Q1 2021 Varex Imaging Corp Earnings Call
Greetings and welcome to the earnings conference call for the fiscal year of 2021.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Howard Goldman.
Rector of Investor Relations.
Good afternoon, and welcome to vertex imaging Corporation's earnings conference call for the first quarter of fiscal year 'twenty 'twenty one.
With me today are sunny Sanyal, our president and CEO and Sam Maheshwari our CFO.
Please note that live webcast of this conference call includes a supplemental slide presentation that can be accessed at <unk> website at investors Dot Verex imaging dot com.
Webcast and supplemental slide presentation will be archived on <unk> website.
To simplify our discussion unless otherwise stated all references to the quarter or for the first quarter of fiscal year 'twenty 'twenty one.
In addition, unless otherwise stated quarterly comparisons are made sequentially from the first quarter of fiscal year 2021 to the fourth quarter of fiscal year 2020.
Rather than to the same quarter of the prior year.
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 could cause actual results to differ materially from those anticipated.
Risks relating to our business are described in our quarterly earnings release.
And our filings with the SEC.
Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including item one a risk factors of our quarterly reports on form 10-Q.
And our annual report on form 10-K.
The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward looking statements in this discussion.
On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures.
We've provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.
Now I'll turn the call over to Sunny.
Thank you Howard.
Good afternoon, everyone and welcome.
I'm very excited to say that last week was our fourth anniversary as an independent public company.
We continue to remain focused on our mission to help improve and save lives throughout the world by making the invisible visible.
We are a world leader in X Ray imaging products for medical and industrial applications.
And with the help of our 2000 colleagues as well as our customers and suppliers over the last 70 years, we have continued to bring innovative and breakthrough technologies to market.
Global Oems incorporate our mission critical components into their X Ray imaging systems, and we have continued to strengthen our relationships with them many of which span more than for decades.
Our first quarter results came in towards the higher end of our guidance range revenues increased sequentially by 4%, indicating the start of a recovery in our business.
Global demand for our C. T tubes that stayed strong during the last few quarters and Q1, followed the same trend.
Our non-GAAP gross margin increased to 34% they.
The improvement was due to realization of benefits from previously disclosed cost reductions as well as a favorable shift in product mix within our medical segment.
Non-GAAP operating expenses were down approximately $3 million, reflecting our continued focus on profitability.
As a result, our non-GAAP.
Operating margin improved to 8% of revenues.
Non-GAAP EPS also came in towards the higher end of our guidance at eight cents per diluted share.
Cash improved $206 million driven by positive cash flow from operations.
Yeah.
Let me give you some high level insight into how our different modalities performed during the quarter.
We previously indicated that our business has stabilized.
This quarter, we began to see a recovery.
C. T has continued to remain strong for a number of quarters, including Q1.
Much of our <unk> business is coming from new system installations, which bodes well for our replacement business in the future.
In fluoroscopy and oncology, we saw some improvement primarily driven by an increase in patient visits for elective procedures.
Our other medical modalities remained sequentially flat for the quarter.
Industrial is also beginning to see consistent sequential recovery cargo and port security as well as baggage screening business remained low but other non destructive testing and inspection verticals showed improvement.
Let me now give you an update on our progress in China, where we are seeing continued momentum.
As a reminder, we estimated that approximately 25000, new C. T systems will be needed in China over a 10 year period.
Partially in response to Covid, we believe the Chinese government intends to accelerate for installation of about 10000 C. T systems over the next few years.
These systems will be placed in so called fever clinics and emergency departments at local hospitals in order to provide dedicated C. T scan of rooms for patients with infectious conditions.
As a result, we're seeing a significant increase in demand for our tubes for new city systems in China.
For the past few years, we've been working with eight Chinese Oems and have active pricing agreements with them to incorporate our C. D tubes, and other components into their new C T systems.
On the left panel on this slide you can see the current planned introduction and rollout of different C. T scan our models by various Oems.
As we have said before these Oems are making steady progress with their product development and we are confident that several new C. T models utilizing our components will hit the market over the next couple of years.
Now let me give you some perspectives on how <unk> is positioned for growth.
Our business has started to exhibit sequential growth that should lead us back to pre COVID-19 revenue levels of about $200 million per quarter.
The pace of recovery will initially be driven by increasing demand for service replacement products.
As surgeries and elective procedure volumes increase.
Service replacements are typically funded by hospital operating budgets.
Whereas the purchase of new imaging systems require capital expenditure budgets.
