Varian Medical Systems Inc
Q2 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Greetings and welcome to the Varian Medical Systems Incorporated Second Quarter Full Year 2015 Earnings Results Conference Call. At this time all participants are in a listen-only mode. A brief 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, 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 second quarter of fiscal year 20 15. With me are Dow Wilson, President and CEO; Elisha Finney, CFO, and Clarence Verhoef, our Corporate Controller. Dow and Elisha will summarize our results, then we'll 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 second quarter of fiscal 2015 versus the second quarter of fiscal 2014, references to financial results for orders are the 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, should, will, and – I lost the second page, so I'm just going to say – I can continue, and similar expressions are intended to identify those statements which represent our current judgment 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 second 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. For the second quarter of fiscal 2015 we generated good earnings that were achieved in the face of significant currency headwinds. In summary, we are reporting net earnings of $1.05 per diluted share, revenues of $759 million, down 2% in dollars but up 2% in constant currency. Excellent cost control efforts that helped our gross and operating margins, double-digit oncology orders growth in the Americas that largely offset declines in EMEA and APAC, challenges in our imaging components business with the clients in orders and revenues and two big wins in our proton business. Let's talk about each of the businesses in more detail starting with oncology. Second quarter gross orders for Oncology Systems rose by 15% in North America and by nearly 10% in China, partially offsetting currency related weakness across the bulk of the international markets. Oncology gross orders totaled $581 million for the quarter, down 5% versus the year ago quarter but equal to the year ago quarter on a constant currency basis. Looking at Oncology three geographies, gross orders in the Americas rose 12% in dollars and constant currency. Gross orders in EMEA declined 24% in dollars and 13% in constant currency, principally due to weakness in Africa and India, where we had strong orders in the year ago quarter and business tends to be lumpy. In APAC, gross orders fell by 15% in dollars and 8% in constant currency, principally due to weakness in Japan. For the first half, oncology gross orders growth rates were as follows; worldwide, even in dollars and up 4% in constant currency, Americas up 5% in both dollars and constant currency, EMEA down 8% in dollars and up 1% in constant currency, and APAC down 1% in dollars, and up 5% in constant currency. Our strong order growth in North America during the quarter was highlighted by several large long term deals, the largest of which was the project with HCA to equip its Sarah Cannon Cancer Center in Tennessee with seven linear accelerators including six systems. This installation will also have our new rapid plan and analytics [ph] software using data analytics tools for treatment planning and information management. The HCA order is an example of the move towards consolidated networks making purchasing decisions aimed at standardizing clinical operations. The need for integrated clinical solutions drove many customer decisions during the quarter to replace competitive hardware and software product from multiple vendors in favor of a single Varian system. Clinical integration of treatment planning and delivery, as well as information management for safe, efficient, and effective workflow is a key Varian advantage. In Latin America, currency headwinds led to some purchasing delays that resulted in modest decline in orders. In EMEA we had sizeable wins in Germany, Bulgaria, Finland, and in the UK; Bayer Healthcare, one of the UK's biggest private hospital chains ordered two true beams together with our full software suite for a planned new radiotherapy and radiosurgery facility in Jumpford FX [ph]. In APAC, weakness in Japan and Australia overshadowed our growth in China. In Japan, orders were flat in constant currency and down in dollars. The market remained sluggish, however, we gained share there during the quarter. Currency was also a culprit in Australia where a stronger dollar caused some customers to pull back on purchasing decisions. In China