Varex Imaging Corporation (VREX) Q1 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Earnings Conference Call for the Fiscal Year of 2021. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Howard Goldman, Director of Investor Relations.

Good afternoon and welcome to Varex Imaging Corporation's earnings conference call for the first quarter of fiscal year 2021. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that live of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at investors.vareximaging.com. The webcast and supplemental slide presentation will be achieved on Varex's website. To simplify our discussion, unless otherwise stated, all references to the quarter after the first quarter of fiscal year 2021. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the first quarter of fiscal year 2021 to the fourth quarter of fiscal year 2020 rather than to the same quarter of the prior year. Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings including item 1A, Risk factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a substitute for, GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. And now, I'll turn the call over to Sunny.

Thank you, Howard. Good afternoon, everyone, and welcome. I'm very excited to say that last week was our fourth anniversary as an independent public company. We continue to remain focused on our mission to help improve and save lives throughout the world by making the invisible visible. We are a world leader in X-ray imaging products for our medical and industrial applications and with the help of our 2,000 colleagues as well as our customers and suppliers, over the last 70 years, we have continued to bring innovative and breakthrough technologies to market. Global OEMs incorporate our mission-critical components into their X-ray imaging systems and we have continued to strengthen our relationships with them, many of which spanned more than four decades. Our first quarter results came in towards the higher end of our guidance range. Revenues increased sequentially by 4%, indicating the start of recovery in our business. Global demand for our CT tubes have stayed strong during the last few quarters and Q1 followed the same trend. Our non-GAAP gross margin increased to 34%. The improvement was due to realization of benefits from previously disclosed cost reductions, as well as a favorable shift in product mix within our medical segment. Non-GAAP operating expenses were down approximately $3 million, reflecting our continued focus on profitability. As a result, our non-GAAP operating margin improved to 8% of revenues. Non-GAAP EPS also came in towards the higher end of our guidance at $0.08 per diluted share. Cash improve $206 million driven by positive cash flow from operations. Let me give you some high-level insight into how our different modalities performed, during the quarter. We previously indicated that our business had stabilized, this quarter we began to see a recovery. CT has continued to remain strong for a number of quarters, including Q1. Much of our CT business is coming from new system installations, which bodes well for our replacement business in the future. In fluoroscopy and oncology, we saw some improvement, primarily driven by an increase in patient visits for elective procedures. Our other medical modalities remain sequentially flat for the quarter. Industrial is also beginning to see consistent sequential recovery. Cargo and Port security as well as baggage screening business remained low. But other non-destructive testing and inspection verticals, showed improvement. Let me now give you an update on our progress in China, where we are seeing continued momentum. As a reminder, we estimated that approximately 25,000 new CT Systems will be needed in China, over a 10 year period. Partially in response to COVID, we believe the Chinese government intends to accelerate the installation of about 10,000 CT Systems, over the next few years. These systems will be placed in so called, fever clinics and emergency departments at local hospitals, in order to provide dedicated CT scanner rooms for patients with infectious conditions. As a result, we're seeing a significant increase in demand, for our tubes for new CT Systems in China. For the past few years, we've been working with eight Chinese OEMs and have active pricing agreements with them to incorporate our CT Tubes and other components, into their new CT Systems. On the left panel of this slide, you can see the current plan introduction and rollout of different CT scanner models by various OEMs. As we have said before, these OEMs are making steady progress with their product development. And we are confident, that several new CT models, utilizing our components will hit the market over the next couple of years. Now, let me give you some perspectives on, how Varex is positioned for growth. Our business has started to exhibit sequential growth that should lead us back to pre-COVID revenue levels of about $200 million per quarter. The pace of recovery will initially be driven by, increasing demand for service replacement products, as surgeries and elective procedure volumes increase. Service replacements are typically funded by hospital operating budgets, whereas, the purchase of new imaging systems require, capital expenditure budgets. Beyond the initial recovery, we expect that hospitals and medical facilities will begin to commit capital for new imaging systems, once utilization levels reach certain thresholds. We also expect that COVID vaccines will play a key role in increasing utilization levels. In our industrial segment, we expect to see continued gradual improvements, as the broader economy recovers. The pandemic has revealed substantial vulnerabilities in the preparedness of healthcare systems and associated infrastructure globally. In response, in the midterm, just like we're seeing in China, other governments and medical facilities around the world are likely to increase spending on healthcare. Such spending is likely to occur over many years in numerous areas of healthcare, including modernizing and expanding X-ray imaging capabilities. Over the long term, we expect our new technologies and innovative products to drive growth. These include our photon counting digital detectors and our Nanotube technology, which I will discuss in a moment. Let me give you a summary of what we have achieved as a company since the spin-off from Varian and where we are headed. During our first three years, we focused on standing up a new public company, completing the integration and consolidation of a major acquisition and expanding our global footprint. We consider Varex 1.0 to be a success. Beginning last year, we entered the second phase, which we call Varex 2.0 and are in the early stages of this transformation. Here we remain focused on three major areas. First, strengthening our balance sheet; second, improving our operating margins; and third, accelerating our growth through innovation. We have already completed the first element of our transformation with the new capital structure that provides increased flexibility with limited financial covenants. Second, we're working to improve the operating structure of the company. Our objective is to improve profitability by expanding our gross margin and reducing our operating expenses. We expect the significant cost reductions that we recently made to largely remain in place even as business recovers. And third, we're focused on releasing new products, based on game changing and changing technologies. We expect that our investments in new an innovative platform will enable us to release a number of new products over the coming years. While adoption of new technologies can take several years, upside is a long, multi-year tale of recurring revenues from products that have been engineered into our customers X-ray imaging systems. Our new products include the Z Platform family of dynamic digital detectors. These detectors are designed to produce high quality images at lower doses compared to equivalent amorphous silicon detectors. Since the acquisition of Direct Conversion, we have continued to invest in our photon counting technology. Detectors using photon counting produce high contrast images at low doses and enable very good soft tissue resolution, due to their ability to do precise energy discrimination. An exciting application for photon counting technology is CT detectors. We plan to leverage our technology to enter the CT detector market, which is complimentary to our CT tube business. At RSNA last year, we introduced our new photon counting CT detector modules. These modules should soon be available for customer evaluation. We believe our entry into the CT detector market has the potential to expand our addressable market by $0.5 billion. While the adoption of this technology may take a few years, we are excited about the opportunity. We continue to work on Nanotube technology with our joint venture, BEC imaging. We are developing a multibeam cold cathode X-ray nanotube. We are pleased with the progress we have made so far and look forward to providing updates on future development. In our industrial segments, we intend to grow by extending our technology into select verticals. We have been focused on our components and subsystems and going forward in certain verticals, we may develop full imaging systems. We are excited about industrial products we are developing. With that, let me hand over the call to Sam to talk about our financial performance in greater detail.

