Q3 2019 Earnings Call
If I could make a joke.
Good day, ladies and gentlemen, and welcome to Varian fiscal third quarter 2019 earnings call.
As a reminder, this conference call is being recorded and a replay can be accessed on the varian investor website at Www Dot Varian Dotcom flash investors.
Now I will turn it over to J., Michael Brown, Senior Vice President of Investor Relations.
Thank you Dana.
Good afternoon, everyone and welcome to Varians third quarter Conference call joining me today on the call.
Our variance President and Chief Executive Officer, Dan Wilson, and Chief Financial Officer, Gary Bishop being Dow will share his thoughts on our results and long term strategy and Gary will cover our operating and financial results in more detail.
After our prepared remarks, we'll be happy to take your questions.
On the Varian Investor Relations website, you can find our fiscal third quarter press release and earnings presentation, which are intended to provide additional perspective in details.
Webcast of this call and any accompanying non-GAAP reconciliations are available on our website at www Dot Varian dotcom forward slash investors.
Unless otherwise stated all financial results discussed our non-GAAP .
References to EPS, our two net earnings per diluted share on growth rates, our year over year and any references to orders our gross orders.
All periods referred to our fiscal period, unless otherwise stated and all references to the trailing 12 months refer to the trailing 12 months ending on the last day of our most recently completed fiscal quarter.
The results announced today include the preliminary impact of our recent acquisition of cyber heart, which closed early in the quarter.
And endocare allocation and cancer treatment services international or Cts Psi, which all closed in June .
During this call we will be making forward looking statements, which are predictions projections and other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties. All results could differ materially because of factors discussed in today's earnings release. This conference call and our SEC filings, we do not undertake any obligation to update any forward looking statements and with that I'm pleased to turn it over to Dow for his comments, thanks, Mike and thanks to everyone for joining us today I'll share the key milestones we achieved this past quarter and how they have contributed to our long term strategy. Our core remain strong and are pleased to see continued momentum in the second half of 2019, we are investing in innovation and future growth opportunities, both organically and through acquisitions and that together are designed to accelerate our execution to be a broad based cancer solutions company.
First let me touch on our third quarter performance total company revenues increased 16% to $826 million.
Oncology revenues grew 19% to $793 million driven by double digit growth in all geographies and strength across our portfolio.
Proton revenues were $31 million down, 26% operating earnings increased 22% to $144 million or 17.5% of revenues, including a 15 million dollar gross impact from terrorists.
GAAP earnings per share was 32 cents, which includes $51 million impairment charge to proton goodwill Gary will discuss the details of this charge in his section non-GAAP EPS of $1.32 cents was up 26%.
Cash flows from operations were $130 million up $28 million due to increased operating profit and strong collection momentum in our oncology business.
This quarter, we closed the acquisitions of cyber heart, Cts I Endocare and allocation.
Now, let me provide some additional color on the quarter.
In terms of our long term growth and value creation strategy, we made progress across our three growth priorities first strengthening our leadership and radiation therapy.
Based on public filings the radiation therapy market grew 11% on an orders basis over the trailing 12 months ending in March 2019, and we grew our worldwide market share by a percentage point during that period.
And our oncology business orders grew 2% in the quarter and 11% in the trailing 12 months our worldwide net installed base of 8412 units grew 366 units or 5%.
This robust growth in our installed base drives future recurring software and services revenues.
Hardware revenues grew 31% driven by our Truebeam and how see on platforms Halcn orders grew over 150% to 46 in the quarter of which 60% were taken in emerging markets. We have taken 284 orders of Halcyon. Since May 2017 launch the success of Halcyon has been driven by its unique treatment capabilities smaller size and lower power consumption requirements.
These capabilities have been greenfield orders access to smaller vaults competitive takeouts and general market demand.
I was going to Chew hospital inherently of University Hospital delivered the first halcyon system treatments in Japan, and Denmark, respectively.
The global installed base or Halcyon is now 90 systems.
The development of our artificial intelligence driven multimodality adaptive radiotherapy suite is progressing well in anticipation of March market introduction.
We recently announced the formation of our adaptive intelligence consortium. This consortium will lead clinical trials to develop evidence based clinical protocols for variance planned adaptive radiotherapy solution.
The solution will incorporate EMR pet CTM is information via deplorable, Evan image registration and artificial intelligence algorithms. This should be the most cost effective versatile and work flow efficient solution for on couch adaptive therapy and will be ideal for an alternative payment model or ATM value based care environment.
On the software front revenues grew 23% driven by continued adoption of our recently launched software solutions orders are Hyperarc, our high definition radiotherapy solution for stereotactic radio surgery, or Srs grew double digits in the quarter. We have taken 263 orders since launch since launch in over 40 countries orders for Eclipse MTO are multi criteria optimization planning software grew over 50% and we have now received nearly 1100 mcl orders in 46 countries.
