Varex Imaging (VREX) Q2 2021 Earnings Call Transcript

Varex Imaging (VREX -3.33%)
Q2 2021 Earnings Call
May 04, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Varex 2Q FY 2021 earnings call.[Operator instructions] I will now turn the conference over to your host, Howard Goldman, director of investor relations. Howard, you may begin.

Howard Goldman -- Director of Investor Relations

Good afternoon and welcome to the Varex Imaging Corporation's earnings conference call for the second quarter of the fiscal-year 2021. Speaking today are Sunny Sanyal, our president, and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at investors.vareximaging.com. The webcasts and supplemental slide presentations will be archived on Varex's website.

To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of the fiscal-year 2021. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the second quarter of the fiscal-year 2021 to the first quarter of the fiscal-year 2021 rather than to the same quarter of the prior year. Please be advised that during this call, we will be making forward-looking statements which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.

Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings including Item 1A, Risk Factors, of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures.

These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. And now, I'll turn the call over to Sunny.

Sunny Sanyal -- President and Chief Executive Officer

Thank you, Howard. Good afternoon, everyone. And welcome. I'm pleased to report that our financial results for the second quarter were stronger than our expectations and revenue exceeded pre-COVID levels.

Continued strong global CT tube sales and higher sales of industrial digital detectors drove this growth. Demand for our other medical imaging products related to certain elective medical procedures also increased. Our revenues in the second quarter increased 15% sequentially, due to gains in both medical and industrial segments. Revenues increased 3% year over year.

Our non-GAAP gross margins increased to 35%, due to higher volume and a favorable product mix. Our non-GAAP operating expense declined sequentially and year over year, reflecting benefits from previous cost reduction actions. Our non-GAAP operating margin improved to 13% of revenues. As a result, non-GAAP EPS was $0.35 and exceeded the top end of our guidance range.

Next, let me give you some high-level insight into how our different modalities and applications trended during the quarter. Medical segment revenues increased 13% sequentially and 1% year over year. Momentum in CT tube sales, which has been building over a number of quarters, remained strong in Q2. Many of these tubes for our new systems, which are also expected to result in future sales of replacement tubes.

In our other medical modalities, oncology, mammography, and radiography also saw growth, while fluoroscopy and dental remained flat. We believe this growth is due to demand that had been deferred over the past year, as well as from the expansion of healthcare services in some markets. Revenues in our Industrial segment increased 24% sequentially and 13% year over year. In Q2 demand for digital detectors for non-destructive inspection increased across several of our industrial verticals.

However, demand for imaging products for our security screening at ports and borders, as well as baggage screening at airports continued to lag. Now I'd like to take a few minutes to highlight the great work we're doing in our extra tubes business. In future. I'll highlight other areas of our business in the same way.

Demand for new CT systems in China and upgrades of CT systems globally are driving growth in our tubes business. In China, we believe that demand is likely to grow at approximately 10% a year for the next several years, due to increased installations at fever clinics and to focus on making rural health systems more self-reliant. Our strategy in China has been to establish relationships with local OEMs. I'm happy to say that of the initial 12 CT projects we have been working on with eight local OEMs, nine projects have been brought to market, and three are still in process.

We believe that local Chinese OEMs have made very good progress and currently account for approximately 40% of CT sales in China. Based on our experience, new OEMs tend to initially focus on gaining market share through launching entry-level systems. This has occurred in China for the CT modality. We are now seeing that the local OEMs are ready to expand into 64,128 and higher slice CT system projects in order to provide greater diagnostic imaging capabilities, including systems that are needed for cardiac procedures.

These projects are potential future opportunities for us and the relationships that we have built with these OEMs over the past five years will play a significant role in our continued success in the China CT market. As part of our local-for-local strategy, our Wuxi facility continued to scale up, loading extra tubes for the China market. By loading tubes, we mean assembling the extra tube inner core into locally sourced housings for OEM, specific customizations, and final testing before shipping to our customers. Over the past year, while most of our customers maintained momentum with their current R&D projects, many of them had slowed down their commitments to new R&D projects while they assessed the market situation.

