Varian Medical Systems Inc
Q1 2018 Earnings Call Transcript

Published: 25 Jan 2018

[Operator:]

Ladies and gentlemen, we will now get started. Just as a reminder that the replay of this call can be heard on the Varian Investor website at www.varian.com/investors where it will be archived for a year. To hear a telephone replay, please dial 1-877-660 -6853 from inside the U.S. or 1201-612-7415 from outside the U.S. and enter confirmation code 13674372. The telephone replay will be available through Friday, January 26. Now, I will turn it over to Michael Bruff, Vice President of Investor Relations.

[Michael Bruff:]

Thank you, operator. Good afternoon and welcome to Varian’s first quarter fiscal year 2018 conference call and webcast. 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 first quarter press release and web deck which are intended to provide additional perspective and details. Included in these documents is the reconciliation of the differences between GAAP and non-GAAP financial measures. We report non-GAAP earnings to provide comparisons of operational performance, excluding unusual items. Unless otherwise stated, all financial results discussed are non-GAAP and from continuing operations. All growth rates are year-over-year and any references to orders are gross orders. All references to trailing 12 months refer to the trailing 12 months ending on the last day of our most recently completed first quarter. Also, note that we may provide growth rates in constant currency allowing assessment of the business excluding the effect of foreign currency fluctuations. And as a reminder, Varian adopted revenue accounting standard codification 606 at the beginning of fiscal year 2018. The results that we disclosed today including fiscal year 2017 results and any forward-looking statements including guidance reflect this new standard. And finally, during this call many statements made maybe considered forward-looking statements. Our use of the words and phrases such as outlook, believe, expect, anticipate, could, should, will, promising and similar expressions are intended to identify those statements which represent our current judgment on future performance and 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. 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 with that, I will turn it over to Dow.

[Dow Wilson:]

Thanks, Mike and good afternoon everyone. Today, I will share the key milestones we achieved this past quarter and how they contributed to our long-term strategy. First, let me touch on our first quarter results. Total company revenues of $679 million increased 13%. Oncology revenues grew 14% and the particle therapy business declined 4% in the quarter. Operating earnings of $126 million or 18.6% of revenue grew 84% in part due to the non-recurrence of an accounts receivable reserve taken in the prior year. GAAP earnings per share, was a loss of $1.22 and non-GAAP earnings per share of $1.06 grew 110%. Our earnings per share results reflect the impact from the new Tax Cuts and Jobs Act as Gary will discuss in more detail later. Cash flow from operations was $179 million, up 118%. Looking more long-term, we continue to make meaningful progress towards our long-term growth and value creation strategy across three initiatives

[Gary Bischoping:]

