Volcano Corporation, Q1 2008 Earnings Call Transcript

May. 7.08 | About: Volcano Corporation (VOLC)

Volcano Corporation (NASDAQ:VOLC)

Q1 2008 Earnings Call

May 07, 2008 5:00 pm ET

Executives

John Dahldorf - Chief Financial Officer

Scott Huennekens - President and Chief Executive Officer

Analysts

Chris Rogers - JP Morgan

Jason Mills - Canacord Adams

Rob Cvengros - Next Generation

Jose Haresco - Merriman

(James Johnson) - Bear Stearns

Operator

Good afternoon everyone thanks for holding and welcome to Volcano Corporation's First Quarter 2008 Conference Call. During the presentation all participants will be in a listen-only mode. Following the formal comments, we will conduct a question-and-answer session. (Operator Instruction). As a reminder, the conference call is being recorded Wednesday, May 7th 2008 and a replay of this call will be available through May 16th by dialing area code 719-457-0820 and using the conformation code 9694232. Or you can access the replay by the company's website at www.volcanocorp.com.

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

John Dahldorf – Chief Financial Officer

Thank you and good afternoon everyone. With me today is Scott Huennekens, Volcano's President and Chief Executive Officer. As we near second anniversary of our initial public offering. We are continuing to head on our key growth objectives as we have since our IPO. As we will discuss today, we record a 24% increase in revenues as we continue to both grow our installed base and generate increase disposables. In addition, we saw the release of favorable data around the use of IVUS and accomplished important milestone in our product development programs.

Before turning the call over to Scott, let me remind you that our prepared remarks contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These include statements related to the guidance about financial results, growth strategies, product development and clinical trial programs, the timing and receipt of regulatory approvals, market acceptance of our product offerings, the functionality and capabilities of our products, any merger or acquisition activities as well as forward-looking statements that we may make in response to your questions.

Factors that could cause Volcano's actual results to differ materially from those forward-looking statements are described in our filings with the SEC including our 10-K for the year ended December 31, 2007. Volcano cautions you not to place undue reliance on forward-looking statements that speak only as of the date that they are made. Volcano undertakes no obligation to update publicly any forward-looking statements to reflect new information with events or circumstances as of the date that they are made. Scott?

Scott Huennekens – President and Chief Executive Officer

Thank you, John and hello everyone. Volcano continued the momentum of 2007 with the first quarter in 2008. In the quarter, we recorded revenues of 36.6 million, a 24% increase over first quarter of last year, with h revenues from IVUS disposables increasing increased 30% year-over-year. This represents the 8th consecutive quarter in which we have exceeded Wall Street consensus. We had excellent revenue growth with our IVUS offerings and in all of our major geographies.

During the quarter we placed 121 consoles, including 58 integrated systems, versus a 111 consoles in the same period a year ago. As John will discuss our console shipments were lower versus Q3 and Q4 at 2007 as expected. This was resulted in US, European and OEM customers ordered in our new s5 family consensus with rotational Catheter and FFR capability in Q1, knowing that they will begin to receive shipments of those attempts in Q2 with the full market released of the product.

Additionally, our Japanese distributors are holding off a new console and shipments until the full market release of the s5 family of console with our rotational catheter in Q3 as expected.

We continue to achieve our strategic objective. As this is our first call for fiscal 2008 I thought I would provide a brief overview of the company before updating you on these another recent development. I will then turn the call back to John for a review of our financial results.

To provide some context for our discussion today, I want to briefly outline what we consider to be Volcano's key investment considerations and an update on those.

First, we have an established and proving global business with our IVUS and FM offerings. These platforms of technologies enable and enhance endovascular procedures and we are the leader in endovascular imaging technology. We ended Q1 with more than 3300 installed systems and a revenue base that is essentially split equally between the US and our international markets. We continue to gain market share for our effective sales and marketing program and distribution agreements with the leading cath lab equipment manufactures and stent companies. This includes our newest collaboration with Philips under which a resale of Volcano branded s5i IVUS systems and accessories with the Allura Xper FD X-ray systems in North America.

