Q1 2023 Varex Imaging Corp Earnings Call
Greetings and welcome to the vertex first quarter fiscal year 2023 earnings call. At this time all participants are in a listen only mode. A brief 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. Other reminder, this conference is being recorded.
It is now my pleasure to introduce your host Christopher Belfiore director of Investor Relations. Thank you Christopher you may begin.
Good afternoon, and welcome to Barrick's Imaging Corporation's earnings conference call for the first quarter of fiscal year 2023 with me today are Sunny Sanyal, our president and CEO and Sam Maheshwari our CFO .
Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at various website at barrick's imaging dotcom forward Slash news.
The webcast and supplemental slide presentation will be archived on <unk> website.
She simplify our discussion unless otherwise stated all references to the quarter or for the first quarter of fiscal year 2023.
In addition, unless otherwise stated quarterly comparisons are made sequentially from the first quarter of fiscal year 2023 to the fourth quarter of fiscal year 2022.
Finally, all references to the year or to this fiscal year and not calendar year, unless otherwise stated.
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 related to our business are described in our quarterly earnings release, and our filings with the SEC additional information.
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 annual report on Form 10-K the.
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 our discussion.
On today's call, we will discuss certain non-GAAP financial measures.
These non-GAAP measures are not presented in accordance with nor are they suitable for GAAP financial measures.
We provide 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.
Thank you, Chris and good afternoon, everyone.
We are pleased to report sales of $206 million for the first quarter.
With our expectations.
This was a result of a more balanced operating environment, driven by good demand and improved supply chain and our internal supply chain initiatives.
That said, while demand levels, whereas expected.
Product mix was less favorable in the quarter and as a result gross margin was lower than what we had originally anticipated.
With that.
Let's discuss our results for the quarter.
Revenue in the first quarter was down 11% sequentially, but up 3% year over year.
Revenue in the medical segment declined 12% sequentially, while the industrial segment revenue declined 9%.
non-GAAP gross margin in the first quarter was 32%, which was below our expectation due to a shift in our product sales speaks to mid and lower tier products during the quarter.
Tom will talk more to this during his prepared remarks.
Adjusted EBITDA in the first quarter was 25 million and non-GAAP EPS was 21 cents.
We ended the quarter with $108 million of cash cash equivalents and marketable securities on the on the balance sheet down 5 million from $113 million in the prior quarter.
This was primarily due to higher inventory in the quarter.
Now, let me give you some high level insights into the market environment based on an assessment of demand that we are seeing for different modalities and applications.
Medical segment revenues increased 3% year over year and decreased 12% sequentially.
Across our product portfolio, we believe our customers are exhibiting cautiousness has to see an uncertain economic environment ahead.
Many of them are still facing challenges fulfilling their backlog primarily due to material shortages.
As a result.
<unk> global leaf RCT tubes was soft.
Demand in other medical modalities, including Fluoroscopy oncology and mammography was flat to down.
Demand for dental and radio graphic products were stable to up.
Revenues in our industrial segment increased 5% year over year and declined 9% sequentially.
Demand for industrial tubes, and detectors remained strong in the quarter led by strength across non destructive inspection products.
Security markets continue to slowly improve as our customers converted their prior period tender wins into orders for us at a higher rate.
Throughout <unk> history, we have focused on investment in R&D and innovation in the field of X Ray imaging.
We see that share based imaging industrial continuing to evolve and as long term components supplier to imaging Oems. We are at the center of this evolution.
This is very evident as we met with our customers at RSA This year.
As you May know each November we attend the annual Radiological Society of North America Conference in Chicago.
This is the largest radiology trade show of the year and as well attended by both our OEM customers and our peers.
With over 31000 participants in attendance this.
This conference provides us a significant opportunity to take the pulse of the markets we participate in.
This year, our Sunday was a very meaningful event for Eric as our customers return to the show with a pre COVID-19 level presence and enthusiasm.
Specifically, we saw a significant shift.
From conversations centered around supply chain rose to active conversations around new product development and our role as a component supplier to them for these future products.
Photon counting technology stood out as a key highlight of our discussions at the conference with many customers interested in our technology and how it could be integrated into their new products.
The focus was mainly on performance.
Resolution image quality of photon counting technology, as well as dose reduction and spectral imaging capabilities.