Beyond the initial recovery, we expect that hospitals on medical facilities will begin to commit capital for new imaging systems once utilization levels reached certain thresholds.
We also expect that Covid vaccines will play a key role in increasing utilization levels.
In our industrial segment, we expect to see continued gradual improvement as the broader a common economy recovers.
Yeah.
The pandemic has revealed substantial vulnerabilities and the preparedness on health care systems and associated infrastructure globally.
In response in the midterm just like we're seeing in China. Other governments on medical facilities around the world are likely to increase spending on health care.
Such spending is likely to occur over many years in numerous areas of health care, including modernizing and expanding X ray imaging capabilities.
Over the long term, we expect our new technologies on innovative products to drive growth.
These include our photon counting digital detectors, and our nano nanotube technology, which I will discuss in a moment.
Let me give you a summary of what we have achieved as a company since the spin off from Varian and where we are headed.
During our first three years, we focused on standing up a new public company completing the integration and consolidation of a major acquisition and expanding our global footprint.
We consider <unk>, one point out to be a success.
Beginning last year, we entered the second phase, which we call. There. It's 2.0 and are in the early stages of this transformation.
Here, we remain focused on three major areas for.
First strengthening our balance sheet.
Second improving our operating margins and third accelerating our growth through innovation.
We have already completed the first element of our transformation with the new capital structure that provides increased flexibility with limited financial covenants.
Second we're working to improve the operating structure of the company. Our objective is to improve profitability by expanding our gross margin and reducing our operating expenses. We expect the significant cost reductions that we recently made to largely remain in place even as the business recovers.
And third we're focused on releasing new products based on game changing changing technologies.
We expect that our investments in new and innovative platforms will enable us to release, a number of new products over the coming years.
While adoption of new technologies can take several years upside is a long multi year tale of recurring revenues from products that have been engineered into our customers' X Ray imaging systems.
Our new products include the XE platform family of dynamic digital detectors. These detectors are designed to produce high quality images at lower doses compared to equivalent amorphous silicon detectors.
Since the acquisition of direct conversion, we have continued to invest in our photon counting technology <unk>.
Detectors using photon counting produced high contrast images at low doses and enable very good soft tissue resolution due to their ability to do precise energy discrimination.
An exciting application for photon counting technology is C T detectors we.
We plan to leverage our technology to enter the Cte detector market, which is complementary to our <unk> business.
At RSA last year, we introduced our new photon counting C. T detector modules. These modules should soon be available for our customer evaluation. We believe our entry into the C. T detector market has the potential to expand our addressable market by half a billion dollars.
While the adoption of this technology may take a few years, we are excited about the opportunity.
We continue to work on nanotube technology with our joint venture <unk> imaging.
We are developing a multi beam cold cathode ex Sri nanotubes.
We are pleased with the progress we have made so far and look forward to providing updates on future developments.
Yeah.
In our industrial segment, we intend to grow by extending our technology into select verticals.
We have been focused on our components and sub systems and going forward in certain verticals, we may develop full imaging systems.
We are excited about industrial products, we are developing.
With that let me hand over the call to Sam to talk about our financial performance in greater detail.
Yeah.
Thanks, Sunny and Hello, everyone and wish you all a very happy new year, and hope you and your families are keeping safe and healthy.
As a reminder, unless otherwise indicated I will provide sequential comparison cell phone results for the first quarter on fiscal year 2021, with those off a low fourth quarter of fiscal 2020.
As Tony mentioned, we have begun to see recovery in our business first quarter revenues were $177 million, an increase of four per cent from the fourth quarter of fiscal 2020.
Medical segment revenues by $139 million or 79% of total revenues.
<unk> segment revenues were $38 million on.
21 per cent of total revenues.
Sequentially medical sales grew 2%, while industrial sales saw a robust 11% growth.
On a regional basis first quarter revenues were $62 million in americas' $58 million in EMEA and $57 million in the APAC region, we saw strong growth in China.
Let me now come on on the results on a GAAP basis first quarter GAAP gross margin was 32% a sequential improvement of 570 basis points from the previous quarter GAAP operating expenses were lower by $7 million compared to the fourth quarter and loss per share was <unk> 16 on a fully diluted.
Yes.
Let me now color on why results on a non-GAAP basis comparable GAAP measures have been included in our earnings release posted on our website.
Gross margin was 33 six per cent a sequential improvement of 580 basis points from the fourth quarter and significantly ahead of the midpoint off for the previously communicated expectations.