Our services revenues grew 4% to $277 million driven by our growing installed base.
And our proton solutions business, we took three orders totaling $188 million in the quarter.
We were selected by Iridium Hospital, let part of Boston University Hospital, and HOKA Lund University Hospital, Bergen to equip each center in Norway with the Probeam Multiroom system. Additionally, we were selected by Shandong cancer Hospital in China.
To equip its new multi room proton clinical research center with a probeam proton therapy system. The Shandong order includes our ARIA oncology information management system and eclipse treatment manage treatment planning software.
We now have a total of 79 proton rooms under contract across 26 sites globally.
35 rooms are currently operational including five rooms, which were handed over to clinical operations this quarter.
The pipeline for our proton business is healthy and we continue to make progress on installations, we installed cyclotron that bioplex in Singapore, and King Chulalongkorn Memorial Hospital in Bangkok, Thailand.
In October last year, we announced the formation of the Flashforward consortium to study potentially groundbreaking ultra high dose rate cancer treatments with protons.
This quarter, we signed a strategic cooperation framework agreement with Shandong cancer Hospital for proton therapy clinical application and research. The first center in China to join the consortium. We also had a successful show at the particle therapy.
Particle therapy Cooperative group conference in Manchester.
With record breaking attendance at our Flashforward consortium users meeting and symposium.
Our second growth priority is to extend our global footprint in EMEA. This was the eighth consecutive quarter of double digit orders growth on a constant currency basis, driven by outstanding performance in India, The Middle East and Africa, and India. We booked initial orders for two linear accelerators and to bracket therapy systems as part of the Tata Trust framework agreement.
In our Middle East and Africa region continues strong collaboration with the AGA Khan charity in Pakistan.
Led to four Truebeam orders has to each at sites in Karachi, Pakistan, and our SLM Tanzania.
In China, our second largest market key wins that Guangjo Concord hospital in Shandong tumor hospital fueled strong double digit growth, we took five house and orders during the quarter, bringing the total to eight and China since receiving regulatory approval last November .
Finally, our third growth priority is to expand into other addressable markets.
With the acquisition of cyber Hearts, we entered the ventricular tachycardia or VTEC market, which is expected to be a $1.4 billion market by 2028.
The acquisition of intellectual property enables varian to innovate in this space and cardiac radio ablation brands building, a team and portfolio solution to address the VTEC market opportunity, we anticipate conducting clinical trials to demonstrate safety and efficacy for necessary regulatory clearances.
In June we announced the closing of our Cts I acquisition, which is an important step in addressing the growing global cancer burden and human capital gap through innovation of new multi disciplinary solutions and provision of services as well as enhanced access to patient data for artificial intelligence and deep learning algorithm creation.
Cts I operates operates the American oncology Institute comprised of 11 cancer centers centers in India.
And Cts I oncology solutions, a technology enabled services business supplying over 7000 Shimon plans globally each year.
Data published in Lancet oncology suggests that the world will need an additional 3000 radiation oncology centers 22000, linear accelerators and 150000 skilled clinicians by 2035 for radiation oncology alone.
Cts I will unlock global access to high quality patient care.
Our company entered the interventional oncology market with the acquisitions of Austin, Texas space, and the care and Hong Joe China based outlook on to add Cryoablation and microwave ablation therapies to our portfolio. Subsequently, we signed an asset purchase agreement to acquire Boston Scientifics portfolio of drug low double Microsphere end blend embolic meat products.
The interventional oncology market is expected to grow from $860 million this year.
The $1.1 billion in 2022.
These acquisitions serve as the first step in creating a comprehensive interventional oncology platform that includes the consumables business and Leverages Varians unique software expertise.
We were also pleased that Tennessee oncology selected varian to implement Nuna software application for managing patient symptoms and capturing patient reported outcomes in cancer care as part of this collaboration and will be deployed at more than 30 centers across Tennessee with the goal of reaching approximately 25000 patients this year.
In the past two months alone 10000 patients have been enrolled into the use of newness.
It was also chosen by the state of Michigan as the vendor for their statewide symptom management and patient reported outcome initiative.
Once deployed across 19 centers Nuno will reach close to 60000, new cancer cases per year last week. The first patient was enrolled at Henry Ford Health system.
Overall, we're pleased with the progress we made in the third quarter, we remain dedicated to providing patients and clinicians around the world with intelligent cancer care solutions with that I'll turn it over to Gary who will provide more context on the third quarter financial results. Thanks, though as always our frame my comments in the context of our long term growth and value creation strategy, which includes balancing growth profitability and liquidity. So let me start with growth.
Companywide revenues were 826 million in the third quarter up 16% in dollars and 19% in constant currency.
One small correction to a prior comment dominate our software growth rate was 24% year on year.
Recent acquisitions Cts Endocare.
And Alex on contributed revenues of $4.8 million in the quarter.
