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TheStreet Open House

Varian Medical Systems' CEO Hosts Investor Mid-Year Review (Transcript)

Stocks in this article: VAR

We did book two Proton orders in the half, totaling $124 million. We have one for Saudi Arabia, and we also booked a deal in St. Petersburg, Russia.

As you can see, revenues were up 10% for total company; Oncology 10%, X-Ray up 3%. And we have booked $23 million of revenue in our Proton business for the first half.

And let me just take a minute, we get lots of questions on how we book the revenue in the Proton Business. So, I’ll go ahead and address that here. Because these are – this is our first installation, this is under project accounting, we are – because we have to estimate our remaining cost to complete the project, and this being the first one, that is a fairly difficult path. So, we have taken the conservative position that revenue is going to equal cost until we get towards the very end of the project, and any profit we’ll be taking at that time.

As we’ve said, the first two or so of these installations, there is a lot of learning costs that’s still spent into those. It’s just a very high cost of goods sold relative to where we expect to be. So, as we’ve been pretty transparent, there’s not going to be a significant amount of profit on the first couple of these. And so, we just took the more conservative position to wait until we get to the very end.

As this business matures and as we get into future installations, it will revert to a more traditional project accounting, where we’ll take a percentage of the revenue – a percentage of the cost as we complete the project over the two to three year period of time.

The operating margin for the first half is 20%, which is down three points if you compare that to the year ago period. All of that in the first half declined coming from the gross margin. Gross margin of 42% for the company, again, down three points. Oncology’s margin is off about three points. And we talked pretty extensively on the conference call, and I’ll come back and talk more about margin, but, basically, we had an unprecedented geographic shift to the Emerging Markets where those markets were up about 30% in the second quarter, whereas one of our higher margin countries that buys highly featured products, Japan, was off about 40% as the end of the stimulus program in the year ago period.

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