Thanks, Dow. As always, I will 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 revenue was $679 million in the first quarter, up 13% in dollars and 11% in constant currency. In oncology, revenue was $649 million, up 14% in dollars and 12% in constant currency driven by increased linac shipments in mature markets. Orders were $620 million, up 7% in dollars and 6% in constant currency. We ended the quarter with $2.7 billion in backlog, up 7%. Taking a closer look at our oncology business results, in the Americas, revenue grew 16% in dollars and in constant currency. Orders were $300 million, up 2% in dollars and in constant currency. North America orders grew 2% supported by key wins in the quarter, including Norton Healthcare, which purchased 3 TrueBeam systems along with our ARIA, InSightive and Eclipse software solutions to deploy in their two sites. In Latin America, orders were down 3%, primarily due to Brazil. We did have 4 Halcyon orders in the region, 2 in Brazil, 1 each in Aruba and the Dominican Republic. Asia-Pacific revenue grew 15% in dollars and 17% in constant currency. Orders were $130 million increasing 6% in dollars and in constant currency. Orders in Japan and Greater China had solid growth in the quarter. In Greater China, we extended our market leadership with key wins in Qingdao Central Hospital, Fudan University, Zhuhai People’s Hospital, all buying our Edge system. In Europe, Middle East, India and Africa geography, revenue grew 9% and 2% in constant currency. Orders grew 19% in dollars and 13% in constant currency to $190 million in the first quarter. We continue to see market penetration across the regions as illustrated by wins in Denmark for 15 total treatment machines, including both TrueBeam and Halcyon to be deployed in two hospitals in Copenhagen region and in Poland, where Varian won a public tender with the Ministry of Health for 1 Halcyon, 1 TrueBeam and 3 VitalBeam machines. Our particle therapy business posted revenues of $29 million in the first quarter, which is down 4%. And as Dow mentioned earlier, we booked two new orders both in the U.S. Turning to profitability, total company gross margin was $304 million, up 13% and 44.8% of revenues. Oncology gross margin of $302 million increased 15% and the rate was 46.5%, up 36 basis points. Looking at particle therapy, gross margin dollars were $2 million, down $3 million due to a mix of lower margin deals in the current period. Companywide SG&A expenses of $122 million or 18% of revenue were down $28 million or down 18%. The decline was primarily driven by the non-recurrence of prior year’s $38 million accounts receivable reserve related to the proton business. Excluding this, SG&A increased $10 million or 9% driven by targeted investments in product management and sales headcounts. On a GAAP basis, depreciation and amortization was $19 million. Investment will continue to be a key driver of our long-term growth and value creation strategy. In the quarter, R&D was up 12% to $56 million investing 8% of revenue. Company operating earnings were $126 million or 19% of revenue increasing $57 million or 84%. Excluding the $38 million impact on the prior year’s results related to the non-recurrence of accounts receivable reserve, operating earnings increased $19 million growing 18%. Turning to taxes, a major event in the quarter was the enactment of the Tax Cuts and Jobs Act, which was signed into U.S. law on December 22. Two provisions with the new law had immediate impact. First, the U.S. corporate tax rate was reduced from 35% to 21%. In the long run, this will be favorable to Varian. However, in the recorder, it requires us to remeasure our deferred tax assets, which were originally recorded assuming a future tax benefit at the 35% rate. We estimate that the total impact of this remeasurement of deferred tax assets will be about $47 million. The impact to our first quarter is a charged income tax expense of $38 million. The remainder or about $9 million will be charged over the balance of the fiscal year. Second, as part of the transition to a new territorial system, the new law imposes tax in the unremitted foreign earnings of the U.S. company’s foreign subsidiaries at reduced rates, specifically 15.5% to the degree the earnings are held in the form of liquid assets and 8% to the degree the earnings are held in the form of illiquid assets. We estimate the tax effect of this mandatory deemed repatriation to be $169 million. Companies may elect to pay this tax often called a toll charge over an 8-year period we intend to make that election. The Securities and Exchange Commission has issued guidance allowing companies a 1 year measurement period to refine their estimates of the tax impact of the new law. We fully expect that we, like many other companies, will true up our estimates of these tax impacts from the new tax legislation over the measurement period. Other provisions of the law will take effect over the next few years, thus after impacts of the new legislations provisions, our resulting GAAP effective tax rate for the first quarter was 191.5%. Our non-GAAP effective tax rate was 22.5%, which excludes the tax expenses due to the repatriation of foreign earnings and lower corporate tax rates impact on our deferred tax assets. Similarly, our non-GAAP net earnings per diluted share also exclude these items. GAAP net loss per diluted share was $1.22. Our non-GAAP net earnings, was $1.06 with related diluted share count of 92.7 million shares in the quarter. Turning to the balance sheet and liquidity, we ended the quarter with cash and cash equivalents of $823 million and debt of $340 million. Cash flow from operations was $179 million. Due to the adoption of ASC 606, we restated oncology DSO in the first quarter of fiscal 2017 from 95 days to 108 days. Oncology DSO in the first quarter of fiscal year 2018 was 103 days improving 5 days year-over-year. In addition to R&D, other investments in the quarter included $9 million in CapEx and $57 million to repurchase shares of our stock. As of the end of the quarter, we had 4.7 million shares remaining under our existing repurchase authorization. I will now turn it back over to Dow who will discuss our fiscal year 2018 annual guidance.

[Dow Wilson:]

Thanks, Gary. With respect to our annual guidance, we maintain the programmatic approach. There are three new factors we have taken into account regarding our fiscal year 2018 guidance. First, the global radiation therapy market growth increased from 2% growth over the trailing 12 months exiting our third quarter of last fiscal year to 4.5% growth over the trailing 12 months exiting our fourth quarter of last fiscal year; second, our growth and share gain in the faster growing market and our operational execution in the first quarter; and third, the implementation of the Tax Cuts and Jobs Act. After a careful consideration of these factors, we believe it is prudent to update and raise our fiscal year 2018 annual guidance to the following

[Operator:]

[Operator Instructions] Our first question is from Jeff Johnson, Robert W. Baird & Company. Please proceed with your question.

[Jeff Johnson:]

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

[Dow Wilson:]

Good morning, Jeff. Jeff, it’s loud and clear.

