Varian Medical Systems, Inc. (NYSE:VAR)
Q2 2016 Earnings Conference Call
April 27, 2016, 05:00 PM ET
Spencer Sias - Vice President, Investor Relations and Corporate Communications
Dow Wilson - President and Chief Executive Officer
Elisha Finney - Executive Vice President, Finance and Chief Financial Officer
Clarence Verhoef - Senior Vice President, Finance and Controller
Jason Wittes - Brean Capital
Tycho Peterson - JPMorgan
Candice Tse - Goldman Sachs
Steve Beuchaw - Morgan Stanley
Toby Wann - Obsidian Research Group
Greetings, and welcome to the Varian Medical Systems second quarter fiscal year 2016 earnings results conference call. [Operator Instructions] It is now my pleasure to introduce your host, Spencer Sias, Vice President of Investor Relations and Corporate Communications for Varian Medical Systems. Thank you, Mr. Sias. You may now begin.
Thank you. First of all, quick apologies for the delay, we had to get the press release out, but we've got the gremlin solved. By now, I think you guys all have the material, and we're ready for the call.
So good afternoon, and welcome to Varian Medical Systems conference call for the second 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'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 2016 versus the second quarter of fiscal 2015. References to financial results for orders are gross orders, unless otherwise indicated.
The 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, will, schedule, feels like 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 during this presentation and discussion, because of new information, future events or otherwise.
And now, here is Dow.
Good afternoon and welcome. Varian is reporting solid results for the second quarter of fiscal year 2016, with strong order growth in our Oncology business, promising progress in our Particle Therapy business and expected weakness in our Imaging Components business.
In summary, we are reporting non-GAAP net earnings of $1.09 per diluted share and $1.01 per diluted share on a GAAP basis. Revenue of $759 million, equal to the year ago quarter and dollars, and up 2% in constant currency. Strong orders in our Oncology business with growth and strategic wins in all three geographies, expected order and revenue declines in Imaging Components and good momentum in our Particle Therapy business with growing customer interest in our single-room system.
Focusing on operational highlights. In our Oncology business, gross orders totaled $618 million for the quarter, up 6% in dollars and 8% in constant currency. Gross orders in the Americas for the quarter increased by 2% in dollars and 3% in constant currency, with 7% growth in North America offsetting a decline in Latin America.
In EMEA, gross orders were up 19% in dollars and 23% in constant currency, helped by big wins in India and the Middle East. Gross orders in APAC rose 2% in dollars and 3% in constant currency, driven by a robust growth in China. Oncology experienced healthy global demand in the quarter with higher unit orders as well as gains in our service and software businesses.
Looking at each of the regions in more detail, our gross order growth in North America was driven in part by demand for newer products, particularly our VitalBeam accelerator as well as our RapidPlan and InSightive analytics software for improving clinical efficiency.
As you know, North America is largely a replacement market, and in this quarter we generated orders to replace several hardware and software products from competitors as well as our own units. As usual, there were some big wins in the quarter including a major order from MD Anderson for six TrueBeam systems. We also won couple of large deals in Canada.
Orders in Latin America declined significant from the year-ago quarter, as a result of political uncertainty in Brazil and volatile currencies that slowed purchasing decisions. During the quarter, we broke ground on our new 50,000 square foot facility in Brazil that will be used for training and product demos as well as product assembly and warehousing. This summer we expect to complete the first few installations of the 80 machines handed by Brazil's Ministry of Health in 2014.
Turning to EMEA, we had a very good quarter with several sizeable orders. The large of these came in India, where we received a multi-site order from the Apollo Hospital Group for 12 high-end linear accelerators and five brachytherapy systems. We also booked several orders in the Middle East, including systems for four new sites in Turkey.
We had a terrific quarter in China, where more than 75% of the Varian linear accelerators ordered in the quarter were for new treatment vault. Elsewhere in APAC, Japan remains slow, but appear to be stabilizing. We also had a key win at a large teaching hospital in Indonesia that we believe will position us for further growth in that important market.
We're pleased with the progress made in our software business during the quarter. Customer interest in RapidPlan continued to grow and it is now installed at nearly 170 sites around the world. We also received multiple orders in the quarter for InSightive analytics, bringing total orders since its introduction earlier this fiscal year to 80.
We had another nice win at the Christie Hospital in Manchester, England, which ordered several software products, including Eclipse Treatment Planning for protons and our Velocity product that uses images to track tumor responses for treatment. Turning to our Oncology Service business, gross orders were up 11% in dollars and 12% in constant currency, with a help of higher capture rates, particularly in North America and China.
