Q1 2022 Varex Imaging Corp Earnings Call

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Speaker 1: Hello and welcome to the Variks Imaging first quarter fiscal year 2022 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.

Hello, and welcome to the Varian imaging first quarter fiscal year 2022 earnings conference call and webcast. 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.

Speaker 1: 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. It's now my pleasure to turn the call over to Christopher Belfiore, Director of Investor Relations. Please go ahead. Good afternoon, and welcome to Verix Imaging Corporation's earnings conference call for the first quarter of the fiscal year 2022. With me today are Sunny Sanyo, our President and CEO , and Sam Maheshwari, our CFO .

This conference is being recorded.

Pleasure to turn the call over to Christopher Belfiore Director of Investor Relations. Please go ahead, good afternoon, and welcome to <unk> Imaging Corporation's earnings conference call for the first quarter of the fiscal year 2022 with me today are Sunny Sanyal, our president and CEO and Sam Maheshwari our CFO .

Speaker 1: Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at VARIX's website at investors.variximaging.com. The webcast and supplemental slide presentation will be archived on VARIX's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year 2022.

Please note that the live webcast of this conference call included a supplemental slide presentation that can be accessed at <unk> website at investors <unk> imaging dot com.

A 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 2022.

Speaker 1: In addition, unless otherwise stated, quarterly comparisons are made sequentially from the first quarter of fiscal year 2022 to the fourth quarter of fiscal year 2021, rather than the same quarter of the prior year. Finally, all references to the fiscal year and not calendar year unless otherwise stated.

In addition, unless otherwise stated quarterly comparisons are made sequentially from the first quarter of fiscal year 2022 for the fourth quarter of fiscal year 2021, rather than the same quarter of the prior year.

Finally, all references to the year or to this fiscal year and not calendar year, unless otherwise stated.

Speaker 1: 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 risk and uncertainties that could cause actual results to differ materially from those anticipatedENDS.

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.

Speaker 1: Risks relating to our business are described in our quarterly earnings release and our filings with the SEC.

<unk> in our quarterly earnings release, and our filings with the SEC additional.

Speaker 1: Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including item 1a, 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.

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.

Speaker 1: 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 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. I will now turn the call over to Sunny.

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.

I'll now turn the call over to Sunny.

Thank you, Chris and good afternoon, everyone.

Speaker 1: Demand for our products remained strong in the first quarter, but supply chain constraints limited our ability to fulfill orders as planned.

Demand for our products remains strong in the first quarter, but supply chain constraints limited our ability to fulfill orders as flat.

Speaker 1: as the quarter progressed, the uncertainty in the supply chain increased, which challenges becoming progressively

As the quarter progressed, the uncertainty in the supply chain increased.

The challenge is becoming progressively worse in the quarter.

Speaker 1: Among other issues, we saw abrupt and unexpected delays in delivery of critical electronics components.

Among other issues, we saw abrupt and unexpected delays in delivery of critical electronics components, as well as delayed and delayed and inbound and outbound freight.

Speaker 2: as well as delays in inbound and outbound freight.

Speaker 2: We estimate that delays in raw material prevented us from shipping more than $20 million of product in the quarter. As a result, our quarterly revenue was $199 million, which was below our expectation.

We estimate that delays in raw material prevented us from shipping more than $20 billion of product in the quarter.

As a result, our quarterly revenue was $199 million, which was below our expectations.

Revenue in the first quarter decreased 12% sequentially and increased 12% year over year.

Speaker 2: Revenue in the first quarter decreased 12% sequentially and increased 12% year over year. Both medical and industrial segment.

Both medical and industrial segments declined sequentially.

Speaker 2: Non-gap gross margin in the quarter was 34%, which was below our expectations, but reasonable considering the persistent supply chain headwinds that we face.

non-GAAP gross margin in the quarter was 34%, which was below our expectations, but reasonable considering the persistent supply chain headwinds that we faced.

Speaker 2: non-GAAP Operating Margin was 11% of revenues and non-GAAP EPS was 25%.

non-GAAP operating margin was 11% of revenues and non-GAAP EPS was <unk> 25.

Speaker 2: Cash generation continued to be strong in the quarter with cash flow from operations of $11 million.

Cash generation continued to be strong in the quarter with cash flow from operations of $11 million.

Speaker 2: Our cash balance at the end of the quarter was $158 million, up $13 million sequentially.

Our cash balance at the end of the quarter was $158 million up $13 million sequentially.

Let me give you some high level insight into how the demand environment for our different modalities and applications trended during the quarter.

Speaker 2: Let me give you some high-level insight into how the demand environment for our different models is an application stranded during the quarter.

Speaker 2: Since first quarter revenue was severely impacted by supply chain constraint environment, our modality trends are based on qualitative assess.

Since first quarter revenue was severely impacted by supply chain constrained environment, our modality trends are based on qualitative assessments.

Speaker 2: Medical segment revenues decreased 14% sequentially and increased 12% year-over-year.

Medical segment revenues decreased 14% sequentially and increased 12% year over year.

Speaker 2: We continue to see robust demand globally for CT tubes in the first quarter, including strength in China, as well as the recovery in the US market.

We continue to see robust demand globally for <unk> in the first quarter, including strength in China as well as the recovery in the U S market.

Speaker 2: Demand was strong in our other medical modalities, including fluoroscopy, oncology, radiographic, dental, and mammoth.

Demand was strong in our other medical modalities, including fluoroscopy oncology radiographic dental and mammography.

Revenues in our industrial segment decreased 6% sequentially and increased 14% year over year, we continued to see strong demand for products for non destructive inspection across several of our industrial verticals, including electronics and oil and gas.

Speaker 2: Revenues in our industrial segment decreased 6% sequentially and increased 14% year over year. We continue to see strong demand for products for a non-destructive inspection across several of our industrial verticals, including electronics and oil and gas.

Speaker 2: We experienced improved demand for imaging products for security screening at ports and borders during the fort.

We experienced improved demand for imaging products for security screening at ports and borders during the quarter.