we booked an $18 million order following a public tender by the People's Liberation Army. During the quarter we also successfully launched the Edge Radiosurgery System in front of more than 250 customers at the Annual China Med Exhibition in Beijing. China remains a healthy market for us. Order activity during the quarter was slow in other emerging markets including Brazil, India, Africa and Russia; Russia in particular remained very quiet. The long term need for cancer treatment products remained high in developing markets with a number of diagnosed cases is rising, and where radiation therapy is among the most cost effective treatment. In past calls we have talked about expanding our product portfolio to offer more to customers in global markets. Over the weekend at the ESTRO show in Barcelona, Varian announced VitalBeam, a significant addiction to our line of linear accelerators. VitalBeam leverages Varian’s basic two beam technology to provide clinics with new cost competitive options for delivering image-guided radiotherapy. It can be equipped with accessories including rapid arc, respiratory gating, onboard imaging, and 80 or 120-leaf collimators. VitalBeam is a scalable and upgradeable system that affordably meets the clinical needs of hospitals today and as they grow in the future. It's optimized for advanced radiotherapy. VitalBeam is targeted at the core radiotherapy market where it can serve as a work horse in busy clinics. Customer interest at ESTRO was very high and we plan to make it available to customers in Europe first, while seeking clearances around the rest of the world. CE mark, FDA 510-K and other international regulatory approvals have not yet been obtained. VitalBeam is currently not available for sale in any market. We will continue to invest in R&D to bring more products like VitalBeam to market. In March, we held our annual research partner symposium, a two and a half day scientific meeting in Atlanta on the future of cancer care. It attracted 150 leading clinicians and research partners from 71 institutions and 15 countries. They shared ideas and presentations on their work with knowledge based planning, data analytics, stereotactic radiosurgery, and advanced imaging technology. It was an exciting meeting and we can see a clear path to the development of significant new treatment capabilities that will dramatically improve the speed and precision of radiotherapy and radiosurgery. The next steps will be every bit as exciting as IMRT, IVRT, SBRT, Rapid Arc, Rapid Plan and TrueBeam. Let me turn now to our imaging components business. Gross orders for imaging components fell by 24% to $156 million for the quarter, and revenues fell by 8% to $155 million. Imaging components had a tough comparison with very high panel orders in the year ago quarter as a result of orders that flipped from the first to the second quarter last year. Additionally, orders in sales for tubes and panels were impacted by pricing pressures related to the devaluations in the yen and the euro. Very strong dollar is causing some customers to reduce inventories, insource or look elsewhere for lower cost alternative to our component. Orders and sales of our security and inspection products also fell sharply in the quarter. And these products [ph] have been delayed and it appears that customers have already ordered most of what they need for the next few quarters as they work through the backlog. For the first half, orders for tubes and panels were up 6% and sales were flat. However, orders and sales for our security products were down significantly. While we remain optimistic about the long term growth prospect, we believe that this business will continue to face challenging conditions in the near term. The company's other category comprised of the Varian Particle Therapy business and the Ginzton Technology Center recorded gross orders of $44 million and generated $14 million in revenue. It was a big quarter for our proton business, we won a public tender and booked an order for a ProBeam installation at Aarhus in Denmark. In addition, Varian was announced as the preferred bidder for two proton therapy centers that will be constructed in the United Kingdom over the next two years. The contacts for these projects are due to be signed during the summer and we expect to book the equipment portion of these orders at that time. With a strong backlog in the sales pipeline we're starting to see some real momentum in our Particle Therapy business. Now I will turn it over to Elisha.