Looking now at Imaging Components second performance versus the year-ago quarter, orders fell by 12% to $138 million and revenue fell by 8% to $144 million, largely in line with our expectations. Beginning 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, insourcing by a large panel customer and uncertainties related to the sale of a major tube customer.
Could you believe, we have largely absorbed these challenges from the last four quarters and we feel that the business is beginning to stabilize at these new levels. Our new MeVis and Claymount businesses performed well in the quarter and we continue to believe they will generate about $50 million in revenue this fiscal year.
During the quarter we opened a regional service center near Shanghai to support local x-ray equipment manufactures across China. With a growing number of imaging equipment manufactures in China this is going to be an important growth area for our components business.
In our Particle Therapy business we continued to make good progress with installations and recorded $31 million in revenue during the quarter. It was great to see patient treatments commence at the Maryland Proton Therapy Center in February. We are proud to collaborate with the center to bring our advanced cancer fighting technology to patients in that region.
In the quarter, we successfully extracted beam from the cyclotron at Cincinnati Children's Hospital, where patient treatments are scheduled to begin before the end of the year. We are also scheduled to begin installing equipment at sites in Holland, Russia and Saudi Arabia, later this year.
Now, I'll turn it over to Elisha.
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 6% from the year-ago period. Backlog adjustments during the quarter totaled $51 million, bringing net orders for the company to $707 million.
Second quarter revenues for the total company were about equal with the year-ago period in dollars and up 2% in constant currency. For the first half, total company revenues were up 1% in dollars and up 4% in constant currency.
Oncology posted a 1% decline in revenues and a 1% gain in constant currency during the second quarter. Imaging Components posted a second quarter revenue decline of 8%, with decreases in tubes, panels, and security and inspection products, partially offset by revenues from our new Claymount and MeVis businesses. Our Particle Therapy business posted second quarter revenues of $31 million, more than double the year-ago period, as we continue to make progress on projects and backlogs.
The total company gross margin for the quarter was 42%, down as expected by 0.5 point due to lower volumes in Imaging Components and a higher mix of proton business. For the first half, total company gross margin was 41.6%, down almost 2 points from the year-ago period.
Oncology Systems second quarter gross margin improved 73 basis points to 43.7%, due to product mix shift towards software and service, variable cost productivity and suspension of the medical device excise tax. Imaging Components second quarter gross margin fell by a little more 2 points to 41.4% due largely to lower volume.
Second quarter SG&A expenses were $112 million or 15% of revenue and R&D were $62 million or about 8% of revenue, each equal as a percentage of revenue to the year-ago quarter. For the first half, SG&A expenses were 16% of revenue and R&D was 8% of revenue, both also equal to the year-ago period.
Second quarter operating earnings totaled $145 million or 19.1% of revenue, down about 1 point as a percentage of revenue from the year-ago quarter and in line with our expectations. For the first half, operating margin at 18% of revenues was down about 1.5 points from the year-ago period.
Depreciation and amortization totaled $20 million for the second quarter and $38 million for the first half. The effective tax rate was 28.1%, virtually equal to the year-ago quarter. We continue to expect that the tax rate will be about 26% to 27% for the year.
Fully diluted shares outstanding of $96.2 million were almost $5 million lower than the year-ago quarter, due to our ongoing share repurchase program. Diluted EPS was $1.09 for the quarter.
Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $961 million, debt of $794 million and stockholders equity of $1.7 billion. DSO at 109 days was up significantly from the year-ago quarter, due to a lower mix of Imaging Components business, a higher mix of proton business, more extended payment term and slower collections for Oncology Systems.
Second quarter cash flow from operations was $32 million, bringing the total cash flow from operations for the first half to $109 million. Primary uses of cash were $19 million for CapEx and $57 million for the repurchase of 725,000 shares of stock. At the end of the quarter, we had 6 million shares remaining under the existing repurchase authorization that extends through calendar year 2016.
Now, I'll turn it back to Dow for the outlook.
Thanks, Elisha. Including the results of the second quarter, we continue to believe that total company non-GAAP earnings will be in the range of $4.55 to $4.65 per diluted share for fiscal year 2016. With expectations of a slower than anticipated recovery in our Imaging Components business due to high inventory levels at a major customer, we now believe revenues for fiscal year 2016 will increase by about 3% over fiscal year 2015.
