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Edited Transcript of VAR earnings conference call or presentation 29-Jan-20 9:30pm GMT

Q1 2020 Varian Medical Systems Inc Earnings Call

PALO ALTO Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Varian Medical Systems Inc earnings conference call or presentation Wednesday, January 29, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anshul Maheshwari

Varian Medical Systems, Inc. - VP of IR & Treasurer

* Dow R. Wilson

Varian Medical Systems, Inc. - President, CEO & Director

* Jesse Michael Bruff

Varian Medical Systems, Inc. - Senior VP of Finance & CFO

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Conference Call Participants

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* Anthony Charles Petrone

Jefferies LLC, Research Division - Healthcare Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Marie Yoko Thibault

BTIG, LLC, Research Division - Director & Digital Health Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Vijay Muniyappa Kumar

Evercore ISI Institutional Equities, Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Varian's Fiscal First Quarter 2020 Earnings Call. As a reminder, this conference call is being recorded and a replay can be accessed on the Varian investor website at www.varian.com/investors.

Now I would like to turn over -- turn the call over to Anshul Maheshwari, Vice President of Investor Relations. Please go ahead.

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Anshul Maheshwari, Varian Medical Systems, Inc. - VP of IR & Treasurer [2]

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Thank you, operator. Good afternoon, everyone, and welcome to Varian's Fiscal First Quarter 2020 Earnings Call. Joining me today on the call are Varian's President and Chief Executive Officer, Dow Wilson; and Chief Financial Officer, Mike Bruff. Dow will share his thoughts on our results and long-term strategy, and Mike will cover our operating and financial results in more detail. After our prepared remarks, we will be happy to take your questions.

On the Varian Investor Relations website, you can find our fiscal first quarter 2020 press release and earnings presentation, which are intended to provide additional perspective and details. A webcast of this call and any accompanying non-GAAP reconciliations are available on our website at www.varian.com/investors. Unless otherwise stated, all financial results discussed are non-GAAP. All references to EPS are to net earnings per diluted share. All growth rates are year-over-year and any reference to orders are gross orders. All reference to organic growth exclude the impact of FX and growth from acquisitions of Cancer Treatment Services International or CTSI and Interventional Solutions business. All periods referred to are fiscal periods unless otherwise stated.

During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of the factors discussed in today's earnings release, this conference call and our SEC filings. We do not undertake any obligation to update any forward-looking statement.

And with that, I'm pleased to turn the call over to Dow for his comments.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [3]

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Thanks, Anshul. As you all know, Mike Bruff formally assumed the role of CFO for the company on December 1, and this will be his first earnings call in that capacity. And as announced in the first quarter, Anshul is now leading our Investor Relations function.

With that, thank you, everyone, for joining us today. I'll share the key milestones we achieved this past quarter and how they contributed to our long-term growth and value creation strategy.

Our first quarter results reflect continued momentum driven by our expanding and industry-leading product portfolio and innovation cycle. Now let me touch on our first quarter performance. Total company revenues of $829 million increased 12%. Oncology revenues grew 11% to $782 million. Proton revenues were $28 million, down 28% and other revenues were $19 million.

Operating earnings of $135 million, or 16.2% of revenues, grew 13%. This includes planned investments to drive growth as well as project mix and updated project costs in our Proton Solutions business.

GAAP earnings per share of $0.96 declined 14% and non-GAAP earnings per share of $1.16 grew 10%. Cash flows from operations were $113 million, down $28 million due to investment in working capital to support our growth.

Now let me provide some additional color on the quarter. Our progress toward becoming the global leader in multidisciplinary cancer care solutions is powered by executing on our 4 strategic enablers for customers and their patients. First, innovating in radiation therapy; second, leveraging artificial intelligence, machine learning and cloud-based solutions; third, growing emerging businesses, geographies and technologies; and fourth, improving operational, financial and capital efficiency.

