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Varian Medical Systems, Inc. (NYSE:VAR)

F2Q2014 Results Earnings Conference Call

April 23, 2014 5:00 PM ET

Executives

Spencer Sias - Vice President, Investor Relations and Corporate Communications

Dow Wilson - President and CEO

Elisha Finney - Chief Financial Officer

Clarence Verhoef - Corporate Controller

Analysts

Tycho Peterson - JPMorgan

David Roman - Goldman Sachs

Amit Hazan - SunTrust Bank

Jason Wittes - Brean Capital

Toby Wann - Obsidian Research Group

Operator

Greetings. And welcome to the Varian Medical Systems Second Quarter Fiscal Year 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Spencer Sias, Vice President, Investor Relations and Corporate Communications. Thank you, Mr. Sias. You may now begin.

Spencer Sias

Thank you. Good afternoon. And welcome to Varian Medical Systems conference call for the second quarter of fiscal year 2014. With me are Dow Wilson, President and CEO; Elisha Finney, CFO; and Clarence Verhoef, our Corporate Controller. Dow and Elisha will summarize our results and we'll take your questions following the presentation.

To simplify our discussion, unless otherwise stated, all references to the quarter or year are fiscal quarters and fiscal years. Quarterly comparisons are for the second quarter of fiscal 2014 versus the second quarter of fiscal 2013.

Please be advised that this presentation and discussion contains forward-looking statements. Our use of words and phrases such as outlook, could, believe, can, expect, will, hope, target, likely and similar expressions are intended to identify those statements which represents our current judgment on future performance or other future matters.

While we believe them to be reasonable based on information currently available to us, these statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important risks relating to our business are described in our second quarter earnings release and in our filings with the SEC. We assume no obligation to update or revise the forward-looking statements in this presentation and discussion because of new information, future events or otherwise.

Before turning it over to Dow, let me remind you that we are holding a Media Review and Webcast for investors in New York on Tuesday, May 6th, details are available on our IR site. And now, here is Dow.

Dow Wilson

Good afternoon and welcome. For the second quarter of 2014 we generated good order growth. Revenues that came in slightly ahead of expectations and solid margins before accounting for the settlement of patent litigation. Quickly summarize our financial results for the second quarter versus the year ago periods.

Revenues rose 1% to $779 million, our gross margin grew nearly 60 basis points to 42.2% and earnings came in at $0.88 per diluted share, including a $0.16 per share charge related to the settlement of the seven-year patent dispute with the University of Pittsburgh regarding our respiratory gating technology and our quarter ending backlog rose to $2.8 billion with the help of about $60 million in proton orders.

Turning to operational highlights, Oncology Systems grew gross orders by 6% to $613 million with strong gains in Latin America and Australia, 3% increases in both North America and EMEA and a 3% decline in Asia, where the weaken offset constant currency growth of 3%.

In North America, we see hospitals continuing to consolidate and hospital administrators focusing increasingly on system purchases that enabled cost efficient quality care with the best clinical practices. This is our strong suit.

As an example we entered into two new multiyear agreements with large hospital systems to supply them with packages of accelerators, accessories, software and services, portions of these agreements were booked in the second quarter and the reminder will be booked over the five to seven-year terms of these agreements. We have more of these type deals in the sales funnel.

In EMEA, we booked roughly half of the $51 million multi-machine Algerian order that we announced early in the second quarter. We also booked sizable orders in Italy, Spain and Switzerland.

Subsequent to the close of the quarter we exhibited at the ASTRO meeting, Indiana, where attendance was up and where we saw heavy booth traffic with a lot of interest in our RapidPlan software and in radiosurgery solution.

In Asia, Japan had double-digit order growth with the key win in Hiroshima and good replacement business from conversations of aging Siemens and Mitsubishi unit. We grew gross orders slightly in China. In the meantime interest in radiotherapy is rising in other Asian markets including Vietnam, the Philippine and Myanmar.

Growth in rest of world including Latin and Australia was particularly strong during the quarter. In Brazil, we received orders for several treating unit, as well as the software systems which were outside of the 80 machine tender that we won earlier this year. We have not yet booked orders relating to this tender. Columbia, Bolivia, Peru and Ecuador were also active during the quarter. We received numerous orders in this region for our cost efficient low energy unique accelerator with RapidArc capability.

In Australian, we received a sizeable order from Genesis care network that included 10 TrueBeams that will be delivered over the next three years. In total, TrueBeam comprised more than 60% of our high energy accelerator orders during the quarter. This product has generated more than $2.5 billion in gross orders since its introduction just four years ago.