During the quarter, we saw an increase in momentum in new product development activity within our customer base across their X-ray imaging product lines, which we interpret as a reflection of their confidence in the markets that they serve. Our own R&D activity on the other hand did not slow down. Later this fiscal year, we plan to introduce two new CT tubes specifically for high-end 256 and 320 slice CT systems. During the quarter, our software business received FDA 510(K) clearance for an enhanced version of our CT lung screening application, which uses artificial intelligence for automated detection of suspicious nodules.

And at the same time, during the past few quarters, we have continued to make progress with our investments in innovation focused on nanotube technology. Now, I'd like to share some additional details about this exciting new technology being developed through our joint venture, VEC Imaging. For simplicity throughout this nanotube discussion, my use of the word power refers to our venture, where we own 50%. First, let me start by outlining the differences between conventional X-ray tubes that use thermionic filament technology and our cold cathode nanotube technology.

On the left-hand side of the slide, you will see that conventional X-ray tubes require an electric power source to heat up a filament. Operating temperatures can get up to 2,400 degrees Celsius. In addition, the ability to place conventional emission sources close to each other is limited, a term that we call packing density. In contrast, our nanotube technology uses a localized electric field to extract electrons from solid-state emitters.

This technology operates at room temperature and has very high switching speeds. Due to its form factor and high packing density, our nanotube technology enables us to design X-ray tubes where many emitters can be sequentially arranged and turned on or off at high speeds. These multi-beam X-ray tubes can offer increased design flexibility to build lighter, mechanically simpler, and more compact imaging systems. We believe that our nanotube technology will provide many benefits over conventional X-ray sources.

First and foremost, we believe that systems designed using nanotube-based X-ray sources will significantly lower the total cost of ownership for hospitals and imaging centers. For example, in a CTA application, a lower TCO could be realized by eliminating the very heavy rotating gantry along with numerous interconnected parts, pieces, and components that are needed to support the complex mechanical design. These electromechanical components add cost complexity and weight and require significant downtime and expenses to maintain repair and replace over the life of the system. In contrast, systems designed using our Nanotube technology could have very few, if any moving parts and would be much simpler and designed, have a significantly smaller footprint and way much less.

This simplicity is expected to result in lower maintenance costs and significantly reduced system downtime. In addition, the next-generation systems would be smaller, lighter, and portable, and could give healthcare organizations additional flexibility in the care delivery process. We believe that the combination of our Nanotube technology and Varex's multi-decade-long experience with designing and manufacturing x-ray sources will enable our customers to redefine medical imaging in the coming years. To give you a status update, our R&D efforts with Nanotube technology is progressing well.

X-ray sources are characterized by energy, emission, and a few other parameters. We have achieved our intended energy output of 40 to 180 kilovolts at different emission levels measured in milliamps. We are now conducting accelerated life testing of different configurations of tubes. Why life testing is ongoing to date? We have completed over 1 billion projections per emitter as 160 kilovolts.

We believe this is the equivalent of several years of emitter life for our typical CT application. We are encouraged by these results and are continuing to move forward with our product development efforts. With that, let me hand over the call to Sam.

Sam Maheshwari -- Chief Financial Officer

Thanks, Sunny, and hello everyone. Before getting to our numbers, I would like to acknowledge that on March 31, our audit committee appointed Deloitte as our new external auditor. There were no disagreements with our prior auditor on any matter of accounting principles or practices, financial statement disclosures, or auditing scope on procedures. We look forward to working with Deloitte.

As a reminder, unless otherwise indicated, I've been provided a sequential comparison of our results for the second quarter of the fiscal-year 2021 with those of our first quarter of fiscal 2021. Varex delivered excellent results for the quarter driven by the broad-based strengthening of our business across both of our segments. For the quarter, both revenue and non-GAAP earnings per share were above the top end of the guidance range. Second-quarter revenues were $204 million, a sequential increase of 15% from the first quarter.

Medical revenues were $157 million, and industrial revenues were $47 million. This translated to 77% medical and 23% industrial sales. Sequentially, medical sales grew 13%, while industrial sales saw a strong 24% growth. On a regional basis, all three areas saw robust sequential growth.

Americas grew 15% overall with higher growth in the industrial segment. EMEA grew 17%, while APAC grew 14%. Let me now cover our results on a GAAP basis. The second-quarter gross margin was 32% and flat sequentially with the previous quarter.

Operating expenses were down $2 million compared to the first quarter, and interest expenses were $10 million. Earnings per diluted share were $0.08 compared to a loss of $0.16 in the prior quarter. Moving on to non-GAAP results for the quarter. The gross margin was 35%, a sequential improvement of 100-basis-points from the first quarter driven by higher sales volume and the favorable product mix.

Freight and logistics costs ran high and we expect them to remain high until the ocean freight-related delays and uncertainties subside and the air freight volume normalizes it. I want to remind you that our gross margin can fluctuate from quarter to quarter due to segment mix between medical and industrial, product mix within each segment, customer concentration, cost performance, and factory utilization levels driven by sales volume. Our gross margin has improved sequentially from 28% in the last quarter of fiscal 2020 to 34% in Q1 and now to 35% in Q2. This performance is due to an increase in sales volume, favorable mix, and through our initiatives to improve efficiencies in our manufacturing and servicing activity.

R&D spending in the second quarter was $18 million or 9% of revenues. R&D was 41% of operating expenses in Q2, as compared to 37% in Q1 reflecting our spending prioritization toward innovation and new products. SG&A was $26 million in Q2 as compared to $29 million in the prior quarter. As a result, operating expenses were $45 million and down approximately $1 million, sequentially due to a decline in SG&A offset by an increase in R&D.

We have kept operating expenses in control while successfully meeting increased customer demand in these challenging times leading to a significant improvement in product sales in the last six months. Overall, our strategy to deliver higher earnings through improved operating leverage is on track and working well. Operating earnings increased significantly to $26 million, or 13% of revenue as compared to $14 million, or 8% of revenue in the previous quarter. Tax expense in the second quarter was less than $1 million, as compared to $2 million in the previous quarter.

During Q2, we are two large favorable items in taxes that drove a $2 million benefit and resulted in an unusually low tax expense for Q2. One item was related to German taxes and the other was related to the Netherlands R&D tax credits. As a result, there was a one-time benefit to EPS of $0.06 per share in Q2. Net earnings more than quadrupled from Q1 to $14 million or $0.35 per diluted share.

This compares to net earnings of $3 million or $0.08 per diluted share in Q1. Now, turning to the balance sheet. Accounts receivables increased by $8 million due to higher sales; however, our collection efforts are efficient with DSO down by four days to 58 days. Our efforts to reduce inventory materialized in Q2 with inventory down by a healthy $22 million.

This is a priority for us. And as a reminder, we are targeting a total inventory reduction of $25 million to $30 million during the current fiscal year. For the first half, we have brought inventory down by about $24 million. Accounts payable decreased by $16 million to minimize supply chain uncertainties and improve efficiencies of our overall operation.

As a result, days payables dropped to 34 days. Now moving to debt and cash flow information. Cash flow from operations improved to $13 million, while non-interest-related coupon payment was due in Q2, we did pay $9 million in taxes in Germany for the fiscal-year 2017 through 2020. We ended the quarter with cash of $111 million on the balance sheet, an increase of $6 million in the quarter.

Gross debt outstanding was $512 million, and debt net of cash came down to $401 million reflecting our priority to continue to delever on a net debt basis. Adjusted EBITDA was $33 million in the second quarter, a significant improvement from $22 million in the prior quarter. I'm pleased to note that if you were to analyze our first half of fiscal 2021 EBITDA performance, the net debt leverage ratio at the end of Q2 would be 3.7 times. This reflects excellent progress toward our goal of a leverage ratio of three times.

In summary, our previously stated financial strategy of improving capital leverage and operating leverage is working well. I want to take a moment to thank our Varex colleagues worldwide for their tremendous efforts to enable these results in such challenging times. Now, moving on to our business outlook for Q3. The demand environment continues to remain strong for us and allows us to provide the following guidance for Q3.

Revenues between $195 million to $215 million, and non-GAAP earnings per diluted share between $0.15 and $0.35. Our expectations are based on non-GAAP gross margin in the range of 33% to 35%, and non-GAAP operating expenses in the range of $44 million to $45 million. With that, we will now open the call for your questions.

Questions & Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Larry Solow with CJS Securities. Please proceed with your question.

Larry Solow -- CJS Securities -- Analyst

Thank you, and good evening, I guess, or good afternoon. Just a couple of questions. And just perhaps Sunny, you can just a quick overview. It sounds like is certainly sequential.

You're seeing some improvement on the medical side in some of your markets, but it sounds like not everything has come back and perhaps the same on the industrial side, it looks like incrementally, certain things, doors are opening more for you perhaps, but not fully there yet. But yet your numbers quantitatively were at the high end or even above your revenue expectations. And you kept your operating expenses in line despite that higher revenue. So perhaps you could just give us a little color qualitatively on the different markets and sequential improvements?

Sunny Sanyal -- President and Chief Executive Officer

Yes, hey Larry. Thanks. So we had a very strong quarter and even sequentially, Larry, medical grew 13%. So that was a pretty strong performance sequentially.

What we saw was fairly broad-based demand on the medical side. As we've highlighted, CT was -- CT stood out in terms of its demand and it has been strong for the past several quarters. But beyond that, we saw broad-based demand across most of our modalities. And as you know, the couple of modalities where demand was that's a neutral sequentially -- as we pointed out a couple.

Floor and dental, but those were -- those have been consistent over the last 12 months. So there was nothing really -- nothing that stood out there. These modalities have their natural cycles, but what was encouraging for us was to see a very strong broad-based demand. On the industrial side was very similar, very strong broad-based demand with electronics -- strengthened electronics.

We saw a very good performance there. And -- but again, it wasn't a one-off, we've seen that trending up over the last several quarters and there's general strength in some of those verticals. And only segment only vertical within industrial that didn't grow much as security, cargo, and airport that's it. So I would characterize Larry that if the demand and the strength were broad-based and at the same time, going into the next quarter, we continue to see that type of strength as well.

Larry Solow -- CJS Securities -- Analyst

And as you look into the next quarter, given your guidance relative to what you normally just put up in Q2, it seems like you'd have to sort of getting to the high end of your guidance, again, to just match what you put up in this quarter. So is there some hesitation on your part are there certain things that you think might primarily benefit you and Q2 that might not benefit you in Q3?

Sunny Sanyal -- President and Chief Executive Officer

No, there weren't timing issues. We continue to see a broad-based strengthened and broad-based demand going into – going forward also into the next quarter. We've been -- we've tempered it a little bit, looking at some of the supply chain challenges that are out there. And we know -- at this point, I can't put a finger on anything particular, other than there are challenges with freight, their constraints, and delays in freight and transportation.

There are some shortages in materials that we're contending with and working through. So on -- cautiously, we gave the range that reflects some amount of caution built into it. And it's all supply chain-related. There's no capacity constraint in the factory with the equipment, people, those resources.

So it's really, it's going to come down to making sure that we have the parts and everything to deliver against the demand.

Larry Solow -- CJS Securities -- Analyst

Got it. And then just one question just on the China outlook. Obviously, a big demand -- China obviously wants to make everything internally. And as you mentioned, I think you said that the local CT, the local OEMs are providing 40% of the CT business.

Over time, is there any outlook on that, as the local OEMs continue to build up? Are these outside OEMs or I mean typically Siemens and GE, are they still selling considerably into this market? Or does it come to a point where it's only going to become, and you guys and I think Philip is providing to the local OEMs, have a greater opportunity?

Sunny Sanyal -- President and Chief Executive Officer

Look, we have anticipated five years ago when we went down this path. We had anticipated that the local Chinese OEMs will -- who at that time had virtually no share. We had anticipated that they will grow and share and capture market share. And they have done that now.

Will they go from where they are to approximately 40% share to a lot higher than that? That remains to be seen. But what we are seeing is that these local OEMs are very successful in both designing and bringing systems to market. And they have also been actually successful. These systems are working very well.

They're providing services and support. And so they have matured fairly rapidly. That said, the global OEMs are also strong players in those markets. And -- but they've benefited from the overall growth in the market, but we've also seen a shift in market share toward the local OEMs, and our play in this continues to remain strong.

These OEMs have continued on with their projects. You recall, we've said eight out of the 10 OEMs had been working on projects with us. We haven't lost a single project. and these projects have continued on and these OEMs have had the tenacity to continue and they've learned from it.

There were some just nominal delays like you'd expect out of any complex projects like this, but they're continuing on. We've got three more projects that are moving forward of the initiative throughout that had been started. And then now we're encouraged to see more projects starting to take shape. These are now driven by their desire to move into more of the higher-tier CT systems.

And what we anticipate is that the bread and butter, CT systems in China will end up being the 64 and one 20 sliced systems. So our expectation is that growth will continue from ongoing sales of new sockets into China. And at the same time, then the older CT systems, the 16-slice systems that were sold, and some of the newer systems we'll get into the higher tier. So we're encouraged by.

Larry Solow -- CJS Securities -- Analyst

Excellent. I appreciate that color. Thanks, Sunny.

Operator

Thank you. Our next question is from Anthony Petrone with Jefferies. Please proceed with your question.

Anthony Petrone -- Jefferies -- Analyst

Hi, good afternoon. And hope everyone's doing well. A couple of questions, backlog, and then a few follow-ups on China on the backlog. Sunny are we actually to sort of quantify the security cargo of screen backlog.

It's certainly been lagging through the pandemic. We'll expect it to continue to do so. On the flip side, this is I believe the highest margin business for Varex. So is there a way to sort of quantify what the backlog of orders looks like and security cargo screening, and maybe just timing as to when you could see a reversal and I'll have a few follow-ups on China?

Sam Maheshwari -- Chief Financial Officer

Yes. So let me answer this question, Anthony. Sam here. So in terms of the security -- hi --the security cargo business, that business, industrial business overall for our sales runs around 20%.

And out of that 20%, less than a third of the industrial business goes to the security cargo import inspection, etc. So for the number of quarters that business has been lagging and soft. So you could see how much the backlog might be building up out there, but for all of this to come back, particularly on the travel and baggage inspection side, we need to see travel resume, and then airport releasing capex. So that should help us.

Don't really have a good idea in terms of how much of the backlog is out there or pent-up demand might be there when travel resumes. In terms of port and cargo inspection, etc., it is somewhat lumpy and it can come in the quarter, and then it can remain soft for a couple of quarters. We expect that dynamic on the cargo and port inspection site to continue. We are encouraged by what's happening in terms of the end customer demand in terms of the port inspection and cargo inspection.

So that should pick up sooner than travel. That's our current expectation.

Anthony Petrone -- Jefferies -- Analyst

Great. And then that port just a quick follow-up there, Sam. On the port side, you mentioned 20% of overall industrial, one-third of that is airport screening. Should we assume that one-third is cargo port screening, is that the right math on that piece of the business?

Sam Maheshwari -- Chief Financial Officer

One-third of industrial is cargo plus, port plus, in airport baggage.

Anthony Petrone -- Jefferies -- Analyst

Would we call that security?

Sam Maheshwari -- Chief Financial Officer

Yes.

Anthony Petrone -- Jefferies -- Analyst

Got it. Ok. And shifting to China, maybe a little bit on the OEM contracts specifically that you announced and you announced some new contracts for newer systems, just maybe an idea of how many of those systems are in clinical trial development. How many are gearing up for commercial installation? So that would be the first question.

