Varian Medical Systems Inc
Q2 2019 Earnings Call Transcript

Published: 25 Apr 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to Varian's Fiscal Second Quarter 2019 Earnings Conference Call. As a reminder, this conference call is being recorded and a replay could be accessed on the Varian Investor website at www.varian.com/investors. Now, I'll turn the call over to Michael Bruff, Senior Vice President of Investor Relations. Please go ahead.

[Michael Bruff:]

Thanks, Ken. Good afternoon, everyone. Joining me today on the call are Varian's President and Chief Executive Officer, Dow Wilson; and Chief Financial Officer, Gary Bischoping. Dow will share his thoughts on our results and long-term strategy, and Gary will cover our operating and financial results in more detail. On the Varian Investor Relations website, you can find our fiscal second quarter press release and earnings presentation, which are intended to provide additional perspective and details. A webcast of this call and any accompanying non-GAAP reconciliations are available on our website at www.varian.com/investors. Unless otherwise stated, all financial results discussed are non-GAAP. All references to EPS are to net earnings per diluted share. All growth rates are year-over-year, and any references to orders are gross orders. All periods referred to are fiscal periods unless otherwise stated, and all references to trailing 12 months refer to the trailing 12 months ending on the last day of our most recently completed fiscal quarter. During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today's earnings release, this conference call and our SEC filings. We do not undertake any obligation to update any forward-looking statement. And with all that said, I'll turn it over to Dow.

[Dow Wilson:]

Thanks, Mike, and good day, everyone. Today, I'll share the key milestones we achieved this past quarter and how they contributed to our long-term strategy. We're pleased to see continued momentum in the first half of 2019 and we're raising our revenue guidance for the fiscal year while continuing to invest in future growth opportunities. First, let me touch on our second quarter results. Total company revenues increased 7% to $779 million. Oncology revenues grew 7%, driven by our integrated platform with best-in-class hardware, software and services. Revenues for our Proton Solutions business were $33 million, up 2%. Operating earnings declined 6% to $119 million or 15.3% of revenues, driven by the impact of tariffs as well as the increased project costs and site delays in our Proton business in the quarter. GAAP earnings per share was $0.96 and non-GAAP earnings per share of $1.05, was down 9%. Cash flows from operations were negative $13 million, down $79 million due to tax payments and networking capital impacts from revenue growth. Based on the company's strong orders and revenue performance year-to-date and our outlook for the rest of the year, we're raising our fiscal year revenue guidance from 5% to 8% to 6% to 9%. Now to provide some additional color on the quarter. In terms of our long-term growth and value-creation strategy, we made progress across our 3 growth initiatives

[Gary Bischoping:]