We believe there's a significant opportunity with our photon counting technology for both medical and industrial applications and we continue to make progress with our <unk> customers for potential integration into their systems.
Yeah.
With regard to some of our other detector products customers continue to show a high level of interest in our dynamic detector platform called Azure.
A number of our customers are already using this platform across various modalities and we expect continued integration given the level of interest we saw.
Our radio graphic customers remain excited about our lumen detectors, which continue to gain interest.
Lumen is a highly competitive radiographic detector platform currently targeted at the approximately $400 million segment of radiographic market, where we have low market share.
We are excited about the lumen family of detectors that are working on a number of projects in 2023.
While AI software has been part of our sunny in the past it felt more palpable this year with a very large.
Exhibit footprint dedicated to this technology.
A key area of interest was AI software related to lung screening.
As we have highlighted in the past, we believe our AI aided lung cancer screening software reality will benefit from our global focus on proactive lung screening.
Last year, we installed six reality platforms in various locations in British Columbia.
All of these systems are working well and have provided runway to be involved with a tender process in Manitoba.
In Ontario, we have a test installation that could also lead to a tender process.
The conversations with current and prospective customers support our view for the continued evolution of extra industry towards new technologies.
While some of these products are several years from being commercialized. There is no doubt that the industry is evolving into a higher technology arena in line with where we have dedicated R&D dollars.
With over 70 years of expertise in the imaging industry and strong customer relationships. We are a critical player in making this evolution of reality.
Turning back to the quarter, while demand in the first quarter as per our expectation as we start the second quarter, we're seeing a softer demand environment.
We expect this change in market dynamic to lead to revenues that will be flat to slightly up for the year.
Whether we expect a less favorable product mix, we experienced in the first quarter to continue into the second quarter.
With that let me handover the call to Sam.
Thanks, Sunny and Hello, everyone. As a reminder, unless otherwise indicated I'll provide sequential comparison of our results for the first quarter of fiscal 2023 with those of our fourth quarter of fiscal 2022.
In the first quarter demand and supply came in balance as a result, we are reporting sales of $206 million at the midpoint of our guidance non-GAAP gross margin was 32% below our expectations, primarily due to lower margin product mix non-GAAP EPS was <unk> 21.
First quarter revenues were down 11% compared to the seasonally high fourth quarter of fiscal 'twenty two.
Medical revenues were $160 million and industrial revenues were $46 million medical revenues were 78% and industrial revenues were 22% of our total revenues for the quarter looking at revenue by region Americas decreased 7% sequentially, while EMEA decreased 13.
Percent and APAC decreased 14%.
This was against a seasonally strong fourth quarter sales to China were 17% of our overall revenue for the quarter.
Let me now cover our results on a GAAP basis fourth quarter gross margin was 31% 100 basis points lower than the prior quarter operating expenses were $50 million flat compared to the fourth quarter of fiscal 'twenty, two and operating income was $13 million down $12 million net.
Earnings were $3 million and GAAP EPS was <unk> <unk> based on fully diluted 41 million shares.
Moving on to the non-GAAP results for the quarter gross margin of 32% was down 100 basis points sequentially, driven primarily by low margin product mix.
While demand in the quarter was in line with our expectations of a product mix in the medical segment changed we saw reduced sales of higher margin higher NCD tubes, and certain detector products in the industrial segment, we saw lower service revenue, which typically carries a higher margin profile.
This product mix shift caused approximately 100 basis points of margin compression in the quarter compared to the fourth quarter.
We believe some customers are taking a more cautious stance either due to the macro.
Economic environment, our challenge at fulfilling their backlog due to supply chain shortages.
R&D spending in the first quarter was $20 million flat compared to the prior quarter. It was 10% of revenues at the high end of our targeted 8% to 10% range due to seasonally low sales level in Q1.
SG&A was approximately $27 million flat compared to the prior quarter.
Result is G&A was 13% of revenue.
Operating expenses were $47 million or 23% of revenue, which was flat sequentially.
Operating income was $18 million down $11 million sequentially due primarily to the lower gross margin.
Operating margin was 9% of revenue compared to 13% in the fourth quarter of fiscal 2022.
Tax expense in the first quarter was $2 million or 15% of pre tax income compared to $4 million or 17% in the fourth quarter of fiscal 2022.
