Varian Medical Systems' (VAR) CEO Dow Wilson on Q1 2016 Results - Earnings Call Transcript

| About: Varian Medical (VAR)

Varian Medical Systems, Inc. (NYSE:VAR)

Q1 2016 Earnings Conference Call

January 27, 2016 5:00 PM ET

Executives

Spencer Sias - President, Corporate Communications and Investor Relations

Dow Wilson - President and Chief Executive Officer

Elisha Finney - Executive Vice President, Finance and Chief Financial Officer

Analysts

Jeffrey Johnson - Robert W. Baird

Amit Hazan - Citigroup

Anthony Petrone - Jefferies

David Roman - Goldman Sachs

Jason Wittes - Brean capital, LLC

Tycho Peterson - JPMorgan

Steve Beuchaw - Morgan Stanley

Brandon Henry - RBC Capital Markets

Operator

Greetings, and welcome to the Varian Medical Systems’ First Quarter Full-Year 2016 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 like to turn the conference over to your host, Spencer Sias, Vice President of Investor Relations and Corporate Communications for Varian Medical Systems. Thank you, Mr. Sias. You may now begin.

Spencer Sias

Thank you. Good afternoon, and welcome to Varian Medical Systems’ conference call for the first quarter of fiscal year 2016. 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 will 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 first quarter of fiscal year 2016 versus the first quarter of fiscal year 2015, references to financial results for orders are to gross orders unless otherwise indicated.

This discussion includes non-GAAP financial measures in order to provide quarter-over-quarter comparisons of operational performance excluding unusual items. A reconciliations to the most comparable GAAP measure is included in our earnings release which can be accessed on our website. Please be advised that this discussion contains forward-looking statements. Our use of words and phrases such as outlook, believe, expect, anticipate, could, should, will, slated and scheduled and similar expressions are intended to identify those statements which represent 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 first 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.

And now, here is Dow.

Dow Wilson

Good afternoon and welcome. Varian is reporting revenues and earnings above our expectations for the first quarter of fiscal 2016, while managing through some challenging conditions in our markets and we’re raising our earnings guidance for the year.

In summary, we are reporting non-GAAP net earnings of $0.99 per diluted share and $0.91 per diluted share on a GAAP basis. Revenues of $757 million, up 3% in dollars and 7% in constant currency. Soft orders in our Oncology Systems business, we expect the declines in Imaging Components orders and revenues and good news on the tax fronts with a permanent R&D tax credit and the suspension of the medical device excise tax.

Focusing on operational highlights in our oncology business, gross orders totaled $533 million for the quarter, down 5% in dollars, and down 1% in constant currency. Gross orders in the Americas for the quarter increased by 3% in both dollars and constant currency with the fastest growth in Latin America. Gross orders in North America rose by 2% in dollars and constant currency.

In EMEA, gross orders declined by 14% in dollars and 5% in constant currency. Gross orders in APAC declined by 12% in dollars and 7% in constant currency with continued market contraction in Japan and a modest decline in China.

Global markets have been weakened by ongoing political unrest, weak oil prices, and economic uncertainty. In EMEA, for example, Russia announced further delays in its cancer plan, Germany scaled back investments, and the Middle East was negatively impacted by political unrest and falling oil prices.

On a positive note in EMEA, we received an order from the UK’s National Health Service for our further 10 TrueBeam systems during the quarter. The National Health System has now ordered more than 50 TrueBeams in the last few years for its cancer programs. Economic uncertainty was also a prime cause of weakness in Japan, which led to an overall orders decline in APAC.

In China, gross orders declined slightly. As of the end of the first quarter, we continue to see hospitals in China aiming to invest in advanced radiotherapy and radio surgery systems for their cancer patients. We booked several orders for EDGE radiosurgery systems in China during the quarter.

In the Americas, the multi-million dollar Siemens replacement project in Argentina and a key Ministry of Health in Chile drove the growth in Latin America, while North America continued to move forward with investments, and our new product platforms to replace aging systems.

We’re focused on global market development through our Access to Care Initiative. And educational program that’s fixed the bridge the gap between the growing need for a modern radiotherapy treatment machines in developing countries and a lack of trained personnel to operate them. This program is already working in Africa and Vietnam, and we took steps during the quarter to initiate this program in India through an educational partnership with Apollo Hospitals Group. This program will train radiation technologist in India.

We made good progress with our software business during the quarter. Licenses for RapidPlan, our tool for enhancing efficiency and quality in treatment planning has tripled since the end of the fiscal year and are now installed at over 50 sites. Clinical networks, including a healthcare system in Victoria Australia that took for licenses during a quarter are rebuilding treatment capabilities around RapidPlan.

Turning to our Oncology Service business, orders were up 1% in dollars, but up 6% in constant currency compared with a strong year-ago quarter.

Let me turn now to Imaging Components, where orders shrink by 22% to a $127 million for the quarter, and revenues fell by 150% to a $141 million. Again, in the second-half of last fiscal year, this business has been confronted with currency-related pricing pressures, weak market conditions for security and infection products, and enforcing at a major panel customer. These challenges together with excess tube inventory at a key customer contributed to the declines in this business during the quarter.

Volumes for tubes were down in the quarter, while demand for our higher margin dynamics fluoroscopic panels increased and led to a sequential improvement in the gross margin for Imaging Components. Our recent acquisitions MeVis and Claymount gained momentum in the quarter and are performing well. As a remainder, we’re aiming for about $50 million in revenue from these newly acquired businesses this fiscal year.