Please note that we completed the exit from Santa Clara manufacturing operations in Q1 itself a head of the previously stated schedule.
As a result, the Santa Clara closure related savings well fully reflected in our Q1 non-GAAP results.
Just as a reminder, we had previously communicated that we expected to fully realize the savings from the second quarter on books.
Overall Q1 gross margin when compared to Q4 benefited from progress on our cost reduction efforts favorable product mix and to a smaller extent by higher sales volume.
In general I want to remind you that are on gross margin can fluctuate from quarter to quarter due to segment mix between medical and industrial.
Mix within each segment customer concentration cost performance and factory utilization levels.
One of them for fiscal 'twenty 'twenty, one initiative to improve efficiencies in our manufacturing and leasing efforts.
Where we are targeting a gross margin improvement of 100 basis points by the end of this fiscal year.
When revenue volume returns to pre Covid levels, and we complete our efficiency initiatives, we expect non-GAAP gross margin in the mid <unk> level.
R&D spending in the first quarter was 9% of revenue as compared to 10% in the prior quarter due to lower spending in R&D materials.
Non-GAAP operating expenses were $46 million and down from $48 million in the previous quarter.
This $2 million sequential decrease was due to lower R&D expenses as well as fully realizing the benefit from reduction in force that occurred in the previous quarter.
Non-GAAP operating earnings for $14 million as compared to a non-GAAP operating loss of $1 million in the previous quarter.
As we outlined in our prior earnings call. Our annual cash interest expense is approximately $32 million or about $8 million per quarter on.
Though the amount actually paid in the quarter can vary.
Non-GAAP tax expense in the first quarter was $2 million the tax rate in Q1 was unusually high at 34 per cent due to Q1 being the transition quarter, where we started generating profit from operations as opposed to incurring losses in the prior few quarters.
Yeah.
Non-GAAP net earnings were $3 million on eight cents per diluted share.
This compares to a non-GAAP net loss in the fourth quarter of $2 million or four cents per diluted share.
Now turning to the balance sheet.
Accounts receivable decreased by $3 million inventory decreased by $2 million and accounts payables also decreased by $5 million during the quarter.
Inventory reduction is a priority for us we have started to make early progress on this initiative and continue to target a $25 million to $30 million inventory reduction by the end of this fiscal year.
We plan to achieve this through a combination of completing facility consolidation implementing lean programs for the streamlining of our supply chain and discontinuing low velocity products.
However, our reduction efforts have been partially offset offset by the need to bring in higher levels of raw material to support growth in sales.
In the first quarter inventory declined by only $2 million from the prior quarter.
Now moving to debt and cash flow information.
Cash flow from operations was $7 million, we ended the quarter with cash of $106 million on the balance sheet, an increase of about $5 million.
Gross debt was $514 million and debt net of cash was for them at an $8 million.
Adjusted EBITDA was $22 million in the first quarter, a significant improvement from $4 million in the prior quarter.
Now moving to our business outlook for Q2.
We expect revenues between $180 million to $200 million driven by continued recovery in our business and non-GAAP earnings per diluted diluted share between five and 25 cents.
These expectations are based on non-GAAP gross margin between 33, and 35% and non-GAAP operating expenses in a range of 44% to $45 million.
And with that we will now open up the call for your questions.
Okay.
At this time, we'll be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is on the question. Kim You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment for us while we poll for questions.
Our.
First question is from Anthony Petrone with Jefferies. Please proceed with your question.
Thanks, Sunny and salmon and congrats on a good quarter and start to the year, maybe a couple for Sunny and then I'll follow up with a few for sand Sunny maybe just starting with the medical can.
Can you give us a sense maybe by indication where are you seeing strength I think last quarter mammography what was the driver.
And was offset maybe perhaps a little bit by dental and maybe just an update on and indications in medical where you're seeing strength and then pivoting.
Pivoting to China. The rebound there can you give us a sense of how much of that is driven by C. T tubes versus all the components on.
And in particular are you seeing any recapture on the flat panel detectors side.
Hey, Anthony.
So one thing that's been consistent.
So for the last several quarters has been we've seen strength in C. T. So on the medical side, we've continued to see strength in C. T and we've now seen some uptick in a couple of other areas like fluoroscopy oncology.
And these are driven by you know it.
The ongoing increase in patient visits in procedure volume.
For the quarter, particularly we see you know dental has we know dental was down last quarter dental also continued to be slow and soft this quarter and mammography was softer as well.
So the strength this quarter, primarily came from a recovery in oncology fluoroscopy and N C T.
