Varian Medical Systems Inc. (VAR)

F3Q10 Earnings Call

July 28, 2010; 05:00 pm ET

Executives

Tim Guertin - President & Chief Executive Officer

Elisha Finney - Chief Financial Officer

Tai Chen - Corporate Controller

Spencer Sias - Vice President of Investor Relations & Corporate Communications

Analysts

Amit Bhalla - Citi

Joshua Jennings - Jefferies Incorporated

Mark Arnold - Piper Jaffray

Dalton Chandler - Needham & Company

Jeff Johnson - Robert W. Baird & Co., Inc.

Tycho Peterson - JPMorgan

Amit Hazan - Gleacher & Company

Michael Matson - Wells Fargo Securities

Sean Lavin - Lazard

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Q3, 2010 Varian Medical Systems’ earning conference call. My name is Tony, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

I’ll now like to hand the call over to your host for today Mr. Spencer Sias, Vice President of Investor Relations and Corporate Communications. Please proceed.

Spencer Sias

Thank you. Good afternoon and welcome to Varian Medical Systems’ conference call for the third quarter of fiscal 2010. With me, are Tim Guertin, President and CEO; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim and Elisha will summarize our results and we’ll take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or years are fiscal quarters and fiscal years. Quarterly comparisons are for the third quarter of fiscal 2010 versus the third quarter of fiscal 2009. All results are for continuing operations only.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as could, will, may, believe, planning, hope and expect, and similar expressions are intended to identify those 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 is Tim.

Timothy Guertin

Good afternoon and welcome. I am please to report a strong third quarter which built on the performance of our first half. North American orders grew strongly after a year of decline and the overall international market including Europe continue to perform well. Net orders for the company grew 14% driven by a double-digit order growth in our oncology systems and x-ray product businesses.

Our quarter ending backlog grew 7%, revenues rose 13% and operating earnings rose by 28% with the help of a healthy gain in our gross margin. Even with an expected substantial increase in our quarter-over-quarter tax rate, earnings per diluted share increased by 9%. New products played a major role in the success of this quarter and I will focus now on some of our operational highlights.

Oncology systems third quarter net orders grew by 10% to $507 million with a 12% increase in North America and a 9% increase in international markets. International markets are countered for 52% of oncology orders during this quarter. Our cautiously optimistic view of the North American market was born out this quarter with order growths driven by hospitals. It is gratifying to see a large number of smaller orders demonstrating broad-based spending activity.

While one quarter does not make a trend, we feel better about the North American market than we have for many quarters. In Europe, net orders increased 11% even with a stronger U.S. dollar versus the Euro as customers across the region continue to invest in new clinical capabilities and services. Growth in this region was led by the Netherland, Switzerland, Spain, Italy and the Middle East.

And as you may have noticed from our early press release, India also contributed to this growth and our European region with one center placing an order for TrueBeam and five Unique. Far East orders grew by 9% mainly driven by good gains in China, Korea and Thailand while orders in the rest of the world declined by 6% primarily due to Latin America.

New products played a major part in our growth. Our TrueBeam platform for advanced image-guided radiotherapy and radiosurgery was a major contributor to order growth this quarter. More than 60 TrueBeam units have ordered since its introduction in April with the bulk of the orders coming from the U.S. We also booked multiple orders in Europe and our first order in the Far East.

A significant number of the TrueBeam orders were upgrades from other machines already in backlog, but more than half were new orders. After years of development, it is very gratifying to see the strong interest and demand for this new platform, which we continue to believe will reach 30% to 50% of our new machine orders over time.

We exhibited TrueBeam at the American Association of Physics and Medicine Meeting in Philadelphia last week and customer reaction continues to be extremely positive.

This response reinforces our commitment to providing clinics with versatile radiotherapy and radiosurgery tools that both advanced the quality of care and lowered the cost of treatment.

As you know, installations have been completed at several sites around the world and TrueBeam is already treating patients. For example, at the University of Alabama and Birmingham, doctors took just seven minutes to deliver a complex image-guided IMRT treatment for a sinus cancer patient to shrink his tumor and reduce the extent of surgery needed to treat his condition.

With conventional platforms, this treatment would have taken 40% longer. Doctors there are expecting to complete treatment even more quickly as they gain experience with the platform and use more of its features; they plan to commence long radiosurgery within a matter of weeks.

We hope over time that TrueBeam could also be a gain changer for liver patients as well. During the quarter, we also saw growing interest among international clinics in Unique, our new accelerator for fast, affordable image-guided RapidArc treatments and we continue to believe that this will be a major contributor to oncology’s international growth.

Oncology service business increased 18% in the quarter. As systems become more sophisticated and use more accessories for IMRT, IDRT and surgery, customers are increasingly calling on us to ensure clinical uptime, maintain their investment and keep their software capabilities current.

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