[Elisha Finney:]

Thanks Dow, and hello everyone. Before I walk you through the P&L, let me touch on backlog. The company ended the quarter with $3.1 billion backlog. Backlog adjustments during the quarter totaled $53 million bringing net orders for the company to $729 million. The adjustment includes $12 million related to currency exchange rates. Second quarter revenues for the total company decreased 2% in dollars and increased 2% in constant currency. Total company revenues in the Americas were up 11% in dollars and up 12% in constant currency. EMEA revenues were down 1% in dollars but up 10% in constant currency. APAC revenues were down 25% in dollars and down 21% in constant currency. For the first half, total company revenues were flat in dollars and up 4% in constant currency. Oncology Systems posted a 2% decline in revenues during the quarter bringing the revenue growth for the first half to 1%. Imaging components posted a second quarter revenue decline of 8% with small declines in our tubes and flat panel products, and a 45% decline in our security and inspection products. For the first half, imaging components revenues were down 3% from the year-ago period with gains in flat panels more than offset by declines in tubes, as well as significant declines in security and inspection products. Revenues for the other category increased significantly from the year ago quarter as we continued production and installation of several proton projects that are in our backlog. Total company gross margin for the quarter rose 30 basis points to 42.5% with increases in all of our businesses. Oncology Systems gross margin increased 18 basis points from the year ago quarter to 43% as favorable product and geographic mix more than offset the negative currency impact on revenue. For the first half, oncology's gross margin increased nearly half a point to 44.3%. The imaging components gross margin for the quarter increased by 216 basis points to 43.7% due largely to a higher mix of panel products, product cost reductions, and improved quality costs. For the first half, imaging components' gross margin increased nearly 1.5 points to 42.9%. Second quarter SG&A expenses were 117 million, or 15% of revenues, an improvement of 250 basis points as a percent of revenues from the year-ago quarter when we had a large patent litigation settlement. SG&A includes a $3 million charge during the quarter to complete the restructuring that was largely implemented last quarter. I think it's worth mentioning that SG&A expenses were down significantly from last quarter as the cost savings from the restructuring have started to flow through the P&L. Second quarter R&D expenses were $59 million or 8% of revenues, even as a percentage of revenue with the year-ago quarter. And for the first half, R&D expenses were about even as a percentage of revenue at 8%. Moving down the income statement, second quarter operating earnings totaled $146 million, or 19% of revenue. Depreciation and amortization totaled $16 million for the quarter and $33 million for the first half. The effective tax rate at 28% was up 35 basis points from the year-ago period when we benefited from a patent litigation settlement. We now believe the tax rate for the full fiscal year will be 27% to 29%. Fully diluted shares outstanding decreased from the year ago quarter to $101 million shares due largely to our ongoing repurchase program. Diluted earnings per share was $1.05 for the second quarter including the $0.02 restructuring charge. Turning to the balance sheet we ended the quarter with cash and cash equivalents of $862 million, debt of $513 million, and stockholders' equity of $1.67 billion. DSO at 88 was improved seven days from the year-ago quarter. Second quarter cash flow from operations was $53 million, less than net income primarily due to working capital increases in inventory and accounts receivable. For the first half, cash flow from operations was $132 million. Primary uses of cash were $76 million for the repurchase of about 825,000 shares of stock. At the end of the quarter, we had 3.9 million shares remaining under the existing repurchase authorization that extends through calendar year 2015. Now I will turn it back to Dow for the outlook.

[Dow Wilson:]

Thanks, Elisha. We believe that for fiscal year 2015 total company earnings will be in the range of $4.02 to $4.14 per diluted share, and that revenues will increase by about 1% to 2% in dollars and by about 5% in constant currency. We now expect that challenges in our imaging components business and currency headwinds will more than offset the earnings momentum of the first half. We estimate that imaging components could negatively impact earnings by about $0.08 to $0.12 per share. Additionally, since our guidance last quarter the strength of the dollar has diminished our earnings expectations by another $0.06 to $0.10 per diluted share. For the third quarter of fiscal 2015 we believe total company revenues should be about equal to the prior year period in dollars, and up about 4% in constant currency. Net earnings per diluted share for the third quarter could be in the range of $0.90 to $0.94 per diluted share. The outlook for the third quarter and full fiscal year 2015 excludes any impact of proton orders not yet booked into the backlog. Let me finish with a comment on the significant impact of the strong US dollar. Since last October when we first guided for fiscal year 2015 the strengthening of the dollar has cost us about $0.30 per diluted share not accounting the competitive challenges that this has presented to our imaging component business. The good news is that we've managed to largely offset this in our operations. We are now ready for your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Johnson with Robert W. Baird. Please proceed with your question.

[Jeffrey Johnson:]

Thank you, good evening, guys. Can you hear me okay?

[Dow Wilson:]

Hi, Jeff.

[Elisha Finney:]

Yes.

[Jeffrey Johnson:]

Great. So Let me start – I don't think I have ever started this way but I'm going to start on the imaging business. So Dow, I hear what you are saying there on some of the dollar impact and all that. Kind of run me through the Hitachi deal I thought kind of helped mitigate some of the volatility and there was some minimum purchase requirements and all. Is it that others on the margin outside of that deal where those variances are coming relative to prior expectations, or how should we think about that?

[Dow Wilson:]

Sure, let me walk you through it. First of all from a profit...

[Jeffrey Johnson:]

So sorry, my fault, sorry.

[Dow Wilson:]

That's okay. Toshiba is our largest customer. We have seen a little bit of weakness from Toshiba, the Japan equipment market is very soft. Equipment is – most of the business is a service business but the equipment business, Japan equipment business is off for them, and that's been an impact. But you heard us say on the half, you do have to kind of look at the half to see what's really going on. The panel business is still a very strong double-digit business, and the first half, it's going well north of up 10%.

