Varex Imaging Corporation

Greetings. Welcome to the Verix third quarter fiscal year 2022 earnings 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. You may begin.

Good afternoon and welcome to Verix Imaging Corporation's earnings conference call for the third quarter of fiscal year 2022. 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 at Verix's website at veriximaging.com forward slash news. 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 third quarter of fiscal year 2022. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the third quarter of fiscal year 2022 to the second quarter of fiscal year 2022, 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 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 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. I'm happy to report very good results of the third quarter of fiscal 2022. Sales remained very strong, reaching $214 million. Our supply chain initiatives began to show results in an otherwise challenging environment and enabled us to realize sales at the high end of our guidance range. We saw robust demand for our products and continue to be excited about future growth. Turning to our results, revenue in the third quarter was flat compared to the second quarter and up 2% year over year. revenue in medical declined 2% sequentially, while industrial revenue increased 7%. Non-GAAP gross margin in the quarter was 35%, which was above our expectations. Price actions and productivity gains helped improve gross margins for the quarter. Adjusted EBITDA was $36 million, and non-GAAP EPS was $0.37. Our cash position remained solid at $110 million at the end of the quarter. our balance was down $5 million sequentially, primarily due to continued investment in inventory to support growth in the current supply chain environment. Let me give you some high-level insights into the current demand environment based on a qualitative assessment of our different modalities and applications during the quarter. Medical segment revenues declined 2% sequentially and was flat year over year. Global demand for CT tubes remains robust as OEMs continue to bring new CT models to market to support global demand, particularly in China. Demand was also strong in our other medical modalities, including fluoroscopy, oncology, radiography, dental, and mammography. We remain optimistic about future growth as we continue to work through our supply chain challenges so that we're able to maintain a consistent flow of materials. Revenues in our industrial segment increased 7% sequentially and increased 8% year over year. Strong demand for our non-destructive inspection products continued in the quarter, with strength across many different products in our portfolio. We continue to see improvement in demand for high energy sources for security screening. As we noted last quarter, an increase in tender activity earlier in the year signaled potential for future demand, Some of this activity resulted in sales during the quarter. We continue to see a healthy pipeline in security, especially in our cargo inspection business. During our first quarter earnings call, we highlighted market growth opportunities in our medical segment. Today, I'd like to provide a perspective on our industrial segment and share with you how we see this market segment and our business evolving over time. In fiscal 2021, our industrial segment revenues were $174 million, or 20% of ERIC sales. We estimate the current addressable market for our X-ray imaging components in the industrial segment to be about $1 billion, which we believe can grow at a 5% to 7% CAGR over time. While the industrial segment has returned to pre-pandemic levels, our revenue growth has been slower than expected due to a slower pace of recovery in the security segment. Earlier in the year, when we had seen increased tender-related activity, we had anticipated that our orders would pick up later in the year. As expected, orders for our linear accelerators, which are used in cargo inspection, increased in the third quarter. We continue to see significant potential for our industrial non-destructive inspection portfolio products, and believe that this segment can grow at mid to high single digits over the next several years. We expect five verticals within the industrial segment to be key to driving our future growth. These verticals are security, energy, food quality, electronics, and consumer safety. These are not new markets for Verix, but our approach to them will be different. Historically, our focus across all markets has been to sell X-ray components like tubes and detectors to our customers. However, as we introduce new technologies like photon counting detectors, image acquisition workflow software, and AI capabilities for automated detection, we intend to provide more integrated system solutions for these industrial verticals. This approach increases our total addressable market in the industrial segment by nearly $1 billion by fiscal 2027. Let me share some examples. In the energy vertical, specifically in the oil and gas sector, we are offering a full workflow solution for pipeline weld and corrosion inspection. This solution incorporates our hardware components, image acquisition workflow software, as well as automated detection of defects using AI and computer aided detection. Similarly, on the consumer side, we see a growing use of X-ray and E-beam to inspect, sterilize, or remediate consumer-facing products like medical supplies, packaged foods, grains, as well as fish, meat, and plant products. This is a growing market, and our high-power X-ray sources and photon-counting detectors can be used to inspect and irradiate food and other consumer-facing products. We are in the early stages of development and introduction of these solutions to the market. We will share more details as well as customer reactions and feedback when we begin to conduct prototype evaluations. In summary, in addition to our good results, I'm pleased to be able to say that our customers appreciate our efforts and remain confident in our ability to deliver on our backlog as they continue to place new orders. This was particularly apparent in China where our ability to successfully run operations despite the COVID lockdowns earned us recognition from one of our top customers in China. Further, in July, we attended European Congress of Radiology Trade Show, referred to as ECR. This is a large annual event that is attended by global manufacturers who market and sell imaging systems in European markets, as well as radiologists and other imaging professionals from all over Europe. The event was very well attended by manufacturers. We were happy to see that our recently launched dynamic detector product called Azure was prominently shown incorporated in a system by one of the leading manufacturers in Europe. We were also happy to see some of our new Lumen family of radiographic detectors also presented by some manufacturers at this show. To date, we have four OEM customers who are designing our Azure dynamic platform into their new systems and 10 others in active evaluation and planning mode. In addition, more than 15 OEMs are either already buying our Illumine family of radiographic detectors from us or plan to do so in 2023. Every customer that I met thanked and appreciated the way our team has been working very closely with them and delivering our products to them despite all the material shortages. With that, let me hand over the call to Sam.