Varian Medical Systems Inc
Q1 2015 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Greetings and welcome to the Varian Medical Systems’ First Quarter Fiscal Year 2015 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Spencer Sias, Vice President of Investor Relations and Corporate Communications for Varian Medical Systems. Thank you, Mr. Sias. You may begin.

[Spencer Sias:]

Thank you. Good afternoon and welcome to Varian Medical Systems conference call for the first quarter of fiscal year 2015. With me are Dow Wilson, President and CEO; Elisha Finney, CFO; and Clarence Verhoef, our Corporate Controller. Dow and Elisha will summarize our results and we will take your questions following the presentation. To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years, quarterly comparisons are for the first quarter of fiscal year 2015 versus the fourth quarter of fiscal 2014 represents to financial results for orders are to gross orders unless otherwise indicated. Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, believe, expect, anticipate, could, will and similar expressions are intended to identify those statements, which represents our current judgments on future performance or other future matters. While we believe them to be reasonable based on information currently available to us, these statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important risks relating to our business are described in our first quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion, because of new information, future events, or otherwise. And now, here is Dow.

[Dow Wilson:]

Good afternoon and welcome. We are reporting solid results for the first quarter of 2015 with healthy revenue, orders and earnings growth. In summary, we are reporting net earnings of $0.92 per diluted share including $0.07 restructuring charge. Revenues of $738 million up 4% or up 6% on a constant currency basis, expected oncology service revenues of $254 million and 81 basis points improvement in the company’s gross margin of 44.3% of sales strong orders in our major businesses and 13% increase in our quarter ending backlog to $3.1 billion. Oncology Systems order totaled $562 million for the quarter up 5% or up 8% on a constant currency basis on a trailing 12 months basis worldwide reported Oncology orders grew by 5%. Consistent with recent geographic re-organization of the oncology systems business will consolidate the rest of world region into three geographic regions. The Americas, APAC and EMEA for comparison purposes the earnings release contains a table providing quarterly results for these regions for 2013 and 2014. In the first quarter of 2015 oncology orders grows 17% in APAC and 12% in EMEA while declining by 2% in the Americas. In North America orders sell by 3% versus strong 13% growth in the year ago quarter. Robust APAC order performance is driven mainly by China where orders grew by 42% with the help of a tender win with the CLA. Market in China appears to be returning to more typical investment levels on the period of delays and uncertainty. During the quarter, the SSDA ran an approval for Varian to supply our Edge radiosurgery systems to customer in China. This opens the door for Varian leading technology to address the growing lung cancer burden there. Looking as whole as BRICA of countries of Brazil, Russia, India, China and Africa we achieve first quarter order growth of 30%. BRICA again accounted for more than 15% of total oncology orders in the quarter. A strong performance in Africa where we booked more than $20 million in orders from project in Algeria, Egypt and South Africa helped our EMEA geographic region achieve orders growth of 12% or 18% on a constant currency basis. Elsewhere in EMEA we saw strong orders performance in France Turkey and Hungry. Turning to Latin America ongoing demand from the private market in Brazil was low as purchases in Columbia helped to drive order growth in the region. As I mentioned at the outset, orders in North America decline slightly versus very strong first quarter performance last year with a consolidation in this market we’ve seen great quarter to quarter variability. On a longer term trailing 12 months basis, North America oncology orders grew 4%. At this point the sales funnel looks good. Orders in our oncology service business were robust rising by 14% to $254 million representing 45% of the total oncology systems business during the quarter. This puts us on course to exceed our goal of reaching $1 billion of service revenue this year. We also made great progress in our software business during the quarter with double-digit growth in treatment planning and oncology information system. We hit a big clinical milestone during the quarter when rapid plan was used for the first time, to planning advance volume our key treatment for 76 year old prostate cancer patient in the UK. Rapid plan makes it easier and faster for clinicians to generate higher quality treatment plan. We’re taking orders for more than 100 rapid plan installations to date. During the quarter we’re pleased to see a promising new lung study showing improved survival rate using stereotactic body radiation therapy or SBRT in combination with the chemotherapy agent called erlotinib. The study by senior author Dr. Robert Timmerman of UT Southwestern Medical Center in Texas which was partially funded by Varian hit an overall survival times extending from historic six to nine months to 20 months. Result of this Phase II clinical trial involving 24 patients with stage 4 non-small cell lung cancer were published in the journal of clinical oncology of the American society of clinical oncology. Turning to our imaging component segment, orders rose by a robust 34% to $163 million versus the very week year ago period when orders declined. We saw specially strong growth in our panel business where orders rose by 65%. Among the highlights in our panel business was a big multi-million dollar win with the customer in Korea. We also started commercial shipments of our new customized veterinary and imaging package that includes both panels and workstations. You can see in our 2014 annual report, these wireless panels are being used in the sound echo and portable systems to image thoroughbred horses. At quarter end, we announced our intention to make an approximate 32 million euro public tender offer to acquire all the shares of MeVis Medical Solutions in Germany. The tender was formally launched yesterday, MeVis develops and supply image analysis software due to screen breast, lung, liver, prostate and colon cancer. We’re about to complete the tender process early in our third quarter, this will be an important step in our strategy to expand the imaging component to software portfolio. The company’s other category comprised of the Varian particle therapy business and the Ginzton technology center recorded orders of $1 million, the sales funnel continues to look good and we submitted five new proton tenders during the quarter. We made progress on our active proton projects generating $9 million of revenue, our customers financing of the Maryland proton project was not sufficiently completed to enable us to book it during the quarter. Before I hand it over to Elisha, I’m pleased to report that as the world economic forum in Davos last week, Varian was included in the global 100 ranking of the world’s most sustainable companies. Varian is a top ranked healthcare equipment company included on the list, we’re proud to be recognized for our commitment and sustainability. Now, I’ll turn it over Elisha.

