Varex Imaging Corporation

Greetings and welcome to the VARIC's third quarter fiscal year 2025 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, 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, Chris Belfourie. Thank you, and you may begin.

Good afternoon and welcome to Varix Imaging Corporation's earnings conference call for the third 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 Varix's website at variximaging.com. The webcast and supplemental slide presentation will be archived on Varix's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the third quarter of fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year over year from the third quarter of fiscal year 2025 to the third 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 10Q and our annual report on Form 10K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. I will now turn the call over to Sonny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our third quarter earnings call. We are pleased to report that third quarter revenue of $203 million was above high end of our guidance. During this quarter, we saw continued strength in our industrial segment and our revenue in China was better than forecasted and in line with the recent quarters. You may recall that our Chinese customers had asked us to hold shipments earlier in the quarter when tariffs were around 145% levels. As expected, once the tariffs dropped to around 55%, customers resumed their delivery requests. I'm happy to say that we were able to accommodate their shipment needs. On a related note, concurrent with the reduction in tariffs, the Ministry of Commerce in China paused both investigations that it had launched in early April. Non-GAAP gross margin of 34% in the quarter was above the high end of our guidance. Compared to expectations, gross margin benefited from higher volume and favorable product-sales mix, as well as lower impact from tariff-related expenses compared to expectations. I'm also happy to say that during the quarter, we paid off our $200 million convertible notes, which reduces our overall debt burden and simplifies our capital structure. Turning to third quarter results, total revenue was down 3% year over year, with medical segment down 4% and industrial segment up 1%. Non-GAAP gross margin of 34% was 100 basis points higher than in the same quarter last year. Non-GAAP earnings per share in the third quarter was 18 cents, up 4 cents compared to last year. We ended the third quarter with $153 million of cash, cash equivalents, and marketable securities on the balance sheet, down $73 million from the prior quarter. This decline was primarily due to the use of cash to repay our $200 million convertible note. Let me give you some insights into cells detailed by modality in the quarter compared to a five-quarter average, which we refer to as the cells trend. Global cells of CT tubes remained strong in the quarter and were in line with the cells trend. Cells in oncology and mammography modalities were above their respective cells trends in the quarter, while cells in radiography and dental modalities were in line with their respective cells trends. Sales in our fluoroscopy modality were below its sales trend. Demand in our industrial segment remained strong in the quarter. Need for security screening globally continued to drive sales of cargo inspection components as well as our recently launched security inspection systems. Similar to prior quarters, strong demand for check baggage inspection and cargo screening at airports as well as non-destructive inspection in other verticals drove growth in our industrial x-ray tubes product line. Moving to some product highlights. In medical, we continue to make progress with our India expansion plans and expect to begin production of radiographic detectors around fiscal year end. As mentioned previously, our objective for India is to establish low-cost manufacturing for value-tier radiographic components where we face competition from Asia-based companies. We expect our factories in India to be a key enabler for driving growth in radiographic components in the coming years. Since our announcement at RSNA, customer interest for Lumen HD detectors continues to grow, and we are providing customers and prospects with detectors so that they can do their integration and validation. The Lumen HD and the HD Pro digital radiography detectors are our new competitively priced family of detectors, which offer superior image quality high reliability, fast image acquisition with lightweight and very user-friendly design, and several options for workflow improvement. As mentioned before, this product line is expected to showcase both our innovation and cost leadership, and our goal is to gain share globally with these detectors. We have received all necessary regulatory licenses for the U.S. and Europe, and we have begun shipping certain models from our Salt Lake City factories. We expect to begin manufacturing and shipping these products from one of our factories in India around fiscal year end. In Foton County, we're making progress as expected with a couple of OEMs who are integrating our technology in their new systems, and these projects are moving forward. Meanwhile, we're also in different stages with other prospective customers who are exploring their design options for CT and other applications. We recently released for general availability of photon counting detector called THOR for very high speed industrial CT imaging. Potential applications for THOR include non-disruptive, non-destructive testing for EV batteries, semiconductor components, food, and material sorting applications. This detector is engineered to operate in demanding industrial applications where both precision and high speed imaging is a critical requirement. On the system side of our business, in our industrial segment, cargo systems continue to perform well. Barracks was honored to have its VXM6 mobile X-ray inspection systems on display at the Blue Light Show in London this past quarter. This is a show highlighting key technology for emergency service teams, enabling them to keep communities safe. This is precisely what the versatility of the mobile X-ray system provides, securing various sites and allowing the emergency response teams to have the flexibility and mobility of deploying the mobile X-ray unit where and when needed. On July 14th, we announced additional new orders worth $17 million for cargo inspection systems for international customers to help secure sea and land ports. These new orders bring our year-to-date bookings to over $55 million, which is a testament to our strong reputation for quality and innovation in high-energy linear accelerator-based imaging. To date, we have installed and commissioned several systems in Saudi Arabia, Turkey, Colombia, and Bangladesh. Additionally, we're in various stages of implementation of portals, gantries, and mobile systems in Brazil, Ukraine, Mexico, and expanding to other locations in Saudi Arabia. A typical cargo inspection system consists of a linear accelerator, which is the source of high-energy X-rays, an array of detectors, software for image acquisition, image viewing, and workflow, and electromechanical framework that ties it all together. We are a vertically integrated systems provider and build each of the major components ourselves. We also have legacy competency in building and deploying full systems, many of which are still in use by the U.S. Customs and Border Protection. We believe that being vertically integrated gives us a distinct advantage. By being able to bring innovation to each component, we believe that we can serve the cargo inspection industry better and more cost-effectively. These capabilities resonate with our current and prospective customers. Through our knowledge and legacy experience in cargo systems, supplemented by small asset purchase, we have been successful in developing systems integration capability out of our facility in Stoke-on-Trent in the United Kingdom. At the same time, we have been investing in our Las Vegas facility that provides components to our UK-based operations, as well as for the broader security inspection industry customers. We are ramping up systems production at our facility in the UK and investing in customer demonstration capabilities in both the UK and in the US. We have a well-established services team and a part supply and logistics infrastructure with global reach through whom we are installing and servicing our customers. We are prepared to expand these capabilities as the business grows. We have been focused on developing our sales channel, which includes Verix employees, in-country agents who we have known for many years, as well as several application specialists and engineers who support the sales process. We have an active pipeline of projects that we are bidding in and continue to develop our future sales funnel of prospects for new business opportunities globally. In summary, our industrial segment continues to perform well, and we are seeing positive trends across our medical segment despite a very challenging and constantly changing global trade environment. We expect to finish out the fiscal year on a strong note. I'd like to thank all our employees globally for their hard work and commitment in helping us deliver a solid quarter. With that, let me hand over the call to our CFO, Sam Maheshwari.