Moving to protons, we make good progress with installations. During the quarter, we turned over the first room of the Maryland Proton Therapy Center for a clinical commissioning and first treatments are slated to begin next month.

We have successfully extracted beam from the Cyclotron at Cincinnati Children’s Hospital, where patient treatments are scheduled to begin before the end of the year. Installation is also underway at the Paul Scherrer Institute in Switzerland, and we are scheduled to begin installations at sites in Holland, Russia, and Saudi Arabia later this year. Proton order activity was quite in the quarter, but our prospects for booking several more systems this year continue to look good.

Before I hand it over to Elisha, I would like to say how proud I’m that Varian has been honored for its commitment to sustainability by being included for the second year in a row on the Corporate Knights Global 100 Most Sustainable Corporations list, which compares to sustainability performance of some 4,600 companies globally. This was announced last week at the World Economic Forum in Davos.

Now, I’ll turn it over to Elisha.

Elisha Finney

Thanks, Dow, and hello, everyone. Dow has already covered gross orders, so let me start with backlog. We ended the quarter at $3.3 billion, up 7% from the year-ago period. Backlog adjustments during the quarter totaled $55 million, bringing net orders for the company to $617 million.

Now, let me walk you through the P&L. First quarter revenues for the total company increased 3% in dollars and 7% in constant currency. Oncology posted a 5% gain in revenues during the quarter with a 9% gain in constant currency. So with a significant geographic mix shift towards international revenues, which grew 21% in dollars and 31% in constant currency versus a year ago quarter, while North American revenues declined by about 10%. International business constituted 55% total oncology revenues in the quarter.

Imaging Components posted a first quarter revenue decline of 15% with decreases in tubes, panels and security, and inspection products. Our Particle Therapy business posted revenues of $27 million, up $18 million from the year ago quarter, as we continue to make progress on projects and backlog.

The total company gross margin for this quarter was 41.1%, down as expected by a little more than 3 points. Oncology Systems gross margin also fell by about 3 points to 42.4% due to geographic and product mix shift, as well as minor currency effects. Imaging Components gross margin for the quarter fell by about 1.5 points to 30.7%, due largely to lower pricing and volumes.

First quarter SG&A expenses were $124 million, or 16% of revenues, an improvement of about one point as a percentage of revenues with the year ago quarter. First quarter R&D expenses were $60 million, or 8% of revenues equals to the year ago quarter as a percentage of revenue.

First quarter operating earnings totaled $128 million, or 17% of revenues, down about 2 points as a percentage of revenue from the year ago quarter and in line with our expectations for the quarter.

Depreciation and amortization totaled $19 million for the quarter. The effective tax rate was 24.8%, down almost 4 points in the year ago quarter, due largely to the geographic mix of profits and the R&D tax credit that was reinstated in late December. We now expect that the tax rate will be about 26 to 27% for the year.

Fully diluted shares outstanding decreased almost $4 million from the year ago quarter to $97.8 million, due to our ongoing share repurchase program. Diluted EPS was $0.99 for the quarter.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $953 million, debt of $728 million, and stockholders’ equity of $1.6 billion. DSO at 99 days was up significantly from the year ago quarter, due to a lower mix of Imaging Components business, a higher mix of proton business, and the timing of collections and oncology.

First quarter cash flow from operations fell slightly from the year ago period to $77 million. Primary uses of cash for $27 million for CapEx and a $192 million for the repurchase of 2.4 million shares of stock.

At the end of the quarter, we had 7 million shares remaining under the existing repurchase authorization that extends through calendar 2016.

Now, back to Dow for the outlook.

Dow Wilson

Thanks, Elisha. Including the effects of the R&D tax credit re-enactments and the suspension of the medical device excise tax in the U.S., we now believe that for fiscal year 2016 total company non-GAAP earnings will be in the range of $4.55 to $4.65 per diluted share. We continue to expect that revenues for fiscal year 2016 will increase by about 4 to 5% over fiscal year 2015.

For the second quarter of fiscal year 2016, we expect revenues to be up 1 to 2% from the year ago quarter in dollars. We expect non-GAAP earnings for the second quarter of fiscal year 2016 to be in the range of $1.06 to $1.10 per diluted share.

We’re now ready for your questions.

Question-and-Answer Session

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jeff Johnson from Robert Baird.

Jeffrey Johnson

Thank you. Good afternoon, guys. Can you hear me, okay?

Dow Wilson

Hi, Jeff, yes.

Elisha Finney

Hi, there?

Jeffrey Johnson

Hey, great. So, Dow, one question for you and one question for Elisha, and let me start off with the question for you, Dow. So it’s not a little bit maybe more cautious on some of the European and given that the Middle East and your European number on your oncology side a little more cautious on Europe and APAC. Is that the right read here? And I guess, as I look back over the last several quarters, we’ve seen oncology orders in both those markets in negative territory, I think three out of the last four quarters. Is that kind of where we should level set, I know you don’t guide the orders. But just given your comments in terms of last several quarter trend line, is that kind of where we should be still hanging out with our thoughts for the year?

Dow Wilson

Let me say that maybe this is going to cast it in a broader view for a second, Jeff, and then kind of comes from the regional data…

Jeffrey Johnson

Sure.

Dow Wilson

When you look at the last 12 months in oncology, in dollars, it’s down 2%, in constant currency, it’s up 4%. I mean in the first quarter, it’s not the greatest growth that we have ever had. Our funnel remains very good. So, we like what we see.

