Varian Medical Systems Inc
Q2 2009 Earnings Call Transcript

Published: 30 Apr 2009

[Operator:]

Good day ladies and gentlemen and welcome to the Second Quarter 2009 Varian Medical Systems Earnings Conference Call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today’s conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to the host for today’s call, Mr. Spencer Sias, Vice President of Investor Relations. Please proceed, sir.

[Spencer Sias:]

Thank you. Good afternoon and welcome to Varian Medical Systems conference call for the second quarter of fiscal year 2009. With me are Tim Guertin, President and CEO; Elisha Finney, CFO; and Tai Chen, our Corporate Controller. Tim will start this afternoon by summarizing our financial results and operational highlights for the quarter, Elisha will detail the P&L and balance sheet, and Tim will finish with the company’s outlook for the third quarter and full fiscal year 2009. We will take your questions following the presentation. To simplify our discussion, unless otherwise stated all references to the quarter or year are fiscal quarters and fiscal years, quarterly comparisons are for the second quarter of fiscal year 2009 versus the second quarter of fiscal year 2008. All references to financial performance are for continuing operations and do not include the discontinued operations of the research instruments portion of ACCEL. Please be advised that this presentation and discussion contains predictions and other forward-looking statements. Our use of words and phrases such as expect, believe, could, recurring, and similar expressions are intended to identify those statements which represent our current judgment on future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important risks 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 Tim.

[Tim Guertin:]

