Q4 2020 Varex Imaging Corp Earnings Call
Greetings and welcome to the Arts Imaging Corporation fourth quarter fiscal full year 2020 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation if.
If anyone should require operator assistance during the conference. Please press star zero and your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to Howard Goldman Director of Investor Relations. Thank you you may begin.
Good afternoon, and welcome to Varex Imaging Corporation earnings Conference call for the fourth quarter and fiscal year 2014.
With me today are studies and you all our president and CEO and Sam Maheshwari our CFO.
Two simple fire discussion unless otherwise stated all references to the quarter force.
Quarter of fiscal year 2020.
In addition, unless otherwise stated quarterly.
Quarterly comparisons are made sequentially from the fourth quarter fiscal year 2020 to the third quarter fiscal year 2020, rather than to the same quarter of the prior year.
On today's call, we will discuss certain non-GAAP financial measures season.
These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures.
We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure and our earnings press release.
Which is posted on our website.
Please be advised that during this call we will be making forward looking statements, which are predictions or projections about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties that cash.
Cause actual results could differ materially from those anticipated.
Risks relating to our business are described in our quarterly earnings release, and our filings with the FCC.
Additional information concerning factors that could cause actual results to materially differ from those anticipated.
Contained in the resi SEC filings.
Moving out of one day risk factors of our quarterly reports on form 10-Q.
And our annual report on form 10-K.
The information and this discussion speaks as of today's date, and we assume no obligation to update or revise the forward looking statements in this discussion.
And now I'll turn the call over to Sunny.
Thank you Howard good afternoon, everyone and welcome.
It's been here 2020 was a productive year for us despite the headwinds created by Kobin.
First of all I'm very happy to report that we renewed all of the multiyear agreements with our top 20 customers that became due during the fiscal year.
Second we completed the closure of our Santa Clara and sold it ahead of schedule and made additional structural changes, which together will result in $28 million or of annual cost savings when fully realized.
Third we replaced our existing debt and the capital structure that provides us with increased liquidity and flexibility.
And last but not the least we launched a number of new products.
The combination of these and other actions lever ex well positioned for future growth once the economy recovers from the impacts of Cobiz.
I'm also very pleased with the performance of our leadership team our managers and our employees around the world. We have navigated the turbulence from this pandemic and through it all we continue to fulfill our customers' needs.
And the current environment as we look at our financial performance, we believe our investors will get a better sense of our performance with sequential comparisons more so than year over year comparisons.
On that note our fourth quarter revenues were $170 million and were comparable to the third quarter of fiscal year Twentytwenty there.
The revenue mix between our segments was also comparable on a sequential basis.
Our margins improved sequentially largely due to the start of benefits from the cost reduction actions.
On a year over year basis total company revenues declined 16% in the fourth quarter due to the ongoing impact from <unk>.
And our medical segment during the fourth quarter C.D. tube sales were strong while sales of our products used in other medical imaging procedures continued to be down.
Demand for our mammography tubes increased slightly but the demand for our Gen X Ray tubes, and detectors was solved presumably due to the increase in purchase as a mobile X Ray systems during the early months of cobot.
During the quarter some of our customers acknowledged that they were seeing an uptick and selling activity and some of their dental surgery and oncology markets. However, while this activity did not translate into significant orders for us and the fourth quarter. We are encouraged to hear this and we are operationally prepared to respond to any.
Increases in demand.
Our R&D teams have been actively engaged with our customers this year with new product development efforts.
We recently began to make engineering prototypes of a new family of liquid metal bearing technology based cubes available to our customers for evaluation.
The initial models are designed for C T and cardiac applications and.
We have a growing pipeline of customers and interested and incorporating these technologies into their future products.
Tubes that incorporates look and liquid metal bearing technologies are expected to have longer life, and we intend to market them with service contracts to though we EPS.
We also continued to make progress with our and attitude technology development with our joint venture partner BC imaging.
You may recall that about a year ago at the annual meeting of Radiological Society of North America also known as ours and Amy we exhibited a prototype of our and attitude technology and a multi emitter mammography system configuration and since then we have received a lot of interest and this technology.
We are very happy with the performance of the emitters and the tubes. We are engaged in early stage product development activity with several Oems to explore the use of our technology and their future imaging systems.
On the detector side, we're in the final stages of commercialization of our news the platform detectors.
Technology is initially targeted that cardiac surgery dental and other fluoroscopy systems that need high performance dynamic detectors that can reduce extra dose and used during imaging.
