Q1 2025 Earnings Summary
- The destocking phenomenon among OEM customers is largely over, leading to improved order rates both inside and outside China, indicating increasing future revenues.
- Varex is successfully expanding its cargo and security inspection systems business, having secured multiple orders totaling approximately $14 million, with expectations of significant long-term growth in this segment.
- China's contribution to revenues is improving, with sales increasing to $35 million in the quarter (18% of total sales), and potential for further growth as the market recovers.
- Uncertainty in China market: Despite a slight uptick in sales, Varex does not expect a meaningful improvement in demand from China this year and lacks clarity on the impact of any potential stimulus measures, which could hinder growth prospects in this key market.
- Margin dilution from cargo inspection systems: The company's expansion into cargo and security inspection systems is currently margin dilutive to both its Industrial segment and overall corporate margins, and will remain so until revenues exceed $10 million to $15 million per quarter, potentially putting pressure on profitability in the near term.
- Supply chain and labor issues affecting revenue: In the last quarter, Varex's revenues were below expectations due to supply side issues, primarily labor absenteeism during the holidays, causing a revenue impact of around $4 million to $5 million, which indicates operational vulnerabilities that could affect financial performance.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +5.2% (from $190.0M to $199.8M) | Total Revenue increased due to combined growth in the Medical segment (up 3.4% driven by higher CT and fluoroscopy sales) and Industrial segment (up 10.2% from robust security inspection product sales), reversing prior declines observed in FY2024. |
Operating Income | +166.7% (from $4.2M to $11.2M) | Operating Income surged as improved gross profit (20% increase and higher gross margins from 30.1% to 34.3%) and controlled operating expenses outpaced expense growth, a marked recovery from the earlier period impacted by revenue and margin pressures. |
Medical Revenue | +3.4% (from $139.9M to $144.6M) | Medical Revenue modestly increased driven by solid CT and fluoroscopy product sales, partly recovering from the previous period’s 14% decline which was due to weakened sales in China and lower performance in key modalities. |
Industrial Revenue | +10.0% (from $50.1M to $55.2M) | Industrial Revenue improved as robust demand for security inspection products drove a 10% increase, overcoming earlier pressures from weaker digital detector sales seen in prior performance. |
APAC Revenue | +21.9% (from $61.6M to $75.0M) | APAC Revenue surged due to increased sales in China—showing a 7% YoY improvement and a 12% sequential increase—and strong CT sales across the region, a turnaround from the prior decline of 18% caused by the anti-corruption campaign and destocking. |
EMEA Revenue | –8.5% (from $66.0M to $60.4M) | EMEA Revenue fell as decreased sales of digital detectors outweighed gains from security inspection products, indicating persistent market challenges in this region compared to previous performance. |
Americas Revenue | +3.2% (from $62.4M to $64.4M) | Americas Revenue experienced modest growth despite previous declines in digital detector sales, suggesting stabilization and incremental improvement driven by enhanced product mix and possibly other localized initiatives. |
Cash Flow | Significant turnaround from –$11.3M to +$131.4M | Net Cash improved dramatically primarily due to the issuance of Senior Secured Notes that injected $126.9M, together with better investing outcomes (improved proceeds from marketable securities), marking a robust recovery from the prior period’s negative cash flow. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q1 2025 | $195M–$215M | no current guidance | no current guidance |
Non-GAAP EPS | Q1 2025 | Loss of $0.05 – profit of $0.10 per share | no current guidance | no current guidance |
Non-GAAP Gross Margin | Q1 2025 | 31% | no current guidance | no current guidance |
Non-GAAP Operating Expenses | Q1 2025 | ~$53M | no current guidance | no current guidance |
Interest and Other Expense (Net) | Q1 2025 | $7M–$8M | no current guidance | no current guidance |
Tax Rate | Q1 2025 | ~22% | no current guidance | no current guidance |
Non-GAAP Diluted Share Count | Q1 2025 | 41M shares | no current guidance | no current guidance |
Additional Week Contribution | Q1 2025 | ~$15M | no current guidance | no current guidance |
Revenue | Q2 2025 | no prior guidance | $200M–$215M | no prior guidance |
Non-GAAP Earnings Per Diluted Share | Q2 2025 | no prior guidance | $0.05–$0.20 | no prior guidance |
Non-GAAP Gross Margin | Q2 2025 | no prior guidance | 32%–34% | no prior guidance |
Non-GAAP Operating Expenses | Q2 2025 | no prior guidance | ~$52M | no prior guidance |
Interest and Other Expense, Net | Q2 2025 | no prior guidance | $9M–$10M | no prior guidance |