[Jeff Johnson:]

Alright, great. Hi, Dow, I wanted to start on the oncology order side. The biggest upside versus my model anyway in APAC, that 6% constant currency growth came against the strong 29% comp, so just wondering what was going on there, what’s driving the strong growth in APAC on top of that tough comp. And if I look at the Halcyon orders of 12, that’s about half of what you bought in the prior quarter in fiscal Q4, so I am assuming it wasn’t Halcyon the drove that and maybe you could touch on Halcyon and maybe thinking we are working to get a budget flush or maybe some upside on the Halcyon number that didn’t seem to come through this quarter, so just what’s going on there?

[Dow Wilson:]

Sure. Yes. I mean just going around the horn geographically, first Jeff, we had a good quarter in Japan. As you know we didn’t get Shonin approval in Japan until the quarter. So there is very good interest there. So we think longer term that the funnel looks very good, but we had a very good quarter in Japan, it was up significantly year-over-year. Southeast Asia was also up year-over-year, we had very good performance on a number of geographies in Southeast Asia. Australia was really the only one that was kind of go the other way. And then we had good double digit growth in China. So even on in tough comp, we had very good performance in China. And again in China, we also don’t have Halcyon approval there yet. There – the from a product point of view it was all about our Edge product had very good up-tick of Edge, Gary mentioned in his remarks as well as on VitalBeam. The other thing that we are starting to see in Asia and especially in China is some very good up-tick in the software side of the business. So historically that’s been a very, very small business for us. And with both the introduction of our ARIA Qin product and longer term development with – with Ping An and others like that, we think we have got a very good cycle. As it relates to Halcyon, we are very comfortable with where we are. It’s the orders are incremental, they are in new sockets, it’s growing our installed base, we did surprise the market with this product, our funnel remains very, very strong. I think what we are excited about is we have tiered the product and so we really think that we can get both more aggressive, but kind of lower end price points and with the coming of kilovoltage Cone-beam CT, higher price points in developed markets. So we are very excited about where this product goes. We are seeing some activity in the tender market. Those customers try to – trying to put themselves in line and develop budgets for the product. So I think it’s very much in the budget development part of the market. And we like what we see very good funnel for the product.

[Jeff Johnson:]

Alright, that’s helpful. Thank you. And Gary, maybe one follow-up just on guidance, it looks like your revenue guidance update implies 1% to 5% reported growth over the balance of fiscal ‘18 over the next three quarters, I have got currency in my model adding probably 250 basis points over the next three quarters, so just trying to figure a kind of flattish organic revenue over each of the next three quarters is kind of – is that you guys being just over conservative at this point, is there something where first quarter took some out of the next few quarters, just how should we think about kind of your constant currency or your organic revenue expectations for the next few quarters?

[Gary Bischoping:]

Yes. There is no real material change from our perspective Jeff in the currency market relative to our guidance. And so we will see what the markets do maybe you know better than I do as to where things are going, but our view is that currency really isn’t impacted by the guidance update that we just gave, so no new news on currency. We like our backlog. I think the teams are doing a nice job of working through conversion. And we saw some of that benefit certainly in the first quarter as we moved more towards some mature markets that came through the revenue line from our recent orders. And so that certainly is helped. But overall not a big impact in guidance for us from what we had previously discussed from currency.

[Jeff Johnson:]

Okay. So just I understand that then with the weakness we have seen in the U.S. dollar across so many currencies here over just the past four weeks, six weeks or so, you are essentially not putting any of that in the updated guidance?

[Gary Bischoping:]

That’s correct.

[Jeff Johnson:]

Okay. Thank you, guys.

[Operator:]

Our next question is from Amit Hazan, Citi. Please proceed with your question.

[Amit Hazan:]

Hey, good afternoon. Let me stick with guidance for a second, you just asked about the cash flow guidance maybe that can help explain some of how the P&L changes are flowing through. You are not changing your cash flow guidance, so if the implication there is that the deep and the rate is kind of more of non-cash accounting related or is there some real pull-through here that somehow kind of offset somewhere else?

[Dow Wilson:]

Yes. Amit good question and thanks for that. It’s a pretty wide range right, $475 million to $550 million. When you look at trailing 12 months our cash flow, it’s actually about $500 million right now on the trailing 12 months basis, so it’s a pretty wide range. But know the update in guidance in the Q1 results are strong operating margin dollars, right, driven by the top line a little bit of margin rate expansion and some operating leverage. And then from the cash flow perspective as we talked about we saw good conversion from a DSO perspective in the oncology business and PT, the PT business had a good cash flow quarter as well, so kind of hitting all cylinders to deliver that $179 million, but there is no impact from ASC or any accounting changes that you have got running around in the revenue number that we have just guided to, right. We had a separate call just for that conversation and this update is based our performance in the market and the stronger market is head outlined.