Speaker 2: In the past quarters, we have highlighted various new products and innovation, including photon counting, nanotubes, and AI-aided software.

In the past quarters, we have highlighted various new products and innovation, including photon counting nanotubes and AI AI software.

Speaker 2: This quarter I'd like to share with you some additional details on design wins and progress made with these technologies and how they could contribute to our long-term growth strategy.

This quarter I'd like to share with you. Some additional details on design wins and progress made with these technologies and how they could contribute to our long term growth strategy, we will be focusing on our medical segment for todays discussion and we expect to provide more color on the industrial segment in the future.

Speaker 2: We will be focusing on our medical fragment for today's discussion, and we expect to provide more color on the industrial segment in the-

Speaker 2: In our tubes business, we began shipping samples of high performance x-ray tubes for cardiovascular applications in the fourth quarter of fiscal 2021.

And our tubes business, we began shipping samples of high performance X Ray tubes for cardiovascular applications in the fourth quarter of fiscal 2021.

Speaker 2: We are seeing good initial customer interest in this product and one of them is getting close to a system launch.

We are seeing good initial customer interest in this product and one of them is getting close to a system launch.

Speaker 2: In addition, several other customers are evaluating integration and design options for their future systems.

In addition, several other customers are evaluating integration and design options for their future systems.

Speaker 2: These highly innovative high-performance tubes are significantly lighter than tubes that are used in systems today. And that half the size take up much smaller footprint.

These highly innovative high performance tubes are significantly lighter than tubes that are used in systems today.

And that half the size take up much smaller footprint.

Speaker 2: We expect that these high performance and compact tubes will give our customers significant systems design flexibility.

We expect that these high performance and compact tubes will give our customers significant systems design flexibility.

Speaker 2: In addition, these tubes have performance characteristics that can help patient through.

In addition, these tubes have performance characteristics that can help patient throughput.

Speaker 2: Our joint venture in Germany continues to make steady progress with Manotube Technology.

Our joint venture in Germany continues to make steady progress with mono tube technologies.

Speaker 2: In the medical segment, we have signed a prototype development agreement with the customer.

In the medical segment, we have signed a prototype development agreement with a customer in.

Speaker 2: In addition, we have shipped the first multi-meter prototype to an industrial customer. Additional prototypes are expected.

In addition, we have shipped the first multimedia prototype to an industrial customer additional.

Order types are expected to ship this quarter.

Speaker 2: In detectors, our photon counting technology continues to make progress and is currently being utilized in various medical modalities, including dental, breast, and skeletal images.

And detectors photon counting technology continues to make progress and is currently being utilized in various medical modalities, including dental breast and skeletal imaging.

Speaker 2: We now expect to ship CT4ton counting modules to customers in the second half of this time.

We now expect to ship <unk> photon counting modules to customers in the second half of fiscal 2022.

Speaker 2: Given that we do not have an offering in the CT detector market today, this would be entirely incremental serviceable addressable market for that. There.

Given that we do not have an offering in the Cta detector market today, this would be entirely incremental serviceable addressable market for vertex.

Speaker 2: Due to its high frame rate per second imaging ability, we are seeing photon counting adoption in inline industrial inspection systems and dynamic applications with automated detections.

Due to its high frame rate per second imaging ability, we are seeing photon counting adoption and in line industrial inspection systems and dynamic applications with automated detection.

Speaker 2: We expect to see some customers launch new systems in 2022, utilizing our photon counting detectors in food inspection and batteries.

We expect to see some customers launch new systems in 2022, utilizing a photon counting detectors in food inspection and battery inspection.

Speaker 2: We have had multiple design bins with our Azure previously Z platform dynamic detectors in with mobile CRM and dental tests.

We have had multiple design wins with our Azure previously Z platform dynamic detectors with mobile CRM and dental customers.

Speaker 2: We expect production of these systems and our product shipments to start ramping up in the second half of 2020.

We expect production of these systems and our product shipments to start ramping up in the second half of 2022.

Speaker 2: Last quarter, we highlighted our AI-aided lung cancer screening software, which continues to gain momentum. The winning bid for the lung cancer screening program in British Columbia is in the installation phase across six sites. And we expect that implementation of our software will be completed by the end of March.

Last quarter, we highlighted our AI aided lung cancer screening software, which continues to gain momentum.

The winning bid for the lung cancer screening program in British Columbia isn't the installation phase across six sites and we expect that implementation of our software will be completed by the end of March.

Speaker 2: In addition, we're seeing interest in implementing lung cancer screening programs in other Canadian provinces, as well as in the UK and Australia.

In addition, we're seeing interest in implementing lung cancer screening programs in other Canadian provinces as well as in the UK and Australia.

Speaker 2: In connection control, we're excited about several new products. For example, our smart X-ray tube cooler proactively measures a performance of the cooler allowing intervention to prevent unscheduled down to.

In connection control, we're excited about several new products for example, our smart X Ray tube cooler proactively measures the performance of the cooler, allowing intervention to prevent unscheduled downtime.

Speaker 2: Similarly, our smart columnator uses proprietary technology that can help limit image retakes, reduces end user cost, and improves product life.

Similarly, our smart collimator uses proprietary technology that can help limit image retakes reduces end user cost and improve product life.

Speaker 2: Our smart mammography compression paddle adapts breast compression to the patient's unique anatomy.

Our smart mammography compression paddle adapt breast compression to the patients unique anatomy.

Speaker 2: Through its proprietary technology, the aim is to improve patients' experience and aid in the healthcare decision-making.

Through its proprietary technology. The aim is to improve patient experience and aid in the healthcare decision making process.

Speaker 2: We expect these new technologies across the medical segment to expand our serviceable addressable market or SAM of approximately $1 billion in calendar 2020.

We expect these new technologies across the medical segment to expand our serviceable addressable market or Sam of approximately $1 billion in calendar 2026.

Speaker 2: This expansion is in addition to organic market growth and just under a half a billion dollars over the same

This expansion is in addition to organic market growth of just under a half a billion dollars over the same timeframe.

As we look forward to the rest of the fiscal year, we expect supply chain volatility remained challenging throughout fiscal 2022.

