Varex Imaging Corp Q4 FY2020 Earnings Call

Greetings! Welcome to Varex Imaging Corporation’s Fourth Quarter and Fiscal Year Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I would now turn the conference over to Howard Goldman, Director of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the fourth quarter and fiscal year 2020. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. To simplify our discussion, unless otherwise stated, all references to the quarter are after the fourth quarter of fiscal year 2020. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the fourth quarter of fiscal year 2020 to the third quarter of fiscal year 2020 rather than to the same quarter of the prior year. 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. 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. And now, I'll turn the call over to Sunny.

Thank you, Howard. Good afternoon, everyone, and welcome. Fiscal year 2020 was a productive year for us despite the headwinds created by COVID. First of all, I'm very happy to report that we renewed all of the multiyear agreements with our top 20 customers that became due during the fiscal year. Second, we completed the closure of our Santa Clara facility ahead of schedule and made additional structural changes, which together will result in $28 million of annual cost savings when fully realized. Third, we replaced our existing debt with a capital structure that provides us with increased liquidity and flexibility. And last but not least, we launched a number of new products. The combination of these and other actions leaves Varex well positioned for future growth once the economy recovers from the impacts of COVID. I'm also very pleased with the performance of our leadership team, our managers, and our employees around the world who have navigated the turbulence from this pandemic. Throughout it all, we continued to fulfill our customers' needs. In the current environment, as we look at our financial performance, we believe our investors will get a better sense of our performance with sequential comparisons rather than year-over-year comparisons. On that note, our fourth quarter revenues were $170 million and were comparable to the third quarter of fiscal year 2020. The revenue mix between our segments was also comparable on a sequential basis. Our margins improved sequentially, largely due to the start of benefits from the cost reduction actions. On a year-over-year basis, total company revenues declined 16% in the fourth quarter due to the ongoing impact of COVID. In our Medical segment, during the fourth quarter, CT tube sales were strong, while sales of our products used in other medical imaging procedures continued to be down. Demand for our mammography tubes increased slightly, but the demand for our general X-ray tubes and detectors was solid, presumably due to the increase in purchases of mobile X-ray systems during the early months of COVID. During the quarter, some of our customers acknowledged that they were seeing an uptick in selling activity in some of their dental surgery and oncology markets. However, while this activity did not translate into significant orders for us in the fourth quarter, we are encouraged to hear this, and we are operationally prepared to respond to any increases in demand. Our R&D teams have been actively engaged with our customers this year with new product development efforts. We recently began to make engineering prototypes of a new family of liquid metal bearing technology-based tubes available to our customers for evaluation. The initial models are designed for CT and cardiac applications, and we have a growing pipeline of customers interested in incorporating these technologies into their future products. Tubes that incorporate liquid metal bearing technologies are expected to have longer life, and we intend to market them with service contracts to the OEMs. We also continue to make progress with our Nanotube technology development with our joint venture partner, BEC Imaging. You may recall that about a year ago at the annual meeting of the Radiological Society of North America, also known as RSNA, we exhibited a prototype of our Nanotube technology in a multi-emitter mammography system configuration. Since then, we have received a lot of interest in this technology. We are very happy with the performance of the emitters and the tubes. We are engaged in early-stage product development activity with several OEMs to explore the use of our technology in their future imaging systems. On the detector side, we're in the final stages of commercialization of our new Z Platform detectors. This new technology is initially targeted at cardiac, surgery, dental, and other fluoroscopy systems that need high-performance dynamic detectors that can reduce X-ray dose used during imaging. Since we introduced this platform at RSNA last year, we have released three new Z Platform models that are now available to all our customers. Additional models are in development, and we expect to release them to customers for evaluation and integration during FY '21. I'm pleased to report that a number of OEMs have placed orders for our Z Platform detectors, with initial shipments scheduled to begin in the first half of fiscal year 2021. While our sales in our Industrial segment were down year-over-year, we saw very early signs of recovery in some nondestructive testing verticals such as electronics and battery inspection. In cargo screening, a modest increase in activity led to increased orders and backlog for some of our OEM customers, and we expect that some of this will turn into orders for us in fiscal year 2021. Meanwhile, China appears to have recovered from the initial shutdown due to COVID, and we are very happy with our performance there. In fiscal year 2020, the China market represented 11% of our total company revenues. Our local Chinese OEM customers have continued to successfully bring new CT systems to market. Strong sales of CT systems by local Chinese manufacturers led to a significant increase in the number of CT tubes that we shipped to China in fiscal year 2020 over the prior fiscal year. In a couple of weeks, we will once again be showcasing our latest X-ray tubes, digital detectors, connection control devices, and software solutions at the annual RSNA conference. In particular, we will be introducing two new Photon counting detectors. More information about these and other new products will be included in our upcoming RSNA announcements. RSNA starts on November 29, and this year, it's going to be a virtual event. For those who are interested, after RSNA starts, we will have links to our virtual exhibit booth posted on our website and on Varex social media channels. With that, let me hand over the call to Sam to talk about our financial performance in greater detail.

