Varex Imaging Corporation

Greetings and welcome to the VARIC's first quarter fiscal 2025 earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Chris Belfiore, Director of Investor Relations. Please go ahead, Chris.

Good afternoon and welcome to Barrick's Imaging Corporation's earnings conference call for the first quarter of fiscal year 2025. 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 VARIC's website at varicsimaging.com. The webcast and supplemental slide presentation will be archived on VARIC's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year over year from the first quarter of fiscal year 2025 to the first quarter of fiscal year 2024. Finally, all references to the year are to the fiscal year and not the 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 information, 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 suitable 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 Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our first quarter earnings call. Demand in the first quarter was solid. However, unscheduled absences in our US facilities during the holidays prevented us from fulfilling all the demand for the quarter. Revenue in both the medical and industrial segments grew year over year. During the quarter, we started to see customer orders begin to improve, And in China, we realized an improvement in sales both year over year and sequentially. Gross margin of 35% in the quarter was strong and higher than anticipated. This was primarily the result of favorable product sales mix and productivity gains in both segments. Gross margin also benefited by approximately 130 basis points from refunds of German customs duties and taxes previously paid. Cash generation was also solid, with cash from operations of $10 million in the quarter. This was driven by very good working capital management. Turning to the first quarter results, which included 14 weeks. Revenue was up 5% year over year. Revenue in the medical segment increased 3%, while the industrial segment revenue increased 10%. Non-GAAP gross margin was 35%, up from 31% in the same quarter last year. Adjusted EBITDA and non-GAAP earnings per share in the first quarter were $24 million and 7 cents compared to $19 million and 6 cents last year, respectively. We ended the first quarter with $219 million worth of cash, cash equivalents, and marketable securities on the balance sheet, up $6 million compared to fiscal 2024 year end, and up $24 million year-over-year. In addition, we also have $124 million of restricted cash raised from our senior secured debt offering in December. Now 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 the sales trend. Sales in our medical segment were up in the quarter, driven primarily by solid global sales of CT tubes, which were above their sales trend. Fluoroscopy and mammography modalities were stable in the quarter compared to sales trend. Radiography, oncology, and dental modalities were all below their respective sales trends. In our industrial segment, continued strength in global security screening drove sales of cargo inspection products. We also saw an increase in our service revenues in this vertical. We experienced a strong start for the year in our industrial X-Ray 2 product line, driven by increased demand for checked baggage inspection and cargo screening at airports, as well as non-destructive inspection in verticals such as aerospace and automotive. During the quarter, we also saw stabilization in the semiconductor, electronics, and battery inspection verticals. but they have not yet returned to the demand levels seen in previous years. Last quarter we announced that we had expanded our offerings in cargo and security inspection to include comprehensive system and service solutions in high-energy cargo inspection. Our state-of-the-art systems are designed to enhance security, improve trade compliance, and combat smuggling. Our portfolio of currently available products includes a stationary portal which enables the seamless inspection of large cargo-carrying vehicles and containers as they drive through it. With a throughput of over 100 vehicles per hour, it can serve as an essential tool for customs and border security agencies. We also offer a similar application called a gantry, which is a rail-mounted portal that can move back and forth to image and inspect stationary vehicles and palletized cargo. Our mobile inspection system consists of a truck-mounted collapsible portal, which is a flexible on-demand cargo and vehicle scanning system that can be set up at various locations as needed. Designed for rapid deployment, it can be operational in 15 to 20 minutes of arrival, making it ideal for events and temporary security checkpoints. And lastly, our current offerings also include a compact vehicle scanning system, providing efficient inspection of passenger vehicles and their contents at