And your and your question about China, China for US is a very strong C. T market. So that means P. T tubes, and other components that go with that you know as you know we are we sell sub assemblies in China related to Cte we sell high voltage connectors on and you know.
There was a general pull through of components that are tied to see T. Youre.
Your question about detectors, you know Theres there hasn't you know we talked about.
Our detector production in Wuxi is up and running we have begun producing dental detectors and B you have seen an uptick from customers in that area, but there's no particular.
Details that I can give at this time about recovery in Denver and detectors.
In China.
But in general you know there.
The market has been strong on C. T and we are continuing to you know.
Our strong our strength and our position with our customers and market leadership is helping us there.
And the follow on would be on industrial and then one for Sam on gross margin on industrial I think you referenced non destructive testing doing well here.
When do you.
Envision you'll see a rebound in an airport security and cargo screening on when do you think those two businesses can get back to pre COVID-19 levels and then for Sam on gross margin.
How much of the sequential uptick was specific to Santa Clara.
On savings relative to mix.
Thanks.
Okay. So on the industrial side.
On the non.
Non I'll, let me start with the non security related vertical so that that is.
All of the other NTT non destructive testing and inspection there the recovery was fairly broad based with.
With the exception of aerospace we know aerospace is still down.
But we saw from you've seen the beginnings of a recovery in most other verticals in food and in electronics inspection battery inspection automotive food inspection and so that's been a very encouraging.
Security and particularly.
Particularly cargo on security inspection, but we expect to see start seeing some amount of recovery in the second half of the year.
As you have noted as you might have noticed and we've noted that our there were some major tender wins by our customers those tender wins have not translated to specific orders for us because the delivery side has been slow and our it is our customers have had been challenged buyer with due to COVID-19 and in getting.
Their installations scheduled but it we're actually we're very.
Happy to see that there has been orders activity and sooner or later those will translate into actual shipments for us we expect that to be in the second half of the year.
Airports different story, we have seen some.
Some modest uptake in passenger travel related activity at airports on it that has translated to a little bit of Uh huh increased business at airports tied mostly to our tubes that go into the baggage screening equipment.
But nothing yet that I can call is a strong trend or a major contributor.
Yeah.
Sure. Anthony This is Sam here I'm trying to address your question on.
Gross margin so sequentially from Q4 for Q1, we saw about six 6% improvement for per cent of that is related to what we call the cost bucket.
1% improvement is due to product mix and say about less slightly less than one is related to uptick in volume here.
So within the cost bucket, the 4% about three per cent of that is from our cost reduction efforts and Oh.
So it's a 2% for Santa Clara migration, 1% is a number of positions that we eliminated in Q4, which is now fully flowing through Q1 results. So again, 2% Santa Clara 1% cost reduction.
Outside of Santa Clara and then another 1% and driven by productivity improvements improving games and stuff like that so that's all on 4% improvement in cost.
And 1% in mix and a slightly less than one and the one area.
That's great. Thank you I'll get back in queue.
Thank you Anthony.
Okay.
Yeah.
Our next question is with Larry So low with CGS Securities. Please proceed with your question.
Good morning, Oh, excuse me good afternoon, guys on that.
Thanks for taking my questions.
The first question kind of a high level question.
So on and then maybe for you maybe you can give or take on Scott. So I know you sort of target getting back to the pre COVID-19 levels, which.
800 million plus or minus and it does sound like you know if we take the high end of your guidance.
Maybe that's a little bit of your you know your aggressive position, whereas the low end as sort of a sequential flat number but just trying to decipher do you you know, but between the low end on the high end.
Is there do you see that as being the difference between.
How do you market actually coming back on your mix significantly improving in some of the areas in medical that it's lagged or are there sort of other variables there.
Look I'll ask Sam too.
Price some additional color let me just interest.
Yep.
Maybe the latter part of your question do I have to answer that.
When we talk about when we say recovering to our 2019 levels basically means to get them back for the 195 to 200 type of quarterly run rate.
To get there, we will need to see well.
Net there two things would have to happen ongoing strength in medical and recovery in medical Fortunately for us the seat the CPE side of our medical business is doing well and we expect to continue to see strength there show that all all the medical wagon.
Harder than it has previously if you have a year on a year over year basis. So I think the medical side, where we expect to continue to do well through a C T but to get to the $200 million level, we'll have to see some recovery in our AR on the industrial side that is more broad based so we will continue I'm I'm happy with debt recovery that we're seeing in India.
