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spk08: Greetings. Welcome to the Verix third quarter full year 2023 earnings call. At this time, all participants are on 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'll now turn the conference over to your host, Christopher Belfour. You may begin.
spk03: Good afternoon and welcome to Verix Imaging Corporation's earnings conference call for the third quarter of fiscal year 2023. 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. 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 2023. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the third quarter of fiscal year 2023 to the second quarter of fiscal year 2023. 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 provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measures in our earnings press release, which is posted on our website. I will now turn the call over to Sonny.
spk06: Thank you, Chris, and good afternoon, everyone. I'm pleased to report another solid quarter for Verix. Revenue of $232 million in the third quarter of fiscal 2023 is a new quarterly record for us. Non-GAAP gross margin of 34% exceeded our expectations and non-GAAP earnings per share of 37 cents was at the high end of our guidance. These results were helped by continued strength in our industrial business. In addition, we increased cash by $30 million in the quarter. primarily driven by diligent inventory management and increased profitability. Revenue in the third quarter was up 2% sequentially and 8% year-over-year. Revenue in the medical segment increased 1% sequentially and 5% year-over-year, while industrial revenue increased 5% sequentially and 20% year-over-year. Non-GAAP gross margin in the third quarter was 34%, which was better than our expectations, and up 100 basis points compared to the second quarter. This was primarily due to the higher portion of industrial sales. Adjusted EBITDA in the third quarter was $38 million, and non-GAAP EPS was 37 cents. We ended the third quarter with $152 million of cash, cash equivalents, and marketable securities on the balance sheet. up $30 million from $122 million in the prior quarter. This was primarily due to higher profitability and $13 million reduction in inventory in the quarter. Let me give you some insights into sales detail by modality in the quarter compared to a five-quarter average, which we will refer to as sales trend. In our medical segment, global sales of CT tubes was solid in the quarter and remains above its sales trend. Our fluoroscopy and oncology modalities improved in the quarter, but were flat compared to their respective sales trends. Mammography was solid in the quarter and above its sales trend. Dental, which can be lumpy from quarter to quarter, remained down in the third quarter, but is trending in a more positive direction, and radiographic continues to grow above its sales trend. Global sales of our industrial products were robust for the second straight quarter, and order intake remained solid. The continued strength was primarily in our non-destructive inspection business across various applications, including cargo screening and oil and gas. We also saw increased adoption of our photon counting technology with growth in food, battery, and electronics inspection in the quarter. Taking a step back from the quarter, I'd like to provide a brief update on some of our products we introduced over the last year. Our dynamic detector platform Azure continues to make solid progress with our customers who are integrating these detectors into various systems, including those for cardiovascular and surgery applications. The Azure platform is a cost effective, high performance dynamic detector technology aimed at enabling us to secure design wins for dynamic applications. These detectors are targeted at expanding our applications footprint in our new and existing customers. It offers high resolution and high performance at lower x-ray dose than its amorphous silicon equivalent and is a cost-effective alternative to CMOS detectors, which become expensive at larger sizes. We expect to see continued adoption of Azure and expect that many new system launches by our customers in the coming years will design in our Azure detectors. Since its launch in 2022, we have seen strong interest in this platform, and we are happy with how this technology is performing in the field. At the same time, we are seeing continued uptake of our lumen detectors. We now have a full portfolio of lumen detectors used across various modalities, including dental and fluoroscopy. We recently also introduced lumen detector models made in our factory in China for sales in global markets where there are no political or economic barriers to sales of products made in China. We expect to see shipments of lumen detectors made in our factory in China starting in October of this year. The lumen platform offers a US-designed detector for radiographic applications at a globally competitive price and is targeted at expanding our coverage of these applications. Our industrial business has seen solid growth this year, partly due to strength in our non-destructive inspection applications, which utilize our linear accelerator products, also referred to as LINACs. These are high-power X-ray sources that are used in inspection of large objects such as cargo containers, automotive parts, jet engines, and rocket motors. We're excited to say that this technology was used in the manufacturing of India's Chandrayaan-3 rocket, which is carrying a rover to the moon. BAREC's LINACs were used to inspect the integrity of the rocket motors, propellant tanks, and detecting voids, cracks, and other abnormalities. Varick is the world leader in high-energy linear accelerators for industrial applications. We work with various rocket manufacturers in the U.S., Europe, and Japan, and now we're proud to support India's growing space program. In summary, we're very happy with our performance in the third quarter, and now I will turn over the call to Sam to go over details of our financial results.