designated checkpoints. Each of these systems are built on a foundation of our proprietary imaging components, such as high-energy X-ray sources, our detectors, advanced imaging software, and control systems. With over two decades of expertise and an installed base of more than 1,500 linear accelerators worldwide, we expect to deliver industry-leading security inspection solutions to our customers. Last quarter, we mentioned that we had successfully completed installation and received customer acceptance of several cargo inspection systems with additional deployments underway. Earlier this week, we were happy to announce that we have received additional orders from certain industrial customers to provide cargo inspection systems valued at approximately $14 million. These orders will include a combination of portals and mobile systems. The systems are expected to be installed over the next 12 months and will be used to secure ports and borders in different parts of the world. As we highlighted last quarter, we view cargo and security scanning systems as a potentially significant long-term growth opportunity for Varix. We estimate that the annual serviceable opportunity is over a billion dollars and expected to grow at approximately 7% CAGR over the next five years. Demand for security screening is being driven by continued global security threats and the need to ensure correct declaration of goods transported across international ports and borders. With decades of experience supplying and servicing key system components for OEMs in this sector, we have built a strong reputation for quality and service excellence. By leveraging our R&D expertise, vertically integrated manufacturing capabilities, and imaging technology leadership, We believe we can provide unique value directly to security and inspection end users worldwide. We're pleased to start off the fiscal year on solid footing and with the positive demand trends that we're seeing across our businesses. We're encouraged by what we're seeing in our China business and continue to remain optimistic about the long-term growth of imaging in China. In geographies outside China, demand trends are improving, and we remain on track to begin production of radiographic components in India during this fiscal year. Before I hand the call to Sam, let me comment on the tariff announcements between the US, China, Canada, and Mexico. This is a rapidly changing situation which we are monitoring very carefully. At this time, based on our current knowledge, we do not expect any significant direct impact to our business. However, additional tariffs or retaliatory actions or changes to currently announced tariffs could change the anticipated impact to our business. With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Let me start off by providing a breakdown of our revenues for both the medical and industrial segments. We thought that it would be helpful to provide this information on an annual basis. In our medical segment, we participate in nearly all X-ray imaging modalities. Total medical sales in fiscal 2024 were $582 million, with CT, the largest modality, representing nearly 40% of total medical sales. Of note, our CT sales are predominantly X-ray tubes, as we currently do not sell detectors in this modality. From a geographic standpoint, the medical segment is relatively evenly split across the three regions, which reflects our balanced exposure with top imaging OEMs across the globe. In fiscal 2024, our industrial segment revenue grew to $228 million. Here, we sell into a highly fragmented customer base with our security inspection vertical being the largest at approximately 40% of total industrial sales. As a reminder, the security vertical can be volatile from year to year, and going forward, our newly launched security systems business will be included in this vertical. The security vertical drives a higher proportion of sales to EMEA given the location of our current customers and equipment. Now turning to results for the quarter. Our revenues in the first quarter were $200 million below the midpoint of our guidance. Non-GAAP gross margin was 35% above our expectation and non-GAAP EPS was 7 cents above the guidance midpoint. Comparing the first quarter to the same period in fiscal 2024, revenues increased 5%. This increase was driven by a 3% increase in our medical segment and a 10% increase in our industrial segment. Medical revenues were $145 million and industrial revenues were $55 million. Medical revenues constituted 72% of total and industrial revenues were 28% of our total revenues for the quarter. Analyzing revenues by region, America saw an increase of 3% compared to first quarter of fiscal 24. MER revenues decreased 9% while APAC increased 22% due to increased sales to China and solid CT sales into other regions within APAC. During the quarter, China sales were 18% of total