Q1 2020 Earnings Call
and product portfolio and innovation
Cycle now, let me touch on our first quarter performance total company revenues of $829 increase 12% oncology revenues grew 11% to $782,000 on revenues were $28 down 28% and other revenues were $19 operating earnings of $135 or 16.2% of revenues grew 13% This includes planned Investments to drive growth as well as project mix and updated project costs and are protons Solutions business gaap earnings per share of May Sixth Sense declined 14% And non-GAAP earnings per share of a dollar 16 grew 10% cash flows from operations were $113 down 28 million dollars due to engage in working capital to support our growth. Now, let me provide some additional color on the quarter our progress toward becoming the global leader in multidisciplinary Cancer Care Solutions is powered off.
executing on our for strategic enablers for custom
And their patients first innovating and radiation therapy second leveraging artificial intelligence machine learning and cloud-based Solutions third growing emerging businesses geographies own knowledge. He's and forth improving operational financial and capital efficiency first. Let's review our progress on innovating and radiation therapy. We continue to expect our global market share leadership and expand our addressable Market with our product Innovation comprehensive portfolio and services offerings in the oncology business orders grew 8% in the quarter and that's 12 months based on public filings. We continue to be the market share leader for both orders and revenues. We signed an agreement with Massachusetts General Hospital for seven variant radiotherapy system will be 5:00 will replace non variant systems one will replace an existing variance system and one will be placed in a new Vault installation is expected to begin in 2020 and December 28th.
we received an order for
Machines with six identify systems at the National Cancer Center in Singapore subsequent. The quarter closed. We are ordered an order for one Edge system and too vital beam systems at the National University Hospital Singapore in Brazil. We received eight orders for Halcyon in the quarter and in China, we continue to see issuance of the category B licenses as well as market share leadership in the Country Hardware revenues grew 2% for the quarter are worldwide net installed base of 8561 units grew 363 units or 4% off continued growth in our installed base drives future recurring revenue from upgrades software and services in Africa. We continue to expand access to Quality Cancer Care with the installation of Thursday and systems at the Central National don't close in Mauritania Santos Italian agonda in Congo and the Legos teaching University Hospital in Nigeria.
on the software front
Is Drew 13% driven by continued adoption of our software Solutions who remain focused on investing Innovation Innovation around efficient clinical work flow systems integration and treatment plan inquiry help close the current resources and skills Gap around the globe orders for Hyperbaric are high definition radiotherapy solution for stereotactic radiosurgery brain metastases. He's grew double-digits in the quarter with less than 14% penetration. This continues to be a sizable opportunity across our true being installed base.
Our services revenues grew 22% in the quarter including the benefit from CTS. I in a 14-week quarter, excluding these benefits service Services Revenue grew 8% seating package, which is integrated into our oncology systems business continues to perform in line with our expectations were investing in infrastructure for new technology enabled services to drive mature Market productivity and accept it emerging market adoption and our proton Solutions business. We took one new order in the quarter our Pipeline and the proton business remains strong and we continue to gain Market global market share with customer interests driven by our smaller footprint probing 360 and the preclinical research. We are doing with the Flash Forward Consortium is highlighted in our fourth quarter earnings call in October . We were selected by pain medicine home install an additional probing 360 system in a single room configuration at the Lancaster General Health and be barshinger Cancer Institute. The center is expected to treat its first patient ma'am.
21 subsequent
To the end of the quarter. We were selected by China Medical University Hospital in Taiwan to install a probing 360 system in a single room configuration with the ability to add a second Gantry. The center will also use birth information management system and Eclipse treatment planning system and is scheduled for completion and 2024. We have seventy eight proton rooms under contract across 20-26 sites. Globally Thursday rooms are operational including one room that was handed over to clinical operations this quarter in November the south Florida Proton Therapy Institute or SF PTI on the campus of Delray Medical Center treated its first patient on our probing compact single room system SF PTI is now treating more than 30 patients per day making it the fastest ramp of patient treatments per gallon in the world turning our attention to flash preclinical research and product development is progressing per plan and we are encouraged by the results. We continue to see from The Flash Forward Consortium efforts dead.
as our Global probing footprint continue
To expand the flash-forward Consortium now has representation from all geographies enabling future research across different Regional populations.