spk07: Thanks, Sunny, and hello, everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparisons of our results for the third quarter of fiscal 2023 with those of our second quarter of fiscal 2023. I'm pleased to report another strong quarter. We exceeded the midpoint of guidance for revenue. Gross margin was above the guided range, and non-GAAP EPS was towards the high end of guidance. The primary driver of the strong performance was the continued execution in our industrial segment. As a result, we reported sales of $232 million and non-GAAP gross margin of 34%. Non-GAAP EPS was 37 cents. Further, we generated $38 million of operating cash flow in the quarter, our second highest cash generating quarter as a public company. Third quarter revenues increased 2% compared to the second quarter of fiscal 2023. Revenues increased 8% compared to third quarter of fiscal 2022. Medical revenues were $175 million and industrial revenues were $57 million. Due to the ongoing strength of the industrial segment, industrial revenues climbed to 24% of total revenues for the quarter. Medical revenues were 76%. Looking at revenue by region, America's increased 8% sequentially, while EMEA increased 10% and APAC decreased 10%. China was 18% of the overall revenue for the quarter. Let me now cover our results on a GAAP basis. Third quarter gross margin was 33%, 100 basis points higher sequentially. Operating expenses were $52 million, down $5 million compared to the second quarter of fiscal 2023, and operating income was $24 million, up $8 million. Net earnings was $9 million, and GAAP EPS was 21 cents based on fully diluted 50 million shares. Please note that GAAP and non-GAAP EPS for the third quarter reflect the adoption of ASU 2020-06. This involves an add back of $1.4 million of after-tax interest expense for us to our net earnings and adds approximately 10 million shares to the diluted share count. Moving on to the non-GAAP results for the quarter. Gross margin of 34% was up 100 basis points sequentially, driven primarily by higher pricing, higher proportion of sales in higher margin industrial segment, and a favorable experience in freight expenses. R&D spending in the third quarter was $20 million, down $3 million compared to the second quarter. This was due primarily to $2 million of payments related to technology milestones made to Micro X in the second quarter of fiscal 2023. Overall, R&D was 9% of revenues within our targeted 8% to 10% range. SG&A was approximately $29 million flat compared to the second quarter. SG&A was 12% of revenues. Operating expenses were $49 million, or 21% of revenue. Overall, our operating expenses were slightly above our expectations. Operating income was $29 million, up $6 million sequentially. Operating margin was 13% of revenue compared to 10% in the second quarter of fiscal 2023. Tax expense in the third quarter was $5 million or 21% of pre-tax income compared to $4 million or 28% in the second quarter of fiscal 2023. Net earnings were $17 million or 37 cents per diluted share up 11 cents sequentially. Non-GAAP EPS of 37 cents is calculated by adding after-tax interest expense of $1.4 million to net earnings of $17 million and the result is then divided by 50 million shares. Now turning to the balance sheet. Accounts receivable increased by $3 million from the prior quarter and DSO held steady at 64 days. Inventory decreased $13 million in the third quarter and days of inventory decreased eight days to 174 days. We are pleased with the progress in reducing inventory and expect this to continue in the fourth quarter of fiscal 23. Accounts payable increased by $1 million, and days payable stood at 44 days. Now moving to debt and cash flow information. Net cash flow from operations was $38 million in the third quarter due primarily to profitability and $13 million reduction in inventory. We ended the quarter with cash, cash equivalents and marketable securities of $152 million, an increase of $30 million from the second quarter of fiscal 23. Gross debt outstanding at the end of the quarter was $449 million, and debt net of $152 million of cash and marketable securities was $297 million. Adjusted EBITDA for the quarter was $38 million, or 16% of sales. Our net debt leverage ratio was 2.3 times trailing 12 months of adjusted EBITDA at the quarter end. Now moving on to guidance. At the beginning of the second half of fiscal 23, we provided guidance for sales growth for the year of 3% to 5%, and we expect to be in that range. Here is the guidance for the fourth quarter. Revenues are expected between $220 and $240 million. and non-GAAP earnings per diluted share is expected between 20 cents and 40 cents. Our expectations are based on non-GAAP gross margin in a range of 33 to 34 percent, non-GAAP operating expenses in a range of 49 to 50 million dollars, tax rate of about 25 percent for the fourth quarter, non-GAAP diluted share count of about 50 million shares per ASU 2020-06. With that, we'll now open the call for your questions.