Siemen's replacement business contributed to our Oncology order growth in North America, EMEA and Asia, the strategic partnership has gained momentum and is working well for our business. Siemen conversations have accounting for more than $80 million in gross orders this year.

We also landed new business in the Philippines working with Siemens. Thanks to their help, Varian will supply accelerators to the first three of eight planned radiotherapy centers at some of the country’s leading hospital.

We also made good progress during the quarter with our Edge radiosurgery offerings. We have booked nearly 100 orders for Edge, upgrades and systems. We reached an important radiosurgery milestone during the quarter when Champalimaud in Portugal commenced the world first treatment with our Edge platform.

Champalimaud’s first Edge radiosurgery patient was a 53-year woman with operable stage one non-small cell lung cancer. Physicians there also treated the 67-year-old man with two metastatic brain tumors. He received radiosurgery for both tumors in a single session that took less than 10 minutes.

To my knowledge there is another system that matches the combined precision and treatment time of our Edge radiosurgery platform. Henry Ford Hospital in Detroit recently became the first center in the United States to commence treating patients with Edge radiosurgery.

Turning to Oncology services, we expanded gross orders in this part of the business by 11% during the quarter. Year-to-date, service orders represented almost 40% of the total oncology gross orders.

As was recorded earlier, we completed our acquisition of Velocity asset, including software design to help clinicians, make more informed treatment decisions by organizing patient data and making it available in one place. This acquisition supports our commitment providing clinicians with tools for data-driven clinical decision making.

The Velocity software enabled healthcare professionals to use oncology patient images and data to plan and assess treatments, collaborate with colleagues and share clinical knowledge. We expect this to play an important part in the movement towards evidence based medicine.

I’m pleased to say that the skilled clinicians who developed this software are joining Varian to help develop and commercialize this product on a broader scale. This software is already in use at over 200 centers around the world. And we believe we can achieve faster and deeper market penetration for this product to our global sales, marketing and service network.

Let me turn to our new imaging component segment which is comprised of our X-ray flat panel detectors to and security products. We consolidated these product lines into a single segment as a result of an organizational change that puts them under the management of Sunny Sanyal, our new Imaging Components President.

Growth orders for this segment increased 14% to $205 million, driven exclusively by very strong demand for our panel. As we mentioned on the last call, this business benefited to some extent some catch-up orders that flipped from the first to second quarter of this fiscal year.

X-ray equipment manufactures have designed our panel into a new C-arm surgical imaging system and new digital mammography system and into a digital radiography system that was the winner of sizable public tender in India. As sales of these systems ramp up, it should contribute to the continued growth of our panel business.

Gross orders for X-ray tubes and security products were soft compared to the year-ago quarter. Two purchases were slowed in part due to improved quality and lifecycle. Demand for security products remains healthy but competition and pricing pressure impacted security business during the quarter.

The company’s other category which is comprised of the Varian Particle Therapy business and Ginzton Technology Center recorded growth orders of $60 million in the second quarter. The Varian Particle Therapy business booked two orders during the quarter and approximately $50 million order for a new proton installation at at the Cincinnati Children's Hospital and approximately $10 million order from the Paul Scherrer in Switzerland for technology and equipment. We look forward to additional clinical research.

Before closing on protons, I’m pleased to report that treatments are progressing at Scripps where they have permission two rooms and are treating as many as 36 patients a day for range of disease including prostate; lung; head and neck; and breast cancer. Average treatment time is 26 minutes with the faster treatment session completed in just 10 minutes.

Now, I’ll turn it over to Elisha.

Elisha Finney

Thanks Dow and hello everyone. While Dow has already covered growth orders, I want to briefly talk about the constant currency growth rates for the quarter. In comparing quarter-over-quarter exchange rates, the weakening of the Yen and the Aussie dollar was mostly offset by the strengthening of the Euro and other currencies.

Oncology growth orders increased 6% in dollars and 7% in constant currency. Oncology’s North American growth order was up 3% in both dollars and constant currency. EMEA growth orders increased 3% in dollars and 1% in constant currency. And in Asia, where the Yen weakened by roughly 15% quarter-over-quarter, that region was down 3% in dollars but up 3% in constant currency.

Oncology growth orders in rest of world region including Latin America and Australia rose by 71% in dollars and 82% in constant currency. The company ended the quarter with a $2.8 billion backlog, up 2% from the year-ago quarter.