Thanks, Sunny, and hello, everyone. I wish you all a very happy new year and hope you and your families are keeping safe and healthy. As a reminder, unless otherwise indicated, I will provide sequential comparisons of our results for the first quarter of fiscal year 2021 with those of our fourth quarter of fiscal 2020. As Sunny mentioned, we have begun to see recovery in our business. First quarter revenues $177 million, an increase of 4% from the fourth quarter of fiscal 2020. Medical segment revenues were $139 million, or 79% of total revenues. Industrial segment revenues were $38 million or 21% of total revenues. Sequentially, medical sales grew 2% while industrial sales saw a robust 11% growth. On a regional basis, first quarter revenue was $62 million in America, $58 million in India and $57 million in the APAC region. We saw strong growth in China. Let me now cover our result on a GAAP basis. First quarter GAAP gross margin was 32%, a substantial improvement of 570 basis points from the previous quarter. GAAP operating expenses are lower by $7 million compared to the fourth quarter and loss per share was $0.16 on a fully diluted basis. Let me now cover our results from non-GAAP basis. Comparable GAAP measures have been included in our earning release posted on our website. Gross margin was 33.6%, a sequential improvement of 580 basis points from the fourth quarter and significantly ahead of the midpoint of our previously communicated expectations. Please note that we completed the exit from Santa Clara manufacturing operations in Q1 itself ahead of the previously stated schedule. As a result, the Santa Clara closure related savings were fully reflected in our Q1 non-GAAP results. Just as a reminder, we had previously communicated that we expected to fully realize the savings from the second quarter onwards. Overall, Q1 gross margin when compared to Q4 benefited from progress on our cost reduction efforts, favorable product mix and to a smaller extent by higher sales volume. In general, I want to remind you that our gross margin can fluctuate from quarter to quarter due to segment mix between medical and industrial, product mix within each segment, customer concentration, cost performance and factory utilization levels. One of our fiscal 2021 initiative is to improve efficiencies in our manufacturing and servicing efforts, where we are targeting a gross margin improvement of 100 basis points by the end of this fiscal year. When revenue volume returns to pre COVID levels, and we complete our efficiency initiatives, we expect non-GAAP gross margin in the mid-13th level. R&D spending in the first quarter was 9% of revenue as compared to 10% in the prior quarter due to lower spending in R&D materials. Non GAAP operating expenses are $46 million, and down from $48 million and the previous quarter. There's $2 million sequential decrease was due to lower R&D expenses, as well as fully realizing the benefits from reduction in force that occurred in the previous quarter. Non-GAAP operating earnings are $14 million, as compared to a non-GAAP operating loss of $1 million in the previous quarter. As we outlined in our prior earnings call, our annual cash interest expense is approximately $32 million, or about $8 million per quarter, although the amount actually paid in a quarter can vary. Non-GAAP tax expense in the first quarter was $2 million. The tax rate in Q1 was unusually high at 34% due to Q1 being the transition quarter that we started generating profits from operations as opposed to incurring losses in the prior few quarters. Non-GAAP net earnings were $3 million or $0.08 per diluted share. This compares to a non-GAAP net loss in the fourth quarter of $2 million, or $0.04 per diluted share. Now turning to the balance sheet, accounts receivable decreased by $3 million, inventory decreased by $2 million, and accounts payables also decreased by $5 million during the quarter. Inventory reduction is a priority for us. We have started to make early progress on this initiative and continue to target a $25 million to $30 million inventory reduction by the end of this fiscal year. We tend to achieve this through a combination of completing facility consolidation, implementing lean programs, further streamlining our supply chain and discontinuing low velocity products. However, our reduction efforts have been partially offset by the need to bring in higher levels of raw materials to support growth in sales as a result, in the first quarter inventory declined by only $2 million from the prior quarter. Now moving to debt and cash flow information, cash flow from operations of $7 million. We ended the quarter with cash of $106 million on the balance sheet, an increase of about $5 million. Gross debt was $514 million, and that net of cash was $408 million. Adjusted EBITDA was $22 million in the first quarter, a significant improvement from $4 million in the prior quarter. Now moving to our business outlook for Q2, we expect revenue between $180 million to $200 million, driven by continued recovery in our business, and non-GAAP earnings per diluted share between $0.05 and $0.25. These expectations are based on non-GAAP gross margin between 33% and 35% and non-GAAP operating expenses in the range of $44 million to $45 million. And with that, we will now open up the call for your questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] First question is from Anthony Petrone with Jefferies. Please proceed with your question.