Since we introduced this platform and ours and they last year. We have released three news. The platform models that are now available to all our customers additional models are and develop and and we expect to release them to customers for evaluation and integration during fiscal year 21.
I'm pleased to report that a number of Oems have placed orders for hours the platform detectors with initial shipments scheduled to begin in the first half of fiscal year 2021.
While our sales and that and our industrial segment were down year over year. We saw very early signs of recovery and some non destructive testing verticals, such as electronics and battery inspection.
And cargo screening a modest increase and activity led to increased orders and backlog for some of our OEM customers and we expect that some of this will turn into orders for us in fiscal years 2021.
Meanwhile, China appears to have recovered from the initial shut down due to called <unk> and we are very happy with our performance there and.
In fiscal year 2020, the China market represented 11% of our total company revenues.
Our local Chinese OEM customers have continued to successfully bring new cities systems to market.
Strong sales of 50 systems by local Chinese manufacturers led to a significant increase in the number of C.T. tubes that we shipped to China and fiscal year 2020 over the prior fiscal year.
And a couple of weeks, we will once again be showcasing our latest X ray tubes digital detectors connects and control devices and software solutions at their annual ours and eight conference.
In particular, we will be introducing two new full time counting detectors.
More information about these and other new products will be included in our upcoming arsenic announcements.
Our son and starts on November 29th and this year, it's going to be a virtual event for those of you that are interested after arsenic starts we will have links to our virtual exhibit booth posted on our website and on barrick's and social media channels.
With that let me hand over the call to Sam to talk about our financial performance in greater detail.
Compared to the fourth quarter of last year revenue declined 16% $270 million from $202 million due to the effects of COVID-19.
Geographically fourth quarter revenues was $64 million and the Americas $55 million and and me.
And $51 million and APAC.
While full fiscally fiscally of 2020 revenue and the America is what $255 million.
$231 million, and Emma and 252 million and APAC.
This reflects a geographically well-balanced revenue profile for us.
Our fourth quarter GAAP gross margin was 27% on a non-GAAP basis gross margin was 28% and improvement of two percentage points from the third quarter of fiscal year 2020.
This increase is due to a favorable product mix and and you shall benefits from cost reductions.
R&D expenses and the fourth quarter was $17 million on both the gap and non-GAAP basis. This was a decree decrease of about $2 million from the previous quarter.
Fourth quarter SG&A expenses were $41 million on a non-GAAP basis is gona expenses were $31 million and increase of about $3 million from the previous quarter, largely due to higher tier and audit fees and pension costs and a a gentleman operations.
Operating expenses are $58 million non-GAAP operating expenses are $48 million compared to $46 million and the previous quarter. There's $2 million sequential increase was primarily due to hire SG&A expenses that were partially offset by Lord R&D spending.
Our fourth quarter operating loss was $13 million on a non-GAAP basis operating loss was less than $1 million compared to and operating loss of more than $1 million and the previous quarter.
GAAP interest expense and the fourth quarter, what's $14 million, which was unusually high and due to various financing activities, including issuing high yield notes and paying off of a previous credit facility and associated interest rate swap on a non-GAAP basis interest expense was $6 million similar to the third quarter.
Other expenses, while approximately $2 million.
We recorded a GAAP tax benefit of $4 million and the fourth quarter on a non-GAAP basis with recorded and $8 million tax benefit the cash Act and subsequent treasury regulations allow us to apply current tier net operating losses to taxable income from prior year tax filings and as a result.
We expect tax refunds from the U S Treasury.
GAAP net loss for the fourth quarter was $26 million or 66 cents per diluted share on a non-GAAP basis net loss was $2 million or four cents per diluted share compared to a net loss and the third quarter of $8 million or 20 cents per diluted share.
Diluted shares outstanding about 39 million shares and both the periods.
Now turn into the balance sheet.
Accounts receivables increased by $14 million during the quarter, a large portion of a shipments occurred and the third month of the quarter, causing DSO to go up by eight days to 66 days and.
Inventory and decreased by $11 million and the fourth quarter to $272 million and we completed the transfer of manufacturing it was Santa Clara facility to Salt Lake City.
Cash flow from operations was negative $12 million for the fourth quarter, but it was positive $13 million for the full fiscal year.
We ended the fourth quarter with cash of $101 million on the balance sheet and increase of $13 million and the quarter.
Total gross debt outstanding was $511 million out of which $455 million was recorded on the balance sheet due to a portion of the convertible alone being recognized as a component of equity let.
Let me know I'll give you a high level summary of our financial initiatives that have either been recently completed all our and process.