Thanks, Dow. As always, I'll consistently frame my comments in the context of our long-term growth and value-creation strategy, which includes balancing growth, profitability and liquidity. So let me start with growth. Companywide revenues were $779 million in the second quarter, up 7% in dollars and 10% in constant currency. In Oncology, revenues were $747 million, up 7% in dollars and 10% in constant currency driven by growth across hardware, software and services. Tariffs had a 130 basis point negative impact on the growth rate. On a trailing 12 months basis, revenues grew 11% in dollars and 12% in constant currency. Orders were $766 million, up 15% in dollars and 18% in constant currency. On a trailing 12-month basis, orders grew 13% in dollars and 14% in constant currency. We ended the quarter with $2.9 billion in backlog, up 13%. Taking a closer look at our Oncology business results. In the Americas, revenues grew 11% with double-digit growth in both North America and Latin America. Orders were $366 million, up 7%. And in North America, orders grew 12% driven by strong execution across our integrated portfolio as well as key wins with Alliance Oncology and Huntsville, Alabama to replace 7 competitor systems and software with Varian solutions, and additional 5 system order from HCA, bringing their total Varian-ordered systems over the past 3 years to over 20 accelerators. Asia-Pacific revenues grew 7%. Tariffs had a negative impact on the growth rate of 7 percentage points. Orders were $167 million, up 35%. As Dow discussed, we grew strong double digits in China, Japan and Southeast Asia. In our Europe, Middle East, India and Africa geography, revenues grew 2%. Revenues grew 9% in constant currency as FX had a significant impact this quarter. Orders were $233 million, up 17%, with outstanding performance across the region. This is Europe's -- this is EMEA's seventh consecutive quarter of double-digit orders growth. Our Proton Solutions business posted revenues of $33 million in the quarter, which is up 2%. Turning to profitability. The company gross margin was relatively flat year-over-year. The gross margin rate was 41.2% of revenue, down 260 basis points. This included negative impacts of 120 basis points from tariffs, 80 basis points from project costs and site delays in our Proton business within the quarter. 30 basis points from FX and 10 basis points from costs related to our software deployment ramp. Our trailing 12 months gross margin rate was 42.7%, down 60 basis points. This included negative impacts of 70 basis points from tariffs and 20 basis points from project costs and site delays in our Proton business within the quarter. Oncology gross margin rate was 43.6%, down 210 basis points. This included negative impacts of 130 basis points from tariffs, 40 basis points from FX, 10 basis points from costs related to our software deployment ramp and the remainder from product mix. Looking at Proton Solutions. Gross margin dollars were negative $4 million, down $5 million driven by $7 million in increased project cost and site delays in the quarter. These items as well as delays in the timing of orders resulted in not achieving our aspiration of reaching operating breakeven for the year. Investments will continue to be a key driver of our long-term growth and value-creation strategy. We invested $59 million in R&D, which is up 1% at 7.6% of revenues. Likewise, we are continuing to invest in sales and marketing, which grew 10% driven by investments in headcount-supporting sales for recent acquisitions and product management for our treatment planning. We are seeing leverage in the P&L when it comes to general and administrative spend with modest growth of 4% compared with robust orders and revenue growth rates. SG&A expenses were $143 million or 18.3% of revenue, a rate which is flat compared with last year. Company operating earnings were $119 million, down 6% at 15.3% of revenues, down 220 basis points. This included negative impacts of 150 basis points from tariffs, 80 basis points from project costs and site delays in our Proton business within the quarter and 40 basis points from FX. On a trailing 12-month basis, operating earnings increased 6% at a rate of 16.4%, down 60 basis points. This included negative impact of 80 basis points from tariffs and 20 basis points from project costs and site delays in our Proton business within the quarter. Turning to tax. Our GAAP effective tax rate for the second quarter was 21.7%, and our non-GAAP effective tax rate was 21.5%. GAAP EPS was $0.96. Our non-GAAP EPS was $1.05, with diluted share count of 91.9 million shares in the quarter. Turning to the balance sheet and liquidity. We ended the quarter with cash and cash equivalents of $546 million and no debt. Cash flow from operations were negative $13 million, down $79 million due to tax payments and net working capital impacts from revenue growth. Oncology DSO increased from 103 days to 110 days in the quarter driven by strong revenue growth. In addition to R&D, other investments in the quarter included $11 million in CapEx and $51 million to repurchase shares of our stock. As of the end of the quarter, we had 2.9 million shares remaining under our existing share repurchase authorization. I will now turn it back over to Dow.

[Dow Wilson:]

Thanks, Gary. With respect to our annual guidance, we carefully considered the projected market growth, our recent orders momentum and our mitigation efforts with respect to tariffs, which remain on track. As such, we are raising revenue guidance to $3.09 billion to $3.18 billion, representing growth of 6% to 9%. Previously, we guided $3.06 billion to $3.15 billion, representing growth of 5% to 8%. And we are reaffirming the following guidance for fiscal year 2019

[Operator:]

[Operator Instructions]. Our first question today is coming from Amit Hazan from Citi.

[Amit Hazan:]

Let's start with the positive and just talk about the order growth you're seeing in the markets. And maybe just run through the regions in particular, all of us are probably most interested in the sustainability of that growth. Europe or EMEA stands out as just having been strong for longer than a lot of us expected but also obviously, China with the tender still upcoming there. Just give us a sense of sustainability of what you're seeing in those regions.

[Dow Wilson:]

Good question. We're continuing to see very strong orders growth across all 3 geographies. As we said, we've got trailing 12 months growth of strong double digit. I'd say it's really driven by execution across the entire portfolio, hardware, software and services. Trailing 12-month orders growth in the Americas, constant currency of 8%, EMEA up 19% and APAC up 21%. So some of that is maybe a little bit above the trend line, I think, for sure. But I'd say from a funnel point of view, Asia looks very strong. In EMEA, we mentioned the Tata momentum, that's an agreement at this point in time. There will be more orders that will be booked against that. We haven't booked many orders against that at this point. We also see big opportunities in Eastern Europe. So I don't know, Europe's going to continue to be double digit, but I think we continue to see strength there. And then as I mentioned in the remarks, we were double digit in North America. So we're seeing a very strong U.S. market. I know there's always conversation about what reimbursement scenario's coming, but I'd say our U.S. model is really delivering right now. We've got tougher comps in the second half. So we've -- we're looking at that but I'd say the overall market is very, very strong. Gary, did I miss anything there?

