Varex Imaging Corp Q1 FY2025 earnings call

Key Points

• Demand was solid in the first quarter, but unscheduled absences in US facilities during holidays impacted fulfillment.
• Gross margin was 35% in the quarter, driven by favorable product sales mix, productivity gains in both segments, and approximately 130 basis points from refunds of German customs duties and taxes.
• Sales trends: Medical segment CT tubes were above sales trend, while other modalities like fluoroscopy, mammography were stable, and radiography, oncology, dental were below trends. Industrial segment saw strength in global security screening, with strong start in industrial x-ray products for airports, aerospace, and automotive, and stabilization in semiconductor, electronics, and battery inspection verticals.
• Launched cargo and security inspection systems, including stationary portal, Gantry, mobile inspection system, and compact vehicle scanning system. Received $14 million orders for cargo inspection systems.
• China sales improved year over year and sequentially. Plan to begin production of radiographic components in India by end of fiscal year.

In the first quarter of fiscal 2025, Varex Imaging's revenue was up 5% year over year. The medical segment saw a 3% increase in revenue to $145 million, constituting 72% of total revenues. CT tubes in the medical segment were the largest modality, representing nearly 40% of total medical sales in fiscal 2024. The industrial segment experienced a 10% revenue increase to $55 million, making up 28% of total revenues. In fiscal 2024, industrial segment revenue was $128 million, with the security inspection vertical being the largest at approximately 40% of total industrial sales.

Second Quarter Guidance

• Revenues expected between $200 million and $215 million.
• Non-GAAP earnings per diluted share expected between $0.05 and $0.20. Expectations are based on non-GAAP gross margin of 32% to 34%, non-GAAP operating expenses of approximately $52 million, interest and other expense net in a range of $9 to $10 million, tax rate of about 22%, and non-GAAP diluted share count of about 41 million shares.

• Tariffs and retaliatory actions could materially impact the business.
• Uncertainty regarding the impact of Chinese stimulus on sales.
• Volatility in the semiconductor, electronics, and battery inspection verticals which have not returned to previous demand levels.

Q: Talk about China market performance and potential impact from stimulus.

A: Sunny Sanyal says sales in China saw an uptick, but there's no indication of meaningful improvement in demand this year from stimulus, and it hasn't translated into orders. There's no change in the view on the Chinese government's commitment to healthcare.

Q: Margin profile of cargo and vehicle inspection systems.

A: Sunny Sanyal states the hardware equipment margin is initially lower than company gross margin levels, but service revenue stream will improve margins longer term. Sam Maheshwari adds it's organically funded and expects margin to improve as scale increases.

Q: Status of the plant in India.

A: Sam Maheshwari says the plan to begin production of radiographic components in India is on track to go online by the end of the fiscal year, currently focused on detectors, and funded through CapEx, OpEx, and cost of goods sold.