2nd, let's turn to our progress and leveraging artificial intelligence machine learning and Cloud Solutions since the launch of the artificial intelligence powered ethos therapy system in September of 2019 reception and excitement for the platform has been extremely strong during the quarter. We received 3 orders for ethos two of the orders were from Australia including a second order from the Icon group and what order from Israel ethos is marked and five ten K pending in the US treatments at our first clinical site and her lab Hospital Denmark continued progress. Well while initial Focus has been on bladder, the team is preparing to start adaptive therapy for new disease sites in the pelvis. Additionally our second Center has Spectrum 20 and Netherlands went live in December and our third and fourth installations are underway in office at The Icon group Center in wahroonga and Royal North Shore Hospital respectively install time has been about two weeks at the initial sites and we expect the number of installs to increase in the second half dead.
adaptive intelligence Consortium
On track for both clinical and Technical Publications throughout 2020. We expect to see significant Publications on several disease sites early evaluation results show that full adaptive sessions are practical in a typical 15-minute treatment time slot.
And you're up in 2019. We launched we launched rapidplan PT are individualized machine learning treatment planning software for proton therapy and plan to expand the offering and other regions in the future consistent with rapid plan for conventional radiotherapy. Rapidplan PT reduces the treatment planning time for proton therapy from several hours two approximately ten minutes without compromising the quality of the plan off his extraordinary particularly when you think about the skilled resources Gap in proton therapy and creates significant clinical efficiency for our customers.
Third let's discuss emerging businesses geographies and Technologies in November . We established a direct sales and service operation in the Republic of Kenya to better serve the growing cancer population in the country and the East Africa region, Africa continues to be a sizable opportunity for us given the minimal access to radiation therapy and the estimated 2.1 million new cancer cases diagnosed per year by 2040. Our installed base in Africa has increased approximately 30% over the last two fiscal years.
continue to
If you can grow our Interventional Solutions business with revenues of nineteen million dollars, which are reported under the other segments. We had solid performance in China and continue to invest in global distribution capacity and our software platform to support this Global business, but that I'll turn it over to Mike will discuss our for strategic enabler and provide more context on the first-quarter financial results.
Thanks, Del. And hello, everyone. Our fourth strategic enabler is improving Financial operational and capital efficiency by maintaining a balanced Focus across gross profitability and liquidity. So let me first start with growth company-wide revenues were $829 up 12% in dollars and 13% in constant currency organic revenues grew 8% in oncology systems revenues were $782 million dollars up 11% off and 12% in constant currency driven by strong growth in software and services on a trailing 12-month basis revenues grew 11% in dollars and 13% in constant currency.
774 million dollars up 8% in dollars and 9% in constant currency in both the quarter and the trailing twelve months Geographic orders mixed with 46% in the Americas 31% in a Mia and 23% in a pack.
orders were
We ended the quarter with three point 1 billion dollars in backlog up 4% taking a closer. Look at our oncology business results in the Americas revenues grew 15% in the geography and in our North America region orders were $360 million dollars up 7% on a trailing 12-month basis orders grew 6% driven by continued market demand for our integrated value-based Care Solutions in our Europe Middle East India and Africa geography revenues grew 11%
Orders were $237 million dollars up 8% on a trailing 12-month basis orders grew 11%
Specific revenues grew 5% in orders were $178 million dollars up 9% led by double-digit growth in our China and our southeast Asia South Korea regions partially offset by softness in Japan on a trailing 12-month basis orders. Grew 6% for the asia-pacific geography.
Are protons Solutions business posted revenues of twenty eight million dollars a decline of 28% primarily driven by project mix service revenues of eight million dollars grew 54% during the quarter. We reduced our proton therapy backlog by $19 to reflect an Indian customer's decision to cancel the order that we booked in the fourth quarter of 2017. No Revenue had been recognized on this order.