For segment reporting Cts I will be consolidated in oncology systems, and Endocare and Ela can really reported under other segment.
In oncology.
Revenues were 793 million up 19% in dollars and 22% in constant currency.
Driven by double digit growth in all geographies and strength across our portfolio.
Tariffs at a 150 basis point negative impact on the growth rate.
On a trailing 12 month basis revenues grew 12% in dollars and 14% in constant currency.
Cts contributed 2.8 million in revenues in the quarter.
Orders were $778 million up 2% in dollars and 4% in constant currency.
On a trailing 12 month basis orders grew 11% in dollars and 13% in constant currency.
We ended the quarter with $2.9 billion in backlog up 7%.
In the Americas revenues grew 19%.
With 22% in North America.
Orders were $357 million down 1% on a trailing 12 month basis orders grew 6%, including 19 million orders for six Truebeam systems and associated software from the Veterans Affairs medical centers.
In our Europe , Middle East, India, and Africa, geography, <unk> revenues grew 23%.
Orders were $281 million up 8% and 13% in constant currency.
On a trailing 12 month basis orders grew 13%.
Asia Pacific revenues grew 11% in dollars.
Tariffs had a negative impact on the growth rate of eight percentage points.
Orders were $140 million down, 1% and grew 1% in constant currency.
Driven by weakness in Japan, Australia, and Southeast Asia.
Offset by strong double digit growth in China.
On a trailing 12 month basis orders grew 22% with double digit growth in all sub regions.
Our proton solutions business posted revenues of $31 million in the quarter down 26%.
Services revenues of 5 million grew 44%.
Three orders were taken in the quarter totaling $108 million.
Turning to profitability.
Total company gross margin of 42.9% of revenues decreased 160 basis points.
This included a negative impact from terrorists of 130 basis points.
With the remainder driven by product and geographical mix.
Our trailing 12 month growth gross margin rate was 42.4% down 150 basis points.
This included a negative impact from terrorists of 100 basis points.
Oncology gross margin rate was 43.9% down 210 basis points.
This included a negative impact from tariffs of 130 basis points with the remaining difference driven by product and geographical mix.
System pricing at the region level remains relatively stable.
Looking at proton solutions gross margin dollars were $5 million.
As Tom mentioned, we took a 51 million goodwill impairment for our proton business.
Our aspirational goal to achieve near term breakeven earnings for the proton business.
This impacted by slower than expected order volumes, notwithstanding three orders in the third quarter.
We revised our growth expectation based on the current market, resulting a lower valuation, which triggered a non cash charge to fully impair proton goodwill.
Even with the market Recalibration, we intend to grow our market share for the proton business.
We remain committed to proton therapy, as an important porton treatment modality in cancer care.
Complimentary to our oncology portfolio.
And we continue to invest in flash technology.
Investments will continue to be a key driver of our long term growth and value creation strategy.
We invested $62 million in R&D, which is up 4%.
7.5% of revenues.
SG expenses were $148 million up 7% at 17.9% of revenues down 150 basis points.
The company operating earnings were $144 million up 22% at 17.5% of revenues.
Up 80 basis points.
This included a negative impact from tariffs of 160 basis points.
More than offset by tariff mitigation execution and operating expense leverage.
On a trailing 12 month basis operating earnings increased 6% at 16.6% of revenues down 80 basis points.
This included a negative impact from terrorists of 120 basis points.
Turning to taxes.
Our GAAP effective tax rate for the third quarter was 50.9%.
And our non-GAAP effective tax rate was 18.5%.
The lower tax rate in the third quarter is driven by a lapse in statutes in various jurisdictions.
GAAP EPS was 32 cents, our non-GAAP EPS was one dollar and 32 cents per diluted share count of 91.8 million shares in the quarter.
Turning to the balance sheet and liquidity, we ended the quarter with cash and cash equivalents of $523 million in $401 million in debt.
Cash flows from operations were $130 million up $28 million due to increased operating profit and strong collection momentum in our oncology business.
College DSO decreased to 105 days from 106 days in the quarter.
In addition to R&D other investments in the quarter included $19 million in Capex.
49 million to repurchase shares of our stock.
As of the ended the quarter, we had 2.5 million shares remaining under our existing share repurchase authorization.
I will now turn it back over to Dan.
Thanks, Gary and just a brief clarification on proton orders before we continue I read $188 million of third quarter proton orders dyslexic moment. It was $108 million. It was three it is stated correctly in the financial information and as as Gary said in his section.
Before I discuss guidance I want to comment on a couple of recent announcements on July eight us trade representative announced a retroactive tariff exclusion on Multileaf collimator source from China.
We expect that finished the fiscal year 2019, gross tariff impact to reduce by approximately $5 million.