Speaker 2: As we look forward to the rest of the fiscal year, we expect supply chain volatility to remain challenging throughout fiscal 2020.

Speaker 2: We will continue to be vigilant in our efforts to meet customers needs while managing the risk in supply chain.

We will continue to be vigilant in our efforts to meet customers' needs, while managing the risk in supply chain.

Speaker 2: We continue to be encouraged by the level of demand we're seeing and the effort that our employees are making to weather the supply chain uncertain.

We continue to be encouraged by the level of demand, we're seeing and the effort that our employees are making to whether the supply chain uncertainties.

Speaker 2: We recently celebrated our five-year anniversary of being their ex-image.

We recently celebrated our five year anniversary of being bearish imaging.

Speaker 2: Over the past five years, we have touched the lives of millions of people around the world, making a difference every day. I'm proud of our talent.

Over the past five years, we have touched the lives of millions of people around the world, making a difference every day.

I am proud of our talented global and diverse team.

Speaker 2: Our investments in innovation have enabled us to expand our market leadership and introduce new technology.

Our investments in innovation have enabled us to expand our market leadership and introduced new technologies. Thus.

Speaker 2: That's allowing our customers to bring innovative imaging solutions to market to help make the world a healthier and safer place. With that,

Thus, allowing our customers to bring innovative imaging solutions to market to help make the world a healthier and safer place.

With that let me hand over the call to Sam.

Speaker 2: Thanks, Annie, and hello, everyone. As a reminder, unless otherwise indicated, I will provide sequential comparison of our results. For the first quarter of fiscal year 2022, we do it off of our fourth quarter of fiscal 2020.

Thanks, Andy and Hello, everyone. As a reminder, unless otherwise indicated I will provide sequential comparison of our results for the first quarter of fiscal year 2022, with those of our fourth quarter of fiscal 2021.

Speaker 2: Despite high demand, supply chain constraints prevented us from shipping products on time. As a result, our revenues came...

Despite high demand supply chain constraints prevented us from shipping products on time.

As a result, our revenues came in below our guidance.

Speaker 2: Rising raw material, logistics, and expedite costs pressured gross amounts.

Rising raw material logistics and expedite costs pressured gross margin.

Speaker 2: lower operating expenses provided some offset and help generate non-gap EPS of 25.

Lower operating expenses provided some offset and helped generate non-GAAP EPS of 25.

Speaker 2: First quarter revenues were $199 million, a decrease of 12% from the fourth quarter.

First quarter revenues were $199 million, a decrease of 12% from the fourth quarter.

Speaker 2: Medical revenues were $156 million and industrial revenues were $43 million.

Medical revenues were $156 million and industrial revenues were $43 million.

Speaker 2: Sequentially, medical sales declined 14% and industrial sales declined 6%.

Sequentially medical sales declined 14% and industrial sales declined 6% medical revenues were 78% and industrial revenues were 22% of the overall revenues for the quarter.

Speaker 2: Medical revenues were 78 percent, and industrial revenues were 22 percent of the overall revenues for the court.

Speaker 2: Looking at revenue by region, America declined 14% sequentially, while MIA declined 10% and APEC declined 14% all due to supply chain driven limitations on our shipment. Let's,

Looking at revenue by region Americas declined 14% sequentially, while EMEA declined 10% in APAC declined 14% all due to supply chain driven limitations on our shipments.

Let me now cover our results on a GAAP basis.

Speaker 3: First quarter gross margin was 33% in line with the previous quarter but on a lower revenue.

First quarter gross margin was 33% in line with the previous quarter, but on a lower revenue base.

Speaker 3: Operating income was $14 million and the tax rate was unusually high at 51% due to a low-based figure of earnings before tax.

Operating income was $14 million and the tax rate was unusually high at 51% due to a low base figure of earnings before taxes.

Speaker 3: This resulted in net earnings of $1 million and gap EBS of 3 cents.

This resulted in net earnings of $1 million and GAAP EPS of <unk> III.

Moving on to non-GAAP results for the quarter gross margin was 34%, which was slightly below our expectations, but reasonable in the face of ongoing supply chain and logistics related challenges.

Speaker 3: Grossmoget was 34% which was slightly below our expectations, but reasonable in the face of ongoing supply chain and logistics related challenges.

Speaker 3: Freight expenses impacted gross margin by about 30 basis points compared to Q421 and by 100 basis points compared to a year ago quote.

Freight expenses impacted gross margin by about 30 basis points compared to Q4, 'twenty, one and by 100 basis points compared to a year ago quarter.

Speaker 3: In addition, we continued to qualify various alternate suppliers and as a result, R&D resources were diverted towards solving supply chain issues.

In addition, we continued to qualify various alternate suppliers and as a result, R&D resources were devoted towards solving supply chain issues. These activities impacted gross margin for the quarter by 20 basis points.

Speaker 3: These activities impacted gross margin for the quarter by 20 b

Speaker 3: As we have highlighted since the second quarter of fiscal 21, challenges in raw material availability, freight and logistics have been a persistent margin.

As we've highlighted since the second quarter of fiscal 'twenty, one challenges in raw material availability freight and logistics has been a persistent margin headwind.

Speaker 3: We continue to work through these challenges with current and alternate suppliers to mitigate impact, but this has been and continues to be a dynamic environment.

We continue to work through these challenges with current and alternate suppliers to mitigate impact, but this has been and continues to be a dynamic environment.

Speaker 3: As we noted last quarter in late October , we rolled out broad-based price increases of mid-single digit percentage or high.

As we noted last quarter in late October we rolled out broad based price increases of mid single digit percentage or higher.

Since many customers are on annual contracts, we expect to realize price increases gradually throughout fiscal 2022.

Speaker 3: Since many customers are on annual contracts, we expect to realize price increases gradually throughout fiscal 2020.

Speaker 3: At this point, majority of our customers, whose contracts were up for renewal, have accepted price increases. And we continue to work with the remaining customers to incorporate price increases into their con.

At this point majority of our customers.