Tax Rate | Q2 2025 | no prior guidance | ~22% | no prior guidance |
Non-GAAP Diluted Share Count | Q2 2025 | no prior guidance | 41M shares | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
China market uncertainty | Discussed in Q2 2024 with uncertainty due to anticorruption, stimulus ambiguity and expectations of gradual recovery ; in Q3 2024, uncertainty remained with impacts from anticorruption campaigns and cautious outlook ; in Q4 2024, stabilization at lower sales and ambiguity around stimulus effects were noted | Q1 2025 saw mentions of an uptick in sales, resolution of destocking and potential for recovery, though still cautious about a full rebound | Recurring with slight positive signs. The sentiment has shifted from persistent uncertainty to cautious optimism as destocking issues resolve, though recovery remains partial. |
Cargo and security inspection systems expansion | Q2 2024 emphasized strong performance in cargo inspection products driving Industrial growth ; Q3 2024 highlighted strong demand and growing revenue contribution ; Q4 2024 focused on portfolio expansion, pilot installations and plans to launch full systems in fiscal 2025 | Q1 2025 detailed expanded product offerings, significant orders and a strategic shift toward full systems and service solutions with robust growth potential | Recurring and deepening. The focus and investment in this area are increasing, with richer product combinations and growing order volumes signaling a major future growth driver. |
Destocking trends and improved order rates | Q2 2024 discussed broad-based cautious customer behavior due to excess inventory ; Q3 2024 mentioned gradual improvements and expectation of normalization in 2025 ; Q4 2024 noted stabilizing inventory adjustments and early signs of order upticks | Q1 2025 reported that destocking was largely behind and order rates improved both in China and globally, though benefits are expected to materialize later | Recurring with steady improvement. The trend shows a normalization in order patterns as customers move past elevated inventory levels, indicating a recovery in demand. |
Margin dilution and gross margin pressure in industrial segments | Q2 2024 did not specifically focus on margins; Q3 2024 attributed lower margins to an unfavorable product mix (more cargo equipment sales) ; Q4 2024 detailed dilution from low-margin equipment (linacs) and the pressure on overall margins | Q1 2025 reiterated short-term margin dilution due to the ramp-up of cargo systems, while expecting long-term improvement as service revenue grows | Recurring challenge. The sentiment remains cautious as near-term margin pressure persists but is expected to ease when the higher-margin service component matures. |
Photon-counting technology development and AI/software integration | Q2 2024 provided robust updates on photon-counting integration in both medical and industrial applications along with active AI/software integration efforts ; Q3 2024 mentioned strong progress on photon-counting with enthusiasm but little on AI/software ; Q4 2024 discussed both aspects comprehensively, emphasizing revenue targets and improved imaging capabilities | In Q1 2025, photon-counting technology was highlighted with accelerated adoption in industrial applications and confidence in long-term potential, but there was no mention of AI/software integration | Recurring with a shift. Photon-counting remains a key growth focus with positive sentiment, while AI/software integration, previously emphasized, is not mentioned in the current period suggesting either reduced discussion or integration into broader technology narratives. |
Supply chain and labor challenges impacting revenue | Not mentioned explicitly in Q2 2024 or Q3 2024; Q4 2024 did not mention these issues | Q1 2025 described labor-related supply chain issues causing a shortfall of about $4–5 million in shipments, linked mainly to high absenteeism over the holidays | New emphasis. This topic emerges in Q1 2025 with specific quantification, indicating a short-term operational challenge that could impact near-term revenue. |
India expansion and cost optimization initiatives | Q2 2024 had no discussion; Q3 2024 mentioned cost-out initiatives and capital investments in India to regain market share and improve competitiveness ; Q4 2024 detailed India expansion plans with production set for Q3 fiscal 2025 along with local-for-local manufacturing and supplier diversification for cost optimization | Q1 2025 mentioned that production of radiographic components in India would begin this fiscal year, without additional details on cost optimization | Recurring with slight change. India expansion remains key, though the current period focuses on production initiation while less emphasis is placed on cost optimization, indicating a potential transition from planning to execution. |