sales. China sales increased 7% year-over-year and 12% compared to the prior quarter. While our sales in China have continued to improve slightly, we have yet to see major capital equipment investments being made. Let me now cover our results on a GAAP basis. First quarter gross margin was 34%, up approximately 400 basis points year-over-year. Operating expenses were $57 million, an increase of $4 million compared to the first quarter of fiscal 24. Operating income was $11 million, an increase of $7 million from Q1 of fiscal 24. Net loss was $264,000 and GAAP EPS represented a loss of one cent per share based on a fully diluted 41 million shares. Now moving on to the non-GAAP results for the quarter. Gross margin was 35%, an increase of 350 basis points year over year, mainly due to favorable product sales mix and productivity gains in both segments. Gross margin also benefited by approximately 130 basis points from refunds of German customs duties and taxes we had previously paid. R&D spending in the first quarter was $23 million, an increase of $3 million compared to the first quarter of fiscal 24, representing 12% of revenues. Of note, R&D included the fifth and final $1 million milestone payment for the transfer of technology from Micro X. SG&A expense was $31 million, an increase of $3 million compared to the first quarter of fiscal 24, representing 16% of revenues. The increase in SG&A was primarily due to an increase in expense associated with one of our joint ventures. Consequently, operating expenses total $55 million, an increase of $6 million, representing 27% of revenue. Operating income was $14 million, an increase of $5 million compared to the previous year, and operating margin was 7% of revenue, up from 5% in the first quarter of fiscal 24. Tax expense in the first quarter was $3 million, or 48% of pre-tax income compared to $1 million, or 20% in the first quarter of fiscal 24. Higher than expected tax rate for the quarter was primarily due to losses in certain foreign jurisdictions for the quarter. Net earnings were $3 million, or 7 cents per diluted share, compared to 6 cents in the year-ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $41 million. Now turning to the balance sheet. Accounts receivable declined by $20 million and day sales outstanding declined by two days to 68 days in the quarter. The sequential decline is primarily due to year-end payments from some large customers. Inventory increased by $15 million in the first quarter and days of inventory increased by 35 days to 209 days. The increase in inventory in the quarter was primarily due to an increased demand outlook. Accounts payable increased by $7 million, and days payable increased by 10 days to 49 days. Now moving to debt and cash flow information. Net cash flow from operations was $10 million. We ended the quarter with cash, cash equivalents, and marketable securities of $219 million, up $24 million compared to the first quarter of the prior year, and up $6 million compared to the fourth quarter of fiscal 2024. Please note that $219 million includes $176 million of cash and cash equivalents and $43 million of marketable securities. In addition, we also have $124 million of restricted cash raised through our senior secured add-on debt offering, which closed on December 20, 2024. The funds raised from this offering are currently held in an interest-bearing restricted account to reduce our convertible debt due in June of this year. Gross debt outstanding at the end of the quarter was $571 million, and debt net of $219 million of cash in marketable securities and $124 million of restricted cash was $228 million. Adjusted EBITDA for the quarter was $24 million, or 12% of sales. Our trailing 12 months adjusted EBITDA was $94 million, and our net debt leverage ratio was approximately 2.4 times adjusted EBITDA on a trailing 12 months basis. Now moving on to outlook for the second quarter. We are encouraged by what we are seeing with sales in China, as well as improving demand trends in geographies outside of China. With that as a backdrop, our guidance for the second quarter is as follows. Revenues are expected between $200 and $215 million, and non-GAAP earnings per diluted share are expected between 5 cents and 20 cents. Our expectations are based on non-GAAP gross margin of 32 to 34 percent, non-GAAP operating expenses of approximately $52 million, interest and other expense net in a range of $9 to $10 million, tax rate of about 22 percent for the second quarter, and non-GAAP diluted share count of about 41 million shares. With that, we'll now open the call for your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, 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'd like to remove your question from the queue. One moment, please, while we poll for questions. Our first question today is coming from Young Lee from Jeffries. Your line is now live.