Whose contracts were up for renewal.

The price increases and we continue to work with the remaining customers to incorporate price increases into their contracts.

Speaker 3: R&D spending in the first quarter was $18 million or 9% of revenues within our 8-10% target.

R&D spending in the first quarter was $18 million or 9% of revenues within our 8% to 10% target range.

Speaker 3: As GNA was approximately $26 million down $1 million from the prior quarter.

SG&A was approximately $26 million.

Down $1 million from the prior quarter.

Speaker 3: Operating expenses were $44 million down $1 million from the prior quarter and explained them.

Operating expenses were $44 million.

Down $1 million from the prior quarter as explained above.

Speaker 3: Lower operating expenses helped generate operating earnings of $23 million. Operating margin was 11% of revenue in the quarter. Tax expense

Lower operating expenses helped generate operating earnings of $23 million.

Operating margin was 11% of revenue in the quarter.

Tax expense in the first quarter was $3 million.

Speaker 3: Net earnings were $10 million or 25 cents per diluted share compared to $19 million or $45 cents per diluted share in Q421.

Net earnings were $10 million or 25 per diluted share compared to $19 million.

<unk> 45 per diluted share in Q4 'twenty one.

Speaker 3: Average diluted shares in the quarter were 41 million in line with the prior court.

Average diluted shares in the quarter were $41 million in line with the prior quarter.

As we highlighted previously due to our convertible notes related bond hedge and associated trading range of our shares there is a difference between diluted shares for GAAP and non-GAAP purposes.

Speaker 3: As we highlighted previously, due to our convertible notes related bond hedge and the associated trading range of our shares, there is a difference between diluted shares for gap and non-gap

Speaker 3: GAP share count ignores the bond hedge while non-GAP share count includes the economic benefit from this hedge. We have provided a reconciliation between the two at the end of our earnings press release.

GAAP share count ignores the bond hedge while non-GAAP share count includes the economic benefit from this hedge we have provided a reconciliation between the two at the end of our earnings press release.

Speaker 3: The Apprentix 2 overslides provides a table showing the effect of this bond hedge on the diluted share count for gap and non-gap up.

The appendix to our slides provides a table showing the effect of the bond hedge on the diluted share count for GAAP and non-GAAP purposes.

Speaker 3: Separately, ASU 2020-06, related to the accounting for convertible instruments, will become effective for us from Q1 of Fiscalia 2023 onwards.

Separately ASU 2026 related to the accounting for convertible instruments will become effective for us from Q1 of fiscal year 2023 onwards.

Speaker 3: Now turning to the balance sheet. Accounts receivable decreased by $28 million, mainly due to lower sales in the quarter.

Now turning to the balance sheet accounts receivable decreased by $28 million, mainly due to lower sales in the quarter.

Speaker 3: DSO improved to 58 days. Inventory increased $23 million, primarily due to increase in work and process inventory, amidst ongoing component shortages, as well as premiums being paid to procure raw material.

<unk> improved to 58 days inventory.

<unk> increased $23 million, primarily due to increase in work in process inventory amidst ongoing component shortages as well as premiums being paid to procure raw material.

Speaker 3: As a result, days of inventory increased 268 days.

As a result days of inventory increased to 168. These.

Speaker 3: accounts payable increased by $13 million partially due to increased purchasing activity and date payables was 49 days.

Accounts payable increased by $13 million, partially due to increased purchasing activity and these payables was 49 days.

Speaker 3: Now moving to debt and cash flow information. Cash flow from operations was $11 million and we ended the quarter with cash of $158 million on the balance sheet and increase of $13 million from the prior quarter.

Now moving to debt and cash flow information cash flow from operations was $11 million and we ended the quarter with cash of $158 million on the balance sheet, an increase of $13 million from the prior quarter.

Speaker 3: Gross debt outstanding at the end of the first quarter was $480 million and debt net of cash declined to $322 million reflecting the continued delivery on a net debt base.

Gross debt outstanding at the end of the first quarter was $480 million and debt net of cash declined to $322 million, reflecting the continued delevering on a net debt basis.

Speaker 3: Adjusted Abid? was $30 million in the first quarter and adjusted Abid? Margin was 15%.

Adjusted EBITDA was $30 million in the first quarter and adjusted EBITDA margin was 15% the.

Speaker 3: The combination of profitability and cash generation has helped lower our net debt leverage ratio to 2.3 times at the end of the quarter.

The combination of profitability and cash generation has helped lower our net debt leverage ratio to two three times at the end of the quarter.

Speaker 3: We remain focused on meeting the demands of our customers while working to mitigate the challenges presented by a constrained supply chain. To that end, I would like to thank our Varick's colleagues, Worldwide, for their continued efforts in staying on course and achieving these results this quarter.

We remain focused on meeting the demands of our customers while working to mitigate the challenges presented by a constrained supply chain to that end I would like to think or that ex colleagues worldwide for their continued efforts in staying on course in achieving these results this quarter.

Speaker 3: Like last quarter before providing guidance, I wanted to take a step back and discuss brother revenue and gross margin dining.

Like last quarter before providing guidance I wanted to take a step back and discuss discuss broader revenue and gross margin dynamics. Our Q1 revenue results came in lower than expected. This was mainly due to supply chain delays. This is the exact opposite of what we experienced in the fourth quarter of fiscal <unk>.

Speaker 3: Our Q1 revenue results came in lower than expected. This was mainly due to supply chain delays. This is the exact opposite of what we experienced in the fourth quarter of fiscal 21. The supply chain environment remains significantly volatile and in the face of strong demand currently remains the governing factor for our sales growth.

91, the supply chain environment remains significantly volatile and in the face of strong demand currently remains the governing factor for our sales growth.

Speaker 3: Turning to gross margins. As we have noted in the past, our target gross margin is 35% plus or minus one.

Turning to gross margins as we have noted in the past.

Our target gross margin is 35% plus or minus 1%.

Speaker 3: Although so far we have been successful in neutralizing cost escalations through customer price increases, we are finding this target is hard to achieve due to inefficiencies caused by manufacturing disruptions, expediting fees, alternate supplier qualifications and various other facts.