[Elisha Finney:]

Thanks Dow and hello everyone. While Dow has already covered growth orders I want to talk further about the constant currency growth rate for the quarter. In comparing quarter-over-quarter exchange rates of euro and the yen weakened significantly against the dollar which reduced our total company order growth rate by about two points. Total oncology orders for the quarter increased 5% in dollars and 8% in constant currency. Oncology’s EMEA orders include 12% in dollars and 18% in constant currency. Oncology APAC orders increased 17% in dollars and 23% in constant currency primarily due to the yen. There was no currency impact in the Americas. The company ended the quarter with a $3.1 billion backlog up 13%. Backlog adjustments during the quarter totaled to $34 million bringing net orders for the company to $692 million. First quarter revenues for the total company increased 4% in dollars and 6% in constant currency. Oncology posted a 4% gain in revenues during the quarter with significant shift for North America and services. North America constituted 52% of total oncology revenues versus 42% in the year ago quarter. Service revenues grew by 14% over the year ago quarter. Imaging component posted first quarter revenue growth of 3% with growth in panels and security and inspection products partially offset by declines into. The total company gross margin for the quarter was 44.3% up 81 basis points, oncology systems gross margin improved by 68 basis points to 45.6% due to favorable geographic and product mix. While we’re pleased with the margin performance in the quarter, we continue to believe that oncology can sustain long term gross margins in the 43% to 44% range. Imaging component gross margin for the quarter rose 85 basis points to 42.2% due to a higher mix of panels as well improved quality cost. First quarter SG&A expenses were 140 million including an $11 million restructuring charge to reduce headcount. This charge increased SG&A as a percentage of revenues by a 140 basis points in this quarter. SG&A was also impacted by a $5 million increase in our bad debt reserve in the quarter to reflect uncertainty and our ability to exchange our Venezuelan bolivar collections into dollars. First quarter R&D expenses were $57 million or 8% of revenues equal to the year ago quarter as a percentage of revenue. Moving down the income statement first quarter operating earnings totaled $130 million down from the year ago quarter due in large parts to the restructuring charge. Depreciation and amortization totaled $17 million for the quarter. The effective tax rate was 28.5% down almost three points from the year ago quarter due largely to the R&D tax credit extension granted in late December. We continue to expect that the tax rate will be 28% to 30% for the fiscal year. Fully diluted shares outstanding decreased almost 6 million from the year ago quarter to $101.6 million due to our ongoing share repurchase program. Diluted EPS was $0.92 for the quarter including the $0.07 restructuring charge. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of 904 million, debt of 525 million and stockholders’ equity of 1.6 billion. DSO at 85 improved by nine days from the year ago quarter. First quarter cash flow from operations increased significantly from the year ago quarter to $79 million or 85% of net income. Primary usage of cash was $22 million for CapEx and a $126 million towards the repurchase of 1.5 million shares of stock. AT the end of quarter we had 4.75 million shares remaining under the existing repurchase authorization at expensive calendar year 2015. Now, I’ll turn it back to Dow for the outlook.