But we'll need to see some recovery in cargo and that's likely to happen towards the second half of the year. So I can't give you a timing, but you know that.
We'll have to see broad based recovery to get to that 2019 levels, but all the trends are encouraging.
But you can set up on all the way it sounds like it sounds like almost you know qualitatively you.
You know not all of your markets I'm fully recovered and I wouldn't expect them.
To fully recover in two quarters.
So to me on it seems like that 200 number when we get back to full recovery, especially with China on now I assume at a higher level than we were a year ago and growing debt you know for recovery, maybe we could be at.
Not putting a number on it but above eight hungry for employment.
Right because it does sound like qualitatively, you're not there yet maybe a couple of quarters, but maybe as we look out and you get into 'twenty. Two just on a macro level. So to me. It's at 780 to 800000 of cardiac number you know that.
Sort of how I look at it. So I was just trying to figure out gauge what's in that number on what could surprise even for the upside as we look out.
Yeah, So again, what's going well for us to see so if <unk> continues to go well and if every other area. Also recovers then you were talking to the scenario you're talking about is possible right. At this time dental is still down it hasn't recovered.
And it's slow it'll get there we're confident we'll get there because people do need to go to the dentist office and they need to maybe you didn't plant and all that will come back with interest see recovery dental we need to see a recovery in mammography and if let's say all the medical modalities are firing on all cylinders and we're getting the uplift from C. T. Then it should be a good situation for us.
Yeah right.
I'll also add standpoint, industrial yeah, Larry industrial is still below its historical level. So industrial loans. So it comes back so that can also add to a low growth here moving forward.
Right and then you guys sort of said as you get back to pre COVID-19 levels gross margin.
Settle in in the in the mid Thirty's could could we.
Is that sort of can.
Could we ever get back what sort of is there a fundamental obstacle to ever get back sort of to that targeted 38% to 40% that you had targeted for several a couple of years, even post spin or is that or maybe even just about 38, maybe the low end of that range and that's something that would.
Inevitably attainable not without putting a timeline on it.
Yes, So let me try to address the questions Larry.
So look right now we have some initiatives going on.
Manufacturing and servicing area and compared to what we just reported there's also upside to volume here. So as these efficient as these initiatives get completed and the volume comes back I think I'm looking at mid <unk> type of for gross margin call. It mid <unk> plus minus one you know something like that.
Right and then beyond that beyond that range on one of these initiatives are completed and once the volume is back on.
I think we still target the highest toady then.
<unk> 30, you said 37 38 per cent type of for gross margin that is our goal.
But for that goal you would need these new technologies and new products to be released to provide us that boost of course volume driven boost will.
<unk> will help us.
We crossed the 200 million on the.
Quarter type of for level, but we do we do need these new products also to give us that extra boost to get to 37 38, 39% type of for gross margin and that is definitely on Google and target. So that's how I see us getting there in terms of our gross margin.
Okay, Great and then just back on just one last question just on on the China opportunity in front of you mentioned on them.
I know, there's like the finishing at 25000 C. T machines over I think it was a 10 year period, and you spoke on sort of expedited or taking a slice of that and.
The.
40000 machines for thousand machines in that.
It sounds like you know if you do the math on that number.
On about 10000 machines could be you know.
Paul I think the tubes are like $40000 is that still sort of the average price of a tube and is it still sort of you and Philips who are the only.
Primary suppliers into China today.
Yeah. So let me start with the last part.
Yes, so for from an OEM for sale.
Sales to Oems.
For a market leader and it's us and largely Philips in terms of the global suppliers.
In terms of the you know the average price.
And on the mix so it's not as high as 40 40000, because it's a mix of a variety of different from high end Tvs to the 16 slice C piece. So it's a it's in a different let's.
Let's say bracket, so to say and I won't call out with average prices, but the good news. There is what you were referring to which is the acceleration of the C T.
Purchases. The number 10000 has been thrown around by our customers as they are trying their plants as they're planning for what capacity expansion as they need to put in place and by the same token, they're asking us to be to be thinking about our capacity as well to be able to deliver so they're expecting in the range of about 10000 C teased out over the next few.
Years, which had clearly been acceleration and so that's and by the way.
The reason China is doing this is also.
The thought process here that that we that.
We committed that we are that I mentioned in the in the earlier in the prepared remarks that we expect other governments would do something similar you know which is the pandemic has shown where the chinks on their armor and the weaknesses in their health care delivery systems have been exposed.