Thanks, Ani, and hello, everyone. Our performance in the third quarter was better than our expectations. Revenues of $203 million were above the high end of our guidance, as well as non-GAAP gross margin of 34% and non-GAAP EPS of 18 cents. Comparing the third quarter to the same period in fiscal 24, revenues decreased 3%. This decrease was due to a 4% decrease in our medical segment, partially offset by a 1% increase in our industrial segment. Medical revenues were $142 million and industrial revenues were $61 million. Medical revenues were 70% and industrial revenues were 30% of our total revenues for the quarter. Analyzing revenues by region, America saw an increase of 1% compared to the third quarter of fiscal 24. MAR revenues were down 2% while APAC decreased 8% year over year. In the first six weeks of the quarter, the Chinese customers paused receiving shipments due to unusually high tariffs. However, the subsequent pause in tariffs helped them to resume receiving their deliveries during the second half of the quarter. We are pleased to meet the shipment needs of our Chinese customers. As a result, sales volume to China ended up fairly in line with the recent quarters and contributed 15% of total revenues for the company. Sales to China increased 4% for the quarter year over year. Let me now cover our results on a gap basis. Third quarter gross margin was 33% up about 100 basis points year over year. Operating expenses were unusually high at $148 million, an increase of $90 million compared to the third quarter of fiscal 24. The primary driver of the increase was a non-cash goodwill impairment charge of $94 million due to a decline in the company's market cap. As a result of this non-cash charge, operating loss was reported at $81 million net loss of $89 million, and GAAP EPS loss of $2.15 per share based on a fully diluted 42 million share count. Now moving on to non-GAAP results for the quarter. Gross margin was 34% up 100 basis points year over year, primarily due to a favorable product sales mix. Compared to our guidance, gross margin benefited from lower than previously anticipated impact from tariff-related expenses, R&D spending in the third quarter was $21 million, a decrease of approximately $1 million compared to the third quarter of fiscal 24 and representing 11% of revenues. SG&A expense was $30 million, a decrease of $1 million compared to the third quarter of fiscal 24 and representing 15% of revenues. Operating expenses totaled $51 million, a decrease of $2 million compared to Q3 of fiscal 24, and represented 25% of revenue. Operating income was $17 million, an increase of $2 million compared to the previous year, and operating margin was 8% of revenue, up from 7% in the third quarter of fiscal 24. Tax expense in the third quarter was $2 million, or 23% of pre-tax income, compared to $352,000, or 6% in the third quarter of fiscal 24. Net earnings were $8 million, or 18 cents per diluted share, up from 14 cents in the year-ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $42 million. Now turning to the balance sheet. Accounts receivable decreased by $9 million, and day sales outstanding declined by one day to 61 days. Inventory increased by $14 million in the third quarter and days of inventory increased by 11 days to 201 days. The increase in inventory was primarily due to raw materials and work-in-process inventory related to the strength in our industrial business. Accounts payable was flat and days payable remained at 47 days. Now moving to debt and cash flow information. Net cash flow from operations was $8 million. We ended the quarter with cash, cash equivalents, and marketable securities of $153 million, down $73 million compared to the second quarter of 2025. Reduction in cash and cash equivalents was due to the use of cash to pay off our convertible debt in June. Gross debt outstanding at the end of the quarter was $370 million, and debt net of $153 million of cash and marketable securities was $217 million. Adjusted EBITDA for the quarter was $29 million or 14% of sales. Our trailing 12 months adjusted EBITDA was $110 million and our net debt leverage ratio was approximately two times adjusted EBITDA on a trailing 12 months basis. Now moving on to the outlook for the fourth quarter. Guidance for the fourth quarter is as follows. Revenues are expected between $210 and $230 million. Non-GAAP earnings per diluted share are expected between $0.10 and $0.30 of profit. Our expectations are based on non-GAAP gross margin of 32% to 33%, non-GAAP operating expenses of approximately $51 million, interest and other expense net in a range of $9 to $10 million, tax rate of about 25% for the fourth quarter, and non-GAAP diluted share count of about 42 million shares. With that, we'll now open the call for your questions.