spk08: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Suraj Khalil with Oppenheimer and Company. Please proceed with your question.
spk02: Hi, Sunny, Sam. Can you hear me all right? Yes, we can. Suraj, how are you? Doing well. Gentlemen, congrats on a really nice quarter. So, Sunny or Sam, either one, Specifically on medical, Sunny, one of the things that I know you have talked in the past numerous times, and I know, you know, for example, GE is also talking about photon counting detectors as a key thing, you know, being viewed. Sunny, if you could, I'd love to understand how should we adjudicate photon counting adoption and competitive dynamics, and maybe if you could give us some aerial snapshot of where worldwide photon counting sales are, where it fits in that pie.
spk06: Sure, Suraj. So, photon counting is an emerging technology and it's in the process of gaining reputation in the market and it's only the last, I'd say, 18 months or so that in the medical field it has been publicized quite a bit for CT type of applications. So from our perspective, we're excited about it because we went into photon counting in anticipation of solid capabilities that would bring value in medical CT, and now we're seeing the industry also starting to move in that direction. We are present with photon counting in two markets, industrial and medical. The adoption cycle in industrial has been faster than in medical so far. And so part of our strength in industrial this quarter is also driven by use of photon counting detectors in a few applications like food processing, battery inspection, et cetera. So we're excited to see photon counting get traction. It's getting traction in industrial faster. We have some OEMs who are engaged in the use of photon counting in medical OEM, medical applications. And more recently, we've started gaining fairly good interest from the market with the use of CT. So that said, this is a novel platform. And we've said that our expected contribution to growth in the medical side is still several years away, while the market absorbs these technologies into their newer designs. So that's where we stand. We're excited about the technology. It's moving forward. And we're glad to see some of the major OEMs also lining up behind it, because that's what then makes the adoption increase.
spk07: And then, Suraj, I'll add that as of now, our photon counting and charge integration combined, that business is right now generating about $20 million of sales annualized, and we are seeing growth there. So just wanted to give you that perspective of where we are with this technology as of now, revenue-wise.
spk02: Perfect. Yeah, that is really helpful. Sunny, one more question for you and one for Sam. Sunny, if you could status on cold cathode and also MIC China 2025, what are the dynamics there currently to the extent that you can share? And Sam, you know, any updates and forgive me if I missed this, we have multiple calls going on. Just in terms of inventory management and your gross margin, your pace of growth of gap gross margins. How should we think about it as we exit this year and going into, let's say, first half of 24? Gentlemen, thank you for taking my questions and congrats again. Okay.
spk06: So, Suraj, with respect to cold cathodes, just like I said, with photon counting, new technology takes time to adopt. An adoption curve there is farther along than with cold cathode nanotube technologies. Nanotubes are much newer and the industry is trying to figure out what kinds of applications would be applied to it. So again, from our perspective, from a revenue contribution perspective, that's further out than photon counting. Where we are with that technology is we're continuing to make progress on the product development and developing, making tubes with that technology. Our technology transfer from Micro X has gone very well. We are continuing to with that work and we're continuing to evolve that technology. We have continued to make prototypes with our joint venture partner and now we're working through some commercial aspects of our relationship. In short, from our perspective, we're making good progress with the technology. We're happy with the technology and we're seeing now customers starting to get engaged to get their head around how they might think about applications for this technology.