[Dow Wilson:]

Thanks Elisha. The company got up to a good start in the first quarter of fiscal 2015 with revenues and earnings coming in ahead of expectations. Our outlook for the full fiscal year is heavily impacted by the recent dramatic swing in currency exchange rate which we believe will significantly reduce revenues and earnings in the balance of the year. We now believe the total company revenue for fiscal year 2015 will increase about 5%. Given our earnings momentum in the first quarter, we believe that we can maintain our prior guidance of $4.16 to $4.26 per diluted share for the fiscal year despite significant currency headwinds. Given current exchange rate and the expected timing of shipments in the year we believe total company revenues for the second quarter should increase by about 2% versus the year ago period. Net earnings per diluted share for the second quarter could be in the range of $0.98 or $1.02. Our guidance excludes contracted proton projects that are not yet financed or booked into backlog. If these projects are booked during the year, the potential upside in revenues and profits could be significant. We’re now ready for your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Amit Hazan from SunTrust.

[Amit Hazan:]

Okay. Just a couple of questions I wanted to start with the guidance, if I think about adjusted EPS guidance 5% to 7% excluding the one-time of course that implies essentially negative leverage I think year-over-year giving your share buyback and if I think about how you describe last year is an investment year, why should we see that within the model this year.

[Elisha Finney:]

So Amit when you go through the guidance we’ll be at about sort of full fiscal year 19% operating margin including the $11 million restructuring charge. Once you exclude that we should get closer to about even where we were with the year ago period, understanding that our revenue is coming down significantly due to FX and we don’t get the full offset. So that has something to do with it as well. But, excluding the effects of FX and the restructuring charge we would get leverage in the P&L this year.

[Amit Hazan:]

Okay. And maybe let move to currency with sales guidance going essentially from the 5% to 6% growth last quarter, now you have 5%, little bit hard to tell what exactly the currency impacted versus a very nice outperformance, is that would have taken guidance higher, can you walk us through the dollar or the growth impact to expect from FX -- expected last quarter when you gave guidance what that dollar or growth impact is now on a top line, and can you then just to remind us how that goes through your P&L?

[Elisha Finney:]

Absolutely, so let me give you the walk from the prior guidance to the new guidance and let me preface by saying to simplify it out at start of the midpoint and the year ago guidance and take it to the midpoint in the quarter ago guidance and take you the midpoint today. Just the 50,000 foot level, we’ve really had a double whammy a recently win the Yen and Euro where we have significant revenue in both of those currencies and we can buy 8% to 10%. Added to that, this Swiss franc strengthened by about 20% and we don’t have much revenue in franc but we have a significant amount of expenses in Swiss franc. So when you put all together we start to support 21 which is the midpoint of the prior guidance and you assume we beat the midpoint by $0.14 in Q1 and then we have a negative $0.20 impact EPS for the balance of the year due to FX and come back and talk a little bit more about that. That gives you the 4.15 and then we believe as we lookout as the momentum that we had in quarter and the gross margin and the geographic mix and product mix along with the some cost controlled initiatives that we will be able to get an additional $0.06 or so for the balance of the year and that gets you back to the $4.21. So let me just say in a minute on how we get to the $0.20 impact from FX, the revenue for Q2 for Q4, we’re estimating just based on what we’re expecting shipments to be and where current exchange rates are to be down about $50 million. And we’re roughly 50% naturally hedged, so we have a $25 million net impact from that loss of revenue and then on top of that our Swiss cost we’re expecting are going to go up between $5 million to $7 million based on the stronger franc and when you tax effect that it gets you at a midpoint of $0.20 for the balance of the year.

[Operator:]

Thank you. Our next question comes from Jeff Johnson from Robert Baird.

[Jeff Johnson:]

Dow, maybe want start on the U.S. hospital FX environment, I obviously understand that you have the tough comp in American oncology orders this quarter and frankly I think you guys probably in the fiscal first quarter never pushing quick as hard as they’re in the fiscal fourth quarter just on a yearend number standpoint. The number this quarter not overly surprising but maybe you talk about underlying trends that you’re seeing in the U.S. it sure sounds like from a lot of companies we’re talking the U.S. CapEx environment is getting better or do you feel that is true in some of the discussions you’re having?