Through this pandemic and that should part of the Chinese government, particularly they have expressed that they wanted to separate the main inpatient facilities from from or I'm, sorry, they want to make sure that the patients are diverted to alternate facilities.
For it particularly for infectious diseases. So that's the notion of setting up for you. There I think they are calling a fever are clinics the fever clinics basically our facilities that are junk to the hospital is part of the same campus or a part of the same facility, but it's a separate location and and and and.
And so they want to equip it they realize that if they bring in COVID-19 patients into the middle of their hospital Theyre endangering their broader hospital population and there.
Consuming the capacity on the broader hospital and hurting their ability to deliver health care to others, which resulted in all kinds of downstream mess and capacity issues and then ability to manage the pandemic. So this is actually a very progressive thinking here by them to set up your sleeve or clinics and so we've also said that they would equip the emergence.
Their emergency rooms, with <unk> scanners, so that.
For fast Triaging now play that forward. There are many countries that are in this situation and the political our elected officials and many countries are looking at this as a career breaking situation that no. One wants this to happen on their watch again. So we believe that there will be a general push towards closing these gaps and so this is gonna be on ongoing.
Thing and it's a good thing for US where we will see continued investments in health care delivery of care delivery and once you do that the first thing you need is medical equipment, particularly imaging. So we expect price to be a favorable trend for us.
Okay, Great I appreciate that color. Thanks, a lot.
Our next question is with Suraj.
Clearly with Oppenheimer and company. Please proceed with your question Hello Suraj.
Sure Good afternoon, Sonny Sam Congrats on the quarter.
Hello, Thank you.
Sorry can you hear me all right.
Yes, we can hear you okay perfect.
So sunny let me start out with a very high level question, and then I'll drill down into too specific and draw the technical questions.
Listening to your commentary Sonny you sound very confident about the outlook.
I understand the initiatives that you and Sam are putting in place to drive varix two point on it and I think so the numbers are starting to show a show the results.
Your comments about the end markets.
They were somewhat mixed.
Maybe I can phrase the question differently what are your end customer seeing in terms of speeding up on the average sales cycle.
Just trying to see if we can get some leading indicators.
From you guys in terms of what what's happening at the end markets and trying to plan out from that scenario.
Hey, Suraj.
First.
Confidence in the outlook.
A lot of actions that we took.
Last quarter on the quarter before that are helping our improve our financial performance such as the low the cost reduction actions that we took the factory initiatives that we put in place to improve productivity efficiency. So part of my confidence in our financial performance and on my optimism or.
From the fact that those actions have been completed and many of the actions already completed and you know both related to Santa Clara and non Santa Clara. So as we look for a line of sight to are the benefits from those with where we've got clear visibility. So.
That's one.
Confidence factor so second in terms of end markets.
I would frame it as optimism more so than super confidence so when I see that our when I see a recovery in our volumes in oncology when I see recovery in volumes in broad based modalities like fluoroscopy that means people are going bad the hospitals are performing.
The general elective procedures in general surgeries, which had really come to a grinding halt previously so that's a that's a positive indicator of that.
Even though COVID-19 is still ramping and even though.
Countries in Europe, how are in Lockdown state the health care delivery side is has not allowed itself to get frozen like it did.
Nine months ago. So that's a that means for US went as we and as we look at our.
Inbound orders on incoming orders and what we're seeing.
That's that makes us believe that we're now starting to see a recovery.
You layer on top of the fact that no one seems to be the lockdowns don't seem to be locking down on hospitals and health care delivery. That's what gives us confidence that the recovery is moving in the right direction.
Now where are and where some markets haven't quite recovered the way we would like to see them happen has been like I said in mammography and dental.
Those are you know those vary by geography, so if so when.
Thank you.
Hard to pinpoint, which we can win but at the same time, if you take the general inpatient trend. The inpatient trend has been very very good in my like that that fluoroscopy.
Another surgery and other procedures are coming back.
We haven't exactly seen that in the outpatient space, yet so mammography and dental are predominantly the outpatient space. There we're seeing increase in replacement volume that means yes procedures are being performed but.
Larger increases in volumes will come when people start placing orders for new capital equipment, but you know once the procedure volumes come back once the hospitals I mean these clinics start performing these procedures than the average utilization goes up then the replacement cycle starts.
Now moving forward. So we're optimistic that if as long as patients keep go on to these clinics than the replacement of older systems, and addition of new systems too.
To handle the capacity those will start to come back so while we can't pinpoint timeline. These are all positive trends okay.
