Varex Imaging Q1 2025 Earnings Report

Varex Imaging EPS Results

• Actual EPS: $0.07
• Consensus EPS: $0.04
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Varex Imaging Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $202.15 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Varex Imaging Announcement Details

• Quarter: Q1 2025
• Date: 2/6/2025
• Time: After Market Closes
• Conference Call Date: Thursday, February 6, 2025
• Conference Call Time: 5:00PM ET

Varex Imaging (NASDAQ:VREX) designs, manufactures, and sells X-ray imaging components. The company operates through two segments, Medical and Industrial. The Medical segment designs, manufactures, sells, and services X-ray imaging components, comprising X-ray tubes, digital detectors and accessories, ionization chambers, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, and heat exchangers. This segment's products are used in a range of applications, including CT, mammography, oncology, cardiac, surgery, dental, and other diagnostic radiography uses. The Industrial segment designs, develops, manufactures, sells, and services Linatron X-ray linear accelerators, X-ray tubes, digital detectors, high voltage connectors, and coolers for use in security and inspection applications, such as baggage screening at airports, cargo screening at ports and borders, and nondestructive testing, irradiation, and inspection in various applications. The company sells its products through imaging system original equipment manufacturers, independent service companies, and distributors, as well as directly to end-users. It has operations in North America, South America, Europe, Russia, the Middle East, India, Africa, Asia, and Australia. Varex Imaging Corporation was incorporated in 2016 and is headquartered in Salt Lake City, Utah.

Varex Imaging Q1 2025 Earnings Call Transcript

Presentation

[Operator]

welcome to the Varex First Quarter Fiscal twenty twenty five Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Chris Belfiore, Director of Investor Relations.

[Operator]

Please go ahead, Chris.

[Christopher Belfiore, Director-Investor Relations at Varex Imaging]

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the first quarter of fiscal year twenty twenty five. 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 Varex's website at variximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year twenty twenty five.

[Christopher Belfiore, Director-Investor Relations at Varex Imaging]

In addition, unless otherwise stated, quarterly comparisons are made year over year from the first quarter of fiscal year twenty twenty five to the first quarter of fiscal year twenty twenty four. Finally, all references to the year are to the fiscal year and not the 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 information, expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC.

[Christopher Belfiore, Director-Investor Relations at Varex Imaging]

Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our Quarterly Reports on Form 10 Q and our Annual Report on Form 10 K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward looking statements in this discussion. 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 provided a reconciliation of each non GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.

[Christopher Belfiore, Director-Investor Relations at Varex Imaging]

I will now turn the call over to Sunny.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our first quarter earnings call. Demand in the first quarter was solid. However, unscheduled absences in our U. S.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Facilities during the holidays prevented us from fulfilling all the demand for the quarter. Revenue in both the Medical and Industrial segments grew year over year. During the quarter, we started to see customer orders begin to improve. And in China, we realized an improvement in sales both year over year and sequentially. Gross margin of 35% in the quarter was strong and higher than anticipated.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

This was primarily the result of favorable product sales mix and productivity gains in both segments. Gross margin also benefited by approximately 130 basis points from refunds of German customs duties and taxes previously paid. Cash generation was also solid with cash from operations of $10,000,000 in the quarter. This was driven by very good working capital management. Turning to the first quarter results, which included fourteen weeks.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Revenue was up 5% year over year. Revenue in the Medical segment increased 3%, while the Industrial segment revenue increased 10%. Non GAAP gross margin was 35%, up from 31 in the same quarter last year. Adjusted EBITDA and non GAAP earnings per share in the first quarter were $24,000,000 and $0.07 compared to $19,000,000 and $0.06 last year respectively. We ended the first quarter with $219,000,000 worth of cash, cash equivalents and marketable securities on the balance sheet, up $6,000,000 compared to fiscal twenty twenty four year end and up $24,000,000 year over year.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

In addition, we also have $124,000,000 of restricted cash raised from our senior secured debt offering in December. Now let me give you some insights into sales detail by modality in the quarter compared to a five quarter average, which we will refer to as the sales trend. Sales in our Medical segment were up in the quarter, driven primarily by solid global sales of CT tubes, which were above their sales trend. Fluoroscopy and mammography modalities were stable in the quarter compared to sales trend. Radiography, Oncology and Dental modalities were all below their respective sales trends.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