As a reminder, both growth and net orders were shown in the consolidated segment of earnings attached to our press release. Second quarter revenues for the total company increased 1% in dollars and 3% in constant currency.

For the first half, total company revenues were up 3% in dollars and 5% in constant currency. Oncology systems posted a 4% gain and revenues during the quarter, bringing the revenue growth for the first half to 3%.

Imaging components posted a second quarter revenue gain of 2% with double-digit growth in our flat panel products, largely offset by declines in our security and inspection products. For the first half, imaging component revenues were up 4% from the year ago period with similar headwinds from the security and inspection business.

Revenues for the other categories fell significantly from the year ago quarter, when we started to report revenue under percentage of completion method for both the Saudi and Russia for proton therapy project.

Total company growth margins for the quarter, rose 57 basis points to 42.2%, driven by a smaller percentage of lower margins proton revenue. Oncology systems gross margin equaled the year ago quarter at 42.8%. For the first half, Oncology’s gross margin increased nearly half a point to 43.8%.

The imaging component gross margin for the quarter declined by 80 basis points to 41.5%, due largely to pricing pressure in X-ray tubes and volume declines in our security and inspection products. For the first half, imaging component gross margin fell 20 basis points to 41.4%.

Second quarter SG&A expenses were $140 million or 18% of revenues, including a charge related to the $35 million Palo patent litigation settlement. Let me take a moment to walk you through the accounting for this settlement.

The settlement expense includes $5 million that was reserved in a prior year and another $25 million or $0.16 per share expense that was booked to SG&A in the second quarter. An additional $5 million will be booked in our current third quarter on the balance sheet as a prepaid royalty that will be amortized over the next two and a half years.

The patent settlement added approximately 3 points to SG&A as a percent of revenues in the second quarter. SG&A was further impacted by about a $5 million increase in our bad debt reserve in the quarter to reflect uncertainty in our ability to exchange our Venezuelan Bolivars that we have collected into dollars.

Second quarter R&D expenses were $61 million or 8% of revenues, up 1 point as a percentage of revenue with the year ago quarter, as we continue to invest in our global strategies and execute on our product roadmap. For the first half, R&D expenses also rose 1 point as a percentage of revenues to 8%.

Moving down the income statement, second quarter operating earnings totaled $128 million, down 18% from the year ago quarter. The patent litigation settlement reduced the operating margin by more than 3 points to 16.4% for the quarter.

Depreciation and amortization totaled $15 million for the quarter and $31 million for the first half. The effective tax rate fell slightly from the year ago periods to 27.6%, with about half a point of benefit related to the patent settlement. Given the ongoing geographic mix shift of profits to outside North America, we now believe the tax rate for the full fiscal year will be approximately 28%.

Fully diluted shares outstanding decreased from the year ago quarter to $105.4 million, due largely to our ongoing share repurchase program. Diluted EPS was $0.88 for the second quarter, including the $0.16 per diluted share litigation settlement charge.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $939 million, debt of $469 million and stockholders’ equity of $1.7 billion. DSOs, day sales outstanding at 95, was up 8 days from the year ago quarter with an approximate 10-day impact from the proton therapy business, where deferred payments terms are not yet due, but revenue has been recognized under the percentage of completion method.

Second quarter cash flow from operations was $126 million, significantly higher than net income, primarily due to working capital increases and accrued expenses and customer deposits.

Primary uses of cash were $159 million toward the repurchase of 2 million shares of stock. At the end of the quarter, we had 4 million shares remaining under the existing repurchase authorization that extends through calendar year 2014.

Now back to Dow for the outlook.

Dow Wilson

Thank you, Elisha. The company is continuing to execute well, and our businesses remain on track to reach our fiscal year 2014 growth targets. For the fiscal year, we continue to believe that total company revenues could increase by about 6% to 8% over the prior fiscal year. We expect net earnings per diluted share for the fiscal year, including the $0.16 effect of the patent litigation settlement, to be in the range of $4.06 to $4.18. We expect total company revenues for the third quarter of fiscal year 2014 to increase in the range of 5% to 6%. We expect net earnings per diluted share for the third quarter to be in the range of $1.06 to $1.10.

We are now ready for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Tycho Peterson of JPMorgan. Please go ahead.

Tycho Peterson - JPMorgan

Question, on net orders, you guys came up a little bit late versus the street [5.59% versus 5.83%] (ph) I think can you maybe just talk through some of the dynamics there and then Elisha you want to breakout net orders in oncology, North America versus international?