Thanks, Sunny and Sam, and congrats on a good quarter and start to the year. Maybe a couple for Sunny, and then follow-up with a few for Sam. Sunny, maybe just starting with medical, can you give us a sense where you by indications, were you seeing strength I think last quarter mammography was a driver. And was offset maybe perhaps a little bit by dental, maybe just been an update on end indications in medical where you're seeing strength? And then pivoting to China, the rebound there, can you give us a sense of how much of that is driven by CT tubes versus other components? And in particular, are you seeing any recapture on the flat panel detector side?

Yep. Hey, Anthony. So, one thing that's been consistent for the last several quarters has been we've seen strengthen in CT. So on the medical side, we've continued to see strengthen in CT, and we've now seen some uptick in a couple of other areas like fluoroscopy, oncology, and these are driven by ongoing increase in patient visits and procedure volumes. For the quarter, particularly, we see the dental has – dental was down, last quarter dental also continued to be slow and soft this quarter, and mammography was soft as well. So the strength this quarter primarily came from recovery in oncology, fluoroscopy and CT. And your question about China, China, for us is a very strong CT market. So that means CT tubes and other components that go with that, as you know, we sell subassemblies in China, related to CT. We sell high voltage connectors and -- there was a general pull through of components that are tied to CT. Your question about detectors, there's – there has, you know, we talked about, our detector production in Wuxi is up and running. We have begun producing dental detectors and we have seen an update from customers in that area. But there's no particular details that I can give at this time about recovery and dent in detectors in China. But in general, there – the market has been strong on CT. And we are continuing to – our strong – our strengthen in our position with our customers and market leadership is helping us there. Q - Anthony Petrone In solid form would be on industrial and then 1% on gross margin. On industrial, I think you've referenced Nondestructive Testing being well here. When do you envision you'll see a rebound in airport security and cargo screening? And when do you think those two businesses can get that the pre-COVID levels? And for Sam on gross margin, how much of the sequential uptake was specific to Santa Clara savings relative to mix? Thanks.