In our Industrial segment, continued strength in global security screening drove sales of cargo inspection products. We also saw an increase in our service revenues in this vertical. We experienced a strong start for the year in our industrial X-ray tube product line, driven by increased demand for checked baggage inspection and cargo screening at airports, as well as non destructive inspection in verticals such as aerospace and automotive. During the quarter, we also saw stabilization in the semiconductor, electronics and battery inspection verticals, but they have not yet returned to the demand levels seen in previous years. Last quarter, we announced that we had expanded our offerings in cargo and security inspection to include comprehensive system and service solutions in high energy cargo inspection.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Our state of the art systems are designed to enhance security, improve trade compliance and combat smuggling. Our portfolio of currently available products includes a stationary portal, which enables the seamless inspection of large cargo carrying vehicles and containers as they drive through it. With a throughput of over 100 vehicles per hour, it can serve as an essential tool for customs and border security agencies. We also offer a similar application called a gantry, which is a rail mounted portal that can move back and forth to image and inspect stationary vehicles and palletized cargo. Our mobile inspection system consists of a truck mounted collapsible portal, which is a flexible on demand cargo and vehicle scanning system that can be set up at various locations as needed.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Designed for rapid deployment, it can be operational in fifteen to twenty minutes of arrival, making it ideal for events and temporary security checkpoints. And lastly, our current offerings also include a compact vehicle scanning system, providing efficient inspection of passenger vehicles and their contents at designated checkpoints. Each of these systems are built on a foundation of our proprietary imaging components, such as high energy X-ray sources, our detectors, advanced imaging software and control systems. With over two decades of expertise and an installed base of more than 1,500 linear accelerators worldwide, we expect to deliver industry leading security inspection solutions to our customers. Last quarter, we mentioned that we had successfully completed installation and received customer acceptance of several cargo inspection systems with additional deployments underway.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Earlier this week, we were happy to announce that we have received additional orders from certain industrial customers to provide cargo inspection systems valued at approximately $14,000,000 These orders will include a combination of portals and mobile systems. The systems are expected to be installed over the next twelve months and will be used to secure ports and borders in different parts of the world. As we highlighted last quarter, we view cargo and security scanning systems as a potentially significant long term growth opportunity for Varex. We estimate that the annual serviceable opportunity is over $1,000,000,000 and expect and expect it to grow at approximately 7% CAGR over the next five years. Demand for security screening is being driven by continued global security threats and the need to ensure correct declaration of goods transported across international ports and borders.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

With decades of experience applying and servicing key system components for OEMs in this sector, we have built a strong reputation for quality and service excellence. By leveraging our R and D expertise, vertically integrated manufacturing capabilities and imaging technology leadership, we believe we can provide unique value directly to Security and Inspection end users worldwide. We're pleased to start off the fiscal year on solid footing and with the positive demand trends that we're seeing across our businesses. We're encouraged by what we're seeing in our China business and continue to remain optimistic about the long term growth of imaging in China. In geographies outside China, demand trends are improving and we remain on track to begin production of radiographic components in India during this fiscal year.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Before I hand the call to Sam, let me comment on the tariff announcements between The U. S, China, Canada and Mexico. This is a rapidly changing situation, which we are monitoring very carefully. At this time, based on our current knowledge, we do not expect any significant direct impact to our business. However, additional tariffs or retaliatory actions or changes to currently announced tariffs could change the anticipated impact to our business.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

With that, let me hand over the call to Sam.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Thanks, Sunny, and hello, everyone. Let me start off by providing a breakdown of our revenues for both the Medical and Industrial segments. We thought that it would be helpful to provide this information on an annual basis. In our Medical segment, we participate in nearly all X-ray imaging modalities. Total medical sales in fiscal twenty twenty four were $582,000,000 with CT, the largest modality representing nearly 40% of total medical sales.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Of note, our CT sales are predominantly X-ray tubes as we currently do not sell detectors in this modality. From a geographic standpoint, the Medical segment is relatively evenly split across the three regions, which reflects our balanced exposure with top imaging OEMs across the globe. In fiscal twenty twenty four, our Industrial segment revenue grew to $228,000,000 Here, we sell into a highly fragmented customer base with our security inspection vertical being the largest at approximately 40% of total industrial sales. As a reminder, the security vertical can be volatile from year to year. And going forward, our newly launched security systems business will be included in this vertical.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

The Security vertical drives a higher proportion of sales to EMEA given the location of our current customers and equipment. Now turning to results for the quarter. Our revenues in the first quarter were $200,000,000 below the midpoint of our guidance. Non GAAP gross margin was 35% above our expectation and non GAAP EPS was $0.07 above the guidance midpoint. Comparing the first quarter to the same period in fiscal twenty twenty four, revenues increased 5%.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