spk07: And then coming back to your question, Suraj, on inventory and gross margin. So in terms of inventories, as you know, we've been trying to bring inventories down, and we are very pleased with the progress that we made in this last quarter. We brought inventories down by $13 million, and our focus on that continues. We are expecting inventories to come down further. We are working in that direction. So in the next three months and six months, we should be bringing inventory further down. We are not guiding the amount that we are targeting to bring down, but I think we have some room to bring it down further. And then in terms of gross margin, we've made good progress in this last quarter. I would say that gross margin has benefited through various initiatives of ours. Manufacturing efficiencies have come back in. The freight environment has generally been favorable in the last quarter. And as I talked about, price-cost drag has been minimized. But we are still suffering through some continued price-cost drag onto the P&L, and we have some high-cost components in our inventory, and we are expecting them to fully worked their way through the system by December, January timeframe. So at that point, I'm thinking of a further pickup of say around 100 basis points in gross margin further. So that is how gross margin picture is shaping up. And we remain committed to our target of getting to a non-GAAP gross margin somewhere between 34 and 35%.
spk06: Suraj, you also asked about China 2025. I didn't understand the first word that you said with it, MIC. I wasn't sure what you meant by that. But as far as China 2025 is concerned, we began our journey to address the needs, requirements for China 2025 a few years ago. And we're taking two different, oh I see, made in China. In terms of our approach to it, we started with our facility in Wuxi to make products local for local in China, and that has been, we started with tubes, we've expanded to detectors, and now we're making a very large number of tubes and detectors in China. We are, so the couple of things are happening. Our strategy for China 2025 is to get our products registered with, and such that we can get the Made in China labeling, which is where we are currently, and we're continuing to expand the portfolio of products that, two products that we sell in China to be made that way and have carried that kind of a label. In addition, we've been expanding our local commercial relationships in China so that we contract locally with our Wuxi office, Wuxi facility, to handle both shipment of new products, but then also warranty, service, support, and all the things that you would expect out of us supplier that's based in China for the Chinese manufacturers. And so our expectation is by 2025, a vast majority of the products that we sell in China can be supplied from China. That's the approach we're taking. We have validated this approach with our global OEMs and with the local OEMs to see their level of comfort in what we're doing. And we seem to be in alignment with what they're expecting from us for China 2025.
spk02: Thank you.
spk08: Our next question comes from the line of Larry Solo with CGS. Please proceed with your question.
spk05: Great. Thanks. A couple of follow-ups to Siraj's questions and a couple of new ones as well. So you mentioned, or I think Sam might have mentioned, on the full-time counting, it's about 20 million in sales today. So that's about 2% of sales. Just trying to get a little, my hands is around, like, you have like a figure of sort of new products or products introduced in the last three years and how much they represent of your total sales today. I imagine it's still under 5%. Is that fair to say? Yeah.
spk07: Larry, this is Sam. In terms of the revenue related to new products and new products received over the last three years from that perspective.
spk05: Or whatever stat you might have. Yeah, and I don't know how you guys look at that, but I'm just trying to get a sense of products introduced over some newer period, whether that's one year, three years, five years, and sort of how much revenue that's contributing today and maybe you know, what that could be in five years.
spk07: Yeah. So, Larry, I do not have that number off the top of my head here right now. Right. But I do want to qualitatively say that in our business, once we release the product, it goes through a fairly long adoption cycle in the sense the product has been released and the customers are trying to make it into their product, and then they release their product, And when that customer's product picks up volume, that is when we see volume. So it is quite normal and natural in our business that for quite some time and that quite some time could easily be two years, one to two years easily where the product has been released and it is not generating a significantly high amount of revenues. So from that perspective, for the first three years of product release, we may not be seeing a whole lot of revenues, and so we do not track it that way, but we can figure that out for some other conversation in future. I think in our business, it'll make more sense in terms of thinking more from a five-year horizon perspective. We can talk about it at some other later call. Larry, I don't have that right now.
spk05: Larry, I can give... Yeah.
spk06: Let me give you one frame of reference.
spk05: Yeah.