Although so far we have been successful in neutralizing cost escalations through customer price increases. We are finding this target is hard to achieve due to inefficiencies caused by a manufacturing disruption expediting fees alternate supplier qualification and various other factors.

Speaker 3: Given that for the near term we expect gross margin to be slightly below the low end of our targeted gross margin rate.

Given that for the near term, we expect gross margin to be slightly below the low end of our targeted gross margin range.

Speaker 3: With that as a backdrop, here is our guidance for Q2. Revenue are expected between 190 and 220 million dollars, and non-gap earnings, but the limited share is expected between 15 cents and 40 cents.

With that as a backdrop periods of our guidance for Q2.

Revenues are expected between $190 and $220 million.

And non-GAAP earnings per diluted share is expected between 15 and 40.

Speaker 3: Our expectations are based on non-GAP cross margin in a range of 33 to 34% non-GAP operating expenses in a range of 45 to 46 million dollars.

Our expectations are based on non-GAAP gross margin in a range of 33% to 34% non-GAAP operating expenses in the range of $45 million to $46 million.

Speaker 3: Tax rate of about 23% for fiscal 2022.

Tax rate of about 23% for fiscal 2022.

Speaker 3: and non-gab deleted share count of about 41 million shares. With that, we'll...

And non-GAAP diluted share count of about 41 million shares.

With that we'll now open the call for your questions.

Speaker 1: Thank you. Now, if you're conducting a question and answer session, if you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. One moment, please. What was the last time you were in the question queue?

Thank you well now be conducting a question and answer session.

It can be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question queue. One moment. Please while we poll for questions.

First question today is coming from Larry Solow from CJS Securities. Your line is now live.

Speaker 4: That was a good afternoon. I just just wanted to say a few questions on the subject of the day, of the month, that matter, on the supply chain. And some of you mentioned you expect these problems to persist through the year.

Hey, guys.

Good afternoon.

Okay.

Hi, a few questions obviously.

On the supply chain.

You mentioned you expect these problems persist through the year.

Speaker 4: with most companies are saying. And I said to you also said that the, it seems like their problems got worse through the quarter. So in light of that, and I fully get the guidance range for the upcoming quarter, but the wide range is really depending on the supply chain. But are we kind of starting from, you know, below that midpoint, I'm just trying to get engaged.

What most companies are saying.

And I think you also saw that the.

It seems like their problems got worse through the quarter.

So in light of that and I fully get the guidance range for the upcoming quarter, but the wide range is really dependent on that.

Fly chain, but are we starting from.

Below that midpoint I'm, just trying to get a gauge.

Speaker 4: where you stand there. It sounds like demand, and you just with back orders alone, you should meet your sales numbers if you had the ability to, you know, frift rate, and other components weren't constrained. So, just trying to get a better picture of sort of where we stand today. Or things still deteriorating, or is it kind of hard to say, and you know, you're at the mercy of...

Where are you still on that and it sounds like demand and you just look back orders alone you should meet your sales number is if you had the ability.

Right and all the components Werent constrained so just trying to get a better picture of sort of where we stand today or things still deteriorating or is it kind of hard to say.

You're at the Mercy of what.

Your suppliers and afraid and whatnot.

Speaker 2: So let me get started and then I'll ask Sam to add more color to it. First of all, demand for us has been broad-based and we've got a very healthy book of business too that we can deliver against.

So let me get started and then I'll ask Sam to add more color to it first of all demand for US has been broad based and we've got a very healthy book of business too that we can deliver against.

Speaker 2: the constraint here is being supply chain. And on the supply chain side, there's two types of constraints. One is...

The constraint here is being supply chain and on the supply chain side. There is two two types of constraints one is.

Speaker 2: What Sam called a disruption in the factory, which is the nuisance type of supply chain situation where we've got these rolling shortages, suppliers are delayed by a few days, something's supposed to come on Monday, shows up on Thursday, and then you end up with having to scramble to put it together, and stuff gets pushed out out of the quarter, right? So that's the...

But sam called the disruption in the factory, which is the newest since type of supply chain situation, where we've got these rolling shortages suppliers are delayed by a few days septic somethings supposed to come on Monday shows up on Thursday, and then you end up with having to scramble to put it together.

Stock gets pushed out out of the quarter right. So that's the.

Speaker 2: That's one hypostergarten. And that's typically, typically in tubes. The second shortage.

That's that's one type of supply that's typically typically in tubes.

Okay mortgage type of ship.

Speaker 2: The second shortage has been electronics, which is where you had consistent short supply and then delays. And there you get stops and starts and starts. As we look forward...

Sorry, just a second shortage has been in electronics, which is why we've ever had.

Consistent short supply and then delays and there you get stops and starts stops and starts as we look forward.

Speaker 2: What we're hearing from our suppliers that have had rolling slowness, and mostly in electromechanical parts, is they've had impacts of COVID and a few other things that have disrupted their environment.

What we're hearing from our suppliers on that are that have had rolling a slowness in mostly in.

Mkay electromechanical parts is there.

The impacts of Covid and a few other things that are just have disrupted their environment. So we feel like that that has the chance of getting better that seems to be getting better right. We've got pockets, where there are problems, but the electronics problems are more consistent and we don't have visibility for improvement in that.

Speaker 2: So we feel like that has a chance of getting better, that seems to be getting better. We've got pockets where there are problems, but the electronics problems are more consistent and we don't have visibility for improvement in that part of the supply chain, beyond what we can see for the next quarter or show. And so hence our indication that we expect this to linger on for the rest of this fiscal year.

So part of the supply chain beyond what we can see for the next quarter or so and so hence our indication that we expect this to linger on for the rest of this fiscal year.

Speaker 3: And Larry, this is Sam, I would like to add here that

Yes, Larry.

This is Sam I would like to add here that.

Speaker 3: You know, hi. What I would like to add here is that sometimes from the supply chain side and various suppliers, material comes to us. And by the time it comes to us, it takes us time to complete it. And if it comes too late in the quarter, then we are not able to complete it within the quarter.

Hi.

What I would like to add here is that sometimes.

From the supply chain side, and various suppliers material comes to us and by the time it comes to US It takes us time to complete it and if it comes too late in the quarter. Then we are not able to completed within the quarter. So there is lumpiness here.

Speaker 3: So there is lumpiness here. And then electronic, amicandector chips, particularly that what we use for detectors, they are in short supply. So both of those things are happening.

And then electronics semiconductor chips, particularly that what we use for detectors.

We are in short supply. So so both of those things are happening.

Speaker 3: But going back to your original question, you know, from a guidance perspective, we guide towards the midpoint and we look at the risk and probabilities and then that's how we guide. So this is what we are seeing right now and that is what we are guiding.

Going back to your original question you know from a guidance perspective.

We guide towards the mid point and we look at the risks.

Probabilities and then that's how we guide.

So this is what we are seeing right now and that is what we are guiding us ethanol.

Speaker 4: And what about you know, the orders, it sounds like demand is strong across most of your modalities on both sides. And everything is just getting pushed to the right. Do you feel like eventually you lose some of these orders? Or is it just that we're just chasing a business for as long as the supply chain issues?

No that's fair.

What about new orders it sounds like demand is strong across most of your modalities on both sides.

And everything is just getting pushed to the right do you feel like eventually you lose some of these orders.

It's just that we're just Jason.

Business for as long as the supply chain issues continue.

Speaker 4: and maybe you're out of sort of your constraint, you can't really do more than 200 million or plus or minus a quarter for quite some time until things get better, right? I mean, it's that.

Continue.

Sort of.

Constraint you currently do more than $200 million or plus or minus a quarter for quite some time until things get better right.

Yeah.

Speaker 4: But look at it and you feel like losing any share or anything. I suppose no.

Good way to look at it and do you feel like you're losing any share or anything I I suppose no but.

Speaker 2: Larry, everyone in all our, others in our space are also having similar problems. So we're not losing share, but at the same time, we don't lose these orders. These are designed in product, so they just move to the right. And we just have to manage customers expectations. So that at this point, losing orders is not a concern.

Larry everyone in all our others in our space are also having similar problems. So we're not losing share but at the same time, we don't lose these orders. These are designed in products. So they just moved to the right and we just have to manage customers' expectations.

So that at this point, losing orders is not a concern.

Speaker 3: Yeah, and Larry, I would like to add that I don't think we are seeing rest of the rest of the quarters or the business for the rest of the year.

Yeah, and Larry I would like to add that I don't think we are seeing rest of the rest of the quarters of the business for the rest of the year as hamstrung around $200 million a quarter that is not the case I think.

Speaker 3: as hamstrung around $200 million dollars. The quarter, that is not the case. I think in the prior quarter, because of Omicron, because of compression, material availability, and all of that caused issues. But there is also reasonable degree of hope out there that soon or later these supply chain issues may not be fully resolved, but they begin to improve.

The prior quarter because of the former con because of compression material availability and all of that caused issues, but there is also reasonable degree of hope out there that you know soon sooner or later the supply chain issues may not be fully resolved, but they begin to improve.

Speaker 3: And so I would not necessarily suggest that we are indicating that we are stuck around to them.

And so I would not necessarily suggest that we are indicating that we are struck stuck around $200 million in the quarter.

Speaker 4: And you mentioned some more supply issues in the tube side. Is there any difference? It sounds like it's from both medical and industrial, but do you have, is it, when I was a medical, a larger piece of business, do you feel like the disruptions are sort of...

And you mentioned some about it seems like some more supply issues in the <unk>.

Maybe on the tube side.

Any difference or is it sounds like it from both medical and industrial but do you have.

Is it when I was a medical is a larger piece of your business you feel like the disruptions are sort of.

Speaker 4: I fairly evenly balance. You don't really see a trend between the two different segments or is there anything? And I'm not worried about that.

Fairly easily balance you don't really see a trend between.

On the two different segments or is there anything noteworthy there.

Speaker 3: Yeah, so I would say that the supply chain issues are a little bit more, more pronounced in the detector side of the business versus the tube. Okay. When you look at it on the product side, but when it comes to medical versus industrial segments, I think they are largely similar because demand is strong in both those segments. It all comes down to what we can, what we can finish in terms of product and ship it to a work customer.

Yeah, So I would say that the supply chain issues are a little bit more.

More pronounced in the detector side of the business versus the tubes. When you look at it from a product side.

But when it comes to the medical versus industrial segment I think they are largely similar because demand is strong in both those segments. It all comes down to what we can.

What we can finish in terms of product and ship it to our customer.

Got it okay. Thanks, I appreciate the call.

Speaker 5: Thank you Larry.

Thank you Larry.

Speaker 1: Thank you. Next question today is coming from Saraj Kaliya from Oppenheimer and Tubani. Your line is that line.

Thank you. Our next question today is coming from Suraj Kalia from Oppenheimer <unk> Company. Your line is now live.

Yeah.

Speaker 1: Good afternoon, the funny fam, Chris, hope everyone is safe and healthy. Can you hear me, all right?

Good afternoon, Sunny Sam Chris Hope, everyone is safe and healthy can you hear me alright.

Yes, we can surge.

Speaker 6: Perfect. Hey, funny. So let me start out with, you know, a different version of the supply supply chain issue question.

Perfect.

So.

Let me start out with.

A different version of the supply.

<unk> changes your question.

Speaker 6: But you all have to ration product delivery, given component shortages. How does the decision matrix look like?

But youll have to ration product delivery.

Given component shortages, how does the decision matrix look like.

Speaker 3: Yeah, so Suraj, great question. Of course, here and there we do have to do this. Obviously, what we are trying to do, it's a multi-dimensional issue.

Yes, Suraj great question of course here and there we do have to do this.

Obviously, what we are trying to do it's a multi dimensional issue.

Speaker 3: and not a straightforward answer. Obviously, everybody wants quite a bit of product, but from our side, we try to make sure no customer is lined down. So there is a degree of variability. There is a degree of judgment and assessment that our sales leadership makes those decisions. So that's...