I will then follow up with an overview of our initiatives for fiscal year 2021.
First I would like to discuss our new capital structure and liquidity during the second half of fiscal 2020, and we put in place a more flexible debt structure that also helped increase our liquidity.
Our debt now includes $300 million of seven seven year senior secured notes that their interest at 7.8, 75%.
$200 million, a five year convertible notes that bear interest at 4% and a new 100 million asset base revolving credit facility that currently remains undrawn.
We also carry additional debt of around $11 million and hour fall and subsidiaries and realized across currency swap.
Overall, our weighted average pretax annual interest rates should be about six 2% and the annual cash interest expense Bud and should be approximately $31 million.
As of the fiscal year, and there was plenty of liquidity with $101 million of cash on our balance sheet and another $100 million.
Through our asset base and while the line.
And so by paying off of a previous credit facility, we remove the substantial doubt about our ability to continue as a going concern.
Second I would like to provide and update on a cost reduction efforts.
As we share that you'd previously we targeted and annualized cost reduction of $28 million, we should be fully realize from the second quarter of fiscal year 2021 and.
Roughly 75% of the cost reductions are expected to benefit gross margin and 25% are expected to benefit operating expenses on the piano.
We are largely complete with the closure of Santa Clara facility with only a few minor steps left to be executed. This specific initiative is expected to provide savings of about $14 million annualized are about $3.5 million per quarter.
Additionally, as part of a cost reduction efforts, we reduced 94 positions and the U S and the fourth quarter, which is expected to save us and annualized $15 million beginning the first quarter of fiscal year 2021.
Let me know move to discuss new initiatives that are and process for fiscal year 2021.
The first initiative is a targeted 25 to 30 million dollar reduction and our inventory during the day to a combination of facility consolidation implementing additional lean programs further streamlining over supply chain and discontinuing low velocity products.
The second initiated for fiscal 2021 is to reduce costs associated with manufacturing and servicing of oil products, particularly and the areas of warranty manufacturing yields and freight costs.
Through this initiative our target is to improve gross margin by one percentage points.
Towards the end of this fiscal year.
Let me know provide you over business outlook.
Given the current economic environment, we're changing of a prior approach of providing annual guidance and fewer of providing quarterly guidance.
We believe quarterly guidance will help investors better understand over business performance and progress.
Accordingly for the first for the first quarter of fiscal year, 2021, and we expect revenues to be between 160 $280 million.
And we expect non-GAAP earnings per diluted share to be between negative 15 cents and positive 10 cents.
These expectations are based on non-GAAP gross margin improvement to a range of 30% to 31%, which includes some benefit from the closure of Santa Clara facility.
Non-GAAP operating expenses reduced to arrange a $44 and $45 million and non-GAAP interest expense around $8 million.
With that I would like to know hand, the call back over to Sonny for some closing remarks.
Thank you Sam so looking beyond Covid, we expect demand for X ray imaging equipment and for our products to rebound.
Once the effect of the pandemic is past us.
And we are confident that our continued focus on innovation will enable us to position.
And our position of the market leader across all product lines and our core business.
Our goals for the next phase of growth, which we have referred to as Verex 2.0 are focused on accelerating organic growth improving operating margins through operational transformation and strengthening our balance sheet.
With the debt refinancing actions, we've already positioned ourselves with the new capital structure that gives us operating flexibility and strengthens our balance sheet.
Our next steps here are to improve our financial performance and lower our debt.
To do that we will continue to drive initiatives to improve gross margin and operating income.
Our initiatives, our investment and the R&D are aimed at enabling verex to expand its footprint within our customer base.
As well as far opening new addressable market opportunities with photo and counting detectors and nanotube X Ray sources.
I'm happy to say that we're making good progress and each of these areas and <unk>.
And these goals are reflected in our fiscal year 2021, operating plans and management incentives.
With that we will now open up the call for your questions.
Thank you.
Good question. Please press star, one and your telephone keypad and confirmation tamra indicate your likeness and the question.
You May price Star kill if you would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up your handset before pressing the stars. He's our first question is from Anthony Perchance with Jeffries. Please proceed.
Thank you and hope everyone's doing well and and staying healthy maybe a couple for Sony and and then I'll have a super Sam as it relates to some of the guidance metrics that you've provided Sam and so suddenly maybe from a high level you gave up to each year on on where each of the businesses.
And is trending and and the COVID-19 sort of resurgence and so.
I guess.
Anaheim level when you consider in particular.
Where you referenced industrial you are seeing some signs of a turnaround.
And select areas of industrial.
Or maybe describe.