First, let's review our progress on innovating in radiation therapy. We continue to extend our global market share leadership and expand our addressable market with our product innovation, comprehensive portfolio and services offerings. In the oncology business, orders grew 8% in the quarter and the trailing 12 months. Based on public filings, we continue to be the market share leader for both orders and revenues.

We signed an agreement with Massachusetts General Hospital for 7 Varian radiotherapy systems. 5 will be -- 5 will replace non-Varian systems, one will replace an existing Varian system and one will be placed in a new vault. Installation is expected to begin in 2020.

In December 2019, we received an order for 7 TrueBeam machines with 6 IDENTIFY systems at the National Cancer Center in Singapore. Subsequent to quarter close, we were ordered an order for 1 Edge system and 2 VitalBeam systems at the National University Hospital Singapore. In Brazil, we received 8 orders for Halcyon in the quarter. And in China, we continue to see issuance of category B licenses as well as market share leadership in the country.

Hardware revenues grew 2% for the quarter. Our worldwide net installed base of 8,561 units grew 363 units or 4%. This continued growth in our installed base drives future recurring revenue from upgrades, software and services.

In Africa, we continue to expand access to quality cancer care with the installation of 3 Halcyon systems at the Centre National d'Oncologie in Mauritania, Centre Hospitalier Nganda in Congo, and the Lagos Teaching University Hospital in Nigeria.

On the software front, revenues grew 13% driven by continued adoption of our software solutions. We remain focused on investing innovation -- in innovation around efficient clinical workflow, systems integration and treatment planning quality to help close the current resource and skills gap around the globe.

Orders for HyperArc, our high-definition radiotherapy solution for stereotactic radiosurgery brain metastases, grew double digits in the quarter. With less than 14% penetration, this continues to be a sizable opportunity across our TrueBeam installed base.

Our services revenues grew 22% in the quarter, including the benefit from CTSI in a 14-week quarter. Excluding these benefits, services revenue grew 8%. CTSI, which is integrated into our Oncology Systems business, continues to perform in line with our expectations. We're investing in infrastructure for new technology-enabled services to drive mature market productivity and accelerate emerging market adoption.

In our Proton Solutions business, we took 1 new order in the quarter. Our pipeline in the Proton business remains strong, and we continue to gain market -- global market share with customer interest driven by our smaller footprint ProBeam 360, and the preclinical research we are doing with the FlashForward consortium. As highlighted in our fourth quarter earnings call in October, we were selected by Penn Medicine to install an additional ProBeam 360 system in a single-room configuration at the Lancaster General Health Ann B. Barshinger Cancer Institute. The center is expected to treat its first patient in 2021.

Subsequent to the end of the quarter, we were selected by China Medical University Hospital in Taiwan to install a ProBeam 360 system in a single-room configuration with the ability to add a second gantry. The center will also use our Re Information Management System and Eclipse Treatment Planning System and is scheduled for completion in 2024.

We have 78 Proton rooms under contract across 26 sites globally, 38 rooms are operational, including 1 room that was handed over to clinical operations this quarter.

In November, the South Florida Proton Therapy Institute or SFPTI on the campus of Delray Medical Center treated its first patient on our ProBeam compact single-room system. SFPTI is now treating more than 30 patients per day, making it the fastest ramp of patient treatments per gantry in the world.

Turning our attention to FLASH. Preclinical research and product development is progressing per plan, and we are encouraged by the results we continue to see from the FlashForward Consortium efforts. As our global ProBeam footprint continues to expand, the FlashForward Consortium now has representation from all geographies, enabling future research across different regional populations.

Second, let's turn to our progress in leveraging artificial intelligence, machine learning and cloud solutions. Since the launch of the artificial intelligence powered Ethos Therapy System in September of 2019, reception and excitement for the platform has been extremely strong. During the quarter, we received 3 orders for Ethos. Two of the orders were from Australia, including a second order from the Icon Group and 1 order from Israel. Ethos is CE marked and 510(k) pending in the U.S. Treatments at our first clinical site in Herlev Hospital, Denmark, continue to progress well. While initial focus has been on bladder cancer, the team is preparing to start adaptive therapy for new disease sites in the pelvis.