For the third quarter of fiscal year 2016, we expect non-GAAP earnings to be in the range of $1.16 to $1.20 per diluted share. We expect third quarter revenues to be about equal to the year-ago period with growth in our core businesses offset by a decline in our proton business versus the year-ago quarter, when we booked a big University of Maryland project.
We're now ready for your questions.
[Operator Instructions] Our first question comes from Jason Wittes from Brean Capital.
So I guess, I'll start with, usually start with oncology, but I will start with imaging. You made some comments about the stability of the business. It seems like the only thing that's really sort of dragging and meeting to the lower outlook for the year is the destocking. I assume that's with the Toshiba transfer to I think Canon. Is there anything else out there? I mean, is that the main drag on the business at this point?
I mean, I think that is the main drag. I mean, I talked a little bit about the constant currency issues that are stabilizing, happy day. We've had some of the price issues that's going along with that, we see that stabilizing. We had a major flat panel customer in-source. We still have a little bit of impact to that and that should be largely anniversaried by Q4.
And then it's really the sale that you mentioned that it's been going on has caused some short-term volume issues at Toshiba. Clearly they're managing for working capital in the short-term. I think when we look at the rest of our customer base, we're seeing very solid customer demand and we think that business will turnaround here in the second half.
Two related questions, and only because I think people want to get comfortable with the imaging business and that is, I think in the past you made comments that about half of the business, as it stand I think at yearend fiscal '15, was kind of commodity-like and somewhat at risk. It sounds to me like you feel like that that has stabilized in terms of the risk of that business. Is that the right way to think about it?
Well, I mean, the short version is, when you go customer-by-customer, our demand has really been very solid. I think this conversation came up in regards to some of the flat panel technology, and how easy or difficult it might be for people to switch suppliers and flat panel technology. In some areas they detect our business, that is a little bit easier to switch suppliers in the tube business that remains, as it can be done, but it still remains very difficult.
And then in terms of Toshiba moving to Canon or that business being bought by Canon, can you give an outlook in terms of discussions you've had and how that might change the outlook for that piece of the business?
Yes, absolutely. The sale to Canon is still closing, first of all. And what we hear is that Toshiba team is staying on. We have very good relationship with them and that gives us some optimism. And clearly there's going to be some cautious purchasing in inventory management in the short-term from a competitive product point of view. Our biggest business there by far is the tube business that we sell to Toshiba, and Canon doesn't make any tubes.
And last question, I just wanted, you mentioned on proton interest in your single-room offering. Can you just give us little more details around that in terms of what the pricing is and et cetera?
I mean, first of all, there is lots of interest, kind of our funnel of activity is very large. So that's good. In the quarter we did have three contract decisions. One of those in fact issued a press release, Delray, in Florida. The three of them all have a contingency of one form or another. Two are financing and one is some permitting. So with a little luck we'll clear those contingencies on one or two of them this year. And if everything goes our way, maybe we'll get all three.
Our next question comes from Vijay Kumar from Evercore.
This is [ph] Scott in for Vijay. I just had a question, in terms of when you're talking about building up a facility in China. I was curious, since you mentioned this is a growth area, what are you guys thinking in terms of where the growth is coming from? And what's the interest and drivers behind that?
I mean, there is a lot of activity in China in the radiology area. So there is some very large customers, I'd say, there is three or four emerging large manufactures of radiology equipment in China. And there is another list of 15 to 20 smaller suppliers and it's a very active radiology market for locally sourced products in China.
So we are not -- we do support Toshiba's global effort in particular, but the big radiology companies at least in CT and kind of high-end X-ray, they manufacture their own tube. So we're not supplying them in that market. This is really development at the local Chinese markets. Our Chinese customers are looking for local service capability, fast turnaround on spares, and anyway it's a very active market.
And then, I guess, as a follow-up on the China market. We've seen for I guess other industries like diagnostics has being auditing on large capital equipment purchasing. Do you see this as any sort of headwind or is this not really been an issue for you guys?
I mean, that's been an issue for us for the last two, two-and-a-half years, I wouldn't say it's any worse. And in fact, in our oncology business this quarter in China we had a very, very good quarter, very strong double-digit growth in China. And what we were particularly pleased about is over three quarters of the units were in new valves, new bunkers. And our funnel in China looks really good. So we remain very bullish about China.
Our next question comes from Tycho Peterson from JPMorgan.
Maybe just to start, I'm wondering if you can touch on competitive dynamics in the market. Accuray last night talked about a little bit more pricing pressure in the single and dual vault market in the U.S. I know you announced the MD Anderson order, but Elekta got in there as well. So I was just wondering to this degree that pricing is becoming more of an issue in the market, if you can touch on that dynamic?