Thank you. We will now 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 to remove yourself from the queue. for participants using speaker equipment. It may be necessary to pick up the handset before pressing the start keys. One moment, please, while we pull for questions. Our first question comes from the line of James Sidoti with Sidoti & Company. Please proceed with your question.

James Sidoti & Good afternoon. Thanks for taking the questions. sounds like you were able to fulfill the orders to China even though you only had six weeks to do it in the quarter. Did that result in higher than expected expenses?

Hey Jim, this is Sonny. No, that did not result in any particular higher than normal expenses. It was just we have the capacity and we were glad we were able to fulfill that demand.

And Do you expect China sales in the fourth quarter to be on par with Q3 or possibly start to pick up?

Hi, Jim. This is Sam. We do not guide really by region or by customer or product as such, but the demand overall, I can say that the demand in China is stable and healthy and it's continuing. So barring any other external event or any such situation, we would expect it to remain normal.

All right, and then when you discussed the photon counting OEM, you called out one of your industrial customers. Do you have any of your medical OEMs testing the photon counting technology?

Yeah, so the big CT projects are on the medical side. On the industrial side, we have ongoing activity in several different applications, but But our big focus and investment in photon counting has been for medical CP.

Right. And, you know, you've done a nice job paying down the debt with operating cash, you know, that you've kind of put in the bank over the past several quarters. You know, what's the plan going forward? Do you think you'll continue to use your operating cash to pay down debt?

Yes, so Jim, as you know, we have another tranche of refinancing coming, but it's about two years away from now, so we need to address it before next fall. So right now we are in a very comfortable cash situation, and overall we would like to target our debt in the $300 million to $350 million range, gross debt I mean. So from that perspective, right now we would like to continue to build up the cash position so we are in a strong position when we approach refinancing in the next 12, 18 months.

And the guidance you gave for 9 to 10 million of interest expense for the fourth quarter, is that net of any interest income you got from the cash on hand? It's net, yeah.