The fourth quarter was huge for us in Europe. Constant currency and dollar growth in Europe was outstanding in Q4. So, our Q4 was 12.5% constant currency growth last quarter. So, maybe there was a little bit of quarter-over-quarter balancing going on. So I think the 12 months trailing is kind of what we are seeing right now. Clearly, we are reading the papers like everybody and some of the macroeconomic weakness in Europe is real. I mean, we did have a light Q1.

But I think we’re – we still see markets growing in that low to mid single-digit range at this time. We haven’t seen anything that would pull us off that. Japan has been the ongoing structural change in Japan. In China, we did have a win in the quarter that was protested.

So, I mean, we’re very close to flat in China. Our funnel remains very good in China. So I think Japan is probably going to be more of the same, that’s been a pretty consistent story over the last few quarters. But I do think China will come back. The order that was protested was up a fairly large order. So, that was in our numbers that China would have been great. But anyway, I mean, those are the kinds of things that’s happened around a quarter, I would say over the long haul within the last 12 months, we haven’t seen anything that would at this time pull us off of market growth number in that kind of 3 to 5 range.

Jeffrey Johnson

Okay, that’s helpful. And, yes, the 4% you cited is a trailing 12 months you’re referring to that worldwide.

Dow Wilson

Yes.

Jeffrey Johnson

So kind of mixed wise we think North America a little bit stronger maybe than others going forward, is that fair?

Dow Wilson

Yes, last – when you look at it in pure dollars, Americas last 12 months is at 4.5%, and international was down 6.5% in dollars. Constant currency adjust the whole thing at 4% up. So that’s kind of, I mean, last 12 months is that kind of the market that I think we feel – we’re still feeling.

Jeffrey Johnson

Okay, that’s helpful. And then Elisha, the question now for you just around EPS guidance. Since you guided back in October, the euros kind of works a little bit more against you, I think a little bit stronger dollar against the euro since you guided some of the emerging market currency still go in the wrong way.

So if I look at as a dime raised to guidance here, how much was net debt tax in R&D driving that dime raise? How much kind of in the guidance number is coming from those two things? How much of an incremental currency headwind was there, if any included in your guidance? And then maybe how are you thinking about the core underlying business? So just trying to bucket kind of those three areas on what contributed to the dime change in guidance?

Elisha Finney

Sure. So, Jeff, the simple answer is, if I take the R&D tax credit and the medical device excise tax together, it’s a dime for the year. So and that’s roughly even at about $0.05 each. So we got a benefit of $0.04 in Q1, so those two impacts. And what we’re saying is the additional $0.06 is going to come from Q2 to Q4. So essentially we took the benefit from those two things impacted onto the prior guidance and got it to the 4.60 midpoint.

Jeffrey Johnson

Okay. Then underlying then kind of the core business, I’m trying to figure out if currency I thought was an incremental headwind since you last guided. Does that imply that your core expectations have improved a little bit?

Elisha Finney

Well, I mean, in certainly Q1, we feel good about and in terms of what I would refer to as an operational bid if you take out the $0.04 related to the tax impact, we had about a nickel deep. And that was due to higher oncology revenue and frankly very good cost controls on SG&A little bit on share repurchase is a little bit more than we’ve historically done, but in line with that 1 to 2 million shares per quarter.

I think your next question is going to be why don’t you get into that nickel? And I’m still a little black and blue after Q4, frankly. And when we miss on that revenue number, it’s very early in the year. And I think that just had to do with some timing and I think oncology did a fantastic job and probably pulled a little bit revenue forward from Q2 and Q3 to make sure we didn’t have a repeat performance.

But for the year, we – it still looks good with the revenue guidance and the EPS from where we stand today. Currency from when I last guided has been relatively stable. I mean, it may have heard us, I don’t know, I think I was at 112 versus 109, but again we built some of that into the range for the guidance when we give it.

Jeffrey Johnson

All right. That’s very helpful. Thank you.

Operator

Thank you. Our next question comes from Amit Hazan from Citi.

Amit Hazan

Hey, good afternoon, guys. Can you hear me okay?

Dow Wilson

Yes, yes, good morning.

Elisha Finney

Yes.

Amit Hazan

So, good afternoon, so…

Dow Wilson

Good afternoon, yes.

Amit Hazan

Start on the gross margin line maybe a question on oncology gross margin. So I was looking back just kind of taking a little bit several quarter view, and if I strip out service just kind of look at your product gross margin on the oncology side. It kind of implies a pretty big decline over the past year. I don’t know if it’s about 36% in fiscal 2014 down to 31% in fiscal 2015.

And as it’s obviously just the product side, so I’m wondering if you can share with us whether that trend continue this quarter first of all and what the drivers here might be outside of FX? But you kind of actually had a nice big shift in revenue towards the U.S. up until this quarter. And so I’m wondering byproduct margins in oncology would be down as much as they were?

Elisha Finney

Yes. So Amit the biggest impact on Q1 was just the geographic mix shift. We had a 7 point shift international deliveries and particularly the Middle East and Eastern Europe, which are lower margin countries. I mean, I would just say some schedule delivery base. So we fully anticipated we were going to have margin declines in oncology and for the total company, and I think that was reflected in the guidance that we gave last quarter.