And then lastly on China, just an update on the Wuxi manufacturing plant, where that plan sits in terms of its capacity today and over time, will Wuxi exclusively be supplying into China? Thanks

Sam Maheshwari -- Chief Financial Officer

Let me start with the latter part of the questions. So Wuxi has been scaling up nicely and doing both tube manufacturing and detector manufacturing. The tube manufacturing side is what we call it as you might characterize it as light manufacturing. And there we can -- we started out with aftermarket tubes, but now we're making -- we're doing the light manufacturing OEM tubes as well.

So, and that we will continue to scale and the -- as we're renewing contracts with our OEM partners many of them are switching to local contracts. So we're going to supply them to local commercial agreements and handle all the service support repairs, etc., from Wuxi. That said, all of the core – the insert are being manufactured in Salt Lake. We shipped those, we buy local housing's local kids and customize them, test them locally and ship them.

The detectors slide if I do this and by that, we'll continue to do that. And that is at this point, largely a local for local operation. And even in the future, there are no plans at this point to turn that into a local for a global. On the other hand, the detector side is a different story.

We have now -- we can manufacture radiographic detectors, dental detectors, oncology detectors, fluoroscopic, some models of fluoro detectors out there. The intent here is to do it twofold. One, it's not just the assembling of kits. We are also sourcing local parts, local materials, and essentially there's a stronger supply chain infrastructure that's been built there that we're using to build detectors at a lower cost in China.

Initially, it was – you may recall a couple of years ago, we started this, as a response to the tariffs. And I had said that we will initially do that to make sure that we fulfill the local, what we need for the local market, but the intent for our operations in Wuxi is to continue on expanding it. And for detectors, we will end up, there's no reason why we should not able to be able to shift those detectors to any other markets in any other part of the world because they're not being customized in any specific way. They're equally applicable to any other customer.

Customers -- detectors tend to get customized, mostly superficially labels and stickers and things like that. So the capacity currently, I'll just give you orders of magnitude. So, we can do several thousand detectors here in China. We have that kind of capacity.

So we don't feel the capacity constraint at this point. So that scaling up Wuxi operation is going well, and it will continue. In terms of the local OEMs, your question about contracts, renewals, and how I think you asked about how the newer projects are going, what phase of probably developing are they in. They're in all stages of product development.

So as you can imagine, the initial projects -- of the 12 initial projects, three are in more advanced stages of product development, and the newer projects, 120 slices, 64 slices, they're in various stages. So hard to -- for me to give a lot of details on that. But they're typically in the exact same sort of phase like we've seen early now. We don't expect these projects to take five years like they did an initial start-up.

These will now -- these new projects are being based on the initial infrastructure of CTs that these customers and OEMs have built. And so those are moving forward. In addition to that, we've also started projects with other modalities, like cardiovascular systems. And so, there are new projects within those existing OEMs that were picking up in other modalities.

As you can imagine, these OEMs have business plans and aspirations to be broad-based modalities suppliers. So, they started with -- many of them started here -- they all started in different places, but many of them focused on CT in a very heavy way initially, and now they are expanding other modalities. And us having the relationships that we built over the last five years with these customers gives us a front-row seat at the table. And we're certainly going to take commercial advantage of it.

Anthony Petrone -- Jefferies -- Analyst

Very helpful. Thank you.

Operator

Thank you. Our next question is from Jim Sidoti with Sidoti and Company. Please proceed with your question.

Sunny Sanyal -- President and Chief Executive Officer

Hello, Jim.

Jim Sidoti -- Sidoti and Company -- Analyst

Hi, good afternoon. So, you've talked about new products in the last couple of calls, you talked about the high-end detectives a little bit, the last time, the nanotube technology this time. Can you give us a sense of how soon these projects turn to revenue?

Sam Maheshwari -- Chief Financial Officer

So, Jim's new products based on existing platforms generally move faster. And because we can put those out in a couple of years, our OEMs already have the established infrastructure, and interfaces and they can absorb them faster, and they're fairly well-understood applications. So, let's use a detector -- I'll separate out detectors from tubes. A typical new detector will go in fairly quickly, a new model.