How you see that trending into 21 from here.
And particularly when you consider that we do have.
A resurgence and some geographies and and a lot of key geography's for that matter.
And then.
China Hounslow.
It's business back to usual so is that.
Fair way to describe where China and it's.
Exiting and the quarter and then all of a <unk> yeah.
Okay.
Thanks, and flee hey for free industrial the way the way we experienced.
Situation is that initially when the full impact of Covid hit everyone around April may timeframe and frame.
Everything stopped right. So we had.
Lockdowns everywhere and all activity essentially ceased and then the airports.
Stopped operating most of their gates and we've resolved serious slowdown there so as it. So that's how it started out and then has COVID-19 progressed and as and what we're seeing now is that the industrial side of our business and those markets and those different vertical with and industrial.
Her pulling away from and their recovery.
Trajectory, they're pulling away from the way medical is recovering and what I mean by that is look airports have been shut down and they're going to stay shut down for some time, there's no improvement or degradation degradation, there, but meanwhile, and other verticals as.
And as you know industrial is very fragmented and there are many sub vertical as you look at different vertical they're progressing along different trajectories. So I made a I mentioned electronics and battery and inspection, we're seeing continued strength and that area and there was strength free COVID-19 and it returned to to increasing levels of activity. So what.
We're seeing what we're anticipating is that with and industrial it won't be and all or nothing there is there isn't it is and tied to one large.
One large group of entities capital budgets like like we have that and the medical side and the medical side, we're pegged to the hospital capital budgets globally. However, on the industrial side, given the fragmentation of the vertical we're seeing different trajectories and each sorry different.
Different dynamics with and each sub vertical and there they have their own little trajectories. So on balance will we expect is that.
The government.
The vertical control by government government spending will continue to move forward, we were encouraged by the.
Tender activity and the cargo screening area, where car some tenders were finalized and our OEM customers received some orders. Similarly, we continue to see spend on the government side.
Or a activity can you do continue to stay active and now what we expect is that the other industrial verticals and food inspection general manufacturing.
And we will continue to evolve and their own and even if he.
Even with with the situation with Covid, we're not anticipating a regression and any significant way.
So that's that's.
That's the scoop on how we see industrial evolving during this recovery.
And then again to follow up on on the China C. T. Two market and you have particular and maybe just to follow up there on on.
That business training and it does sound like that is sort of.
Completely back to business that free COVID-19 levels is that accurate.
Yeah, So we're very happy with our performance and China and and.
So they were shut down for about eight weeks this year and when they came back up the wind right back to work and they caught up with their prior trajectory so from that perspective all.
All the things we've said about the China market have continued to play out just the way we had to explain it which is the Chinese government continues to make investments and healthcare the purchasing of Cte continues and through the through the Covid pandemic, while we saw.
And uptick in the buying of <unk> systems and X Ray systems.
Post they went through a peak of their own and beyond that peak, we didn't see the the Cte market subsiding or anything like that trajectory that the one that they were on previously appears to have continued. So we are we're happy with the way things are going and China are Oems have not slowed down and their product development.
And efforts, they're continuing on with their plans.
Any slowdowns or any any delays there are typical to it or.
Normal R&D cycle them processes. So.
For all practical purposes, and the medical side and.
And it feels like business as usual.
And then I'll shift gears and get back and King and for Sam just.
Up on on one on expenses and and one on the guidance range for one Q.
Just when we look at the operating expense level and I know some of the savings.
Are going to involve as we head into physical 21, when we look at the fourth quarter level.
$48 million and Opex and.
Should we be.
Gradually see more savings on that line is free.
And who physical 21, so that would be the first question just how to think of the quarterly cadence on total opex visa visa fourth quarter and and the second question would be on the guidance range in particular for one Q, It's a 20 million spread on the top line and.
And.
30.
25 cent ton of range on the bottom line and so maybe walk us through.
The lower end of that range wood wood sort of Utah, and a factoring in and the variables that can drive it to the upper and of the range. Thanks sure sure. Thanks, Anthony Let me address your questions by and at a time so in terms of Opex Opex.
We are guiding significant improvement for Q1 versus Q4. So Q4 was at $48 million there were certain expenses and that should go away as we around out the audit and the 10-K filing and all of that stuff. So essentially.
We are guiding 44% to $45 million beginning with Q1. So all the positions that were eliminated and the July August timeframe. They are beginning to use there'll be starting from October. So that's why that run rate is going to go straight from 48 to say 44 45 and then.
And it should remain at those levels.
