Varex Imaging Corporation (VREX) Q2 2021 Earnings Report, Transcript and Summary

Greetings. Welcome to the Varex 2Q FY2021 earnings call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Howard Goldman, Director of Investor Relations. Howard, you may begin.

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the second quarter of fiscal year 2021. With me today are Sunny Sanyal, our President and CEO, and Sam Maheshwari, our CFO. Please note that the live webcast 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 archived on Varex's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2021. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the second quarter of fiscal year 2021 to the first quarter of fiscal year 2021 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. Those 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 financial 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 pleased to report that our financial results for the second quarter were stronger than our expectations, and revenue exceeded pre-COVID levels. Continued strong global CT tube sales and higher sales of industrial digital detectors drove this growth. Demand for our other medical imaging products related to certain elective medical procedures also increased. Our revenues in the second quarter increased 15% sequentially due to gains in both medical and industrial segments. Revenues increased 3% year-over-year. Our non-GAAP gross margins increased to 35% due to higher volume and a favorable product mix. Our non-GAAP operating expense declined sequentially and year-over-year, reflecting benefits from previous cost reduction actions. Our non-GAAP operating margin improved to 13% of revenues. As a result, non-GAAP EPS was $0.35 and exceeded the top end of our guidance range. Next, let me give you some high-level insight into how our different modalities and applications trended during the quarter. Medical segment revenues increased 13% sequentially and 1% year-over-year. Momentum in CT tube sales, which has been building over a number of quarters, remained strong in Q2. Many of these tubes were for new systems, which are also expected to result in future sales of replacement tubes. In our other medical modalities, oncology, mammography and radiography also saw growth while fluoroscopy and dental remained flat. We believe this growth is due to demand that had been deferred over the past year as well as from expansion of health care services in some markets. Revenues in our industrial segment increased 24% sequentially and 13% year-over-year. In Q2, demand for digital detectors for nondestructive inspection increased across several of our industrial verticals. However, demand for our imaging products for security screening at ports and borders as well as baggage screening at airports continued to lag. Now I'd like to take a few minutes to highlight the great work we're doing in our X-ray tubes business. In future, I'll highlight other areas of our business in the same way. Demand for new CT systems in China and upgrades of CT systems globally are driving growth in our Tubes business. In China, we believe demand is likely to grow at approximately 10% a year for the next several years due to increased installations at fever clinics and a focus on making rural health systems more self-reliant. Our strategy in China has been to establish relationships with local OEMs. I'm happy to say that of the initial 12 CT projects we have been working on with 8 local OEMS, 9 projects have been brought to market and 3 are still in process. We believe that local Chinese OEMs have made very good progress and currently account for approximately 40% of CT sales in China. Based on our experience, new OEMs tend to initially focus on gaining market share through launching entry-level systems. This has occurred in China for the CT modality. We are now seeing that the local OEMs are ready to expand into 64, 128 and higher sliced CT system projects in order to provide greater diagnostic imaging capabilities, including systems that are needed for cardiac procedures. These projects are potential future opportunities for us and the relationships that we have built with these OEMs over the past 5 years will play a significant role in our continued success in the China CT market. As part of our local-for-local strategy, our Wuxi facility continued to scale up loading of X-ray tubes for the China market. By loading tubes, we mean assembling the X-ray tube in our core into locally sourced housings for OEMs' specific customizations and final testing before shipping to our customers. Over the past year, while most of our customers maintained momentum with their current R&D projects, many of them have slowed down their commitments to new R&D projects while they assessed the market situation. During the quarter, we saw an increasing momentum in new product development activity within our customer base across their extra imaging product lines, which we interpret as a reflection of