Good afternoon. Varian Medical Systems is reporting growth in net earnings, revenues, and net orders for the second quarter of fiscal year 2009. Compared to company totals in the year-ago period, net orders grew by 2% and revenues grew 7%. The company’s gross margin and operating margin, each improved by about 2% even with the step-up in R&D investment. Our return on sales increased by nearly 2 points to just over 22% and despite a more than 3-point increase in our tax rate and no stock repurchases during the quarter, our fully diluted EPS from continuing operations grew by a solid 12%. We achieved these results in the face of a more challenging environment where we felt the effects of a global recession, a stronger US dollar, and greater uncertainty in markets for both our Oncology Systems and X-ray imaging products. Oncology Systems’ second quarter net orders rose 5% to $434 million with 4% growth in North America and 7% growth in international markets. On a constant currency basis, total Oncology Systems’ net orders rose 10%. Service and upgrades lead the net orders growth in North America, offsetting declines in equipment and software. International growth was driven by demand for equipment and accessories with the strongest growth occurring in Europe. On a constant currency basis, Oncology Systems’ international orders growth was 15%. In North America, we believe we are now seeing the effects of tighter controls on capital spending and longer credit approval times, which are lengthening our order and revenue cycles. In recent quarters, customers were continuing to move ahead with previously budgeted equipment purchases. Now, as more customers enter new budget cycles, we are seeing overall – we are seeing smaller overall allocations for capital spending. We are being told over and over that radiation oncology monetization remains a priority for many hospitals and clinics, but the constraints on capital spending are slowing or halting plans for even high priority items at some institutions. As a consequence, more customers are looking at acquiring equipment through operating leases. Financing is available for this type of purchase, but with stricter conditions and higher interest rates. Our own customer finance team is increasingly engaged in helping customers replace loan commitments from lenders whose terms became to owners, or who got out of the business altogether. This has added to the work needed to close some business. Nevertheless, while credit is tougher and more time consuming to obtain, creditworthy customers who want financing are definitely finding it. More aggressive pricing from our competitors has also lengthened decision making among some customers. Despite this behavior, we believe we added to our share in this market. In these tough economic times, we are fortunate to have RapidArc, which has stimulated demand for many products including our linear accelerators, our onboard imagers, and treatment planning software. As of the end of the quarter, we had more than 120 RapidArc installations, putting us way ahead of the competition in the deployment of this important capability. As you may have noticed from news releases and media coverage, more and more centers are using this new technique on patients when they see a clear clinical advantage over fixed-beam IMRT. The number of cases that can be treated with this approach has expanded as we’ve continued to refine and enhance our RapidArc product. Our global service and parts business continued to perform well and was up in double digits for the second quarter and now represents an annuity that is equal to almost one-fourth of the company’s total annual revenues. A high installation rate of more sophisticated products for the most advanced radiotherapy and radiosurgical procedures in the last two years has lead to the growth in this business. Before leaving Oncology Systems, let me take a few moments to focus on its long-term growth prospects. Radiotherapy is among the most cost-effective weapons in the war against cancer and we expect it to be used in a higher number of cases in coming years. In the last decade, we have significantly improved the imaging, precision, speed, and usability of this technology so that it can be used to greater effect in a broader range of cancer cases. We are particularly excited about the prospects of making big improvements in lung cancer outcomes, thanks to our new imaging, motion management, planning, and faster dose delivery capabilities. For example, one of several lung cancer studies at VUmc in Amsterdam has demonstrated that in early-stage disease, non-invasive radiosurgery can achieve comparable outcomes to conventional surgery at much less risk to the patient. As you probably know, lung cancer is the biggest single cancer killer with a roughly 80% mortality rate. This disease causes one-third of cancer fatalities in the US alone, but there are now more than 200,000 new cases diagnosed every year. We believe we now have the technology to begin making a difference in these numbers. Underequipped international markets also represent a tremendous growth opportunity for Oncology Systems, particularly in nations with emerging economies that can support higher investments in modern cancer care. Notwithstanding the present environment, we are pressing ahead with investment in next-generation products that can help our long-term growth by advancing the quality, cost effectiveness, and value radiotherapy and radiosurgery in the fight against cancer. Moving on, our X-ray Products business had a tough quarter. Compared to the year-ago quarter, net orders fell 17% to $69 million as customers for X-ray tubes and flat panels appear to be adjusting inventory levels in response to overstocking in recent quarters, coupled with the slowdown in the imaging equipment market. The order weakness was most severe for our high-tier tubes for CT scanners and for our mammography tubes. The tube business was helped to a degree by our new distribution channel, which helped to build our after-market tube sales in China. Net orders of panels for filmless imaging were down slightly during the quarter as steep declines in orders for dental and veterinary imaging were largely offset by strong demand for our new radiographic panels. Despite the inventory related order adjustments that we saw in the second quarter, we remain optimistic about the medium and long-term growth prospects for our X-ray Products business. As we’ve seen in past, cycles of tube orders should return to more normal levels once inventory adjustments are complete. The flat panel business should continue to grow as end-users and imaging equipment manufacturers' transition to lower-cost filmless imaging systems. We are well positioned to serve this market with a broad, competitively priced product line, based on high volume, cost efficient manufacturing. Our Other business category including our SIP, Security and Inspection Products business, our Proton Therapy business, and our Ginzton Technology Center generated combined net orders of $21 million for the quarter, up 9% from the year-ago period, almost exclusively from SIP. Revenues for this category were $23 million, up 3% from the year-ago quarter. Net orders for our SIP products rose 9%; orders for non-destructive testing products played an important part in the growth of the business during the quarter. Customers moved to replacing their aging Linatron accelerators with our new, more versatile, and upgradable units. Expansion and modernization initiatives in the nuclear power industry, particularly in Europe, helped to add orders for these products. Orders for lighter, smaller, and more cost-efficient accelerators contributed to the growth of our cargo screening business with Europe and Africa providing most of the growth. Cargo screening systems integrators who incorporate our products are acting more cautiously as governments around the world wrestle with spending priorities. I’ll finish my comments with the Varian Proton Therapy business where we achieved three key milestones during the quarter. First, we received a CE Mark, permitting us to help – permitting us to begin marketing our system in Europe and other markets where CE is accepted. Second, patient treatments have started on the proton system installed in Munich. Third, as was noted in our press release, we completed the sale of the ACCEL Research Instruments business to Bruker so that we can focus exclusively on Varian Particle Therapy. Development efforts remain on track and while customer interest in this technology remains high, financing large proton centers is challenging in this environment. Now I’ll turn it over to Elisha for a review of the numbers and then come back to you with our outlook for the third quarter and full fiscal year 2009. Elisha?