[Dow Wilson:]

I mean first at the back, North America orders were down 3% versus 13% growth a year ago quarter. They had a drift trailing 12 months is 4% growth. I not only believe too much less than 12 months orders trends that’s when what we keep our eye on around here, but even when you short out six month it’s north of the 4%. So I think we’re seeing a small move in the market that’s good. We still believe that North America is a low to mid-single digit market and our sales are going to look pretty good. We’ve seen the same capital improved rate with everybody else. I think you know the surveys are usually ahead of where people actually send the money, but I would say our performance looks good.

[Jeff Johnson:]

All right that’s helpful and then at least maybe a question on SG&A even a high adjust for the restructuring charge just for the $5 million above our right off adjustment that you made, SG&A still up in your 17% of revenue and historically we haven’t seen a 17% SG&A number until going back to 2007 or so and typically in the first quarter you’re close to 15, 15.5, so what else is driving maybe that SG&A higher in the quarter?

[Elisha Finney:]

Yes, what really sets us because we had our reduction in headcount a bit at the end of the quarter, it will start to turnaround and should approximate closer to 15% as we go forward on Q2 through Q4. So here we just see effects of the investments that we made last year on a quarter-over-quarter basis. You’ve mentioned the riff and the retirement plan as well as Venezuela. We will normalize going forward closer to 15% of revenue.

[Jeff Johnson:]

All right that’s great and then just my last question, we’ll follow up on the detail maybe off line later tonight. But it sounds like the incremental FX headwind is around $0.20 and that’s incremental since you last updated or not and we can talk about that offline, but if you’re absorbing that in guidance, it seems like fundamentally the year is obviously coming in stronger already one quarter end you fundamentally feel better about the year, so when I first saw the stronger margins in the first quarter you talk about the positive revenue mix, it sounds like maybe that was just pulling into first quarter and out of the second quarter specially then second quarter guidance being little lighter than most model. But obviously fundamentally you must be feeling better and I am just trying to figure out fundamentally is it the strong growth you see in imaging as is it the software and services side of oncology just where fundamentally you’re feeling better maybe today than you were there months when you first gave guidance?

[Elisha Finney:]

So Jeff, you’re absolutely correct it’s about the impact from the last guidance to today’s guidance and is really helpful of course that we got the 14% lead in Q1, so largely it make up for that. First we do think just given the geographic mix and the margin performance and the service growth and these cost control initiatives that we took late in the calendar year that we will have a little bit more that we added to guidance for the balance of the year. If I could you mentioned the Q2 guidance, let me just do a very quick one, because at first it looks like it is very low relative to the year-ago period. And some of this is just timing about let’s see the tax is going up about three points versus a year-ago quarter this is just the timing of the geographic mix of profits in the year that negatively impacted Q2 EPS by about $0.05 and then the FX impacts for Q2 is about $0.06. So if you were to strip out those events we would have high single-digit growth quarter-over-quarter for Q2.

[Operator:]

Our next question comes from David Roman from Goldman Sachs.

[David Roman:]

Good afternoon, thank you for taking the question. Elisha I just had a quick clarification on the guidance. I know that you are much more purist when it comes to reporting your numbers and don’t have the adjustments that lot of your peers do. So, is the 416 to 426 guidance on a basis you did $0.92 in Q1 and $0.99 in Q1?

[Elisha Finney:]

On a GAAP basis which we report $0.92 if you were to exclude that restructure target it will be $0.99. So my 416 to 426 is GAAP that does include the $0.07 charge.

[David Roman:]

Okay, got it, thank you. And then just on the emerging market side Dow in your prepared remarks as you discussed China, I think you made a reference to the market coming back to more normalized levels of demand, and I know you had a nice tender win there, but maybe could you just talk about the underlying operating dynamics in China specifically and maybe in the emerging markets more broadly. I think you are one of the first companies that reported as part of fairly strong numbers in those regions. So maybe just help us walk through what are the key underlying drivers there?