their confidence in the markets that they serve. Our own R&D activity, on the other hand, did not slow down. Later this fiscal year, we plan to introduce 2 new CT tubes, specifically for high-end 256 and 320-slice CT systems. During the quarter, our software business received FDA 510(k) clearance for an enhanced version of our CT lung screening application, which uses artificial intelligence for automated detection of suspicious nodules. And at the same time, during the past few quarters, we have continued to make progress with our investments in innovation focused on nanotube technology. Now I'd like to share some additional details about this exciting new technology being developed through our joint venture, VEC Imaging. For simplicity, throughout this nanotube discussion, my use of the word our refers to our joint venture, where we own 50%. First, let me start by outlining the differences between conventional X-ray tubes that use thermionics element technology and our cold cathode nanotube technology. On the left-hand side of the slide, you will see that conventional X-ray tubes require an electric power source to heat up a filament. Operating temperatures can get up to 2,400 degrees Celsius. In addition, the ability to place conventional emission sources close to each other is limited, a term that we call packing density. In contrast, our nanotube technology uses a localized electric field to extract electrons from solid-state emitters. This technology operates at room temperature and has very high switching speeds. Due to its form factor in high packing density, our nanotube technology enables us to design X-ray tubes where many emitters can be sequentially arranged and turned on or off at high speeds. These multi-beam X-ray tubes can offer increased design flexibility to build lighter, mechanically simpler and more compact imaging systems. We believe that our nanotube technology will provide many benefits over conventional X-ray sources. First and foremost, we believe that systems designed using Nanotube based X-ray sources will significantly lower the total cost of ownership for hospitals and imaging centers. For example, in a CT application, a lower TCO could be realized by eliminating the very heavy rotating gantry along with numerous interconnected parts, pieces and components that are needed to support the complex mechanical design. These electromechanical components add cost, complexity and weight, and require significant downtime and expenses to maintain, repair and replace over the life of the system. In contrast, systems designed using our Nanotube technology could have very few, if any, moving parts and would be much simpler in design, have a significantly smaller footprint, and weigh much less. This simplicity is expected to result in lower maintenance costs and significantly reduced system downtime. In addition, the next-generation systems would be smaller, lighter and portable and could give health care organizations additional flexibility of their care delivery process. We believe the combination of our Nanotube technology and Varex's multi-decade long experience with designing and manufacturing X-ray sources will enable our customers to redefine medical imaging in the coming years. To give you a status update, our R&D efforts with nanotube technology is progressing well. X-ray sources are characterized by energy, emission and a few other parameters. We have achieved our intended energy output of 40 to 180 kilovolts at different emission levels measured in milliamps. We are now conducting accelerated life testing of different configurations of tubes. While life testing is ongoing, to date we have completed over 1 billion projections per emitter at 160 kilovolts. We believe this is the equivalent of several years of emitter life for a typical CT application. We are encouraged by these results and are continuing to move forward with our product development efforts. With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Before getting to our numbers, I would like to acknowledge that on March 31, our Audit Committee appointed Deloitte as our new external auditors. There were no disagreements with our prior auditors on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures. We look forward to working with Deloitte. As a reminder, unless otherwise indicated, I will provide sequential comparison of our results for the second quarter of fiscal year 2021, with those of our first quarter of fiscal '21. Varex delivered excellent results for the quarter, driven by broad-based strengthening of our business across both of our segments. For the quarter, both revenue and non-GAAP earnings per share were above the top end of the guidance range. Second quarter revenues were $204 million, a sequential increase of 15% from the first quarter. Medical revenues were $157 million, and industrial revenues were $47 million. This translated to 77% medical and 23% industrial sales. Sequentially, medical sales grew 13%, while industrial