[Elisha Finney:]

Thanks, Tim and hello everyone. As usual, I will walk you through the income statement attached to the press release, as well as cover a few balance sheet items. As Tim pointed out, the company’s second quarter revenues increased 7% to $554 million. Oncology Systems posted an increase of 6%, X-ray Products posted a gain of 15%, and the Other category gained 3%. On a constant currency basis, total company revenues were up 9%. Gross margin for the quarter was 43%, up more than 2.5 points. Oncology Systems’ gross margin was 44%, also up more than 2 points due to a favorable geographic shift towards North America, entire acceptances of software products including RapidArc. X-ray Products’ gross margin rose more than 4 points to over 40%, principally due to higher volume, improvement in quality cost, and a favorable product mix. Second quarter SG&A expenses were 15% of revenues, about even with the year-ago quarter. Second quarter R&D expenses were 7% of revenues, up about 0.5 point as we continued to invest more in new product development. Moving down the income statement, second quarter operating earnings increased 17% to $122 million or 22% of revenues. Oncology Systems and X-ray Products together contributed $140 million in operating earnings while our other businesses and corporate consumed a net $18 million. Depreciation and amortization of intangibles totaled $12 million in the quarter. Net interest expense for the quarter was $400,000, a reverse from $1.6 million in net interest income in the year-ago period as interest rates have fallen to near zero on our invested cash. Our effective tax rate was 35%, up from 31% in the year-ago quarter. For the year, we estimate that our tax rate will be between 31% and 32% with a rate of approximately 22% in the third quarter. Average fully diluted shares outstanding for the quarter were 124.5 million, down by about 3.5 million shares from the year-ago period due primarily to stock repurchases in previous quarters and a lower stock price. In the interest of conserving cash in this economy, we did not repurchase shares of stock during the second quarter. We reported fully diluted EPS from continuing operations of $0.64 for the quarter, which includes $0.06 for the share-based compensation expense. As planned, we completed the sale of the ACCEL Research Instruments business to Bruker during the quarter and recognized an $11.5 million loss net of taxes. Including discontinued operations, we recorded fully diluted earnings per share of $0.54 for the quarter. Turning to the balance sheet and cash flow, we ended the quarter with $375 million of cash and cash equivalents, $43 million of total debt, and $1.1 billion of stockholders equity. DSO was 87 days, an improvement of three days from the year-ago period, but an increase of four days from the first quarter of this fiscal year. Subsequent to the end of the quarter, collections have been strong. During the quarter, we used a net $25 million for operations as working capital increases more than offset net earnings. Major changes to working capital from the first quarter of this fiscal year included increased AR, stemming from higher revenues and DSOs, higher inventories, a decrease in deferred revenues, and a large tax payment that reduced our tax liabilities. We also used $23 million to pay down debt, $11 million for capital expenditures, and $7 million for additional investments in our DETECT consortium. Now, I’ll turn it back over to Tim for the outlook.

[Tim Guertin:]

Thanks, Elisha. Our outlook for the balance of the fiscal year is more cautious due to tighter capital budgets and credit, currency fluctuations, a longer order delivery cycle in oncology, and weaker demand for X-ray Products. We now believe that fiscal year 2009 revenues from continuing operations could grow by about 5% to 8%. With the help of cost control measures that the company has put in for fiscal year 2009 and beyond, we believe that net earnings per diluted share from continuing operations for the fiscal year could grow to between $2.50 and $2.60 compared to $2.31 from continuing operations in the last fiscal year. For the third quarter of fiscal year 2009, revenues could grow in the range of 5% to 7% with higher growth in operating earnings. Including a higher expected tax rate and lower interest income, third quarter net earnings per diluted share from continuing operations should be in the range of $0.61 to $0.65. And we will now take your questions.

[Operator:]

(Operator instructions) And please standby for your first question. And your first question comes from the line of Amit Hazan of Oppenheimer.

[Amit Hazan:]

Thanks. Hey, good afternoon guys.

[Tim Guertin:]

Hi, Amit.

[Elisha Finney:]

Hi, Amit.

[Amit Hazan:]

I wondered maybe to start on the revenue side. I’m hoping maybe you can give us a little bit more color on to what extent there were units that were pushed out in the US, how many units may have been pushed out, and more specifically, kind of like when we talked about last quarter, what you are doing in terms of going back into your backlog and talking to folks and seeing what kind of visibility you have for this next quarter and who might take installation?