[Elisha Finney:]

14%.

[Dow Wilson:]

14% on orders in the first half. The tube business is about flat in the first half, and in orders, and SIP, our security and inspection business is where we've taken a big hit. We had some big orders last year and then we think with the inventory that people have they're kind of taken care of for a while. So we see that as kind of the ongoing part here. And in tube and panel, you know, we are concerned – combined panel and tube together, 6% in the first half, that's not kind of 8 to 12 that we've done historically, so we're a little bit worried there. I'd say people are being very careful and holding back purchases. We think it will come back, but it's a little cloudy as to what it's going to be here over the next six months.

[Jeffrey Johnson:]

Okay. And then any update at all on Maryland? And Elisha, just want to ask one question on FX.

[Dow Wilson:]

I'll start on Maryland, and Elisha can fix it. We have made significant progress towards financing this past quarter, and we know it's been frustrating for everybody but we're feeling good about where it is. It is still not done yet, we won't book until it's complete so it is still not in our guidance for the year. There is some probability that could happen this quarter or next quarter, so that's the good news but we're not going to put it in guidance until everything's signed up. When it does book, just as a reminder for everybody, it will be about $80 million in both orders and revenues and around $0.20 of EPS.

[Jeffrey Johnson:]

Got it. And then just on currency, Elisha, I just want to make sure I'm understanding the comments over the last few quarters. I thought last quarter, the currency impact for the year was up to $0.30, then another $0.06 to $0.10 here. And Dow I think you referenced in your prepared remarks you're hurdling $0.30 for the year altogether. So just trying to reconcile, I thought we were at $0.30 already last quarter plus the $0.06 to $0.10 incremental this quarter. Am I missing something there or am I misremembering?

[Elisha Finney:]

Jeff, I would have to go back and take a look at that, since we gave guidance in Q1, we had another FX impact of about $0.18. So if you look back at January, we were facing guidance on a euro rate of around $1.14 to $1.15 as we've talked about. Recently up to today it's been closer to the $1.07, $1.08 revenues coming in April are closer to that range. So that's the delta that we're now talking about. If the euro were to come back to the $1.11, $1.12 rate that we saw today and stay there for the balance of the quarter, obviously that would be good news and could help us get back to the higher end of that range. But currencies have just been all over the map and so we're trying to look at it as where it's been trending the past week which was closer to the $1.07 range.

[Jeffrey Johnson:]

Okay, that's helpful. Thank you very much.

[Operator:]

Our next question comes from Jason Wittes with Brean Capital. Please proceed with your question.

[Jason Wittes:]

Hi, thanks for taking the question. If I could just follow up on imaging, it seems like this is more than your temporary destocking issue hitting that business. It sounds like you think this will be a little bit more prolonged than we have seen in the past. Am I characterizing this correctly or how do you think about sort of what's happened in this quarter and the outlook for the rest of the year but that's basically three quarters.

[Dow Wilson:]

We think that certainly the security and inspection piece is going to be a big issue for us all year. So on that aspect of it, you're right, we – as I said, when you look at the panel and – panel business is doing great going 14% in the first half. The tube business is flat in the first half. Combine it together, 6%. We'd like to see two or three more points on that. So we have seen people be very careful with their purchases. Will that come back? We do know that people are – it is hard to move because we're designed in. But they are looking at other sourcing options and in-sourcing options in the case of some competitors. The exchange rate has moved a nickel here just this week, maybe that helps us out a little bit as we look at the second half. Anyway, I mean, I think the bottom line is, when you look at the business I think it's fair to say that we've got some challenges here in the near term, two of them panel markets are likely to grow in the mid-single digit range, that 5%, 6%, 7% range is probably about right for panel and two of them comes from market growth.

[Jason Wittes:]

Just to push a little further, just to understand, I mean most of your panels and tubes are made, I think, in Utah. So that the US dollar manufacturing, that's obviously gotten more expensive so that's part of why some of especially the lower cost customers are looking other places. Is that the right way to think about?

[Elisha Finney:]

Yes, Jason, I mean – because like we've said many times, we sell in dollars, so the direct FX impact has not affecting us, but what I'm kind of referring to is an indirect impact of the exchange rates. We are just less competitive relative to Japanese or European manufacturers right now. And holding inventory, helping, we suspect customers are going to bleed inventory down to the bare bones and hoping they can bay at a better rate.