Who out the year and if you would remember last quarter I had guided opex for the full year and the range of about $175 million in debt in that range for the year, and say $43 and $45 million per quarter by Q2 of 2021.
So I'm glad to say here that we are already at that range $44 and 45, and that's all that will build up.
Some of the other cost reduction initiative that we've been taking on for example, Santa Clara and some other position.
Eliminations, you are going to see that benefit and the continuous improvement and gross margin. So we just did 28% and guiding 30% to 31% and as Santa Claus benefits fully begin to get realized I expect gross margin to sequentially improved during the year.
Couple of one or two percentage points from one quarter to another so I expect gross margin to be nicely building up during the year based on the way initiatives.
Then lastly in terms of your guidance range.
Yeah. So the revenue is $20 million on the top line and the bottom line is at about $10 million and what really is happening here is we are and quite uncertain environment.
Given COVID-19 and all of that but at the same time. There are a few things that can change on us, which is which you know Anthony you've been with us for some time here.
Given the mix that mixed can change.
All the Lockdowns have started to happen and Europe et cetera. So we don't really know what exactly the type of makes that would come we feel good about the quarter and tons of where we are and we're halfway done with the quarter. So we feel good and.
And the next quarter is also beginning to form on a on a similar trajectory as this quarter. So we feel good about that quarter also but you never know there can always be a shipment push out by any one of our customers. So that's the revenue difference and then mixed can drive a change to a little gross margin.
<unk>.
And then lastly taxes can be different because we are closer to breakeven so taxes on a GAAP bases and start to behave and varied.
Unpredictable and back.
So that's the reason for some of this some of this range essentially.
Thank you again.
Thanks Anthony.
Our next question is from Larry shallow and C. J S. Security is please proceed.
Great, Thanks, and good evening, Sony and Sam.
A few follow up.
A person Anthonys question on the cost side did you see any benefit and.
I guess, some I guess it would be from the closure of the facility and.
Q4 at all and it sounds like the operating expenses and the headcount reductions were all.
Going forward, but did you get any any benefit at all or do we still get a full 14 million.
Uhm benefit.
Coming.
So Larry there were some benefits, but very very small the bulk of the benefits would begin to show up from Q1 for the positions that eliminated and Santa Clara The 14 million dollar I expect half of it because it's kind of a situation, where we are ramping the cost savings and a.
Way.
During Q Q1, so essentially half of Santa Clara benefits are going to go through Q1.
And.
And and when you look at that $28 million cost reduction program, 25% of that is and.
Alpex and 75 percentage and Cogs are gross margin and.
And when you look at that.
And if you just take simple numbers, Santa Clara and and half of it and position eliminations and half of it so half of Santa Clara is going through and Q1 remaining will go through completely through the P&L and Q2.
And then all of the position elimination and they would benefit over Opex and Q1.
Okay.
And that makes sense and could you just just a question and I know you don't break out and.
The adjusted gross margin between medical and industrial but just noticed city.
Industrial number was over 41% so.
You've never you haven't put up a non-GAAP, 40% number and you know going back two years. So I'm, just trying to was or something and that number that and.
Usually the benefit and yeah, so Larry the way to understand it is that at these low levels and do remember and our industrial business. We have machine sales as well as services services are on contracts and all of that so what happens is these margins behave somewhat erratically when the machine sale.
Low and we are really going through a very low period and the industrial business from a new machine shipments or installation perspective and that is that is what explains that type of gross margin behavior. There.
I would not suggest that the margin profile overall for the business and streaming in that direction. It would not and I didn't think I was actually more concerned that maybe the the day you know that was at one time or.
Or on the Flipside day.
A medical margins are worse and I thought I was actually you know so that's real and while I was yeah.
Yeah, It's just the mix within the industrial segment of machines, which this service and time and material type of service.
Okay, Okay, no fair enough and and just.
Switching gears just to the revenue trends realized your components business and and somewhere down the down and all of those.
No not not front and as elective surgery start to come back you know you want and see that benefit probably for a little while so, but you know and and that vein and elective surgeries and certainly come in and way off and her bottoms I realize COVID-19 is.
And since it is not and proving anytime soon although it does seem like.
And most of the medical World before and.
And maybe there was some pent up demand that causes but people are.
And to get back to it, especially for and things I absolutely have to do have you have you seen any at least I don't totally free.
Estimate.
Hospitals may start to purchase and.
Things is when you go out to 21 and we.
You better visibility maybe with.
Coupled with budgets coming out and on the beginning of hospitals fiscal years are any better clarity on that and are you still kind of very uncertain and timing.