[Tim Guertin:]

Yes. Amit, it was fairly normal in the quarter in terms of we are not seeing that backlog is getting cancelled or customers are pushing out indefinitely or anything like that. I would say it was probably on the order of one or two machines and that really related to things such as letters of credit and getting our financing, all the I’s dotted and the T’s crossed. We are seeing, as Tim mentioned in his remarks, a slightly longer time in backlog with the orders coming in, but nothing that I would say is drastic. I’d remind you, I mean the FX had a significant impact in the second quarter and we would have reported 9% sales growth. The way our quarter breaks down, it’s the four weeks, four weeks, five weeks and so, obviously most of orders and sales come in that third month of the quarter and the euro rate that we had to use that month was right around $1.26. So, it killed us on the FX with the highest volume of our sales coming at a very low rate. Fortunately today, it’s at $1.32, $1.33, which we certainly hope it can stay there.

[Tim Guertin:]

Right. So, we have been talking to customers and third quarter, we see us reasonably lined up at this point and we are working on trying to line up fourth quarter and make sure that everything is there that we want to have and I think as we look at orders and the effects of currency, I think our – I think the fourth quarter is more something we are watching than third quarter at this point.

[Amit Hazan:]

So is it fair to say that in terms of your reduction in sales guidance for the year that you really haven’t changed any forecasting of unit installations on the oncology side?

[Elisha Finney:]

No.

[Tim Guertin:]

I would say, no. The biggest effects have been currency and in terms of backlog. And our concern is every year a certain number of deals that we get are related – are what we call book and ships. That is we get the order and we ship it in the same year in which we get the order. And so, in the last half of any fiscal year, there was, I forget the exact number, but there was a certain percentage of our business, which is book and ship and a lot of that, tends to happen – those shipments tend to occur in the fourth quarter. So, our problem right now is those are orders we don’t have, those orders we will get during the quarter, I’m talking about for the oncology business. Obviously, a lot of the other – and the X-ray tube business is heavily book and ship, but for the oncology business, most orders that we get have a year – spend a year or more in backlog, but a certain small percentage of orders don’t. And so, it’s those orders that we are paying a lot of attention to in the third and fourth quarter because our number in the fourth quarter depends upon that. And so the reason we’ve expanded the range is because we don’t know based upon capital budgeting in the United States what the – what those orders will look like. We are in – this is different behavior for our customers. And so the reason why we expanded our range was to build some cushion into that. But if things – if the currencies – the currency right now I think today is nearly $1.33. If the currency stays at $1.33 and if the book and ships come in, well, then we are going to be at the higher end of that number. If the currencies do what they did in March and spend their time at $1.26 and the book and ships don’t happen, then we will be towards the middle part of that range or worse.

[Amit Hazan:]

Okay. And if I can switch to oncology orders in the US, I just wonder if you can give us a little bit more color on units in particular, to what extent they were down in the quarter year-over-year and if so, if you can give us color on what those customers are telling you, are you seeing any – are you getting any sense from them that they might come in and make orders in the next couple of quarters or is it a sense that the budget is frozen until we say otherwise, what kind of color are you getting from them?

[Tim Guertin:]

Once again, I’ll remind you there was a negative currency effect. Units were actually up. So, I am – a lot of that business was international because – and so, what happens is international orders don’t contain – usually the average dollars per unit is lower internationally than it is in the United States, but units were up globally and so, we think that that’s good news for 2010. So – and there – but there are so many events that happened to happen – have to happen between now and October that it’s difficult for me to know what to predict for 2010, but units were up.

[Amit Hazan:]

Is that true for North America as well?

[Tim Guertin:]

No. North America has – North America is where the chill wind is.

[Amit Hazan:]

Okay. That’s where I was looking for some color as to what you are hearing from your customers there and the ones that are holding off, what they are telling you in terms of ordering again?

[Tim Guertin:]