[Amit Hazan:]

Okay, that’s very clear. And then I want to come back to health because I think that would be one question people ask tomorrow and so maybe a different way is asking the question, if we look at your orders I might get in about 5% of your oncology orders or something right now and I think what you are saying about it being more in budget development at the movement and so forth, but can you just maybe give us a sense of over the next year or 2 years how do you want to characterize it, where it should be as a percent of oncology orders, what you feel about that product if you can just ballpark something for us, so we get an idea of your confidence in it, I know it’s early days but where that might go?

[Dow Wilson:]

And I think that number one thing I had pointed too here is our total installed base growth. When you look at what we are trying to do we want to grow sockets, we want to go after those 12,000 incremental sockets that the Lancet report came out with a couple of years go. Clearly, that’s what Halcyon is focused on. Having said that, we introduced two new products last year both that are in the 60 unit range, we feel very good about that. Both are driving installed base growth. We have been very pleased. For us here early on, we are looking at where they are going, so when you look at the 62 orders, first of all it’s almost 20 countries – 19 countries have placed orders, so we like the big broad base. We still have regulatory approvals to go in some key geographies, but we are seeing 60% of those in mature markets. Frankly, I think that will come down the kilovoltage Cone-beam CT will probably have an impact and we will see a little juice there. But I think long-term the big play here is going to be in the emerging market, so 40% here early on have gone into emerging markets. 40% of the 62 are in new sights, so these are folks had not gone radiation therapy before, so that’s 25, 26 customers that are new in the business, that’s huge for us, we can keep that up with the product that will be very significant, growth coming back to where I started grows our installed base gives us new opportunities for upgrade software and service. We also like the competitive trust here, about seven of them have been in competitive sockets and there has been a handful 4 or 5 that were in – where we wouldn’t have been able to sit and evolve before. So I think we are very comfortable with where this is. We are not as we have kind of said before. We are not guiding on kind of Halcyon units, because its part of the whole portfolio with the family, it is not replacing an existing product, it is a new product on the market. And so that kind of test of what’s incremental for us is really the game here. And we like what we are seeing there and we think in a developed world as we bring Cone-beam CT into the market and then exercise these new – these new price points in the value markets, we are going to get some more juice. Funnel remains very positive. And so that’s the Halcyon story. And then you have got the HyperArc story to go with it. And HyperArc, we have placed 57 or we have 57 orders placed, that’s very, very good on HyperArc, as I said on that in the text 60% of those are upgrade. People are really liking this product, the upgrade prices around depending on what they order some ins and outs, but it’s about $1 million for the upgrade and north of 2.5 for new systems, but the we are – we are really liking what we see here on HyperArc.

[Amit Hazan:]

Okay. Let me just sneak one quick one in for Gary and on the next quarter I know you guys you don’t guide quarterly, but is there anything you want to tell us from a modeling perspective that this kind of help us keep numbers consistent given the volatility we saw in some of the accounting changes happen with last week changes?

[Gary Bischoping:]

Yes. Nothing material, Amit, as we look through kind of the full year, again backlog is strong, the market is better than we thought, but kind of in line with what we expect for the long-term. We have been able to take share in that market. And we saw – we saw good hardware execution in the quarter. So nothing really new news with regard to Q2 versus where we land in Q1 and our ability to continue to convert that backlog in orders is key focus area and the teams are out there winning business competitively in the field. So in the long-term, we think that turns into that 4% to 7% revenue range that we gave.

[Amit Hazan:]

Alright. Thanks very much, guys.

[Operator:]

Our next question is from Anthony Petrone, Jefferies. Please proceed with your question.

[Dow Wilson:]

Hi, Anthony.

[Gary Bischoping:]

You might be on mute Anthony.

[Anthony Petrone:]

Sorry about that, can you hear me now?

[Dow Wilson:]

We got you.

[Anthony Petrone:]

Great. How is everybody doing? Thanks. Maybe just start on installation cycles and a backlog question, I think Gary you mentioned in your prepared comments just I think installations on Edge accelerated, to how much are you seeing a faster installation cycle benefit or come through to that 4% to 7% top line outlook. And then maybe just reconciling the order backlog, it grows orders down a little growth of $3 billion, I think with the accounting change you called out $3.1 billion, so how much of that was just installations coming out as opposed to maybe age outs and cancellations? And then I have a follow-up.