Also on July 10, the center for Medicare and Medicaid services, or CMS announced the proposed radiation oncology payment bundle intended to test an episodic payment structure across a cohort of you has hospitals and freestanding cancer centers at Varian, we've long anticipated the transition to a value based care environment, our innovations over the past decade, such as Truebeam Halcyon Bravos Hyperarc rapid plan and numerous other innovations combined with our recent acquisition of Cts I provide solutions designed to be the most efficient and effective delivery systems driving outstanding quality and return on investment as the clear leader in the market and with over 1.5 million patients treated with Srs and SBR tea, we are poised to help guide customers and implementing a value based care environment.
As the proposed rule enters the comment period and additional data regarding the actual rates and coverage areas are released we will assess policy implications and work strategically with key stakeholders to advocate for changes that ensure that our customers are best positioned to successfully provide quality care.
To their patients.
And now looking forward.
Our guidance continues to consider that projected market growth and continued momentum of our products and solutions in the market. Additionally, the $5 million positive impact due to the retroactive tariff exclusion is being reinvested to drive future innovation and support our long term growth.
Including investments and Flash technology software capability key programs, such as adaptive radiotherapy and infrastructure incrementally. We're also investing in sales and distribution capability to support the global build out of our recent acquisitions.
And after carefully considering these factors we expect the following for the fiscal full year.
Revenues of $3.18 billion to $3.21 billion, representing growth of 9% to 10%.
non-GAAP operating earnings as a percentage of revenues of 16.5%.
non-GAAP earnings per share of $4.58 to $4.63 cash flows from operations of $430 million to $470 million. The guidance continues to assume a non-GAAP effective tax rate of 21% to 22% weighted average diluted share count of 92 million currency rates as of the beginning of the fiscal fourth quarter of 2919.
Includes the expected net impact of all tariffs currently in effect and includes acquisitions announced today to date.
Thank you and now lets go to couponing.
At this time, we'll be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to move your questions from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Matt Taylor with GBM.
Please proceed with your question.
Hi, Thanks for taking the question.
So the fast.
Good afternoon first topic I wanted to ask about was just some of the changes in the ordering patterns here.
You did you say there is any change in the environment in the Americas are in APAC, you called out some weakness in a number of geographies or.
We do chalk this up to some variability.
What are you seeing in terms of trends that would explain some of the different sir.
Yes, I know.
Thanks, Matt looking at the biggest pitcher first of all our trailing 12 month growth remains robust across all geographies.
Our orders are lumpy as you know and it's also tough to grow off a very large comp we had a very very good third quarter last year, but now just kind of making around the horn on the on the geographies. The trailing 12 months in the Americas is 6%, we're very pleased with long term performance.
The.
We had strong wins at the Veterans Hospital I'd say certainly here in the short term there is no indication that the CMS proposal is impacting us demand wouldn't make that linkage at all.
You know the us product portfolio remains in a very good position to to drive growth, we're seeing software competitive takeouts installed base growth and a lot of folks transitioning to higher technology with SBR T capability Asia, we as I said in the script, we continue to see strong double digit growth in China.
Despite the fact that relaxing any traction yet from the.
License quota.
But China remains very very strong rest of Asia, and Japan did not grow in the quarter the other smaller markets with.
Lumpier lumpier businesses, but all are growing double digit on trailing 12 month basis.
You know and it's certainly been strong for us.
For the last year.
You know as I said about emeas eighth consecutive double digit constant currency growth quarter, we've had.
So we're continuing to see a strong strong environment there.
I mentioned on the call we did see the first activity in the Tata agreement, we booked two orders in the quarter. We hope that will continue to grow I think that's that's probably a pretty good.
Around the horn, Gary anything add there and I missing no software growth continues to perform well from an orders perspective as well as we continue to sell those solutions around the globe Thats, the only thing I'd add.
John maybe since I've messed up the number.
We did get three proton orders in the quarter and I'd also say the funnel looks pretty good there.
So far after a couple of quarters with no no proton activity, it's nice to see that come back.
Okay. Thanks for that and then just as a follow up you did mention.
The.
Bundled proposal that came out and some initial thoughts on that.
No there has not been a linkage to.
Increased demand would be great to hear.
What you're hearing from customers what are some of the things that you think.
We need to change or be commented on down in the comment period.
Yes, yes, it's really I'd say that number one item as people are still looking for more clarity they didnt they didnt give everything.
Just as effort just to remind everybody kind of from the top this is a proposed rule and we will be.
Working with stakeholders to address.
Dress issues.
But that weve long anticipated transition to value based care environment.
Our innovations, especially our big ones with.
Housing on Truebeam Hyperarc rapid plan all of these have had and that in the pack of our minds as we develop them a transition to this kind of.
Payment model, we're also very encouraged.
That's how we havent known Cts I very long, but we're very encouraged about the kind of play it gives us that gives us an opportunity to consult and sell with people as they as they as they go through this transition.
So we think so the short version is from a product line portfolio perspective.
I think were really in very good shape too.
To help our to help our customers.
In terms of the proposed rule itself remains in the comment period.