Well, in North America what we are seeing is that, as I probably indicated, customers believe that radiotherapy is one of the places where they want to invest. They are actually trying to keep their capital investments on radiation therapy intact, but the fact is that the hospitals have imposed significantly tighter restrictions on capital overall and departments all have to go back and defend it. So, what we’ve seen is as the budgets that were created in 2008 are coming to an end and most of them will have come to an end by July, we are seeing the new budgets in place now. And so we are talking to a lot of people who are fighting to keep their budgets intact for the latter half of 2009 and into 2010. One of the tools we are using to do that is leasing. A lot of customers are looking at leasing radiation therapy equipment, more customers than usual are looking to lease radiation therapy equipment in this environment because it enables them to handle their capital budget problems because these machines make money. So, it’s a reasonable way, they are not going to lease equipment for parts of the hospital that don’t make money, they are going to lease it in parts of the hospital that do make money and we are one of the areas where they are profitable. So, we are seeing leasing activity rise as people try to handle these budgets and we are seeing a lot more conversations with customers where we try to help them get through their capital budget cycle. So, it’s difficult for me to know yet, I’ll know a lot more at the end of the third quarter because we are going to see a lot more in those capital budgets. So, it’s difficult for me to make a prediction, but I would have to say that in the US, people are still buying. Those people who are buying are still buying at the high end and although – but we are seeing some prudence, some customers are saying, well, look, I can get capital, but I can’t get as much capital as I might have gotten before. And so, I would expect that we will see more machines in late 2009 and 2010 that are in the mid range of pricing rather than the high end of pricing and I think that that will – that may be a larger effect than even volume.

[Amit Hazan:]

Okay, thanks very much.

[Operator:]

Your next question comes from the line of Amit Bhalla at Citigroup.

[Amit Bhalla:]

Hi, good afternoon. I wanted to stick with oncology orders for a minute and I wanted to see, Tim, if you could give us some more color on how the oncology orders internationally played out by region, Europe, Far East, and rest of world. And so, where there any other large single site orders like the $17 million order in Germany?

[Tim Guertin:]

There was one large order in Europe, which I think – I don’t know if we put out a press release on it or not, I’m not sure. The Europe was up 8%, the Far East was up 6%, the rest of the world was flat in dollars. Now, the Far East was helped by currencies. So, in – if the currency effect wasn’t there, the Far East would be more or like flat and Europe would have been stronger. And also, yes, the Far East had a huge comp from a year ago. I think in – without the FX effect, Europe would have been up 22%. So, it’s a huge ill wind from currencies in Europe. We do – I mean, we had a very big quarter in Europe in terms of order increases and North America is 4%.

[Amit Bhalla:]

I just want to clarify. That order in Germany for $17 million, did you say there was one in addition to that or was that the only one?

[Tim Guertin:]

No, there was an order called Stokes in the UK.

[Amit Bhalla:]

Okay. Can you quantify that? And then second question is –?

[Tim Guertin:]

It’s not big – it’s not anywhere near as big as that other. It’s important, but it qualifies as a large order, but not large enough to have changed the picture.

[Amit Bhalla:]

Okay. And then, on Linux what is your assumption? Are you assuming North America Linux and software grow to get to your guidance for the rest of the year?

[Elisha Finney:]

I mean the guidance is on a global basis. So, we are just not going to break down our estimated growth rates by territory.

[Tim Guertin:]

To get to the revenue guidance for the rest of this year, we have used backlog plus certain assumptions about book and ships. Those assumptions about book and ships are based upon historical numbers and so, the reason why you saw us increase the range is because we don’t know if those historical assumptions will hold in the second half of the year. And it’s worldwide book and ships, not just North America book and ships. So, if international continues to do well for the rest of the year, that will ease the problem of getting those book and ships. If North America has difficulties because of budget constraints, that will work against us and that’s the reason why we increased that range. So – but the vast majority of the revenue that you see in the second half is based upon an in-depth analysis of orders we already have in backlog.

[Amit Bhalla:]

Okay, good. And then, can you just give us a color on just how you expect the x-ray business to play out over the next couple of quarters? And just a clarification; Elisha, can you give us that tax rate for the fiscal 3Q? Thanks.

[Elisha Finney:]

The tax rate will be at about 22% for the third quarter and that – last year it was 18% I believe and the reason it’s so much lower compared to other quarters is that’s when we typically we have statutes expire under our audit.

[Tim Guertin:]