[Dow Wilson:]

I think across the emerging market, first of all from high-level a 15% oncology orders. We believe that we will continue to see double-digit growth in the emerging markets and quickly doing this claim China as we talked about last year that we are purchasing aberrations. So not a lot of volume coming from government, they retooled the purchasing processes. We are seeing those trading out which I think the good news is that means they are little pent-up demand there. So I think we will see that come. The Africa continues to be kind of a surprise for us I would say three years or four years ago it was really low number and we have a terrific year last year and we started out this year very good in Africa as well. Maybe one other things that just going back to China one of the thing that we are seeing besides the kind of government trends, is we are seeing the emergence of a private market in China and I think that’s something that other diagnostic imaging is going to around for long-time leases historically we have seen a little bit of that but not a lot. I think we are starting to see a little bit more of the private market emerge in China. Latin America the first quarter was okay, better in terms of growth but we still had a good growth in the first quarter, we grew 5% in the first quarter in Latin America that I think will keep growing there. We feel there is a lot of volatility and uncertainty with exchange rates and what’s going on how does that impact Latin America but we haven’t seen that yet in those markets. The one market that’s quite is Russia, that’s we have not seen much there at all. India I would say on the year looks really good.

[David Roman:]

Maybe speak little more here on the U.S. There obviously been a just a moving parts in the U.S. the past couple of years with consolidation among the freestanding clinics and potentially some pent-up replacement demand. Where do you think we are in sort of that handoff where a lot of that consolidation and freestanding clinics are going to cleaned up and we move more into the natural replacement cycle that you should be enjoying now?

[Dow Wilson:]

I think we are still going to see some more consolidation. I don’t think it’s over yet. The good news is I think the strong players looking at this an opportunity to grow and invest. So we are seeing some growth from some players on both the freestanding side and in hospital market. And I think last radiation oncology is valuated treating cancer. And I think from an overall point of view the trends that we are planning to really good uptake radiation of oncology over the few years in that cancer play.

[Operator:]

Our next question comes from Raj Denhoy from Jefferies.

[Raj Denhoy:]

What if could ask about proton. I think you mentioned at the Maryland facility is not yet progress to where you’re ready to book again. But I am curious do you have any update or any I think you offer in terms of timing on that installation.

[Dow Wilson:]

The short version this isn’t over and talked over. We’re not going to book it and sell it and now we have seen some progress on the quarter and that could. But it’s not done until it’s done and Elisha do you want add anything.

[Elisha Finney:]

No I think that’s it.

[Dow Wilson:]

The short straight version.

[Raj Denhoy:]

Well in terms of, can you remind us again in a way it does happen. What sort of implications are in terms of revenue to get a release from that.

[Elisha Finney:]

It will be a significant amount Raj it’s probably North of $70 million or so given that the project has continued under percentage of completion to progress and as you recall when it did not refinance in the fourth quarter there was about $0.17 impact. And again as we progress on the installation it could be a little bit north of that wants this thing finally and we’re confident that’s going to get financed, it’s just a matter of the timing which is impossible to predict.

[Raj Denhoy:]

Okay and then just continuing on proton I believe you mentioned that there was five new tenders you completed for in the quarter anything you offer in terms of size of those installations where those might be in terms of.

[Dow Wilson:]

No I would say most of them are three and four room centers for a large center. Flight wise 50 days 75 configurations are all different each one of them. But I’d say in a 50 to 75 range.

[Raj Denhoy:]

Okay and just lastly I think you ultimately comment around how service in the quarter was about 45% of oncology revenues. I’m curious if you could put that number in perspective without percentage in perspective in terms of where you think that never ultimately go I know you guys targets a billion is in service but where we are in that past and then also if you could kind offset something similar in terms of where software are at this point will be helpful as well.

[Dow Wilson:]

On service side we’ve growing double digit for the last several year. This business is getting really big and hard to grow with double digit rate. But I’d say we’re going to be if not double digit really close to it. So it was all a bit stronger in the quarter then we usually see as another will 2014 and the service business but we should be in that double digit range. What is driving it is really everywhere it’s forgetting installed based throughout any emerging market and so got product coming out warranty driving the emerging key market if got truly which we’re actually celebrating our thousandth TrueBeam this next quarter. It is the most successful product in both the history of the product and the industry where four and half years get to a thousand in it. The capture rate on TrueBeam is higher and the price is little bit higher. So that’s driving service content and then we move to lot of our kind of software as a service to the service business and for that part of the growth there, as well, which is a nice transition to our software business. Our software business has had two very good quarters in a row the business we’re investing in aggressively both organically and inorganically with some of things that we did last year. The velocity is making a nice addition to our product line and we saw very good orders grow in our software business in both fourth quarter and the first quarter.