Hilarious and sunny so the activity that our customers are seeing varies by geography and varies by modality. So.
As we mentioned and activity and China.
Has been for all practical purposes seems like every day normal business, but that's not so and rest of Asia rest of Asia.
Slower.
Pre before the second wave are these lockdowns I began and Europe, our customers were saying that they were encouraged by.
Being increased tender activity.
There were there was more quote activity and and of course, we're going out and so so that was that was a positive thing and they were feeling good about it.
Now of course with these current total lockdowns that'll probably slowed down a little bit because communication slows down et cetera, and then and America America is North America was the Americans was was slower and slowest. So that's on a region basis from a modality perspective.
What we saw was mammography was one of mammography and that those were the two that initially stopped very quickly right because these were and.
Outpatient.
Areas, but then the return also feels like you know it seems like as a modality they respond quicker they they stopped quicker sooner they really come back faster. So that's how we are seeing.
So we did see and uptick in mammography now that's coming largely because as you mentioned has these.
Elective.
I'll just call it and mammography screening as elective and that context as people go back to the office is open up and people go back to their screening activities. The usage of the system's them drives the replacement tube revenues for us. So we began to see and uptick and as as hospitals.
Become more active and outpatient imaging centers are more active we're seeing replacement tubes volume picking up so that's where we're seeing it in terms of capital equipment purchases.
Haven't seen any anything conclusive, one way or another but we have seen pockets of increased activity, which are encouraging.
Okay stick one on the product so it's on and and and you mentioned.
And that'll to technology, and you sound and I'm very excited about that.
What might we actually see.
And commercialization of this so it sounds like we're still are we still you know several years out from that or.
Is hillary as you look at our and and this is the can be a frustrating part of our business right that time to revenue tends to be long because if you look at that product lifecycle.
From the point, where we have first we develop the foundational technologies and when we have it would take into our Oems and they start evaluating it and then they start designing there.
Imaging applications around it and then they bring it to market. So we're at that stage, where we feel good about the foundational technologies that initial phase of development is is moving along very well and now we're making samples available to our customers who are now characterizing them and then so this R&D process continues on so give directly.
And your question.
Frankly be it'll be it'll be two plus years before we see anyone bring.
Our system to market, but the good news is once they bring it to market then the next 15 to 20 years, we stay engineered and they're right. So that's the.
Yeah, not so that and that's what I, yeah fair enough no and I and obviously hopefully several you can start will come to market and.
That would be great.
Absolutely and just just last question just on the on the cost again.
I guess, the 100 bps gross margin.
And targeted improvement and will be a gradual type thing that you hope to.
Sort of reach full run right as we had and too.
Since call 22 is that fair enough and and that would be like a $678 million type thing. If we just based on on.
Yes, yes.
So Larry I think we as I said, we started working on them, but these are.
These things move slowly I I'm, hoping that it has a beneficial impact.
And the second half of fiscal 2021 here so.
Target would be that for sure FY 2002 gets the help of full one percentage point.
And I'm, hoping even for Q4 of this fiscal year, we are able to get the full percentage 0.4, okay. Great. So you'll you'll get some graduate improve maybe not and queue on but maybe a little bit and given and Q2 to three or have you're going to get to the full blown and go a little bit slow slower and Q1 Q2, and then pick up her and cute and Q force so cute <unk>.
Two I will not count too much on that got.
Okay, great excellent and thanks, Thanks, a lot I appreciate the car.
Thank you thank you Larry.
Our next question is from scratch Kelly.
And the Oppenheimer and company and please proceed.
Sonny Sam Howard hope, everyone and safe and healthy.
Can you hear me are accurate.
Yes, we can.
Sending a bunch of questions for you and some for Sam Let me start out and high level Sunny, but obviously you guys for forced into a tricky position with this whole nonsensical, China tariff thing.
Now with the new administration on the horizon.
Do you anticipate any realignment that potentially could offer some incremental benefits, whether it's and work flow logistics.
Product streamlining.
Locally manufactured product any additional color day would be great.
Okay. So let me take that.
As you as soon as you might recall that we got hit by tariffs and the beginning and and we reacted very quickly to that and one of the things. We did was setup local manufacturing we said.
Today's China to Mark by day, India somewhere else, how do we make ourselves.
Local for local so good news here is that our local for a local.
Initiative, which is that manufacturing and Wuxi is is.
Is up and running for detectors and tubes, we've had multiple models. Many models of tubes. Many models of detectors being built so in a way where at in a situation where at this point.
For what we need to sell.
Sell in China, we feel confident that should there be and.