Thanks, Sunny, and hello everyone. As a reminder, unless otherwise indicated, I will provide sequential comparisons of our results for the fourth quarter of fiscal year 2020 with those of our third quarter of fiscal 2020. Our fourth quarter financial results indicate that our sales have stabilized. Fourth quarter revenues were $170 million and comparable to the third quarter of fiscal 2020. Medical segment revenues were $136 million, and Industrial segment revenues were $34 million. Compared to the fourth quarter of last year, revenues declined 16% to $170 million from $202 million due to the effects of COVID. Geographically, fourth quarter revenues were $64 million in the Americas, $55 million in EMEA, and $51 million in APAC. For full fiscal year 2020, revenues in the Americas were $255 million, $231 million in EMEA, and $252 million in APAC. This reflects a geographically well-balanced revenue profile for us. Our fourth quarter GAAP gross margin was 27%. On a non-GAAP basis, gross margin was 28%, an improvement of two percentage points from the third quarter of fiscal year 2020. This increase is due to a favorable product mix and initial benefits from cost reduction. R&D expenses in the fourth quarter were $17 million on both a GAAP and non-GAAP basis. This was a decrease of about $2 million from the previous quarter. Fourth quarter SG&A expenses were $41 million. On a non-GAAP basis, SG&A expenses were $31 million, an increase of about $3 million from the previous quarter, largely due to higher year-end audit fees and pension costs in our German operations. Operating expenses were $58 million. Non-GAAP operating expenses were $48 million compared to $36 million in the previous quarter. This sequential increase was primarily due to higher SG&A expenses that were partially offset by lower R&D spending. Our fourth quarter operating loss was $13 million. On a non-GAAP basis, the operating loss was less than $1 million compared to an operating loss of more than $1 million in the previous quarter. GAAP interest expense in the fourth quarter was $14 million, which was unusually high due to various financing activities, including issuing high-yield notes and paying off our previous credit facility and associated interest rate swap. On a non-GAAP basis, interest expense was $6 million, similar to the third quarter. Other expenses were approximately $2 million. We recorded a GAAP tax benefit of $4 million in the fourth quarter. On a non-GAAP basis, we recorded an $8 million tax benefit. The CARES Act and subsequent treasury regulations allow us to apply current year net operating losses to taxable income from prior year tax filings. And as a result, we expect tax refunds from the U.S. Treasury. GAAP net loss for the fourth quarter was $26 million or $0.66 per diluted share. On a non-GAAP basis, net loss was $2 million or $0.04 per diluted share compared to a net loss in the third quarter of $8 million or $0.20 per diluted share. Diluted shares outstanding were 39 million shares in both periods. Now turning to the balance sheet. Accounts receivables increased by $14 million during the quarter. A large portion of our shipments occurred in the third month of the quarter, causing DSO to go up by eight days to 66 days. Inventory decreased by $11 million in the fourth quarter to $272 million as we completed the transfer of manufacturing from our Santa Clara facility to Salt Lake City. Cash flow from operations was negative $12 million for the fourth quarter, but it was positive $13 million for the full fiscal year. We ended the fourth quarter with cash of $101 million on the balance sheet, an increase of $13 million in the quarter. Total gross debt outstanding was $511 million, of which $455 million was recorded on the balance sheet due to a portion of the convertible loan being recognized as a component of equity. Let me now give you a high-level summary of our financial initiatives that have either been recently completed or are in process. First, I would like to discuss our new capital structure and liquidity. During the second half of fiscal 2020, we put in place a more flexible debt structure that increased our liquidity. Our debt now includes $300 million of 7-year senior secured notes that bear interest at 7.875%, $200 million of 5-year convertible notes that bear interest at 4%, and a new $100 million asset-based revolving credit facility that currently remains undrawn. We also carry additional debt of around $11 million in our foreign subsidiaries as well as a cross-currency swap. Overall, our weighted average pre-tax annual interest rate should be about 6.2%, and the annual cash interest expense burden should be approximately $31 million. As of the fiscal year-end, there was plenty of liquidity with $101 million of cash on our balance sheet and another $100 million through our asset-based revolver line. Also, by paying off our previous credit facility, we removed the substantial doubt about our ability to continue as a going concern. Second, I would like to provide an update on our cost reduction efforts. As we shared with you previously, we targeted an annualized cost reduction of $28 million, which should be fully realized from the second quarter of fiscal year 2021. Roughly 75% of the cost reductions are expected to benefit gross margin, and 25% are expected to benefit operating expenses on the P&L. We are largely complete with the closure of our Santa Clara facility with only a few minor steps left to be executed. This specific initiative is expected to provide savings of about $14 million annualized or about $3.5 million per quarter. Additionally, as part of our cost reduction efforts, we reduced 94 positions in the U.S. in the fourth quarter, which is expected to save us an annualized $15 million beginning the first quarter of fiscal year 2021. Let me now move to discuss new initiatives that are in process for fiscal year 2021. The first initiative is a targeted $25 million to $30 million reduction in our inventory during the year through a combination of facility consolidations, implementing additional lean programs, further streamlining our supply chains, and discontinuing low-velocity products. The second initiative for fiscal year 2021 is to reduce costs associated with manufacturing and servicing of our products, particularly in the areas of warranty, manufacturing yields, and freight costs. Through this initiative, our target is to improve gross margin by one percentage point toward the end of this fiscal year. Let me now provide you with our business outlook. Given the current economic environment, we are changing our prior approach of providing annual guidance in favor of providing quarterly guidance. We believe quarterly guidance will help investors better understand our business performance and progress. Accordingly, for the first quarter of fiscal year 2021, we expect revenues to be between $160 million to $180 million. And we expect non-GAAP earnings per diluted share to be between negative $0.15 and positive $0.10. These expectations are based on non-GAAP gross margin improvement to a range of 30% to 31%, which includes some benefit from the closure of our Santa Clara facility. Non-GAAP operating expenses reduced to a range of $44 million to $45 million and non-GAAP interest expense around $8 million. With that, I would like to now hand the call back over to Sunny for some closing remarks.

