Varex Imaging Corporation

Greetings and welcome to the VAERS fourth quarter fiscal year 2024 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Belfourier, Director of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Verix Imaging's earnings conference call for the fourth quarter of fiscal year 2024. 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 BARICS' website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the fourth quarter of fiscal year 2024. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the fourth quarter of fiscal year 2024 to the fourth 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 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 setting.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our fourth quarter earnings call. Fourth quarter revenues were at the high end of our guidance range, driven mainly by continued strength in our industrial segment. During the quarter, we experienced the continued effect of destocking actions by our customers in the medical segment outside of China. However, we believe customer inventory adjustment actions are beginning to stabilize and expect the effect of destocking to subside in the second quarter of fiscal 2025. Gross margin in the fourth quarter was at the low end of our guidance range as unfavorable sales makes in our industrial segment due to high proportion of equipment sales continued in the quarter. We expect a strong growth of equipment sales to drive higher margin services in the future. Revenue in our China business remains stable for the quarter, although that business overall is running at a lower levels than in fiscal 2023. We are optimistic that medical imaging demand will improve in China, and Verix is well positioned to benefit when growth resumes. While we have not yet seen a measurable uptick in our incoming order rate, we are encouraged by the potential of stimulus funds making their way into the healthcare system. Turning to fourth quarter results, revenue in the quarter decreased 10% year-over-year. Revenue in the medical segment decreased 12% year-over-year, while industrial segment revenue decreased 4% year-over-year. Non-GAAP gross margin in the fourth quarter was 33%. Adjusted EBITDA in the fourth quarter was 23 million, and non-GAAP EPS was 19 cents. We ended the fourth quarter and fiscal year with $213 million of cash, cash equivalents, and marketable securities on balance sheet, up $18 million compared to prior fiscal year end. Let me give you some insights into sales detail by modality in the quarter compared to a five-quarter average, which we refer to as sales trends. Sales in our medical segment were down in the quarter primarily due to continued inventory management by our customers. Global sales in CT and oncology modalities in the quarter were flat compared to trend, while sales in radiographic modality continued to be above trend. Sales in fluoroscopy, dental, and mammography modalities in the quarter were all below their respective sales trends. In our industrial segment, our customers continue to benefit from strong demand in security screening, driving sales of our cargo inspection products in the quarter. Other industrial end markets, primarily semiconductor, electronics, and battery inspection, continue to remain soft in the quarter. Switching gears to fiscal 2025, we're excited about several initiatives that will drive growth in future years. A significant portion of our business each year comes from repeat product purchases from existing customers. This is what we refer to as our core business. To grow the core, we need to continue to innovate and refresh our current product portfolio to get designed in into subsequent system models that our customers plan to release. To accomplish this, we work closely with our customers as they develop or update their imaging systems, primarily in areas of CT, dynamic detector applications, and in industrial imaging applications. In our existing CT tube business, we're investing in the premier tier to include capabilities to support high resolution, higher speed, and cardiovascular applications. We believe the premium tier is growing at a higher rate with higher margins compared to the rest of the CT market. Since CT tubes are the largest revenue contributing modality within our medical segment and require replacement at a higher frequency, Staying in step with our customers' R&D plans is important for profitable growth for us. We are very happy with the performance of our IGZO-based Azure detector platform, which we launched last year with great success. This platform enables high-quality imaging cost-effectively as compared to CMOS-based detectors. In fiscal 2025, we are going to continue to expand our portfolio of Azure dynamic detectors, to include additional products for premium applications such as surgery, oncology, and cardiology. We are continuing to migrate customers from legacy amorphous silicon products to the Azure platform and pursuing design wins in premium applications. In our industrial segment, radiographic inspection applications for castings, pipelines, and additive manufacturing continue to evolve from using film to digital detectors. These applications demand versatile detectors with high resolution that are bendable to address complex use cases. We believe we are well positioned to address both these needs, along with differentiated software and image processing to accelerate analog to digital conversion in the growing non-destructive inspection space. In addition, we're investing in digital detectors for automotive and aerospace verticals. where we see a growing need for large area imaging with high energy X-ray sources. Investment in platforms like CT, Azure, and bendable industrial detectors in growing application areas enable us to expand our leadership position with margin accretive revenue contribution. We expect fiscal 2025 to be a year where we take meaningful steps with a number of novel technologies. We have been laser focused on developing our photon counting technologies, which we believe can be a key enabler for fast, high resolution, and low radiation dose spectral imaging. We expect the adoption of photon counting technology, especially in next generation CTs, to be a new and significant revenue growth driver for Varix. Varix is a leading merchant manufacturer and supplier of photon counting technologies. We are actively engaged with large imaging OEMs to integrate our photon counting detector technology in their next generation CT system designs. We are excited about the prospects of working with these OEMs as well as other medical imaging OEMs to drive further adoption of photon counting technologies. In our industrial segment, where we currently generate the majority of photon counting revenues, we are expanding applications and our customer base. Specifically, we're seeing continued interest and adoption by new OEMs in both food and recycling inspection applications. We're excited about these verticals, as well as growing opportunities in battery, oil and gas, security, and aerospace inspection. We believe that the industry is at an inflection point in both our medical and industrial segments with photon counting, and we expect to see increased adoption in fiscal 2025. Given the potential size of photon counting market and our position as a leading merchant supplier, we anticipate an increase in revenue contribution from products using this technology in the near future. As we highlighted earlier this year, we target photon counting technologies to contribute approximately $150 million in annual revenue by fiscal 2029. In our industrial segment, we are excited to bring a portfolio of cargo inspection systems that include a portal, a gantry, a mobile scanner, and a car scanner to the security inspection market. In fiscal 25, we plan to launch these solutions utilizing our years of experience integrating our high energy linear accelerators into third party scanning systems. We know these applications very well as we have provided the core imaging components such as linear accelerators, detectors, software, and services for these types of systems for many years, and we believe we can provide differentiated value directly to end customers. I'm happy to say that we have successfully completed a few cargo inspection systems installations and have additional installations underway. We are working actively to establish distribution channels and participate in tenders worldwide. This end market is tender driven and can be very lumpy, but we see a long-term potential for revenue and margin contribution from equipment and services with these solutions. Our India expansion plans continue to make progress, and we remain on track to begin production of components in India during the third quarter of fiscal 2025. Our initial objective for India is to establish low-cost manufacturing for our radiographic components in a very competitive market. We have outstanding product knowledge, and with an improved cost structure, we're confident that we can grow our sales of radiographic components. In the past, we have talked about our investments in nanotube or cold cathode technology. We recently completed a full technology transfer with Micro X. We're pleased to announce that we will begin shipping evaluation kits consisting of nanotube-based X-ray tubes and tube control electronics to several customers. In addition, our R&D teams are engaged with OEM customers who are in early stages of commercializing this novel technology, and we look forward to working with them to bring innovative systems to market. As we look forward to fiscal 2025, we believe we are taking the necessary steps to expand our leadership and drive future growth. As noted earlier, in terms of market dynamics, we expect the impact of destocking by medical OEMs to subside in the second quarter of fiscal 2025. In China, while we have not seen a measurable uptick in our incoming order rate, we are encouraged by the potential of stimulus funds making their way into the healthcare system. Before handing the call to Sam, I'd like to briefly touch on the effect of potential changes to tariffs on our business. The effect is currently unknown, but we will continue to monitor developments in this area and adjust our operations where possible. Meanwhile, we continue to advance our local for local manufacturing as well as supplier diversification strategies. Our initiative to manufacture in India for global consumption may also help mitigate some of the impact of potential changes in tariff policies. With that, let me hand over the call to Sam.