sales saw a strong 24% growth. On a regional basis, all 3 areas saw robust sequential growth. Americas grew 15% overall, with higher growth in Industrial segment. EMEA grew 17%, while APAC grew 14%. Let me now cover our results on a GAAP basis. Second quarter gross margin was 32% and flat sequentially with the previous quarter. Operating expenses were down $2 million compared to the first quarter and interest expenses were $10 million. Earnings per diluted share were $0.08 compared to a loss of $0.16 in the prior quarter. Moving on to non-GAAP results for the quarter, gross margin was 35%, a sequential improvement of 100 basis points from the first quarter, driven by higher sales volume and a favorable product mix. Freight and logistics costs ran high, and we expect them to remain high until the ocean freight related delays and uncertainties subside and the air freight volume normalizes. 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 driven by sales volume. Our gross margin has improved sequentially from 28% in the last quarter of fiscal 2020 to 34% in Q1 and now to 35% in Q2. This performance is due to increase in sales volume, favorable mix and through our initiatives to improve efficiencies in our manufacturing and servicing activities. R&D spending in the second quarter was $18 million or 9% of revenues. R&D was 41% of operating expenses in Q2 as compared to 37% in Q1, reflecting our spending prioritization towards innovation and new products. SG&A was $26 million in Q2 as compared to $29 million in the prior quarter. As a result, operating expenses were $45 million and down approximately $1 million sequentially due to a decline in SG&A, offset by increase in R&D. We have kept operating expenses in control, while successfully meeting increased customer demand in these challenging times, leading to a significant improvement in product sales in the last 6 months. Overall, our strategy to deliver higher earnings through improved operating leverage is on track and working well. Operating earnings increased significantly to $26 million or 13% of revenue as compared to $14 million or 8% of revenue in the previous quarter. Tax expense in the second quarter was less than $1 million as compared to $2 million in the previous quarter. During Q2, we had 2 large favorable items in taxes that drove a $2 million benefit and resulted in an unusually low tax expense for Q2. One item was related to German taxes and the other was related to the Netherlands R&D tax credits. As a result, there was a one-time benefit to EPS of $0.06 per share in Q2. Net earnings more than quadrupled from Q1 to $14 million or $0.35 per diluted share. This compares to net earnings of $3 million or $0.08 per diluted share in Q1. Now turning to the balance sheet. Accounts receivables increased by $8 million due to higher sales. However, our collection efforts were efficient with DSO down by 4 days to 58 days. Our efforts to reduce inventory materialized in Q2 with inventory down by a healthy $22 million. This is a priority for us. And as a reminder, we are targeting a total inventory reduction of $25 million to $30 million during the current fiscal year. For the first half, we have got inventory down by about $24 million. Accounts payables decreased by $16 million to minimize supply chain uncertainties and improve efficiencies of our overall operations. As a result, days payables dropped to 34 days. Now moving to debt and cash flow information. Cash flow from operations improved to $13 million. While no interest related coupon payment was due in Q2, we did pay $9 million in taxes in Germany for fiscal years 2017 through 2020. We ended the quarter with cash of $111 million on the balance sheet, an increase of $6 million in the quarter. Gross debt outstanding was $512 million, and debt net of cash came down to $401 million, reflecting our priority to continue to de-lever on a net debt basis. Adjusted EBITDA was $33 million in the second quarter, a significant improvement from $22 million in the prior quarter. I'm pleased to note that if you were to annualize our first half fiscal '21 EBITDA performance, the net debt leverage ratio at the end of Q2 would be 3.7x. This reflects excellent progress towards our goal of a leverage ratio of 3x. In summary, our previously stated financial strategy of improving capital leverage and operating leverage is working well. I want to take a moment to thank our Varex colleagues worldwide for their tremendous efforts to enable these results in such challenging times. Now moving onto our business outlook for Q3. Demand environment continues to remain strong for us and allows us to provide the following guidance for Q3. Revenues between $195 million to $215 million and non-GAAP earnings per diluted share between $0.15 and $0.35. Our expectations are based on non-GAAP gross margin in a range of 33% to 35% and non-GAAP operating expenses in the range of $44 million to $45 million. With that, we will now open the call for your questions.