[GaryBischoping:]

Yes, so thanks Anthony for the question. So first of all, just in the quarter the way to think about what was a robust revenue growth rate of 13%, is in our oncology business from a hardware perspective, we mix the hardware. And then inside of that we have really saw an acceleration of units that we kind of booked in orders over the last six months, is a higher percentage of our overall book than we had seen in the prior year, even all of last year. And so we attribute that to some good execution in the field, but also just kind of how the order book mixed out into revenue here early in the year. So, can we keep that up, that level of consistency, it’s choppy, it’s choppy out there, that’s part of while we went to annual guidance we are trying to smooth out some of that choppiness that we see in any given quarter. So overall we are happy with execution. We like the book of business that we took on from an orders perspective, it’s 7% in oncology. We think that translates into 4% to 7% kind of revenue growth over the year. As it relates to backlog, that the backlog for oncology is something that it wasn’t impacted by ASC 606 first and foremost, okay, so there is no impact from ASC 606 adoption the backlog at all. We made a change in methodology right that we had talked about on the call and there were no abnormal amounts of dormancy that we saw in the quarter from what we would see normally with regard to a percent of the overall backlog total. So, we are not seeing anything at all to reiterate from ASC 606 in backlog and the overall oncology business backlog increased 10%, sorry, the overall the Varian backlog increased 10% year-on-year and oncology grew 7% year-on-year to $2.7 billion of backlog. So, good backlog growth should translate into that 4% to 7% revenue growth hasn’t moved through the year.

[Anthony Petrone:]

Yes. Maybe just a follow-up on revenue rec, just I mean is there any if we are under the prior model, I mean would there have been a notable difference in the revenue guidance or again is this just you are seeing whether it’s better installations or just share gains whatever the case maybe, is that more reflective of the 4% to 7%?

[Dow Wilson:]

Yes, just to be really clear right, we held the call earlier in the month and that call was a pure translation of ASC 605 to ASC 606, right. So, this current guidance going from 3% to 5% to 4% to 7% is purely two things in our mind, one is the markets better than we had thought as we exited Q3, right, actually the Q3 was growing about 2% and now we see the market growing 4.5% and two is our execution in that market. So, that’s what’s reflected in the increasing guidance purely our market growth, the overall market growth and our ability to execute in that market nothing to do with ASC 606 adoption.

[Anthony Petrone:]

Very clear. And the last two for me real quick would be just a quick update on Siemens, the installed base there haven’t heard about that in a while, just where that is and maybe where those bunkers are going? And then just on the M&A, I think out of the spin from Varex, there was some talk potentially of tuck-in acquisitions, the company’s balance sheet continues to strengthen you are approaching $900 million, it looks like the debt is going to be paid off soon. So, there is room to lever back up, so just an update there? Thanks.

[Dow Wilson:]

Yes, in terms of the Siemens installed base, it remains a good opportunity for us. It does continue to ramp down. We like the Halcyon play in that market a lot. So, it’s where we are actually seeing in the Halcyon market with prospects. A lot of these customers that have been hanging on to old stuff are really interested in Halcyon. So, these were smaller systems that were sold. Often, we couldn’t get a big TrueBeam in those vaults. With Halcyon, we got a real play. It is a value market and we see that opening up. I don’t have the exact count for you on the installed base. I would say that it’s come down from where it was 5, 6 years ago, but it is stickier than we thought. I think when we started this thing, it was like 2,200, 2,500 unit installed base and it’s certainly less than that now. But when we kind of look at the whole thing at least for Halcyon as an opportunity that IEA counts about 2,100 cobalt units, there is a whole bunch of tomotherapy units and a whole bunch of Siemens units on top of that that we would kind of view that as the prime target market for Halcyon. And then the second part of the question was M&A, in terms of M&A as we have kind of said before, we are looking at extending our footprint in software. So first and foremost is we want to continue drive the organic investment in R&D. Second is really looking at what we can do to enhance kind of this ecosystem for cancer therapy. On the software side, we continue to value things that use radiation and is there a play for synergies with our treatment planning or oncology information system software. And then with that, we can make some other kind of capital allocation decisions as we go, but at least here as we look at the fiscal year we wanted to maintain our fire power and all the flexibility for those kind of plays as we move forward.

[Gary Bischoping:]

The only thing I would add with regard to financial flexibility is that, over time, certainly the jobs – the tax and jobs act will give us some more financial flexibility as we work our way through getting that money to the U.S. and so but that you can’t kind of do that, switch it that takes a few months to actually get the money.

