Varian Medical Systems Inc. (VAR) reported an impressive first quarter of fiscal 2015, wherein EPS (excluding restructuring charges of 7 cents) of 99 cents surpassed the Zacks Consensus Estimate by 12 cents.
EPS (including restructuring charges) increased 1.1% from the year-ago quarter to 92 cents, which comfortably surpassed the company’s guided range of 76 cents to 80 cents.
The year-over-year growth was primarily driven by a 3.7% increase in revenues, which totaled $737.9 million, much better than the Zacks Consensus Estimate of $724 million. At constant currency (cc), revenues increased 6%.
The year-over-year growth in revenues was driven by robust performance from both Oncology Systems and Imaging Components segments. Varian reported order backlog of $3.12 billion at the end of first quarter, up almost 13% from the year-ago quarter.
Gross margin expanded 80 basis points (bps) from the year-ago quarter to 44.3%, primarily on the back of favorable geographic and product mix. Oncology gross margin expanded 68 bps to 45.6% in the quarter. Imaging component gross margin increased 85 bps to 42.2% on higher mix of panels as well improved quality cost.
Research & development expenses as percentage of revenues decreased 40 bps, which was fully offset by 360 bps increase in selling, general & administrative (SG&A) expenses. The SG&A expenses increased due to an $11 million restructuring charge and $5 million increase in bad debt reserve.
The higher SG&A expenses fully offset the gross margin improvement in the quarter. As a result, operating margin contracted 240 bps from the year-ago quarter to 17.5%.
Segment Details
Oncology Systems revenues increased 4% from the year-ago quarter to $563.3 million, while gross orders rose 5.3% (up 8% at cc) to $561.7 million in the quarter. Gross orders soared 17% (23% at cc) in APAC and 12% (18% at cc) in EMEA but declined 2% in Americas (3% in North America).
APAC Oncology results were primarily driven by strong performance in China (42% order growth). The company achieved 30% order growth in the BRICA (Brazil, Russia, India, China and Africa) countries. The region accounted for more than 15% of the total oncology orders in the quarter.
EMEA Oncology results were driven by higher demand for Varian products in African countries of Algeria, Egypt and South Africa ($20 million in orders) as well as in France, Turkey and Hungary.
Orders in the Oncology service business jumped 14% year over year to $254 million, which accounted for approximately 45% of total Oncology Systems business in the quarter.
Varian Medical’s software business achieved strong year-over-year growth on double-digit growth in treatment planning and oncology information system. During the quarter, the company’s rapid plan was used for the first time. Rapid plan makes it easier and faster for clinicians to generate higher quality treatment plan. The company has already received orders for more than 100 rapid plan installations.
Imaging Components (comprising X-Ray Products and Security and Inspection Products) revenues increased 3% on a year-over-year basis to $166 million. Gross orders surged 34% to $162.7 million, driven by 65% order growth in the panel business. During the quarter, the company won a large multi-million dollar contract in Korea
Other segment (comprising Varian Particle Therapy businesses and the Ginzton Technology Center) revenues decreased 3.4% to $8.6 million. Gross orders were $1.4 million in the reported quarter.
Outlook
For fiscal 2015, Varian Medical expects revenues to increase approximately 5% from the year-ago quarter (down from earlier guidance of 5% to 6% range). The company reiterated the EPS guidance range at $4.16 to $4.26.
Foreign currency volatility is expected to negatively impact the company’s fiscal year results (20 cents negative impact to EPS in the rest of the year). SG&A expenses as percentage of sales is expected to remain around 15% for the next three quarters.
For the second quarter of fiscal 2015, Varian Medical forecasts EPS to in the range of 98 cents to $1.02. EPS for the quarter will be negatively impacted by unfavorable geographic mix (5 cents) and foreign exchange headwind (6 cents). Revenues are likely to increase 2% from the year-ago quarter.
The company expects Oncology gross margin in the 43% to 44% range over the long term. The continued growth at the segment will help Varian Medical achieve $1 billion of service revenue in fiscal 2015.
On the geographic front, Varian Medical estimates low to mid-single digit growth opportunity in the North America over the long haul. The company believes that the spending environment in the U.S. is improving slowly. However, the company expects consolidation to continue in the industry.
Management forecasts double-digit growth in the emerging markets. The company expects to benefit from pent-up demand in China and robust performance from Africa. While India is expected to have a good year, Russia will remain a headwind for the company in 2015.
Our Take
We believe that Varian Medical is well positioned to benefit from higher demand for its products in China and BRICA countries. The growing private markets in China and Brazil are expected to present strong growth opportunity to the company in 2015. Moreover, an improving hospital spending environment in the U.S. is a positive for Varian Medical.
Product-wise, aggressive investment in the software business is a key growth catalyst. Rapid plan is expected to generate $200 to $300 million of business over the next three years. Investment in InSightive (Data analytics) products will also expand the company’s product portfolio going forward.
We believe that the company’s focus on improving cost structure by reducing headcount and streamlining operations will boost profitability despite significant negative impact from foreign exchange headwinds.
Nevertheless, we believe that a weak second-quarter outlook will remain an overhang on the stock. Meanwhile, rising SG&A expenses will continue to hurt the bottom line. Moreover, increasing competition in the Oncology market is a major concern.
Zacks Rank
Currently, Varian Medical has a Zacks Rank #3 (Hold).
Better-ranked stocks in the same sector are Abiomed (ABMD), Fluidigm (FLDM) and IntersectENT (XENT). All the companies carry a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment