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Why is Varian Medical Systems (VAR) Down 5.5% Since its Last Earnings Report?

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A month has gone by since the last earnings report for Varian Medical Systems, Inc. (VAR - Free Report) . Shares have lost about 5.5% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is VAR due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Recent Earnings

Maintaining its streak of positive earnings surprises, Varian Medical Systems reported second-quarter fiscal 2018 adjusted earnings of $1.15 per share, which beat the Zacks Consensus Estimate of $1.06. Adjusted earnings also improved 27.8% on a year-over-year basis.

Revenues totaled $729.9 million, which beat the Zacks Consensus Estimate of $659.6 million. On a year-over-year basis, revenues increased 10.1%, or 6% at cc. The company has strengthened its foothold in the radiation therapy as the market grew 3% on an order basis in the trailing 12 months.

Let’s delve deeper to the company’s quarterly results.

Segment Details

Oncology Systems

In the said quarter, oncology revenues totaled $698 million, up 6% at cc on a year-over-year basis. Varian’s worldwide net installed base is 7,954 units, up 3% or 263 units on a year-over-year basis.

As a whole, gross orders were $664 million, up 1% from the year-ago quarter at cc.

Gross orders in Americas inched up 1% on a year-over-year basis at cc. In EMEA, gross orders were flat year over year. In APAC, gross orders increased 1% year over year.

Operating earnings for the segment rose 16% year over year.

In February, Varian acquired a small privately-held quality assurance software company, Mobius Medical Systems. Per management, Mobius' market leading software – Mobius3D and DoseLab are solid enhancements to Varian’s existing portfolio of patient treatment plan QA and machine QA technologies.

Strong performance in the Software, Hardware and Service revenues boosted Varian’s oncology systems in the reported quarter.

Particle Therapy

Revenues in this segment inched up 2% on a year-over-year basis to $32 million.

Notably, the company did not book any new ProBeam orders in the quarter.

In March, Varian announced the first patient treatment at the St. Petersburg Proton Therapy Center in Russia, an important step in expanding access to proton therapy around the world.

Halcyon Drive Revenues

In the second quarter, the Halcyon platform witnessed 81 total orders since its inception in 2017, with the majority from greenfield sites. This reflects solid demand for the platform in the quarters ahead. The anticipated growth will be driven by solid new-scaled configurations optimized for different customer segments and with advanced capabilities.

Margins

Total company gross profit in the reported quarter was $318.5 million, up 15.6% year over year. Gross margin in the reported quarter is 43.6%, which expanded 200 basis points (bps) on a year-over-year basis.

Oncology gross margin in the reported quarter was 45.7% as a percentage of revenues, up 168 basis points. This is primarily driven by revenue growth across hardware, software and services and margin rate expansion in Europe from pricing discipline and ongoing operational excellence.

Financial Condition

The company ended the quarter with cash and cash equivalents of $740 million and debt of $255 million.

Cash flow from operations was $66 million, up 104% year over year, driven by operating income performance and working capital efficiencies.

FY18 Annual Guidance

Revenue growth of is expected in the range of 6% to 9% on a year-over-year basis for fiscal 2018.

Adjusted operating earnings as a percentage of revenues is expected in the range of 18% to 19%.

Adjusted earnings per share is expected in the range of $4.43 to $4.53.

Cash flow from operations is expected in the range of $475 million to $550 million for 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to one lower.

VGM Scores

At this time, VAR has a nice Growth Score of B, however its Momentum is doing a bit better with an A. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for growth and to a lesser degree value.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions has been net zero. It comes with little surprise VAR has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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