Elisha Finney

Yes. So Tycho, we had two what I would say rather unusual items in the second quarter. First because of the situation that I mentioned in Venezuela, we took roughly $5 million out of backlog relating to deals that we had previously booked there as well as we had kind of an unusual and what we believe to be one-time cancellation in flat panel of another about $5 million from both the Chinese and the Korean customer. So if you -- that said, for the first half, typically, if you look at it as a percentage of backlog, it’s 3% to 5% in any given year. And if I look at the first half, we are about 4%. So if we assume the backlog will continue to grow throughout the year, I think for the full year we still have a shot at being at 3% to 5% for the year.

Tycho Peterson - JPMorgan

And then a color, is the North American versus international split of oncology net orders?

Elisha Finney

So net orders, yes, and I can mark you through this quickly, I am just having to refer to my notes here. So for oncology, the geographic split was 39% in North America, 61% in international versus growth that look 42. That was net.

Tycho Peterson - JPMorgan

And then is the momentum picking up with Siemens though, I mean you hadn’t commented on the conversions picking up and so is that driving most of the growth?

Dow Wilson

I think we commented last quarter that we felt very good after last quarter and I would say that momentum is continuing and we are seeing good strength with Siemens globally. Frankly, we like what we see there. Now some of that was at in the product ready and we’re trying to get connectivity with the product and that’s good. And I think we are going doing a nice coming there, so in their hardware, but it’s really kind of the story of all the software coming together and completing that capability in our product lines next to their old install base and that’s all done now and we’ve got some site to take people, improve statements and clinically and I think that momentum is turning now.

Tycho Peterson - JPMorgan

Okay. And then last one given the guidance for next quarter year-over-year becomes little bit more back end loaded, could you comment on some of gives and takes in the back half of the year. I know you previously talked about hoping for recovery in China, so what are your thoughts on that and maybe some other drivers for the back half of the recovery?

Elisha Finney

Sure, Tycho. The biggest driver is as we have assumed that our Maryland proton we have been talking just at the beginning of the fiscal year. It will be ready for equipment at the end of May which doesn’t give us a whole of leverage there leeway there for Q3. So we moved that into assumptions as into Q4. So that’s really what’s driving. If you look through the settlement and my lawyer told let me do the math for you, but if you do the math, you will see that the guidance is essentially unchanged from the prior year. We simply moved Maryland into Q4 but the full year remains where it was.

Tycho Peterson - JPMorgan

Okay. And now you are still confident China getting better back half of the year?

Dow Wilson

No. Our funnel remains very strong. We were positive. It wasn't as biggest as we hope this last quarter, but it was still positive. We do believe we're getting some share in China. So that's good. But we do see a pretty strong second half in China.

Tycho Peterson - JPMorgan

Okay. Thanks. I’ll hop off.

Operator

Thank you. The next question is from David Roman of Goldman Sachs. Please go ahead.

David Roman - Goldman Sachs

Thank you, and good afternoon, everyone. I wanted to maybe start with something came up in your prepared remarks regarding Brazil, I think, I don’t know, I can’t remember you gave exact number, but you did talked about having some strong orders for proton now we are outside of the 80 unit tender you had won and that you haven’t booked any orders on the tender. To what extent do you think that having the tender might be helping your access to some of the private market and your own ability to perform well in Brazil versus just general strength in the end market and the fact that you're kind of already the market leader?

Dow Wilson

Let me start by saying, we had a very good position in Brazil before the tender win. We are finally the market leader in that market. So we always had a good position in Brazil. Winning the tender has certainly helped us. It has reinforced that leadership position.

So I think there has been maybe a little bit of a halo effect. This is the private market. I think our product is very well-positioned. We've got a very good distribution for this team down in Brazil and we think we are very well-positioned for both the short-term and the long-term.

I guess maybe what especially given from investor point of view is the new tenders both government and non-government are not affected by the MOH, Ministry of Health pricing. So we're seeing good pricing on these other orders as well.

David Roman - Goldman Sachs

And then maybe just go to kind of a follow-up which is just on pricing in general. Could you maybe give us some sense as to how pricing is trending globally? I mean, if I look at the gross margin, which was, I think, pretty flat, it was just flat in the quarter that would suggest to me that pricing is also pretty stable given your shifting mix of business. Maybe you just sort of help us understand pricing trends by regions specifically in Oncology?