And not a straightforward answer obviously.

Everybody wants quite a bit of product, but from our side, we try to make sure no customer is lying down. So there is a degree of variability there is a degree of judgment and assessment that our sales leadership.

It makes those decisions. So that's one and then secondly, there are various customers with different degrees of applications in terms of whether it's <unk>.

Speaker 3: And then secondly, there are various customers with different degrees of applications in terms of whether it's medical or industrial, whether it's a cell phone versus a life saving machine, there is a degree of...

Medical or industrial whether it's a.

Cell phone versus a lifesaving.

Machine there is a degree of.

Speaker 3: that comes in there. And then we also have to look at what is going into the product from a component perspective. So, for example, we may have one component in short supply, but then if we try to work on one set of products, something else may become an issue. So there is a cascading effect of components that's also taught through.

Assessment that comes in there.

And then we also have to look at what is going into the product from a component perspective. So for example.

We may have one component in short supply, but then if we try to work on one set of products something else may become an issue. So there is a cascading effect of components. That's also part two so those are some of the things that come to my mind and then there are a couple of other factors also maybe if you if you want to add.

Speaker 3: So those are some of the things that come to my mind and then there are a couple other factors also. Maybe Sunny, if you want to add there, but those are the things that come to.

But those are the things that come to mind.

Speaker 2: So as these discussions go on daily, weekly with customers, and we try to balance, the number one priority is not letting any customer have a line down, and that's where we start. And then other factors that Sam described goes in. And we get that input from our customers on a regular basis.

So as Dave said discussions go on a daily weekly with with customers and we try to balance the number one priority smart let me any customer have a line down and that's that's how we that's where we start and then and then other factors as Sam described so we get that input from our customers on a regular basis.

Speaker 6: Got it. Sam won for you and then won for sunny and I'll pose both of these together. So Sam, one of the tenets of your P&L optimization was eliminating $25 million of inventory.

Got it.

Some one for you and then one for Sunny and I'll pose both of these together so Sam.

One of the tenets of your P&L.

Optimization was eliminating $25 million of.

Inventory.

Just given you do have a visibility.

Speaker 6: Given, you know, you'll do have a visibility, you know, if I remember correctly, six to nine months, you're rolling visibility into order. So obviously that helps you all plan your inventory or do inventory management. Just given everything going on.

I remember correctly six to nine months rolling visibility into orders, so obviously that.

Helps fuel plan your inventory or do inventory management.

Given everything going on.

Speaker 6: has anything changed specifically with the respect to the $25 million dollar number that you had mentioned earlier and sunny if I could on a completely different tangent the multi-emitter two prototypes being sent in

Has anything change specifically with respect to the $25 million number that you had mentioned earlier and sunny if I could on a on a completely different tangent the market metric two prototypes being sinton.

Speaker 6: Presumably, this would only be for new sockets, right? And I'd love to maybe, maybe I missed it. What feedback have you all received so far to whichever application or OEM partner you'll send out your carbon nanotubes? Gentlemen.

Presumably this would only be for new sockets, right and I'd love to maybe maybe I missed it what.

Feedback have you received so far.

Two whichever application or OEM partner Youll sent out your carbon nanotubes gentlemen, thank you for taking my questions.

Speaker 3: Sure. So Suraj, I'll answer your question first. So in terms of inventory, the $25 million reduction, that was our goal for last fiscal year. We achieved that and we were able to make a lot of improvement there in terms of efficiencies and a number of other things. At this time,

Sure. So suraj I'll answer your question first so in terms of inventory the $25 million reduction that was our goal for last fiscal year, we achieved that and we were able to make a lot of improvement there in terms of efficiencies and a number of other things.

At this time.

What we are doing with raw material procurement is giving out long lead purchase orders to our suppliers. So as we're getting more and more visibility on the demand side from our customers. We are providing more visibility to our customers. We are also.

Speaker 3: What we are doing with raw material procurement is giving out long lead purchase orders to our suppliers. So as we are getting more and more visibility on the demand side from our customers, we are providing more visibility to our customers.

Speaker 3: We are also areas where the lead times are longer or maybe there is a little bit more volatility from the supplier perspective. We are increasing the stock that we carry. So as a result, you are seeing inventory go up. And then lastly, we are procuring material at higher prices. So cost is definitely...

Areas, where the lead times are longer or maybe there is a little bit more volatility.

Supplier perspective, we are increasing the stock that we carry so as a result, you are seeing inventory go up and then lastly, we are procuring material at higher prices. So cost is definitely <unk>.

Speaker 3: beginning to flow through the P&L and as a result inventory values have gone up and I think inventory will remain high and at this time truly everybody is trying to have more material on hand because the demand and the volume of the demand is quite robust and there is a lot of visibility on that so currently we would like to have more inventory than less in order to meet our customers

Beginning to flow through the P&L and as a result inventory values have gone up and I think inventory will remain high and at this time truly everybody is trying to have more material on hand, because the demand in the world that volume along with.

The demand is quite robust and there's a lot of visibility on that so currently we would like to have more inventory than less in order to meet our customers.

Demand.

Speaker 2: And then Surajar asks you a question about the nanotubes that we've shipped out. You know, we've sent out...

Okay.

And then sorry, you asked a question about the nanotubes that we've shipped out.

We've sent out.

Speaker 2: multimeter tubes, massively multimeter tubes. And we're getting the feedback we're getting, is it works as...

These multi meter tubes massively multi metered tubes, and we're getting the feedback we're getting is it works as stated so our customers have given us specs to what they need in terms of energy dose that they need for their imaging application and it's working.

Speaker 2: So customers have given us specs to what they need in terms of energy dose that they need for their imaging application and it's working. You know, as we had said earlier in the prior calls, we were satisfied with the performance levels for the energy and dose levels that we were targeting and that tested and those are panning out. So we're pretty happy with what we've done so far.

We had said earlier in the <unk>.

Your prior calls that we're satisfied with that.