Okay. So, on the industrial side, in the – non – let me start with a non-security related vertical. So that is, all those other NDT, Nondestructive Testing and inspection there – the recovery was fairly broad based. With the exception of aerospace, we, aerospace is still down. But we saw – we've seen – beginnings of recovery in most other verticals in food – in electronics inspection, battery inspection, automotive, food inspection. And so that's been very encouraging. Security and particularly cargo and security inspection, well, we expect to see start seeing some amount of recovery in the second half of the year. As you've noticed, you might have noticed and we've noticed that our – there were some major tender wins by our customers, those tender wins have not translated to specific orders for us, because the delivery side has been slow, and as our customers have had been challenged by with due to COVID in getting their installations scheduled. But we're actually – we're very happy to see that there has been orders activity and sooner or later those will translate into actual shipments for us. We expect that to be in the second half of the year. Airports different story. We have seen some modest uptick in passenger travel-related activity at airports and it -- that has translated to a little bit of increased business at airports, tight mostly to our tubes that go into the baggage screening equipment, but nothing yet that I can call as a strong trend or a major contributor.

Sure. So -- and Anthony this is Sanyal, I will try to address your question on gross margin. So sequentially from Q4 to Q1, we saw about 6% improvement, 4% of that is related to what we call cost bucket, 1% improvement is due to product mix, and say about less slightly less than 1% is related to uptick in volume here. So within the cost bucket, the 4%, about 3% of that is from our cost reduction efforts. And --- so 2% at Santa Clara migration, 1% is a number of positions that we eliminated in Q4, which is now fully flowing to Q1 results. So, again 2% Santa Clara, 1% cost reduction outside of Santa Clara, and then another 1% is driven by productivity improvements, improving yields and stuff like that. So that's overall 4% improvement in cost, and 1% in mix and slightly less than one in the volume area.

That's great. Thank you. I'll get back in queue.

Thank you, Anthony.

Our next question is with Larry Solow with CJS Securities. Please proceed with your question.

Good morning. Excuse me, good afternoon guys in there. Thanks for taking my questions. The first question, kind of, a high level question. Sunny, it maybe for you – maybe you can give Sam. I know you, sort of, target getting back to pre-COVID levels, which 800 million plus or minus. And it does sound like, you know, if you take the high-end with your guidance, and maybe that's a little bit of your aggressive position, whereas the lower end is sort of a sequential, not flat number. But just trying to decipher, do you -- between the low-end and the high-end is there, you see that as being the difference between a lot of your markets actually coming back and your mix significantly improving and some of the areas in medical that it's lagged or there -- sort of, other variables there?

Look, I'll ask Sam to provide some additional color. Let me just introduce – tied up maybe the latter part of your questions to my -- to answer that. When we talked about -- when we say recovering to 2019 levels, that basically needs to get back to 195 to 200 type of quarterly running rate. To get there, we'll need to see. Well, to get there, two things would have happened ongoing strength in medical and recovery in medical. Fortunately for us, the CT-side of our medical business is doing well. And we expect – we continue to see strength there. So that will pull the medical wagon -- harder than it has previously here year-on-year-over-year basis. So I think the medical side, we expect to continue to do well through CT. But to get to the 200 million level, we'll have to see some recovery in our -- on the industrial side that is more broad based. So we will continue -- I'm happy with the recovery that we're seeing in NDT, but we'll need to see some recovery in cargo. And that theater is likely to happen towards the second half of the year. So I can't give you a timing, but its -- we’ll have to be broad based recovery to get to that 2019 levels, but then all the trends are encouraging.