We are now modeling, 25% tax rate for full fiscal year 2023, due to certain tax reform related favorable items as well as increasing R&D and foreign tax credits.
Net earnings were $8 million or 21 cents per diluted share down 22% sequentially.
Average diluted shares for the quarter on a non-GAAP basis were 41 million.
Now turning on to the balance sheet.
Accounts receivable decreased by $15 million from the prior quarter due to lower sales in the quarter compared to the prior quarter and DSO increased two days to 70 days.
Inventory increased $17 million into first quarter.
Result of the days of inventory increased to 203 days.
While it is common for our inventory to increase in our first fiscal quarter, we expect inventory to decrease going forward.
Accounts payable increased by $8 million and days payable was 55 days.
Now moving to debt and cash flow information.
Net cash flow from operations was a use of $4 million in the first quarter due to an increase in the inventory employee incentive payments and the bi annual coupon payment on our debt. We ended the quarter with cash cash equivalents in marketable securities of $108 million.
A decrease of $5 million from the fourth quarter of fiscal 2022.
Gross debt outstanding at the end of the quarter was $450 million in debt net of $108 million of cash and marketable securities was $342 million.
Adjusted EBITDA for the quarter was $25 million and adjusted EBITDA margin was 12% of themes. Our net debt leverage ratio was two five times at quarter end.
Now moving onto guidance for the second quarter as we talked about earlier, we are providing outlook for revenue in fiscal 2023 to be flat to slightly up compared to the prior year.
Separately, we believe hospitals are seeing good patient.
Add elective procedure volume, however, higher than capital expenditures and long term payback projects are being reevaluated. This phenomenon is cascading over to us as a somewhat unfavorable product mix as a result for the second quarter of fiscal <unk> fiscal year 2023 revenues are expected.
<unk> between 205, and $225 million and non-GAAP earnings per diluted share the unexpected between <unk> and 'twenty five.
non-GAAP earnings guidance includes an anticipated $2 million payment for technology transfer milestones in R&D. This would equate to approximately four cents and non-GAAP EPS.
Our expectations are based on non-GAAP gross margin in a range of 31% to 32%.
non-GAAP operating expenses in a range of $48 million to $49 million temporarily high due to the anticipated R&D milestone payments.
<unk> rate of about 25% for the second quarter and the rest of fiscal year 2023.
non-GAAP diluted share count of about 41 million shares.
With that we will now open the call for your questions.
Thank you we will now 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.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question is from young Li with Jefferies. Please proceed with your question.
Alright, great.
Hey, everyone. Thanks for taking our questions can you hear me all right.
Yes, we can hear you all right.
Alright perfect.
I guess, maybe just to start on the the cautiousness from customers common.
I was wondering if you can expand upon that a little bit more which products and markets geographies are more impacted.
And what is holding up better.
Like some of your customers are maybe seeing some more deferrals or cancellations as well.
Yeah, Hey, this is sunny.
The cautiousness comes from just the comp general conversations that we've had with customers and the actual.
Softening in the order in take rates of the call offs as we call them that we're seeing from them and without exception every conversation that we've had with our customers they've indicated to us that they're sitting on a backlog of whip that they can't get out of the door because they were missing some component.
In their system that they are building in our systems that they're building. These are not our and in our tubes and detectors either other parts and components that theyre missing, so and that's causing them to rebalance some of their inventory in order to enhance the orders to us now.
That's what's driven us to look at our forecast for the rest of the year and we've indicated that they were seeing some softening.
Alright, great very helpful. I guess, maybe one more.
I guess, the China market.
Attractive and important.
I guess, what are you seeing and hearing on the ground are related to the COVID-19 disruptions during the quarter and how has that changed if any and in January.
And how long do you think that market might take to sort of normalized.
I think what we're seeing in China first of all with Covid. There was there was disruption across the board for most of our customers they have trouble getting.
People to work and get product out the door. So there is somewhat of a similar situation as I described earlier with.
Unable to get product out of the door, but in their case to us.
A lot of it was also tied to labor we motor through it we are we manage to deliver all the things that were needed.
In terms of Cte and.
Our strength in China's heavily.