Second, since going public in June of 2006 we had a track record of delivering on or exceeding expectations including the delivery of strong revenue growth and as John will discuss we are updating guidance for annual growth of 26 to 29% in 2008 and reaffirming our expectation of achieving sustainable profitability in the fourth quarter. We have a well defined business model that leverages our growing install base by increasing disposable revenues and we continue to execute successfully on this razor blade strategy. As I will discuss, there are a number of drivers that are creating a strong tailwind for IVUS and our programs to increase market share.

Third we have a significant number of market opportunities ahead of us with product development and clinical trial programs underway and I will update you on those initiatives shortly.

Our growth and profitability strategy is supported by three platforms, increasing our IVUS and FM business by more than 20%. #2) Leveraging our operating expenses to profitability, expanding the reach of our technology into new markets to drive revenue growth about 20% and achieve decreased profitability, and lastly, developing new opportunities through acquisitions.

With respect to todays business we estimate the combined IVUS and FM markets were approximately 420 million in 2007. This represents roughly 30% growth over the estimated 325 million in 2005. Keep in mind this growth came despite a decline in stenting activity and PCI procedures in the US over the last year or so. The good news is that it appears that the pendulum is swinging back in our favor. The market consensus appears to be the PCI in Drug Eluding Stent or DES markets have stabilized. Boston Scientific reported on their Q1 call that both US DES penetration and PCI volumes increased sequentially in the first quarter with US PCI volumes up 5% from their low of the third quarter of last year. Other stent manufactures have reported similar trends. If these patterns continue the current quarter would mark the first quarter of year-over-growth in over a year in this market.

Additionally, Boston reported IVUS console growth of more than 10% in Q1. Volcano's Q1 revenue growth of 24% indicates the overall IVUS market is growing faster than 10% and the Volcano continues to increase market share globally. The factors driving more IVUS adoption and our ability to grab market share begin with the growing volume of data that portrays the value of IVUS as both a diagnostic and therapeutic tool particularly given the continued concerns around the use of stents be DES or bare metal. The clinical findings have demonstrated that the use of angiography alone is efficient and is having advanced imaging modality such as IVUS can address a number of the clinical issues leading to events such as restenosis, subacute thrombosis and late stent thrombosis.

As a result a growing number of interventional cardiologist are using IVUS for enhanced diagnosis and therapy guidance to prevent stent placement related complications. The stable flow clinical data with an evidence that the American College of Cardiology where we announced the formal launch of the new s5i integrated system with phased array and Rotational catheters and integrated FFR Fractional Flow Reserve pressure guide virus. In addition Volcano has displayed at the best of our distribution partners GE, Philips, Siemens and Toshiba. There are also a number of live cases utilizing IVUS and clinical presentations throughout the meeting. Dr. Antonio Colombo discussed his routine use of IVUS to confirm stent expansion and apposition and Dr. Jeff Dysart outlined data involving more than 6000 patients from the Washington Hospital Center that demonstrate the improved clinical outcomes and lower rates of stent thrombosis in patients where IVUS guidance was used.

In addition DR. S. J. Park of Korea presented data showing the value using IVUS and VH with decreased mortality rates of IVUS guided left procedures. There is also a great deal of interest surrounding the potential of our new required OCT technology as we conducted product feed back sessions with key opinion leaders and Dr. Mark Feldman made a presentation on OCT technology in the main arena. A second factor driving IVUS adoption is our ability to make IVUS simple and faster and easier to perform through innovative and differentiated technology. We used to take 12 steps now it takes 2 and the procedures can be completed in 2 to 3 minutes versus 12 to 15 minutes all with improved imaging capabilities.

We broke new ground in this regard with the US and European launch of our s5i with our revolution rotational catheter and FFR that I mentioned earlier. With these features we now have unmatched offerings in the intravascular imaging field and are the only company to offer both phased array and rotational catheters along with the integrated FFR. And we have OCT waiting in the wings as a new feature to add to this platform or hub.

In Japan we are on track to launch the revolution catheter and FFR on the s5 family of consoles in the third quarter as we have received all the necessary regulatory approvals. Drivers are increased market presence. In addition to increasing our US sales force by more than 25% last year we have bolstered our sales and support infrastructure in both Japan and Europe. In the US we now have a sales force numbering 102, while in Japan we continue to build our infrastructure with seven sales representatives. In Europe we now have 16. In addition we have joint marketing on our inventory distribution agreements with all the major cath lab equipment manufactures as I referenced earlier with all of them showing our systems in their ACC boths.