Turning to profitability Total company gross margin was $369 million dollars up 16% and 44.5% of revenues wage increase of 160 basis points driven by product mix Acquisitions and tariff exclusions. This was partially offset by pro-life business project mix and the four million dollars of updated project costs oncology gross margin of 45.4% of revenues increased one hundred basis points.
invest
In R&D to drive Innovation remains core to our long-term growth and value-creation strategy. We invested $67 in R&D up 10% off which is 8.1% of revenues. Sg&a expenses were $167 up 21% which is 20.2% of revenues excluding Acquisitions of CTS. I endocare Alec on and the Boston Scientific be portfolio sg&a was up 13%
Company operating earnings were 135 million dollars up 13% which is 16.2% of revenues up fifteen basis points driven by the gross margin expansion and planned Investments to drive future growth. The four million dollar updated project costs in the proton business impacted operating earnings in the quarter by fifty basis points, Gap EPS was $0.96 and non-GAAP EPS was a dollar 16 gaap and non-GAAP tax rates were 21% and to look up your account was ninety one point seven million shares.
this quarter
Our gaap operating earnings and gaap EPS included an eight point eight million dollar change in fair value of the contingent consideration related to our Acquisitions of endo Karen Alec on in the first quarter of fiscal year 2019 gaap net earnings and GAP EPS included a $22 million dollars a gain on the sale of our Equity investment in augment X turning to the balance sheet and liquidity. We ended the quarter with cash and cash equivalents of $720,000 and $544 million dollars in debt certain proceeds from borrowings in the quarter were used to fund us operations in the short-term.
Cash flows from operations were $113 down 20% due to investment in in working capital to support continued growth oncology DSO with them versus last year at 111 days other investments in the quarter include $23 in capex and forty six million dollars used to repurchase shares of our stock as of the end of the quarter. We had one point nine million shares remaining under existing share repurchase authorization in summary. We are pleased with the solid operating performance in the first quarter which delivered double-digit growth in both revenues and non-GAAP operating earnings. I will now turn it back over to Dallas.
Thanks, Mike based on.
Solid operating performance in the first quarter and continued market and product momentum from making no changes to the fiscal year 2020 guidance given during the last earnings call. We expect earnings to be weighted towards the back of the fiscal year as we continue to invest in future growth is considered factors that can influence the business including the strength across the portfolio growing contribution from software and services performance variability of wage and solutions segment and the mix of mature and Emerging Markets. Thank you. And now now let's go to Q&A operator.
Thank you at this time. It will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone indicates line is in the question to you. You may press start to if you would like to remove your question from the Q4 participants using speak your equipment and may be necessary to pick up your handset before pressing the star key. What's it going to ask the question and press star one on your telephone keypad?
Question comes from Vijay Kumar with a record is I please State your question. Hey guys congrats on a nice quarter here. Thanks for taking my question just on the order form here really strong. I'm just curious, you know, you mentioned China, you know, we've been hearing a variety of you know, feedback just given coronavirus, you know, that's how that's going to impact you guys if if at all and and were there any pool followed of you know, chinacota orders in in the in the current cure I tell you what, let me let me stop by and then I'll walk walk down to China, you know starting at a high level, you know, you saw the overall 9% constant currency growth on the quarter 9% trailing 12 months the American a 7% on the quarter trailing constant currency growth is six Amiya was still on a constant currency basis a double-digit quarter 11% in the quarter of 14% off.
failing 12 months and if
A pack was 9% on the quarter 7% trailing twelve months, you know is that relates to China? I would say, you know, we are seeing an uptick uptick in the incremental licenses being released. As you know applications for the remaining category. A license has ended late December category B license continue to roll out. We you know, we as wage last quarter were really kind of starting to see that role. Um, you know, I think still though the best way to think about this is in the past five years our Revenue Caterers been 17% If anything ever seen that accelerate a little bit, you know, so the market remains very good, you know, we don't guide our China orders as you know, but funnel looks good and are win rates in a public tenders remains High, I think maybe the other thing I'd add about China is you know, the strength of our portfolio is very strong and we have three proton orders in China. We're executing on and off.
areas business Interventional
Solutions we also have a nice presence in China, you know as it relates to uh-uh the virus, you know, we're not seeing anything yet. You know a good news is you are priority is to make sure we're doing everything to protect and support our employees and customers during this time. We haven't seen any impact life in either of those situations at this point. I think from a business perspective. It's too early to call we're continuing to monitor the impact on our Factory and customers founding activity. Of course, you know, we're trying to be a very responsible local citizen. We've made it pretty significant contribution to the local Red Cross and like everybody watching it off. Maybe just one of the thing I'd add on on the kind of China momentum, you know, the Halcyon product is doing very well in China. We have over 20 orders now dead.