Layer on that the fact that even though a vaccine.
Distribution Hasnt picked up.
The pace, yet there's a general optimism in the market that theres going to be a flood of vaccines in the near future because there's so many different manufacturers that up now that are in the throes of introducing their vaccines. So all this is contributing towards our sense of end market optimism here that we're sharing.
Now our customers.
They have given us anecdotal.
Guidance that their sales activity is picking up but there hasn't been very specific guidance on when exactly some of these are some of the orders backlog that they have captured with what velocity, though they'll start.
Shipping those except for C T and C. T people want it now they want it yesterday and so there's been a high sense of urgency around C T. But the other modalities, they're picking up orders, they're booking orders, we like that and that means sooner or later the shipments will come. So that's you know look all of this creates a positive atmosphere, which perhaps.
Same thing from us.
Got it.
Sunny this might be getting down into the weeds and I'd be more than happy to take it offline. So you mentioned about your photon counting detectors for C T applications.
I can't help but think when you launch it eventually with a partner is the emphasis gonna be purely on any or at least initially on image quality or are there going to be some clinical attributes that would also be in the mix I E dose reduction that potentially.
Or do you think that would be the next phase.
Marrying up with your core capital technology.
Hey, So let me just comment in general about photon counting and what what it's capable of and then Suraj you answer to your question about how they'll manifest themselves in the field Luckily a lot will depend a lot on how our customers choose to implement it so photon counting technology.
It's it's main benefit there's two two huge benefits from photon counting number one.
Since it.
X Ray photons vs measuring.
Yeah.
Something.
That's a proxy for let's say.
Amount of.
Equivalent to what would be a way for them as an amplitude instead of measuring the value of that we're just counting this is like a M to F. N M used to measure the amplitude it was.
Festival to noise, so photon counting detector because it does not measure anything thats an intensity. It's it is not subject to noise. So theres no. So if you take a signal to noise ratio, which is the number one thing that impacts your quality of your image.
The noise, which isn't the denominator zero. So so youll get theoretically very very high signal to noise ratio.
So conversion efficiency of a photon counting detectors very very high and what that means is you get very good image quality.
With very low dose that means these detectors are exceptionally sensitive that's number one exceptionally sensitive detectors debt and every photon of X Ray is used in the imaging process versus your traditional detect theres a lot of that is lost and you get cross noise et cetera, So dose reduction sensitivity number one number two and.
This is where some of the applications creativity will come in with from our customer side, which is photon counting detectors are able to while we're capturing and counting the photonics, we put them in different buckets of energy levels. So that means you get you can just differentiate very very precisely on all kinds of.
So very precise material discrimination now what that means is you get.
You've heard people want dual energy they want on spectral imaging what it all comes down to is can you how well can you image soft tissue, so photon counting detectors, because their inherent ability to to energy discrimination and the way, we build our photon counting detector and its the software algorithms, we can do very very precise.
Energy discrimination, which then if you take these as the foundational capabilities. What we expect is that our customers will apply these to their new development and come up with new applications, new clinical algorithms.
And really we'll have to watch and see how they position them.
In terms of their effectiveness.
I can't quite answer that part of the question, yet, but we know that the capabilities bring enormous.
Potential opportunities for the table for for new applications for it.
And somehow on the last one on I'll hop in queue.
As have been public for a relatively shorter period of time.
And we look at product life cycles, right intuitive surgical day launched the da Vinci XI in 2014.
Now 70% had been replaced.
We can clearly map want us to on Okay. This is what happened.
And the net effect on when we start talking about you guys are working on some pretty interesting innovations that deal are still relatively tight lipped about whether it's for tonne corcap. So on and so forth how should we start thinking about can you give us. An example of you know in the past under very and you know this was.
Lifecycle.
We can sort of extrapolate and say okay. This is the time where.
We should start looking at the next step up.
In terms of the churn and new technology coming in thank you very much for taking my questions.
Hey, Suraj that last question was.
Very good question, but a very difficult question and so let me frame it for you.
When we have an existing platform in the market So let's say.
Amorphous silicon detector actually I mean, even backup further let's say when there were.
Film was being used NCR was being used for detectors and we wanted to bring.
Analog too I mean, we want to move to digital let me introduce digital detectors. It takes for a new platform. It takes a very long time. It takes five to seven years of active development work and then your Oems get into it and by the time, they bring something to market. It can be closer to seven years on you know or more to actually start seeing.
The result of that that technology investments start to pay back with revenues, but then after that you get this very long a.