These are partnership our competitor does not have and they give us more feed on the street and an enhanced presence in the cath labs around the world. This leaves us to being aware of IVUS system deals increases, our probability of winning system placements, limits Boston's bundling capability and increases our success in achieving two of our primary objectives. #1) Increasing the rate of integrated lab adoption, and #2) Wining 70% of the cath lab land grab.

We are optimistic about the future demand for our core offerings for a couple reasons. First there are more than 6000 cath labs in the US, Japan and Europe and the penetration of integrated IVUS systems is under 500 or less than 10% of these facilities. Both Boston and Volcano believe that IVUS can achieve a 90% penetration of this market over the next five years.

Additionally, while we are going to increase the number of IVUS consoles in the market the majority of them are the prior generation roll around systems which means that we have a significant opportunity to sell in upgrading integrated systems to our existing customers as well as Boston’s existing customers.

In addition we are excited about the potential of our FM business as we are launching new wires and other enhancements to this offering in Q2 this year at the PCR.

Before addressing our future opportunities I want to mention that the recent CMS panel recommendation for separate outpatient IVUS reimbursement which was unbundled payments for IVUS from total reimbursement for procedures such as diagnostic angiography or stent placement.

While this decision will not be finalized until August, we are optimistic that it will be adopted and help mitigate the economic barriers to using IVUS in an out patient setting. This change will be particularly important to fostering future IVUS and our OCT adoption for outpatient diagnostic and therapeutic procedures.

In addition, CMS has issued new proposals regarding reimbursement for MF, DRGs coming inpatient stent procedures. They are speaking small reductions and reimbursements about drug eluding and bare metal stenting procedures. However we don't see this as a major issue as hospitals have been anticipating these proposals and DES prices are expected to decline. Consequently if adopted is proposed we wouldn't expect these newly reimbursement levels to materially impact the overall volume of procedures or demand for IVUS technology.

We have also been asked about our views regarding hospital expenditures or capital equipment. We track our pipeline of capital equipment opportunities on a 12 month forward-looking basis as well as our expected orders and invoice shipment projections for the next two quarters.

Our pipeline is strong and close rate in Q4 and Q1 are consistent with historical parameters. We have not seen evidence of a capital crunch that is significantly affecting hospital IVUS capital equipment expands.

We see significant opportunities beyond our current base business and we introduced offerings to leverage our technology platforms in installed base. Think of our s5i integrated system as a hub or pod that we would leverage by adding new modalities and capabilities each with disposable revenue streams. The s5i is no longer an IVUS system. It is a multimodality system. The first approach under the strategy will be image guided therapy products that combine IVUS with Drug-Eluting Stent. The initial authoring will be a balloon and IVUS on the same catheter with both coronary and peripheral application and we are in track to beginning clinical program for this device this year and begin commercial sales in the second half of 2009.

Other potential opportunities include combining IVUS a bare metal stents and a balloon on a single catheter and new applications to address areas such as vulnerable plaque, Inter Cardiac Echo are forward looking IVUS. Both of these efforts is to create differentiation for Volcano’s s5i multimodality system, drive utilization, increased catheter sales and physician of Volcano to address very sizable therapy market with a variety of platform technologies all working on one Volcano Hub or Pod.

Another major opportunity is available through the OCT technology we acquired with our purchase of CardioSpectra at the end of last year. With our two imaging technologies we are the leader in intravascular imaging and commercializing this technology will provide us further competitive advantages. We are working in offerings that incorporate OCT functionality into the s5 platform or hub, as well as standalone OCT system. Our timetable is to begin human clinical studies in the current quarter. And in fact, we did our first two human two cases today in Rotterdam and Netherlands with Professor Patrick Serruys and Dr. Evelyn Regar which will putout in the press release tomorrow.

Our plan calls to achieving regulatory approval in the US and Europe through our first OCT offering in the second half of 2009 in Japan in the late 2010 or early 2011 period. While the initial focus here will be in the area of stent placement we believe OCT has significant potential through a number of other indication including news to determine stents of and it is safe to take patients off of products.