Thank you, Sam. So looking beyond COVID, we expect demand for X-ray imaging equipment and for our products to rebound once the effect of the pandemic is past us. We are confident that our continued focus on innovation will allow us to expand our position as a market leader across all product lines in our core business. Our goals for the next phase of growth, which we have referred to as Varex 2.0, are focused on accelerating organic growth, improving operating margins through operational transformation, and strengthening our balance sheet. With the debt refinancing actions, we've already positioned ourselves with a new capital structure that gives us operating flexibility and strengthens our balance sheet. Our next steps here are to improve our financial performance and lower our debt. To do that, we will continue to drive initiatives to enhance gross margin and operating income. Our investments in R&D are aimed at enabling Varex to expand its footprint within our customer base as well as to open new addressable market opportunities with Photon counting detectors and Nanotube X-ray sources. I'm happy to say that we are making good progress in each of these areas of Varex 2.0, and these goals are reflected in our fiscal year 2021 operating plans and management incentives. With that, we will now open up the call for your questions.

[Operator Instructions] Our first question is from Anthony Petrone with Jefferies. Please proceed.

And I hope everyone is doing well and staying healthy. Maybe a couple for Sunny, and then I'll have a few for Sam, as it relates to some of the guidance metrics that you provided, Sam. And so Sunny, maybe from a high level, you gave updates here on where each of the businesses is trending amid the COVID sort of resurgence. At a high level when you consider, in particular, where you referenced Industrial, you are seeing some signs of a turnaround in select areas of Industrial, maybe describe how you see that trending into '21 from here, particularly when you consider that we do have a resurgence in some geographies and a lot of key geographies for that matter? And then if you can refer to China, it sounds like its business is back to usual. Is that a fair way to describe where China is exiting the quarter? And then I'll have a few follow-ups.