Additionally, our second center, Medische Spectrum Twente in the Netherlands went live in December, and our third and fourth installations are underway in Australia at the Icon Group center in Wahroonga and Royal North Shore Hospital, respectively. Install time has been about 2 weeks at the initial sites, and we expect the number of installs to increase in the second half.

Our adaptive intelligence consortium efforts are on track for both clinical and technical publications throughout 2020. We expect to see significant publications on several disease sites. Early evaluation results show that full adaptive sessions are practical in a typical 15-minute treatment time slot.

In Europe in 2019 we launched RapidPlan PT, our individualized machine learning, treatment planning software for Proton therapy and plan to expand the offering in other regions in the future. Consistent with RapidPlan for conventional radiotherapy, RapidPlan PT reduces the treatment planning time for Proton therapy from several hours to approximately 10 minutes without compromising the quality of the plan. This is extraordinary, particularly when you think about the skilled resources gap in proton therapy and creates significant clinical efficiency for our customers.

Third, let's discuss emerging businesses, geographies and technologies. In November, we established a direct sales and service operation in the Republic of Kenya to better serve the growing cancer population in the country and the East Africa region. Africa continues to be a sizable opportunity for us given the minimal access to radiation therapy and the estimated 2.1 million new cancer cases diagnosed per year by 2040. Our installed base in Africa has increased approximately 30% over the last 2 fiscal years.

We continue to execute and grow our Interventional Solutions business with revenues of $19 million, which are reported under the Other segment. We had solid performance in China and continue to invest in global distribution capacity and our software platform to support this global business.

With that, I'll turn it over to Mike, who will discuss our fourth strategic enabler and provide more context on the first quarter financial results.

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Jesse Michael Bruff, Varian Medical Systems, Inc. - Senior VP of Finance & CFO [4]

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Thanks, Dow, and hello, everyone. Our fourth strategic enabler is improving financial, operational and capital efficiency by maintaining a balanced focus across growth, profitability and liquidity.

So let me first start with growth. Company-wide revenues were $829 million, up 12% in dollars and 13% in constant currency. Organic revenues grew 8%.

In Oncology Systems, revenues were $782 million, up 11% in dollars and 12% in constant currency, driven by strong growth in software and services. On a trailing 12-month basis, revenues grew 11% in dollars and 13% in constant currency.

Orders were $774 million, up 8% in dollars and 9% in constant currency in both the quarter and the trailing 12 months. Geographic orders mix was 46% in the Americas, 31% in EMEA, and 23% in APAC.

We ended the quarter with $3.1 billion in backlog, up 4%. Taking a closer look at our Oncology business results, in the Americas, revenues grew 15% in the geography and in our North America region. Orders were $360 million, up 7%. On a trailing 12-month basis, orders grew 6%, driven by continued market demand for our integrated, value-based care solutions.

In our Europe, Middle East, India and Africa geography, revenues grew 11%. Orders were $237 million, up 8%. On a trailing 12-month basis, orders grew 11%.

Asia Pacific revenues grew 5% and orders were $178 million, up 9%, led by double-digit growth in our China and our Southeast Asia, Korea region, partially offset by softness in Japan. On a trailing 12-month basis, orders grew 6% for the Asia Pacific geography.

Our Proton Solutions business posted revenues of $28 million, a decline of 28%, primarily driven by project mix. Service revenues of $8 million grew 54%. During the quarter, we reduced our proton therapy backlog by $19 million to reflect an Indian customer's decision to cancel the order that we booked in the fourth quarter of 2017. No revenue had been recognized on this order.

Turning to profitability. Total company gross margin was $369 million, up 16% and 44.5% of revenues, an increase of 160 basis points, driven by product mix, acquisitions and tariff exclusions. This was partially offset by Proton business project mix and the $4 million of updated project cost. Oncology gross margin of 45.4% of revenues increased 100 basis points.