Stream of revenues because in health care, two things adoption cycles.
Can be slow, but there's also a very large installed base. So when you were talking about digital detectors. You were talking about two things you were talking about introduction into the new systems and then there is the massive installed base of half a million or more X Ray based systems that are out there that eventually will get converted so you get this tale, that's very very long so a new platform takes.
Very long for to bring to market. It also takes the adoption rate is slower, but there's generally a tipping point and the tipping point, even though digital detectors for introduced 20 years ago that tipping point came with reimbursement and <unk>.
Accelerated adoption of radiographic detectors into the market and so volumes have picked up alright long winded answer.
But when we have an existing product now that we have detectors in the market for us to bring new detector models on new detector products. Those are relatively fast so from that perspective, we expect that R. R.
Yeah.
Our Z platform, even though it's a new platform. It's not the same as going from film to digital detectors that cycle, we expect to be faster. It's taken us about three years to bring digital detector, sorry, Z platform to market and now our customers are catching the front end of their of their new product introduction cycles. So now we're in our <unk>.
Customers development cycles for introducing the products, which is somewhere between one and a half to three years. So we will start we will start to see revenues from these customers start ordering engineering.
Supplies et cetera, and we will see sooner, even though we call. It a new platform. It is actually on its digital detectors. So we will see faster adoption than let's say the first digital detectors.
Now fast forward to <unk>.
Photon counting photon counting is a is a.
Is a very drastically different type of a detector.
And a different type of an application. So it takes longer what we have seen now is that over the last few years, particularly driven by the fact that we have gotten over some of the technical hurdles. The interest in it is expanding we still expect that it's a new platform. So our customers will have to do a lot of work with software in there.
Applications to bring this to market and we.
We will we will see that option, but it'll take some time it will take some time on our customer side. We are now ready for getting very close to being ready for it now we're in our customer cycles. Then you take nanotubes, it's farther behind than you know photon counting detectors in terms of the market understanding. These technologies there I think the adoption cycle will be similar.
Two when you bring.
Digital technology to market versus analog it's a whole different platform. So I don't know of a clean answer for you. Other than these are long product cycles, we're just going through them and it'll take some time for the market adoption, we will be there faster than the market as always happens, but once it changes then a sea change occurs and we get the front seat in that.
In that race and we're looking forward to that.
Thank you.
As a reminder.
Please press.
Star One if you have a question.
Our next question is for non.
On.
Jim Sidoti with Sidoti <unk> Company. Please proceed with your question.
Good afternoon, Sam can you hear me.
Yes, we can Jim how are you.
Great great.
I think you've got a really good job Tonight.
Laying out where you think for businesses and how it's going on.
The one question I had was.
It's been about a month now since we've.
We changed the administrations.
Have you seen any impact from that and do you expect.
Any impact from that at this point.
Go ahead your tax rate tariffs on those issues.
It's Jim Great question tough question, but yes, let me have that for them.
Yeah. So.
So hey, Jim so far we've not seen any change and you know.
We will be closely monitoring anything that comes out. So that's really on I think you had in a monitoring mode.
It's.
I can say at this time.
But we you know our from a tenant that's on the tax side on the tariff perspective.
You know we've been working on our local for local manufacturing strategy. So we have plant in Wuxi in China, and we also have a factory in Europe and of course here in Salt Lake City. So we've been moving slowly.
Slowly and surely towards.
Towards the situation there we are somewhat buffeted from some of these actions whether they happen or not so we feel good about it.
But again, even on that side, we are on the on the monitoring basins at this time.
Yes.
Okay, Alright that was it for.
For me I mean, the tone I get and I think that's what you're trying to convey is that it's really.
It's not a matter of if.
It's a matter of when that at some point these businesses will come back and.
And some of the.
Some of the measures you've put in place to get through this weak period.
Are you starting to pay off and they should pay off even more on once the business returns.
That's correct.
Yeah, that's correct, Jim the only thing I would add for you there is that.
Two quarters, we said that the business has stabilized and now we are seeing that business is recovering and as you look at the mid point of our guidance. It clearly indicates that business is.
Is recovering and that is what we are seeing in the order pattern and the flow et cetera.
At the leading edge in the company here.
So so so we feel good about recovery that it has happened on tap.
Definitely.
Heading in that direction.
Yeah.
Alright, well thank you.
Thanks, Jim.
Ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back over to Howard Goldman for closing remarks.
Yeah.
Thank you for your questions and participating in our earnings conference call for the first quarter of fiscal year 2021.
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