[Operator Instructions] Our first question is from Larry Solow with CJS Securities.

A couple of questions. I'm just -- perhaps Sunny, you can do just a quick overview. It sounds like certainly sequentially you're seeing some improvement on the medical side in some of new markets, but it sounds like not everything has come back and perhaps not the same on the industrial side. It looks like incrementally, certain things, doors are opening more for you perhaps, but not fully there yet. But yet your numbers quantitatively were at the high end or even above on your revenue expectations and you kept your operating expenses in line despite that higher revenue. So perhaps you could just give us a little color qualitatively on the different markets and sequential improvements.

Yes. Larry, thanks. So we had a very strong quarter. And even sequentially, Larry, medical grew 13%. So that was a pretty strong performance sequentially. What we saw was fairly broad-based demand on the medical side. As we've highlighted, CT stood out in terms of its demand, and it has been strong for the past several quarters. But beyond that, we saw broad-based demand across most of our modalities. And as you know, the couple of modalities where demand was essentially neutral sequentially was we pointed out a couple. Fluro and dental. But those were -- those have been consistent over the last 12 months. So there was nothing really, nothing that stood out there. These modalities have their natural cycles. But what was encouraging for us was to see very strong broad-based demand. On the industrial side, it was very similar, very strong broad-based demand with electronics strength in electronics, we saw very good performance there. But again, it wasn't a one-off. We've seen that trending up over the last several quarters, and there's general strength in some of those verticals. And the only segment, only vertical within industrial that didn't grow much was security, cargo and airport. That's it. So I would characterize, Larry, that the demand and strength is broad-based. And at the same time, going into the next quarter, we continue to see that type of strength as well.

And as you look into the next quarter and give your guidance relative to what numbers you just put up in Q2, it seems like you would have to sort of get to the high end of your guidance again to just match what you put up in this quarter. So is there some hesitation on your part? Are there certain things that you think might -- that was timing related that benefited you in Q2 that might not benefit you in Q3?

No, there weren't timing issues. We continue to see broad-based strength and broad-based demand going into -- going forward also into the next quarter. We've been -- we've tempered it a little bit, looking at some of the supply chain challenges that are out there. And we don't -- at this point, I can't put a finger on anything particular other than there are challenges with freight, there are constraints and delays in freight and transportation. There are some shortages in materials that we're contending with and working through. So cautiously, we gave the range that reflects some amount of caution built into it, and it's all supply chain related. There's no capacity constraint in the factory with equipment, people, those resources. So it's really -- it's going to come down to making sure that we have the parts and everything to deliver against the demand.

Got it. And then just one question just on the China outlook. Obviously, big demand. China, obviously, wants to make everything internally. And as you mentioned, I think you said the local CT, those local OEMs are providing 40% now of the CT business. Over time, is there any outlook on that? As the local OEMs continue to build up, are these outside OEMs? I mean, particularly Siemens and GE, are they still selling considerably into this market? Or does it come to a point where it's only going to become you guys and they'll still have to be provided to the local OEMs who have a greater opportunity?

Look, we had anticipated 5 years ago when we went down this path, we had anticipated that the local Chinese OEMs will -- who, at that time, had virtually no share, we had anticipated that they will grow in share and capture market share, and they have done that. Now, will they go from where they are to approximately 40% share to a lot higher than that? That remains to be seen. But what we are seeing is that these local OEMs are very successful in both designing and bringing systems to market, and they have also been commercially successful. These systems are working very well. They're providing services and support. And so they have matured fairly rapidly. That said, the global OEMs, they are also strong players in those markets. And -- but they've benefited from the overall growth in the market, but we've also seen a shift in market share towards the local OEMs. And our play in this continues to remain strong. These OEMs have continued on with their projects. You recall, we said 8 out of the 10 OEMs have been working on projects with us. We haven't lost a single project. I mean these projects have continued on, and these OEMs have had the tenacity to continue, and they've learned from it. There were some just nominal delays like you'd expect out of any complex projects like this, but they're continuing on. We've got 3 more projects that are moving forward of the initial 12 that had been started. And then now we're encouraged to see more projects starting to take shape. These are now driven by their desire to move into more of the higher tier CT systems. What we anticipate is that the bread and butter CT systems in China will end up being the 64 and 128-slice systems. So our expectation is that growth will continue from ongoing sales of new sockets into China. And at the same time, then the older CT systems, the 16-slice systems that were sold and some of the newer systems will get into the higher tier. So we're encouraged by it.

Our next question is from Anthony Petrone with Jefferies.