All right, great. Thanks so much for taking the question. I guess to start, I was wondering if we can talk a little bit about China. You know, it seems like the quarter was better, similar to, I guess, the past couple of few quarters where There seems to be some sequential improvement. Can you maybe just talk a little bit more about that market performance there and, you know, any additional color on the potential impacts from stimulus there as well?

Hey, Young. This is Sunny. Yeah, you know, look, sales in China, there was an uptick, and we're encouraged to see that. But, you know, we don't – We don't call it a rebound at this time, or we're not expecting a meaningful improvement in demand this year. However, as we had said, we did not see it going backwards, so this is encouraging to see an uptick. There has been really no indication of what the stimulus will do, and there's been no further clarity on it. and it has not translated into any orders for us. So we're not counting on any impact of stimulus at this time in our projections. Now, there's been also no change in our position on expectation of the Chinese government's commitment to healthcare. We think that will continue, so the long-term prognosis is just as we have discussed in the past.

All right, got it, very helpful. I guess maybe my second question, I wanted to hear a little bit more about the cargo and vehicle inspection systems that you're selling direct. I was kind of curious if you can comment on the margin profiles of those products at scale, sort of the level of investment needed to stand up that business. and maybe at what revenue level will they be accreted to margins?

Let me get us started and then I'll ask Sam to also chime in. This business consists of hardware equipment, which goes in first, followed by, after a couple of years, you get the service revenue stream from this business. The margin profile typically tends to be lower for the hardware equipment and then very good on the service side. So for us, in the short run, as we're ramping up this business, we expect that the margin profile for the equipment will be below our company gross margin level. However, As we keep shipping this equipment and as we start transitioning into the service revenue streams longer term, we expect this margin profile to improve and get better. In terms of the investments that we've made so far, those are already included in our plans for this year, which includes the R&D work that we do and then the deployment. But as we scale up, there will be need for additional investments, which we will plan for.

Young, I would add that, like Sunny just mentioned, that we are organically funding this business. We already are in the component side of this business, as you know, so we know this area very well. Yes, there will be investments. However, as I said, it would be mostly organic, funded through the P&L. At this point, we are in early stages, and this is a large market, more than a billion dollars in size. So we are expecting in the next three to five years pick up a decent amount of revenue, and that should allow us to also pick up on margins. In terms of current situation, yes, our investments and the amount of revenues that we are generating, it is margin decretive right now to our industrial segment and also to our overall corporate margins. However, you know, once it is more than $10 to $15 million, a quarter type of a run rate, it should be margin accretive for us. So one is the scale as we look at this business. One aspect is the scale. But the second aspect is also what Sunny mentioned, which is the equipment to service ratio. The service ratio is much more accretive. and generally service would be say 18 to 24 months after the full system has been shipped. One area of investment that we would be looking at in this business development effort is to develop our channel. I think we are sufficiently covered in R&D. We would be expanding as the sales grows, but one area we would be expanding more is on the channel side so that we can cover the broader global exposure or presence for this market. All right. Thank you so much.

Thank you. Next question is coming from Kyle Dowser from B-Riley Security. Your line is now live.

Great. Thanks for taking my questions. Maybe I'll stick with the cargo inspection business here. A couple questions. So what's the kind of current percentage of the total industrial segment that that the cargo inspection business comprises and um you know what's what's a reasonable kind of run rate i know you you put together some um analysis on the total market size of being over a billion dollars so appreciate that but just kind of curious how big is it now what's the reasonable size and then what's kind of the turnaround time on a big order that you just got you know for 14 million dollars is in their inventory. I'm just kind of curious how that looks. Thank you.

Sure. So today we participate quite meaningfully in the component side of the cargo inspection market. The overall security inspection market, as we just reported, is about 40% of our industrial sales in this last fiscal year. A vast majority of that security inspection market is Revenues are generated from the cargo inspection market. Keep in mind, we are also, you know, in airport and some other areas when it comes to inspection market. So I would say 75, 80% of that security inspection market last year was generated from cargo inspection. I would also say that the contribution of cargo systems, full systems, that we just announced in a press release earlier this week, its contribution to those revenues was very minimal. It was mostly through components. So now we are expecting to continue with the components revenues as well as add-on the cargo systems revenues to this business.

And you also had a question about the timeframe. The $14 million that we talked about, we expect to deliver it within a 12-month timeframe.