Performance levels for the energy and dose levels that we were targeting and have tested and.

Those are panning out so we're we're pretty happy with what we've done so far.

Thank you as a reminder, Thats star one to be placed the question queue. Our next question is coming from Jim Sidoti from Sidoti <unk> Company. Your line is now live.

Speaker 1: Our next question is coming from Jim Sedotti from Sedotti in Coventry. Your line is now live.

Speaker 7: I get an afternoon takes a take on the questions. Um, you know, I think everyone agrees it's only a matter of time before the

Hi, good afternoon, thanks for taking the questions.

Sure.

I think.

Everyone agrees, it's only a matter of time before the spin.

Speaker 7: Client issues get resolved. I don't think anybody is sure if that's three, six, nine months or so now, but I think everybody thinks it will happen at some point. So my question is when you do get back to normal environment, do you think that the price increases that you're putting in will stick and is there opportunity for additional cost cutting it?

Supply chain issues get resolved I don't think anybody is sure if that's 369 months ago, but I think.

Everybody thinks it will happen.

At some point. So my question is when you do get back to more normal environment.

Do you think that the price increases that you're putting in.

We will stick and is there opportunity for additional cost cutting at that point.

Speaker 2: So let me start. So the price increases are, we're not intended to be temporary, or just temporary pass-throughs. These are increases to the base price. So yes, we do expect them to stick. And we will see the realization of that as SAMHSA ramping up through this year and going into next year, we should see the full impact of those price increases. And then the second...

So let me start took the price increases are not intended to be.

Temporary or just temporary pass throughs. These are these are increases to the base price. So we yes, we do expect them to stick and we will see the realization of that as Sam said ramping up through this year and going into next year, we should see the full impact of those price increases and then.

The second I'm, sorry, the second Greg.

Speaker 3: And the second question in terms of cost cutting, Jim, I can help you with that here. So in terms of, as you look at costs, there are two types of costs that our P&L or our business is experiencing right.

And the second question in terms of cost cutting Jim I can help you with that here.

So in terms of as you look at costs.

There are two types of costs that our P&L or of our business is experiencing right. Now one is the inflationary costs on the raw material.

Speaker 3: One is the inflationary costs on the raw material.

Speaker 3: And we are neutralizing that by passing it on to customers and we expect that these price increases, like Sunny said, will be longer term. And so that would definitely neutralize the cost.

And we are neutralizing that by passing it on to customers and we expect that these price increases like Sandy said will be longer term and so that would definitely neutralized the cost increases, but there is another set of fixed costs or expenses that is going through our P&L, which is what I call.

Speaker 3: But there is another set of costs or expenses that is going through our P&L, which is what I call inefficiencies, or there is a lot of supply chain chaos, whether it is start and stop in terms of manufacturing lines or expediting fees or paying the freight for...

Inefficiencies or there is a lot of supply chain kiosks, whether it is.

Stop start and stop in terms of manufacturing lines, all expediting fees or <unk>.

Paying.

Paying the freight freight for.

Speaker 3: very high or elevated freight expenses. So I do expect that when the supply chain environment improves and it becomes more orderly and stable that our inefficiencies would go away and that would actually create efficiencies or improvements to the PN.

Very high or elevated freight expenses, so I do expect that when the supply chain environment improves and it becomes more orderly and stable that our inefficiencies would go away and that would actually create efficiencies or improvements to the P&L.

Speaker 3: In terms of the raw material cost and inflation, we don't know right now. All we can do is monitor it and ensure we are maintaining the profitability for the business by working it out on the pricing side with the customers. So just hopefully that...

In terms of the raw material costs and inflation, we don't know right now all we can do is monitor it and ensure we are maintaining the profitability for the business by working it out on the pricing side with the customers. So hopefully that gives you the color that youre looking for.

Speaker 7: Yeah, well, I guess what I'm trying to get at is if we look out to Cisco 2023 and beyond, I mean, those targets that you've put out previously for burst margin, do you think they will be achieved?

Yes, well I guess, what I'm trying to get at.

We look out to fiscal 2023 and beyond.

Those targets that you've put out previously for gross margin do you think they will be achievable.

Speaker 3: We certainly hope so. Obviously we need to know.

We certainly hope so obviously, we need to know.

Speaker 3: that supply chain and all of those, but we certainly would target them back in as soon as this environment improves. But obviously we do not know right now when and where we would be achieving those, but that certainly remains the target. Yes.

The supply chain and all of those but we certainly would target them back in soon as this environment improves, but obviously, we do not know right now when and where we would be achieving achieving those but that certainly remains the target yes.

Yeah.

Thank you.

Thank you as a reminder, if any further questions or any follow ups. Please press star one at this time one moment, please will be Paul for further questions.

Speaker 1: Thank you as a reminder, if any further questions or any follow-ups, please press star one at this time. One moment please, will we pull for further...

Speaker 1: We've reached the end of our question and answer session. I'd like to turn the floor back over to Chris, for any further closing.

You've reached the end of our question and answer session I'd like to turn the floor back over to Chris for any further or closing comments.

Speaker 1: Thank you for your questions and participating in our earnings conference call for the first quarter of fiscal year 2022.

Thank you for your questions and participating participating in our earnings conference call for the first quarter of fiscal year 2020 to the.

Speaker 1: The webcast and supplemental slide presentation will be archived on various websites. A replay of this quarterly conference call will be available through February 22nd and can be accessed at the company's website or by calling 877-660-6853 from anywhere in the US.

The webcast and supplemental slide presentation will be archived on <unk> website, a replay of this quarterly conference call will be available through February 22nd and can be accessed at the company's website or by calling 870 76606 to 853 from anywhere in the U S or 200, 161 to 741, 5% from <unk>.

Speaker 1: or 201-612-74015 from non-US locations. The replay conference call access code is 137-26-332. Thank you and goodbye.

Non U S locations. The replay conference call access code is one 307 26332, thank you and goodbye.

Speaker 1: Thank you, that does include today's Telecom for its webcast. And we just connect your line at this time and have a wonderful day. We thank you for your participation.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.

Okay.