You know, so that's that's flown.
Going and you know seeing seeing only kind of starting to see after all the regulatory wait starting to see that uptick that's helpful though and just maybe one on the margin side be given the Tariff relief. I would have expected, you know, gross margins, you know, maybe a perhaps up to come in better in a while. I understand, you know, the comments are not growth Investments to support the business. I'm curious on on Gross margins, you know, if you are seeing anything at all, you know, I'd say, you know, it was the quarter was right in line with where we were kind of expecting the quarter. I'll turn it over to Mike here in kind of do them back for you on the on the margins. Yeah. Exactly Del Vijay. Thanks for the question. You know the Tariff did have you know, roughly around 70 basis points of impact to our gross margin, you know, that was that was planned in our guidance based on the events in the exclusive exclusions that we got back in Q4, but the real story here. Yep.
Gross margin expansion is is the product and and jio mix that's playing into that expansion. We've had a 100.
Fifty basis points of expansion at the company level a hundred of that was product in Geo expansion. So think about the the the strong software and services growth rates that we had Acquisitions as as we expected improve the gross margin rate by around 45 Bishops, and then you know, the unexpected thing that we had in the quarter which we call them out was was the unexpected costs in our proton business and that impacted around sixty basis points on gross margin perspective, but on the operating margin in fact acted about fifty basis points, but what I'd like to say about that is is you know while it was unexpected in the quarter. It was something that the team identified early in the quarter. We got our heads around. In fact, it was isolated to a project and some very specific retrofit costs. It triggered a review of all the other projects that that we have in process and yep.
The end of the day, you know after that deep dive the four million cost we believe, you know is well within our tolerance range on the year. And again, I just kind of go back to our top-line and bottom-line growth rates. We are set up in a very good position to achieve our our our full-year commitments. Thanks guys.
Thank you. Our next question comes from Anthony Petrone with Jeffrey's please State your question. Thanks and good afternoon. Also congrats on the strong orders here, you know, maybe just to dig a little bit deeper into into China at analyst day. The company, you know announced that there was forty covering 70 Linux month. And so just wondering you're in the quarter if there was any activity out of out of those specific orders and then the follow-up they're also would be you know, the distinction between Class A and Class B. Sounds like certainly Class A is moving along but an update on Class B licenses and where that's its would be helpful as well. And then I'll have one follow-up. Thanks. Yeah, I would say Anthony off the you know, as it relates to the China import Expo meeting most of those Mo use or long-term and you know, tend not to be executed for wage.
About nine to twelve months kind of. So, I would I would say that.
None of those are in here at at this point. We had a very strong quarter in the in China, you know, so we we continue to like very much what what we see we're we're seeing strong equipment demand across the portfolio frankly, you know, I I highlighted highlighted. I highlighted Halcyon but we're also seeing very good traction month on edge on truebeam and on and on vital beam and believe that when he feels comes to Market eventually in that in that market will also have a strong position there. So the portfolios well well set up, you know as it as it kind of relates to, you know, each contract and whether it was whether it was a part of the quote or not. You know, what I what I can tell you is the best way we track it is it was double strong double-digit growth on a tough comp. We were also strong double-digit growth last name.
Here and that's probably the best way to to.
To characterize it a fair enough and and the follow-up will be just on you know over to the US just any updates from the company's view on the bundle where it seems like there's just a range of expectations in terms of timing. So maybe with the latest is in terms of discussions with CMS and where the final rule is and timing there thinks, you know, it says, you know, given the original time timeline CMS is clearly been delayed. If you know there were significant comments from from customers from from, you know, the providers from the clinical Community from the vendor Community likely led to a delay in issuing the final ruling, you know, there's no definite guidance office timing. I've seen some of the ranges that are out there, you know, I I think that it's going to be sometime in 2020 and you know, it's not going to be delayed. Yep.