Yeah, Kyle, just keep in mind in this business, because we are working with government or quasi-government agencies, the turnaround time from receiving the order to shipping the system can vary quite a bit. It could be as little as four or five months to as much as 18 months, or sometimes even 24 months, depending upon the situation. So it just depends upon the specific order, the specific country, and a number of other factors. But the one that we announced we are expecting to ship in the next 12 months.

Got it. Very helpful. Appreciate that. And maybe shifting back to China, Sorry if I missed this. Did you call out the amount of revenues from China specifically? I think, you know, a couple quarters ago it was $29 million, then stepped up to $31 million. Is that still the $30 million range, a good baseline? And, you know, to the extent you can provide color on your expectations, you know, where do we think this can go in the near to medium term?

Yes, Kyle. So we reported, I mentioned in my prepared remarks China contributed 18% of our overall sales for the quarter, so that comes to about $35 million for the quarter. In terms of guidance or providing more color by country specific, we tend to not do that. However, as Sunny mentioned for the prior question, China is still not operating, not at all operating at its full potential for us. So as the recovery happens, whenever it happens, we should expect to grow from this level. At one time, six, seven quarters ago, we were operating higher than 40, closer to 43, 44, $45 million. But remember, a lot of our business in China is related to tubes, and tubes have a very high attach rate from a service perspective. So as time passes by, more and more percentage of revenues for tubes from China would be from replacement purposes, as opposed to simply new sockets is what we call it.

Yep, appreciate that. That makes sense. Okay, great. Thanks so much for taking my questions. Thank you.

Thank you. Next question is coming from Larry Solo from CJS. Your line is now live.

Great. Thanks. Hi. Good afternoon, guys. Good evening. I guess first question, two-part question. I guess just on the – you mentioned it sounds like demand in the quarter was good and knit orders are – it sounds like they're even better going forward. There was a little bit of a supply issue. You mentioned – Could you maybe give us a little more color on that? It sounds like that held back. I don't know if you could quantify sort of the impact on sales, and I assume you're making most of that up in this quarter. I guess that would be my first question.

Sure, Larry. Let me try to address that. That is true. The revenue for this last quarter was below our expectations, impacted primarily by the supply-side issues, and the supply-side issues mostly by the labor aspects. Remember this last quarter, we had 14 weeks in the quarter and it was spanning the Christmas holiday timeframe as well as the new year timeframe and so there were a little bit more absenteeism than what we were expecting and as a result, we were not able to complete the product that was slated for shipment and which is what caused us to kind of miss our expectations. So that shipment rolled over into Q2, our fiscal Q2. So that's really what happened.

And was that one particular order or was it spread out? I'm just curious, was it just isolated because of one large order?

No, no, it was not one large order, but it was also not many. I would say a few, maybe two, three, maybe four. We were not able to complete those tubes. And once we were a little bit late, then trying to get all of the freight forward and logistics worked out to get those shipped. That's what really happened. And I remember you also are the amount, the impact. The impact was sub $5 million, $4, $5 million. Okay. Okay.

Okay. And sort of the outlook certainly sounds like things are getting better. China was a little better this quarter. What about outside China? I guess in the quarter, in terms of, you know, I know you had spoken the last couple quarters that you had some visibility that we're starting to normalize outside of China. And maybe by Q2, Q3 this year, we would sort of be almost fully normalized. Curious where we stand now and how that's incorporated into your guidance.

Yes, so Larry, you're absolutely right in remembering what we said. And actually, the current experience is panning out as we had provided that color to you all three, four months ago. Outside of China and the anti-corruption measure, the issue that we've been dealing with in all of last fiscal year, in fact, all of last calendar year as well, was the destocking effect. And we had guided or we had provided expectation that we would be expecting that to begin to subside or be subsided by January, February timeframe. And since we are pretty much there now, we are experiencing that the destocking phenomena as of now as we speak is largely behind us. So we are seeing improvement in order rates. But as you know, from order to shipment, it takes a few months. So the benefit of that kind of mostly goes outside of the Q2 window, but we are experiencing that as we speak.