This increase was driven by a 3% increase in our Medical segment and a 10% increase in our Industrial segment. Medical revenues were $145,000,000 and Industrial revenues were $55,000,000 Medical revenues constituted 72% of total and Industrial revenues were 28% of our total revenues for the quarter. Analyzing revenues by region, Americas saw an increase of 3% compared to first quarter of fiscal 'twenty four. MAR revenues decreased 9%, while APAC increased 22 due to increased sales to China and solid CT sales into other regions within APAC. During the quarter, China sales were 18% of total sales.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

China sales increased 7% year over year and 12% compared to the prior quarter. While our sales in China have continued to improve slightly, we have yet to see major capital equipment investments being made. Let me now cover our results on a GAAP basis. First quarter gross margin was 34%, up approximately 400 basis points year over year. Operating expenses were $57,000,000 an increase of $4,000,000 compared to the first quarter of fiscal 'twenty four.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Operating income was $11,000,000 an increase of $7,000,000 from Q1 of fiscal 'twenty four. Net loss was $264,000 and GAAP EPS represented a loss of 0.01 per share based on a fully diluted 41,000,000 shares. Now moving on to the non GAAP results for the quarter. Gross margin was 35%, an increase of three fifty basis points year over year, mainly due to favorable product sales mix and productivity gains in both segments. Gross margin also benefited by approximately 130 basis points from refunds of German customs duties and taxes we had previously paid.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

R and D spending in the first quarter was $23,000,000 an increase of $3,000,000 compared to the first quarter of fiscal 'twenty four, representing 12% of revenues. Of note, R and D included the fifth and final $1,000,000 milestone payment for the transfer of technology from MicroX. SG and A expense was $31,000,000 an increase of $3,000,000 compared to the first quarter of fiscal 'twenty four, representing 16% of revenues. The increase in SG and A was primarily due to an increase in expense associated with one of our joint ventures. Consequently, operating expenses totaled $55,000,000 an increase of $6,000,000 representing 27 of revenue.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Operating income was $14,000,000 an increase of $5,000,000 compared to the previous year and operating margin was 7% of revenue, up from 5% in the first quarter of fiscal 'twenty four. Tax expense in the first quarter was $3,000,000 or 48% of pretax income compared to $1,000,000 or 20% in the first quarter of fiscal 'twenty four. Higher than expected tax rate for the quarter was primarily due to losses in certain foreign jurisdictions for the quarter. Net earnings were $3,000,000 or $0.07 per diluted share compared to $0.06 in the year ago quarter. Average diluted shares for the quarter on a non GAAP basis were $41,000,000 Now turning to the balance sheet.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Accounts receivable declined by $20,000,000 and days sales outstanding declined by two days to sixty eight days in the quarter. The sequential decline is primarily due to year end payments from some large customers. Inventory increased by $15,000,000 in the first quarter and days of inventory increased by thirty five days to two zero nine days. The increase in inventory in the quarter was primarily due to an increased demand outlook. Accounts payable increased by $7,000,000 and days payable increased by ten days to forty nine days.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Now moving to debt and cash flow information. Net cash flow from operations was 10,000,000 We ended the quarter with cash, cash equivalents and marketable securities of $219,000,000 up $24,000,000 compared to the first quarter of the prior year and up $6,000,000 compared to the fourth quarter of fiscal twenty twenty four. Please note that $219,000,000 includes $176,000,000 of cash and cash equivalents and $43,000,000 of marketable securities. In addition, we also have $124,000,000 of restricted cash raised through our senior secured add on debt offering, which closed on 12/20/2024. The funds raised from this offering are currently held in an interest bearing restricted account to reduce our convertible debt due in June of this year.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Gross debt outstanding at the end of the quarter was $571,000,000 and debt net of $219,000,000 of cash and marketable securities and $124,000,000 of restricted cash was $228,000,000 Adjusted EBITDA for the quarter was $24,000,000 or 12% of sales. Our trailing twelve months adjusted EBITDA was $94,000,000 and our net debt leverage ratio was approximately 2.4 times adjusted EBITDA on a trailing twelve months basis. Now moving on to outlook for the second quarter. We are encouraged by what we are seeing with sales in China as well as improving demand trends in geographies outside of China. With that as a backdrop, our guidance for the second quarter is as follows.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Revenues are expected between $200,000,000 and $215,000,000 and non GAAP earnings per diluted share are expected between $0.05 and 0.2 Our expectations are based on non GAAP gross margin of 32% to 34%, non GAAP operating expenses of approximately $52,000,000 interest and other expense net in a range of $9,000,000 to $10,000,000 tax rate of about 22% for the second quarter and non GAAP diluted share count of about 41,000,000 shares. With that, we'll now open the call for your questions.