The actual rates and the geographic areas are not yet released so the headset aerie.
Key piece of information, we're going to need to kind of complete the final assessment on the policy implications we do have.
Some concerns as to other stakeholders.
In the field.
There's lots of data and complexity to sort through but we're working with Astro and others to advocate for changes to ensure our customers are are are in a very good position, yeah, just kind of coming back to the portfolio position I think we're in a really good shape and niche players are going to have difficulty.
Justifying slower treatments in higher cost that's kind of what this come downs comes down to so.
From a share perspective, we think we're in very good shape.
Maybe even in better shape than ever and.
As to what happens in the market I think we really kind of have to kind of look at the the final rates before we can make that assessment.
Okay.
Alright, thanks for the call.
Thank you Matt.
All right next question.
From the line of Matt.
Hi, Sam with Citi. Please proceed with your question.
[noise], maybe you're on mute I mean, we got you.
Meet your line is now live.
[laughter] here can you hear me Okay, Yeah, we got you.
Sorry about that guys tend to phone problems here I want to start with guidance I apologize if I missed it but can you give us some kind of better understanding of the higher revenues, but tighter. He P.S. guide just thinking through some of the positives that you're experiencing with healthy on installs now coming through the tariff mitigation that you been made mentioning for the second half of the year that big software growth seems to be some some pretty good visibility, but the obviously the operating margin coming down to 16.5% and a tighter bps range just help us out with what the offsets are there.
Yeah, you know what a great question and first of all I'd say, yeah. As you referenced show revenue is a is definitely growing and we felt good about that and Dow referenced some of the Tailwinds, we're seeing in the marketplace.
And you know trailing 12 months orders are in good shape and.
We're certainly getting little help from acquisitions, there and that will translate into some of that revenue guide increase a job that you just saw.
You know from an operating perspective I just got to kind of help you think maybe a little less sequentially from Q3 to Q4, a couple of things you know so first of all as we are as we alluded to in the Cts I announcement, there's three cents of dilution here that you're going to see.
We talked about in the quarter.
Next quarter.
You know I would say the tax rate from an EPS perspective is seasonally low in the third quarter.
Under Finforty eight we set up reserves for uncertain tax positions.
It is typically in Q3, we have lapses in the statute of limitations in various jurisdictions.
And that causes the seasonally low tax rate in Q3 that bounces back up into Q4.
You know we have a little more interest from the iOS acquisitions interest expense from the iOS acquisitions that we just talked about.
And then.
I think one of the things that we want to make sure is fully understood here is the ongoing nature of the investments we've been making not only in R&D, but also in sales and marketing.
Angie in a way to support that long term growth.
You know for the buttons, Boston scientific beads portfolio. That's pending close you know, we're going to build into a salesforce for that and so we'll make ongoing investments there in that SGN a line to make sure we support that growth rate over time and the last thing I would point to here as you know the current range that we gave from an EPS perspective, which is narrowed.
The prior midpoint of our guidance is still within that range.
So you know we we like how this has positioned relative to wrapping up the year and facing into this tariff.
You know tariff challenge that we had I feel like were operating very very well in that environment and delivering strong growth on top of it maybe if I could just maybe make a few comments too about the reinvestment side, we've been making some ongoing investments in our software upgrades in emerging markets. A field teams. So that's that's kind of ongoing little bit infrastructure support and go with that but then when you look at the acquisitions cyber hearts very exciting its and intellectual property.
Acquisition, we think it can be a very substantial piece of business, it's going to require some clinical trial work on some investment to get going so.
Weve got that kicked off we havent owned them very long as I mentioned, but we're very encouraged by what we see with the interventional oncology play three acquisitions around to care and Alex on and then the asset purchase.
From Boston Scientific you know that's a billion dollar plus smart will be a billion dollar plus market.
With very generously accretive gross margin rate. So our our challenge is to kind of bring that to global scale. So we've got some investment going on going on there and then as I mentioned, the Cts I play literally with everyday we like it more and more.
Opportunity to pivot that business into a technology enabled services business and really help grow help grow the business also.
With accretive gross margin rates so.
That's a little bit where the investments are going.
You know and that kind of four cents ish impact that we've got here in Q4.
Okay, and then just to make sure we're clear on that so that prior guidance of six and a half 16, and a half to 17 anat percent going to 16.5% now it sounds like that's all related to acquisition, there's nothing else that's impacting that reduction.
Yes, predominantly investments to support acquisitions, and you know that that's as Don alluded to to get to scale and get to those higher gross margin rates in growth over time.
And then the tax and tariff. Please you talked about well the tax and tariffs will be below that line, but yet our operating earnings perspective that is correct.
[noise], though.