Gotcha. That's fair. What about just on the operating expense side? So you mentioned a little bit higher expenses, even if we take out the micro X payment. Can you just give a little more color? You mentioned a new JV, I guess, that maybe that's not coming up in the JV line, but that's in your SG&A line. And it sounds like it's going to bounce around a little bit because your guidance, at least for Q2, has that kind of coming down a little bit.

Yes, that's correct, Larry. We just reported $55 million, which was driven by $1 million of payment to Micro X, which since it was the last payment, that goes away. But remember, we also had 14 weeks in this last quarter, so that also drove a little bit higher expense. So between... between micro X going away, between the quarterly span going back to 13 weeks. And then we also had a little bit higher expense in one of our already existing joint ventures. So this is not a new JV, but one of our joint venture had a little bit higher expense. So since we consolidate them in proportional manner, we also had a little bit higher expense there. So those three things should benefit us going forward, and we are expecting that OPEC should come down to, say, $52 million for the quarter.

Gotcha. Perfect. If I could just squeeze one more in. Just on the security side, exciting to see you getting some orders. Curious, was this one large customer? Was it more than one customer? You mentioned it's a government. So I imagine it's some border. I'm just curious if it's like a one-off. Are there more orders to come and other locations? Are you side by side with other, you know, obviously we know there's your customers themselves are selling much bigger, larger orders on borders. Maybe they don't report some of the smaller ones too. So just trying to get like a little lay of the landscape where your machines actually are. Are they in spots where they're exclusive or is it more now that you're a new entrant? They maybe try you a little bit now and then you grow over time. Just trying to get a little more feel for that if you can give us honey. Thanks.

That was a pretty complicated question, Larry. Let me see if I can tease it apart. I can't disclose where they are, but it was multiple orders. And as we said, the orders included mainly two products. One was the portal and the second some mobile scanners. So that's the profile. We have been bidding actively on tenders and I'm not sure exactly how your question was going, but in these tenders, depending on which country and where there tends to be, there can be civil works, there can be other parts, other things associated with the tender. Sometimes we go through a partner in the country who plays the prime role. Our play in this is... The systems that do the imaging, do the scanning, and everything, all services that go with it, implementation and then follow-up maintenance services. So it's fairly simplistic from a model perspective that way. And the four products that we talked about in the presentation are what we're bidding actively. And where we don't have, if there's a gap, if there's something else that's needed, we typically then will bring in another partner.

Gotcha. Okay. I appreciate that. Okay, great. Thanks again. I appreciate it.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Hello, Suraj.

Sunny Sam. How are you?

Great. Thanks.

So, Sunny Sam, a lot of details have already been provided, and forgive me for belaboring this. So Sam, you mentioned 35 million China contribution in the quarter. If I could ask, what percent of it, Sunny, was local for local, and what was the split between medical versus industrial? Let's start out there.

Sure. Let me try to address that, Suraj, for you. Vast majority, or nearly all, not 100%, but nearly all of our revenues in China are from medical. So the split between medical and industrial is significantly tilted towards medical. And within medical, it is very, very significantly tilted towards tubes. So that's the revenue profile for China for us. And then in terms of local for local versus exported out of countries into China you know your specific question was for the given quarter but kind of expanding upon your question you know the exported into China versus local for local can be very volatile from quarter to quarter depending upon specific customer or particular products that are needed in that quarter by any one of our customers over there whether those customers are global OEMs or whether those are Chinese OEMs. So focusing only on Q1 quarter might lead you into a wrong conclusion. But I would say right now we are operating around 50-50, local for local versus global product of Varex into China. But it is increasing over time. more from local, more from global exports into China to local for local. Hope I answered your question and understood it right. Let me know. No, that was great.