I would say, for us, pricing was not all an issue in the market, especially here in the U.S. market our prices are up and our volume is very, very good. I mean, as you saw, we had 7% growth in U.S. and Canada on the quarter. That's got to be one of the best quarters we've had in the U.S. in a long time. And our pricing looks very, very good. So you may have heard me said, I think their product was way overpriced, so I'm not surprised that I got pricing problems.
And then how about the challenged tenders that you called out last quarter. Are those still being challenged and you expect that we'll see more of this?
They are still being challenged. I'd say, we saw a little bit less this quarter than we had previously. And the good news is as we saw large percentage of them come to us. So that was good news on the quarter. And that was some of the China growth was catch-up on that from the previous quarter.
And then for, Elisha, can you just breakout the FX component to the guidance. In other words, how much did organic guidance change if we back out the FX move?
For the first time, Tycho, you did not hear me say currency headwinds in the script, which felt really good. So in the second quarter, it was minimal, maybe a $0.01 or $0.02. As we move into Q3, the euro is exactly today where it was in the year-ago period. So it's going to be virtually non-existent in Q3 and Q4, assuming that rates hold where they are today.
And then last one on Japan. Dow, I think you used the word slow, but stabilizing. Again, last night, Accuray, I think talked about a facility delays and new construction there. Are you seeing any slippage in terms of new facility build out?
I say, we're not seeing slippage, we have seen a contraction in the market. There is less government spending, but we're not seeing slippage. Maybe let's just come back to your first question, it's little bit on price. We did launch the VitalBeam product. And its priced right at or maybe even a hair north of where we thought it was landing. We are very excited to see its volume globally. Since the launch we've taken 45 orders with that product, and 36 of those came in the first half of this year.
And it fills a mid-tier pricing market where frankly we haven't had coverage. But it's also enabled our TrueBeam pricing to move up a little bit, so we feel very good about where the product portfolio is and the pricing discipline that our team has. And frankly that product, I mean coming back to your Accuray comment that product is a little bit more aims at Elekta's than it is Accuray, so I'm not sure what -- you'll have to talk to Josh about its pricing challenges I guess.
Your next question comes from Jeff Johnson from Robert W. Baird.
This is actually [ph] Jason on for Jeff. Just wanted to start on Europe. You had some very good growth out of your European oncology business. It seemed to be extra one of the companies that are bucking the trend here in the quarter in the capital equipment side in Europe. So just wondering if you could discuss how you feel about the sustainability of the performance of that business, especially in light of what are some tougher comps that are going to be coming up against your next quarters?
I'd say the other quarter was terrific. We love that we did have a couple of large orders. First off all from the top our orders just to review, gross orders were up 19% in EMEA, 23% in constant currency. We did have a large multi-site order from the Apollo Group in India. And that was 11 TrueBeam's, one Edge and five Brachytherapy systems.
We also had some major wins in the Middle East, which that was nice to see. I mean, I wouldn't that was anomalous, that market has been kind of a little bit down with people dealing with oil price impact on federal healthcare budgets. But that was nice to kind of see that come back.
We had a very nice win in the U.K. And then I'd say all across Europe, we had a very good mix of product, a little bit richer hardware mix and very good engagement of our software business in Europe. So I'd say, we're not going to do 20% every quarter. That's probably a little bit too much to ask.
As it comes to the total, when you look at the overall market, last 12 months, our estimate is that its 12 months constant currency growth rate of about 5%. And at least kind of in that really big picture, that's kind of what we see going forward. We've clearly gain some market share in the last two, three years. And we're seeing that we're able to maintain that share and get little price, which is kind of where our focus is right now.
And then just want to come back quickly on the FX side as it relates to guidance. We had expected actually a little bit of upside, maybe the guidance given what FX has done here in the recent months. So is it fair to think that all that FX upside basically has just been offset by the weakness on the ICB business?
Look, we are taking somewhere, call it, $35 million or so out of the topline for the year to come down by 1 point on the growth rate and maintaining EPS. And virtually the currency impact is very, very small. This is our businesses doing a fantastic job on cost control.
The margin is coming in a little bit higher on the gross margin level than we were expecting, which is great news due to pricing, due to MeVis software and our Imaging Components business drove that up maybe 1 point more than we were expecting in the second quarter. So if we anniversary now, the currency is roughly neutral to us as we go into the second half of the year. And the business, we're just committed to offsetting that slight revenue mix by good cost controls across the board.