[Jeffrey Johnson:]

Okay. One other question I wanted to ask about was VitalBeam. I assume, you guys have talked a lot about coming out with products for emerging mark that are both cheaper but also lower cost for you guys to produce as a way of maintaining or even helping your – or even boosting your gross margin. Is VitalBeam sort of part of that process? Is there a way to think about?

[Dow Wilson:]

Absolutely. Your VitalBeam is the force of many, so I think this is an important growing market for us – as we've said too many times last year we took up R&D pretty significantly last year because we saw a lot of opportunity in the number of markets. One of those being value segments around the world.

[Jeffrey Johnson:]

Okay, thanks. I'll jump back in queue.

[Operator:]

Our next question comes from Tycho Peterson with JP Morgan. Please proceed with your question.

[Tycho Peterson:]

Actually I just want to pick up on that last line of questioning. Was there any disruption in the order book from VitalBeam from the sales people knowing about coming for the emerging mark orders? Just trying to figure that.

[Dow Wilson:]

I don't think so at all. I think you kind of heard that go around, maybe that's worth hitting for just a second. Just as a reminder, the Americas was great, so gross orders were up 12% in the Americas. North America was up 14%, so that was terrific. EMEA, as I said, was down when you look at year-to-date, year-to-date gross orders are up, constant currency 1% in EMEA, and that feels okay, we would obviously like to do better than that. We've been surprised by the strength in western Europe, we've been weak in eastern Europe, Russia; we had a weak Q2 in India and in Africa. So – Africa and India tend to be lumpy, I think the Russia, eastern Europe impact is a political one. But I think we'll see India and Africa come back. And then we did have a tough comp for our EMEA organization where last year we had a large Algeria order. In Asia, you have heard the story a little bit, year-to-date gross orders are up 5% in constant currency in Asia. In China we were up 9%. So we still feel very good about where we are in China. The Japan market year-over-year, we think it's down pretty substantially, there is some retrenchment going on in Japan, the market feels like it's down 30ish percent. The good news is, as I mentioned, we've had a very strong performance in market share in Japan, and it's nice to see that coming around. Then of course the other impact we have in Japan is the yen’s off pretty substantially and hitting us there as well in Japan. So that's kind of a go around the globe. Elisha, would you add anything there?

[Elisha Finney:]

No, sounds good.

[Dow Wilson:]

Does that answer your question Tycho?

[Tycho Peterson:]

That helps. And then I guess just as we think about the opportunity for VitalBeam, it's unique as a proxy or I'm just trying to understand how you think about these?

[Dow Wilson:]

Sure, it's a really good question. As I said, the really great thing about VitalBeam it's built on the TrueBeam platform, so it gives our customers a ton of upgradeability, they can scale up IMRT, IVRT, Rapid Arc, they can put a mega voltage imager on it, or mega voltage and killer voltage imager, they can go down market with an 80 multi-leaf collimator, we haven't done that before. It's got a dose rate that's optimized for radiation therapy at 14000 monitor units. The TrueBeam is still optimized for SRT – for SRS and SBRT, and TrueBeam still has all the motion management, the six degree of freedom couch, the high definition, collimator flatten and culture free in all of our triggered imaging capabilities. The difference between VitalBeam and Unique, Unique is built on our C series platform, it's a single energy system, and it's really the entry-level product. So I don't think these – we see this as really kind of between Unique and TrueBeam, and fulfilling a space where we can be more competitive. I think it's going to give us better price support, TrueBeam, and it's not going to compete with the Unique at all. And we still have the rest of the product line, the IX and the trilogy that kind of fit in there as well. So we feel very good about the way this product lines up. I guess just kind of reiterate the point, I don't think there was – I would like to say there was some impact from people waiting in these markets for VitalBeam but I don't think so in this last quarter.

[Tycho Peterson:]

Okay. And then just lastly on software, you guys have done a good job there, you called out HCA. I mean is rapid plan coming up in most of your discussions with consolidated networks? And can you maybe just talk to how much share you can pick up? I know you've put out overall goals.