You know we've been very heavy on Cts doing well with Cte theres been a lot of <unk> buying and although the Chinese government continues to reinforce their investments in health care there.
This year, we expect that there'll be some softening in demand in <unk>.
Down from from the traditional just fanatic buying do more traditional growth rates. So again early signs early indicators. There is no sign of slowing down of overall investments in health care and <unk> buying we expect will continue.
And for US it's a it's.
Two pronged right one is new sockets that we get through a lot of these activity by the way there's been continued activity with R&D and our new.
New design wins as the Chinese Oems continue to bring out new models. So one first prong is new sockets in the second prong is we've now sold quite a bit of new sockets into China. We expect a replacement revenue stream from that to continue and should help our should help us in the future.
Alright, great I appreciate the color I'll get back in queue.
Thanks, Ken.
Thank you. Our next question is from Larry Solow with CJS Securities. Please proceed with your question.
Great Thanks, and good afternoon or good evening.
Just a follow up to just on the on the demand or the questions on the somewhat lower now at.
Just from a high level the revenue outlook it seems like it's.
It's a combination of things I guess it did some supply chain issues.
And you mentioned just things caught up in the web.
But I guess also the hospital spending.
Or capital expenditure sort of reassessment that that seems to be somewhat of a newer phenomenon I guess.
And.
How does that flow to the OEM might go there orders it sounds like the OEM orders are still good. So I'm just trying to figure out does this hospital slowed down is that like a next step. So does that maybe make this slow down a little bit longer just trying to kind of connect the dots there.
Great.
So hi, Larry This is Sam yeah. So what we are hearing from our hospitals and the Ceos, what they're seeing is that although they are seeing very good patient volume in elective procedure volume and as you know from prior history, we have.
We are connected to the hospital capex somewhat particularly to the elective procedure volume overall.
And what they are saying is that they are under tremendous profit pressure so to say in the sense. They are expenses are running quite high and so in order to maintain their profits. They are looking at.
Everything.
And this is what we've heard from more from the United States based hospitals.
And as they look at it they are scrutinizing their capital expenditures and also everywhere that they can manage their expenses better.
And in this scenario what we are hearing is that.
Longer term ROI type of projects, which are much higher in terms of capital layout.
Those are probably being deferred or delayed and anything that can increase patient volume et cetera is already being is being taken care of them. So we believe that is causing.
Little bit of pushout on the higher end products or higher end machines and that is cascading over to us. That's what we believe is happening over there of course, we are one step removed.
What we mean.
Okay.
It sounds like it.
The end market demand is all based on patient volumes for sure.
Sure drive your long term business, but I guess you could never.
Customer behavior.
Just around maybe they could decide to hold less.
C G machines or whatever in the long run, but okay, but I guess, that's really hard to decipher in a couple of quarters and then just on China. So I'm just trying to get a little better read on that.
I feel like and also China and the government. So behind this initiative in terms of C. T machine build out and then I thought that was sort of.
The accelerating in 2022 to have all these freestanding centers just C T centers or imaging centers, including C T.
How would that slow like to me two years doesn't seem like they can.
Catch up that fast as to where they'd be slowing down noticeably up to you guys at least so I'm just trying to get a little more.
Sure.
Color on that.
If you if you look at our growth in China, that's been a very high clip, 25%, 30% ish types of grow sure yeah in terms of the buying so.
This this month is a holiday month in China, There's you know there's new year. So.
Hard to call it a trend but in general we're not seeing a slowing of government investment we're not seeing a slowing in expansion of health care. So the question becomes is it going to come to you. How long is it going to continue at 30% pace you know that that's the part that I think as we look ahead, we can see a couple of quarters.
We cannot see beyond that but you know.
We're just putting it in that same bucket of us the softening to same.
If you.
The trends are probably global trends, so right, but <unk> continues to be strong and right behind <unk> in China, its cardiovascular and oncology those of the new modalities that are starting to pop up so overall prospects of China for US continued to remain strong.
Okay. That's fair so I mean like just a groan when growth rate, maybe I mean, you can't grow 30%, 40% forever I get that so.
But it does but it does sound like you're still growing there and just to clarify the COVID-19 related shutdowns in Q4 or calendar Q4, I know, there's been talk from some other manufacturers and stuff that.
Normally that quarter is more of a.