A new platform like IGZO, that we've talked about, there it's mostly, when we launched new products and detectors, we, we tried to maintain as much of the previous interface as possible, so they can be dropped in into our customers' design and into their environment. And we try to do that as far as feasible and practical. So that pick by our customers is really mostly gated by the start of their new projects. They typically don't take a new detector, model and drop it into an old system.

They'll time it with the introduction of new launches. So, I generalize by saying it typically takes us three years to start seeing revenues from the point where we start working on a new detector. Initially, the volumes are low. Then once our customer launches its second year of their launch it picks up.

That's new detectors, whether it's significant platform enhancements of existing amorphous silicon. However, when we launch something brand new, like when there is a completely new platform, like a CMOS platform for something which – and customers have to shift gears completely, that can take longer. So let me give an example, photon-counting detectors, you can't simply throw out a photon-counting detector and make it backward compatible so it can fit right into an existing application, but it's a completely different technology. And it's scans images in a very different way.

Those are where it takes a lot longer because even if we bring a product to market, it may take us two to three years, it takes our customers another two to three years to redo their applications and build them into new applications. So, it's a little frustrating thing for all of us, but our time to revenues is long. Once these are done, then they stay in for a lifetime as you know. So newer platforms, completely new technologies like photon counting takes time to revenues very long.

The same way when we bring a new CT tube to market, let's talk about the Chinese OEMs as an example, they've taken our 16 slices, 64 slices CT tubes. Now we bring a new tube with new capability. They just take it in stride and take it on and either put it in their next CT system that they are bringing to market. But nowhere comes nanotube technology.

This is like the photon counting example. Nanotubes completely different platform, new technology, very different model of very different application needs to be overhauled mechanically, electrically, electronics, everything has to be redone. So that takes a lot longer. So, what we anticipate is that the time to revenue for something like nanotubes can be as much as five-plus years, five, seven years.

So that's why we're very careful in how much we count on in the near term from revenues, from some of these brand-new technologies, which are really a sea change for imaging.

Jim Sidoti -- Sidoti and Company -- Analyst

Ok. So, it sounds like we should see maybe a small contribution to revenue in perhaps in fiscal 2022 and 2023, but those game-changing technology things are out another three or four years after that.

Sunny Sanyal -- President and Chief Executive Officer

That's correct.

Jim Sidoti -- Sidoti and Company -- Analyst

Ok. All right. And then you talked a lot about China. India has been in the news a lot, the last couple of weeks, the pandemic really started to have a severe impact there.

Do you have partners in India and is there a potential to grow sales there as well?

Sunny Sanyal -- President and Chief Executive Officer

We do have customers in India. There isn't that same type of strong OEM base in India, a local OEM base. There are a few. And by the way, we know them, we are working as we did with China, we're working with them.

But I think five years from now, three years from now, we'll see more of these OEMs start to mature. So, there are some local OEMs and we are working with them and we do get some business with them. Now, most of the market in India actually is served by international and global OEMs. So, our current customers the reason I said, we're seeing strength in CT, not just in China, but also globally, is because some of those products are also ending up in India.

We don't control how our customers distribute their products. So, it's hard for me to say, what's going to India and what's not. But we do business -- to summarize, we do business directly in India through Indian OEMs, and we also do business in India through global OEMs.

Jim Sidoti -- Sidoti and Company -- Analyst

And then the last one from me, are you seeing any significant increases in material cost right now, or are you able to manage that and often it's seen like other cost-saving initiatives you put through?

Sunny Sanyal -- President and Chief Executive Officer

Yes, let me ask Sam to respond to that.

Sam Maheshwari -- Chief Financial Officer

Yes, currently we are seeing a little bit higher material costs or input costs. I talked about freight, so freight and input costs, definitely are a little bit of a headwind to the gross margin currently. So far, we have not seen a big impact and we are managing through it. My expectation is we will manage through it and hopefully, it remains a minor impact, but we are seeing high input cost too.

Jim Sidoti -- Sidoti and Company -- Analyst

Ok. Thank you.

Sam Maheshwari -- Chief Financial Officer

Thanks, Jim.