Briefly touching on a couple of other product development initiative the date of synovitis and the diagnosis of vulnerable plaque continue to be favorable and the addition of OCT technology advances our leadership position and the use of imaging for invasive diagnosis of vulnerable plaque.

We are looking forward to release a two year followup data from our prospect trial of TCT in October and expect during the current quarter publication of data from the IBIS-2study a thrive done in conjunction with GlaxoSmithKline is in our IVUS and VH tissue characterization technology. We are hopeful that the results we share the value of VH in monitoring plaque progress in total, like tissue type and plague type entering future incurring opportunities to using Volcano’s technology and other major drug studies. In that regard we announced on Monday Volcano’s former inclusion in AstraZeneca Pharmaceutical Study entitled SATURN. This trial is designed to study the impact of rosuvastatin 40 mg versus atorvastatin 80 mg on the disease as measured by IVUS. And are included based on a followup data on 1,300 patients or a 160 centers in 13 countries. This study is being run through the Cleveland Clinic Core Lab with Dr. Steve Nessen serving as Chair and Dr. Steven Nichols as Principle Investigator. Our catheters used in the study will be purchased by AstraZeneca. There are more than 50 cardiovascular scheduled between g clinical trials during the next two years.

Given the FDA’s increased scrutiny, we expect IVUS has an endpoint to play an important role on the majority of these studies. We believe the potential market for using IVUS and OCT to reevaluate plaques for local or systemic therapy is about 6 million diagnostic angiography and PCI procedures annually. The final aspect of our growth strategy is potential strategic acquisition. I think we have clearly demonstrated that we have very compelling business, but our current base businesses we did not need to make an acquisition to realize our growth objectives. However, we believe that we can leverage our model through the addition of tuck in technologies to build out the Volcano multimodality hub or pod as we’ve done with OCT, and b), coronary and endovascular therapies that part with our existing base.

As indicated in our press release, over the past several months we persuade an acquisition with an interventional therapy company that we believe could have been a very complimentary opportunity given the other entities complex legal structure, global revenue base and lack of audited US GAAP financials, the due diligence and related cost are unusually high. However, we were not able to reach a final definitive agreement. As we have made clear we will judicious and discipline in our approach to this process to ensure that we can meet our growth rate, gross margin, profitability and valuation objectives. We are focused on achieving managed growth and realizing value for our shareholders. In closing we are in another excellent as we grow our base business through technology innovation and effective sales and marketing programs and HIPPA development objectives for our new market opportunities. Our confidence in our business in terms of revenues, gross margin and sustainable comparability are exhibiting in our updated guidance. We know we have only scratched the surface of the market opportunities and profitability expansion ahead us and are confident that we can continue to both achieve and exceed the ambitious goals we have set for Volcano. Thank you again for joining us and I will now turn the call back to John.

John Dahldorf – Chief Financial Officer

Thank you Scott. Revenues for the first quarter of 2008 was 36.6 million a 24% increase of revenues of 29.6 million in the same period a year ago. Strong sales or high margin disposable continued as those revenues grew 30% from a year ago. IVUS system sale increased 9% over the same period a year ago. As Scott mentioned, our system sales during the quarter were impacted by the timing of shipments related to our new technology offerings who are now in a full market release.

With respect to the revenue breakout for the quarter, consolidated site sales of IVUS system and related equipment was 6.4 million versus 5.8 million a year ago. In the US, IVUS system revenues were 3.8 million versus 3.7 million a year ago, in Japan they were 916,000 versus 692,000 a year ago, and in Europe they were 1.2 million versus 801,000 a year ago.

As we’ve discussed in the past growing our installed base is a key driver of our growth. During the quarter we placed a 121 IVUS counsels versus a 111 in the first quarter a year ago. As a result we now have more than 3,300 IVUS and FM counsels installed worldwide.

On a consolidated basis IVUS disposable revenues were 25.2 million versus 19.3 million a year ago or 30%, activity was strong across all of our key geographies. In the US IVUS disposable revenues were 11.6 million versus 9.4 million, a 23% increase. In Japan they increase by 43% to 8.8 million versus 6.1 million a year ago, and in Europe they were 4 million versus 3.2 million a year ago, a 27% increase. FM revenues in the quarter were 3.7 million comparable to those in the first quarter a year ago. In the United States FM revenues were 1.9 million versus 1.6 million a year ago, in Japan they were 223,000 versus 707,000 and in Europe they were 1.5 million versus 1.2 million a year ago.

