Varian Medical Systems (VAR) Q3 2012 Earnings Call July 25, 2012 5:00 pm ET Executives Spencer R. Sias - Vice President of Corporate Communications and Investor Relations Timothy E. Guertin - Chief Executive Officer, President and Executive Director Elisha W. Finney - Chief Financial Officer and Corporate Executive Vice President of Finance Analysts Steve Beuchaw - Morgan Stanley, Research Division Dalton L. Chandler - Needham & Company, LLC, Research Division Jason Wittes - Caris & Company, Inc., Research Division Jeremy Feffer - Cantor Fitzgerald & Co., Research Division David H. Roman - Goldman Sachs Group Inc., Research Division Amit Bhalla - Citigroup Inc, Research Division Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division Anthony Petrone - Jefferies & Company, Inc., Research Division Junaid Husain - Dougherty & Company LLC, Research Division Tycho W. Peterson - JP Morgan Chase & Co, Research Division Sean D. Lavin - Lazard Capital Markets LLC, Research Division Presentation Operator
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Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, should, believe, think, appear, opportunity, can, expect, potential 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's Tim. Timothy E. Guertin Good afternoon, and welcome. And today, we're reporting results for the third quarter of 2012 with healthy growth in revenue, margins and earnings. Net orders were up slightly in constant currency, but even with the -- excuse me, net orders were up slightly in constant currency, but even with the year-ago period on a dollar basis. To summarize the third quarter results compared to the year-ago quarter, company revenues rose to $705 million, up 9% in dollars and 11% in constant currency. Our gross and operating margins improved even in the face of a weakened euro and net earnings increased 16% to $0.96 per diluted share. Net orders were up in Oncology Systems and were down in our X-ray Products and Security businesses. Our quarter ending backlog rose 16% to more than $2.6 billion with Oncology backlog up 9%. Let me give you more detail about our Oncology Systems Business first. Third quarter revenues for this business were $546 million, up 7% from the year-ago quarter. The gross margin was 44%, up nearly 40 basis points from the year ago quarter and up 2 percentage points from the second quarter. We achieved this improvement while continuing to experience a significant shift to International business, which accounted for 57% of total oncology revenues.
Oncology net orders totaled $562 million, up 2% in dollars and 4% in constant currency. Reported net orders were up 4% in North America but down 1% internationally with currency-driven declines in EMEA that offset double-digit growth in Asia. Oncology orders were split 46% in North America and 54% internationally.Our flagship TrueBeam system continues to be ordered and deployed in healthy rates. Since the product launch, we have received 550 orders and some 270 installations are complete or in progress. TrueBeam comprise about 50% of total high-energy machine orders in the quarter. During the quarter, we received several multi-Linac orders including 6 TrueBeams at 2 centers in New York. We also received our first 2 orders as part of a program in the U.K. to stimulate replacement of machines in public hospitals. We were selected to supply a minimum of 10 TrueBeam machines that hospitals can acquire through the National Health Service between April 2012 and March 2013. The first 2 of these have been ordered for our new cancer center in Hereford and to replace a competitor's machine at Clatterbridge, near Liverpool. Service orders and revenues, which represent a long-term annuity for oncology, grew at a faster rate than the overall oncology business. Year-to-date, services achieved double-digit growth and is nearly 35% of Oncology Systems revenues. Shortly after the quarter ended, CMS announced its initial proposals for 2013 reimbursement rates in the U.S. This calls for slight increases in hospital rates, but painful and inappropriate cuts for freestanding clinics. As a consequence, we are working with clinic operators in the industry to oppose these cuts in order to help ensure continued access to cancer care for patients. Freestanding clinics in the U.S. represent about 10% of Varian's global oncology business. With ongoing pressure on reimbursement rates, it's clear to us that the market will place a greater and greater premium on fast, cost-efficient delivery of both radio therapy and radiosurgery without compromising treatment quality. This is a strength for Varian because we offer greater performance and value than any of our competitors. Read the rest of this transcript for free on seekingalpha.com