Reversed I mean, if there's a turnaround and it's reversed that's great it'll be.
It'll be helpful.
But if the tariffs continue and or if the tariffs increase we're hoping that what we have done by putting and local manufacturing and local local sourcing and China that we will.
We will offset some of that risk and and and create a.
A bit of a hedge for ourselves that's that's how I am looking at it hard to tell which way things are going to go with the tariffs I don't think.
I mean, this just it'll be totally speculative for me too.
Say something I mean, I really don't know all I can say is we saw that this is not something we would allow for two dog our business and the future and that's why we took the steps of locals where local like we did.
Fair enough Sunny you and.
I've talked a number of times about your cord cats with technology.
Obviously, there is a lot of buzz about.
About this new approach and potentially paradigm shifting.
Approach to to.
Two four concentration and X Ray generation. So suddenly you made some comment specifically if I heard you right you said it'll be ready and two beers, you guys and lifecycle testing free.
Frame the question a little differently, how do you balance cannibalization that could occur of existing versus new sockets with this new approach.
Have you done the internal price points.
How would this work.
Any any.
Any color that would be great.
Yep Yep, Hey, so in terms of lifecycle testing and those things. Those are those are all stuff that's underway and they will continue on so the work that we're doing now is and parallel with that so now we're giving.
These.
And.
Samples of too so to say engineering samples to our customers. So they can understand the how they behave how they operate so they can start thinking about what types of applications and modality would be useful for this now in terms of.
With this cannibalise existing product line and technologies.
First of all I expect what I expect will happen out of this is that we will get a lot of new customers. My that's obviously, that's what we would be pushing for Oems that didn't use our technologies and you know these.
The people that are lining up to evaluate these are and I'm really happy to see that a lot of new pens right. So that's from our from my perspective, that's a good thing and then in terms of cannibalization of existing technologies well you know this there.
And that could happen if one of our existing customers decides that they're next version of X Y Z modality will use and Amative based.
Tubes, so be it what we are going to do is to we have we're not at that stage to have set pricing and those other.
Parameters, but the intent here is that this thing has very significantly significantly different and new value proposition. So I would expect that this will be a net very positive thing for us to I'd, rather cannibalize ourselves and put out something that's technologically far superior brings a lot of additional value and advantage. So.
It'll be up that positive thing for us even if it replaces our existing.
Product line now we still have remember we have that any customer that builds this into their new application still has a very large installed base of the other technologies right and which will continue to supply. So this becomes a new enemy a new revenue stream for us for the future.
Got it and people are but I guess, what I mean, there's people are not going to.
Retrofit this into an existing product line, it's going to be mainly a new application and a new.
New revenue stream right now I get it I was just curious if you'll anticipate any of the existing sockets when the equipment lifecycle and.
Is up and.
And the new suck the new machine of the replacement would that incorporate if and all it incorporates.
And the core capital technology, and and they were ramifications for replacement cycle, and all that but I get your point I.
I guess and a couple of follow ups, if I could for Sam Sam.
<unk> just following up on the Anthonys question about the 20 million spread and the top line.
I'm not sure I heard about your ex implicit expectations for the medical versus industrial and the reason I ask is if I look at the medical or for that matter and industrial right.
It isn't clear to me that things have bottomed out.
Especially on the medical but maybe you can sort of give us a flavor of how you all are thinking in terms of this guidance and the second part of my question and I will just plug that and now.
And you'll mentioned about improvements.
I was just making notes and you said streamlining existing manufacturing operations, what this offset any gains from the Santa Clara shutdown and.
I was scribbling notes.
What I wrote was about 1% to 2% incremental improvement and gross margins every quarter. So should I think that as we exit next year, we're probably talking gross margins GAAP gross margins and the 31 35 ish per cent range or did I get that wrong. James. Thank you for taking my questions.
Sure so resolved.
Breath your.
Second question first here so.
The the big fear I talked about improving manufacturing in warranty et cetera. That's what I think you were referring to that is incremental to Santa cloud and related cost savings.
Spot.
And I just want to highlight that that entire initiative for fiscal year 21 will give us an improvement of one percentage points and gross margin. So just wanted to make sure that it is not 1% every quarter. So the way gross margin is lining up here and.
And that.
This coming quarter, we have some benefits from Santa Clara shut down the following quarter, we would have full benefits from Santa Clara shut down and the following quarter, we would have some benefits coming in from our warranty and <unk> and some of those initiatives and so that is how gross margin.
Ramping up.
So if you take.