Accelerated manufacturing over time and whatnot. Because then they know there is sort of a slowdown in Chinese new year.
So it's kind of a double whammy.
But I feel like you guys haven't been impacted that much by the COVID-19 shutdowns or at least a C. T built out over the last couple of years given the the heart of Covid. So was that did that have any play on your on your.
Our results for this quarter or was that this quarter's outlook.
No go ahead, Sam Yep, So Larry.
The medical products were exempted all through that process and so yes, there was some buildup of disruption.
But not major we continued to produce all through the last many quarters and so it was neither a big.
It was not something that impacted us very much and so we are not expecting that that opening up would increase significantly for us either because it really did not impact us significantly that rate and then as I said, our products were exempted and so we've been continuing to produce through and ship them.
And our operations. During this time were stable and so are our customers, yes, right. Okay. If I can just squeeze one more just.
So revenue slower maybe a little it sounds like completions still hurting you guys in labor cost.
So are there any levers you can pull or you guys have done a good job the last couple of years sort of.
Keeping costs down where you can in a tough environment. So revenue outlooks are little slower can you is there any offsets maybe over the next few quarters.
Or.
Or are you sort of just you know it's not.
Not much to do on that side.
Yes, so I think there are certain levels, but there is always a timeline associated with those levers Larry so what's happening is that the.
Price cost drag on the P&L cost increase happened sooner than price.
<unk> get realized on the P&L, that's the price cost drag that kind of hurting us about 200 basis points right now and.
And in the December quarter.
Freight was high speed is beginning to improve as we speak since January so so that.
That was a drag of about 100 basis points.
And on our gross margin so hopefully in a couple of months begins to improve and we talked about mix and I'm, hoping mixes a shorter term phenomenon.
And you know maybe it impacts us in the first half and gets to improve from the second half onwards, we mix. It is very difficult to predict or difficult to control, but that is how I am thinking mixes impacting about 100.1 hundred basis points. So you know overall in terms of.
US improving our gross margins in our us improving of our financials.
We are laser focused on improving manufacturing efficiencies in our supply chain pressure.
Get eased a little bit and they are they have been improving steadily now for a few months.
So as that gets eased our manufacturing efficiencies should come back into play.
Hmm.
And so the volume we have.
Still expecting flat to slightly up as we said in our prepared remarks. So it is still a positive for us, but maybe not as much as we thought about it three or four months ago, but we the offsets would be manufacturing efficiencies hopefully mix comes back.
And I am thinking its a as the as a few quarters go by the price caused the drag that gets more in shape.
And then finally are you know in our inventory we have we have some high priced semiconductor chips in our inventory that will roll through.
You know my my thinking is by the end of calendar year <unk>.
Price cost drag in the higher margin high cost chips.
Have rolled through the inventory and that's how I'm looking at it.
Okay No I appreciate it I'll call. It that's great. Thanks again guys.
Thank you.
Yeah.
Yeah.
Thank you. Our next question is from Suraj Kalia with Oppenheimer. Please proceed with your question.
Sunny Sam can you hear me all right.
Yes, we can suraj how are you.
Hope you guys are well.
So sunny.
Obviously, you guys made a lot of commentary about forward looking outlook Sunny maybe specifically I wanted to compare and contrast, if I could.
So.
If you look at the commentary from GE healthcare REIT <unk> presented.
Quite a bullish outlook in terms of time spent.
Amy Chang.
Across the across the spectrum.
Dave if I remember correctly, there wasn't that the level of caution.
You guys have a relatively sort of.
Forward looking contracts.
A significant portion of your revenues are recurring help us right.
Child.
On one hand.
I, just caution and from you guys, but on the other hand some of the bigger players are.
It's.
Guns blazing what are we missing in this picture.
Yeah, Let me I'll get started and I'll ask Sam to add more color.
Our Oems.
They're they're scheduled end of <unk>.
Where they are with their orders and order their cycles of order to delivery versus ours are slightly different right. So so the Oems had a strong bookings quarter lets say last couple of quarters and if they're sitting on.
Inventory right now of stuff that they haven't shipped yet or haven't been able to ship yet that that includes our components. So our current quarter is it might be.
Is is softer and slower because their output is slower. It has already has our stuff in it then as that moves as that moves through the system that we would expect certain amount of.