Yeah, it's net interest income plus the other operating and expense item. So it's those three items.

Yes, it's not just pure interest expense, yeah.

All right. All right, thank you.

Thanks, Jim.

Thank you. Our next question comes from the line of Suraj Talia with Oppenheimer. Please proceed with your question.

Hi, Sonny and Sam. This is Shane Masson for Siraj. Thanks for taking our questions. Hi. And congrats on the really strong quarter and nice guide for the 4Q. Just kind of, you know, trying to paint an overall picture. You guys gave a great guide for 4Q and whatnot. Can you guys kind of characterize kind of the capital spending environment and kind of what you're seeing? You know, how sustainable is, you know, obviously you had a great 3Q, 4Q looks great, you know, from what you've told us. know just trying to understand the sustainability in the medical side of the business kind of going into you know fiscal 26 and whatnot so just any color you can provide there kind of give us a little bit i know you won't probably give guidance but again just trying to help us start model that out yeah so uh shamans um the environment seems to be uh seems to be healthy

You know, the demand pattern is good, and based on whatever hospital CAPEX environment and overall priority of imaging from an investment perspective and the procedure volume, all of them, what we see and read, all of them seem to be in a decent place as of now. So, and remember... Last year, FY24, it was somewhat of a soft year because of the inventory destocking situation. So we are expecting to enter FY26 with a decent situation here in terms of the macro or the macro demand environment. Is that what you were asking, Seamus, or did I misinterpret your question?

Yeah, no, you for the most part got the gist of it. I guess kind of a side note to that, just trying to understand, I know this is a sliding scale, so to speak, with you kind of performance in the quarter by line. I guess where are you kind of seeing strength? Because I know, you know, I think you noted like philosophy is down, you know, a lot of things have kind of been stable, so to speak. So I guess where within that medical segment kind of are you seeing, you know, strength that's kind of leading to these kind of, revenue numbers?

Yeah, I would say from a revenue mix perspective, our industrial business is fairly strong, and CT was strong in this last quarter, and that's where we are seeing. Radiographic was somewhat stable. Fluoroscopy was down. So I would say a number of modalities were stable to slightly better than stable. And the strength was there in CT and industrial.

Okay. I appreciate that. And one more from our end, just photon counting. I know you guys kind of gave a little bit of color on that. Can you give us any kind of, I say metrics or something where we can start potentially seeing, you know, how many customers you are kind of, working with at either any stages and kind of, you know, rough timelines for when you expect, you know, say 50% to kind of move to the next, you know, looking for commercialization and whatnot. I know you've said, what is it? I think 27, you gave a guidance number for the number of expected sales or sorry, it might've been 29, but yeah, just trying to understand that when we start kind of to see that initial kind of orders start coming in and you guys kind of add that to your backlog. Thank you again for taking our questions.

So let me try to respond to your question and then I'll ask Sam to also chime in. So we had indicated that we're expecting $150 million of contribution from photon counting. And that's at a point where we expect pretty good rollout on the CT side in medical, and at the same time, about $50 million worth of contribution from industrial. So on the industrial side, that is more of a continuous growth. It's happening now. It's continuing to happen. And in bits and bytes, it's growing. And launch of a new product like Thor that I talked about will help with that. And then we expect to see pretty good uptake on industrial. On the medical side, we have that we have two very solid candidates and good OEMs, strong OEMs, that are in that phase of design implementation. So we're past the selection process and what they're going to do. Now they're actively building, developing, and designing their systems. So for the next 12 months or so, you'll get a bit of a boring update from us because as they continue to do their work, It's beyond that that we expect them to start doing their pilots and then go down the process of bringing systems to market. I can't give you narrower dates than that because, one, it's really confidential for our customers. Even though we're not disclosing names, I just don't want to get to a point where we create a problem for our customers. But our timelines that we have talked about earlier, the 2029 timeframe, that has not moved. Yeah.