spk06: Yeah, go ahead, please. Sorry. One frame of reference. You may recall when we spun off, at that time, we had a lot of discussions about China and CT tubes in China and the contribution of revenues from those. It's been now six years, and at that time, those tubes were designed, and we recall we said our OEMs were implementing them, designing them in We are now five, six years into that journey, and now you see what our China revenues are. That's sort of a frame of reference. What happens when we launch products? How long does it take? And once we do, what kind of volume sort of to expect in an active market?
spk05: Yeah, no, I appreciate that call. Yeah, no, I appreciate that. While I got you on that, so the 18% that you referenced or Sam referenced as coming from China, Is the vast majority of that today in CT tubes?
spk06: It's in tubes, yes. And the majority of tubes is CT tubes for us there. Right. Okay. Right.
spk05: Okay. Okay. Dan, did I cut you off there? Maybe you were going to say something else.
spk06: No, that's it.
spk05: Okay. And then just to follow up on the margin question, I guess early in the year, I think you guys sort of cited price-to-cost lag. inflation or, I guess, price to cost lag, maybe tied with inflation because you were trying to catch up with price raising, but also some supply chain issues. I think you sort of said you were, you know, you thought there were like a 400 to 500 basis point tailwind on EBIT or just EBIT margin. We, you know, how far along are we? You know, you kind of mentioned you have like another 100 bps on gross margins. And if I just look at what you did this quarter versus what you did in Q1, you're sort of 400 bits higher. So does that kind of capture that 400 to 500 bits that you spoke about in Q1? Can we get more as we look out? How should we do that?
spk07: Yes, Larry. So, you know, six, nine months ago when we talked about it, there were a number of things that were headwinds. And slowly we have been working on it, including – freight and manufacturing efficiencies and supply chain driven issues, et cetera, a lot of them are now back to the pre-crisis or pre-COVID crisis type of levels. So I would say at this point, there is still 100 to 200 basis points of improvement possible from where we are here. But I would say more closer to 100, 150 basis points. You might see some noise here and there from quarter to quarter. And we are working through it. But a lot of these other factors have now actually been recovered or we have already, we are behind it. And that is the cause of the margin improvement.
spk05: Yeah, fair enough. So you sort of said that 100 bits on gross margin. So it feels like once you hopefully get that sometime, maybe by the end of the calendar year, and maybe there's a little bit more on the operating end, but Going forward beyond that, it would just have to be new products driving higher prices or operating leverage, I guess, right?
spk07: Yeah, there will be three things, Larry. One is what you said exactly, sales volume. Second will be the – and that will drive the operating leverage. Right. And then the new products will be a major factor in that. And the third element there is the segment mix as industrial becomes a higher portion of – of the business, then it has a positive gross margin effect on the overall margin.
spk05: Got it. Okay. Let me just squeeze in one more question just on the guidance. I get the gross margin maybe down a little bit because you had a nice quarter mix this quarter, and usually Q4 medical is usually stronger, seasonally stronger. That's a little bit lower margin. So I'm just trying to figure out how come you know, as we look out the Q4, I thought, you know, seasonally and with medical being stronger and being majority of revenue, usually you have a better Q4 than Q3. Is there any reason why we're kind of at the same guidance range or is it, you know, anything, you know, I'm missing there. Thanks.
spk07: Yeah, sure. So Larry, I'll let me take that question for you. So if you look at our second half of FY23 versus the first half of FY23, we are up around 7%. If you look at last year, second half to first half, we were about 8%. So I would say if you look at it a little bit broader than the quarter, we are pretty much showing the same pattern. But within the quarter, what can end up happening is two, three, $4 million comes into this quarter versus the next quarter. And so that can give that optics of quarter to quarter. But if you look at it from a half versus half, we are pretty much doing what we said And then also for the full year, we kind of guided 3% to 5%. And at the midpoint here, we are looking at 4.3% or something for the full year growth. So essentially, from our perspective, we are achieving what we set out to do for FY23. But then a couple million here and there between the quarters can have that optics effect.
spk05: Gotcha. Fair enough. I appreciate all the call, I think. Thank you.
spk07: Thank you, Larry.
spk08: Our next question comes from the line of Young Lee with Jefferies. Please proceed with your question.