[Operator]

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Young Lee from Jefferies. Your line is now live.

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

Hi, great. Thanks so much for taking the question. I guess to start, I was wondering if we can talk a little bit about China. It seems like the quarter was better, similar to, I guess, the past couple of few quarters where there seems to be some sequential improvement. Can you maybe just talk a little bit more about that market performance there?

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

And any additional color on the potential impacts from stimulus there as well?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Hey, Young, this is Sunny. Yes, look, sales in China, there was an uptick and we're encouraged to see that, but we don't call it a rebound at this time or we or not expecting a meaningful improvement in demand this year. However, as we had said, we did not see it going backwards. So this is encouraging to see see an uptick. There has been really no indication of what the stimulus will do and there's been no further clarity on it and it has not translated into any orders for us.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

So we're not counting on any impact of stimulus at this time in our projections. Okay. Now there's been also no change in our position on expectation of the Chinese government's commitment to healthcare. We think that will continue. So the long term prognosis is just as we have discussed in the past.

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

All right. Got it. Very helpful. I guess, maybe my second question, I wanted to hear a little bit more about the cargo and vehicle inspection systems that you're selling direct. I was kind of curious, if you can comment on the margin profiles of those products at scale, sort of the level of investments needed to stand up that business?

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

And maybe at what revenue level will they be accretive to the margins?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Let me get us started and then I'll ask Sam to also chime in. This business consists of hardware equipment, which goes in first, followed by after a couple of years, you get then the service revenue stream from this business. The margin profile typically tends to be lower for the hardware equipment and then very good on the service side. So for us, in the short run, as we're ramping up this business, we expect that the margin profile for the equipment will be below the our company gross margin levels. However, as we keep shipping this equipment and as we start transitioning into the service revenue streams longer term, we expect this margin profile to improve and get better.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

In terms of the investments that we've made so far, those are already included in in our plans for this year, which includes the R and D work that we do and then the deployment. But as we scale up, there will be need for additional investments, which we will plan for.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

And I would add that, like Sunny just mentioned, that we are organically funding this business. We already are in the component side of this business, as you know. So we know this area very well. Yes, there will be investments. However, as I said, it would be mostly organic funded through the P and L.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

At this point, we are in early stages and this is a large market, more than $1,000,000,000 in size. So we are expecting in the next three to five years pick up a decent amount of revenue and that should allow us to also pick up on margins. In terms of current situation, yes, our investments and the amount of revenues that we are generating, it is margin decretive right now to our Industrial segment and also to our overall corporate margin. However, once it is more than $10,000,000 to $15,000,000 a quarter type of a run rate, it should be margin accretive for us. So one is the scale as we look at this business.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

One aspect is the scale. Second aspect is also what Sunny mentioned, which is the equipment to service ratio. The service ratio is much more accretive and generally service would be say eighteen to twenty four months after the full system has been shipped. One area of investment that we would be looking at in this business development effort is to develop our channel. I think we are sufficiently covered in R and D.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

We would be expanding as the sales grows, but one area we would be expanding more is on the channel side so that we can cover the broader global exposure or presence for this market.

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

All right. Thank you so much.

[Operator]

Thank you. Next question is coming from Kyle Bauser from B. Riley Securities. Your line is now live.

[Kyle Bauser, Managing Director at B. Riley Securities]

Great. Thanks for taking my questions. Maybe I'll stick with the cargo inspection business here. A couple of questions. So, what's the kind of current percentage of the total industrial segment that the cargo inspection business comprises?

[Kyle Bauser, Managing Director at B. Riley Securities]

And what's a reasonable kind of run rate? I know you put together some analysis on the total market size of being over $1,000,000,000 So appreciate that. But just kind of curious, how big is it now? What's the reasonable size? And then what's kind of the turnaround time on a big order that you just got for $14,000,000 Is there inventory?

[Kyle Bauser, Managing Director at B. Riley Securities]

I'm just kind of curious how that looks. Thank you.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Sure. So today, we participate quite meaningfully in the component side of the cargo inspection market. The overall security inspection market, as we just reported, is about 40% of our industrial sales in this last fiscal year. A vast majority of that security inspection market is revenues are generated from the cargo inspection market. Keep in mind, we are also in airport and some other areas when it comes to inspection market.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So I would say 75%, eighty % of that security inspection market is last year was generated from cargo inspection. I would also say that the contribution of cargo systems, full systems that we just announced in a press release earlier this week, that its contribution to those revenues was very minimal. It was mostly through component. So now we are expecting to continue with the components revenues as well as add on the cargo systems revenues to this business.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

And you also had a question about the time frame. The $14,000,000 that we talked about, we expect to deliver it within a twelve month time frame.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Yes. Kyle, just keep in mind in this business, because we are working with government or quasi government agencies, the turnaround time from receiving the order to shipping the system can vary quite a bit. It could be as little as four, five months to as much as eighteen months or sometimes even twenty four months depending upon the situation. So it just depends upon the specific order, the specific country and a number of other factors. But the one that we announced, we are expecting to ship in the next twelve months.