And Sonny, I'll just ask, Sam, I'll just ask the last question and hop back in queue. As you look into, you know, obviously you look provided your Q2 guide, we can sort of extrapolate where FY25 is headed. I guess my question more so is, Sonny, we are doing our own independent checks on China stimulus, right? As you lay out your FY25 roadmap, right, how can we think about your sensitivity of numbers to a new Chinese stimulus? Is 18% per quarter the right bogey? Is that excluding new China stimulus? Could it go higher? You know, just kind of walk us through how you all are thinking, because admittedly, you know, the whole macro level thing is very uncertain. And, you know, I get it where you're coming from. It's difficult to plan a business. But how should we think about if we start out at 18%, and the sensitivity up or down to whatever happens on the stimulus. Gentlemen, thank you for taking my questions.

Yes, Suraj, I don't know how to quantify that for you with respect to that 18%, but what I can say is that as we've seen the uptick, the uptick is coming from our customers who have gotten past their destocking issues in China to the extent that they had any, and then also their sales, to the Chinese hospitals, which is driven by just normal course of business. We haven't seen any significant tie-in through stimulus. Typically what happens is if there's a stimulus-related buying, that tends to have a pattern across many different customers, right, versus the one-off sales that we're starting to see in spots, different places, versus stimulus tends to have some of its own momentum. So at this point, I really cannot pin down or give you any guidance around what any effect of stimulus might do for the rest of the year to China. Now, a lot of this, as we're forecasting, it's one quarter, it doesn't make a real trend, but it's a positive thing. However, I just have to remind you and everyone that there's still the potential impact of any changes to tariffs and the trade situation. As of now, while we've not seen any meaningful impact to us, either from the U.S. tariff perspective or the retaliatory tariffs in China, so we're being careful about looking too far ahead, not knowing what might happen with changes to the tariff situation.

And Suraj, I would like to add a few more points to what Sunny just said. that remember in China our Q1 revenues are typically higher than Q2 because in Q2 we have the Chinese New Year, so the China-based customers buy a little bit more in Q1 compared to say Q2 timeframe, so keep that in mind. At the same time, our business outside of China, so the Chinese New Year and a little bit of recovery still not full or in any way. So China turned out to be a little bit stronger, and the business outside of China, particularly in medical, still got impacted by the destocking phenomenon. So that yields a little bit higher percentage of revenue to China, so keep that in mind. Also, we reported 35 million for China, but just two years ago or 18 months ago, we were doing mid 40s in terms of our revenues per quarter from China. So we have more potential to grow in China, but at the same time, we also feel we have potential here to grow outside of China. And in that way, we can grow our sales while keeping the percentage out of China still within the teens. Uh, and then all of what Sunny and I said is all of that, all of this is subject to changes or impact from tariffs, which we don't know wherever they will land. And so we, so it is a very uncertain macro environment right now. So that's, I just wanted to provide that perspective.

Excellent color gentlemen. Thank you.

Thank you. Next question is coming from James Sidoti from Sidoti and company. Your line is now live.

All right, good afternoon. Thanks for taking the questions. Last call, you talked about the new plant in India. Is that still on track to get online by the end of this year?

Yes, Jim. Our plans are proceeding well. We are making very good progress, and that is still our expectation, to go online by the end of this fiscal year. I do want to highlight that currently we are funding India and our India operations and our investments through CAPEX and also through OPEX and through cost of goods sold area, it is impacting our overall financial performance where we really do not have a whole lot of revenues. So we are investing in India right now and our plans are, we are making progress as per our plans.

And is the plan for that plant, is it CT tubes for Asia primarily?

We are focused on detectors right now, at least for this fiscal year, Jim. Tubes would be the following year.

Okay. All right. But primarily to the customers in Asia? Yes.

No, these are for global companies. Initially, India is for global. So it would be anywhere where those radiographic products are needed.

Okay. And then on the convert, that's due mid-this year, and that's about $200 million. Do you plan to pay that entire balance down?