Your next question comes from Amit Hazan from Citi.
This is actually [indiscernible] for Amit. A quick question about market share gains. You guys have been talking about this a little bit more recently. Just hoping you can give us what you think the drivers are that will drive incremental share right now versus where you guys stood competitively last year or over the last few years?
I think our product line has never been better at every price point. We've got Edge at the top. When you look at the ability to deliver dose to small volumes, the ability to have planned difficult treatments with an efficiency that nobody else can touch and the speed of delivery at the high end Gamma Knife or Cyberknife can't touch this. When you look at the mid-tier of the market, our TrueBeam product it is what everybody compares to. It is the gold standard of radiation therapy. And that's what we're seeing a rich mix on there.
I think the other thing, at both the high-end and the mid-tier of the market is we've got the best total cost of ownership and the best throughput of anybody else out there. So that might be some of Accuray's problems, I don't know. And I think we are extremely competitive at a total cost of ownership, especially when you look at our throughput advantages, we have far than way the most efficient product out there in terms of throughput and reliability.
And we've been focused very, very much the last few years on net promoter score. And we believe when we measure this through independent groups, we believe that we've got a significant lead in customer service. And then you add that with our VitalBeam launch that I just talked about, our Eclipse and ARIA product lines, recently both won the best-in-class award. So we had that for a while in Eclipse. This was a first time for us in our ARIA oncology information system product.
So I just think the strength of the product line is very, very good. On top of that, some of the vision that we shared with Astro, the future around hardware and software is capturing the imagination of our customers for even better stereotactic body radiation therapy and data analytics.
Maybe one of the thing to add there is that's kind of the product side of it, but at the same time you heard us talk 12, 15 months ago about a change to a new distribution organization and we regionalized our distribution team into -- took it from a global sales organization and cut it into three geographic structures. And I think that's really a nice difference. It's gotten us close to the customer. Decisions don't have to come to Palo Alto, they're made in the field, and it's made as part of this kind of improving net promoter score and customer satisfaction and customer response.
And then my follow-up is that we've been hearing some intuitive surgical -- they've been reporting a fairly big rebound in prostatectomy volume; it's been about double-digits with sideline patients possibly coming back post-2012 guideline changes. Has that been coming up on your radar at all in terms of helping those capacity or drive interest in new system?
I mean I'd say when watchful Waiting Guidelines went out in 2012, 2013, we did see -- our customers did see some drop-off in their prostate volumes. And I think is it back to where it was in 2012, I haven't seen any math that says that. But it's definitely back up for sure.
Your next question comes from David Roman from Goldman Sachs.
This is Candice on for David. Just a quick question on the imaging side. Could you give a little more detail and dynamic around customer inventory levels and what's driving them to be elevated?
Yes. We were just speaking in particular our largest customer in that space, Toshiba has been up for sale. I think as part of that their customers have probably gotten conservative about seeing the transition happen. And so our demand is off there and their supply is up. So that's the driver. That will bounce back we think as the acquisition gets completed. They've obviously announced the sale to Canon. And I'd say, otherwise, this business is usual in that shop. It's just a one specific customer situation.
So there is nothing further there and that's the only weakness, nothing beyond that consolidation?
Right. That's the incremental fees. We talked a little bit about some of the other issues that businesses has had the last year. But when you look at versus what we expected for this year that would be the one slight miss to the year has been volume in that business as they've gone through this change in strategy.
And then I know that you guys have talked about the impact of FX, but I was just curious about the indirect impact that you had spoken about on past calls. Could you maybe just shed some light on what your reception internationally has been and if that's changed it all as the dollar has weakened?
I'd say, when you look at it over 18 months, it's had a pretty significant impact. Elisha, fix this, I want to say the yen was down 20% and euro was down 25%, is that about right?
That is about right.
And our competitors in the business are yen based and euro based and rather taking it to translation profits, they took the gift to pricing. So we've worked very hard to maintain our share and I think we have. We're seeing those prices stabilize, so that's good news.
And Candice, I would just add, I mean we've pricing stabilize and the Imaging Components business by product line. So we've largely anniversaried the impact particularly as we get into Q3. But we're actually going to see some growth in the Imaging Components business quarter-over-quarter, just not the level that we have first anticipated, because of the issues we've talked about.
Our next question comes from Steve Beuchaw from Morgan Stanley.