[Anthony Petrone:]

Okay. Thanks.

[Operator:]

Our next question is from Brandon Henry, RBC Capital Markets. Please proceed with your question.

[Brandon Henry:]

Yes. Thanks for taking my question.

[Dow Wilson:]

Hi, Brandon.

[Brandon Henry:]

Hi. So, fiscal year ‘18 guidance still assumes kind of wide range in terms of operating margins, can you talk about what your view is the main drivers of operating margin expansion for this year and the various factors that lead you to the top and the bottom end of that range?

[Dow Wilson:]

Yes. I think you saw some of that in the current quarter. With that stronger top line we were able to still invest and grow our investment in R&D, but get a little bit of operating leverage out of that, I think it’s 10 basis points on a year-over-year basis in the quarter. And then SG&A leverage right, we continue to invest on the sales side. We like how those investments are returning for example in the software folks in Asia, that makes lot of sense and that we are starting to see early returns from that. So you will see us continue to look to invest right in R&D or organic growth options as well as on the sales line and then get a little more operating leverage out of G&A. So some of what you saw on a year-over-year basis Q1 of ‘18 versus Q1 of ‘17 is what we think we will define the high end of the range and the lower end of the range, we are going to invest. And so we are looking, there is a whole host of organic options. Now we are a pure play cancer treatment company. We are focused on the software side that will also require organic investment. Kind of throttling that as we go through the year would help the final low end of the range.

[Brandon Henry:]

Okay. And then separately, the ramp of 360 oncology has gone a bit more slowly than we expected, can you give us an update there and kind of talk about what Varian is doing to accelerate that option of this solution?

[Dow Wilson:]

Yes. I know I think we are pleased with the products of getting very good reaction from early customers. I think the market very much wants to see evidence. And so we are kind of very much in the evidence building phase of that product. I think it’s going to take this year to kind of be able to show people both the effectiveness impact as well as the efficiency productivity related impact. We have gotten very good relationships in the UK and with Cone Health, what our folks are working this. We have had other very good luminary orders on the quarter. But I think big impact is going to be after we really got the evidence. In the meantime we are working on increased functionality for broadening the capability of the product, bringing critical decision support, the incremental tumor board functionality and I think we have – I think we have got the right product. We have also retooled our sales force a little bit to make sure we are calling on the right people. And we are bullish about where it’s going. But I think in full disclosure, we do think it’s going to – it is an enterprise sale, it is a little more complex sale and I think our real impact is going to be after we kind of get the evidence accumulated and demonstrated to folks.

[Brandon Henry:]

Alright. And then just last question for me if I can sneak one more in, can you give us an update on the current balance sheet exposure both on the receivables and loan for proton therapy, so I am just asking, because I remember the Munich, Germany facility I think, went bankrupt last year and is in proceedings right now. And then also if you can provide kind of an update on how the Maryland proton facility, how the uptake is going there? Thanks.

[Gary Bischoping:]

Yes. Just from a balance sheet perspective, where I think is about $175 million on the balance sheet in terms of the investments that we have in those – in the loans related to that. Look, we continue to monitor that MPTC is showing pretty good results relative to the patient volume. They continued to work their way through driving those with multiple initiatives, maybe Dow can help chime in there here in the second, but that’s a key to success. And we have seen very good markets with regard to the municipal bond market, right. The Georgia Proton Center kind of got that started. Delray kind of followed through, we have successful refinancing the CPT Center in San Diego that’s now clinically moved over to a new operator as well. So, we do see strong capital markets for these assets and that combined with kind of steady to slightly rising patient counts should help us move our way through this.

[Dow Wilson:]

Yes, I think just on Maryland, they are doing very well. Their patient count is around 100 patients a day. So, they are getting good volumes. They are doing very interesting work. I think the medical staff is very much on board with the program, have an outstanding team and are continuing to drive it forward.

[Brandon Henry:]

Okay, thank you.

[Operator:]

Our next question is from Tycho Peterson, JPMorgan. Please proceed with your question.

[Tycho Peterson:]

Hey, thanks.

[Dow Wilson:]

Hi, Tycho.

[Tycho Peterson:]

Go back to guidance, you are guiding to 4% to 7% after doing 13% this quarter, maybe Gary, can you kind of address the question as to whether there was some pull forward this quarter or whether you are just being a little bit conservative on the rest of the year? And then can you clarify what the organic growth guidance is that there seem to be some confusion on that based on my amounts?