[Kyle Bauser, Managing Director at B. Riley Securities]

Got it. Very helpful. Appreciate that. And maybe shifting back to China, sorry if I missed this, did you call out the amount of revenues from China specifically? I think, a couple of quarters ago, it was $29,000,000 then stepped up to $31,000,000 is that still the $30,000,000 range, a good baseline?

[Kyle Bauser, Managing Director at B. Riley Securities]

And

[Kyle Bauser, Managing Director at B. Riley Securities]

to

[Kyle Bauser, Managing Director at B. Riley Securities]

the extent you can provide color on your expectations, where do we think this can go in the near to medium term?

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Yes, Kyle. So we reported, I mentioned in my prepared remarks, China contributed 18% of our overall sales for the quarter. So that comes to about $35,000,000 for the quarter. In terms of guidance or providing more color by country specific, we tend to not do that. However, as Sunny mentioned in the prior for the prior question, China is still not operating not at all operating at its full potential for us.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So as the recovery happens, whenever it happens, we should expect to grow from this level. At one time, six, seven quarters ago, we were operating higher than $40,000,000 closer to $43,000,000 40 4 million dollars 40 5 million dollars But remember, a lot of our business in China is related to tubes and tubes have a very high attach rate from a service perspective. So as time passes by, more and more percentage of revenues for tubes from China would be from replacement purposes as opposed to simply new sockets is what we call it.

[Kyle Bauser, Managing Director at B. Riley Securities]

Sure. Yes. I appreciate that. That makes sense. Okay, great.

[Kyle Bauser, Managing Director at B. Riley Securities]

Thanks so much for taking my question.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Thank you.

[Operator]

Thank you. Next question is coming from Larry Solow from CJS. Your line is now open.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Thanks. Hi. Good afternoon guys. Good evening. I guess first question, two part question.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

I guess just on you mentioned, sounds like demand in the quarter was good and net orders are it sounds like they're even better going forward. There was a little bit of a supply issue you mentioned. Could you maybe give us a little more color on that? It sounds like that held back. I don't know if you could quantify the sort of the impact on sales.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

And I assume you're making most of that up in this quarter. I guess that would be my first question.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Sure, Larry. Let me try to address that. That is true. The revenue for this last quarter was below our expectations, impacted primarily by the supply side issues and the supply side issues mostly by the labor aspects. Remember this last quarter, we had fourteen weeks in the quarter and it was spanning the Christmas holiday timeframe as well as the New Year timeframe.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

And

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

so

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

there were a little bit more absenteeism than what we were expecting. And as a result, we were not able to complete the product that was slated for shipment and which is what caused us to kind of miss our expectation. So that shipment rolled over into Q2, our fiscal Q2. So that's really what happened.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

And was that one particular order or was it spread out? I'm just curious, was it just isolated because it was one large order?

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

No, no, it was not one large order, but it was also not many. I would say a few, maybe two, three, maybe four. We were not able to complete those tubes. And once we were a little bit late, then trying to get all of the freight forward and logistics worked out to get those shipped, that's what really happened. And I remember you also asked the amount, the impact.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

The impact was sub $5,000,000 4 million dollars 5 million dollars

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

of the impact of that.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Okay. And sort of the outlook certainly sounds like things are getting better. China was a little better this quarter. What about outside China? I guess in the quarter, in terms of I know you had spoken last couple of quarters that you had some visibility that were starting to normalize outside of China and maybe by Q2, Q3 this year, we would sort of be almost fully normalized.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Curious how that where we stand now and how that's incorporated into your guidance?

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Yes. So Larry, you're absolutely right in remembering what we said. And actually, the current experience is panning out as we had provided that color to you all three, four months ago. Outside of China and the anti corruption measure, the issue that we've been dealing with in all of last fiscal year, in fact, all of last calendar year as well, was the destocking effect. And we had guided or we had provided expectation that we would be thinking we would be expecting that to begin to subside or be subsided by January, February timeframe.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

And since we are pretty much there now, we are experiencing that the destocking phenomena as of now as we speak is largely behind us. So we are seeing improvement in order rates. But as you know, from order to shipment, it takes a few months. So the benefit of that kind of mostly goes outside of the Q2 window, but we are experiencing that as we speak.