Does it take with this with this topic for me to my last question and just thinking about this obviously just passed this next quarter I think people understand dilution from deals, but as I think about the year and you guys having started out at 17% to 18% operating earnings talking about getting to north of 20 and here. We are looking to end the year at 16 and a half inevitably. The question is going to come in Ukraine. So so how do we think about this for next year. So can can you I know you're not going to give guidance, but can you talk just directionally to whether in aggregate. The acquisitions are going to be accretive next year and whether some of the items that I mentioned that seem to be positive for you are going to start to pay off or how we should start to think about that 16.5%. As we go into next year are we is that now the new base and just work off of that for another 100 basis points or is there more room because of some of the one times another impact this year.
You know I think couple of things there I mean, great question. So first of all there's a as you know roughly a 160.
Basis point impact from tariffs in that number.
Okay and so.
Let's let's you know add that to the top and then that starts to get you you know heading in the right direction relative to the 20% to 20% that we gave.
You know certainly wasn't inclusive of what's going on with the tariff environment. We're in today. So that's kind of 0.1.
Two is.
Yes, we are seeing some nice tailwinds from hardware accretion from halcyon.
We've now got 90 90 of the 90 those installed in the world and.
Good healthy backlog to pull from so we're seeing we're seeing that nice accretion.
I would say that we are seeing dilution on the other side of that from the acquisitions investments in flash and other investments that we've alluded to along the way.
And I would say that.
Software is going to continue to be a good tailwind for US who saw we saw here in the third quarter, we anticipate seeing it for the rest of the year and continued to be a nice mix up from a margin rate perspective proton profitability will has improved over the last two years on a year over year basis and.
I was calling at the helm and the work she has underway we hope to continue that down the down in the past. So and then we'll get some operating leverage out of this portfolio as we stabilize those investments to support the growth in the near term. So yeah. We feel good about where we're exiting the year from an operating earnings perspective, and I would remind you that even with the tariffs were still going to grow operating earnings dollars on a year over year basis.
Okay.
Our next question comes from the line of Jason Bednarz with Robert W. Baird. Please proceed with your question.
Thanks, Good afternoon, everyone.
You did 12, we'll come back to the China quota I mean, how would you seem to suggest that quotas contribute to your business here going forward I mean, how should we think about it for for fiscal 20, assuming that we start to see it here coming coming in a bigger way in the coming quarters and is it fair to think it to a gradual ramp up is that the right way to think about it.
And is that market, the China market running really into any bottlenecks, that's holding up that quota from being executed.
You know I think that you know the short version is to where we are today, it's kind of within our expectations.
I do think we've got to watch it going forward yeah, you've got the data on that as you know 1200 to 1400.
Systems that they had licenses that they were going to do we didn't believe kind of thought from the beginning that that would be a gradual ramp that they had a lot of work to do to get that done.
We are seeing some of that work come together you know now kind of how the whole China economy plays into this and what's going on what they spend the money I think that's a question that we're just really not gonna see till till till next year.
Next fiscal year for us. So I you know short version is nothing we've seen so far surprises us it's kind of on track for what we thought would happen.
The licenses are moving through the process.
Provinces and as soon as we as soon as we see that we'll we'll certainly let you know I would say that that you know absent all that we're still seeing a very strong market. It's been strong double digit at in the quarter and in the trailing 12 months.
And our share is very very good 55% public win rate.
You know so were I think very well positioned and.
Kind of like what we're seeing even despite that.
The the quota and not not hitting up.
Or maybe as fast as some people had hoped.
Okay. Thanks Thats helpful.
And then I just want to come back to Matt's question earlier, and just maybe dig in on a pack a bit more.
I mean do you think you ran it just ran into an air pocket with some of those markets like weather was Japan or southeast Asia, or Australia or is has capex spending softened in some of those markets. I mean, just trying to understand what's what's really going on there in those markets just especially in light of what had been some pretty darn good growth rates, you've been putting up here. The last few quarters now no I mean, I'd clearly China was very strong as I mentioned strong double digit growth both in the quarter and the trailing 12 in the quarter, both Japan and rest of Asia were down and that down.
Not insignificantly.
These markets are just lumpy.
So so we look very much the trailing 12 on these markets, it's been strong double digit both in Japan and in the trailing 12.
You know, but they are markets you know for example, Australia is a market that's very tender driven.
You could get five or six linde x., one quarter and zero. The next so so we got some of that Lumpiness kind of going on in those in those markets that at this point I wouldn't over read anything into Asia. We continue to see a strong Asian believe it's going to be a a.
A good geography for us we've recently retooled kind of our rest of Asia team, We've got very strong leadership in China, Japan, and Australia, and we've retooled our southeast Asia leadership team really like the team that's in place and.
Pushing that market and seeing some market development and growth there one of the things that maybe just come back to the halcyon comment that Gary mentioned.
We Oh, we did 46 LC on orders in the quarter, 60% of them were in emerging markets, but the really amazing statistic is nearly every one of the emerging market orders was a new vault.
So this is drawn our installed base growing the.
Oh on the beach front of the business long term growth of our service and software business.