Okay. To set it another way, it sounds like almost qualitatively not all your markets have fully recovered, and I wouldn't expect them to fully recover in two quarters. And so, to me, it almost seems like that's 200 number when we get back to full recovery, especially with China now, I assume at a higher level than we were a year ago and growing that full recovery, maybe we can be at, not putting a number on it, but above 800 right from the beginning, right? Because it does sound like qualitatively you're not there yet, maybe a couple of quarters, maybe as we can look at it even to 2022 just on a macro level. So, to me that 780 to 800 is an encouraging number, and that's sort of how I look at it. So I'll just kind of figure out gauge what's in that number and what could supply even to the upside as we look out?

Yes, so again, what's going well for us is CT. So if CT continues to grow well, and if every other area also recovers, then you're talking about scenario, you're talking about is possible, right. At this time, dental is still down. It hasn't recovered. And with 800, so it'll get there. We're confident it will get there because people do need to go to the dentist's office and they need to need implants and all that will come back. We need to see recovery in dental, we need to see recovery in mammography, and I've looked at all the medical modalities, they’re firing on all cylinders and we're getting the uplift from CT than it should be good situation for us.

Go ahead, please. Yes.

I’ll also add that industrial is still below its historical level. So industrial also comes back. So that can also add to growth here moving forward.

Right. And you guys sort of said, as you get back into pre-COVID levels, gross margins settle in the mid 30s, could we -- is that sort of -- could we ever get that what sort of is there a fundamental obstacle to ever get back sort of to that targeted 38% to 40%, that you had targeted for several a couple years even post spin, or is that -- or maybe even just a 38%, maybe the low end of that range? Is that something that would inevitably cannibal or not without putting a timeline on it?

Yes. So let me try to address the questions, Larry. So look, right now we have some initiatives going on in manufacturing and servicing area. And compared to what we just reported, there is also upside to volume here. So as these efficient as these initiatives get completed, and the volume comes back, I think I'm looking at mid 30s type of gross margin, call it mid 30s plus minus something like that.

Right.

And then beyond that, beyond that range, and once these initiatives are completed, and once the volume is back, I think we still target the highest 30, and 30s, you said 37%, 38% type of gross margin, that is our goal. But for that goal, you would need these new technologies and new products to be released to provide us that boost. Of course, volume driven boost will help us, as we cross say the $200 million per quarter type of level. But we do need these new products also to give us that extra boost to get to 37%, 38%, 39% type of gross margin. And that is definitely a goal and a target. So that's how I see it, getting there in terms of gross margin.

Okay. Great. And then just if can, one last question is, on the China opportunity. And Sunny, you mentioned, I know there is like the signature of 25,000 CT machines go by 10 year period, and you spoke about sort of expedited or taking a slice of that and the 40,000 machines or 4000 machines and that sounds like -- if you do the math on the number -- on the 10,000 machines, could be if I recall, I think these tubes are like $40,000. Is that's still sort of the average price of the tube? And is it still sort of you and Philips, who are the only primary suppliers into China today?

So let me start with the last part. Yes. So from an OEM -- sales to OEMs, we’re a market leader. And it's us and largely Philips in terms of the global suppliers. In terms of the average price depends on the mix. So it's not as high as 40,000, because it's a mix of a variety of different from high end CT to [indiscernible] CT. So it's in a different, let's say bracket, so to say, and I will call out the average prices. But the good news there is what you were referring to, which is the acceleration of the CT purchases, the number 10,000 has been thrown around by our customers as they are trying their plans. As they're planning for what capacity expansion they need to put in place. And by the same token, they're asking us to be thinking about our capacity as well to be able to deliver. So they're expecting in the range of about 10,000 CTs over the next few years, which has clearly been acceleration. And so that's -- and by the way, the reason China is doing this is also the thought process here that we -- that I mentioned there in the earlier -- in the prepared remarks that we expect other governments would do something similar, which is the pandemic has shown where the kinks are in their armor, and the weaknesses in their healthcare delivery systems have been exposed through this pandemic. And as for the Chinese government, particularly they have expressed that they want to separate the main inpatient facilities from -- I am sorry, they want to make sure that the patients are diverted to alternative facilities for particularly for infectious diseases. So that's this notion of setting up fever. I think they're calling it fever clinics. The fever clinics basically are facilities that are an adjunct to the hospitals part of the same campus or part of the same facility, but it's a separate location. And so they want to equip it, they've realized that if they bring in COVID patients into the middle of their hospital, they're endangering the broader hospital population. And they're consuming the capacity of the broader hospital and hurting their ability to deliver health care to others, which results in all kinds of downstream mess and capacity issues and then barely to manage the pandemic. So this is actually a very progressive thinking here by the set up the fever clinics. And so they've also said that they would equip the emergency rooms with CT scanners, so that for faster [indiscernible]. Now play that forward, there are many countries that are in this situation. And the political elected officials in many countries are looking at this as a career breaking situation, and no one wants this to happen on their watch again. So we believe that there will be a general push towards closing these gaps. And so this is going to be an ongoing thing and it's a good thing for us where we will see continued investments in health care delivery, care delivery. And once you do that, the first thing you need is medical equipment, particularly imaging. So we expect this to be favorable trend for us.