[Gary Bischoping:]

No, I think that's right. I would say that, again, just to reaffirm from a China perspective, these results do not reflect any orders from the quota increase, and so continue to see progress at the provincial level there and we're tightly aligned with kind of the undergoing -- underlying activity that's happening at the provincial level here.

[Dow Wilson:]

Yes. Maybe the other thing I'd mention is Halcyon just continues to be a big deal here. We had more orders in the quarter in developing markets than we had in developed markets. It continues to be very strong, very pleased with the Halcyon performance.

[Amit Hazan:]

Okay. And then secondly, you moved to the P&L and kind of some of the challenges. I think one thing we'd like to better understand is the gross margin profile from here. Obviously, I'm curious when Halcyon starts to more materially impact that, but also just to understand better, are you thinking about it for this year and next year? That was not a -- it didn't look like a great number to us and I don't know if services is a part of that, that looks like it wasn't growing nearly as fast as it had been in the past but software looked like it was growing quite fast and that's usually a good guide contributor. So just a little more color on the elements of gross margin and how you're thinking about that for the next 12, 18 months?

[Gary Bischoping:]

Yes. Great, Amit. And thanks for the question. And the gross margin rate, as it relates to the second quarter, there is that Proton kind of site delay as well the project costs. That cost is about -- thinking about that is kind of 80 basis points in the quarter. And then we'll continue to invest in other elements of the business. But overall, that was a big part of what we saw in the second quarter was that proton -- that proton piece and then gross margin rate. From the services perspective, trailing 12-month growth rate is just fine there. We had a tough compare. Last year, we had a 14% year-on-year growth rate in Q2 in the services side from a revenue perspective. The business is healthy, attach rates are fine, underlying to the -- elements of that are moving along just fine. So we're okay on the services line. And we had strong growth in orders over the last 12 months. And so we just have to wait, also, for those to anniversary from one key perspective and to start to see the growth rate off of those what that orders trajectories are over the last 12 months. As far as going forward goes, I mean from a gross margin rate perspective, as you know we don't guide to that, however, some of what we talked about all throughout the year will start to roll through. One would certainly be our commercial efforts on the tariff mitigation side. That will start to pick up steam in the second half. As you think about that in the second half, it's still more loaded to the second part, so the fourth quarter of the second half. We'll continue -- as you saw, we invested in software deployment teams. So we'll continue to see, we think, nice, strong growth out of the software business, which will be accretive to the gross margin rate in the second half vis-a-vis the first half. And again just to tie it up, that proton issue that we saw or the challenges we saw with the site delays as well as the overall increase in cost, that we think we are continuing to the second quarter. And so that will be accretive in the second half as well. So good underlying dynamics that help us get comfortable with holding on to that range from an earnings per share perspective all while still investing back in the business.

[Dow Wilson:]

Maybe just to underscore the software point. Our software growth rate is about twice our hardware growth rate and our hardware growth rate is very good. So that's kind of what that investment is laying in for us in the second half. And we should see some -- both some volume and some positive margin mix out of that.

[Operator:]

And our next question today is coming from Matt Taylor from UBS.

[Matthew Taylor:]

Just wanted to follow-up on the China quota and the opportunity in India. And specifically what I wanted to understand was you said you were seeing some I guess action in the provinces. When do you think you might start to see some of these orders come through? And at what pace? Can you -- do you have any updated insights there? I'll start with that one.

[Dow Wilson:]

Yes. yes, Matt, good question. I'd say the activity that we're starting to see, we're seeing some questions, we're seeing the provinces engage. We haven't seen any published tender yet and that -- for me, that would be kind of the #1 signal when do people start issuing tenders. We do see some initial licenses in the province distributed to hospitals, so now the hospitals kind of got to pull their activity together, issue the tender and get going. I expect that we'll see a little bit of activity in the second half but that most of the real action here is going to be fiscal year '20.

[Matthew Taylor:]

Okay. Great. And I guess same kind of question on the EMEA agreement. Congrats on that. What kind of pacing, if you have any thoughts on the potential 200 orders? Should we expect that they start here in the second half? Do you have any visibility on that?

