Varex Imaging Corporation

Hello, and welcome to the Verix Imaging first quarter fiscal year 2022 earnings conference call and webcast. At this time, all participants are in 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. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Christopher Belfiore, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Verix Imaging Corporation's earnings conference call for the first quarter of the fiscal year 2022. With me today are Sunny Sanyo, 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 at Verix's website at investors.veriximaging.com. The webcast and supplemental slide presentation will be archived on Verix's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year 2022. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the first quarter of fiscal year 2022 to the fourth 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 or projections about future events. These statements are based on current expectations and assumptions that are subject to risk 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 provided 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 Sonny.

Thank you, Chris, and good afternoon, everyone. Demand for our products remains strong in the first quarter, but supply chain constraints limited our ability to fulfill orders as planned. As the quarter progressed, the uncertainty in the supply chain increased, with challenges becoming progressively worse in the quarter. Among other issues, we saw abrupt and unexpected delays in delivery of critical electronics components, as well as delays in inbound and outbound freight. We estimate that delays in raw material prevented us from shipping more than $20 million of product in the quarter. As a result, our quarterly revenue was $199 million, which was below our expectations. Revenue in the first quarter decreased 12% sequentially and increased 12% year over year. Both medical and industrial segments declined sequentially. Non-GAAP gross margin in the quarter was 34%, which was below our expectations, but reasonable considering the persistent supply chain headwinds that we faced. Non-GAAP operating margin was 11% of revenues, and non-GAAP EPS was 25 cents. Cash generation continued to be strong in the quarter, with cash flow from operations of $11 million. Our cash balance at the end of the quarter was $158 million, up $13 million sequentially. Let me give you some high-level insight into how the demand environment for our different modalities and applications trended during the quarter. Since first quarter revenue was severely impacted by supply chain-constrained environment, our modality trends are based on qualitative assessments. Medical segment revenues decreased 14% sequentially and increased 12% year-over-year. We continue to see robust demand globally for CT tubes in the first quarter, including strength in China as well as a recovery in the U.S. market. Demand was strong in our other medical modalities, including fluoroscopy, oncology, radiographic, dental, and mammography. Revenues in our industrial segment decreased 6% sequentially and increased 14% year over year. We continue to see strong demand for products for non-destructive inspection across several of our industrial verticals, including electronics and oil and gas. We experienced improved demand for imaging products for security screening at ports and borders during the quarter. In the past quarters, we have highlighted various new products and innovation, including photon counting, nanotubes, and AI-aided software. This quarter, I'd like to share with you some additional details on design wins and progress made with these technologies and how they could contribute to our long-term growth strategy. We will be focusing on our medical segment for today's discussion, and we expect to provide more color on the industrial segment in the future. In our tubes business, we began shipping samples of high-performance x-ray tubes for cardiovascular applications in the fourth quarter of fiscal 2021. We are seeing good initial customer interest in this product, and one of them is getting close to a system launch. In addition, several other customers are evaluating integration and design options for their future systems. These highly innovative, high-performance tubes are significantly lighter than tubes that are used in systems today, and that half the size take up much smaller footprint. We expect that these high performance and compact tubes will give our customers significant systems design flexibility. In addition, these tubes have performance characteristics that can help patient throughput. Our joint venture in Germany continues to make steady progress with nanotube technologies. In the medical segment, we have signed a prototype development agreement with a customer. In addition, we have shipped the first multimeter prototype to an industrial customer. Additional prototypes are expected to ship this quarter. In detectors, our photon counting technology continues to make progress and is currently being utilized in various medical modalities, including dental, breast, and skeletal imaging. We now expect to ship CT photon counting modules to customers in the second half of fiscal 2022. Given that we do not have an offering in the CT detector market today, this would be an entirely incremental, serviceable, addressable market for Verix. Due to its high frame rate per second imaging ability, we are seeing photon counting adoption in inline industrial inspection systems and dynamic applications with automated detection. We expect to see some customers launch new systems in 2022, utilizing our photon counting detectors in food inspection and battery inspection. We have had multiple design wins with our Azure, previously Z platform, dynamic detectors with mobile CRM and dental customers. We expect production of these systems and our product shipments to start ramping up in the second half of 2022. Last quarter, we highlighted our AI-aided lung cancer screening software, which continues to gain momentum. The winning bid for the lung cancer screening program in British Columbia is in the installation phase across six sites, and we expect that implementation of our software will be completed by the end of March. In addition, we're seeing interest in implementing lung cancer screening programs in other Canadian provinces, as well as in the UK and Australia. In connection control, we're excited about several new products. For example, our smart X-ray tube cooler proactively measures the performance of the cooler, allowing intervention to prevent unscheduled downtime. Similarly, our smart collimator uses proprietary technology that can help limit image retakes, reduces end user cost, and improves product life. Our smart mammography compression paddle adapts breast compression to the patient's unique anatomy. Through its proprietary technology, the aim is to improve patient's experience and aid in the healthcare decision-making process. We expect these new technologies across the medical segment to expand our serviceable addressable market, or SAM, of approximately $1 billion in calendar 2026. This expansion is in addition to organic market growth of just under a half a billion dollars over the same timeframe. As we look forward to the rest of the fiscal year, we expect supply chain volatility to remain challenging throughout fiscal 2022. We will continue to be vigilant in our efforts to meet customers' needs while managing the risk in supply chain. We continue to be encouraged by the level of demand we're seeing and the effort that our employees are making to weather the supply chain uncertainties. We recently celebrated our five-year anniversary of being Verix Imaging. Over the past five years, we have touched the lives of millions of people around the world, making a difference every day. I'm proud of our talented, global, and diverse team. Our investments in innovation have enabled us to expand our market leadership and introduce new technologies, thus allowing our customers to bring innovative imaging solutions to market to help make the world a healthier and safer place. With that, let me hand over the call to Sam.