[Raj Denhoy:]

And if you said what percentage of revenue oncology revenue was this software at this point.

[Elisha Finney:]

We could saw to $500 million business when you include both the licenses and software.

[Dow Wilson:]

On a pro forma basis it’s about 500 million some of that equivalent come in the slide.

[Operator:]

Our next question comes from Tycho Peterson from JPMorgan.

[Tycho Peterson:]

Thank for taking the question. Wanted to kind of go back to one on the international market that I appreciate kind of walk you did earlier here on under different geographies thinking about the fact that a lot of value exposure I think 150% Brazilian rush to wind our commodity sensitive market. Can you just talk about how much you are taking in around macro issue which would be under control and you are thinking that lower oil and prices and things that potentially could have macro impact scenarios like Russia, Eastern Europe, Brazil, Venezuela.

[Dow Wilson:]

We actually talked a lot about it this last week clearly some of growth we’re seeing in Africa is from oil producing countries you haven’t seen that slowdown so far? That’s a reasonable question to ask. Some of the growth that we’re seeing in Africa is we’re seeing a lot of growth in Sub-Saharan Africa. And with the exception on Nigeria there is not of oil in the rest of Sub-Saharan Africa. So that’s kind of good news on the rest of the African continent we did see some big volume in Eastern Europe, Russia in 12 to 18 months ago we take a big order in tons on and we maybe have seen that tail off a little bit as here recently but I think Russian we didn’t much the good news is they need radiation oncology, they’re still competitive, and they’re pumping oil like crazy and we’ve seen continued investment there, we haven’t seen that tail off yet it will be interesting to watch Brazil, I think that market have remained strong and we’ve got obviously the big tender we won year ago but we continue to see the private market which tends to buy a higher configuration but it will be interesting to see where the market goes there?

[Elisha Finney:]

And Tycho, while it obviously impacts their ability to buy based on the foreign currency we feel in dollars in all of those countries.

[Tycho Peterson:]

And actually two more question for Japan, I mean given that - one rate - and how do you think about the risk in that market for you guys this year?

[Dow Wilson:]

I mean to some degree it’s kind of in that in the P&L already. We had weak orders a year ago and we’re seeing that flow through a little bit that’s part of the weaker guidance you got for Q2 revenue that Elisha talked about. We did have a very good market share quarter in the first quarter but the market was down. So, we think some of its driven and there is macroeconomic issues but we also think that some of it is driven as well by consumption tax change that maybe had people pulling in some volume little more than a year ago.

[Tycho Peterson:]

And then with the realignment of the reporting by geography obviously get better granularity on the revenue line, can you maybe just give us an update on cost structure, changes that you’ve made U.S. versus OUS and where is your US versus OUS cost mix go two to three years in that?

[Dow Wilson:]

I think the bottom line on this line is the intent that what we’re trying to do is get our team closer to the customers. So we feel very good about that I think we’re already seeing really good empowerment, really good ownership in the field, on the quarter we saw very good orders with revenue execution. So that’s what we’re trying to get, from the cost point of view that side of it is really small. Last year most of the investments that we’re making, there is a little bit of SG&A that most of the investments we’re making on the R&D side as we look at some programs to drive some top line.

[Tycho Peterson:]

Okay, and then two quick follow up. Elisha, I think did you gave the net order number and can you also just comment on annual translation.

[Elisha Finney:]

I did, given that order number 692, which was up 14% over the year ago period. So why don’t you do the calculation, you will see the adjustments in the quarter were 34 million for the total backlog adjustment going from gross to net orders.

[Tycho Peterson:]

And then last one for Dow, you talked about [indiscernible] data potentially driving a cycle around therapy capable machine, is that actually happening, are you seeing that drive dedicated equipment purchase?

[Dow Wilson:]

I’m sorry, say that again Tycho, the first part of your question kind of broke up.

[Tycho Peterson:]

Lung screening mandate.