[Dow Wilson:]

It's a good question. We have not booked any orders yet from this agreement. We expect the initial orders will received in the second half of the year. The contract language says up to 200 systems. It's a big market that's way underserved. I talked about -- in India sits 10% to 15% of patients that have access to radiation therapy, whereas in the west, it'd be 50% to 60% get radiation therapy as part of their treatment. The Tata Trust has signed agreements with multiple states throughout India. So we do expect to see orders flowing here in the second half. We're not ready to guide on the amount yet, we want to see some -- see the color of the currency as it comes falling through. But we're very excited about it that Tata Foundation has been outstanding in this. They're very motivated by bringing cancer care to a population that hasn't had access to cancer treatment in India and, kind of, as I mentioned in the call, in smaller cities and villages. So I expect this will be a multiyear order flow and not a big onetime bolus. And again, just to underscore, that's not in the Q2 performance.

[Operator:]

Our next question is coming from Jason Bednar from Robert W. Baird.

[Jason Bednar:]

I wanted to start with -- I just wanted to start with Halcyon. The orders here are a bit better sequentially, up nicely year-over-year. But do you think we're on the cusp of really seeing Halcyon turn a corner? I mean it just seems like a lot of things could be coming together, with China availability starting January, 2.0 having been available for 6 or 12 months here in the U.S. and Europe and 3.0 slated to launch later this year. So just curious if you agree with that assessment or if there's anything else we should be considering with Halcyon?

[Dow Wilson:]

I would say we love the orders momentum, the socket growth is starting out nicely. Our marketing efforts are working well. Customer endorsements have been outstanding. We have really strong engagement, excellent experience with our customers. I think I said in the call 70% of the Halcyon units, we believe, are incremental. So we're -- so it is hitting. We did launch the product in the beginning of the quarter in China. And we just have a handful of orders in the quarter from China. So we expect -- as you state, we expect that to start hitting, so there should be some good growth coming in China. We have had very good customer reaction in China. Our strategy here is we just want to expand the number of sockets out there. And it really complements our TrueBeam product in the portfolio. We're seeing incremental customers come in with small vaults, resource constraint on the operating side, winning some competitive take-outs and I think we're going to have some cobalt replacements on top of that. I think we're very well positioned for continued growth with Halcyon.

[Jason Bednar:]

Okay. And then turning over to revenue and kind of this order-to-revenue conversion maybe. I mean just wondering, you put up some unprecedented growth here just over the past 12 months. I mean when do you expect we'll see -- start to see some of that strong order growth begin translating to an accelerating revenue growth profile? And is it reasonable to think that this will track as typical with Varian and talk about maybe a 12-month lag and we'll start seeing some of that order growth convert to revenue beginning fiscal '20? Or should we have a different lag in mind for some reason?

[Gary Bischoping:]

Yes. No, great question. And what we're seeing here is from an overall trailing 12-month growth rate in Oncology of 13%. And when you take a look at backlog, backlog grew about the same on a year-over-year basis. So we continue to move product through that, through backlog, and out into revenue at a nice clip. The conversion rate will reflect some of the nuances in the underlying mix of the product in the business. But overall, Jason, when you think about this in the long term, we still see our revenue -- our orders turn into revenue growth and convert. So the trajectory of the orders growth rate continues to accelerate. So you're going to see the revenue growth rate kind of lag a little bit here, and that's what's happening in the business. But overall, we're pleased with how the teams are operating and pushing product out the door and meeting, exceeding customers' needs and demands.

[Operator:]

Our next question is coming from Anthony Petrone from Jefferies.

[Anthony Petrone:]

Maybe a couple on China and then one just on the U.S. momentum in Oncology. As far as China, as we look toward really, I guess, quoting now 2020, when you start to see order momentum, clearly there's a larger amount of Type B licenses out there. How do you think the Type B licenses will flow? And what level of sort of chunkiness do you expect once this starts next year? And I'll have a couple of follow-ups.

[Dow Wilson:]

I think it's going to be small, growing linearly. I mean the one thing about this market is it's one or two at a time. We tend not to see the big like the Tata thing or the Brazil thing we had a few years ago or even Algeria or some of the other companies that we've talked about last 2 or 3 years where we get, call it, 10 to 50 units as part of an order. China is much more linear in the way it's tendered kind of hospital at a time. So I think that's the way it's going to happen. I don't think that's the way that market is as well. There are big resource needs. By the way, I think it's one of the things that we're very uniquely positioned to do well. A lot of these are going to be going into smaller cities, more rural orientation, county hospitals. They don't need just the license, they need the people, the training, the education. We have localized the software now. We have significant education resources both on the ground and in flight, so we train everybody locally. We think we're in a very, very good position.

