Varian (VAR) Earnings and Revenues Surpass Estimates in Q3

Varian Medical Systems, Inc.’s VAR third-quarter fiscal 2019 adjusted earnings per share (EPS) of $1.32 beat the Zacks Consensus Estimate of $1.14. Adjusted EPS also surged 26.9% year over year.

This Zacks Rank #2 (Buy) company reported revenues of $825.8 million, which surpassed the consensus mark of $760.2 million. On a year-over-year basis, revenues rose 16.5% and 19% at constant currency (cc). However, the US-China tariffs have negatively impacted quarterly revenue growth by $10 million.

Let’s delve deeper into the quarterly results.

Varian Medical Systems, Inc. Price, Consensus and EPS Surprise

 

Varian Medical Systems, Inc. Price, Consensus and EPS Surprise

Varian Medical Systems, Inc. price-consensus-eps-surprise-chart | Varian Medical Systems, Inc. Quote

Segment Details

Oncology Systems: Revenues totaled $778.3 million, up 2% year over year and 10% at cc. Operating earnings at the segment were $149 million, up 18% year over year.

Varian’s worldwide net installed base had 8,412 units, up by 366 units on a year-over-year basis. As a whole, gross orders grew 16.2% from the year-ago quarter to $891.6 million.

Orders in the United States dropped 1% year over year.  In EMEA, orders rose 8% year over year, marking the eighth consecutive quarter of double-digit growth at cc for the region.  In APAC, orders fell 1% year over year with softness across the region, except in China, which saw strong double-digit growth.

Proton Solutions: Revenues at the segment climbed to $111.3 million, significantly up from the year-ago quarter’s $3.8 million. However, per management, operating earnings were negatively impacted by a goodwill impairment.

Margins

Total gross profit in the reported quarter was $351.4 million, up 12.1% year over year. Gross margin in the reported quarter was 42.5% of net revenues, down 170 basis points (bps). Per management, this includes a negative tariff impact of 130 bps.

Research and development expenses rose 4.4% year over year to $62.1 million. Selling, general and administrative expenses increased 9.4% year over year to $153.6 million.

Adjusted operating income in the fiscal third quarter totaled $144.3 million, up 22.3% year over year. As a percentage of revenues, operating margin was 17.5%, up 90 bps.

Fiscal 2019 Guidance Updated

Varian raised its guidance for fiscal 2019 revenues to $3.18 billion to $3.21 billion from the previously stated $3.09 billion to $3.18 billion. This indicates a year-over-year increase of 9-10% compared with the previously projected band of 6-9%. The Zacks Consensus Estimate for the same stands at $3.14 billion, much below the guided range.

Meanwhile, the view for 2019 adjusted EPS has been narrowed. Varian now expects adjusted EPS within $4.58 to $4.63, compared with the earlier stated range of $4.55 to $4.70. Notably, the mid-point of $4.60 lies below the Zacks Consensus Estimate of $4.64.

Adjusted operating margin is expected to be 16.5% while cash flow from operations is expected within $430 million to $470 million.

Our Take

Varian ended the fiscal third quarter on a solid note. The company continues to gain from its core Oncology Systems segment, which saw solid overseas growth, especially in EMEA and China. In fact, management foresees tremendous opportunities in China for its radiation therapy products. Gross orders surged in the quarter. Also, the company’s new proton therapy products are building momentum for the core Proton Solutions business. Management is optimistic about the recently-closed acquisitions of CyberHeart, Cancer Treatment Services International, Endocare and Alicon. A raised revenue guidance paints a bright picture as well. Expansion in operating margin is an added positive.

On the flip side, contraction in gross margin is worrisome. Additionally, the U.S.-China tariffs have been negatively impacting the top line for a couple of quarters now. Operating income at the Proton Solutions unit also dipped owing to tariffs. Moreover, Varian saw softness in its U.S. and APAC businesses in the quarter. A narrowed EPS view adds to the woes.

Other Key Picks

Other top-ranked stocks in the broader medical space are Hologic Inc. HOLX, DENTSPLY SIRONA Inc. XRAY and Teleflex Inc. TFX.

Hologic is scheduled to release second-quarter 2019 results on Jul 31. The Zacks Consensus Estimate for the to-be-reported quarter’s adjusted EPS is pegged at 61 cents and the same for revenues stands at $834.6 million. The stock carries a Zacks Rank #2.

DENTSPLY SIRONA is scheduled to release second-quarter 2019 results on Aug 2. The Zacks Consensus Estimate for second-quarter adjusted EPS and revenues is 62 cents and $1.03 billion, respectively. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Teleflex is expected to release second-quarter 2019 results on Aug 1. The Zacks Consensus Estimate for adjusted EPS for the to-be-reported quarter is $2.59 and the same for revenues is pegged at $636.7 million. The stock has a Zacks Rank of 2.

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