All right. So, x-ray. Well, as I said, x-ray orders were down 17%. Most of that is because about three companies that had – we could see their business was – their sales were slowing, but they were continuing to make strong orders from us in the x-ray tube business. And so, effectively they overstocked and we’ve seen this before, I think we saw this in 2003 as I recall where we saw that customers overstock in the x-ray business and when that happens, they suddenly apply the breaks and that’s what happened in this quarter, they suddenly applied the breaks. Now, we are expecting that they – the breaks may not be finished being applied, so we may expect this effect to continue on into Q3, but the business unit is actually expecting to see somewhat of a return to normalcy in quarter four and into next year. And the radiographic panels, as I said, we break up the panel business into radiographic panels and fluoro panels. The fluoro panel business is being affected, but the radiographic panel is a business – it’s a new business for us. So we expect the growth there to be important to us for the rest of the year and it – in fact, it was good during quarter two, we expect it to be good during quarter three and quarter four. We are shipping those panels now to people, they like them. So I think that business shows good potential for growth. So, the areas for difficulty for us in quarter three are going to be the x-ray tube and the fluoro flat panel businesses I suspect will be reduced because of the desire of people to reduce their inventory during that period and then I would expect to see some return to normalcy in quarter four. Of course, I’ll know the story better at the end of quarter three, but that’s what we think today.

[Amit Bhalla:]

Okay. Thanks, Tim. Thanks, Elisha.

[Operator:]

Your next question comes from the line of Tycho Peterson of JPMorgan.

[Tycho Peterson:]

Hi, good afternoon.

[Tim Guertin:]

Hi, Tycho.

[Elisha Finney:]

Hi there.

[Tycho Peterson:]

Just a question on maybe visibility in Europe. I’m just – I’m wondering how you are thinking about that going forward given that you tend to have I guess government tenders in lot of cases and I mean, it’s been a strong growth driver for you and a lot of the industry. How are you thinking about for next couple of quarters?

[Tim Guertin:]

Well, we think international markets are a place we need to target and we have – we’ve increased the number of sales people that we have in our international territories at the beginning of the year and those people are coming up to speed now and I think that’s helping and we have a general campaign to do better internationally than we have done in the past. I would expect that Western Europe will be flat and most of the rest of Europe will be up and we expect China and Japan to be up.

[Tycho Peterson:]

Okay. On – I guess in your comments you had talked about cost control measures. And just can you clarify, I mean is there a broader program here in place or is this kind of singles and doubles and cutting back on travel?

[Elisha Finney:]

Yes. Well, what we are doing, Tycho, is we are taking just a really hard line on discretionary spending. So, whether that is through consultants and contractors and increasing vacation time, and overtime travel, all of those kinds of things we are taking a tough look at as any company I think is doing in this environment just to be prudent.

[Tim Guertin:]

And I think investments that we’ll make or save us money in 2009 and 2010 are a priority. Projects that will make or save us money in 2011 probably have less priority. And so, we are examining those things, we are being very prudent in our hiring programs and any place where there is discretionary expenses where we can suffer a little bit of inconvenience and still conduct our business as normal, we are doing those things. And I wouldn’t say that – I’ll just remind you all that I’ve been through this before in the mid-1990s, I went through a very dark period where headcount had to be reduced and where we went flat in the midst of a market that was in every other condition was growing, inflation rate was higher, et cetera. This is a period of relatively low inflation and high unemployment, which gives us some advantages in terms of controlling costs in this period that we might not have if we didn’t have a global recession going on. So, I think we can exercise some tools here that will give us some additional freedom of operation, but – our slogan around here is that we are going to aim for the best, we are going to plan for the worst, and we are going to prepare for surprises and that’s what we are really trying to do. So, although I think it’s possible that we will see growth next year, I am not making that assumption in our planning going forward.

[Tycho Peterson:]

That’s helpful. On the competitive dynamic, I appreciate the color you provided on some of the competitors and some of the pricing dynamics, maybe can you just touch on whether you are bumping up against other CapEx items as you go after the hospital market? In particular I’m thinking about robotic surgery, we are hearing a little bit more about scrutiny and more physicians talking about, in some cases doing more touchup work in regards to robotic procedures, but also the pull-away from robots over to radiation therapy. Can you just comment on –?

[Tim Guertin:]

I don’t know any customer – I don’t know any customer who lost their CapEx for radiation therapy because it went to robotic surgery. I would say that robotic surgery and radiation therapy have taken priority over diagnostic imaging.

[Tycho Peterson:]

Okay, that’s helpful. And then, just one last one. I mean, I think I know the answer to this, but did you have additional selling days this quarter and I mean, presumably it’s less of an impact because it’s capital equipment, but was that a factor as well here or –?

[Elisha Finney:]

No.

[Tim Guertin:]

No.

[Tycho Peterson:]

Okay.

[Tim Guertin:]

No, the biggest factor was that five-week month at $1.26.

[Elisha Finney:]

Yes.