[Operator]

Got you.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

No, it's fair. What about just on the operating expense side? So you mentioned a little bit higher expenses even if we take out the MicroX payment.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Can you just give

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

a little more color? You mentioned a new JV, I guess, that maybe that's not coming up in the JV line, but that's in your SG and A line. And it sounds like it's going to bounce around a little bit because your guidance, at least for Q2, how is that kind of coming down a little bit?

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Yes, that's correct, Larry. We just reported $55,000,000 which was driven by $1,000,000 of payment to MicroX, which since it was the last payment that goes away. But remember, we also had fourteen weeks in this last quarter, so that also drove a little bit higher expense. So between MicroX going away, between the quarterly span going back to thirteen weeks and then we also had a little bit higher expense in one of our already existing joint ventures. So this is not a new JV, but one of our joint venture had a little bit higher expense.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So since we consolidate them in proportional manner, we also had a little bit higher expense there. So those three things should benefit us going forward, and we are expecting that OpEx should come down to, say, dollars 52,000,000 for the quarter.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Got you. Perfect. If I could just squeeze one more in. Just on the security side, exciting to see you getting some orders. Curious, is this was this one large customer?

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Was it more than one customer? You mentioned it's a government, but I imagine it's some border. I'm just curious if it's like a one off. Are there more orders to come? And other locations, are you side by side with other obviously, we know that your customers themselves are selling in much bigger, larger orders on borders, maybe they don't report some of the smaller ones too.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

So just trying to get like a little lay of the landscape where your machines actually are. Are they spots where they're exclusive? Or is it more now that you're a new entrant, they maybe try you a little bit now and then you grow over time? Just trying to get a little more feel for that if you can get a signing. Thanks.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

That was a pretty complicated question, Larry. Let me see if

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

I can tease it apart. I can't disclose where they are, but it was multiple orders. And as we said, the orders included mainly two products. One was the portal and the second, some mobile scanners. So that's the profile.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

We have been bidding actively on tenders. And I'm not sure exactly how to what your question was going. But in these tenders, depending on which country and where there tends to be there can be civil works, there can be other parts other things associated with the tender. We sometimes we go through a partner in the country who plays the prime role. Our play in this

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

is the

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

systems that do the imaging, do the scanning and everything, all services that go with it, implementation and then follow-up maintenance services. So it's fairly simplistic from a model perspective that way. And the four products that we talked about in the presentation are what we're bidding actively. And where we don't have if there's a gap, if there's something else that's needed, we typically then will bring in another partner.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

Got you. Okay. I appreciate that. Okay, great. Thanks again.

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

I appreciate it.

[Operator]

Thank you. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

[Suraj Kalia, Managing Director & Senior Analyst at Oppenheimer & Co. Inc.]

Hello Suraj. Sunny, Sam, how are you?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Great. Good. Thanks.

[Suraj Kalia, Managing Director & Senior Analyst at Oppenheimer & Co. Inc.]

So Sunny, Sam, a lot of details have already been provided and forgive me for belaboring this. So Sam, you mentioned $35,000,000 China contribution in the quarter. If I could ask, what percent of it, Sunny, was local for local? And what was the split between medical versus industrial? Let's start out there.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Sure. Let me try to address that Suraj for you. Vast majority or nearly all, not 100%, but nearly all of our revenues in China are from medical. So the split between medical and industrial is significantly tilted towards medical. And within medical, it is very, very significantly tilted towards tubes.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So that's the revenue profile for China for us. And then in terms of local for local versus exported out of other countries into China, Your specific question was for the given quarter, but kind of expanding upon your question, the exported into China versus local for local can be very volatile from quarter to quarter depending upon specific customer or particular products that are needed in that quarter by any one of our customers over there, whether those customers are global OEMs or whether those are Chinese OEMs. So focusing only on Q1 quarter might lead you into a wrong conclusion. But I would say right now, we are operating around fiftyfifty, local for local versus global product of Varex into China. But it is increasing over time more from local more from global exports into China to local for local.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Hope I answered your question and understood it right. Let me know.

[Suraj Kalia, Managing Director & Senior Analyst at Oppenheimer & Co. Inc.]

No, that was great. And Sunny, I'll just ask the Sam, I'll just ask the last question and I'll hop back in queue. As you look into obviously, you have provided your Q2 guide, we can sort of extrapolate where FY 'twenty five is headed. I guess my question more so is, Sunny, we are doing our own independent checks on China stimulus, right? As you lay out your FY 2025 roadmap, right?

