can just go through a little bit more on Europe and the drivers that you’re seeing there. Obviously it was a good performer in 2013. How much of that was Verrata and iFR contributions as we think about them going into other geographies?

Scott Huennekens

Yes, it was pretty minimal Verrata and iFR because that was in the fourth quarter. It’s more of what’s happening now in what we’re seeing which continues to be very strong with both of those as we started 2014. So 2013 was just strong performance across the board between imaging as well as FFR, and probably pockets of more strength in Eastern Europe, Middle East and little bit slower in Southern Europe. John…

John Dahldorf

And we saw a solid console sales really starting in the middle of the year and proceeding through the end which – and again a lot of those were into the Eastern Europe, Middle East territories which are going to pull through disposal sales as we roll through 2014. So I would say that the majority was just the focus job that the sales force did, both direct as well as distributed team.

Steven Lichtman – Oppenheimer

Great. And then John you talked about 35% tax rate this year. Is that a good number to think about beyond ‘14 versus that high 30s number? And is there is a downward bias to that at all potential as you think about mix or anything else overtime?

John Dahldorf

I think for ‘14, it’s a pretty solid number as we continue to operate in a loss. Obviously it changes based on the level of valuation allowance that you have and things like that, when you kind of turn to profit. And then also it will depend on the size of Costa Rica, but so I think – I feel fairly comfortable with 35% benefit this year. And then again as we kind of look at our march to profitability and how much income we are generating in Costa Rica which is a free trade zone for us and a favorable tax status for us, I can have an update then, but right now we feel pretty good with the 35%.

Steven Lichtman – Oppenheimer

Okay, fair enough. Thanks guys.

Operator

Thank you. I would now like to hand the conference back over to Mr. Huennekens for closing remarks.

Scott Huennekens

Thank you everybody for the questions and the time on the call today and look forward to seeing you guys at an upcoming conference.

John Dahldorf

Thank you.

Operator

Thank you. And ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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