Investing in R&D to drive innovation remains core to our long-term growth and value creation strategy. We invested $67 million in R&D, up 10%, which is 8.1% of revenue. SG&A expenses were $167 million, up 21%, which is 20.2% of revenue. Excluding the acquisitions of CTSI, Endocare, Alicon and the Boston Scientific bead portfolio, SG&A was up 13%.

Company operating earnings were $135 million, up 13%, which is 16.2% of revenues, up 15 basis points driven by the gross margin expansion and planned investments to drive future growth. The $4 million updated project cost in the proton business impacted operating earnings in the quarter by 50 basis points.

GAAP EPS was $0.96 and non-GAAP EPS was $1.16. GAAP and non-GAAP tax rates were 21% and diluted share count was 91.7 million shares. This quarter, our GAAP operating earnings and GAAP EPS included an $8.8 million change in fair value of the contingent consideration related to our acquisitions of Endocare and Alicon. In the first quarter of fiscal year 2019 GAAP net earnings and GAAP EPS included a $22 million gain on the sale of our equity investment in Augmenix.

Turning to the balance sheet and liquidity. We ended the quarter with cash and cash equivalents of $722 million and $544 million in debt. Certain proceeds from borrowings in the quarter were used to fund U.S. operations in the short term.

Cash flows from operations were $113 million, down 20% due to investment in working capital to support continued growth. Oncology DSO was flat versus last year at 111 days.

Other investments in the quarter include $23 million in CapEx and $46 million used to repurchase shares of our stock. As of the end of the quarter, we had 1.9 million shares remaining under our existing share repurchase authorization.

In summary, we are pleased with the solid operating performance in the first quarter, which delivered double-digit growth in both revenues and non-GAAP operating earnings. I will now turn it back over to Dow.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [5]

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Thanks, Mike. Based on the solid operating performance in the first quarter and continued market and product momentum, we're making no changes to the fiscal year 2020 guidance given during the last earnings call. We expect earnings to be weighted towards the back half of the fiscal year as we continue to invest in future growth. We've considered factors that can influence the business, including the strength across the portfolio, growing contribution from software and services, performance variability of the Proton Solutions segment and the mix of mature and emerging markets. Thank you. And now let's go to Q&A, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Vijay Kumar with Evercore ISI.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [2]

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Congrats on a nice quarter here. Dow, just on the order front here, really strong. I'm just curious, you mentioned China. We've been hearing a variety of feedback just given coronavirus. Curious how that's going to impact you guys, if at all, and were there any pull forward of China quota of orders in the current Q?

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [3]

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I'll tell you what, let me start high, and then I'll walk down to China. Starting at a high level, you saw the overall 9% constant currency growth on the quarter, 9% trailing 12 months. The America was 7% on the quarter, trailing constant currency growth is 6%. EMEA was still on a constant currency basis, a double digit quarter, 11% in the quarter, 14% trailing 12 months. And if APAC was 9% on the quarter, 7% trailing 12 months.

As it relates to China, I would say we are seeing an uptick in the incremental licenses being released. As you know, applications for the remaining category A licenses ended late December. Category B licenses continue to roll out. We -- as we said last quarter, we're really kind of starting to see that roll. I think still, though, the best way to think about this is, in the past 5 years, our revenue CAGR has been 17%. If anything, we've seen that accelerate a little bit. So the market remains very good.

We don't guide our China orders, as you know. But funnel looks good, and our win rate for public tenders remains high. I think maybe the other thing I'd add about China is the strength of our portfolio is very strong. We have 3 Proton orders in China we're executing on in Gary's business, Interventional Solutions. We also have a nice presence in China.

As it relates to the virus, we're not seeing anything yet. The good news is our priority is to make sure we're doing everything to protect and support our employees and customers during this time. We haven't seen any impact in either of those situations at this point.

I think from a business perspective, it's too early to call. We're continuing to monitor the impact on our factory and customers' surrounding activity, of course. We're trying to be a very responsible local citizen. We've made a pretty significant contribution to the local Red Cross, and like everybody, watching it carefully.

Maybe just one other thing I'd add on the kind of China momentum, the Halcyon product is doing very well in China. We have over 20 orders now. So that's flowing and seeing -- it's only kind of starting to see -- after all the regulatory wait, starting to see that uptick.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [4]

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That's helpful, Dow. And just maybe one on the margin side. Given the tariff relief, I would have expected gross margins, maybe perhaps to come in better. While I understand the comments on the growth investments to support the business, I'm just curious on gross margins, if you're seeing anything at all?

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [5]

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I'd say it was -- the quarter was right in line with where we were kind of expecting the quarter. I'll turn it over to Mike here and kind of do the walk for you on the margins.

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Jesse Michael Bruff, Varian Medical Systems, Inc. - Senior VP of Finance & CFO [6]

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Yes, exactly, Dow. Vijay, thanks for the question. The tariff did have roughly around 70 basis points of impact to our gross margin. That was planned in our guidance, based on the events and the exclusions that we got back in Q4. But the real story here on the gross margin expansion is the product and geo mix that's playing into that expansion. We've about had -- the 160 basis points of expansion at the company level, 100 of that was product and geo expansion. So think about the strong software and services growth rates that we had.

Acquisitions, as we expected, improved the gross margin rate by around 45 bps. And then the unexpected thing that we had in the quarter, which we called out, was the unexpected costs in our Proton business. And that impacted around 60 basis points on gross margin perspective. But on the operating margin, it impacted about 50 basis points.

But what I'd like to say about that is, while it was unexpected in the quarter, it was something that the team identified early in the quarter. We got our heads around it. It was isolated to a project and some very specific retrofit costs. It triggered a review of all the other projects that we have in process. And at the end of the day, after that deep dive, the $4 million cost we believe, is well within our tolerance range on the year. And again, I just kind of go back to our top line and bottom line growth rates, we are set up in a very good position to achieve our full year commitment.

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Operator [7]

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Our next question comes from Anthony Petrone with Jefferies.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Healthcare Analyst [8]

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Also congrats on the strong orders here. Maybe just to dig a little bit deeper into China. At Analyst Day, Dow, the company announced that there was 40 MOUs, covering 70 LINACs. And so just wondering here in the quarter, if there was any activity out of those specific orders.

And then the follow-up there also would be the distinction between Class A and Class B, it sounds like certainly, Class A is moving along. But an update on Class B licenses and where that sits would be helpful as well. And then I'll have one follow-up.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [9]

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Yes, I would say, Anthony, on the -- as it relates to the China import expo meeting, most of those MOUs are long-term and tend not to be executed for, call it, 9 to 12 months kind of period. So I would say that none of those are in here at this point.

We had a very strong quarter in China, so we continue to like very much what we see. We're seeing strong equipment demand across the portfolio, frankly. I highlighted Halcyon, but we're also seeing very good traction on Edge, on TrueBeam and on VitalBeam. And believe that when Ethos comes to market, eventually, in that market, we'll also have a strong position there. So the portfolio's well set up.

As it kind of relates to each contract and whether it was part of the quota or not, what I can tell you is the best way we track it is it was strong double-digit growth on a tough comp. We were also strong double-digit growth last year, and that's probably the best way to characterize it.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Healthcare Analyst [10]

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Fair enough. And the follow-up would be just on -- over to the U.S. Just any updates from the company's view on the bundle, where it sits. It seems like there's just a range of expectations in terms of timing. So maybe what the latest is, in terms of discussions with CMS and where the final rule is and the timing there.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [11]

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As you know, given the original time line, CMS has clearly been delayed. There were significant comments from customers, from the providers, from the clinical community, from the vendor community, likely led to a delay in issuing the final ruling. There's no definite guidance on timing. I've seen some of the ranges that are out there. I think that it's going to be some time in 2020. And it's not going to be delayed to 2022 as some time is out there.