It's doing exactly what we wanted to do and and kind of really.
Responding to that lancet study that Weve famously quoted now for three or four years, and it's just fun to see the fulfillment.
Of.
All of that.
Fulfilling that access to care in these markets, where cancer patients have not had radiation therapy as part of their.
As part of their Arsenal.
Okay. Thanks for that.
Our next question comes from the line of Anthony Petrone with Jefferies. Please proceed with your question.
Thanks, and maybe I'll stay on APAC orders for second and moving to you just reimbursement.
No just as we look ahead and when we start to.
See orders from say Tata and then also the.
The the outstanding tenders that are in China that that 1400, or so systems I mean.
How are you expecting eventually that to roll through I mean, it seems that it possibly.
Will cause even more lumpiness as time goes on or or.
You know you expecting perhaps maybe a more measured process as you know both Todd on the tenders in China began.
I mean, let me, let me talk India first you know.
We're very pleased with the Tata relationship are.
A big piece of our EMEA growth. This last year has been India and you know and that continues even you know it's kind of same store in both India and China right I mean that that core business is doing very very well.
Our.
If you look at it on a revenue basis, our five year CAGR in India is 20%.
You know so so that's kind of the India story. If you are at radiation therapy utilization in India as is less than 20%. So there's still a huge access issue. That's what the top foundation really wants to get at.
You know we book the first two orders.
There.
Yeah, it's it's underway to Linux and to bracket therapy orders you know so that those are kind of their pilots to get it going I think there's been a lot of focus on the on the election and the campaign and and now as you know the government is rolling out budgets I think we will see.
In all over the next few years more engagement from the government buyers in India.
So so you have kind of our core market, the Tata Foundation, and the India government getting into it. So you know I mean, it's going to be a little bit lumpy and and you know we don't guide orders, but that's kind of the that's kind of the market that we're seeing in India and China, we're seeing.
The historical market as I mentioned a minute ago is very strong and continues to be strong I would maybe add one thing to it and that is we're starting to see a private market emerge in China and.
And that's.
That's good.
You know the Ministry of Health thing as I mentioned, it's on our expectations.
You know as we had hoped to see some here in the second half of the year and Thats, what we said earlier in the year.
We do see provinces and starting to kind of get their ducks in a row and and line up you know now what economy emerges in China and is there some fiscal restraint and how does that impact us I can look in the eye and tell you how that's going to impact us one or the other at this at this point, but maybe there'll be some of that but frankly that the core business continues to rock in China, and we feel very comfortable about its growth and about our market position there I mean literally.
Our market share has been trending up there the last.
Last eight nine quarters and continues to be very strong position as a leader so grateful for that.
And just a follow up there in the U.S. on on reimbursement full understanding it's early here, but as you look at sort of what's out there in the proposal.
Is there any early view on perhaps what impact this could have on one hand.
When when the changes you know maybe it leads to a little bit of hesitation on hospitals, but on the other end.
It seems like going to value based could trigger.
And upgrade cycle is if your systems are really not prepared to do you know really heiple fractionation really so maybe just some early thoughts there. Thanks.
Yes, I think it's really a good question, we're watching it very very closely.
My view of this is there's one negative and one positive the negative is its uncertain and you know and and uncertainty it's uncertain times people hesitate a little bit the positive is.
With this transition to more value based we're going to see a shift to more hyper fractionation and theres no product portfolio better positioned in the world than ours to take advantage of that and that could cause people to really look at.
Their their fleet of Linux and say boy are we well positioned for that transition and you know I need a better Srs SBR t. capability.
And I need to be able to do it in my standard treatments slot.
So so its.
I think it's a nice opportunity for both for both new systems and the and for upgrades, we could sell imaging upgrades more rapid plan upgrades.
I am very encouraged I mentioned briefly our our adaptive therapy consortium to do that in a in a existing treatment window.
Without without impacting the productivity of our customers is a big deal. So they can maintain and grow their their their or their return on investment with.
With equipment. So we think we're in so I think thats. The positive I think the positive is there some encouragement to swap out old stuff and then there will be a little uncertainty while people kind of kind of transition into the new.
The new alternative payment model.
Thank you.
Our next question comes from the line of Peco Peterson with JP Morgan. Please proceed with your question.
I'd Echo, Thanks, Hey, I'll start with where you left off you made a comment earlier about working with customers to address some of the issues around bundling can you maybe elaborate on that and what's kind of a range of acceptable outcomes in your view when we do get the physician fee schedule in terms of cuts.
I think the only outcome I can really predict is we'll know in November and December .
So so that mean that they've been very regular in terms of their timing, we see the trial balloon in July and then the final final proposal comes out in.
In November December .
No we have not seen actual rates and geographic areas yet as part of this.
You know so that's one item the mandatory nature of it as another item anyway, we're working with with a number of customers freestanding hospital academic across the board, we're working with our trade Association at advent med and of course through through Astro.