[Suraj Kalia, Managing Director & Senior Analyst at Oppenheimer & Co. Inc.]

How can you think about your sensitivity of numbers to a new Chinese stimulus? Is 18% per quarter the right bogey? Is that excluding new China stimulus? Could it go higher? Just kind of walk us through how you all are thinking because admittedly the whole macro level thing is very uncertain.

[Suraj Kalia, Managing Director & Senior Analyst at Oppenheimer & Co. Inc.]

And I get it where you're coming from, it's difficult to plan a business. But how should we think about if we start out at 18% and the sensitivity up or down to whatever happens on the stimulus? Gentlemen, thank you for taking my questions.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Yes. Suraj, I don't know how to quantify that for you with respect to that 18%. But what I can say is that as we've seen the uptick, the uptick is coming from our customers who have gotten past their destocking issues in China to the extent that they had any. And then also their sales to the Chinese hospitals, which is driven by just normal course of business. We haven't seen any significant tie in through stimulus.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Typically, what happens is if there's a stimulus related buying, that tends to have a pattern across many different customers, right, versus the one off sales that we're starting to see in spots, different places versus stimulus tends to have some of its own momentum. So at this point, I really cannot pin down or give you some any guidance around what any effect of stimulus might do for the rest of the year to China. Now a lot of this, as we're forecasting, it's one quarter. It doesn't make a real trend, but it's a positive thing. However, I just have to remind you and everyone that there's still the potential impact of any changes to tariffs and the trade situation.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

As of now, while we've not seen any meaningful impact to us either from The U. S. Tariff perspective or the retaliatory tariffs in China, so we're being careful about looking too far ahead, not knowing what might happen with changes to the tariff situation.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

Yes. And Suraj, I would like to add a few more points to what Sunny just said that remember in China, our Q1 revenues are typically higher than Q2 because in Q2, we have the Chinese New Year. So the China based customers buy a little bit more in Q1 compared to say Q2 time frame. So keep that in mind. At the same time, our business outside of China, so the Chinese New Year and a little bit of recovery still not full or in any way.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So China turned out to be a little bit stronger and the business outside of China, particularly in medical, still got impacted by the destocking phenomenon. So that yields a little bit higher percentage of revenue to China. So keep that in mind. Also, we reported $35,000,000 for China, but just two years ago or eighteen months ago, we were doing mid-40s in terms of our revenues per quarter from China. So we have more potential to grow in China, but at the same time, we also feel we have potential here to grow outside of China.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

And in that way, we can grow our sales while keeping the percentage out of China still within the teens. And then all of what Sunny and I said is all of that all of this is subject to changes or impact from tariffs, which we don't know wherever they will land. And so it is a very uncertain macro environment right now. So that's I just wanted to provide that perspective.

[Operator]

Next question is coming from James Sidoti from Sidoti and Company. Your line is now live.

[Jim Sidoti, Analyst at Sidoti & Company]

Hi, good afternoon. Thanks for taking the questions. Last call you talked about the new plant in India. Is that still on track to get online by the end of this

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

year? Yes, Jim. Our plans are proceeding well. We are making very good progress and that is still our expectation to go online by the end of this fiscal year. I do want to highlight that currently we are funding India and our India operations and our investments through CapEx and also through OpEx and through cost of goods sold area, it is impacting our overall financial performance where we really do not have a whole lot of revenues.

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So we are investing in India right now and our plans are planned we are making progress as per our plans.

[Jim Sidoti, Analyst at Sidoti & Company]

And is the plan for that plant, is it CT tubes for Asia primarily?

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

We are focused on detectors right now, at least for this fiscal year, Jim. Tubes would be the following year.

[Jim Sidoti, Analyst at Sidoti & Company]

Okay. All right. But primarily to the customers in Asia?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

No. These are for global companies. Initially, India is for global. So it would be anywhere where those radiographic products are needed.

[Jim Sidoti, Analyst at Sidoti & Company]

Okay. And then on the convert, that's due in mid this year. That's about $200,000,000 Do you plan to pay that entire balance down?

[Shubham Maheshwari, Chief Financial Officer at Varex Imaging]

So Jim, we raised $125,000,000 and in that, that entire amount is put in a restricted bank account because that we have already stated that we plan to use those proceeds to pay down the convertible. The remaining $75,000,000 or so of principle, No decision has been made by our Board yet, and that's why we've not officially stated anything. However, we have indicated to you that we are in an excess cash situation. So I would say that our intention is to pay down fully. However, no decision has been made yet regarding the $75,000,000 of the principal of the convertible that would be left after paying down using the $125,000,000 or so of the proceeds.