[Gary Bischoping:]

Yes. So, I would say, again, we executed pretty well in the quarter. We did see more of a mix shift into mature markets on the hardware side. And as mature markets are shorter duration to get from orders to revenue that certainly helped that revenue growth, whether that continues or not over the rest of the quarter, probably not at that rate that we saw in Q1. As it relates to what’s organic, what we gave is guidance 4% to 7% is organic growth rate, right and so currency, there is some benefit here that we have seen the short-term. We will see if that holds on. You saw a little bit here in Q1, but really what you are staring out there 4% to 7% is our organic growth guidance.

[Tycho Peterson:]

Okay. And then I guess for Dow, did you – new rules around CapEx expensing for tax deductions change anything from your view from a customer perspective in terms of willingness to purchase?

[Dow Wilson:]

I mean, I think we could intellectualize it a little bit, but we certainly haven’t seen any change in behavior yet.

[Tycho Peterson:]

Okay.

[Dow Wilson:]

At least when we look at the funnels, I wouldn’t say we have seen any change in behavior yet, Tycho.

[Tycho Peterson:]

Okay. And one last one that’s come up is GE this morning talked on their call I guess the SEC is looking into the revenue recognition around 606 you are one of the other few companies that have changed your numbers? Is there any risk to you guys that SEC could be looking into this for you?

[Gary Bischoping:]

We have been transparent with investors and with our disclosure approach. And look, we are not at the SEC, but we are very comfortable with how we have gone through the implementation and in coordination with our accounting teams internally as well as PwC.

[Tycho Peterson:]

Okay, thank you.

[Operator:]

Our next question is from Isaac Ro, Goldman Sachs. Please proceed with your question.

[Isaac Ro:]

Good afternoon, guys. Thank you.

[Dow Wilson:]

Hey, Isaac.

[Isaac Ro:]

Hey, Dow. First question is on Halcyon, no update on the prepared comments with regard to China, just curious if you still expect June or July approval timeline and if so what’s baked into your expectations there, I am wondering if there is any pent-up demand that you can point to?

[Dow Wilson:]

I mean, we have kind of said summer all along. So, I think we have had – we do have to go through a clinical trial and we are going through that clinical trial. It’s accumulating slowly, but there might be a little bit of risk around that, but it’s not more than that quarterish, but I would say we are still in the second half of the year. In terms of pent-up demand, what we have seen, we have seen a very good China market, double-digit again this quarter. So, we haven’t seen anybody stalling plans. We do know that people are looking at the product and maybe there will be a few out there. So, we are bullish about the market and the play it’s eventually going to have in the market, in part, why we have elected to manufacture it there and certainly excited about the long-term prospects of Halcyon in China.

[Isaac Ro:]

Okay, thanks. And then maybe a second question on software, could you give us any color as to the percentage of your software that comes from planning related tools versus other applications? And the reason I ask is I am just trying to take through the path of doubling your software over the next few years for your long-term plan?

[Dow Wilson:]

Yes, it’s about 50

[Isaac Ro:]

Thanks. Last question is for Gary, on the guidance, I just want to reconcile one more time, you guys raised revenue and EPS guidance today, but you didn’t raised cash flow guidance and I am just not clear as to why that’s the case, I am wondering if there is something with working capital that the factors into the guidance for cash flow?

[Gary Bischoping:]

Got it, again appreciate the question, but it’s a pretty wide range, like I had mentioned in earlier in the call $475 million to $550 million. We saw a good progress again year-over-year on oncology system’s DSO. We will continue to drive our work through that progress. And then on the inventory front, we think we have opportunity as we go through the rest of the year. So I wouldn’t read anything into that it’s just again a wide range and we thought it was comfortable given the changes we had in revenue.

[DowWilson:]

And with the huge increase over 2017.

[Gary Bischoping:]

The only thing, I would point to that remember as we grow, we actually chew into working capital, right. So we raised the revenue growth was 3 to 5 to 4 to 7, so as you grow you actually eat working capital. So that’s the other thing you keep in mind here is think about that $475 million to $550 million.

[Isaac Ro:]

Okay. Thank you, guys.

[Operator:]

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

[Vijay Kumar:]

Hi, guys. Thanks for taking my question. Congrats on the nice quarter. So I had a few questions if maybe I will start with the Q1 revenue it really, really maybe strong, I guess my question is would – that 13% growth we saw in Q1, would that have still been 13% if this is the own accounting methodology, because there seems to be some confusion on what happened, what drove that 13%?