I can also just add that we had said by 2029 we would be expecting, say, $150 million or so in photon counting revenue with, say, two-thirds of that approximately from the medical segment and a third from the industrial segment. Now, keep in mind, right now, most of the photon counting shipments are in the industrial area. side of photon counting business is continuously and very nicely progressing and improving. However, on the medical side, we expect it to be in a step basis manner. So say about $100 million of medical contribution for photon counting revenue would mean that we need to have three to four OEMs design our product into their systems and be rolled out. And so we say, two quarters or so ago, we were working very strongly with one OEM, and now we are working with two OEMs. And so we are pretty happy with the progress we've made and how we are moving in this direction in terms of commercializing the technology.

And as I mentioned on a call, we have others in the pipeline that are in that phase of the consultative phase where they're trying to figure out how they would integrate this in their systems. They're doing the initial physics measurements, and all the things that get them ready to get their head around the next product that they're going to bring to market. So the pipeline's good, and the interest remains strong. So it's on its way.

Got it. Thank you again for taking our questions, and congrats. Thank you.

Thank you. Our next question comes from the line of Young Lee with Jefferies. Please proceed with your questions.

Great. Thanks very much. I guess to start, I was curious on the China business outperform expectations. I was wondering if you can talk a little bit about your expectations for potential outsized orders in China. Maybe some customers will take this opportunity to stock up on inventory to try to de-risk future, um, tariff updates. Uh, and also, um, you know, are you seeing an impact from, uh, government stimulus, uh, uh, in China?

Hey, uh, this is Sonny. So our order intake in for, from China has been steady. As we said, you know, in the third, in this, uh, third quarter, our, um, sales in China was consistent with the performance in China over the last several quarters. So it's been, there's, they, they don't buy in, in lumpy manner or the, we've not seen them try to predict the, just, you know, the tariff rates and the tariff rates themselves have been fairly steady for some time. So we're not seeing that yet. And we've not seen that kind of behavior. So the demand is, I'd say is steady in China. The only time we had a, we had a pause was when it was a ridiculous tariff rate of 145%, which made everyone just pause and say, geez, this can't be real. I bet it'll come down. And so we took a breather, but other than, and when they did come back, they came back to the levels of inventory that they needed. So that's the backdrop there. And then I'm sorry, I forgot the second half of your question.

Government stimulus.

Oh, government stimulus. Yes. So again, like we've said before, there's been talk of stimulus, and we've heard of stimulus programs making its way through the provinces and to the hospitals. But we have not seen yet any significant indicators of additional demand. It's very hard to tease that apart and say what's because of stimulus and what's secular or normal demand. All we can see is that the Chinese government remains committed to their expansion of healthcare services. And the healthcare, Ministry of Health Commission, I believe that's what it's called, continues to push for getting imaging technologies into rural hospitals. And I think there have been circulars that we've seen where they want at least 164 slice CT in every single, you know, county hospital in China. And as you know, there's like 15,000 of them So we expect that this demand for CTs to continue along with their expansion of healthcare services in a fairly steady manner.

All right, great, very helpful. I guess just your comment on ramping up system productions in the UK and investing in the Vegas facility as it relates to the industrials, cargo systems business, is that a signal that, you know, we should be seeing more outsized orders in the coming quarters? And can you maybe put the order sizings in context for us? I mean, it ranges from 14 to 25 million. But, you know, can we see 25 plus million type of orders in future quarters?

So first of all, the facility in the UK, the expansion there is mainly for as business ramps up, and we've taken in $55 million worth of orders for us to continue to fulfill them. We need space. We need people. And so that's what I was referring to, and we will continue to do that. In terms of the health of that business and future orders, all I can say is that the pipeline is strong. We've got a good pipeline. We're competing in, you know, I have to believe that given our reputation, given our footprint currently, we're probably seeing virtually every deal, if not, I mean, if not every, you know, majority of the deals. And so we see the pipeline. It's healthy. What's uncertain, there's some amount of uncertainty around timing of when those deals will happen because of, just their tender-driven process. So what we don't want to do is to fall behind on our ability to deliver, so that's why we want to make sure that we ramp up thoughtfully, and that's what we're doing. In terms of deal sizes, you know, I can't predict that, but what we have so far, you know, the $17 million-ish, $25 million-ish type of order sizes are not abnormal for us.