Okay, great. I appreciate that color. Thanks a lot.

Our next question is with Suraj Kalia with Oppenheimer and Company. Please proceed with your question.

Hello, Suraj.

Sure. Good afternoon, Sunny, Sam. Congrats on the quarter. Hello?

Thank you.

Sunny, can you hear me all right?

Yes, we can hear you.

Okay, perfect. So Sunny, let me start out with a very high level question. And then I'll drill down into two specific and rather technical questions. In listening to your commentary, Sunny, you sound very confident about the outlook, I understand the initiatives that you and Sam are putting in place to drive Varex 2.0. And I think so the numbers are starting to show – show the results. Your comments about the end markets, they were somewhat mixed. Maybe I can phrase the question differently, what are your end customers seeing in terms of speeding up the average sales cycle, just trying to see if we can get some leading indicators, you know, from you guys in terms of what's happening in the end markets, and trying to plan out from that scenario?

So, Suraj, first, confidence in outlook, a lot of actions that we took last quarter and the quarter before that are helping our – improve our financial performance, which is a lot of the cost reduction actions that we took, the factory initiatives that we put in place to improve productivity efficiency. So part of my confidence in our financial performance and had my optimism or comes from the fact that those actions have been completed. And many of the actions already completed. And, you know, both relate to Santa Clara and non-Santa Clara. So, as we looked for line of sight to the benefits from those, we have clear visibility, so that – that's one confidence factor. So second, in terms of end markets, I would frame it as optimism more so than, you know, super confidence. So when I see that, or when I see recovery in our volumes in oncology, when I see recovery, in volumes in broad based modalities, like fluoroscopy, that means people are going back to the hospitals are performing the general elective procedures and general surgeries, which had really come to a grinding halt previously. So that's a – that's a positive indicator that even though COVID is still rampant, and even though countries in Europe are in lockdown state, the health care delivery side is – has not allowed itself to get frozen like it did nine months ago. So that's – that means for us when – and as we look at our inbound orders and incoming orders and what we're seeing that's – that makes us believe that we're now starting to see a recovery, if you layer on top of the fact that no one seems to be locked down, don't seem to be locking down hospitals and healthcare delivery. That's what gives us confidence that the recovery is moving in the right direction. Now, where our end – where some markets haven't quite recovered the way we would like to see them happen has been like I said, in mammography and dental, those are you know, those vary by geography. So when you know, when I think hard to pinpoint, which and when, but at the same time, if you take the general inpatient trend, the inpatient trend has been very good and I like that fluoroscopy and another surgery and other procedures are coming back. I haven't exactly seen that in the outpatient space yet. So mammography and dental are predominantly in the outpatient space. There we're seeing increase in replacement volumes that means yes, procedures are being performed. But the larger increases in volumes will come when people start placing orders for new capital equipment. But once the procedure volumes come back, once the hospitals -- I mean, these clinics start performing these procedures, then you have the utilization goes up, then the replacement cycle starts, moves forward. So, we're optimistic that if as long as patients keep going to these clinics, then the replacement of older systems and addition of new systems to handle the capacities, those will start to come back. So while we can't pinpoint timelines, these are all positive trends. Okay. So -- and later on that the fact that even though vaccine distribution hasn't picked up the pace yet, there's a general optimism in the market that there's going to be a flood of vaccines in the near future, because there's so many different manufacturers that have now -- that are in the throes of introducing the vaccines. So all this is contributing towards a sense of end market optimism here that we're sharing. Now, our customers, they have given us anecdotal guidance that their sales activity is picking up. But there hasn't been very specific guidance on when exactly some of these -- some of the orders backlog that they have captured with what velocity they'll start shipping those, except for CT. And CT people want it now they want it yesterday. And so there's been a high sense of urgency around CT. But other modalities, they're picking up orders, they're booking orders, we like that. And that means sooner or later, the shipments will come. So that's all of this creates a positive atmosphere, which perhaps you're sensing from us.

