Varex Imaging Corporation

Greetings. Welcome to the Verix fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Chris Belfiore, Director of Investor Relations. You may begin.

Good afternoon and welcome to Verix Imaging Corporation's earnings conference call for the fourth quarter of fiscal year 2021. With me today are Sunny Sanyal, our president and CEO, and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed on Verix's website at investors.veriximaging.com. The webcast and supplemental slide presentation will be archived on VARIS' website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the fourth quarter of fiscal year 2021. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the fourth quarter of fiscal year 2021 to the third quarter of fiscal year 2021, rather than the same quarter of the prior year. Finally, all references to the year are to the fiscal year and not calendar year, unless otherwise stated. Please be advised that during this call we will be making forward-looking statements, which are predictions and projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including item 1A, risk factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. I will now turn the call over to Sunny.

Thank you, Chris, and good afternoon, everyone. Fiscal 2021 was an outstanding year for Verix, despite what turned out to be a very challenging and dynamic environment. As we entered the year, uncertainty around the ongoing effects of COVID were top of mind. Pent-up demand and an increase in focus by many countries around the world on expanding their healthcare delivery capabilities has increased the demand for diagnostic imaging systems. As the year progressed, this increased demand was met with supply chain constraints that challenged both our output levels and our profitability. That said, we continue to execute on our strategic initiatives, improving gross margin, reducing operating expenses and inventory, and introducing new products and technology to drive future growth and profitability. Turning to the fourth quarter, I'm excited to report a strong finish to the year. Broad-based strength globally, especially in our medical segment, drove record quarterly revenues of $226 million in the fourth quarter. Profitability improved in the quarter, driven by strong growth and stable operating expenses. Improved earnings and working capital management helped drive robust cash generation. Cash flow from operations was $51 million in the quarter, and the cash balance at the end of the year was $145 million. Global demand for CT tubes remained strong in the quarter, as did demand for detectors in both medical and industrial applications. While the third quarter marked a return to pre-COVID levels or better for many medical modalities, I'm pleased to say that the fourth quarter saw all modalities above pre-COVID levels. Our revenues in the fourth quarter increased 7% sequentially and 33% year-over-year, with both medical and industrial segments showing strong growth. Non-GAAP gross margins in the quarter were 34%, as strong volumes were partially offset by supply chain challenges. Non-GAAP operating margin was 14% of revenues, and non-GAAP EPS of 45 cents exceeded the top end of our guidance range. Let me give you some high-level insight into how our different modalities and applications trended during the quarter. Medical segment revenues increased 8% sequentially and 33% year-over-year. We continue to see... globally for CT tubes in the fourth quarter. In our other medical modalities, oncology, radiographic, dental, and mammography posted sequential growth and were above pre-COVID levels. Fluoro was somewhat flat in the quarter due to timing of shipment. Revenues in our industrial segment increased 4% sequentially and 34% year over year. During the quarter, demand for digital detectors for non-destructive inspection remained strong in several of our industrial verticals, including battery inspection and oil and gas. Demand for imaging products for security screening at ports and borders, as well as baggage screening at airports, continued to be soft, but both remain headed in a more positive direction. As we have done in the past, I would like to highlight the outstanding work we're doing in one of our businesses. At Varix, our mission is to make the invisible visible, and our AI-aided software is strategic to that mission. This software will be on display at our CNA in a few weeks, along with other products such as photon counting detectors, nanotubes, z-platform detectors, and our new lumen detectors. Our software business represented over $30 million in revenue in fiscal year 2021. As imaging becomes more accessible globally and efficient workflow becomes more critical, we're excited about the growth potential that AI-aided software represents. The AI-aided software leverages are more than a decade of field-based experience with software for image analysis and computer-aided detection that is installed on thousands of diagnostic workstations globally. We have been able to apply these competencies for developing AI-aided software for breast, lung, neuro, and liver imaging, and we expect to continue this development across various other imaging modalities. With an increasing focus on connectivity and integration, we're happy to be able to offer this software via the cloud. Our AI-aided lung screening software called Veolity is setting new standards in the industry as a trusted diagnostic platform for high throughput environments. With an increased focus on lung screening globally, we think Viality has the potential to become a significant contributor to our software growth. We have been participating in tenders globally, and recently we won a tender to provide lung screening software for nine hospitals in the province of British Columbia in Canada. We expect this win and other projects won in Europe and the United