So for the year, I still expect even with the – we still had some currency impact in Q1. We will have a little bit in Q2 and then it should anniversary. For the year, we still think Oncology is right in that 43% range, so holding in line with our long-term expectations. I would point out, so this was a bigger proportion in the year ago quarter and not as one of our highest margin product lines. So that impacted it as well. But I think Oncology is performing well at this point.

Amit Hazan

And just to reiterate nothing outside, anything outside of FX is hurting the product side of gross margin in oncology, that would seems to be down over the course of a year now?

Dow Wilson

It’s a region mix.

Elisha Finney

Region, yes, the region mix, the geographic mix. Yes, so, international went from 48% of total revenue in the year ago period to 55% is just a very big geographic mix shift. But on an apples-to-apple basis, it’s really just the geography that was impacting it. And again, less service as a percentage of the total.

Amit Hazan

Let me jump to Imaging, just a couple of questions on that. Number one, I’m wondering if you are reiterating kind of the guidance you laid out in fiscal year was, I think it was about flat or so on Imaging revenues?

And then secondly, specifically has your assessment of the risk around losing more business in flat panel and into – changed at all since the earnings call last quarter?

Dow Wilson

I think maybe the one difference we have here is, Toshiba announced during the quarter that they’re selling their medical unit. Otherwise, I think it’s very much consistent with what we guided a quarter ago. The challenges continue that the security and inspection business is stabilized – stabilizing currently at the lower revenue levels.

The panel pricing decline should anniversary in the second-half. And we are still absorbing the loss of major – of a major customer that went insourcing on flat panel. That said, we’re probably not going to – that’s happening every quarter to us and then probably doesn’t have anniversary until Q4ish.

Toshiba’s volume, the good news is most of that business is a service business. So that is going to continue to need to be replaced. But their ongoing forward production with the uncertainty around their sale and kind of who picks it up et cetera. We might see a little bit of volume adjustment there. As I did say in the script, they do have some inventory that they’re working through as they kind of manage through this whole thing.

The good news is that in order the medicine claim on acquisition seem to be performing for us. So we are looking for a return to growth. I think consistent with what we said before in 2017 and 2018.

Amit Hazan

All right. Thanks very much, guys.

Operator

Thank you. Our next question comes from Anthony Petrone from Jefferies.

Anthony Petrone

Thanks. Just a couple of questions, maybe on proton…

Dow Wilson

Hey, Anthony, how are you.

Anthony Petrone

Good. A couple of questions on proton, I will begin with proton and then we can follow-up with some of the geographies as well on oncology. So maybe just an update on the potential to hit the $0.15 swing factor in proton specifically. So I think it hinged it on the Emory deal. And then in your prepared comments, Dow, you mentioned potentially an installation in Russia, but you’ve also touched upon some dislocations in that marketplace. So maybe just proton overall, the potential to hit the $0.15, where Emory is and how Russia plays into that?

Dow Wilson

Sure. I mean, the sites I named were all in our guidance. So that their orders that we have and no mystery around those. We have not guided to Emory. It is not a books order yet, and until the financing is complete, we won’t put it in the guidance. If that were to happen, it would be a nice upside for us.

Elisha Finney

Yes, we lived that problem…

Anthony Petrone

Same guidance there.

Elisha Finney

We are not doing that. And it’s just, it’s our customer who was securing the financing. We all working with them, but it really is somewhat outside of Varian’s control and we are monitoring it closely.

Anthony Petrone

Great. And then just on geographies that you touched on China a bit, but Brazil is also sort of in the headlines out there with struggles. And can you just update on that specific tender, I think, if you go back it was 50 linux [ph] several of which had already been sort of shipped and installed. Can you maybe just update on that specific tender?

Dow Wilson

We’re seeing the Ministry of Health is continuing their program that, I mean, that obviously that order was placed with us a year ago. But we’re completing first installation this year and it is going as expected. So from a backlog point of view, we haven’t seen it a change in their approach on these, so that’s good. Markets are a little bit quiet there, but it hasn’t been bad.

Anthony Petrone

And then just the last one for me just on software specifically. So last year that really seem to be a driver particularly on share gains, I think both on information management and even treatment planning. So maybe, do you see that as still a share gain story for 2016? And maybe Dow an update on how many RapidPlan has served? How many eclipse users have migrated to RapidPlan at this point? Thanks.

Dow Wilson

Yes. The – I mean, first of all as the overall – for the overall soccer business, it continues to be very well. We just got news that couple weeks ago that both eclipse and Aria got top ranking from class. Classes the – Gartner of our industry, independent organization that evaluates products for customer.

So we were very thrilled by that external validation. The – and then in terms of RapidPlan, as I said in the script, it’s now installed over 50 sites. I would have to get you the exact number of orders, but it’s well over 300 now. So the momentum continues there. I think from a overall differentiation point of view, our treatment planning position is terrific. I think we’re way ahead with our knowledge base tools.

And then in Aria, our workflow tools and our informatics are a very good differentiators for us. And we continue to see very strong competitive take out with both of those products.

Anthony Petrone

Thanks, again.

Dow Wilson

Okay.

Operator

Your next question comes from David Roman with Goldman Sachs.

Dow Wilson

Hey, David.

David Roman

Hey, guys, how are you? Thank you for taking the question. I wanted to start with a clarification on the proton. I understand that Emory is not in the guidance and with the historical context why you did that? But our Russia and Saudi Arabia, they talked about are, to what extent are those reflected in the forward guidance?

Dow Wilson

They’re very small amounts. They are in the guidance.