Yung, I would add that in terms of our CAPEX requirements, and maybe that's what you're thinking or maybe a little bit reading your mind here, from a CAPEX perspective, we have guided $25 to $30 million CAPEX for the year, last year, this year, as well as the coming year. That would include investments in the U.K. that we plan to make to ramp up our ability to address the orders and ship the product. So that $25 to $30 million CapEx would include this. And then I would just add that in cargo systems business, order size more than $25 million is not uncommon. So it's just our ability to compete and win. So it can happen. But at the same time, as I said earlier, It'll be great if we win those orders and then we would be able to fulfill them, but we'll be mindful about the capex that we need to invest in those facilities.

Okay, great. Very helpful. Thank you.

Thank you. Our next question comes from the line of Larry Solo with CJS Securities. Please proceed with your question.

Great, thanks. Good evening or good afternoon for you guys. I guess first question, just on the guidance, nice improvement year over year. I think it's implying 7% growth and 3% sequential growth at the midpoint. So is most of that growth going to come from just looking at it sequentially or maybe even year over year too? Is it more on the medical side just in Q4? Or, you know, industrial usually, you know, has been kind of tracking around that 60 million for several quarters. So we'll bump up a lot more on both, you know, segments. Just trying to add a little more color there. Yeah.

Yeah, Larry, I think both the segments are, we expect to grow both the segments in Q4. You know, in industrial, of course, we have a number of, orders that we have taken in cargo systems that we expect to fulfill. And on the medical side, we have a backlog to address from our customers in Japan, Europe, et cetera.

Okay. I'm actually more curious just on the gross margin outlook. So if you look back, you two, obviously, I think that may have been a lot of the stars aligned where you had a 30% gross margin. But it felt like exiting Q2, if the China story could at least stabilize, your sales would be a lot better, which are, it appears to have happened this quarter, and your outlook implies even 10% sequential growth. How come the gross margin is this quarter, and then your next quarter outlook is even lower? Is that because of, I assume, mix? Is that more because you're delivering on some of these you're delivering upfront equipment versus maintenance or any color there would be appreciated.

Sure. Yeah. So Larry, remember in Q2, which is where you're comparing it to in Q2, we had talked about a one-time refund from customs agencies in Germany and outcome of multiple years of, you know, back and forth with them. So that was a one-time benefit. I would say, and we did highlight in that quarter's commentary.

Right. Well, how much was that benefit? I thought that was only 100. That was about 200 basis points, 200 basis points. So even so, Bill, you're still down from 34 to 32.5 at the midpoint in your guidance, but you're growing sequentially. Correct. 5% at the midpoint.

Yes. So your point is well taken, and the degradation in gross margin of say 150 basis points that you're talking about, is really coming from the tariff aspect. The tariff pieces, we are passing it along to customers, but we are not able to fully mitigate it. And so that is impacting about 100 to 150 basis points. And then on the cargo systems business, we've talked about that that business is slightly lower in gross margin and So that is also happening. So that is all in the mix here, which is what it's got.

And the industrial piece in particular, I know that that margin has, at least from the front end of last fiscal year, has come down because I think you were delivering more on the equipment side and less on the service, right?

That's what I meant. That's what I meant.

Yeah, yeah. And is that, you know, I guess as that install base grows and then the warranties expire and then there's... service requirements, I guess some of that should come back to help you, right? Because the maintenance, I believe, is margins a lot better. Is that correct?

Yes, that is absolutely correct, that the service margins are much higher on the industrial side. So all the linear accelerators and cargo systems, et cetera, you rightly pointed out, have a warranty period of 18 months, sometimes 24 months. And we began shipping quite a bit of linear accelerators, I would say towards the mid part of 2024. And so from mid-2026 onwards, they should be coming off of warranty and begin to contribute that. You know, if you look at our numbers, we have improved medical segments gross margin. However, as you rightly said, industrial gross margin has come down. So the gross margin is is seeing a little bit of a segment headwind, but it's all good news in the sense we are shipping quite a bit of hardware, and we should benefit from that. In 18 months, we should get the benefit from it.

Okay. And just in general, from a high level, Q4 guidance, just a trend the last two, three quarters, going back to Q2, too. Just as we think about fiscal 26th, at least from a high level, is most of it, and again, outside of China, let's just say China stabilizes from here for now. But global OEM order patterns, inventory destocking, it feels like a lot of that's getting closer to normal. So could 26 continue to have a sort of low to mid single-digit or perhaps even better, you know, top-line growth? I know you're not giving guidance yet, but just trying to maybe you can give us some of the big, you know, bullet points as we think out over the next few quarters where we stand.