A couple of questions, backlog and then a few follow-ups on China. On backlog, Sunny, is there a way actually to sort of quantify the security cargo screening backlog? It's certainly been lagging through the pandemic. We'll expect it to continue to do so. On the flip side, this is, I believe, the highest margin business for Varex. So is there a way to sort of quantify what the backlog of orders looks like in security cargo screening? And then maybe just timing as to when you could see a reversal. And I'll have a few follow-ups on China.

Yes. So let me answer this question, Anthony. Sam here. So in terms of the security, the security cargo business, that business, industrial business overall for our sales runs around 20%. And out of that 20%, less than 1/3 of the industrial business goes through the security, cargo and port inspection, etc. So for a number of quarters, that business has been lagging and soft, so you could see how much the backlog might be building up out there. But for all of this to come back, particularly on the travel and baggage inspection side, we need to see travel resume and then airports releasing CapEx. So that should help us. Don't really have a good idea in terms of how much of the backlog is out there or pent-up demand might be there when travel resumes. In terms of port and cargo inspection, etc., it is somewhat lumpy, and it can come in, in a quarter, and then it can remain soft for a couple of quarters. We expect that dynamic on the cargo and port inspection side to continue. We are encouraged by what's happening in terms of the end customer demand in terms of the port inspection and cargo inspection. So that should pick up sooner than travel. That's our current expectation.

Great. And then that port, just a quick follow-up there, Sam. On the port side, you mentioned 20% of overall is industrial, 1/3 of that is airport screening. Should we assume that 1/3 is cargo port screening? Is that the right math on that piece of the business?

1/3 of industrial is cargo plus port plus airport package.

What we call it is security.

Got it. Okay. Then shifting to China, maybe a little bit on the OEM contracts specifically that you announced, and you announced some new contracts for newer systems. Just maybe an idea of how many of those systems are in clinical trial development. How many are gearing up for commercial installation? So that would be the first question. And then lastly, on China, just an update on the Wuxi manufacturing plant. Where that plan sits in terms of its capacity today. And over time, will Wuxi exclusively be supplying into China?

Anthony, this is Sunny. Let me start with the latter part of the question. So Wuxi has been scaling up nicely and to do both tube manufacturing and detector manufacturing. The tube manufacturing side is what we call is -- you might characterize it as light manufacturing. And there, we can -- we started out with aftermarket tubes, but now we're making, we're doing the lite manufacturing of OEM tubes as well. So -- and that we will continue to scale. And as we're renewing contracts with our OEM partners, many of them are switching to local contracts. So we're going to supply them through local commercial agreements and handle all the service, support, repairs, etc., from Wuxi. That said, all of the core, the inserts, are being manufactured in Salt Lake. We ship those. We buy local housings, local kits and customize them and test them locally and ship them. The detector side, and by the way, we'll continue to do that. And that is, at this point, largely a local-for-local operation. And even in the future, there are no plans at this point to turn that into local for global. On the other hand, the detector side is a different story. We have -- now we can manufacture radiographic detectors, dental detectors, oncology detectors, fluoroscopy, some models of flora detectors out there. The intent here is twofold. One, it's not just assembly of kits. We are also sourcing local parts, local materials. And essentially, there's a stronger supply chain infrastructure that's been built there that we're using to build detectors at a lower cost in China. Initially, it was, you may recall a couple of years ago we started this as a response to the tariffs. And I had said that we will initially do that to make sure that we fulfill the local, what we need for the local market. But the intent for our operations in Wuxi is to continue on expanding it. And for detectors, we will end up -- there's no reason why we should not be able to ship those detectors to any other markets in any other part of the world. Because they're not being customized in any specific way, they're equally applicable for any other customers. Customers' detectors tend to get customized mostly superficially, labels and stickers and things like that. So the capacity currently, I'll just give you orders of magnitude so you know, we can do several thousand detectors a year in China. We have that kind of capacity. So we don't feel capacity constrained at this point. So that scaling up of Wuxi operation is going well, and it will continue. In terms of the local OEMs, your question about contracts, renewals and how -- I think you asked about how the newer projects are going, what phase of product development are they in? They're in all stages of product development. So as you can imagine, the initial projects, of the 12 initial projects, 3 are in more advanced stages of product development. And the newer projects, 128-slice, 64-slice, they're in various stages. So hard for me to give a lot of details on that, but they're typically in the exact same sort of phase like we've seen earlier. Now, we don't expect these projects to take 5 years, like they did in the initial start-ups. These will now, these new projects are being based on initial infrastructure of CTs that these customers and OEMs have built. And so those are moving forward. In addition to that, we've also started projects with other modalities, like cardiovascular systems. And so there are new projects within those existing OEMs that we're picking up in other modalities. As you can imagine, these OEMs have business plans and aspirations to be broad-based modality suppliers. So they are -- they started with -- many of them started -- they all started in different places, but many of them focused on CT in a very heavy way initially, and now they are expanding into other modalities. And us having the relationships that we've built over the last 5 years with these customers gives us a front-row seat at the table, and we're certainly going to take commercial advantage of it.