Order input progress call offs for US then in this in the future quarters. So as we sit in Q2, we're expecting that softness because I think our Oems are sitting in that position of working through their whips and so as then as that clears as time goes by I think then we end up.
Progressing through the year, so with that in mind, we're looking at our run rates of revenues and that's why as we did all the math, we're saying you know this is likely to be more like flattish to up versus versus growth.
Does it starts to then bunch up towards the second half and then as we look at the recessionary environment and what we're hearing from also from customers is that they are having trouble scheduling delivery of some of the larger modality products smaller products are going in between sort of the capital budgeting process and are making their way into the hands of.
Other customers, but anything that requires facility modification is getting scheduled out further out because of capex squeeze in other variety of different competing priorities that are their customers. So with all that and we try to paint a picture for ourselves what does the we only get visibility so much visibility two quarters.
Worth but this is as we look further out we're trying to paint this picture and hence our our cautionary note.
I think Suraj I would also like to add here is that my understanding or belief is that hospitals are carrying six to nine to 12 not hospitals, sorry, our customers are carrying six to nine to 12 months of backlog, whereas we are carrying four to six months of backlog so the backlog.
<unk> is the buffer that enables our customers to kind of ship through to their customers, whereas.
US with less than two quarters of backlog.
We see it a bit sooner that would be one way to also think about the difference between us and our customers.
Got it and some specifically for you I'll hop back into queue. After this.
You made some comments in terms of the gross margins.
Obviously, they came a little softer than our expectations, maybe I missed it.
So the shift in customer credit terms.
Dsos any additional line item color would be greatly appreciate it gentlemen, thank you for taking my questions.
Thanks, Yeah.
No there wasn't really any change in terms of customer credit or DSO.
DSO DSO.
It increased by one or two days, so largely remain flat I think at this point, the credit or customer credit or.
That type of an issue is not at play here.
I mentioned that.
The gross margin did come in below our expectations as well and that was mostly around the mix and mix can change for us and it is also very difficult to get visibility.
And for US so it was really mix that.
Caused the gross margin to come in a bit lower than our expectation and I'm, hoping you know and we are guiding Q2 with that same somewhat unfavorable mix at this point.
But we are thinking mix if you will.
Thinking is right, we believe mix should come back.
Should improve back again after Q2, that's what that's what our current thinking is.
Okay.
Thank you. Our next question is from Anthony Petrone with Mizuho Group. Please proceed with your question.
Okay.
Okay.
Okay.
Anthony we can't hear your lineup.
<unk> line was muted.
Afternoon Sunny Sam.
Maybe just staying on the theme here of the outlook and to really splice it a little bit finer geographically.
It sounds like it is.
Broad based in other words that you are seeing similar sort of trends whether it be in Europe , and the U S. Specifically.
Maybe a little bit better as it relates to trends in China, although they're currently going through COVID-19 in the current quarter. So maybe just to fine tune. It a little geographically are the headwinds that you're hearing from customers more acute in the U S are they more acute in Europe.
How are they fairing in China, and then I'll follow up.
Sure Anthony fields.
Fairly broad based I would say.
The variability right now, we see is more and by modality.
So modalities like dental.
We did we saw strength in dental.
Fluoroscopy and oncology in these other mid tier modality.
Non C T modalities, they're flat to down and these are pretty heavy modalities that.
High price points and require a lot of work.
And by the way for those our customers are in all regions of the World and then Cte Cte felt he was CTO of soft.
And.
Not.
Not as much by geography, I don't know that helps.
And Sheila questions more by modality and China.
China is their strength. This is probably is just a cyclical thing or just a consumption.
Issue in Covid, all that tied into some level of softness we're not expecting anything.
Dramatically different there.
And then maybe more near term in the first half some of the chip companies and AMD and Intel called out just.
Some lingering headwinds and <unk>, but that towards the back half after the year the outlook for chips improves a bit I mean should we expect some of the pressure.
As you relate to your full year guidance to be more front end loaded instead of back end loaded.
Yeah, just one quick comment we tend to be about a 90 to 120 days ahead of everyone else.
Of the Oems because of where we sit in the supply chain process.
If the Oems and up.
Clearing up thereabout.