Dow Wilson

On the quarter, well, on the half, for that matter as well, pricing has been stable. So our pricing is definitely holding and we're please about that. On the quarter, we did have -- our unit volume was up and our mix was a little more of kind of international mix, we had more unique and usual and we had a little bit more of kind of value segment mix for that. But product-to-product with year-over-year, quarter-over-quarter pricing is effecting very stable.

David Roman - Goldman Sachs

And maybe I just sneak one more in here just on the U.S. Well, I know this market is seen some variations past several quarters around uncertainty and reimbursement and look like things are kind of coming back last quarter and I know you briefly talk about some of the issues around consolidation the U.S. where you thought that was a competitive advantage for Varian. But maybe just kind update us on your latest thought regarding the U.S. market and maybe sort of help us draw kind of the trend line to kind of transcend what's been some volatility over the past couple of quarters?

Dow Wilson

Sure. The good news is that volatility has measured in the last two quarters, sorry someone sneak here a little bit, last -- measure in the last few quarters, we've had good U.S. market performance and that's, for us have -- we had together, it's been a tough market as you said, David. But our orders on the half or very good year-to-date gross orders were up 8%, gross orders in the quarter were up 3% as we said.

Yes, the market is consolidating and the free standing clinic market is pretty quite, but we are seeing the hospital market to be pretty aggressive. In terms of outlook, the funnel looks good and I would say, we're looking for kind of mid single-digit market growth out of U.S. and frankly that's a part of positive outlook as we’ve had on that market in the long-term.

David Roman - Goldman Sachs

Okay. Thank you very much.

Operator

Thank you. The next question is from Amit Hazan of SunTrust Bank. Pleased go ahead.

Amit Hazan - SunTrust Bank

First, I just want to go back to the difference between growth and net orders and in quality side. I'm getting the number -- the printed number is about $54 million, which is a actually a little bit bigger than normal. I know Elisha you touched on it in the prior question, but some of that what you touched on was not inside of oncology. And in particular, if I apply kind of majority of that to the net order for the North American line, I get a pretty weak North American order number -- net order number despite a really weak comp?

Elisha Finney

Yes. I mean, most of the cancellations and dormancies are in North America. We did have some of the international market as I mentioned particularly in rest of world related to Venezuela this quarter. But you’re going to get variability in any given quarter. I just want to come back to in terms of history, 3% to 5% of backlog is typically adjusted. You just haven’t seen it really up until this point for this year, but this is very typical to what we historically have seen. Every single year it’s been 3% to 5%.

Amit Hazan - SunTrust Bank

Can you confirm what was the change of growth rate for net orders in North America?

Elisha Finney

It was down slightly mid-single digit.

Amit Hazan - SunTrust Bank

Okay.

Elisha Finney

And it was up in international market. And then you get a lot of variability within the international market.

Amit Hazan - SunTrust Bank

Okay. Thank you for that. And just I want to ask a question about Edge, and to one of your competitors. Just kind of going -- thinking through SRS in particular, but some of your Edge related comments in the past couple of quarters, seeing one of your big competitors missed numbers due to GEMini weakness. I’m just wondering if you guys can set a little bit of color on whether there is a direct link to the new imbursement changes there that happen at the end of last year to the extent what we’re seeing maybe a change in the marketplace where the traditional neurosurgeon call point for a GEMini type product is now being rolled into the oncology suite. Is that helping you at all? Just any color on what’s happening on the SRS side, where it kind of look from very short term numbers that you might be gaining some share?

Dow Wilson

No, I would say it’s a combination of factors. You named the number of them, but certainly the reimbursement was helpful to get those on the same footing now as the big deal, if we were substantially lower than GEMini for reimbursement before for radio surgery and those are now reimbursed at same level. So that’s one help. Two is clearly on the environment that we’re in. Administrators are particularly looking at making their purchases go farther, and when you look at the number of patients and indications they can threat with Edge versus what they can threat with GEMini. Testing with the single largest trend in radiation therapy being SDRT with lung, liver and pancreas growing, it’s having the flexibility and versatility of the Edge is a big deal.

And then last of all, Edge, as I said in my prepared remarks, is the combination of the most precise and fastest delivering method to threat this indication. And it has obviously a throughput impact, but also has a patient impact. Now these patients are sick and having to in some cases, sit on a table half hour to an hour for complex treatments on Edge. They can have that completed in 10, 15 minutes and they’re set to go. So I think it’s really kind of combination of all those factors and I do agree. I think we are seeing some momentum there with that product from a relative little competition point of view.