Our next question is from Jim Sidoti with Sidoti & Company.

You've talked about new products on the last couple of calls. You talked about the high-end detectors a little bit the last time, the nanotube technology this time. Can you give us a sense on how soon these projects turn to revenue?

So Jim, new products based on existing platforms generally move faster. And because we can put those out in a couple of years, our OEMs already have the established infrastructure and interfaces, and they can absorb them faster, and they're fairly well understood IT applications. So let's use detector -- I'll separate our detectors from tubes. A typical new detector will go in fairly quickly, a new model. A new platform, like IGZO that we've talked about, there it's mostly -- when we launch new products and detectors, we try to maintain as much as much of the previous interface as possible, so they can be dropped in into our customers' design and into their environment. And we try to do that as far as feasible and practical. So the uptake by our customers is really mostly gated by the start of their new projects. They don't -- they typically don't take a new detector model and drop it into an old system. They'll time it with introduction of new launches. So I'll generalize by saying it typically takes us 3 years to start seeing revenues from the point where we start working on a new detector. Initially, the volumes are low, then once our customer launches it, second year of their launch it picks up. That's new detectors, whether it's significant platform enhancements of an existing amorphous silicon platform. However, when we launch something brand new, like when there's a completely new platform, like a CMOS platform for something, which -- and customers have to shift gears completely, that can take longer. So let me give us an example photon counting detectors. You can't simply throw out the photon counting detector and make it backwards compatible that can fit right in into an existing application. It's completely different technology and it scans and images in a very different way. Those are where it takes a lot longer because even if we bring a product to market, it may take us 2 to 3 years, it takes our customers another 2 to 3 years to redo their applications and build them into new applications. So it's a little frustrating thing for all of us, but our time to revenues are long. Once these are done, then they stay in for the lifetime, as you know. So newer platforms, completely new technologies like photon counting takes time to revenues very long. The same way, when we bring a new CT tube to market, let's talk about the Chinese OEMs as an example. They've taken our 16-slice, 64-Slice CT tubes. Now we bring a new tube with new capability, they just take it in stride and take it on and either put it in their next CT system that they're bringing to market. But now here comes Nanotube technology. This is like the photon counting example. Nanotube is completely different platform, new technology, very different model of very different application, needs to be overhauled mechanically, electrically, electronics, everything has to be redone. So that takes a lot longer. So what we anticipate is that the time to revenue for something like nanotubes can be as much as 5-plus years, 5, 7 years. So that's why we're very careful in how much we count on in the near-term for revenues from some of these brand-new technologies which are really a sea change for imaging.

Okay. So it sounds like we should see maybe a small contribution of revenue in perhaps fiscal '22 and '23, but those game-changing technologies, those are out another 3 or 4 years after that?

That's correct.

And then you talked a lot about China. India has been in the news a lot the last couple of weeks. The pandemic has really started to have some impact there. Do you have customers in India? And is there potential to grow sales there as well?