[Dow Wilson:]

We think, I’d say at this point we haven’t really seen it flow through I think there is a lot of conversation about it I think that, that’s happening for sure but I wouldn’t say that we’ve seen material increase yet. Well, I mean the increase is material but if on such a small base it’s kind of hard to characterize but we continue to - I talked about the new [Tim Merman] paper, it’s kind of small patient dataset but very encouraging results and just another example of the clinical research that’s happening with really good news and more and more patients are having access to that and asking their physicians about it and that’s what causing the change. So, I don’t think it’s really kind of in the market yet but very encouraging progress.

[Tycho Peterson:]

Okay, and then actually Elisha just to clarify that, net order I was looking for oncology not net?

[Elisha Finney:]

That was net orders overall. So, what you do Tycho, you start with the prior quarter ending backlog, add gross orders for the total company subtract revenue for the total company, that should be the ending backlog and any difference from what we report backlog as is the net adjustments. So that’s total company of which about 30 million of that was related to oncology.

[Operator:]

Thank you, our next question comes from Vijay Kumar from ISI Group.

[Vijay Kumar:]

Hey guys, congrats on the quarter. Maybe I just want to follow up on the guidance question and I apologize for asking this. The guidance we’ve - on the revenue and EPS right, so basically the way I was looking at it was you had FX which went incrementally worse off. Does that mean that top line is coming in a lot better than expected or you expecting margin to be much better? What was the math behind the EPS guidance, if you will, and do you have any proton orders baked into that?

[Elisha Finney:]

No. So, Vijay as we mentioned just on FX alone we think we’re going to lose close to around $50 million in top line Q2 through Q4 and so if the exchange rate has not changed we would be guiding closer to 6% top line growth the prior guidance was 5% to 6% we are now guiding closer to the 5% growth. We were able to maintain guidance where at the prior level largely because of the Q1, which offset that $0.20 impact as well as we do see some improvements from operations and cost controls and margin going forward into the balance of the year of about $0.06.

[Vijay Kumar:]

So basically you are saying incremental FX headwinds you’re receiving in the model about 100 bps, right, from the time you gave the last guidance is that correct one.

[Elisha Finney:]

Correct.

[Vijay Kumar:]

Actually, and maybe one in that gross margin clearly phenomenal pull-through on the gross margins, and obviously we don’t have the segment details, is this all sort of coming in from -- sort service also on the oncology system side or sort of how the schedule is there I guess the gross margin pull through.

[Elisha Finney:]

Sure. So oncology I mean obviously we were very pleased with the 45.6% gross margin in the quarter which is well ahead of our long-term margin expectations for oncology and that was driven by product mix shift in service and software clearly driving that as well as a 10 point shift in revenues in North America. So we had kind of the perfect good stone for a change where both the products and the geographic mix that moved largely in that, in our favor. For the year what that means is based on that Q1 performance I think oncology will come closer to a 44% margin rate which means for the balance of the year we continue to think we’ll be in that 43% to 44% range.

[Operator:]

Thank you. Our next question comes from Jason Wittes from Brean Capital.

[Jason Wittes:]

Hi, thanks. So, if you could remind us again what the proton assumption is for this year in the guidance you provided?

[Elisha Finney:]

Sure. So the assumption is revenues are roughly 65 million so that does not include the Maryland or the Emory or UT Southwest potential deals that are not financed yet, but those are existing proton deals that we are working on with a growth profit of maybe high single digits very low double digit somewhere in that range.

[Jason Wittes:]

Okay. And you mentioned there is five tenders ongoing at the moment, are those potentially things will be here about in this fiscal year or are those something we’ll hear more about or pushed into next fiscal year.

[Dow Wilson:]

One you have to hear it when we award it and two you have to hear it when they’re financed. So I think there is a good chance that we hear some news on most of those this year and if there is any financing continue to deal all -- before we’re looking. I think the good news is most of these are outside of the U.S. so there is not financing continuity.

[Jason Wittes:]

Okay. That’s helpful. And also about the Brazilian tender offer that starting to hit this year, is that a two year process that you fill those orders, how we think about that and how it flow through?

[Dow Wilson:]

No, it’s probably and short version is three quarters of it is slightly over two years but we do think it will be three and maybe even for by the time there all done. We’re beginning shifting in the second half of this year.

[Jason Wittes:]

Okay, that’s helpful. It also sounds like the other, the private side of Brazil is also doing well it sounds like is there way that happen at this point?

[Dow Wilson:]

Probably little less than half, that market as we’ve said before pricing is maintaining and by configuration so it’s a good market.