spk00: All right, great. Thanks so much for taking our questions. Maybe to start on the industrials performance, you know, good to see the continued growth and margin contribution there. I guess I'm wondering if you can maybe talk a little bit about the sustainability of the growth trend. you know, your visibility into the ordering patterns there. And, you know, is this sort of, you know, are we still in the early innings of a multi-year growth cycle for industrials?
spk06: So, industrial has been strong for us and it has been, I think, post-COVID, it has come back and been consistently strong and it has been growing. So, we're very pleased with it. We're also at a point where There are certain segments of the market that are adopting imaging fairly rapidly, and so we continue to benefit from that effect. So, look, we're fairly optimistic about continued adoption of technology in industrial, and it seems to be there are parts of that industry that are tender-driven that can be lumpy, but non-destructive inspection in industrial general industrial areas have been fairly steady and strong for us. So I'm optimistic about the long-term prognosis because it's largely a greenfield market. It's also, you know, it's growing faster than medical as well, as we've discussed in the past.
spk00: Okay, very helpful. I guess my follow-up, just on China, 18% of REVs That implies, I guess, low single to mid single digit growth year over year. You know, that's below the historical growth trend. Would be great if you can provide some more color on the growth that you saw this quarter. You know, how did it perform relative to your expectations and, you know, what's the outlook for growth for China going forward?
spk07: Yeah, sure. So China performed as per our expectations. There was neither a positive versus expectations or a negative in this last quarter. And then coming back to your question of year-over-year growth, I would say that the numbers for China are now becoming reasonably large for us. So the law of large numbers is coming in, as well as You know, it's difficult for a region to continue to grow 15%, 20% ongoing basis. But even smaller percentages now are reasonably large size in terms of the dollar amount. So you are seeing year over year growth kind of moderate, but we are seeing strength in terms of percentages. That strength is moderating, which is natural. And we have talked about this in the past, that over time, China growth will fall back in line with the rest of the world, but there is still some more room to go there in terms of China growing faster than the rest of the world. So China is, as of now, China is behaving and sales are happening like how we would expect it to do.
spk00: All right. Thank you very much.
spk08: Our next question comes from the line of James Sidoti with Sidoti and Company. Please proceed with your question.
spk04: Hi, good afternoon and thanks for taking the questions. Can you talk a little bit about inventory at your medical OEMs? I know at the beginning of the year you were worried that because they were having supply chain issues that they maybe had an oversupply of your components and might be cutting back. six or eight months down the road, have those supply chain issues subsided? And where is inventory of your products at the OEMs?
spk06: So, hi, Jim. This is Sonny. I'll generalize. Yes, a couple of quarters ago, there were some acute problems with some of our OEMs with getting their factories to flow because of supply chain issues. and they had huge backlogs, and there was some amount of our products that were in inventory. And you may recall that's why our first quarter faced a lot of stress as a result of that. But since then, the flow seems to have improved through the production environments of our customers, and they're not declaring victory yet. There are still supply chain issues, spotty, and we are seeing those as well. While broad-based supply chain issues have eased, there's still spots where we get fewer vendors, but there are situations where things get caught up. So it's not fully out of the woods yet, but I would say that the overall inventory levels of our product, our customers are lower than where they were in, I'd say, a couple of quarters ago.
spk04: Okay, and then one of the other concerns you had two quarters ago was... Hospital capital spending, you thought it might slow down because of the economic uncertainty. And, you know, again, you know, six months down the road, it seems like the recession may not be as bad as we thought initially. Have you seen pressures there subsided as well? Have you seen hospitals more willing to step up their capital spending?
spk06: You know, what we are seeing is that the labor market Related costs are easing up, and increasingly we're hearing hospitals doing better with their use of temporary labor. So we see that as a positive. That improves profitability. We've also seen some amount of continued buying by hospitals. So I'd say it's more positive than it was before. But beyond that, it's hard for us to speculate what that environment looks like, particularly on a generalized global basis. These things vary by geography.
spk04: Okay. All right. And then I'll just sneak in one more on a balance sheet. Prepared expense and other current assets, that was up about $15 million, $16 million in the quarter. Is that where some of the cash is?