Elisha Finney

So all of our – under the percentage of completion, all of our projects where we have actually identified material specific to our customer we’re taking revenue on those projects. So…

David Roman

Got it.

Elisha Finney

So Saudi and Russia would be included in that umbrella.

David Roman

Okay, understood. Thank you.

Dow Wilson

Our Saudi, for example, I know we already took film out last year.

Elisha Finney

We’ve taken about $33 million in total and Russia about $25 million in total.

David Roman

Okay. And then maybe a more strategic question. Dow, obviously we focus a lot on a quarter-to-quarter order trends, and how you’re doing by region? But as you kind of take a step back and think about your growth rate and how things have progressed the past several quarters versus where you kind of want them to be? How much of the forward outlook depends on factors over which do you have control and kind of invest to drive those versus being dependent on macro factors or sort of end market conditions?

Dow Wilson

I mean for the whole company, I think, the cancer business remains at a terrific business for us. Our constant currency growth last year of 5%, 6% in oncology, very strong fourth quarter, a little weak this quarter. But our funnel still looks good. And we think that the cancer business unfortunately whether it’s economic downturns. I mean, people get cancer regardless of economics. And if you look back when economic times were bad, we weathered those storms pretty well.

It’s not to say that we might see something in our orders, if the economy really turns south. But there was this nice external validation of that last quarter with the global task force on the utilization of radiation oncology as published in the Lancet journal, that called for a thousands more machines, basically a 2.5 times in the installed base that we have today. And really asking the international organizations to help countries develop cancer plans.

So, especially outside of the U.S. a huge focus on utilizing radiation therapy for cancer. I think one of our big challenges I mentioned in the script there is making sure the people side of that comes along with it, because we’ve got to have the people to be able do the work. But I think, as you look at the long-term health of the oncology business, the franchise is in as good a product position as we’ve ever had. And I think the market remains in the long-term very, very solid.

Now, on the Imaging business, we’re fairly going through a big storm right now. And we still like the fundamentals of the business. We do think it’s an industry that has an consolidation opportunity and we’ve got to – kind of got to figure out how to pay that hand a little bit. But the – as we get through the insourcing of this one customer is kind of short-term Toshiba probations and look for the long-term, the digitization of – but specially the radiographic market remains a huge opportunity and we like the long-term fundamental there.

David Roman

And then maybe just a last one maybe sort of a follow-up to that. As you’re thinking about the opportunities that sit in front of you. What was sort of the thought process around and what to do with the medical device tax in million dollars, it’s not all that material for you compared to some of the other companies in the group. But why not plow some of those savings back into the business and how should we think about your spending patterns on a go-forward basis to support some of that growth?

Dow Wilson

Yes, I mean at a high level let me take first crack at this and will have Elisha walk you through some of the detail. But at a high level, we have actually taken up our R&D and as a percent of sales over the last couple of years. So we’re investing a lot in the business if we’re going to make sure we get pop for that growth. So we’re challenging the spend as we do it, as we want to see the growth kind of linking it to your previous question. But we have taken up the R&D investment as a percent of the total over the last couple of years. So we were never making R&D decision as a result of our tax impact. I mean, clearly, it would have been a little easier if we didn’t have to pay that. But we’re making that independent of the tag making that decision independent as a tax stuff.

Elisha Finney

And I would just add, I mean, our roadmap is kind of set for the year. We’ve got the people, the projects. It maybe more disruptive to try and even accelerate some of those things at this point. And the last point is, when we increase R&D, it comes from people and that tends to be permanent in nature whereas this is only a reprieve for two years as drafted at this point.

David Roman

Got it. Okay. Thank you very much.

Operator

Your next question comes from Jason Wittes from Brean capital.

Jason Wittes

Hi, thank you for taking the questions everybody.

Dow Wilson

Hi, Wittes.

Jason Wittes

Hey. But I just want to ask first off, in terms of the security business, I think you said about $25 million of the revenues related to security are service related?

Dow Wilson

That’s right.

Jason Wittes

And that – is that most of the revenues we should expect this year, or should we also expect some orders on top of that?

Dow Wilson

No, I mean, that’s that maybe not quite half, I mean, a little bit more than half of the total revenue we should have on the year.

Elisha Finney

Yes. That’s about right.

Jason Wittes

Okay. And then just to understand Toshiba, they are looking to sell that business. I assume, they are one of your larger customers. And I assume they are still a decent percentage of the imaging business? Is that the right way to think about it?

Dow Wilson

Yes.

Jason Wittes

And I guess the presumption would be they are right now working down their inventories, but they will have to start reordering at some point whether or not that’s after a sale or not, I guess is harder to determine?

Dow Wilson

I mean, here is what I can tell you. They are our largest customer, in fact, they are terrific customer. They account for about $150 million of our Imaging Components revenue. The split on that is $125 million to about $25 million in panel. We expect to continue supplying high-end CT tubes to whoever it is that buys Toshiba. We’re designing future products for them having very good conversations. So, we think that I mean there’s obviously kind of uncertainty as it go through that process, but we are well designed in and I think that that will continue whoever the new owner is.

Jason Wittes

Okay that’s very helpful. And then maybe to switch to proton, I mean you mentioned sort of global turmoil impacting your core oncology business. Should we assume that the proton business should may also be impacted this year?

Dow Wilson

No I mean it’s tough to say, when we look at our funnel, our funnel remains positive, we have had one or two fallout. I don’t know how much of that some of that I think some of their own decisions. I don’t know how much of that was kind of macro economy. We are competing on a number of compact units, and I do think we’ll see our first compact orders this year, so we’re encouraged about that.

