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Varian Medical (VAR) Misses on Q1 Earnings and Revenues

Palo Alto, CA-based leading manufacturer of medical devices and software Varian Medical Systems, Inc.VAR reported adjusted earnings of 75 cents per share in the first quarter of fiscal 2017.

Despite having a streak of positive earnings surprises in the last four quarters with an average beat of 3.47%, adjusted earnings missed the Zacks Consensus Estimate of $1.05 in the first quarter. Furthermore, adjusted earnings declined 24.2% on a year-over-year basis.

Meanwhile, revenues of $763.3 million increased 0.8% year over year on the back of strong growth at the oncology segment. However, revenues missed the Zacks Consensus Estimate of $769 million.

Varian Medical Systems Inc. - Earnings Surprise | FindTheBest

Coming to backlog, Varian reported a backlog of $3.4 billion at the end of the fiscal first quarter, up 2% on a year-over-year basis.

Revenue Details

Varian Medical has been addressing both the tier 1 and mid-tier markets through its Edge, Truebeam and VitalBeam products. Varian also won contracts in the American and international markets, which is a huge positive.

We believe China and Japan present significant top-line growth opportunities in the near term. The company is also on track to open new offices in Africa and the Middle East, which reflects its awareness about the growth opportunities in the region.

Oncology Systems: In this segment, revenues totaled $581.1 million, down 1.4% year over year. Per management, despite the year-over-year decline, the oncology segment witnessed a favorable product mix, stable pricing and product cost reductions in the first quarter.

Coming to gross orders, first gross orders were $585.6 million, up 10% from the year-ago quarter. In the U.S., gross orders increased 5%. In EMEA and APAC, gross orders jumped 8% and 29%, respectively, on a year-over-year basis.

Imaging Components: Revenues at the segment totaled $151.9 million in the reported quarter, up 7.4% from a year ago. The upside was fueled by gains in both the medical and industrial platforms. Notably, Medical revenues increased by almost 8%, buoyed by strong growth in CT tubes and dynamic detectors. Also, industrial revenues grew 6%.

Per management, this segment had quite a 'busy quarter', courtesy of the spinoff of the Varex Imaging platform and the acquisition of the medical imaging business from Waltham, MA-based PerkinElmer, Inc.

Delving deeper into the developments at the segment, the company announced an agreement to take over the Medical Imaging business of PerkinElmer for $276 million earlier in the quarter. The buyout will be an addition to Varian's Imaging Components business, which is scheduled to become an independent public organization -- Varex Imaging Company -- by early 2017. The deal is expected to close after the separation of Varex from Varian (read more: Varian to Acquire PerkinElmer's Medical Imaging Business ).

Meanwhile, gross orders at the segment totaled $131.8 million in the reported quarter, up 3.7% from the year-ago quarter.

Other segment: The other segment includes Varian's flagship Particle Therapy business. The company's Particle Therapy business platform recorded first-quarter revenues of $30 million. Varian made good progress in the platform with 13 installations in the quarter.

Varian Medical Systems, Inc. Price and EPS Surprise

Varian Medical Systems, Inc. Price and EPS Surprise | Varian Medical Systems, Inc. Quote

Margin Details

In the first quarter, Varian Medical had a gross margin of 43.8%, up 290 basis points (bps) on a year-over-year basis.

Expenses on research and development (R&D) in the quarter were 63 million or 8% of revenues, increasing 30 bps year over year.

Coming to the selling, general and administrative expenses (SG&A), this accounted for 23.6% of revenues in the first quarter, compared to 17.6% in the year-ago quarter.

Financial Condition

As of Dec 31, 2016, Varian Medical had $815 million in cash and cash equivalents and $607 million in debt. During the reported quarter, cash flow from operations increased 6% on a year-over-year basis to $82 million.

Guidance

Varian Medical announced that its Imaging Components segment will be considered as a discontinued operation for the first four months of fiscal 2017. For the rest of the year, Varian's revenues from continuing operations are expected to multiply in the range of 4% to 5%, bringing in net revenue growth for the year of 3% to 4%.

For Varex Imaging, the company expects revenues for fiscal 2017 to increase 3% to 4%, compared with $620 million recorded in fiscal 2016.

For the second quarter of fiscal 2017, Varian Medical's revenues are expected to increase in the band of 4% to 5%. Furthermore, adjusted earnings per share are forecasted in the range of 84 cents to 90 cents per share for the second quarter.

Our Take

We are particularly upbeat about Varian Medical's takeover of Medical Imaging business of PerkinElmer. Considering the bountiful opportunities for diagnostic imaging in the global space, this development is a significant positive for long-term growth. In this regard, a research report by the Markets And Markets reveals that niche markets are expected to reach a worth of $33.42 billion globally by 2020, multiplying at a CAGR of 6.2%.

Secondly, the company's oncology segment holds considerable promise. Service constitutes about one-third of the Oncology segment revenues and is recurring in nature. It is expected to further grow as the company expands its installed base in overseas markets, particularly in China and Japan.

On the flipside, increasing local competition is a primary headwind. Moreover, the Imaging Components' business spin-off will remain an overhang on the stock, at least in the near term.

Stocks to Consider

Varian Medical has a Zacks Rank #3 (Hold)

Better-ranked stocks in the broader medical sector include Addus Glaukos Corporation GKOS , ARIAD Pharmaceuticals, Inc. ARIA and Hologic, Inc. HOLX . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Glaukos Corporation has a long-term expected earnings growth rate of approximately 25%. Notably, the stock represents an impressive one-year return of 161.3%.

ARIAD Pharmaceuticals estimates sales growth at around 28.9% for the current year. Additionally, the company posted a promising one-year return of almost 365.1%.

Hologic has a long-term expected earnings growth rate of approximately 10.32%. Notably, the stock represents a solid one-year return of 12.6%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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