Kingdom to help drive the broader adoption of Viality over time. In the US alone, there are over 200,000 lung cancer cases and over 60,000 deaths from lung cancer each year. A high mortality rate of about 19% is mainly late diagnosis of lung cancer, catching the disease at a point where it's often too late to treat effectively. However, over the last few years, global and national recommendations have encouraged early lung cancer screening using low-dose CT among more high-risk groups. In the U.S., this could potentially increase the number of persons eligible for screening from about 6 million to nearly 15 million. With other regions like Europe, Canada, and Asia following suit, we expect this expansion of lung cancer screening to continue to grow. This expansion will require productivity-enhancing software that supports effective high-volume screening. This is a key capability and a strength of Viality. Our Viality AI-aided software can enhance radiologist productivity by enabling them to perform CT lung screening quickly and with AI oversight for added diagnostic confidence. This software offers automated workflow with historical comparisons and 3D volume measurement capabilities that tracks the progress of a tumor over time and can help with early detection of cancer. Over the last five years, Verix has licensed over 570 instances of Viality across the Americas, Europe, and Asia. The global lung cancer screening market is expected to grow at 20% CAGR from a base of approximately $20 million in calendar 2021, and we expect to benefit from this market growth. We are excited about the possibilities that AI-aided software can bring to the imaging world and proud that Varix is an innovator in this space. As we expand our AI-aided software capabilities into other applications, We expect this business to become a larger contributor to Verix in the future. Before I hand over the call to Sam, I'd like to take a minute to reflect on the past year. As noted earlier, fiscal 2021 was a record year for Verix across the board. It's demand drove our business to new levels. Looking back to a strong period before COVID, revenue was up 5% from fiscal 2019 to $818 million in 2021. while adjusted EBITDA was up 15% to $133 million. This translates to nearly 50% incremental margin, an outstanding accomplishment from a period considered to be very strong at a time. This increase includes the results from the first quarter of fiscal 2021, which was still significantly impacted by the effects of COVID. As we all know, the strong results exiting fiscal 19 were met with significant headwinds from COVID, but the actions that we took to bolster our financial position helped us recover to an even stronger position. Robust demand drove revenue growth of over 30% from the low point in the fourth quarter of 2020 to $226 million in the fourth quarter of 2021, while adjusted EBITDA grew 10x to $40 million. This strong sequential quarterly improvement culminated in record revenue of $818 million in fiscal 2021. This revenue, along with continued expense management, led to gross margins of 34.7% in fiscal 2020, while adjusted EBITDA improved to $133 million and EPS finished the year at $1.31. During this period, global CT volumes increased double digits. In fiscal 2021, we generated record operating cash flow of $93 million, and our cash balance ended the year at $145 million, even after paying down $30 million of our debt in July. I'd like to take a moment to recognize all our employees, customers, and suppliers globally for continuing to weather a very difficult environment and meeting elevated demand levels through significant supply chain challenges. Fiscal 2021 set a strong foundation for us to build upon. As we move into 2022, demand remains strong, the supply and we're confident in our ability to deliver quality products to our customers. While we expect COVID and supply chain issues to remain part of our business environment during fiscal 2022, we are steadfastly maintaining our focus on Verix 2.0 and the long term. The focus of that journey is centered around expanding our leadership position through innovation and continued focus on improving profitability. Our fiscal 2022 expenses include fully funding several R&D initiatives that we will expect to drive future growth. As we have discussed earlier, we're developing several exciting new products, such as photon counting detector for CT, a family of next generation radiographic detectors on flexible substrate, several advanced tube models for CT and cardiovascular applications, AI-aided software, and new connect and control components as well. We expect to have customer prototypes of CT photon counting detector modules available in the second quarter of our fiscal 2022. We expect that these and other innovation initiatives will expand our addressable markets and increase our position as a preferred partner for innovative technology with current and potential customers. While our Local4Local platform in China continues to be highly successful in CT, we are now engaged with local OEMs on our innovation in x-ray tubes, detectors for applications such as cardiovascular, oncology, and surgery. Our joint venture, VEC, is making steady progress with nanotube technologies, and we are at a stage in our development process where we are shipping prototypes to industrial OEMs. Our continued focus on improving profitability and cash generation are driven by investments in our factory, ongoing improvements in productivity and yield, and reducing product costs through lower cost designs, vertical integration, and supply chain actions. We have weathered uncertainties created by COVID so far and have come out stronger. In the same way, we expect to continue to navigate the current supply uncertainties and emerge with a more resilient supply chain globally. With that, let me hand over the call to Sam.