Other revenues on a consolidated basis were $1.3 million versus 756,000 in the first quarter a year ago. Gross margin in the first quarter was 63% versus 53% a year ago and 60% in the most recent quarter. Operating expenses in the quarter of 28.6 million including 2.9 million related to the due diligence cost that we mentioned earlier. Excluding those cost operating expenses would have been 25.7 million versus 18.1 million a year ago, and 24.2 million in the last quarter excluding charges related to the CardioSpectra acquisition.

Our operating expenses for the first quarter of this year reflect increase spending in sales and marketing where our global headcount is growing from a 120 in the first quarter last year to a 174 at the end of first quarter this year. Increase R&D spending related service and acquired OCT businesses, increased G&A infrastructure expenses and higher stock based compensation expense. I should also note that our results in the first quarter of 2008 include interest income of 1.8 million versus 1.2 million a year ago. Also in the first quarter this year we are in a exchange rate gain of 1.7 million and our euro dominated inter company receivable last year the exchange rate gain was a 122,000.

On the GAAP basis, we reported loss of 2.3 million or $0.05 per share. In the first quarter of last year we reported GAAP net income of 1.7 million or $0.04 per diluted share. Excluding acquisition related cost, stock based compensation expense and in process Research and Development expenses totaled 5.1 million and reported non-GAAP net income of 2.8 million or $0.06 per diluted share.

In the first quarter of 2007 excluding stock based compensation expense of 1.2 million, we reported non-GAAP net income of 2.9 million or $0.07 per diluted share. Weighted average diluted share in the quarter of 47 million versus 41.7 million a year ago, reflecting the impact of our equities offering still its completed in the fourth quarter of 2007.

Turning to the balance sheet, we ended the first quarter with a 188.1 million in cash, cash equivalents and short term available for sale investments versus a is 189.1 million at the end of 2007. Since there has been some discussion in the market around auction rate securities, I would like to mention that we have no exposure to them in our portfolio. Our approach is the preservation of capital and investment philosophies that balances yield and liquidity.

Our 2008 guidance or earnings per share however thus reflect and expect the reduction in interest income due to declining interest rate and investment returns. We are updating the guidance for 2008 that we provided in our last call, we are now providing guidance for total year revenues of approximately 164 to 168 million. This compares with prior guidance or revenues of approximately 158 to 162 million and it represents an increase of approximately 26% to 29% over last year.

We continue to expect that gross margin will be in the range of 60 to 61%, although, we expect to be exiting 2008 with margins in the range of 63 to 64%. We expect operating expenses including stock based compensation, due diligence cost recorded in the first quarter and approximately 3.1 million of intangible amortization expenses will be 65 to 66% of revenues for the year, and we expect to be leveraging of operating expenses to 58 to 68% of revenues in the fourth quarter.

Interest income for the year should be in the range of 5.1 to 5.3 million and we do not expect any material gain or losses and our inter company receivables for the remainder of the year. On a GAAP basis, we expect to report to net loss of approximately $0.6 to $0.10 per share, although we expect to be profitable on GAAP basis in the fourth quarter. This compares with the prior guidance for the net loss of 2 to$0.4 per share. The decrease in guidance for earnings per share despite our guidance for increased revenue reflects the due diligence expense, reduced interest income due to declining interest rates increase sales and marketing expenses related to the revenue increase and increase Research and Development spending on programs to accelerate the commercialization of new products. Excluding stock based compensation expense in approximately $10 million duel diligence and in process Research and Development cost we expect to report non-GAAP net income of $0.16 to $0.20 per diluted share. This compares to prior guidance for non-GAAP net income of $0.16 to $0.18 per diluted share. We expect to end 2008 with approximately 47.7 million basic shares and 50.4 million shares on a diluted basis.

Before opening the call for the questions. I would like to mention we will be appearing at the JMP conference later this month. Thank you again for joining us today and we will now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instruction). And we will hear first from Michael Weinstein with J.P. Morgan.

