Volcano Corporation (VOLC) reported a net loss of 5 cents in the third quarter, narrower than the Zacks Consensus Estimate for a net loss of 12 cents. Although third-quarter revenues increased 22% from the year-ago period, earnings declined from last year’s profit of one penny, mainly due to higher operating expenses.

Third quarter revenues came in at $54 million. Revenues included $4.6 million from Axsun Technologies, Inc, which was acquired by Volcano in late 2008.

Although intravascular ultrasound (IVUS) systems sales declined 20% to $8.4 million, sales of IVUS disposables increased 15% to $31.3 million. Growth in the Japanese market remained strong at 22%. Meanwhile, the U.S. market recorded growth of 16% in IVUS disposable sales. Functional Measurement (FM) device sales increased a whopping 53% to $7.6 million, led by more than 75% growth in the U.S. and rest-of-the-world (ROW) countries.

Data presented at the Transcatheter Cardiovascular Therapeutics (TCT) meeting showed that the use of IVUS and FM devices not only enhances patient care but also has a meaningful impact on the cost of healthcare. This data could help drive demand for these products.

Operating expenses increased 41.5% to $38.5 million. We expect operating expenses to increase due to higher spending in Japan , expansion of sales and marketing programs in other geographies, and spending associated with clinical studies.

During the quarter, the company completed its transition from a distributor relationship with Goodman to a direct sales effort in Japan. Direct marketing in Japan should allow Volcano to realize end market prices on its products. Japan is the largest IVUS market, and the establishment of a direct sales force should allow the company to provide more focused service and support to the market. We believe the transition will boost top- and bottom-line growth in the long run.

The company reaffirmed its previously issued guidance for 2009. While revenues are expected in the range of $218-$223 million (up 27-30% over revenues in 2008), Volcano expects to post a net loss in the range of 6-11 cents.

Volcano’s ability to sustain its strong revenue growth appears promising as a result of market share gains, successful execution of growth strategies, and a strong R&D emphasis. While tight hospital budgets could keep a lid on growth in the near-term, we believe that increasing demand for the company’s products will support strong results going forward. Positive clinical data on IVUS/FM should also help the company take share from Boston Scientific Corporation (BSX) and St. Jude Medical (STJ). We have a Neutral rating on Volcano.

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