Operator

Thank you. Our next question is from Mike Ott with Oppenheimer. Please proceed with your question.

Mike Ott -- Oppenheimer & Co. Inc. -- Analyst

Congrats on a nice quarter. And thanks for taking my questions and for all the color thus far guys. Curious in medical, if you are continuing to see a higher utilization as a harbinger for future capital demand that you mentioned on your last call.

Sunny Sanyal -- President and Chief Executive Officer

It generally is because higher utilization for us means two things: one, more replacement components, we have several components that have wear and tear like tube connectors, etc. So that's one positive impact to that for us. And secondly, higher utilization also means replacements of entire systems. So, we're encouraged both ways.

I mean, we've seen utilization levels grow, and that's why we've seen such broad base demand in many modalities. So that's a positive that -- that gives us a lot of good optimism.

Mike Ott -- Oppenheimer & Co. Inc. -- Analyst

That's great to hear Sunny. Thank you. And then just a quick housekeeping one for Sam, when you gave the fiscal second-quarter sequential revenue growth rates by geography, slinking from EMEA was that up 17%?

Sam Maheshwari -- Chief Financial Officer

Yes, they were all up double-digit percentages. I just don't remember exactly right now. But yes, all of the three regions, were up quite strongly. Yes.

Mike Ott -- Oppenheimer & Co. Inc. -- Analyst

Ok. Thanks so much, guys.

Sam Maheshwari -- Chief Financial Officer

Thank you.

Operator

Thank you. Our final question is a follow-up from Larry Solow with CJS Securities. Please proceed with your question.

Larry Solow -- CJS Securities -- Analyst

Great. Thanks for taking the quick follow-up. Sunny you mentioned the photon counting technology. Just curious if you can sort of taking a step back.

I know, I think, when you bought, I get two questions, I guess when you bought Direct Conversion, a couple of years ago, I remember correctly it was around $20 million in sales. I think there was a pretty good backlog there. I guess on the existing platform so you had a pretty good runway for growth. Two questions, has that been interrupted at all because of COVID? Is that still kind of out there? And then the second question on photon counting is, I think, you had mentioned in your last call, potentially getting into the CT detective space.

So, I guess that's sort of the data acquisition space where Analogic kind of dominated. Is that correct? And is there any timing on that? Thanks.

Sunny Sanyal -- President and Chief Executive Officer

So, the first part existing photon-counting component sales did take a dip during the COVID period, because just like those products they had both medical and industrial applications on the customers using them for both medical and industrial. On the medical side there were some -- it slowed down during COVID in both areas. What we've seen since then is activities picked up and it's continuing to grow. The pipeline that we had, the backlog, didn't go away.

Some of those OEMs, that are bringing products to market, I mean, fell short during the COVID period. In terms of, we bought them for the auction value a long-term getting into the OneNeck, getting hold of the technology, but also getting into a market expansion into CT detectors. That project from a technology development perspective has been going well. We now have modules that we're working with.

So, there is OEM interest, we're working with OEMs, we can ship modules to them, they are testing them, they are validating them. So that's moving forward.

Larry Solow -- CJS Securities -- Analyst

Ok, great. Thanks. I appreciate that.

Sunny Sanyal -- President and Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the Q&A session. I will now turn the call over to Howard Goldman for closing remarks.

Howard Goldman -- Director of Investor Relations

Thank you for your questions and for participating in our earnings conference call for the second quarter of the fiscal-year 2021. The webcast and supplemental slide presentation will be archived on our Varex's website. A replay of this quarterly conference call will be available through May 18 and can be accessed at the company's website or by calling 877-660-6853 from anywhere in the U.S., or 201-612-7415 from non-U.S. locations.

The replay conference call access code is 13719035. Thank you. And goodbye.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Howard Goldman -- Director of Investor Relations

Sunny Sanyal -- President and Chief Executive Officer

Sam Maheshwari -- Chief Financial Officer

Larry Solow -- CJS Securities -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Jim Sidoti -- Sidoti and Company -- Analyst

Mike Ott -- Oppenheimer & Co. Inc. -- Analyst

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