[Gary Bischoping:]

The only thing I would add there, Anthony, is that we've got Halcyon and TrueBeam both in that category now and didn't have that over the last 12 to 24 months as we considered that marketplace. So we've got, as Dow just -- Dow mentioned, just to put a finer point on it, well positioned to go out there and execute in these rural markets with Halcyon and TrueBeam.

[Anthony Petrone:]

Yes. The follow-up would be just on the tariff side on exemption. Is there any update there on the China side specifically? I know the company filed for some exemptions, maybe just a quick comment on that. And then the last question would just be on the U.S. reimbursement side. We're in the proposal season here for CMS, are there any thoughts on how this year shakes out?

[Dow Wilson:]

Yes. I'd say on the tariff side first, I mean we continue to be very engaged both in Washington and in Beijing on the issue. I'd say no major things to report. Maybe the biggest thing to report is that our mitigation activities continue to be very -- to be executed very well by the team. We're executing sustainable actions there. Mitigation efforts are on track. I know I kind of get this up, we're profiled for the year. But it's why we kind of feel good about second half is our mitigation activities, as we've kind of said all year, are really implementing in the second half of the year. And Gary, anything else on tariffs?

[Gary Bischoping:]

No. I think directly to your question, the remaining application we have in the U.S., there's been no update with regard to the parts we're importing there and the couple of applications we have in there, Anthony. And just to reiterate, the ramp in the tariff mitigation is just that, it'll ramp not only into the third quarter but also ramp into the fourth quarter. So as Dow referenced, the profile for the year kind of isn't normally what we would expect.

[Dow Wilson:]

On the reimbursement side, I'd say it will take as ever if we're waiting for early July proposal from CMS. Clearly, we're hearing the rumor about bundled payments for SBRT. We think that positions our product line very, very well. We are the global leader in stereotactic body radiation therapy with our advanced dose rate, our conformality, our imaging. So I think we're positioned well if that change goes into effect, and we'll kind of keep you updated as we hear more about that.

[Operator:]

Our next question is coming from Tycho Peterson from JPMorgan.

[Tycho Peterson:]

Maybe on that last point, Dow, one of the things that you guys have talked about was bundling, if you could maybe kind of catalyze some of those customers that don't have SBRT capabilities to upgrade. Can you maybe just talk to how much of your installed base in the U.S. at this point has older systems that potentially would need to upgrade if the bundle goes through and talk stuff.

[Dow Wilson:]

I'd say at least 1,000 units. That's kind of my gut reaction. I might need to get our pencil on that a little finer. But I mean our U.S. installed base is 3,500 machines, and we've got a lot of TrueBeam out there. But there's SBRT capabilities on TrueBeam as well as -- I mean it's at least 1,000 units that we have significant opportunity on. But I think it's some of the momentum we're seeing in the U.S. now. I mean you saw the numbers on the quarter, double-digit performance in North America, and I think we're seeing a lot of nice configuration mix out of the U.S. market.

[Tycho Peterson:]

And then can you maybe touch on pricing dynamics? Your biggest competitor called out pricing pressure last quarter after you guys have reported. They've also launched a new value model. As we think about China quota, India orders, EMEA funnel, just curious how you're seeing kind of pricing level in the market.

[Gary Bischoping:]

I think Elekta is known to compete on price. But Tycho, if you look at the country level for us, pricing dynamics are in check and in order with what we've seen historically so no major changes, kind of puts and takes here and there. But overall, we'll -- we continue to sell value because our customers are really looking for that full solution of hardware, software and services. That differentiated value proposition is enabling us to hold price at the country level, and we feel pretty good about that.

[Tycho Peterson:]

And then, Gary, maybe just one follow-up on cash flow. I know you maintained guidance for the year. Can you maybe just talk to how you get there because it was down again this quarter? So are you assuming NWC kind of reverses? Or what kind of gets you to that full year cash flow based on what we've seen in the last two quarters?