Yes. Okay. So thanks Anthony. For Industrial, the way we experienced the situation is that initially, when the full impact of COVID hit everyone around the April-May timeframe, everything stopped, right? So we had lockdowns everywhere and all activity essentially ceased. Airports stopped operating most of their gates, and we saw serious slowdowns there. That's how it started out. And then as COVID progressed and as what we're seeing now is that the Industrial side of our business, and those markets and different verticals within Industrial are advancing in their recovery trajectory, while Medical is recovering more slowly. What I mean by that is that airports have been shut down. They're going to stay shut down for some time. There's no improvement or degradation there. But meanwhile, in other verticals, as you know, Industrial is very fragmented and there are many sub-verticals. As you look at the different verticals, they're progressing along various trajectories. I mentioned electronics and battery inspection. We're seeing continued strength in that area, which had strength pre-COVID, and it's returning to increasing levels of activity. So what we're anticipating is that within Industrial, it won't be an all-or-nothing situation. It isn't tied to one large entity's capital budgets like we have on the Medical side. However, on the Industrial side, given the fragmentation of the verticals, we're seeing different dynamics within each sub-vertical. On balance, what we expect is that all the verticals controlled by the government will continue to move forward. We were encouraged by the tender activity in the cargo screening area where some tenders were finalized, and our OEM customers received some orders. Similarly, we've continued to see spending on the government side or activity continue to stay active. Now we expect that other Industrial verticals in food inspection and general manufacturing will evolve on their own. Even with the situation with COVID, we're not anticipating significant regression. That's the scoop on how we see Industrial evolving during this recovery.

Okay. And then again, a follow-up on the China CT market in particular. Just a follow-up there on where that business is trending, and it does sound like that is sort of back to business, pre-COVID levels. Is that accurate?

Yes. So we're very happy with our performance in China. They were shut down for about eight weeks this year. When they came back up, they went right back to work and caught up with their prior trajectory. From that perspective, all the things we've said about the China market have continued to play out just the way we have explained it, which is the Chinese government continues to invest in healthcare. The purchasing of CT continues, and during the COVID pandemic, while we saw an uptick in the buying of CT systems and X-ray systems, post their peak, we didn't see the CT market subsiding. The trajectory they were on previously seems to have continued. We're happy with the way things are going in China. Our OEM customers have not slowed down in their product development efforts. They're continuing with their plans. Any slowdowns or delays there are typical of our normal R&D cycles and processes. So for all practical purposes on the Medical side in China, it feels like business as usual.

And then I'll shift gears and get back in queue. Here for Sam, just up on expenses and then one on the guidance range for 1Q. When we look at the operating expense level, and I know some of the savings are going to evolve as we head into fiscal '21. When we look at the fourth quarter level, $48 million in OpEx, should we be gradually seeing more savings on that line as we run through fiscal '21? That's the first question, just how to think of the quarterly cadence on total OpEx vis-à-vis the fourth quarter. The second question would be on the guidance range; in particular, for 1Q, it's a $20 million spread on the top line and a $0.30 or $0.25 kind of range on the bottom line. Maybe walk us through the lower end of that range and what variables would drive it to the upper end of the range?

Sure. Let me address your questions one at a time. In terms of OpEx, we are guiding a significant improvement for Q1 versus Q4. Q4 was at $48 million. There were certain expenses in there that should go away as we complete the audit and the 10-K filing and all of that. We are guiding for $44 million to $45 million starting with Q1. The positions we eliminated in July and August have begun to use starting in October. So essentially, that run rate is going to decrease from $48 million to $44 million to $45 million. We had previously guided OpEx for the full year to be around $175 million, and we are at that range now. Some other cost reduction initiatives that we've been implementing will also benefit our margins. We expect gross margin to improve sequentially during the year by one or two percentage points as a result. In terms of your guidance range, yes, there is a $20 million spread on the top line and approximately $10 million on the bottom line, and the reason is the current uncertain environment due to COVID. However, we feel good about the quarter, as we are halfway through it. We have already begun seeing business stabilizing.

