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What's Behind Varian Medical Systems' Mixed Q1 Results?

By Keith Speights - Jan 30, 2020 at 5:34AM

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Here's how the company beat revenue expectations but fell short on the bottom line.

Varian Medical Systems (VAR) has been on a roll over the last five months, with its shares soaring 36%. The medical device maker's solid fiscal 2019 fourth-quarter results in October helped keep that roll going.

But that momentum was put to the test when Varian announced its fiscal 2020 first-quarter results after the market closed on Wednesday. Here are the highlights from the company's Q1 update.

Healthcare provider with child oncology patient

Image source: Getty Images.

By the numbers

Varian reported first-quarter revenue of $829 million, a 12% year-over-year increase. It also topped the average analysts' revenue estimate of $826.6 million.

The company announced Q1 net income of $88.2 million, or $0.96 per share, based on generally accepted accounting principles (GAAP). That was well below the prior-year period net income of $103.2 million, or $1.12 per share.

Varian posted non-GAAP adjusted earnings in the first quarter of $106.6 million, or $1.16 per share. That was an improvement from the adjusted earnings of $97.3 million, or $1.06, announced in the same quarter last year. However, it fell short of the consensus Wall Street earnings estimate of $1.19 per share.

Behind the numbers

Over 94% of Varian's total revenue comes from its oncology systems segment, which markets radiation therapy systems. Revenue for the segment jumped 11% year over year in the first quarter to $782 million. The company experienced its strongest order growth in China, Southeast Asia, and South Korea but also had strong order growth in the Europe, Middle East, and Africa region.

Varian's proton solutions segment markets the ProBeam Proton Therapy System. Revenue for this segment in Q1 totaled $28 million, a 28% year-over-year decline. The company said it received one new system order in its fiscal 2020 first quarter.

In addition, Varian lumps its revenue from its interventional solutions and cardiac radioablation businesses into its "other" segment. The company reported revenue of $19 million in Q1 for its other segment, compared with no revenue for the segment in the prior-year period.

Despite posting solid revenue growth, Varian's GAAP earnings slipped from the prior-year period due to increased spending. The biggest culprit was a 25% year-over-year jump in selling, general, and administrative expenses.

Looking ahead

Varian continues to expect that revenue for full-year 2020 will be between $3.5 billion and $3.6 billion. The company anticipates non-GAAP earnings per share will be between $5.30 and $5.45. 

Some healthcare stocks could be negatively affected in the coming months by the coronavirus scare that originated in China. Joshua Levine, CEO of one of Varian's top rivals, Accuray, said in his company's quarterly conference call on Tuesday that the coronavirus threat doesn't impact the long-term outlook in China. That should be true for Varian as well. However, it's entirely possible that the company could be affected in the short term.

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