Chris Rogers

Hi guys this is Chris Rogers calling here for Mike. Couple of questions Mike, couple of questions. First, Scott, can you expand on the type of deal you are looking, over size or potential transaction or the therapeutic area?

Scott Huennekens

Exactly what we have talked about in the past products that would be in a coronary and peripheral therapy space with balloons and stents and stands and the like?

John Dahldorf

Given the confidentiality agreements around I can’t really give you any more details than that.

Chris Rogers

Okay. And then on the guidance, can you talk a little bit on what you saw in the past couple of months the drove the increase in the top line expectations?

Scott Huennekens

Yeah, across the board we are on schedule with our programs sort of REVO program with the s5i where we’ve seen our backlog for consoles and opportunities for consoles around the world, gaining all the regulatory approvals and timings for lunching the catheters and the orders that we have, all those things are just going very, very well.

Chris Rogers

Okay. And then just one last question…

Scott Huennekens

Looking for the average, John?

John Dahldorf

Yeah, I think that the disposable growth both on the IVUS side and the trends that we see on the FM side leads us to be very confident with the – that we will continue to see that throughout the year.

Chris Rogers

Okay great. One last quick one, Japanese disposable sales are going to be strong this quarter, are there any impact or onetime kind of bulk stocking orders from distributors that we saw last quarter or you can say what you saw this quarter organic demand?

Scott Huennekens

We believe that the stocking orders really kind of happened in the fourth quarter and what we are seeing now the kind of true run rates of the business.

Chris Rogers

Okay great thank you

John Dahldorf

And you will see a increase Chris and run rate next quarter when we fully market released s5i with revolution and on it Japan. So that will be available on a broader platform, it was available on IVG, now its getting available on the s5 family in Q3. So that’s a bigger base that the product will be available on. And that’s another part of our – the expectations for revenue growth.

Operator

Moving on now to on (Inaudible) at Piper Jaffray.

Unidentified Analyst

Hi, I would continue on the Japanese frontier Scott, you said last quarter that you are gaining share in Japan and this is in my view sort of the Europe, Japan and put it maybe 40 or 50 sites that you gained over Boston scientific, can you give us an update in Q1?

Scott Huennekens

I don’t have an update I had an update from (Gilman) our distributor in (Fukuda) for the full year, I don’t have a quarterly update from them. I know that their sales are growing and they’re starting new accounts, I couldn't give you the exact numbers at this time. I can tell you that the expectations are very high and we have a strong lift of new accounts starting in the Q3 based upon adding more additional.

Unidentified Analyst

Okay thanks

Scott Huennekens

On that’s s5 family

Unidentified Analyst

And then, you have mentioned John last quarter that we should look for some pressure down on gross margin as you put rotational kits out there at lower negative margins, you have quite a nice gross margin this quarter, was there any detraction from the kits?

John Dahdorf

No, you know Sam, the much the same as we experienced in Q1 of last year, we have a very favorable variances, net variances that rolled out in the first quarter based on activity that went thorough our manufacturing plans the in the fourth quarter. So that helps the margin in the first quarter. We are still foreseeing the upgrade impact on gross margin in the third quarter from Japan. And so, we feel confident at this point that that guidance is right on from the margin prospective

Unidentified Analyst

Okay, and then last question and I will get in line. Scott, you mentioned PCR coming up and you also mentioned IVUS II being published, is there any presentation by Patrick or anyone on IVUS II at QCR, I think you’re also possibly doing some OCT live cases there. is there anything else we should watch for?

Scott Huennekens

AT this point of time IVUS II data being presented as all type to publication of data and its been submitted to circulation. If it comes out in next weeks circulation then I am sure Patrick will fit it on to the agenda somewhere because its very important data. As far as what to expect we will have OCT live cases, there should be a number of IVUS and FFR live cases and we have the launch of our new FFR wires. And then the launch of s5i with revolution and FFR launch in Europe which is more important because FFR market penetration was higher in Europe than in the US and Japan. It's more of an FFR and IVUS market versus just an IVUS market.

Unidentified Analyst

Okay thank you.

Operator

Next up from Canacord Adam this is Jason Mills.