Two.
To raise some of the issues, we have and make sure the voices heard so that the.
Cancer patients continue to receive the best quality care.
And on how soon I appreciate the commentary can you just comment on the Kb launch how much is that driving demand at this point, what's the mix like kv versus non not give you enable.
And let's see I don't have it here for you all.
If I get it before the end of the call Oh here. We go we got 55% is.
Happy to have it up at a 55% is kv.
I'm sorry, 55% in.
Yeah, Let me, let me start over 60% of this is an emerging markets. So you could say that the 40% that's in developed markets almost all of that is.
Virtually 100% incentive that is kv.
I'd say in emerging markets, maybe 10% to 15% of it is as a killer voltage imager in it I think the one thing that we're excited about is that kilovolt imager is not yet launched in China.
We don't have regulatory approval for that yet in China, and I think our Chinese customers are in part waiting for that and that's going to be another elbow of growth for us when we bring that into the market.
All right and then one or two quick ones for me Gary I have to ask on cash flow because you didn't cut it again can you maybe highlight what's what's behind that.
Yes, Tycho Thanks is really related to growth here as we're growing faster as outlined by the upgrade in the.
And the growth rate, we're going to put some more receivables on the board and carry a little more inventory so.
Thats kind of a.
The bulk of it of the small change we made there and.
Yes, I would say on the on the flip side of that our oncology business saw a record collections quarter. So really good collections by the team and our Dsos in oncology was down from 106 days last year 205 days this year.
And is down from 110 and the prior quarter. So.
The teams are executing very well says we're growing fast so we're going to be a little more working capital.
And then on Terror, if you offset the impact on EBIT this quarter or tariffs then a net tailwind to earnings growth next year as you lap the softer first half or do you plan to kind of reinvest that.
We'll talk a lot more about as we as we talked to you guys next quarter, but we've seen some good momentum as you outlined as we've gone through the year here.
Okay. Thank you.
Our next question comes from the line of the Jay Kumar with Evercore ISI. Please proceed with your question.
Hey, guys. Thanks for taking my question I have a few here.
Maybe just starting on the fourth quarter guidance here, Gary if I understand correctly.
The 10% revenue growth for the year, that's implying low single digit topline for Q4.
Was that were revenues pulled forward into Threeq I'm just trying to understand you did 16 reported 19 constant currency why is that decelerating to a unit 3% reported in Q4.
Yes, big compare from last year VJ.
When you look at what we did in in the fourth quarter of fiscal <unk>.
Fiscal 18, that's the majority of the reason going off that big compare.
As always the challenge, we're up to the challenge and as you outlined given the guidance, we'll see good growth here. So.
That's really the long and short of it here from from a revenue growth perspective.
The Dps guidance.
That's that's implying no dollar 21.
At the high end.
That's 15% below Street models for Q4, I'm just wondering if there was any timing element from Threeq to Fourq, you, obviously had a really strong Q.
That that EPS number basically implies a sequential deceleration in op margins am I looking at this the right way in terms of.
No the implied fourth quarter guidance on EPS in margins.
So it implies a sequential decline in earnings per share right. So the first thing that I think you have to look at it from a quarter on quarter perspective is.
The tax rate like I outlined.
That's certainly the sequential tax rate decline that I talked about earlier.
You know under under Finforty, eight we set up reserves for uncertain tax provisions.
And positions and in the third quarter, we had some of the statue limitations in various jurisdictions lapse. There. So you see you know seasonally as you've seen the last couple of years. It dropped in a drop in the growth rate or a drop in the tax rate in the third quarter and that will pop back up in the fourth quarter.
That's a big part of that earnings per share sequential change.
Cts side, the three cents dilution, we've already talked about that that you'll see in the fourth quarter.
We will have some more interest expense as we go from Q3 to Q4, given the acquisitions that are outstanding and then as Don outlined we continue to make investments across the us DNA line to support that growth rate.
Building out a sales distribution marketing with the acquisitions were very excited to have in the portfolio.
That's helpful and if I, if I could just squeeze in one.
On the bundling side.
When I was reading the document it looks like Weve freestanding centers.
Our getting paid.
On the first part VJ.
I know in a lot of areas the reimbursement rates have been equalized. So.
I mean that but it's something we can tackle in in another call somewhere.
The.
In terms of the second part of your question present, a backlog for Ciena backlog I mean that there was a day a decade ago when the freestanding market was a quarter of our business today, it's less than 5% of our business.
Thank you guys.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Dow Wilson for closing remarks.
Thank you in closing we're excited about the strong momentum in the business and look forward to continuing to execute our growth priorities.
We remain committed to investing in innovation and future growth opportunities, both organically and through acquisitions. These activities accelerate our strategy to be a broad based cancer solutions company to drive towards the ultimate victory a world without the fear of cancer. Thanks for joining us today.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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