Varian Posts a Mixed Bag, Ups View - Analyst Blog

Leading integrated radiotherapy systems maker Varian Medical Systems (VAR) reported first-quarter fiscal 2011 (ended December 31) earnings per share from continuing operations of 80 cents, comfortably beating the Zacks Consensus Estimates of 73 cents and exceeding the corresponding year-ago earnings of 63 cents. Profit climbed 22% year over year to $96.5 million, riding on higher sales from oncology systems and X-Ray products. 

Revenues & Orders

Revenues leapt 7% year over year to $579.9 million, but missed the Zacks Consensus Estimates of $584 million. Net orders surged roughly 20% year over year to $592.8 million for the reported quarter with order backlog rising 10% to $2.2 billion. Growth was led by double-digit increase in net order for X-Ray products and strong order bookings in North America for oncology systems.

Segment Results

Oncology Systems' revenues grew 5% year over year to $452 million, boosted by healthy demand for the company's radiotherapy and radiosurgery systems. Net orders rose 5% to $459 million with a 20% increase in North American, in part offset by a 6% fall in international orders owing to a sharp decline in Japan. Cumulative orders for Varian's TrueBeam radiotherapy and radiosurgery systems increased to more than 170 units.

Varian's X-Ray Products business had a strong quarter with revenues cruising 22% year over year to $112 million aided by some recovery in the global imaging market. Net orders spiked 13% to $112 million. The company attributed the growth to higher demand for X-Ray tubes and flat panel detectors.

Revenues from the Other category, however, skid 19% year over year to $16 million. Net orders for this business increased year over year to $22 million. Varian cancelled a $62 million order for a proton therapy system in Sweden in the year ago-quarter. Excluding that order, first quarter net orders were flat year over year.

Margins

Gross margin improved to 46% from 44.6% a year ago while operating margin rose to 23.6% from 22%. Margins were supported by higher sales, favorable mix in the oncology business coupled with higher shipments in the X-Ray Products franchise.

Balance Sheet and Cash Flow

Varian exited the quarter with cash and cash equivalents of $704 million, up 13% year over year, with a debt of $23 million, down 38%. Cash flow from operations was $138 million.

Outlook and Recommendation

Based on the healthy first quarter results, the company has lifted its earnings per share target for fiscal 2011 to a band of $3.39 to $3.45 from its earlier forecast of $3.34 to $3.39. However, Varian continues to project revenue growth of 10%-11% for the year.

For the second quarter, Varian expects total revenues to grow about 9%-10% year over year. The company expects earnings per share of 83-86 cents for the quarter. The current Zacks Consensus Estimates for second quarter and fiscal 2011 are 84 cents and $3.41, respectively.

Varian believes that strong order activity at the Oncology Systems segment as well as current momentum in the X-Ray Products business will set the stage for better performance in fiscal 2011.

Varian is the world's leading manufacturer of integrated radiotherapy systems for treating cancer and a premier supplier of X-ray tubes for diagnostic imaging applications. In the radiation oncology market, the company competes head-to-head with Accuray Incorporated (ARAY) and TomoTherapy (TOMO).

Varian is poised to increase its market share in the radiation oncology market. The company currently enjoys a healthy demand for its coveted RapidArc radiotherapy technology, which is meaningfully contributing to its oncology net order growth. 

However, uncertainties stemming from health care reform and a still weak hospital capital spending environment provide headwinds. We currently have a Neutral recommendation on Varian. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.

 
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