Jason Mills

Hi Scott, John. Congratulations on a good quarter. I apologize for the back ground noise I am in airport so just cut me off if its smother some. Just wanted to – on Chris question which respect to guidance, you guys beat consensus by 100 million but you are raising guidance by I guess its about 4 to 6 million. And I am just wondering Scott, what change – you did have an expectation, correct me if I am wrong, that these products are rolling out in the timeframe that you laid out again on this call. So my guess is your previous guidance contemplated it as well. Should we take them up that you are seeing perhaps stronger business trends in IVUS generally or specifically to your business and in all parts of your disposable placements FFR et cetera.

Scott Huennekens

Yes I mean the growth and the increases is by $6 million is reflective of all product lines and all geographies.

Jason Mills

Right. In just three months since you gave that guidance. So you’re seeing just three short months than improvements over what you thought just that time ago correct? Just want to make sure I am understanding it right?

Scott Huennekens

Yeah improvements and you have three months more data relative to your three months to the three month product releases and everything else. So there is less risk associated with timing of releases regulatory approvals et cetera.

Jason Mills

Okay. And I appreciate this cell phones cut, probably (Inaudible) one more and I will get back in the line. With respect to the US market can you give us a sense or two what penetrations stands out in your view after you seeing the data now and where you think we could get to by the end of the year with the launch of the new product.

Scott Huennekens

Yeah we are believing that you know we exited last year 13 to 14%, and we can exit the year at 15% plus and the trends are inline with that relative disposables growth and placement of consoles that we drive at.

Jason Mills

Great thanks guys.

Operator

Moving on now to Rick Wise of Bear Stearns.

James Johnson

Hey guys, it's (James Johnson) here filling in for Rick. Actually just to continue on Jason's question looking at IVUS penetration. I am wondering if you maybe could touch on in Europe and Japan as well?

Scott Huennekens

Yeah, Japan data comes out quarterly, but delayed a couple of months. I don’t have Q1. If I recall correctly, it exited at over 65% last year, and Europe is probably in the 3.5 to 4% range.

James Johnson

Okay, great. And then maybe just a housekeeping question for John. Of the 121 units you placed, can you break it out what it was in by region and then how many of the units were leased versus purchased?

John Dahldorf

Yeah, we have sold approximately 80 of the 121 in the quarter and we placed 85 in the US, 8 in Japan and 28 in the rest of the world.

James Johnson

Great. Thanks guys.

Operator

And a question now from Rob Cvengros of Next Generation.

Rob Cvengros

Hi guys, nice quarter.

Scott Huennekens

Thank you.

Rob Cvengros

Just on the pressure down on gross margins for the rollout for rotational catheter, can you give us some color on how the rotational catheter is rolling out the success of it, how placements and also regards the some of the issues with deferred revenue and how that’s working?

John Dahldorf

Yeah, first of all the downward pressure is from the upgrades of hardware in Japan that are not the catheter per se. I will let John?

Scott Huennekens

You are kind of new to the story and don’t forget the benefit of -- into the past calls. But we are planning on the launch of the rotation of the s5 family in the third quarter and we plan on upgrading over a 150 consoles in Japan, those upgrades gets in that quarter and it – as kind of a thinking by an investment we are selling those upgrade kits to Japan at a smaller loss. So that was putting the depression the margin.

Rob Cvengros

Okay, very good thank you. Also with respect to credit and labs hospitals, it doesn’t appear that there is any issue at all with spends by the hospital to upgrade their IVUS system?

Scott Huennekens

I have not heard this is an issue and any deal of ours not one.

Rob Cvengros

Very good. And finally just catheters and John, I know that in the previous quarter that we have seen roughly a plus 20% growth in catheter utilization versus our role on IVUS are we still seeing or is that actually increased or how is that working on embracing the eye lab?

John Dahldorf

Yeah, for new systems that’s the case, you know, it something grew 20%, you don’t see 20% growth on top of that.

Rob Cvengros

Okay, very good. Thanks guys.

Operator

Next from Merriman this is Jose Haresco.

Jose Haresco

Hi good afternoon guys congratulations on that increased guidance. Can you hear me okay?

John Dahldorf

No you kind of cut out there.