Sure, yeah. So I think the first point you raised was about the inventory destocking, and we had said that we expected it to be over by March-April timeframe, and it actually did happen that way. So we are fairly beyond that phenomenon at this point. And also China has stabilized. And then came the tariffs. There was a little bit of instability, but seems to be normalizing now and cannot really predict what happens in the next month. It's a very, very fluid and dynamic environment. But it seems to be a little bit more stable than when we talked to you last time, say 90 days ago. It was extremely unstable at that time. So overall, both the medical and industrial businesses seem to be in a decent place, and barring any other external events that we don't think of right now, they should grow, and we should be in a decent position. So overall, I would say, I would concur that we should be expecting 26 to be a growth year for us, but obviously it's a bit too soon, and external events can always... come in a positive way or a negative way, but we'll deal with it as they come and as we get closer to the year.

Yeah, I feel like I understand that. I appreciate all the color. Thanks. Okay.

Thank you. And as a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. Our next question comes from the line of Anderson Shock with B Riley Securities. Please proceed with your questions.

Hi, this is for Anderson. Congratulations on the quarter, and thanks for taking our questions. I think you just mentioned some impact of the tariffs contributing to the GM guide. Do you have any updates on the progress of redirecting supply chains as part of your tariff mitigation strategy? I know you said that that would take some time, but is there anything you've been able to do or plan to do in the near term?

So yes, and Brian, is that Brian?

Brandon.

Brandon, sorry. So, yeah, Brandon, yes. Yeah, we've been making good progress. I would say that we've not completed or concluded our efforts there, but we are midstream, and we are definitely making good progress there. Our efforts in producing out of India are doing good, but at the same time, we are also making progress in terms of creating structures like bonded warehouse and also increasing manufacturing in a given region to service that region. So we are slowly making those changes. As you know, it takes time. At the same time, we've also started passing along price increases to our customers. So we've been successful in that. And a number of initiatives that we are in midstream, for example, you know, redirect material spending to suppliers in a lower tariff region, so to say, and duty drawback and bonded warehouse, and also more local for local manufacturing. So all of those initiatives are in play, but I would say we are in the, I would not say we are in the early innings, but we are definitely not beyond the mid-innings on these initiatives. I would say we are somewhere closer to midpoints in some of these initiatives. It takes time.

Got it. Thanks for that. Maybe just following up on that. If you're able to start shipping detectors from the India plant by the end of the year, do you think that that would have an immediate impact on the tariff exposure in China or will we have to wait another quarter or two to see the impact?

So India, the main strategy for India for us is to be able to produce radiographic components in a more cost-effective manner so that we are more price competitive in the market. This is a value to your type of a market. So that is our strategy out of India. And so we plan to produce out of India for global consumption. So in that regard, if we are shipping out of U.S. to a foreign country, then all the supply chain or raw material that we are bringing into the U.S. would be able to avoid tariffs on that raw material because we are not bringing it in U.S., manufacturing it here, and shipping it out of here. So in that regard, yes, it would be helpful, but I just wanted to make sure our primary and secondary strategies are clear in terms of their priority.

And also just to add, even for detectors, our detectors business in China, is supported by manufacturing in China. The vast majority of the components that go into it are also procured in that region. China is pretty independent in that sense.

Got it. Is there any connection between the India plant and production in the US? I'm just wondering you know, if there's any components from India coming into the U.S. that might be affected by the recent sort of escalation in trade tensions between those two countries?

Yeah, there is not. I mean, there may be small, but there is no significant dependence in the U.S. for product coming from India. And keep in mind, dual sourcing and triple sourcing has been some of the mantras for the supply chain folks and the team here. So we are slowly... increasing our supply chain from a supply chain resiliency perspective, other countries. And India, anyways, has been a new initiative for us, so there is not a whole lot of dependence of the Salt Lake factory for supply chain out of India. There is some, but not significant.

Got it. Thanks again for taking our questions, and congratulations again on the great quarter.

Thank you, Brent. Thank you.

Thank you. And ladies and gentlemen, this does conclude today's conference. We have reached the end of the question and answer session. This concludes today's conference call. You may disconnect your line at this time. We thank you for your participation.