EUR 850.00 For Business Accounts Only

Morningstar | Varian Medical Continues to Gain Share Across All Major Markets

Varian Medical Systems' second-quarter results were slightly ahead of our forecast on the top line and orders growth. We’re maintaining our fair value estimate for now as the revenue and order outperformance was largely offset by the increase in reinvestments, proton-related expenses, and tariffs. Our wide moat rating is intact.

The firm delivered strong results in all of its major geographies. Orders in North America continue to impress; the United States saw 12% growth fueled by several large contract wins and competitor displacement, strong software uptake, and overall healthy demand. Europe, the Middle East, and Africa delivered the seventh consecutive quarter of double-digit order growth, and the momentum should continue with the recent signing of the Tata Trusts agreement to increase patient access to radiotherapy in India. We have viewed India as a sizable but rather remote opportunity for radiotherapy despite its massive potential patient population (largely undiagnosed currently) and significant underutilization of radiotherapy in cancer treatments. The Tata agreement is a positive development (up to 200 units over the next three years), but for the market of India’s size, we are still in the very early innings of addressing population need. Asia-Pacific order growth was supported by strong performance in China, Japan, and Southeast Asia. Halcyon received approval in China, and Varian saw its first few orders from this market.

Halcyon performance continues to impress. There were 36 orders for Halcyon in the quarter, double from last year’s levels, and 70% of orders are incremental. Halcyon’s small vault requirement positions it well to take out older competitor systems, and its attractive value proposition makes the system appealing for more cost-conscious customers. More than half of Halcyon orders were from developing countries, underscoring its attractiveness in this market. Software was up 14%, double the hardware growth, and the runway for future expansion remains very attractive. The only relative weakness was lower-than-expected service growth, although this was mainly due to tougher comparisons.

On the margin line, business mix, tariffs, and foreign exchange had an adverse effect in the quarter. The proton business incurred incremental project costs and remains below break-even levels. However, the underlying trends should position Varian well to recover 200 basis points of margin ceded in the quarter. Strong software placements, meaningful Halcyon volume, and tariff mitigation efforts should allow the firm reach its 20% operating margin target in the near future.