There remains to be a lot of customer interest I know and I guess I would say that versus in 2009, 2008 – 2009 when we went through this, we were just selling big systems. So that market dried up. Now when you look at our funnel, our funnel has a lot of compact units, and customers were hanging in there, we are having a lot of conversations. And so funnel remains pretty good and our objective is to see if we can win few of those single room orders this year.

Jason Wittes

So Just to get clarification. The large centers, there’s really not much of a market this year for them? It is mostly compact centers that people are looking at right now?

Dow Wilson

Well that was a comparison to 2008 – 2009.

Jason Wittes

Fair enough. Sorry. Yes.

Dow Wilson

2008 – 2009 that’s what the market was, when you are looking at $50 million to $90 million of expense into that kind of recession that market just went away during 2008 – 2009. We are not seeing that. There is still a good multi-room market out there, but we’re also seeing a very good funnel of these compact rooms. We’re competing on both, but just to say that in terms as it relates to kind of a global macroeconomic environment. I think these contract customers are hanging in there little more in terms of the funnel, the strength of the funnel.

Jason Wittes

Very helpful I’ll jump back in queue.

Dow Wilson

Thanks.

Operator

Thank you. Our next question comes from Tycho Peterson from JPMorgan.

Tycho Peterson

Hey. And maybe just a higher level strategic question on some of the emerging markets that you called out is being kind of problematic. I mean given that a lot of issues here are kind of structural rather than cyclical in some of these markets, does this change your thinking around how you address these markets, the resources you put to them? Any change in where you are placing incremental efforts internationally based on what we have seen the last couple of quarters?

Dow Wilson

Let me kind of underscore one of the things I had pointed out in the call weaken Japan, weaken Europe. The emerging markets weaken Russia for sure, but we had some Latin America activity that wasn’t too bad. China as I mentioned was down. But we kind of have a timing issue with that fairly large protested orders. So we actually think China is going to be a okay.

The long term is where we still think these markets are going to grow we’ve built that market development team. We’re investing in our access to care program to bring new, operators into the business and we are still bullish about the long term opportunities I mean to replace somebody that leaves as fast as maybe we used to, while we go through maybe some downturns, maybe not. But we were clearly looking at this very opportunistically and strategically for the long-term.

Tycho Peterson

And any hope on Japan turning, I mean I know you talked in the past about only 20%, 25% of patients receiving radiation there. So clearly, there is a clinical need?

Dow Wilson

Yes there’s I mean a clinical need remains I just think between the currency movement their market restructure it’s we are investing a little bit in government affairs they are to kind of get the government a little bit more supportive. But at least for kind of market outlook this year. I wouldn’t say I’ve seen anything that dramatically changes what we’ve been seeing over the last few year anyway.

Tycho Peterson

And then you called out the Edge orders in China. Just, I mean, any thoughts on how the mix there evolves, TrueBeam, Edge, others?

Elisha Finney

I think it’s been pretty consistent.

Dow Wilson

It’s a bi-mobile market. There is a value market that’s aggressive, where people are looking at entry level products. But there’s also a high-end market. Edge is part of that. We’re really glad to get those three Q1 Edge orders. And then one of the exciting piece of the news is that TrueBeam, the TrueBeam volume there still remains pretty good. It is a category A product.

So puts it in a little more – a little bit more of a regulatory process to get through, but sort of limited licenses to that end of the market. But I’d say our mix of products remains pretty consistent. And the high-end of that market remains a really important market for us. And we’ve been expanding our share in China over the last 18 months. So we’re doing that by winning in the value market.

Tycho Peterson

Backlog declined a bit this quarter. Was that just the order slippage from last quarter? And any thoughts on backlog stability, I guess, going forward?

Elisha Finney

So versus a year ago quarter backlog was up…

Tycho Peterson

Sequentially.

Elisha Finney

Sequentially.

Tycho Peterson

Sequentially, yes.

Elisha Finney

Yes. So, I mean, we came in ahead – a little bit ahead on oncology revenues and the orders. So that’s all it is.

Tycho Peterson

Okay. Two other quick ones, I guess, on kind of the software initiatives, Dow in the past you talked about a $300 million opportunity over the next couple of years. Can you just give us a sense of the magnitude of the growth you think you can capture from all the initiatives, RapidPlan and everything else you’ve been highlighting over the last couple of quarters that you can capture this year?

Dow Wilson

Yes, and I think the RapidPlan is certainly our single biggest opportunity. We maybe talking about it in terms of units. If we have – if we’ve taken 300 to 350 units, there’s probably an installed base of 3,500 to 4,000. So we’re just nicking that. And I think what encourages me is the early evidence both for clinical outcome and the productivity is outstanding. So I think it really helps us to make the economic case for people to invest. And the, of course, the ASPs, the selling prices and the margins there remain very good.

Inside of analytics and our kind of the transition to coordinate and care on Aria is maybe not as far as advanced the product was released a little bit later. But we also really like the progress there, and we do think it’s driving share. We’d really like to see where it drives a little bit more volume.

We are investing in some software sales resources outside of the U.S. to kind of help us attack the markets that we haven’t maybe attack as aggressively on the software side. Much of our software business is still frankly U.S. based. So we’re trying to drive that that piece as well. But I – we’re still – we’re very encouraged by what we see, and both in terms of kind of the market opportunity and the share opportunity by our software product.