Jose Haresco

Sorry about that, just a quick question on the US sales force. #1) Have we done hiring now and have your clinical reps and your actual sales team do you think fully up to speed and fully trained?

Scott Huennekens

Yeah, we have big – the steeper part of the hiring is done Jose, I think, where the 102 and our plan caused us to get John to the end of the year at about…

John Dahldorf

Add about 10 more.

Scott Huennekens

Add about 10 more, so we had nine people that have gone through training in the last two days. So you could says minus the nine out of the 102 all the rest are full up to speed does 9 to full speed within the next 60 to 90 days.

John Dahldorf

Okay. And then the other ones are kindly equally spaced out in hiring throughout the rest of the year.

Jose Haresco

Okay. With regards to the old roll around systems, can you give me a sense for how much of your installed base has already moved onto the fully integrated to the smaller boxes on the s5s. How much – in terms of – I guess, if you are looking at penetrating the upgrade market it is for single digit or – in total what’s already been penetrated?

John Dahldorf

Yeah as we talked about there are 6,000 cath labs and there are less than 500 integrated system that have been sold by Boston and Volcano. So less than 10% of that available market is penetrated now. Before there were probably, roughly role on IVUS system in the 6,000 labs. So you can see a lots of run rate for integrated systems to replace roll around systems.

Jose Haresco

Okay, great thank you.

Operator

We have a followup from Jason Mills.

Jason Mills

Thanks guys for taking my followup. Scott you mentioned the reimbursement that comes up later this year, it doesn’t get much – on this conference calls in talking with investors, and I am wondering if that is appropriate given – it was taken away and its obviously not going to establish yet, or if we are overlooking something here that could be significant for the company. And your second part of that question here is, based on your risk weighting is to whether or not that will come, whether investment to be made time or will you make as you get closer to that and get more optimistic about it to leverage that decision it will comes in your favor and what sort of impact that have suppose in what timeframe, sort of question, I am just trying to get a sense of whether or not we are looking at it properly?

Scott Huennekens

Yeah, I would break that down into a few buckets to answer it. #1 is that you are going to down taken before they hatch, lets make sure the ruling goes it was recommended before you do anything. So we haven’t overly talked about our promoted yield or anything. We will wait to see what happen. Once it happens though, there is two things and we will -- we prepared everything to take advantage of that relative to diagnostic survivors. So its two things, that means using IVUS within the diagnostic angio, and it also means doing stenting on an outplacement basis which is what centers were doing, because if they did they got more reimbursement plus the cost rollover. So if you check someone into the house at 11 o'clock at night or 10 o'clock, you went to bed they have the PCI in the morning and he checked them out at 7 o'clock the next day, it is less than 24 hour procedure. The hospital has got better reimbursement, the insurance company is happy because the cost is lower than 2 to 3 days you know, all things considered it was beneficial. So that does involve some change of clinical practice. But it always beneficial to IVUS if we can have that reimbursement change, just for basic procedures like doing diagnostic angio better to define which plaques are significant. We know right from prospect rid about 40% of plaques that are considered significant by IVUS are missed. And then #2 is driving better reimbursement options for the hospital to the outpatient stenting.

The other beneficial area is the whole area of understanding plagues for focal, local systemic therapies if you want to call that area the vulnerable plaque area and whether its IVUS or OCT you would already have reimbursement for the two established when the market data arise with prospect for example. So we kind of have laid all the ground workout as you may recall from a year and half ago we had a VP in this area we built up all that plans, and that kind of just sitting hereon the shelf ready enact. So there is not a major investment already in act and with the additions we’ve made to the marketing group, the current marketing group of the side could be able to roll this out as part of the programs.

Jason Mills

Okay. So just incrementally marketing materials perhaps a modest change to your reps called cycle during a day or week, but nothing more than that?

John Dahldorf

Correct.

Jason Mills

Okay, thanks John.

Operator

And with that we will conclude the question and answer session. Thank you very much everyone for your participation. I will turn things back over to our speakers for additional or closing comments.

John Dahldorf

Thank you all for the call and as I said we had a great quarter and we expect it will be a great 2008. So we look forward to see you in the future to help your conferences other meetings or talking on the next call.

Operator

Thanks again for joining us everyone. Now we will conclude the teleconference. Have a good day.

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