[Gary Bischoping:]

Yes. The second quarter is kind of what -- about what we thought in the trajectory of the cash flow for the year. We'll continue to see progress here in the second half with regard to inventory. And as we've talked about, we've talked about billings and inventory for the supply chain. You can see the strong revenue growth here, and so that will work its way through. And on the revenue side, the -- how the revenue flows in the quarter kind of has an impact in the quarter, but you catch that over time. So you'll see us kind of catch this increase in revenue growth with some nice collections in the second half of the year. So I think the teams are out there executing nicely through the supply chain. But yes, to directly answer your question, we see it coming back in net working capital as well as an increase in operating earnings half-over-half as well.

[Operator:]

Our next question is coming from Vijay Kumar from Evercore ISI.

[Vijay Kumar:]

Maybe going back to the margin question, Dow. You gave out a number of moving parts in the Q. I mean it looks like there's incremental cost here, right? You have some benefits from tariffs, but there is more investments in the software piece, in the FlashForward, et cetera. When we think about the $48 million of savings, right, the tariff mitigation efforts, maybe can you talk about the cadence of when those savings are expected to hit? And is that more of Q4 weighted or Q3? And 80 bps impact on this Proton, is that going to come back in the back half?

[Dow Wilson:]

Maybe let me kind of just start on that Q2 piece. Relative to the margin, right, in the Q2, as Gary said in his section, the single biggest piece was proton therapy. And so that was our biggest driver in the first half. Gary, do you want to pick up on the tariff point?

[Gary Bischoping:]

Yes. Vijay, the timing of the tariffs, first of all, it's $42 million in mitigation, right? It was -- we talked about a $60 million down to $42 million. And the timing of the tariff mitigation efforts, as I referenced and we were referencing all year, is second half loaded. And even inside of the second half, will continue to ramp out of Q3 and into Q4 in terms of higher -- more benefit in the fourth quarter than in the third quarter. So that's how we think about it. Teams are executing well out there in the field. As it relates to the proton, no cost and site delays in the second quarter. We think that's largely contained to the second quarter. I don't see it repeating in the second half, but we won't get that back in the second half, right? So that's part of how we think about the full year guidance is, we don't see us clawing that back in the second half, but it won't repeat in the second half.

[Vijay Kumar:]

That's helpful, Gary. And just on the guidance as a follow-up. Any -- it looks like FX was worse. Any update on FX? I think the last guidance baked in some modest FX. Maybe it's coming in a little worse. So I guess the underlying growth may be coming in better? And I think the visibility on that $42 million of savings, the tariff mitigation, maybe can you just talk about the drivers here and your comfort level with that number?

[Gary Bischoping:]

Yes. From a currency impact, no material change from what we guided to originally. If you look at rates kind of from when we guided to the start of the third quarter, there's no material change. There's a year-over-year impact that we called out but nothing really material to note versus guidance. As it relates to the tariff mitigation efforts, things are on track, and they're moving forward. I would say they're the things we talked about

[Operator:]

Our next question is a follow-up from Anthony Petrone from Jefferies.

[Anthony Petrone:]

Maybe just a follow-up on margin, again unchanged here this year. And obviously there's some headwinds on the proton side. But just as you look out multiyear, next couple of years, and we start to get perhaps faster acceleration in bookings to revenue, margin benefits potentially from Halcyon and then a mix of software, over time, what are your thoughts on operating margin expansion next couple of years?

[Gary Bischoping:]

Yes. Sure, Anthony. You hit on a lot of them already. We're continuing to march towards our aspiration of north of 20% operating margin. Clearly, the tariffs haven't helped us here. We outlined what that impact is here in fiscal year '19. That being said, the tailwinds that are running for us are software mix. You can see the accelerated growth rates there, twice what we experienced on the hardware side. Proton profitability, while still not back to operating breakeven like we talked about, but improving on a year-over-year basis. Halcyon mix will certainly help. We're starting to see that now. We saw that in the second quarter, becoming visible in the P&L. Continue to work through the upgrade cycles, we've put upgrade teams in place around the globe. They're continuing to execute well. And then we'll continue to work through the tale of the tariff mitigation. So as you think about kind of the next couple of years, that will help us continue to accrete up to that 20 points of operating earnings. Last point I would make is services certainly increasing on the installed base will be a nice tailwind as well.

[Operator:]

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

[Dow Wilson:]

Thank you. Per my previous comments, given the momentum in the business, we raised our revenue guidance. And in concert with that revenue raise, we've decided to reinvest in innovation primarily related to the FlashForward Consortium, and we remain on track to achieve our 2019 targets. Looking forward, we'll continue to execute on our growth initiatives and remain committed to investing in innovation and new technologies to drive toward the ultimate victory

[Operator:]

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