I think that as we're really thinking about it, clearly, the portfolio we've been designing to a value-based world for many years. So I think the portfolio was well set up for the transition. And with the CTSI acquisition, we are particularly excited about having a technology-enabled services play, as we believe customers will look to more outsourcing of all kinds of activities. And we'll be well set up for that growth.

So we're seeing both in the quarter. As I mentioned a minute ago, our total Americas, trailing 12 is 6% and on the quarter, it was 7%. So we're not seeing it impact the order rate at this point in time, not seeing any acceleration of cancellations or anything else that would cause us to worry. And in fact, then when you look at the way the backlog's flowing, the Americas revenue number, as we said in the script, was up 15% on the quarter. So we're seeing a nice flow in the geography.

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Operator [12]

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Our next question comes from Matt Taylor with UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [13]

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The first one I wanted to ask about was Ethos and Ethos timing. Can you give us any update on when you would expect to get approval for that in the U.S.? And then just on the orders in the quarter, you had three. You had really strong orders out of the gate last quarter. Can you talk about what the funnel looked like there? And if you think we'll see a step-up in the coming period.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [14]

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Yes, sure, Matt. Thank you. We were very pleased with the early orders in Q4. As you know, it got out of the gate late in Q4, launch in basically September of Q4. Between Q4 and Q1, we've taken out 20 orders. Frankly, when we look at the ramp versus Halcyon, kind of right on. So that's -- that looks pretty good. The orders are a little lumpy, maybe a little bit of pent-up demand and waiting for regulatory approval last quarter. We do not have, as I said in the script, we do not have yet U.S. regulatory approval. We expect that 510(k) this quarter. So the next 30 to 60 days, we should have it. Customer feedback remains outstanding. And frankly, one of the things that we really like is how it positions across our portfolio and gives us, again, something in the high end of the product mix from a pricing and margin rate point of view.

So it's still early. We do expect 510(k) approval in this quarter. We do think that this shift to adaptive radiotherapy is on the order of the kind of shifts we saw with IMRT and IGRT. So we're -- at this point, I'd say we've seen nothing that discourages us from that, and we're bullish about Ethos.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [15]

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And just a follow-up on that. I just would love to hear more about how you're positioning in the market. Are you kind of putting it up head to head with MRI or positioning it differently? And what are some of the things that customers are telling you about your adaptive approach versus others?

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [16]

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Yes. We're getting very, very positive feedback from our customers. I'd say they love the quality of the product. They love the multimodality image integration of the product. I'd say right at the top of the list, they love the fact that our workflow is superior to everything else out there. As I mentioned in the script, we haven't seen anything yet that we really can't envision in a 15-minute time slot, and that's kind of sacred to our customers and sacred to patients. It leverages all the Halcyon technology for ease of use. I think it's very well positioned for the APM environment that's coming, has an outstanding ROI with that kind of throughput. So I think it's going to win on that basis. We're seeing a lot of people engage with us on the product, a lot of enthusiasm. Clearly, we got to get through the 510(k) in the U.S. before we can market and sell it here. But we are, I think, early out of the gate here. We're very much perceived as the AI leader with our previous introductions with machine learning, in RapidPlan, the technologies that we have on the software side in the market. And now Ethos, I think, we're very much perceived as the AI leader in the market.

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Operator [17]

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Our next question comes from Jeff Johnson with Robert W. Baird & Company.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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So a question for you. I think the only question I have left here is Tata. I don't know that I heard any update there. Just wondering if you saw any tailwinds here in the first quarter from that relationship. And anything you can quantify there, high energy, low energy, anything like that?