22 is as sometime as
Is out there, you know, I think that you know as we're really thinking about it, you know clearly the portfolio we've been designing to you know, a value-based world for many years. So I think the portfolio was well set up for the transition and with the CTS I acquisition we are particularly excited about having you know, a technology-enabled Services wage play as we believe customers will look to more Outsourcing of all kinds of activities and we'll be well set up for for that for that growth so often, you know, we're we're seeing both in the quarter as I mentioned a minute ago. You know, our our total of Merrick is trailing twelve is 6 and on the quarter it was seven, you know, I am not seeing it impact that were to rate that at this point in time not seeing any acceleration of cancellations or anything else that would you know, cause us wage.
cause us to to worry
In fact, you know and then when you look at the way the backlogs flowing the Americas Revenue number as we said in the script was was up 15% on the quarter. So, you know, so we're seeing nice nice flow in the Geography. Okay. All right. Thanks again. I'll hop in queue.
Thank your next question comes from Matt Taylor with UBS. Please State your question.
Hi, thank you for taking the question. The first one I wanted to ask about was ethos and he says he said can you give us any update on when you would expect to get approved for that, uh in the US and then uh just on the orders and the court you had three they had really strong orders out of the gate glass quarter. Can you talk about what the funnel looks like Thursday? And if you think you will see a step up into coming. Yeah. Sure Matt. Thank you. We were very pleased with yearly orders in Q4, as you know, took out of the gate late in Q4 launch and basically September of Q4 between Q4 and q1. We've taken out twenty orders, you know, frankly when when we when we look at the ramp versus Halcyon kind of right on you know, so so that's that looks pretty good. You know, the orders are a little
Lumpy or maybe a little bit.
Demand of waiting for regulatory approval last last quarter. We do not have as I said in the script we do not have yet, uh, uh us regulatory approval we suspect that 510k this quarter, you know, so the next 30 to 60 days, we we should have it customer feedback main remains outstanding and frankly one of the things that we really like is how it positions across our portfolio and gives us again something in the high end of the product mix, you know from a pricing and margin rate off point of view. So it's it's still early. We do expect 510k approval in this quarter, you know, we we do think that this shift to Adaptive radiotherapy is the, you know, on the order of the kind of shifts we saw with imrt and I GRT, you know, so at this point I'd say we've seen nothing that discourages
from that then we're we're bullish at
Thanks. So just to follow up on I just would love to hear more about how your positioning in the market, you know, you kind of putting it up head-to-head with MRI or positioning it differently and you know, what are some of the things that customers are telling you about your adaptive approach versus yeah. We're getting very very positive feedback from from our customers. I'd say, you know, they love the quality of the product. They love the multi-modality image integration of the product. I'd say right at the top of the list. They love the fact that on a workflow is superior to everything else out there as I mentioned in the scrip. We haven't seen anything yet that we really can't Envision in a fifteen-minute time and that's kind of, you know sacred to our customers and sacred to patients it leverages all the Halcyon technology, you know for ease-of-use. I think it's very wage.
Positioned for the 8 p.m. And
Environment that's that's coming as a you know has an outstanding Roi with that kind of throughput. So I think it's going to win on that on that basis. We're seeing a lot of people will engage with us, you know on the product a lot of enthusiasm, you know, clearly we gotta get through the 5 10-K in the US before we can market and sell it here, but you know, we're uh, we are I think early out of the gate here War very much perceived as the AI leader, you know with with our previous introductions with the machine learning in Rapid plan the other technologies that we have on the software side in the market and now ethos. I think we're very much perceived as the AI leader in the market.
Thank you very much.