With backlog that they're currently stuck on then things will start to open up for us in the second half, but again, that's a bit unknown, because it's only six months or so.
And then Anthony I can add if your question was.
So referring to cost side or the Intel AMD pricing perspective, and how it appears to us on the cost side.
We're all we.
When we are procuring chips.
Not just FPGA has all kinds of chips. We go out many years. So in many years I mean 12 to 24 months and in some cases, even beyond 24 months.
So of course as the chips situation improves then what we would be procuring in second half that would be favorable but right now what we have in inventory already is that high cost and that is what I think I mentioned in an answer to Ann's question before is that that high cost.
Chips are in inventory now and they are rolling through and based on our projections most of that would have rolled through buy towards by the end of this calendar year.
So that's our situation, but whatever Intel AMD et cetera are saying that would definitely help us.
In future periods.
Thank you very much I'll get back in queue. Thank you.
Thanks Anthony.
As a reminder, 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.
Our next question is from Jim Sidoti with Sidoti <unk> Company. Please proceed with your question.
Hi, good afternoon, thanks for taking the questions.
First one on inventory.
The increase in inventory I guess too.
Two questions why now and now that you have inventories at this level are you confident that you won't have any stock out issues.
For the remainder of the year do you have all the key components you need through fiscal 2023.
Yes, Jim Hi, Jim Yes, so.
There are a couple of reasons for our growth in inventory and inventory has increased for at least for a few quarters now.
So you know as we began Q1, we were planning for a higher growth rate and so we were positioning our inventory accordingly going forward, we will adjust it somewhat to adjust the new rent to adjust to the new forecast or new projections that we are planning, but I do want to.
Remind you because Q1 is a seasonally low revenue quarter for us and thats more on demand supply side and right now demand and supply are largely in balance. So the Q1 results were mostly a reflection of the demand levels, but from an inventory management perspective, we have to go on in <unk>.
<unk>. So if you look at many if you look at our prior Q1s and inventory performance there generally inventory in the last four or five years.
<unk> has grown by about $20 million. So in Q1 inventory grows by $20 million on where it ended in Q4, it's because generally we grow in Q2 Q3 and Q4 as is generally the high quarter for us. So a growth of $17 million is not unusual for us from an inventory.
Tori growth perspective, but I do.
Do accept that inventory was a bit higher already and so and because as I said, we would we were driving towards a little bit higher revenue and so we're not going to adjust it and it should come down partially because of our adjustment actions. But then also adds revenue grows in the midpoint of our guidance is higher than Q1.
Juul revenue so all of those things should help to bring down inventory going forward. So that's the situation on the inventory hope I answered your question Jim.
Okay, Yeah yeah.
And then following up on that so I would assume then that you'll see.
Positive.
Cash flow from operations for the remainder of the year as you start to work down that inventory.
Jim generally we do not guide cash flow from operations, our cash balances, but provided we are successful in bringing inventory down that should provide that should be a good factor to bake in for the cash performance of the company for the remaining quarters.
In general you're thinking right, but I could not say that.
I could not guide you to that but in general inventory should provide a positive.
Response to cash as opposed to be a downward pressure on cash.
Okay and then.
Is there any update on the on the joint venture with micro Rx and the expansion into southeast Asia and India.
Yes, so Jim on the on the micro X question that is the.
The micro X.
Sure.
Announcements that we had done.
We have five milestones for <unk>, indeed to pay them for the technology transfer it isn't always an acquisition financed through the P&L in a way you could look at it that way.
So we are expecting one milestone was completed and we are expecting two more milestones to be completed in Q2 that is why our operating expense guidance in Q2 is a bit higher and then after that two more milestones would be left I do not have a specific view at this.
Time window when the remaining two milestones would be completed so that's that on on that.
On that collaboration and then your second question about Southeast Asia, That's really South Asia and I believe you are referring to our initiatives in India is that right.
Right yes.
So in India, we are making progress.
We've made a we made incremental progress.
At this time.
We have made certain payments to the government for acquiring the land we have.
Just in the final phases of <unk>.
Completing that purchase hopefully we.
We have made the payments and now we are.
We're trying to work towards getting the position in those type of agreements done and.
So progressive full speed on that initiative.
And look forward to having good things come out of that initiative in 12 to 18 months more like 18 months I would say.