It's actually Steve in for Steve. So first question is, Elisha, on the seasonality in the model, the implied guide for the fourth quarter puts a little bit more weight on earnings in the fourth quarter than normal. What is it about the model this year that's a little different relative to last, I don't know, three years or so?
Yes, so couple of things. First of all FX, we're going to completely anniversary the effect of FX at today's level. So that takes some pressure off. And in oncology, we're going to see a more linear year. Last year Q3, actually sequentially was down for oncology. You're going to see that for our expectations this quarter. So what you're seeing is really some fluctuations mostly in our PT business.
So if I look at Q3 guidance, oncology should do high single-digit. We're going to have our Imaging Component, somewhere around the mid-single digit. But we get a significant drop off in our proton business, because we booked Maryland in the year ago period, so that's why you get to a zero percent flat revenue.
If you get into Q4, it's exactly the opposite and our proton business is going to grow significantly just based on the projects and the timing of revenue recognition under percentage of completion. So those are few of other things that are different versus a year ago period.
And then sorry if I missed this, but at this stage half way through the fiscal year, what would be for the full fiscal year, the impact in $0.01 I suppose of currency at the bottomline?
I would say, it probably -- I'm going to say about $0.05, $0.06. I don't have it exactly, Steve. It was a little more in Q1 than in Q2. Q2 was only about $0.02 or so. And again, Q3 it should be roughly zero at today's level.
It's a nice thing isn't it?
And then, Dow, I just want to come back to your comments earlier on VitalBeam. Can you go into just a bit more detail on the strategy for deploying it in the U.S. it puts you in a position, where you're obviously high-tier with TrueBeam and now mid-tier provider with VitalBeam. How do you think about segmenting the market? And how much more aggressive can you get in the rollout of VitalBeam? How much more push is in the plan there?
I mean, we're very excited about the product. It's gone very well. I think the way the guys are using in a lot, the guys and girls are using it is really the sell up. So often versus our competitors, it starts out in the canal water from a pricing point of view. And what we really want to do is, we want to differentiate the TrueBeam and it has many, many significant advantages of everything else that's out there. We've trained very hard on that. And I think there's good discipline around it and we are seeing that in our numbers.
From a product cost point of view, the team has also done a really great job getting the product cost out. So it's given us some flexibility to do that. So the margin dollars, margin percent at this point price points are still pretty good. So we like that part of it.
I'd say it might be a little bit ahead of our expectations in terms of its impact in the U.S. We've thought have a little bit bigger impact outside of the U.S. and our team it's just playing that through. So I do think we'll see some upside from the product outside of the U.S. it typically takes us little longer to train and get it into budget cycles and things like that.
But for this market, in particular, where we have an old install base that's looking to trade up and chances are they're not depreciating the old asset any more, it's been through its depreciation cycle and they're looking to, how can they swap out that old stuff and get something new and competitive at a good price point. This has worked out very, very well. And I think the proof is in the pudding, in North America, the whole business is up 7% on the quarter. And our funnel remains pretty good.
Our next question comes from Toby Wann from Obsidian Research Group.
Can you guys kind of talk quickly about the pipeline of the potential new Particle Therapy business out there, the big I guess, multi-room systems?
I never know what to say to this question. The short version is the pipeline of proton systems is gigantic. The pipeline for financing proton systems is significantly smaller. I guess, the good news is, as I mentioned, we've got three contracts that we signed for compact this last quarter, we think they're all financeable, but we don't book them until they are, in fact financed. And we've got a very good funnel that looks very strong. So we're optimistic about where it's going.
And it's global. I'd say, it's just as much as outside of the U.S. as it is in the U.S. at this point. So we like the global nature of it. I would say that one of the other things that we like is we are seeing a little transition from a developer-driven market to more of a customer sovereign government, Ministry of Health kind of market, which is taking away some of these financing issues. And frankly other thing is happening as the market is moving smaller units, so last year we booked several four and five room systems; more of the market is in one, two, three market -- one or two, three treatment valves and I think a trend that will continue.
So I guess, you haven't really seen, given kind of global economic conditions, unrest here, unrest there, any impact, any changes in terms of the velocity of kind of how people are thinking about [multiple speakers]?
I think given that one of the things that we really like is of the compact products on the market, ours is the only no compromise compact product. And a true scan beam, full rotational gantry, highest throughput, most clinical capability, to really leverage the physics advantage of proton therapy you need what we got and I think that's beginning to resonate with customers.
At this time we have no further questions. I will turn the call back over to our speakers for closing comments.
End of Q&A
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