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [19]

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Yes, sure. The Tata deal continues to move along. We've had 17 booked since the signature of the agreement. We had 2 more this past quarter. So that's going to continue to be lumpy, kind of I think, as you looked last 3 quarters, it's something like 2, 13, 2, something like that. So it's going to bounce around. But the framework for the agreement is for up to 200 systems. We're thrilled for how it's going. RT utilization rate in India is only 15% to 20%. We think that this is a great play. And frankly, in the long term, kind of combination of this agreement with the position that we have on CTSI for enabling customers to get in to radiation therapy with the services approach we have, we're very encouraged by what we see in India.

I'd say most of the products sold there is TrueBeam, Jeff. So -- so it's a good mix of product. I'd say it's going kind of how we expected. We like what we see.

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Operator [20]

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Our next question comes from Marie Thibault with BTIG.

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Marie Yoko Thibault, BTIG, LLC, Research Division - Director & Digital Health Analyst [21]

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Congrats again on strong orders. I wanted to ask a quick one, that you called out some softness in orders in Japan. Given that's a really important market, I just want to hear a little bit about the dynamics going on there.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [22]

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Yes, I'd say it's kind of the normal oscillations, unfortunately, of what we've seen in Japan in the last 2 or 3 years. The overall is down a hair. So it's -- the service business has been very strong in Japan. The equipment is down a little bit. And overall, Japan is dilutive to our APAC growth rate, because China's hitting it out of the park. The rest of Southeast Asia, Korea has been very strong, and Japan is dilutive to the growth rate, of course. But we have very strong service business there. We're starting to see a little software activity. We had tough comps in APAC and in Japan, in particular, in the first half last year. So we might see a little bit more of this coming. But we've got a good team there.

Service business continues to hum. I'd say kind of no change in our outlook in China, Southeast Asia, Korea, very strong and working hard to kind of build some recovery in Japan.

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Marie Yoko Thibault, BTIG, LLC, Research Division - Director & Digital Health Analyst [23]

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Yes, makes sense. Okay. And then my other question, kind of taking a look at my model, the spending on both R&D and SG&A, I understand the investments you're making there. And I -- at the Investor Day back in November, you spoke quite a bit about some of the R&D projects that are going on, like FLASH. I'd love to hear a little bit more about the SG&A spend that you did this quarter? And it sounds like the second half, some of that should peel off. So wanted to hear a little bit about the timing of that as well.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [24]

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Yes. I mean, I think the -- let me tee this up, and then I'll have Mike kind of take you through the walk. I think the first big piece is there's a huge piece of it that's acquisition. So between the CTSI and the Interventional Oncology acquisitions that we made last year, you're looking at $13 million of SG&A additive to last year and then $3 million on the -- from the extra week on the quarter. And then the rest is kind of balanced between some infrastructure things we're doing, some ongoing investment in our distribution and marketing. And frankly, the kind of annualization of the build that you saw in the last half of last year. Mike, do you want to put any color on that?

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Jesse Michael Bruff, Varian Medical Systems, Inc. - Senior VP of Finance & CFO [25]

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I think that's about right, Dow. We said that x the investments in the acquisitions and the acquisitions themselves, that SG&A is growing at 13%. Our revenue is growing at about that rate on a constant currency basis. And so we've got -- excluding the acquisitions, we're scaling at 100%, even with all of these investments that we're making. So again, the investments there are to drive the growth, but also to support the growth that we're driving in the business. And as we play out the rest of the year, we would expect to continue to drive scale in SG&A throughout the year, and as we said in our long-range plan over those 5 years as well. So early days there, but the majority of this lift is acquisition-related.

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Operator [26]

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Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

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Dow R. Wilson, Varian Medical Systems, Inc. - President, CEO & Director [27]

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Thank you, operator. I am pleased with the strides we've made in the first quarter. Our focused execution enabled us to deliver solid oncology orders growth and double-digit growth in both revenues and non-GAAP operating earnings. Looking forward, we'll continue to invest in our strategic enablers and remain committed to innovating and investing in new technologies to drive for the ultimate victory, a world without fear of cancer. Thanks for joining us today.

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Operator [28]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.