[Jim Sidoti, Analyst at Sidoti & Company]

All right. And then I just want to make clear, I know China is still a little bit destocking among the medical customers, the OEMs, that primarily has complete and that you expect those orders to come back to more historical levels?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

That is correct. We saw an order intake uptick in both in China and outside of China. And typically, when customers have inventory, they don't place orders. And so an uptick in it we're seeing a positive trend and it is fairly widespread. So we believe that most of this phenomena is behind us.

[Jim Sidoti, Analyst at Sidoti & Company]

Okay. And then the last one, on the cargo inspection, do you think you'll benefit at all from the increased focus with the new administration on border security? Could that help push those sales, maybe not this year, but in the next couple of years?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Oh, absolutely. In fact, the and globally, not just in The U. S, we see this the pressure on security globally has increased. And at the same time, now with also with tariffs, the need to scan cargo to ensure that what's being transported matches the documentation for accurate assessment of tariffs and taxes across borders, That's also becoming now just as equally important. So it was always about there's three two parts to it, right?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Security and inspection for contraband and guns, etcetera. But now the tariffs are also equally important. So it does raise the level of activity of cargo inspection tenders, and we're happy to participate in those.

[Jim Sidoti, Analyst at Sidoti & Company]

All right. Thank you. That's it for me.

[Operator]

Thank you. Next question is a follow-up from Jung Li from Jefferies. Your line is now live.

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

Great. Thanks so much for the follow-up question. I guess, wanted to hear a little bit about the pathway of photon counting detector development and adoption and how that could be different or maybe similar as digital detectors sort of started out and gained scale. From your perspective, as you're kind of planning it out for loan counting, you provided Cisco twenty twenty nine guidance. What are some of the major differences between the photo counting plans versus how digital adapters gain traction?

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Yes. So if you if if I understand the question correctly, what is the trajectory for photon counting detectors look like versus what happened with flat panel detectors? I think in flat panel detectors, the trend was driven by medical, and medical started it. And then afterwards, industrial digitization industrial started happening versus here, what we are seeing is much more accelerated adoption in industrial for several reasons, mainly being the photon counting detectors are very, very conducive for high speed high speed imaging, three d imaging at very fast pay rates because of the high frame rates of these detectors. So we're seeing a lot of enthusiasm and excitement in industrial.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

And so as we laid out our trajectory for the next for between now and 2029, the initial the near term, midterm is largely being driven by industrial. In the meantime, during this time, the medical customers have begun characterizing this technology and planning their new equipment with it. But adoption in medical takes longer just to bring those products. See, these are not retrofit systems versus in flat panel detectors, they went into existing systems, the x-ray, not much had to change. They had to just stick in a detector and go from there.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

However, here there's more work involved on the medical side in order to take advantage of the counting detector's capabilities. And medical always takes a little longer. So that's the main difference. We're going to see fast uptick in industrial, which allows us to scale up

[Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities]

and then

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

medical is following it. The one thing that I'll say that we're very happy about is there is no doubt in our minds that this technology is here to stay. That last RSA, which was the Radiological Society of North America, with all the conversations that we've had with customers, it was fairly broad based conversation with OEMs about photon counting. There was a lot of interest in it in our booth and every conversation we had with our customers included for account counting. And the value of the technology that the technical viability, all that is fairly well understood.

[Young Li, Senior VP - Equity Research at Jefferies Financial Group]

All right, great. Appreciate the color. And yes, definitely agree with those RSNA. We felt the same as well. Thank you.

[Sunny Sanyal, President & Chief Executive Officer at Varex Imaging]

Thank you.

[Operator]

Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

[Christopher Belfiore, Director-Investor Relations at Varex Imaging]

Thank you for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of the quarterly conference call will be available through February 20 and can be accessed at veriximaging.com/investorrelations. Thank you and goodbye.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

Participants

Executives

• Christopher Belfiore, Director-Investor Relations
• Sunny Sanyal, President & Chief Executive Officer
• Shubham Maheshwari, Chief Financial Officer

Analysts

• Young Li, Senior VP - Equity Research at Jefferies Financial Group
• Kyle Bauser, Managing Director at B. Riley Securities
• Larry Solow, Partner & Managing director - Equity Analyst at CJS Securities
• Suraj Kalia, Managing Director & Senior Analyst at Oppenheimer & Co. Inc.
• Jim Sidoti, Analyst at Sidoti & Company