[Gary Bischoping:]

The answer is yes, right. We restated Q1 for ASC 606 of last year and we use the same methodology in this year. So that growth rate is year-over-year, like-for-like with regard to accounting standard.

[Vijay Kumar:]

Okay. And then what’s the FX in the quarter, right, was if like couple of percentage points on the revenue so if organic is 11 in Q1 and that 4% to 7% organic that you mentioned for the guidance is that, so do we assume that there is no FX in that 4% to 7% guidance on the revenues?

[Gary Bischoping:]

Yes. So in the quarter it was 1.5% impact on our growth rate and again to reiterate that growth we had guided to for the full year that’s organic. And so if currency kind of stays where it is we will then chop that out as we get closer to realizing that.

[Vijay Kumar:]

Okay and that’s helpful, Gary. And then on the product side oncology, it was up 20% in 1Q, I can’t remember last time products were up by 20%, right, so maybe some color on what happened, what drove products plus 20% because that implies in a services, which has certainly been stronger, that came in more like mid-singles?

[Gary Bischoping:]

Yes. I referenced it a little bit earlier on the call, but it’s growing into more mature markets that have shorter data going time slot going from orders into revenue. And so just for example in Q1 of ‘17 about 25% of our units came from – came from units that were the prior six months, whereas in Q1 of ‘18 that jumped up to about 35% of units. And so we saw – we saw an increase in a number of units that are growing into revenue from the prior six months of orders than we had in the prior year. So that’s in large part of that mix of mature markets that we have talked about, but also some good execution by the team.

[Vijay Kumar:]

That’s helpful, Gary and that segues me into my next question, so North America, when you say mature, I am sort of thinking its North America, what was North America orders in Q1?

[Gary Bischoping:]

North America orders in Q1 in oncology don’t have it at my fingertips.

[DowWilson:]

It was up 2%.

[Gary Bischoping:]

Yes, 2%, yes, up 2%.

[Vijay Kumar:]

Thank you, Dow. And then one last one, just on the quarterly EPS cadence, so if I historically, if I look back, so Q1 was the least and then usually, we have sequential step ups throughout the year, is that, but again when we look at the guidance for this year, just given the revenue strength, some of this quarterly cadence changes can you comment on the quarterly EPS progression?

[Gary Bischoping:]

Yes. I am not going to comment on the quarterly EPS progression, we gave our annual guidance, we think $4.24 to $4.36 made sense given how we are operating and given the market we are operating in. As quarters go on, we will see trends kind of play out here, so no comment at this point.

[Vijay Kumar:]

Thank you, guys.

[Operator:]

Our next question comes from Jeff Johnson, Robert W. Baird & Company. Please proceed with your question.

[Jeff Johnson:]

Thank you, guys. I will be quick here and I don’t want to belabor the point, but Gary, I just want to understand you are now guiding constant currency revenue, I have covered you guys I think 10 years, 11 years now and it’s always been reported revenue is what the guidance is, so is this a formal change that we are now any guidance in the future is organic in our currency assumption go on top of that or should we just assume that you’re just being conservative in the 4% to 7% and there is currency upside to that, I just want to know if this is formal from here on out, any – any revenue guidance you gave us is organic growth guidance? Thank you.

[GaryBischoping:]

This is not formal, Jeff. So FX rates are basically the same as we saw at our initial budget, so there is we are not going to breakout currency here specifically, this is not formal though.

[Jeff Johnson:]

Okay. And again not to belabor this, but I think the yen or the pound has moved like almost 10%, euro has moved 5%, the yen for 5% here in the last few weeks, so I am just trying to understand your comment that currency has it moved since, you put the budget together?

[GaryBischoping:]

It’s that is where it is Jeff at this point from a currency perspective and it’s a guidance as it rolls out is like I said organic, it’s not a formal change. You saw about 150 basis point impact in Q1 and we will see how that plays out over the year.

[Jeff Johnson:]

Alright. Thanks guys.

[GaryBischoping:]

Sure.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Dow Wilson, for closing remarks.

[Dow Wilson:]

Yes, I am very pleased with our first quarter performance. We are strengthening our leadership in radiation therapy, extending our global footprint and enthusiastic about entering faster growing markets beyond traditional radiation oncology. Looking forward, we will continue to focus on our growth initiatives. We remain committed to innovating new technologies for treating cancer and building solutions that connect clinical teams to advance patient outcomes or driving towards the ultimate victory a world without the fear of cancer. Thank you all for joining us.