Okay and then the last one for me can you just repeat the comments you made regarding interest expense and share count for the for the second quarter.
Yes.
In terms of share count given our EPS guidance range used for.
Due to its U.
2020, or six so yes, because of that our share count for EPS calculation purposes toggles between 41 million shares of 49 million shares. So for the Q2 guidance range for EPS, we are using 41 million shares.
And then what was the second question Jim.
Interest expense.
Interest expense I would just model I did not provide any guidance on interest expense, but this should at least at this point.
No change from Q1 really whatever debt, we are carrying 200 million on convertible that is at 4% and about 243 million on high yield note. That's about seven 875 interest rate so that should continue.
I just want to remind you maybe you heard of her comments I just want to remind you that the coupon on both the debt is.
Payable in the same quarter, so we pay a coupon interest payments in Q1 and Q3.
And so maybe that is what you are asking so we're not expecting a cash coupon payment in Q2, but of course, we would recognize the expense over Q2 for that.
Got it alright, thank you.
Thank you. Our next question is from Michael <unk> with Mizuho Securities. Please proceed with your question.
Hey, guys. How are you doing so just looking at.
You guys are carrying a fair amount of cash or have been and then I saw some comments of a recent equity conference that you were at.
How are you viewing the capital structure I know you Claude the bonds a couple of times I think you have one claw available left.
You're just going to stockpile cash until you sort of get closer to that convert maturity or how are you guys thinking about the cap structure.
Cash in regards to that.
Yes.
Thanks, Mike.
So what we have said that we want to keep $100 million of cash and operating cash and we reported about $108 million of total cash at the end of December quarter. So we do not have that much more cash that we are carrying at this time compared to.
The cash level that I would like to carry for just general operations I want to remind you that of our cash is distributed across various geographies. We are a multinational company and movement of cash et cetera, sometimes may have that tax consequences and so as a result cash is not at one place.
So that said.
Your comment in terms of one tranche that is possible for us to pay that is true every calendar year, we can pay down 10% of our high yield notes. So that is at this point about $243 million. So that gives us an opportunity to pay down about $24 million in debt.
And when we.
We have sufficient cash to pay that down and provided our board of directors approves that so pending those two things.
We can do that we have highlighted that retiring debt is a high priority for us.
And that said as we look towards our business typically we generate cash so as our cash from operations improve.
Improves our cash balance.
We would like to overall, bringing down the overall debt levels right now the debt levels at about $450 million on the company.
And we would like to bring it down by about $100 million.
When is the right time for that depends on various factors, but that is what something we would like to get to.
At the right time, when the environment is right and when we can execute towards that.
Okay, Great and then so you did mention that your coupons are both coincidentally the same quarters Q1, Q3, So Q2 Q4 should should be sort of a.
Cash.
You know influx right relative to sort of what we saw this quarter I think you know the coupon those get paid so you're high watermarks on cash generally going to be Q2, and Q4 does that sound right.
In general from a modeling perspective that is right, but from a tactical perspective, they are AP and et cetera.
But in general in General Youre thinking is right, but you know.
We would like to make sure we have sufficient windage over that in terms of tactical movements, but in general your thought process is on the right direction Mike.
Okay, great well. Thank you very much for taking my question.
Thank you Mike take care.
Thank you there are no further questions at this time I'd like to turn the floor back over to Christopher Belfiore for any closing comments.
Great. Thank you Sunny if you have any final comments.
Yes, Thank you Chris.
In closing I mean.
The quarter was largely as expected and outside of the gross margin pressure from the from revenue mix.
Economic uncertainty is creating caution across various industries, but as we continue.
To view the health care industry, we participate in as a stable.
See the health care industry is a stable grower over the long term I am very proud of the effort our employees are making globally on a daily basis in this uncertain environment and I. Appreciate your taking the time for us to join us for joining us today and for your continued interest in <unk>. Thank you. Thanks.
Thanks, Sunny and thank you all for your questions and participating in our earn earnings conference call today.
The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference will be available through February 14th and can be accessed at our website barrick's imaging dot com forward slash investors.
Or by calling eight 770, 660 653 from anywhere in the U S or 200 161 to 7415 from non U S locations. The replay conference call access code is 137 35486, Thank you and goodbye.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.