Tycho Peterson

And just lastly, obviously there has been a lot of news earlier this year on the cancer Moon Shot program and a lot of developments in liquid biopsy. Does any of that change your view on the long-term outlook on the U.S. market in particular with better and earlier detection?

Dow Wilson

The short version is we love it. We do know that there has been some reach out to some of our customers in that radiation therapy is going to be part of that. So that’s sort of frankly any other clarity beyond that is difficult. But we’re encouraged that at least our thought leaders are at the table.

Tycho Peterson

Okay. Thanks.

Dow Wilson

Thanks, Tycho.

Operator

Thank you. Our next question comes from Steve Beuchaw from Morgan Stanley.

Steve Beuchaw

Hi, good afternoon, and thanks for taking the questions.

Dow Wilson

Hi Steve.

Steve Beuchaw

Just a few housekeeping items from me at this point. I guess, first up for Mevis and Claymount, that do you have a sense of what the contribution was in the top line from those specifically for the quarter? I know we have the number for the year, I don’t know that we have it for the quarter?

Elisha Finney

Yes, it’s roughly $15 million.

Steve Beuchaw

$15 million, okay. And then on the protons financing, now you guys have a little bit more of that on the balance sheet. Do you have a sense of what the contribution was on the P&L in the quarter?

Elisha Finney

The total interest income was like $1.7 million, so or the $1.5 million maybe. I don’t have that number right in front of me Steve, but that’s close enough.

Steve Beuchaw

Got it, and then last one from me is, I’m thinking back to the fourth quarter call. And the delivery slippages, I think Tycho, might have alluded to this.

Elisha Finney

Yes.

Steve Beuchaw

But there was a $0.10 impact from deliveries I believe that was predominantly TrueBeam’s slipping from the fourth quarter. Did we recapture that in the first quarter? Is there more in the second quarter? How do we think about those layering in here?

Elisha Finney

Well, I think you should, just assume that was built into our guidance for FY16 and the bulk of that in Q1. So we took that into account when we set the guidance for Q1.

Steve Beuchaw

Perfect, and thanks so much all the guys again.

Elisha Finney

Thanks Steve.

Operator

Our next question comes from Charley Jones from Dougherty Markets.

Unidentified Analyst

Hey, good afternoon this is Jon.

Dow Wilson

Hey Jon

Unidentified Analyst

I want to go and put some numbers around some comments you made around software Dow. And then I had a questions around some comments that Elisha had around the guidance for the year end revenue. And so wondering if you could cheese out, what the growth, well I think this is kind of a $500 million service offer business.

If you could kind of breakout how much of it is maybe just software only? And then particularly I’m interested in trying to figure out the opportunity of this. I was guessing it was going to be international and I was curious Elisha if you could talk about the growth rates of service and software for 2015 kind of between international and U.S. and how that’s going to change in 2016.

Really trying to understand what this business can look like if we did get into a lower unit kind of environment? And that goes to my second question around the guidance of revenue. It seems like you are putting a lot in the fourth quarter if I’m reading you right about pulling revenue out of the third quarter Elisha in the second quarter.

So I am curious where does that come from? Is it more oncology or proton or x-ray? And I think Dow last quarter you said maybe we get a little bit of growth from x-ray as we went through the back half of the year. But I’m curious if you have any better visibility on that as well? So those are my questions. Thanks.

Elisha Finney

Okay hope you like to remember all that…

Dow Wilson

Let me start on that.

Elisha Finney

Sure.

Dow Wilson

After further thing I meant for logistic theground is our service business is about $1 billion business. Our software business is about $0.5 million business much of, which is equipment and much of, which is service. So, well it’s kind of gets double counted if you look at it, because there is a software service agreement paid fees that goes into our service business.

And then the upfront licenses that we sell as product the customer getting into the business there are ongoing equipment transactions as booked in our equipment business. So, did you know it as we have said that the service business historically has been a double-digit business. I think constant currency adjusted last year was 9%.

Elisha Finney

9%

Dow Wilson

9% and that it was constant currency adjusted growth in Q1…

Elisha Finney

6%.

Dow Wilson

6% so I think on the year it’s we clearly kind of see at high single-digit…

Elisha Finney

Yes.

Dow Wilson

Kind of growth range and now if we stretch everything goes as far as it will be a double-digit business but that’s that kind of overseeing on the software business and the service business. But software is a big piece of that growth in the service business and the software business itself has about $0.5 billion business call it 50-50, 50%ish equipment 50% ongoing service agreements with their service installed base.

Last year that business grew a little faster than the average. So with the constant currency growth in oncology last year was 6% that was call it 7% or 8% and so we’d love to stretch that business get double-digit growth that’s what we love to see, I think it will be stretching to get there, but right now we’d love to see it grow a little bit faster than the oncology average.

Unidentified Analyst

Yes.

Dow Wilson

At least you can fix all that.

Elisha Finney

No, I’m reluctant to get a whole lot of breakdown on our guidance. I mean, this is again, we’re in Q1 we’re looking out at the full-year. We’re confident from where we sit today. I think you’re correct that more growth is going to come in the second-half. But the reason for that is, we anniversary two really big effects of last year. The first thing effects, we’ll still have a little bit at quarter-over-quarter impact in this second fiscal quarter that we’re currently in. But as we assuming currency stay where they’re today that impact gets reduced significantly if we go into Q3 and Q4. And so obviously, we expect the dollar growth rates are going to be higher in the second-half of the year.