Got it. Sunny, this might be getting down into the weeds and I'd be more than happy to take it offline. So you mentioned about your photon counting detector for CT applications. I can't help but think when you launch it eventually with a partner, is the emphasis going to be purely on or at least initial image quality, or are there going to be some clinical attributes that would also be in the mix i.e. those reductions that potentially could be, or do you all think that would be the next phase with marrying up to the record capital technology?

Okay. So let me just comment in general about Photon counting and what it's capable of. And Suraj you ask your question about how they'll manifest themselves in the field. Luckily, a lot will depend a lot on how our customers choose to implement it. So photon counting has technology. It's main benefit, there's two huge benefits from Photon counting. Number one, since it counts, X ray photons versus measuring, something that's a proxy for, let's say, amount of equivalent to what would be a waveform as an amplitude, instead of measuring the value of that we're just counting. This is like AM to FM, AM used to measure the amplitude, it was susceptible to noise. So photon counting detector, because it does not measure anything that's an intensity, it is not subject to noise. So there's no -- so if you take a signal to noise ratio, which is the number one thing that impacts your quality of your image, if the noise which is in the denominator is zero, so in -- so you get theoretically very, very high signal to noise ratio. So, conversion efficiency of a photon counting detector is very, very high. And what that means is, you get very good image quality with very low -- that means these detectors are exceptionally sensitive. That's number one. Exceptionally sensitive detectors that and every photon of X-ray is used in the imaging process versus their traditional detectors, a lot of that is lost and it cause noise etcetera. So those reduction sensitivity, number one. Number two, and this is where some of the applications creativity will come in with from our customer side, which is photon counting detectors are able to -- while we're capturing and counting the photons, we put them in different buckets of energy levels. So that means you get – you can just differentiate very, very precisely, all kinds of very precise material discrimination. Now what that means is, you get, you know, you've heard people want dual energy, they want spectral imaging, but it all comes down to is, can you -- how well can you image soft tissue. So photon counting detectors, because their inherent ability to do energy discrimination, and the way we build our photon counting detector and it's the software algorithms, we can do very, very precise energy discrimination, which then – like you take these as the foundational capabilities, what we expect is that our customers will apply these to their new development and come up with new applications, new clinical algorithms and it's really love to watch and see how they position them and in terms of their effectiveness. So I can't quite answer that part of the question yet. But we know that the capabilities bring enormous potential opportunities to the table for new applications.

Fair enough. And Sunny last one and I’ll hop in queue. You guys have been public for a relatively shorter period of time. And, you know, we look at product life cycles right into the surgical they launched the da Vinci Xi in 2014, now 70% have been replaced. We can clearly map one is to one, okay, this is what happened, and the net effect of that. When we start talking about you guys are working on some pretty interesting innovations that you all are still relatively tight lipped about, whether it's photon, core cato so on and so forth. How should we start thinking about, can you give us an example of, you know, in the past under variance, this was a life cycle so that we can sort of extrapolate and say, okay, this is the time where we should start looking at the next step up, just in terms of the churn and new technology coming in? Thank you very much for taking my questions.

