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.