Thank you. Our next question comes from Jeff Johnson with Robert W Baird & Company, please State your question. Good afternoon guys. Can you hear me? Okay. Hi, Jeff Jeff. How you doing? Hey, Mike Goldberg back. So question for you. I think the only question I have left here is taught. I don't know that I heard any update there. Just wondering if you saw any Tailwinds here in the first quarter back from that relationship and anything you can quantify their high-energy low-energy anything like that. Thanks. Yeah sure, you know the Tata deal continues to move along. We've had 17,000 books since the signature of the agreement. We had two more this past quarter, you know, so that's going to continue to be lumpy kind of I think as you look last three quarters, it's something like, you know, two thirteen two something like that. So it's going to bounce around but you know, the framework for the agreement is for up to two hundred systems were thrilled for how it's going.
RT utilization rate in India is only fifteen to
20% you know, we we think that you know, this is a great play and frankly in the long-term, you know kind of combination of this agreement with the position that we have on CTS. I for enabling customers to get in to radiation therapy with with the services approach we have you know, we're very encouraged by what we see in India, I'd say most of the products sold there is true beam Jeff, you know, so, you know, so it's a good mix of product home. You know, I I I'd say it's it's going kind of how we how we expected. We like what we see. Yeah, understood. All right, that's all I've got. Thanks guys.
Thank you. Our next question comes from a table with btig, please State your question. Hi. Thanks so much for taking the questions. I wanted to ask a quick one that you called out some softness in orders in Japan given. That's a really important Market. I just want to hear a little bit about the Dynamics going on there. Yeah, I say it's kind of normal oscillations. Unfortunately of what we've seen in Japan the last two or three years, you know, the overall is down a hair, you know, so it's off, you know, the service business been very strong in Japan equipment is down a little bit, you know, and and overall Japan, you know is is diluted of two are a pack growth rate cuz you know China I'm hitting it out of the park the rest of you know, southeast Asia and Korea has been has been very strong and you know, Japan is a flutist to the growth rate of course birth.
We we have very strong service business there.
Starting to see a little software activity, you know, we had tough comps in a pack and and in Japan in particular in the first half last year, so we might see a little bit more of this coming Monday, but we got a good team there service business continues to hum United thinking of no change in your outlook in in China southeast Asia Korea, very strong and you know working hard to kind of recovery in Japan. Yeah makes sense. Okay, and then my other question, you know kind of take a look at my model, you know, the spending on both are wrong. It's you're making there and I you know at the investor day back in November you spoke quite a bit about some of the R&D projects that are going on like flash. I'd love to hear a little bit more about the sg&a speeds that you did this quarter and it sounds like the second half some of that should peel off so wanted to hear a little bit about the timing of that as well. Yeah. I mean, I think the let me off.
T this up and I'll have Mike kind of take you through the walk. You know, I think the first big piece is there's a
Huge piece of it that's acquisition, you know, so between the CTS I and the Interventional oncology Acquisitions that we made last year you're looking at, you know, thirteen million of sg&a additives last year and then three million on the uh, from the extra week on the quarter, you know, and then the rest is kind of balanced between 15 some infrastructure things were doing some ongoing investment in our distribution and marketing and and frankly, I'm kind of annualization of the build that you saw in the last half of last year Mike you want to put any color on that. I think that's about right. We said that the the investments in the in the Acquisitions in the Acquisitions themselves that sg&a is growing at 13% Our you know, our revenue is is is growing at about that rate on a constant-currency. Yep.
Basis and so we've got you know, excluding the Acquisitions. We're we're scaling at 100% even with all of these Investments that we're making so, you know, again the Investments there to drive the growth but also to support the growth that we're we are that we're driving in the business and and you know, as we as we play out the rest of the year, you know, we would expect to continue wage scale in in sg&a throughout the year and you know, as we said in our long-range plan, you know over those five years as well so early days there but the majority of this link is is acquisition-related makes perfect sense. Thanks so much.
Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you. Thank you operator. I'm pleased with the strides you've made in the first quarter are focused execution enabled us to deliver solid oncology orders growth and double-digit growth in both revenues and non-GAAP operating earnings looking forward will continue to invest in our strategic enablers and remain committed to innovating and investing in new technologies to drive for the ultimate Victory a world without fear of cancer. Thanks for joining us today.
Thank you. This concludes today's conference all parties me to disconnect. Have a great evening.