Tariff regime and geopolitical/political uncertainties | Q2 2024 and Q3 2024 had no discussion; Q4 2024 focused on tariffs impacting both input costs and export duties, expressing caution ahead of political changes | Q1 2025 addressed monitoring U.S. and China tariff changes, with an emphasis on potential impacts and caution regarding future adjustments | Recurring and sustained. While the focus and details vary, the topic remains important with continuing cautious sentiment regarding geopolitical risk and trade uncertainties. |
Competitive pressures in low‑end modalities | Q2 2024 had no mention; Q3 2024 explicitly discussed intense competition in low‑end radiographic and dental segments, particularly from Asia-Pacific players ; Q4 2024 did not provide specific commentary | Q1 2025 did not mention competitive pressures in low‑end modalities | Diminishing emphasis. Previously highlighted competitive challenges in low‑end modalities are not mentioned in Q1 2025, suggesting they may be less top‑of‑mind or overshadowed by other strategic priorities. |
Global softness in medical and industrial segments | Q2 2024 noted a 15% drop in medical revenue due to cautious purchasing and softness in China, while the Industrial segment saw modest growth despite softness in certain markets ; Q3 2024 mentioned inventory adjustments, weak performance in several modalities and softness in China for Medical, and mixed performance in Industrial ; Q4 2024 reported declines of 12% (Medical) and 4% (Industrial) due to softness and challenging comparisons | Q1 2025 conveyed mixed performance with growth in CT tubes offset by weaknesses in other modalities; destocking improvements contributed to better orders, although overall softness is implied | Recurring with mixed sentiment. Global softness remains a challenge, particularly in medical modalities, but incremental improvements (e.g. improved order rates and selective growth) indicate a potential stabilization trend. |
Liquidity and convertible debt management | Q2 2024 detailed new financing of ~$175 million and discussed plans to reduce convertible debt with excess cash, and Q3 2024 reported a solid liquidity position and upcoming convertible maturity with refinancing flexibility ; Q4 2024 did not address it | Q1 2025 provided detailed updates on liquidity with $219 million in cash and marketable securities, $124 million in restricted cash for debt reduction, and a net debt position of $228 million, underscoring ongoing convertible debt management | Recurring and stable. The company continues to focus on liquidity and debt management, with consistent improvements and clear strategic priorities to deleverage, reflecting a positive long‑term financial management outlook. |
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China Sales
Q: How did China revenue perform this quarter?
A: Management reported an uptick in China sales, with revenues reaching $35 million, representing 18% of overall sales. However, they caution that while this is encouraging, they don't consider it a rebound and are not expecting meaningful demand improvement this year. They also noted no impact from government stimulus in their projections. -
Destocking and Supply Chain Issues
Q: Is the destocking issue resolved, and what about supply challenges?
A: The destocking phenomenon is largely behind them, and they are seeing improvements in order rates. However, benefits may materialize after Q2 due to lead times. Supply chain issues impacted last quarter's revenue by about $4 million to $5 million due to labor-related delays, but they expect to recover this in the current quarter. -
Cargo Inspection Business
Q: Discuss the cargo inspection business and its margin impact.
A: The company is expanding direct sales of cargo and vehicle inspection systems. Initially, equipment sales have lower margins, but as they transition to service revenue after 18–24 months, margins improve. They expect the business to become margin accretive once revenues exceed $10 million to $15 million per quarter. -
Operating Expenses Outlook
Q: Why were operating expenses higher, and what's the expectation?
A: Operating expenses were $55 million, including a $1 million final payment to Micro-X and an extra week in the quarter. They expect expenses to decrease to $52 million next quarter as these factors normalize. -
Photon Counting Detectors Adoption
Q: What's the outlook for photon counting detectors?
A: Management is optimistic about photon counting technology, noting accelerated adoption in the industrial segment due to high-speed imaging capabilities. Medical adoption is following but takes longer due to integration complexities. They believe this technology is here to stay, with strong interest from OEMs. -
Convertible Notes Repayment
Q: How will the company handle the convertible notes due this year?
A: They raised $125 million to pay down part of the convertible notes due midyear, with the funds held in a restricted account. No decision has been made on the remaining $75 million, but they are in an excess cash situation and may pay it down fully.