We do have customers in India. There isn't that same type of strong OEM base in India, local OEM base. There are a few. And by the way, we know them. We are working, like we did with China, we're working with them. And I think 5 years from now, 3 years from now, we'll see more of these OEMs start to mature. So there are some local OEMS, and we are working with them, and we do get some business with them. Now most of the market in India actually is served by the international and global OEMs. So our current customers, the reason I said we're seeing strength in CT not just in China but also globally, is some of those products are also ending up in India. We just -- we don't control how our customers distribute their products. It's hard for me to say what's going to India and what's not. But we do business, to summarize, we do business directly in India through Indian OEMs, and we also do business in India through global OEMs

And then the last one for me, are you seeing any significant increases in material costs right now? Or are you able to manage that and offset it through some of the other cost saving initiatives you put through?

Yes. Let me have Sam respond to that.

Yes. Yes, currently, we are seeing a little bit higher material costs or input costs. I talked about freight. So freight and input costs definitely are a little bit of a headwind to the gross margin currently. So far, we have not seen a big impact, and we are managing through it. My expectation is we will manage through it. And hopefully, it remains a minor impact, but we are seeing high input costs too.

Our next question is from Mike Ott with Oppenheimer.

Congrats on a nice quarter. Curious in medical, if you're continuing to see the higher utilization as a harbinger for future capital demand that you mentioned on your last call?

It generally is. And because higher utilization for us means 2 things. One, more replacement components. We have several components that have wear and tear, like tubes, connectors, etc. So that's one positive impact of that for us. And secondly, higher utilization also means replacements of entire systems. So it's -- so we're encouraged both ways. I mean we've seen utilization levels grow, and that's why we've seen such broad-based demand in many modalities, so that's a positive. That gives us a lot of good optimism.

That's great to hear, Sunny. And then just a quick housekeeping one for Sam. When you gave the fiscal second quarter sequential revenue growth rates by geography, just like for EMEA, was that up 17%?

Yes, they were all up double-digit percentages. I just don't remember exactly right now. But yes, all of the 3 regions were up quite strongly. Yes.

Our final question is a follow-up from Larry Solow with CJS Securities.

Great. Appreciate taking a quick follow-up. Just on -- Sunny, you mentioned the photon counting technology. Just curious if you can sort of take a step back. I know I think when you bought -- I guess 2 questions. When you bought Direct Conversion a couple of years ago, if I remember correctly, it was around $20 million in sales. And I think there was a pretty good backlog there. I guess, on the existing platform, so you had a pretty good runway for growth. 2 questions. Has that been interrupted at all because of COVID? Is that still kind of out there? And then second question on the photon count thing is, I think you had mentioned in your last presentation on the last call potentially getting into the CT detective space? Or I guess that's sort of the data acquisition space where Analogic kind of dominated? Is that correct? And is there any timing on that?

So the first part, the existing photon counting component sales, it did take a dip during the COVID period because just like those products, they had both medical and industrial applications on customers using them for both medical and industrial. The medical side, there were some -- it slowed down during COVID in both areas. What we've seen since then is activity has picked up and it's continuing to grow. The pipeline that we had, the backlog didn't go away. It's -- some of those OEMs that we're bringing products to market, I mean they fell short during the COVID period. In terms of we bought them for the option value long term, getting into the -- well not getting into all of the technology, but also getting into market expansion into CT detectors, that project from a technology development perspective has been going well. We now have modules that we're working with. So there is OEM interest. We're working with OEMs to -- we can ship modules to them. They're testing them, they're validating them. So that's moving forward.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Howard Goldman for closing remarks.

Thank you for your questions and participating in our earnings conference call for the second quarter of fiscal year 2021. The webcast and supplemental slide presentation will be archived on Varex's website. A replay of this quarterly conference call will be available through May 18th and can be accessed at the company's website or by calling (877) 660-6853 from anywhere in the U.S., or (201) 612-7415 from non-U.S. locations. The replay conference call access code is 13719035. Thank you, and goodbye.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a great day.