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

Just a few follow-ups. First on Anthony's question. On the cost side, did you see any benefit, I guess, from the closure of the facility in Q4 at all? It sounds like the operating expenses and the headcount reductions were all going forward. Did you get any advantage at all? Or do we still expect that full $14 million benefit coming?

So Larry, there were some benefits, but very, very small. The bulk of the benefits are expected to begin in Q1. The $14 million from Santa Clara, I expect about half of that to come through in Q1. Also, about 75% of the cost reductions will benefit gross margin while 25% will help reduce operating expenses.

Got it. Okay, that makes sense. And could you -- just a question, I know you don't break out the adjusted gross margin between Medical and Industrial. But I noticed that the GAAP Industrial number was over 41%, so that you never up a non-GAAP 40% number going back two years. Is there something in that number that was unusually beneficial?

Yes. The way to understand it is that at these low levels, in our Industrial business, we have machine sales as well as services. Services are on contracts, and all of that. What happens is these margins behave somewhat erratically when the machine sales are low. The GAAP gross margin reflects this mix of machine sales and services.

Okay. No, fair enough. Just switching gears to the revenue trends. I realize you're a component business and somewhat down the line; the elective surgeries have started to come back. People are at least trying to get back to appointments, especially for necessary procedures. Have you seen, at least anecdotally, customers starting to purchase? Will you have better visibility with capital budgets coming out in the beginning of hospital fiscal years or any clearer timing?

Larry, this is Sunny. The activity that our customers are seeing varies by geography and modality. In China, it appears to be back to normal business. However, other areas are slower. Pre-second wave lockdowns in Europe, our customers mentioned increased tender activity. They felt encouraged and saw increased quotes going out. Now these current lockdowns might slow things down a bit due to communication challenges, among other issues. In North America, the activity was slower overall. In terms of modality, we saw that mammography and dental sectors experienced the most rapid return to activity. Our customers have reported an uptick in mammography volume, particularly as hospitals reopen and outpatient imaging centers regain momentum. This increased usage drives the demand for replacement tubes. In terms of capital equipment purchases, we haven't seen anything conclusive yet, but we have observed pockets of increased activity that indicate positive trends.

Okay, just take one on the product side. You mentioned the Nanotube technology, and you sound very excited about that. When might we actually see some commercialization of this? Are we still a couple of years away from that?

Yes. So in terms of commercialization, this is a longer process. If you look at the product life cycle, from developmental stages to working prototypes, and through OEM evaluations, it could take two-plus years before we see systems coming to market. But once they are introduced, we tend to remain engaged, realizing continued revenue growth for the next 15 to 20 years. It's frustrating in terms of timelines, but based on current development progress, I believe this will become a lucrative revenue stream for us in the near future.

Right. Just one last question on cost again. I guess the 100 bps gross margin targeted improvement will be gradual, and you hope to reach full run rate as we head into fiscal '22. Is that fair enough?

Yes. So Larry, as I mentioned earlier, we expect gradual improvement with more pronounced benefits in the second half of fiscal 2021. We're aiming for gross margins of around 32% to 33% as we end the fiscal year.

Our next question is from Suraj Kalia with Oppenheimer & Company. Please proceed.

Sunny, Sam, Howard, I hope everyone is safe and healthy. Can you hear me?

Yes, we can.

So Sunny, a bunch of questions for you and some for Sam. Let me start out on a high level, Sunny. Obviously, you guys were forced into a tricky position with the whole nonsensical China tariff thing. Now, with the new administration on the horizon, do you anticipate any realignment that potentially could offer some incremental benefits, whether it's in workflow logistics, product streamlining, or a locally manufactured product? Any additional color there would be great.

As you might recall, we got hit by tariffs initially, and we reacted quickly to set up local manufacturing. Today, it's China; tomorrow might be India or somewhere else, so we're making ourselves local for local. Our local-for-local initiative, which involves manufacturing in Wuxi, is operational for detectors and tubes. Therefore, our position is favorable regardless of how the tariffs play out. Should there be a reversal, it would benefit us directly; should they continue, our local manufacturing can help offset some risk. I'm cautious in making predictions, but our local operation serves to hedge against potential headwinds.