[Jason Wittes:]

And if I can just ask one on software I appreciate you broke out its roughly $500 million run rate for software right now, but you guys done a lot of investing in also -- in expanding our offering I think quite a bit last three years, is there any assumption that the general sort of package that a typical side will double or triple at some level over the next few years that part sort of built into your assumption and kind we’d like to maintain double digit growth.

[Dow Wilson:]

I mean clearly we’re bringing new offerings to the market so we do hope that with every socket there is more opportunity. So that’s clearly a big piece of what we’re driving. And I’d say in the short term the single biggest opportunity is rapid plan and rapid plan we think is $200 million to $300 million over the next three years. It get a 100 orders so far I mentioned on the call we’ve just done our first treatment, we really like that. One of the big investments we’re making is into data analytics, that’s our product called instigative and that’s really good. I think the other kind of exciting thing is, lots of these products are relatively Greenfield outside of the U.S. So Asia and Europe have big opportunity and then of course in the U.S. at least for things like rapid plan, InSightive and our new QA product huge upgrade opportunity in those markets. So this continues to be a big focal area for us and I think a really good opportunity for the company strong double digit growth last few quarters and we want to keep going.

[Operator:]

Thank you our last question comes from Steve Beuchaw from Morgan Stanley.

[Steve Beuchaw:]

Good afternoon, thanks for let me speak on to the wire here. Elisha, lot of good granularity on the impact of currency, would you mind giving us the spot rates that you’re using on the euro and the yen for your calculations of that incremental impact?

[Elisha Finney:]

Sure, now and understand there is a kind of the midpoint so obviously we got so much volatility going on right now but our assumptions currently as of the euro that 1.14 began at 1.18 and the Swiss franc at 0.87. I think that was yesterday’s rates were very close to ours.

[Steve Beuchaw:]

Perfect, thank you and then on the tax rate with the R&D tax credit in the original guidance for fiscal ’15?

[Elisha Finney:]

No, so that obviously until it happen we just didn’t want to count on it. So that did help Q1 by about $0.02 to $0.03 and had a significant impact on Q1 because the entire affect have to be taken in that quarter, once you smooth that R&D tax credit over the fiscal year, it impacts the total tax rate - by about 40 basis points.

[Steve Beuchaw:]

Got it, and then a strategic one for Dow, I’d agree with Jeff’s view I mean the U.S. has been a really nice market for you guys likely so when I look at the numbers, my observation is really more that it’s about market share not relative performance. It is really helpful to hear you reflect on the last 12 months or so, and what as you think you’ve done that, that’s really working as you drive in competitive situations in the U.S. and how you see that playing forward?

[Dow Wilson:]

I think it starts first with that product out there to being one of the best product when we introduced it, we think the second best product in the market - and both products has just gotten better in last four years. So we are in terrific market position and high end of the market just if we’ve had the number of customers here to Palo Alto and singing phrases of our TrueBeam product so I think we really have a terrific position on TrueBeam. One of the things that customers are looking at is total cost of ownership and on total cost of ownership isn’t always about price. It’s about throughput, it’s about versatility, it’s about volume, it’s about brand and reputation in the market and then it’s also by cost and we’ve I think done a really nice job in our sales team of pushing the differentiation of the product from the total cost point of view. And on the software side, from our software products just keep getting better and better and I think we’re really beginning to turn some heads, I think we’ve been turning heads for a long time in treatment planning, our treatment plan with physician is terrific and I really think over the last 6 to 12 months in oncology information systems especially with the investments we’ve made in our ARIA product and now these new expansions for QA and analytics really getting some traction there.

[Steve Beuchaw:]

Hospital consolidation it hasn’t been a positive for you, do you have an incrementally stronger position do you think in the hospitals there are on the buyer side in those transaction?

[Dow Wilson:]

I think we’re equally strong on both sides. I don’t have my market share in front of me but I’d say it’s pretty close in both hospital and non-hospital.

[Operator:]

Thank you, I’ll now turn the call back over to Spencer Sias for closing comments.

[Spencer Sias:]

Thank you for participating. A replay of this call can be heard on the Varian investor Website at www.varian.com/investor, where it will be archived for a year. To hear a telephone replay, please dial 1877-660-6853 from inside the U.S. or 201-612-7415 from outside the U.S. and enter confirmation code 13597116. The telephone replay will be available through 05

[Operator:]

Thank you this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.