Amit Hazan - SunTrust Bank

Okay. Thanks very much guys.

Operator

Thank you. The next question is from Jason Wittes of Brean Capital. Please go ahead.

Jason Wittes - Brean Capital

Hi, thanks for taking the question. Actually, I wanted to ask about the gross margins and specifically, Dow, I know that when I spoke to you recently, you discussed some investments being made in terms of your emerging market product offering and how that might translate into better gross margins in outer years. Can you just talk about the spend you’re doing now and sort of how that might translate into the outer years margin improvement?

Dow Wilson

Yes. I think from an R&D point of view, we’re kind of three significant areas where we’re spending this increase in R&D. One is software. We think there is a big opportunity where as a market leader in Eclipse, we will continue to invest in algorithms in Eclipse and you’ve seen things like RapidPlan for us, that will continue. ARIA is a terrific product. We’ve had to make investments this last year for the Siemens connectivity and things like that. We continue to bring a lot of enhancements to that product and look forward really to evolving that product in the informatics space and in globalizing the product, so that’s some of the investments there.

And then for the rest of the product line, emerging markets are a big piece of our product line more and more and that's where we have a big chunk of our investment going that will yield products this year, next year and beyond. So we're investing aggressively in those areas.

As we already, as we said on the call, we're pretty comfortable with the margin rates on the quarter and pricing holding. We continue to invest a fair amount as well in operational program to drive productivity across our business and have made pretty good progress on the variable costs of our TrueBeam platform as well as on, our cost of quality and built our X-ray component business as well as Oncology.

Jason Wittes - Brean Capital

Okay. But I guess, what I was trying to get at was, I thought there was some effort to bridge the gap between emerging market and developed markets in terms of gross margins by product mix, is that?

Dow Wilson

Absolutely. I mean, from a long-term point of view that's absolutely what we've got to do and that’s -- in terms of new product, we want to deliver products that deliver what the customers want from a feature performance point of view and match our requirements, our shareholder margin point of view and so we are -- so that is where our significant piece of our investment is going.

Jason Wittes - Brean Capital

Okay. If I could just do one follow-up in terms of the U.S. market, you had mentioned that there was some consolidation I think there was some other questions about it. But you also mentioned that the funnel was strong, does that imply partially seen your guidance as well that there is going to be some backend loadedness in terms of obviously, a revenues or even order rates as well, they were held back for some of the consolidation this quarter?

Dow Wilson

As you know, we don't guide the orders and I will say that second half of last fiscal year, we had a pretty good funnel and their results weren’t that great.

Jason Wittes - Brean Capital

I see.

Dow Wilson

So, I think part of what we're seeing is the yield on the funnel is good. So we continue to see a very good funnel, yield on the funnel recently has been good and I'll stick to the comment I made before and that is, we are kind of seeing market outlook in the -- for long-term in the mid single-digit.

Jason Wittes - Brean Capital

Okay. Fair enough. Thank you management guys.

Operator

Thank you. The next question is from Toby Wann of Obsidian Research Group. Please go ahead.

Toby Wann - Obsidian Research Group

Hey, good afternoon everybody. I just wanted to ask quickly, kind of, about rapid plan market adoption, kind of, how the pace of that, how that’s been received both domestically and across the globe?

Dow Wilson

There is a lot of enthusiasm and excitement for the product. We showed it at ASTRO, of course, last year as you know. It has European introduction at ASTRO, very strong global interest. We shift the first units to customer here in eight weeks or so and kind of, official commercialization is this summer.

So we've got lots of customers lined up for us. We think it's a game changer and it was a little color we will start with prostate model and then head and neck followed through shortly after that. And then we’re onto breast cancer models and other cancers. And with the enthusiasm that we're seeing from our customer based both luminary and committee and outside of the U.S., we think this is -- this remains $700 million opportunity for us.

Toby Wann - Obsidian Research Group

Thank you.

Operator

Thank you. We have no further questions at this time. I'd like to turn the call back over to Mr. Sias for any closing remarks.

Spencer Sias

Thank you very much. Thank you all for participating. A replay of this call can be heard on the Varian investor website at www.varian.com/investor, where it will be archived for a year. To hear a telephone replay, please dial 1-877-660-6853 from inside the U.S. or 1-201-612-7415 from outside the U.S. and enter confirmation code 13578961. Telephone replay will be available through 5 p.m. Friday, April 25th. Thank you again.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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