So, Jim, we raised $125 million, and that entire amount is – put in a restricted bank account because that we have already stated that we plan to use those proceeds to pay down the convertible. The remaining $75 million or so of principal, no decision has been made by our board yet and that's why we've not officially stated anything. However, we have indicated to you that we are in an excess cash situation So I would say that our intention is to pay down fully. However, no decision has been made yet regarding the $75 million of the principle of the convertible that would be left after paying down using the $125 million or so of the proceeds.

And then I just want to make clear. I know China is still a little bit uncertain for the next few quarters, but did I hear you say that the stocking among the medical customers, the OEMs, that that primarily has complete and that you expect those orders to come back to more historical levels?

That is correct. We saw an order intake uptick in both in China and outside of China. And typically when customers have inventory, they don't place orders. And so an uptick and we're seeing a positive trend and it is fairly widespread. So we believe that most of this phenomenon is behind us.

Okay. And then the last one, on the cargo inspection, do you think you'll benefit at all from the increased focus with the new administration on border security? Could that Did that help push those sales? Maybe not this year, but in the next couple of years?

Oh, absolutely. In fact, globally, not just in the U.S., we see the pressure on security globally has increased. And at the same time, now also with tariffs, the need to scan cargo to ensure that what's being transported matches the documentation for accurate assessment of tariffs and taxes across borders, that's also becoming now just as equally important. So it was always about, there's two parts to it, right? Security and inspection for contraband and guns, et cetera, but now the tariffs are also equally important. So it does raise the level of activity of cargo inspection tenders, and we're happy to participate in those.

All right, thank you. That's it for me.

Thank you. Next question is a follow-up from Jung Lee from Jefferies. Your line is now live.

All right, great. Thanks so much for the follow-up question. I guess I wanted to hear a little bit about the pathway of photon count and detector development and adoption and, you know, how that could be different or maybe similar to as, you know, digital detectors sort of started out and gained scale. You know, from your perspective, as you were kind of planning it out for photon counting, you know, you provided Cisco 29 guidance. You know, what are some of the major differences between the photon counting plans versus how digital adopters gain traction?

Yeah, so if you... If I understand the question correctly, what does the trajectory for photon counting detectors look like versus what happened with flat panel detectors? I think in flat panel detectors, the trend was driven by medical, and medical started it, and then afterwards industrial, digitization industrial started happening. Versus here, what we are seeing is much more accelerated adoption in industrial. for several reasons, mainly being the photon counting detectors are very, very conducive for high speed imaging, 3D imaging at very fast rates because of the high frame rates of these detectors. So we're seeing a lot of enthusiasm and excitement in industrial. And so as we laid out our trajectory for between now and 2029, The initial, the near-term, mid-term is largely being driven by industrial. In the meantime, during this time, the medical customers have begun characterizing this technology and planning their new equipment with it. But adoption in medical takes longer just to bring those products. See, these are not retrofit systems. Versus in flat panel detectors, they went into existing systems to x-ray You know, not much had to change. They had to just stick in a detector and go from there. However, here there's more work involved on the medical side in order to take advantage of the photon counting detector's capabilities, and medical always takes a little longer. So that's the main difference. We're going to see fast uptick in industrial, which allows us to scale up, and then medical is following it. The one thing that I'll say that we're very happy about is there is no doubt in our minds that this technology is here to stay. You know, there's that last RCNA, which was the Radiological Society of North America, with all the conversations that we've had with customers, it was fairly broad-based conversation with OEMs about photon counting. There was a lot of interest in it in our booth, and every conversation we had with our customers included photon counting. and the value of the technology, the technical viability, all that is fairly well understood.

All right, great. Appreciate the color, and yeah, definitely agree with those RS&A results as well. Thank you. Thank you.

Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Thank you 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 the quarterly conference call will be available through February 20th and can be accessed at veriximaging.com forward slash investor relations. Thank you and goodbye.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.