[Dow Wilson:]

I mean the response of rapid plan has been huge. I think we're in the top half of the first inning still of that diffusion. I will say at our research symposium, people extremely excited about what rapid plan can do. We've talked about it a lot in the context of quality, in terms of letting everybody in the world do the absolute best care. But I think the other thing that people are getting ready excited about is the efficiency aspect of the product. And we had a paper presented at ESTRO last week where one institution was seeing 90-minute reduction in planning times. So that's per plan, that's huge. And all of a sudden you start to get the same productivity and the symmetry that we had. When we launched Rapid Arc, Rapid Arc was about productivity in the delivery room. Now we're talking about patient productivity in planning 90-minutes, where do you get that kind of productivity, it's huge. And by the way this is a Varian only thing, research can't do this, and Electa can't do this, Pinnacle can't do this. So we're really first to market with a terrific product, great quality and great efficiency.

[Tycho Peterson:]

Okay, thank you.

[Dow Wilson:]

I'm selling hard there, Tyco, you should buy one.

[Operator:]

Our next question comes from David Roman with Goldman Sachs. Please proceed with your question.

[David Roman:]

I wanted just to start with a few detailed follow-ups on the guidance, and hopefully my math is correct here. As I look at the operating margin progression that sort of implied by the guidance for the rest of the year, it does look like you're contemplating a very significant fall-off in profitability in the third quarter and a big bounce back in 4Q. And while I understand revenue volumes have something to do with the overall profitability, you would still be down materially on operating margins year-over-year in the third quarter despite relatively flat revenue. Can you just help us understand the gyrations in profitability over the balance of the year?

[Elisha Finney:]

Absolutely, David. And really it's just – when we look at the shippable backlog and what we expect to deliver in Q3, it is very significantly shifting to international and to emerging marks. So it's really reflected in the gross margin based on geography. We had the opposite effect in Q2 where we had a significant increase in North America deliveries. It's just the way the machines land, I would say in Q4 in the year ago period if you remember we had strong orders in North America. So Q4 will be again more North American focused, and so it's just the way it breaks down. I wouldn't read too much into quarter-to-quarter but really just kind of looking at the year. And interestingly on the year, if you exclude all of the augmenix [ph] and the patent litigation from last year, and you exclude the restructuring from this year, we're actually going up about 10 basis points in margin. So I look at that and say apples-to-apples, we're doing a really good job on controlling costs and that the restructuring is starting to pay off. So I would just caution you to look at the years versus one quarter.

[David Roman:]

Okay, understood. And then I guess a follow-up on the restructuring, it looks like a very fast impact for the comments in your prepared remarks, and also in the numbers. Are we getting to a point where the direct costs take out opportunity is reaching a plateau or is there still more opportunity to go on the SG&A line without seeing a pickup in revenue?

[Elisha Finney:]

Yes, I mean you saw from immediate impact on the restructuring because the bulk of that was implemented in the first quarter. And so those heads came out of payroll immediately when that was executed. So you will continue to see that flow through the P&L. Now that said, we are continuing to replace some of those retirees and lower cost jurisdictions. So don't hold me to no headcount increases because that won't happen, but we did see a significant improvement in SG&A. It can be lumpy, I will caution that, but I feel very good about how the businesses have controlled headcount, how we've controlled travel expenditures, and all of our costs.

[David Roman:]

Okay. And then my last question, it's sort of a longer term one, and understandably this business does have quarter-to-quarter fluctuations and order timing delivery, macroeconomic factors, etcetera, but as I think about what you talked about as a multi-year revenue goal, something like 68%. You just haven't gotten there the past several quarters; I think the trailing four quarter constant currency average revenue growth is below 5% and closer to 4%. So what gives you the confidence in being able to see that type of sharp acceleration and be able to perform at that higher level sustainably?

[Elisha Finney:]

So if I look at the full year in dollars, we're expecting 1% to 2% as we talked about, and constant currency is going to be between 5% and 6%. Now a significant part of that is coming from growth in our proton therapy business year-over-year. But – you get me back to $1.27, $1.30 euro, we can turn in that kind of growth. This is clearly FX related and unprecedented levels on the euro and the yen that we're facing today.

[David Roman:]

Understood. Thank you.

[Operator:]

Our next question comes from Vijay Kumar with Evercore ISI. Please proceed with your question.

