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Varian (VAR) Q2 Earnings Lag Estimates, Gross Orders Surge

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Varian Medical Systems, Inc.’s (VAR - Free Report) second-quarter fiscal 2019 adjusted earnings per share of $1.05 missed the Zacks Consensus Estimate of $1.16. Adjusted earnings declined 8.7% year over year.

This Zacks Rank #2 (Buy) company reported revenues of $779.4 million, which edged past the consensus mark of $779 million. On a year-over-year basis, revenues rose 6.8% and 10% at constant currency (cc). However, revenues were affected by $9 million due to U.S.-China tariffs.

Let’s delve deeper into the quarterly results.

Segment Details

Oncology Systems: Revenues totaled $746.8 million, up 7% year over year and 10% at cc. Operating earnings at the segment declined 8% owing to the impact of tariffs and currency fluctuations.

Varian’s worldwide net installed base had 8,292 units, up by 338 units on a year-over-year basis. As a whole, gross orders grew 15.4% from the year-ago quarter on strength in hardware, software and services.

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

 

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

Geographically, gross orders in Americas increased 7% on a year-over-year basis. In EMEA, gross orders rose 17% year over year, marking the seventh consecutive quarter of double-digit growth for the region. In APAC, gross orders increased 35% year over year on strength in China.

Operating earnings at the segment declined 10% year over year owing to the impact of tariffs.

Proton Solutions: Revenues at the segment climbed 2.2% on a year-over-year basis to $32.6 million. However, operating earnings were negatively impacted by $7 million due to impact of tariffs and increased project costs.

Margins

Total gross profit in the reported quarter was $318.2 million, down 0.1% year over year. Gross margin in the reported quarter was 40.8% of net revenues, down 280 basis points (bps).

Research and development expenses rose 0.8% year over year to $59.4 million. Selling, general and administrative expenses increased 6.9% year over year to $149 million.

Adjusted operating income in the fiscal second quarter totaled $109.8 million, up 0.6% year over year. As a percentage of revenues, operating margin was 14.1%, down 80 bps.

Revenue Guidance Raised

Varian raised its guidance for 2019 revenues to $3.09-$3.18 billion from the previously stated range of $3.06-$3.15 billion. The Zacks Consensus Estimate for the same stands at $3.13 billion, within the guided range.

Meanwhile, the view for 2019 adjusted earnings per share has been kept intact.

Varian continues to expect adjusted earnings per share within $4.60-$4.75. The Zacks Consensus Estimate for the same is at $4.73, close to the high end of the range.

Adjusted operating margin is expected between 17% and 18%, while cash flow from operations is expected within $460 million to $510 million.

Our Take

Varian ended the fiscal second quarter on a mixed note. The company continues to gain from its core Oncology Systems segment, which saw solid overseas growth in recent times. Strength in China also buoys optimism. In fact, management foresees tremendous opportunities in China for its radiation therapy products. The Proton Therapy unit also aided growth. In fact, new proton therapy products are building momentum for Varian’s Proton Solutions business. The company’s increasing activities in the emerging nations buoy optimism. A raised revenue guidance paints a bright picture as well.

On the flip side, contraction in gross and operating margins is worrisome. Additionally, the U.S.-China tariffs have negatively impacted the top line in the quarter. Moreover, operating income at the Oncology Systems and Proton Solutions units is under pressure.

Earnings of Other MedTech Majors at a Glance

Other top-ranked stocks which posted solid results this earning season are Stryker Corporation (SYK - Free Report) , Abbott Laboratories (ABT - Free Report) and CONMED Corporation (CNMD - Free Report) , each carrying a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stryker delivered first-quarter 2019 adjusted earnings per share of $1.88, beating the Zacks Consensus Estimate by 2.2%. Revenues of $3.52 billion were in line with the Zacks Consensus Estimate.

Abbott reported first-quarter 2019 adjusted earnings of 63 cents per share, beating the Zacks Consensus Estimate by 3.3%. First-quarter worldwide sales came in at $7.54 billion, above the Zacks Consensus Estimate of $7.47 billion.

CONMED posted first-quarter 2019 adjusted earnings per share of 57 cents, which beat the Zacks Consensus Estimate of 54 cents. Revenues were $218.4 million, surpassing the Zacks Consensus Estimate of $213 million.

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