Yes. Suraj, that last question was very good question, but a very difficult question. And so let me frame it for you. When we have an existing platform in the market, so let's say more of a silicon detector, actually maybe even backup further, let's say when they were -- film was being used and CR was being used for detectors. And we wanted to bring analog, I mean, you want to move to digital and introduce digital detectors, it takes -- for a new platform, it takes a very long time. It takes five to seven years of active development work and then your OEMs get into it. And by the time they bring something to market, it can be closer to seven years or more or more to actually start seeing the results of that, that technology investments start to pay back with revenues. But then after that, you get this very long stream of revenues because in healthcare two things, adoption cycles can be slow. But then after that, you get this very long stream of revenues, because in healthcare two things, adoption cycles can be slow. But there's also very large installed base. So when you're talking about digital detectors, you're talking about two things. You're talking about introduction into the new systems, and then there's a massive installed base of half a million or more X-ray-based systems that are out there that eventually will get converted. So you get this tail that's very, very long. So a new platform takes very long for it to bring to market. It also takes the adoption rate is lower, but there's generally a tipping point and the tipping point. Even the video detectors were introduced 20 years ago that tipping points came with reimbursement and it accelerated adoption of radiographic ETO detectors into the market. And so, volumes are picked up. All right, long winded answer. But when we have an existing product, now that we have detectors in the market for us to bring new detector models and new detector products, those are relatively fast. So from that perspective, we expect that are our Z Platform, even though it's a new platform, it's not the same as going from film to digital detectors. That cycle we expect to be faster. It's taken us about three years to bring digital detector -- sorry, Z Platform to market. And now our customers are catching the front-end of their new product introduction cycles. So now we're in our customers development cycles for introducing the products, which is somewhere between 1.5 to three years. So we will start to see revenues from these as customers start ordering engineering, supplies et cetera. And then we'll see -- soon even though we call it a new platform, it is actually on -- it's a digital detector, so we'll see faster adoption than let's say the first digital detectors. Now fast-forward to Photon counting. Photon counting is a very drastically different type of a detector and a different type of an application, so it takes longer. What we have seen now is that over the last few years, particularly driven by the fact that we have gotten over some of the technical hurdles, the interest in it is expanding, we still expect that it's a new platform. So our customers will have to do a lot of work with software and their applications to bring this to market. And we will see that option. But it'll take some time. It'll take some time on our customer site. We are now ready for getting very close to being ready for it. Now we're in our customer cycles. Then you take Nanotube. It’s farther behind than photon counting detectors in terms of the market understanding these technologies. There, I think the adoption cycle will be similar to when you bring digital technology to market versus analog. It's a whole different platform. So I don't have a clean answer for you, other than these are long product cycles. We're just going through them, and it'll take some time for the market adoption. We will be there faster than the market as always happens. But once it changes, then a sea change occurs and we get the front seat in that race, and we're looking forward to that.

Thank you.

[Operator Instructions] Our next question is from Jim Sidoti with Sidoti & Company. Please proceed with your question.

Good afternoon, Sam and Sunny. Can you hear me?

Yes, we can, Jim. How are you?

Yes, Jim.

Great, great. I think you've done a really good job in laying out where you think the business is and how it's going. And the one question I had was it’s about a month now since we've changed administrations, have you seen any impacts from that? Do you expect anyone passing note at this point with regard to cash, tariffs all those issues?

It's a great, Jim, great question, tough question. Let me hand back to Sam.

Yeah. So -- hey, Jim. So far, we've not seen any change. And, we will be closely monitoring anything that comes out. So that's where we are. I think we are in the monitoring mode as best as I can say, at this time. But we -- our -- from tariffs -- so that's on the tax side, on the tariffs perspective we've been working on our local-for-local manufacturing strategy. So we have plant and machinery in China. And we also have factory in Europe and of course, here in Salt Lake City. So we've been moving slowly and surely towards the situation where we are somewhat buffeted from some of these actions, whether they happen or not. So we feel good about it. But again, even on that side, we are on a monitoring basis at this time.

Okay. Got it, that's it for me. I mean, it's all I had. And I think, it's not a matter of -- it's a matter of when at some point, these businesses will come back. And some of the measures you've put in place to get through this week period are starting to payoff and they should payoff even more than once the business returns.

That's correct, Jim.

Yeah. That's correct. Jim, the only thing, I would add for you there is that, the prior two quarters and we said that the business has stabilized. And now we are saying that businesses recovering. And as you look at the midpoint of our guidance, it clearly indicates that businesses is recovering and that is what we are seeing, in the order pattern and then the flow et cetera, at the leading edge in the company here. So, we feel good about recovery, that that is happening. Definitely, that will proceeding in that direction.

All right. Well, thank you.

Thanks, Jim.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to, Howard Goldman for closing remarks.

Thank you for your questions and participating in our earnings conference call, for the first quarter and fiscal year 2021. The webcast and supplemental slides presentation will be archived, on our website. A replay of this quarterly conference call will be available through February 18th, and can be accessed at the Company's website or by calling 877-660-6853 or by dialing 201-612-7415. The replay conference call access code is 13715201. Good bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.