[Vijay Kumar:]

Hey, guys, thanks for taking my question. So Dow, I apologize if I'm repeating my question. I just hopped on the call. Can you give some clarity on the cancellations within the quarter – it looks like, if I'm looking at may math, oncology was high singles or maybe low doubles; and could you talk about sort of what drove that acceleration? I mean, sequentially it looks like it's worsen.

[Elisha Finney:]

Vijay, actually if you were to look at the year ago period, backlog adjustments at $53 million are down. In that $53 million – I think it was $59 million in the year ago period. In that $53 million, there is $12 million related to FX, and that's because when we put something into backlog, we put it in at that rate and then it is held at that rate in dollars. So when the revenue comes out at a different exchange rate, we have to adjust our backlog to make the math work. So though we put the order in at the exchange rate of today, I know that's a little complicated answer, so there is an FX impact of $12 million in the quarter, as well as we had a $10 million, $11 million outright cancellation of a tender for our security and inspection products business. I believe it was the Saudi Arabia tender that was just delayed indefinitely, so we took that order out of our backlog. So oncology, actually if you look at those two things, they had a very low rate of dormant fee or cancellation in the quarter.

[Vijay Kumar:]

Got you, and that was helpful. Maybe on the imaging side, and I understand you have a large customer, sort of – can you maybe just talk about the longer term sort of trends? Because imaging in past, I mean it's been a fantastic business, probably doesn't get as much attention, but then when you look at the EBIT line the contribution has been pretty significant. So I'm just trying to sort of put this into context and probably some of this was FX or maybe on the longer term outlook for this market.

[Dow Wilson:]

No, we still really love the long term prospects to this business, the whole shift from analog to digital products is driving the flat panel business. We actually think that, in fact, as that cost and price comes down, we're opening up more and more markets for that growth. So we think the panel business is going to continue to be a very strong and good market for us. I think we've got some short term perturbations, we're looking at our supply chain, comment was already made relative to the cost of businesses, very good dollar denominated, and do we need to do something to have a little bit more of a natural hedge and make sure we've got the cost position that we need with this kind of global currency market fluctuation that we've seen. But we think the long term of the business is still very, very positive; we love the business model that we have, it's a very low cost distribution and service business. So that's terrific, and frankly, we love to add on to it, and are even looking at some inorganic opportunities to maybe grow the portfolio.

[Vijay Kumar:]

Got you. And maybe if I can squeeze out one more in, I'm not sure if your commentary on product versus service growth within the oncology systems in the quarter?

[Elisha Finney:]

Yes, service on the revenue side for the quarter was up 4%, 9% year-to-date. Orders were about flat, and that really is just a timing issue related to when contracts get renewed.

[Dow Wilson:]

And currency.

[Elisha Finney:]

And currency, yes.

[Operator:]

Our next question comes from Steve Beuchaw with Morgan Stanley. Please proceed with your question.

[Dow Wilson:]

Hi, Steve.

[Steve Beuchaw:]

Hi, good afternoon, everyone. Sorry if it was embedded in that last response somewhere, but did you give a software growth number for the quarter?

[Dow Wilson:]

We did not.

[Elisha Finney:]

No, but it was up $7 million or $8 million quarter-over-quarter versus year ago period and revenue.

[Steve Beuchaw:]

Quarter-on-quarter and year-on-year?

[Elisha Finney:]

I don't have year-on-year but it should be up in revenues. I believe it was up last quarter as well.

[Steve Beuchaw:]

Okay. And then we're here in late April, so I'll ask the obligatory reimbursement question. I guess it's less interesting than some years given that CMS laid out so much in the final rule last year about where they were going, but I wonder if you've heard anything from your DC folks about where you think reimbursement goes this year, whether it's in terms of structure or rates? Thanks.

[Dow Wilson:]

I'd say is it's been pretty quiet, we have not heard anything new in the last quarter or so. So it's been pretty quiet on the eastern front.

[Steve Beuchaw:]

That's impressive that you know that considering that you're on the west coast. Well, thanks so much, guys. Have a good day.

[Operator:]

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Sias for closing comments.

[Spencer Sias:]

Thank you. Thank you all for participating. The 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 1-877-660-6853 from inside the US or 1-201-612-7415 from outside the US, and enter code number 1360946. Telephone replay will be available through 5.00 PM. Thank you.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.