Take all of these numbers that I have highlighted here and I think you are going to see that you would probably be looking at 32, 33% type of gross margin by the time the year is ending as opposed to say.
33% as opposed to 35% that you mentioned so that is one thing I want to highlight and these are all non-GAAP.
Numbers.
And then coming back to your first question and tons of the top line and the variability around that.
And our channel.
Let's see who's coming in and Covid is also floating up here and there and this is why we are highlighting 20 million dollar range on the top line and it is possible that some.
Facilities that our customers have the may or may not be able to take our shipments. So so far there is no such new the knowledge that we have but we had just being cautious about it and that is why we are giving this range. It's really the normal known so to say at this point, which is what we have and.
Cooperating.
But in general our guidance both for top line and also forward over EPS guidance.
We attract towards the midpoint of the values.
Our next question is from Tim and Sidoti was Cydonia Company. Please proceed.
Flow, Jim and <unk>.
Hi, Good afternoon, and can you hear me.
Yes, yes.
Hope everyone's well a couple of quick questions you talked to a little bit about the samples were prototypes that you have out and.
And the field now with some euroyen customers, how long does it take for that too.
Converting to orders.
First of all.
If it's an existing technology like an existing tubes existing detectors, usually that processes between 12 to somewhere between 12 and 24 months.
Tubes take longer to integrate detectors are usually faster.
This is a brand new technology, I think you're referring to our nanotubes based.
It's brand new technology, something entirely different and new so my expectation.
Jim and is that it'll take a little longer first of all customers have to figure out what the heck. This thing can do for them and they have ideas and then they have to do a lot of design work and redesigning a the modality and maybe a whole different way of thinking about what they're gonna do so.
I'll take it will it take will take some time, you'll take longer than normal. So we're not putting out anything out there in terms of.
For your timelines or.
Revenue trajectories.
All I'm, saying is and it'll take two to three years for people to bring something to market with this technology.
Okay, and Sam did you indicate whether you think you'll be cash flow neutral castle positive and make sure did you and make any comments would go.
I did not make any comments, but I'm happy to provide some color on that.
And tons of with our cost reductions and I think at current levels.
After this next quarter past this we should be cash flow breakeven that these these levels and essentially.
Obviously, what all we're working on is to reduce costs and improve gross margin and that should begin to play but the biggest thing is we would like and we have all day and everybody doesn't want recovery to happen. So we are nicely positioning ourselves from our cost structure and and gross margin perspective.
To be able to receive the recovery well and that should really improve.
The cash flow performance of the business.
Okay and were there any additional and the staff reductions and the and the fourth quarter.
Yeah, we only and fourth quarters, sorry, not only said on made a fourth quarter. We had about 94 positions that were eliminated and the U S. So that staff reduction was there and then a low grade of there are a few other <unk>.
Small options that are still.
Being worked on and we haven't completed and fully but they are they are.
Minor piece compared to what was done and July August.
So is it fair to say the bulk of this day I productions or or your past the bulk of the staff reductions at this point.
Yes, I think that is very fair to say that bulk of the staff reductions are behind us at this time that is fair to say.
So if we look at the guidance and gave for for the first quarter of fiscal 21.
And I'd like to <unk>, you're putting comfortable with the level of the staff or we have right. Now I know you don't want to go out and get blown and some guidance, but is it fair to say that you think that things are pretty much bottomed out the last two quarters and.
You don't expect business to deteriorate significantly from the level of it is right there.
So Jim and.
And we would never say and that will again type of a thing but in terms of our business look Q3, Q4, we have that it has stabilized and thats tabular and although at a lower level.
We are just waiting for the recovery to happen. So I think your understanding or interpretation is correct. We're not seeing any further day gradation of our business and it seems to me, we kind of bottomed out maybe July.
In terms of the month performance.
And so that's where we are but at the same time.
Major piece of recovery, we're still waiting waiting for and we will be ready for it as it comes.
We are taking this time to get our cost structure and gross margin structure at all and line and as.
As.
Top line and <unk> from where we are currently.
It should provide and nice tailwind to overall performance, including growth and and operating margin.
Alright, thank you.
We have reached and have a question and answer session and I'd like to try and the conference back over to management and for closing remarks.
Alright, Thank you for your questions and participating and our earnings conference call for the fourth quarter and fiscal year 2020.
A replay of this quarterly conference call will be available through December 1st and can be accessed with the company's website or by calling 87766 06853 from anywhere in the U S.
Or by dialing 201.
6127415 from non U S location.
The replay conference call access code is 13712445 thank.
Thank you and goodbye.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.