The other thing that we anniversary that was huge last year is the pricing impact on particularly the flat panel business. And all of the declines that we saw there, which again were late in second quarter and really large in Q3 and Q4. So, our hope is that we’re going to get a little more linear in our – on our oncology business, as we go through this fiscal year. And if you look at the guidance for the third cap versus the full-year, it’s right around at the midpoint 45% of the year and that is very common with historical performance having about 45% of our EPS in the first-half.

Unidentified Analyst

Thank you very much. Maybe I can just follow-up, I guess, on the question around x-ray. You made comments last quarter, Dow, about maybe seeing some stabilization in x-ray. Obviously, you talked about Toshiba and there’s an unknown there. But if you look at what’s happened to your currency and some of these other Korean different suppliers into that business. Do you feel like your position is a little bit better and you’ve got more visibility or stability, or are you still in this kind of unknown position there as you look forward?

Dow Wilson

I mean, I guess if kind of as I said [FIP] is stabilizing. The security business is stabilizing, we like that as Elisha said. Panel pricing probably anniversaries Q3ish. We’re still absorbing a loss of a major customer that’s going on. I think the only thing has changed from last quarter has been this Toshiba announcement and with that some readjustment of their inventory in order level, I think that’s probably going to go on for a while as they adjust.

So that would be the one piece of new news. We still think that it’s a good business and look for its return to growth I think in terms of whether it’s stabilizing or not where the numbers aren’t great, we have at least made our internal goals for the business and we feel good about that.

Unidentified Analyst

Thank you for the time.

Operator

Thank you. Your next question comes from Brandon Henry from RBC.

Brandon Henry

Yes. Thank you for taking my question. You guys have been reporting pretty strong order numbers in the EMEA in Asia Pacific regions over the last couple of quarters. But it looks like the gross order number for oncology systems in those two regions was a little weaker this quarter. So just help me understand how much of this is market related versus market share related? Have you seen any change in the competitive dynamics or pricing with Electra in either one of those markets?

Dow Wilson

I mean, I think as I talked a little bit about the market side last quarter, we were very gratified by the European volume we saw at the end of last year. And frankly, we’d love the market to perform at that level all the time, as we look forward, we didn’t think that kind of 12%.

Elisha Finney

The 25% on Q4 constant currency.

Dow Wilson

Yes, 25% constant currency growth, 12% that real dollar growth last quarter. That’s just not going to continue it, probably is a mid single digitish market. So that’s probably the European market. There was one other part of the question that my jet lag is not helping me remember.

So, yes competitively I mean our share is up as we reported the last quarters, when you look at last 12 months, our share is up pretty significantly. So and it’s worldwide, we’re seeing share growth literally in every geography. So some of it has come from share growth. We obviously like that. We have seen Electra be a little more aggressive, especially at challenging tenders that are awarded. And also that maybe is a little bit different competitive practice than we’ve seen in the past. And not quite sure why they’re doing that. I think that hurts them with the customers frankly. But anyway, that might be the one competitive change that we’re seeing a little bit.

Brandon Henry

Okay. And then on the Imaging Components side, can you talk about some of the strategies longer-term after we see some stabilization that you are looking to kind of reaccelerate this business? Is it something that can be done internally with the product pipeline, or will it require M&A? And also can you give us an update on kind of the strategic review process for the security inspection business? Is that a business that still fits for Varian?

Dow Wilson

Yes, sure. The – in terms of the strategy, it remains at a product development business. So I alluded to the fact that with Toshiba, we started some new product programs. This remains a very innovation driven segment. And especially in tubes, it’s innovation driven. In flat panel, it’s innovation and cost reduction driven. So one of the things that we’ve got to come in, we’ve just announced and it’s being working to our customers the supply chain a new low-cost flat panel. I think that gives us both a margin opportunity as well as some share play. So we would like to see that come back.

As I mentioned in last quarter in the call, the security business on the one hand we’ve seen that the volume come down, its profitability still remains very, very good. So, even though we’ve gone from $80 million, $85 million to $45 million, $50 million, it’s still a 20% return on sales business. It’s technology that we leverage throughout our product line both in imaging and in oncology. So that’s, were continuing to look at it, but replacing that revenue and profit is not an easy thing.

Brandon Henry

Okay. And then one last question for me. On the service side for Oncology Systems, can you kind of talk about what the installed base for you guys? How quickly that’s growing? And then in the medium term, how do you grow the services business? How do you continue to grow the service business high-single digits kind of above the growth in the installed base, just talk about that strategy?

Dow Wilson

Until now the short version is the installed base is growing. Our unit volume remains very good. As we’ve said before, the U.S. market remains replacement market. But outside of the U.S., it’s – we still get very good socket growth and the TrueBeam percentage is still quite high, I’m sorry the TrueBeam percentage is so quite low. When you look at TrueBeam as a percentage of our overall installed base, I’d say I’m guessing now here, but call it maybe 20%, 15% to 20%.

So the – and we get a big price adjustment as we go through that. So that’s true in the U.S. and it’s even more true outside of U.S. So between the installed base growth, the price growth and then the software opportunities that we get in the service, we think that high single-digit growth number constant currency is very doable.

Brandon Henry

Okay. Thank you.

Operator

Thank you. At this time we have no further questions. I will turn the call back over to Spencer Sias for closing comments.

Spencer Sias

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 201-612-7415 from outside the U.S., and entering confirmation code 13627253. The telephone replay will be available through 5:00 PM this Friday, January 29. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!