[Tim Guertin:]

That was the biggest factor, but I don’t think this quarter two was a different length than quarter two last year.

[Tycho Peterson:]

And actually one last one. Tim, can you comment on the leasing and your comments before, what percentage of your systems are now leased and I mean, do you ultimately look at maybe taking some more balance sheet risk going forward or do you envision just trying that over a third party?

[Elisha Finney:]

And these are leases that we facilitate and that are non-recourse and done through a bank. So, it really is not putting anything additional on our balance sheet, Tycho. In the past, we probably did five to 10 deals per quarter, some of these full-blown systems, some of these upgrades. So, there is a vast – you can get a big difference in ASPs between those deals, but now we are probably running closer to 10 to 15 and we were pushing 20 deals that we are working on this quarter. So, we are seeing more folks come to us because our leasing team that we have in place is obviously educated on the equipment, they understand residual value and they can go out and work with banks and educate them to the point where they get comfortable on financing Varian equipment.

[Tycho Peterson:]

Great. That’s helpful. Thank you very much.

[Operator:]

And your final question will come from the line of Dalton Chandler of Needham & Company.

[Dalton Chandler:]

Hi, good afternoon.

[Elisha Finney:]

Hi.

[Tim Guertin:]

Hi Dalton.

[Dalton Chandler:]

I was wondering since your lowered outlook is really driven by FX and not by units, what level of confidence you have that you’ve lowered it enough this time and you won’t have to come back and do it again maybe next quarter?

[Tim Guertin:]

I would have to say the main effect is concerned about currency, but as I said, we are concerned about book and ships in the latter half of the year and so, that was the second half of the reason for this. I would have to say at this point that if currencies stay up above $1.32, $1.33, I am a much more relaxed guy. If currencies stay down at $1.26, I am a fairly un-relaxed guy about the international portion of our business. Book and ships, I’m going to have a much better picture of this by the end of quarter three. We’ll know what the funnel for book and ships looks like. By nature, these are – book and ships are machines where the customer has a machine that has suddenly started performing very poorly or where their patient demand has risen to the point where they are just not able to keep up with it without having a machine in fairly short order. So, you don’t get a lot of notice for these situations. They generally are sort of – I wouldn’t – maybe emergency is not the right word, but they are very fast cycle events when they occur. So, I – putting now all of that together, I would have to say the bottom end of our guidance assumes a lot of bad things happen and the top end of our guidance assumes that reasonable things happen.

[Dalton Chandler:]

Okay. And just on the fact that you get this big sort of boldness [ph] of orders in the September quarter, which is kind of an odd quarter given that your Europe is on vacation and so forth, what do you think is really driving that? Is it just – is it because of your fiscal year-end?

[Tim Guertin:]

Yes. I think we are so large and we’ve been in the market for so long and that’s been our fiscal year-end for so long that we’ve actually changed the dynamics of the market. So, that just becomes an important period. No, it is true that a lot of hospital budgets begin on July 1st and there are a lot of people whose fiscal year ends on October 1st and they want to – if they are going to place orders, they want to place it before the end of their fiscal year. So, it’s not perfectly corresponding to us, but there is no doubt about it that years and years of this being our practice has cost us to have us this boldness of orders at the end of the year.

[Dalton Chandler:]

Okay.

[Tim Guertin:]

No matter how you redesign and send your plans, you can’t redesign them to take this out without causing havoc.

[Dalton Chandler:]

Okay. It’s helpful, thanks a lot.

[Tim Guertin:]

Sure.

[Operator:]

I would now like to turn the call back over to Spencer Sias for closing remarks.

[Spencer Sias:]

Thank you for participating. Let me give you all a reminder that we will be holding a midyear review in Boston on May 7th next week. That will be Thursday and you can get information on this on our website and can – or call me at RSVP. We hope to see you there. For listeners who may have come in late, this call has been taped and it will be available for replay on the Investor Relations page of our website at www.varian.com/investor beginning at 4 PM Pacific Time today. You can also access a replay via telephone by calling 1-888-286-8010 from inside the US or 1-617-801-6888 from outside the US and entering confirmation code number 11191883. The telephone replay will be available beginning today at 4 PM through 5 PM this Friday May 1st. The replay will be archived and available on the company’s website for one year. Thank you.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. And you may now disconnect.