Fair enough. Sunny, you and I have talked several times about your core cathode technology. There is a lot of buzz about this new approach, which may potentially be a paradigm-shifting approach to Photon generation and X-ray generation. You made comments specifically about its readiness in two years. How do you balance the potential cannibalization of existing products versus new sockets with this approach? Have any internal discussions on price points occurred? Any further color would be great.

As we conduct life cycle testing, we are also developing the samples. We're providing engineering samples to our customers for evaluation, enabling them to consider applications. Regarding cannibalization, I expect to gain new customers with the Nanotube-based tubes. Existing OEMs may adopt this new technology in future applications, but our goal is to provide a product with a significantly better value proposition. Ultimately, this can be a net positive, driving new revenues, even if it cannibalizes some existing sales. Our existing customer base will still maintain a large installed base of our traditional technologies.

Fair enough. I was curious if you may anticipate any existing sockets being replaced when the equipment life cycle is up with new machines using the Nanotube technology. I get your point about additional revenue opportunities. A couple of follow-ups, if I could for Sam. Sam, just following up on Anthony's question about the $20 million spread on the top line. I wasn't sure if you indicated any expectations for Medical versus Industrial. If I look at both sectors, it isn't clear to me that we've hit the bottom yet, particularly in Medical. Maybe provide some clarity on that?

In terms of top line variability, we are uncertain given the current COVID environment. Some facilities may not be able to take shipments at times, but we are generally tracking towards the midpoint of our guidance. Our forecast includes considerations for both segments and provides a conservative outlook based on current trends.

The second part of my question was regarding the improvements you've mentioned. Streamlining existing manufacturing operations – would this offset any gains from the Santa Clara shutdown? Additionally, I noted you mentioned about improvements that could yield 1% to 2% incremental improvement in gross margins quarterly. Should I anticipate gross margins reaching the 31% to 35% range as we exit next year, or did I misunderstand that?

Let me clarify. The initiative for improving manufacturing yields is incremental to the cost savings from the Santa Clara closure. We aim for an overall improvement of one percentage point in gross margin, not a one percent improvement every quarter. By the end of the fiscal year, we expect to be in the low 32% to 33% range for gross margins.

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

Good. Hope everyone's well. A couple of quick questions. You talked about the samples or prototypes that you have out in the field now with some of your old customers. How long does it take for that to convert to orders?

If it's an existing technology like traditional tubes or detectors, it usually takes between 12 to 24 months for conversion to orders. However, as this is a brand-new technology, it will likely take longer. We are projecting a timeline of around two to three years before revenue starts coming in.

And Sam, did you indicate whether you think you'll be cash flow neutral or cash flow positive next year? Or did you make any comments regarding that?

I did not provide specific guidance, but I can offer some context. Given our recent cost reductions and the stabilization of operations, I think we should be cash flow breakeven after this next quarter. We're also prepared to take advantage of any recovery that unfolds, which will positively impact our cash flow performance.

Okay. And were there any additional staff reductions in the fourth quarter?

Yes, we reduced 94 positions in the U.S. around mid-fourth quarter, and there are a few more minor actions in progress. However, the bulk of the reductions are behind us at this stage.

So is it fair to say the bulk of the staff reductions are past us at this point?

Yes. It is very fair to say that bulk of the staff reductions are behind us at this time.

If we look at the guidance you gave for the first quarter of fiscal '21, it sounds like you’re comfortable with the level of the staff we have now. While you don't want to provide long-term guidance, do you think that things are pretty much bottomed out in the last two quarters and that you don't expect the business to deteriorate significantly from where it is right now?

In general, we wouldn't say never about the business climate; however, our business has stabilized, and we believe that it has bottomed out. We're waiting for the recovery, taking this time to ensure our cost structure and gross margin are in alignment, which positions us well to benefit once the top line increases.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you for your questions and participating in our earnings conference call for the fourth quarter and fiscal year 2020. A replay of this quarterly conference call will be available through December 1 and can be accessed at the Company's website or by calling 877-660-6853 from anywhere in the U.S. or by dialing 201-612-7415 from non-U.S. locations. The replay conference call access code is 13712445. Thank you, and goodbye.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.