Varian Medical Systems (VAR)

Q3 2011 Earnings Call

July 27, 2011 5:00 pm ET

Executives

Elisha Finney - Chief Financial Officer and Corporate Senior Vice President of Finance

Timothy Guertin - Chief Executive Officer, President and Executive Director

Spencer Sias - Vice President of Corporate Communications & Investor Relations

Analysts

David Roman - Goldman Sachs Group Inc.

Tycho Peterson - JP Morgan Chase & Co

Anthony Petrone - Jefferies & Company, Inc.

Junaid Husain - Ticonderoga Securities LLC

Dalton Chandler - Needham & Company, LLC

Amit Hazan - Gleacher & Company, Inc.

Sean Lavin - Lazard Capital Markets LLC

Amit Bhalla - Citigroup Inc

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Varian Medical Systems Earnings Conference Call. My name is Tahisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Spencer Sias, Vice President of Investor Relations and Corporate Communications. Please proceed.

Spencer Sias

Thank you. Good morning or good afternoon, and welcome to Varian Medical Systems Conference Call for the Third Quarter Fiscal Year 2011. With me are Tim Guertin, President and CEO; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim and Elisha will summarize our results, then we'll take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years. Quarterly comparisons are for the third quarter of fiscal 2011 versus the third quarter fiscal 2010. Annual comparisons are for fiscal 2011 versus fiscal 2010. All results are for continuing operations, which exclude the sales of the research instruments portion of ACCEL.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, should, believe, promising, can, estimate and similar expressions are intended to identify these statements which represent our current judgment on future performance or other future matters.

While we believe them to be reasonable, based on information currently available to us, these statements are subject to risks and uncertainties that could cause actual results to differ materially.

Some of the important risks relating to our business are described in our third quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion because of new information, future events or otherwise. And now, here's Tim.

Timothy Guertin

Good afternoon, and welcome. Today, for the third quarter of fiscal 2011, we are reporting financial results that demonstrate continued progress on our long-term growth strategy.

Demand for our newer products on oncology and X-ray products remained healthy during the quarter. In summary, revenues rose by 12% to $649 million. Gross margin was lower than normal, 43.1% for the quarter, but is up by half a point year-to-date.

Net earnings were $0.83 per diluted share, up 12% from the year-ago quarter. Net orders were up in both our major businesses, and our quarter-ending backlog increased by 10% to $2.3 billion. And we ended the quarter with $568 million in cash and cash equivalents.

I'll focus now on orders and market conditions in each of our businesses, and Elisha will then walk you through the financials. Oncology Systems' third quarter net orders totaled $553 million, up 9% with 18% growth in international markets and flat orders in North America.

Year-to-date, our Oncology Systems net orders are up 8%, revenues are up 9% and operating profits are up 10%. Asia net orders grew by 19%, where our China business was particularly strong, driven mainly by high-end systems and leading cancer centers. China celebrated its first TrueBeam installation at Shantou Medical Center with an opening ceremony that garnered international media coverage.

In Japan, we saw a return to quarter-over-quarter order growth despite of the earthquake and tsunami that, that country experienced earlier this year.

In our European, Middle East and Africa territory, net orders grew by 8%, with notable wins in Scotland, Norway, Saudi Arabia, Russia, Turkey and Belgium. In Scotland, Varian was awarded an order for 10 linear accelerators, including 8 TrueBeams. That's part of a national procurement project to replace aging accelerators in the country's 5 radiotherapy centers. We've also received an order for 2 TrueBeams in Belfast, Northern Ireland.

Business doubled in our rest of world territory. Central and South America performed particularly well, with wins in Brazil, Mexico, Uruguay, Argentina and Panama. Net orders were flat in North America versus a strong rebound in the year-ago quarter. We saw a strong demand for our TrueBeam platform, which made up the majority of high-energy machine orders in this market.

Year-to-date, we believe we've gained significant share in North America where our net orders are up by 10%. We booked an order for 5 TrueBeams at the Central Arkansas Radiation Therapy Institute, while the University of Colorado ordered 3 TrueBeams, 2 of which will replaced competitor units and one which will go into a new radiosurgery suite.

Overall, we had another terrific quarter for our TrueBeam product with more than 60 orders, bringing the total to almost 300 orders since the product was introduced just a little more than a year ago. The take rate for TrueBeam represented more than 40% of all high-energy machines ordered globally.

Installations of TrueBeam are proceeding smoothly with more than 100 installations complete or in progress as of the end of the quarter. While it contributed to higher installation costs early in the third quarter, by the end of the quarter, we reached a 4-week installation time. This approaches the installation time for the rest of our accelerators.

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