spk07: Yes. Jim, I just want to make sure I hear it correctly. Did you say prepaid and other current assets?
spk04: Right.
spk07: Yes. Some of the cash, because it is beyond 90 days, is considered other current assets, and that's where it is, yes.
spk04: Okay. All right. Is there any other reason why that was up so much in the quarter, or is that just basically the cash equivalents?
spk07: That is basically the cash equivalents. Now, it might be a few hundred K here and there, a noise level change, but most of it is the cash equivalents.
spk04: Right. Okay. All right. That's what I thought. I just wanted to make sure. All right. Thank you. Thank you.
spk08: And our next question comes from the line of Anthony Patron with Mizuho Securities. Please proceed with your question.
spk01: Thanks for interesting to be in here. We're on just manufacturing mix. Just kind of want to get an update on what amount is actually being produced at Awushi versus Salt Lake and how that influences margin. overall gross margins, and as we look ahead over the next couple of years, where can that next trend, and I'll have one follow-up question.
spk07: So, Anthony, this is Sam. Good to hear your voice. So, in terms of WUSHI production, WUSHI, in the overall scheme of things, even as of now, is a smaller site for us. I would say about closer to 70% of value or revenue volume is done through Salt Lake City and the remaining is done through Germany, Philippines, Netherlands, and WUSHI. So that gives you a little bit of a perspective. I would say it is still on an annualized basis less than 10% of our overall revenue volume going through WUSHI. So that gives you a little bit of a perspective there. And then in terms of overall gross margin, it just It just depends from what type of modality that we are shipping from there and it can change. So it is not something which is due to labor difference or anything else. It gets impacted largely depending upon which customer, what modality that we are shipping from WUSHI versus Salt Lake City. So it's a little bit of a hard question to answer. It can vary from quarter to quarter.
spk01: And maybe just an update on the mix between tubes and flat panel detectors, other components. Last year, extending maybe even 18 months ago, there was pressure in pricing on flat panel detectors, but CT tubes in particular were holding price quite well. So anything of note on the pricing side between tubes and flat panel detectors as we look into the back half of the year, maybe even into 2024? Thanks again for taking the questions.
spk07: Yeah, so in general, a few years ago, I would say our business used to be 45% sources, 45% panels and detectors, and 10% would be connect and control or CNC and software. As of now, I would say we are around 10% CNC and software, but that the 90% split, which used to be equal between sources across industrial and medical segments, used to be 45 and 45%, but now that has moved 50% towards tubes and 40% towards panels, driven by the factor that tubes, the sources side, the medical sources side has grown a bit faster than the panel side. And so that is the overall distribution between panels and x-ray sources and the other components of the business. What was the second question, Anthony? Right. In terms of pricing, as you know, 18 months ago, 18 or so months ago, we had a broad initiative across the entire customer base for price increases. I would say that we've been successful at that. We've been getting prices. And then it has been somewhat in phases for some time. Semiconductors, which largely go into panels, those prices spiked up, and that enabled us to, that helped us to increase prices on the panel side a bit more. But then on the tube side, since it's more of a mechanical and a hardware type of a product, those metals and all those prices, those costs go up. And based on that, we were able to increase prices on sources. I would say as of now, as I look back at the last 12, 18 months of experience, our price increases on the sources side has been a bit higher than on the panel side.
spk01: Thank you very much.
spk08: And we have reached the end of the question and answer session, and I will turn the call back over to Chris Bellheri for closing remarks.
spk03: Thank you. Thank you for your questions. I'll now hand the call back to Sandy for some final comments.
spk06: Thank you. Thank you, Chris. In closing, we're very pleased with the solid third quarter results and on track to achieve our target growth rate for the year. And as always, I'm very proud of our global team and employees who make a difference on a daily basis. And thank you all for taking the time to join us today and for your continued interest in Verix.
spk03: Thank you, Sonny. And thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference call will be available through August 15th and can be accessed on our website, veriximaging.com forward slash investor relations. Thank you and goodbye.
spk08: This concludes today's conference and you may disconnect your lines at this time. Thank you for your
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