Accuray Inc

NASDAQ:ARAY

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to the Accuray Fiscal 2025 First Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.



I would now like to turn the conference over to Jesse Chew, Chief Legal Officer. Please go ahead.

[Jesse Chew, executive]

Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the first quarter of fiscal year 2025, which ended September 30, 2024. During our call this afternoon, management will review recent corporate developments.



Joining us on today's call are Suzanne Winter, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's Chief Financial Officer.



Before we begin, I would like to remind you that our call today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are outlined in the press release we issued just after the market closed this afternoon as well as in our filings with the Securities and Exchange Commission. We base the forward-looking statements on this call on the information available to us as of today's date. We assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements.



A few housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to two questions and then requeue with any follow-up. Second, all references to specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our first quarter refer to our fiscal first quarter ended September 30, 2024. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com.



With that, let me turn the call over to Accuray's Chief Executive Officer, Suzanne Winter. Suzanne?

[Suzanne Winter, executive]

Thank you, Jesse. Good afternoon and thank you for joining the call.



Before discussing the quarter, I would like to thank you all and the global Accuray team for your support, well wishes and keeping me in your thoughts during my medical leave. I'm extremely grateful and proud of Sandeep Chalke, Accuray's Senior Vice President and Chief Commercial Officer, who stepped in as an interim CEO during my absence. He seamlessly continued to execute our vision and strategic priorities while concurrently running day-to-day operations. It is a privilege to return as CEO, and I could not be more excited about where we are as the company executes our strategy to drive top line and adjusted EBITDA growth, transforming our competitive position in the global radiotherapy market.



Turning to the first quarter results. We had a strong start to the fiscal year where we delivered on both revenue and adjusted EBITDA. We've begun to make good progress on our FY '25 priorities that we laid out in August, which includes new product innovation to Advance Care, the expansion of our Service Solutions business and execution of commercial strategies to improve patient access in high-growth emerging markets like China, where we believe we can achieve #1 or #2 market share in the long-term. Finally, we advanced progress on operational efficiencies and pricing actions to improve margins and profitability.



There were several positive highlights during the quarter, which has added a level of optimism to our outlook for the remainder of the fiscal year. First, our Q1 performance in China. The region delivered significant revenue growth at 30% year-over-year, driven by strong customer demand in both Type A and B markets.



As discussed in the last earnings call, we ended fiscal year '24 receiving the final regulatory approvals for the Tomo C product, which allowed a full market launch and shipments to end customers. As a reminder, the Tomo C system expands our product portfolio in China and allows us to compete in the largest and fastest-growing segment of the China radiotherapy market, the Type B segment, which is estimated to be $3 billion over the next 5 years.



In Q1, we continue to see positive customer reception to our technology in both Type A and B segments. In the Type A market, where we have been the radiotherapy market share leader over the last several years, customer installation activity of both the CyberKnife and Radixact systems were robust, and we ended the quarter with 22% growth in new customers installed year-over-year as well as building the China backlog funnel by achieving above-market new order growth.



Operationally, I'm very proud of our China team's ability to ramp manufacturing production of the Tomo C product, hitting a key milestone of systems built at the Tianjin facility with the close support of our operations and quality teams here in Madison, Wisconsin. These systems will ship over the next several quarters based on customer timing with the majority expected in Q2 through Q4.



As discussed, when Tomo C systems ship to the end customer, we can then realize deferred margin on our balance sheet from previous shipments to our JV partner that was used in final assembly and testing of finished product. This will positively impact product gross margins and adjusted EBITDA as it is released through the next several quarters. After FY '25, we expect this impact to be minimal.



We also saw revenue momentum in the APAC region, where we had several first-in-country shipments to new markets, consistent with our strategy of expanding patient access in areas where radiotherapy is underserved. First, we delivered the first VitalHold surface-guided radiotherapy for the Radixact system in Thailand, which provides advanced breast cancer treatment capabilities. The first CyberKnife S7 was delivered in the Philippines, providing SBRT and stereotactic radiosurgery capabilities and the first Radixact system was shipped in Myanmar, providing patient access to advanced radiotherapy treatments.



In the EIMEA and Japan regions, Q1 total revenue was in line with expectations, but down 35% and 22% year-over-year, respectively, mainly due to tougher year-over-year comps and after achieving record shipments in Q4. As we have discussed, regional performance can vary significantly from quarter-to-quarter based on customer time lines. However, I was very satisfied with the installation rates of new systems in both regions. The customer base grew 4% year-over-year in EIMEA and 3% in Japan within the quarter, which will increase installed base in those regions and drive future recurring service and upgrade revenue opportunities. We expect both regions to show stronger revenue growth in the second half of FY '25, driven by visibility to customer timing and additional commercial coverage.



In the Americas region, revenue was up 2% year-over-year, driven by a strong increase in product shipments, which was offset by an 8% decline in service revenue due to the installed base consolidation we have seen over the last year. Installed base remains a key area of focus for trade-in, trade-up upgrades, and we expect conditions to improve in the U.S. market in the second half of FY '25 and into FY '26, in line with the guidance we provided in August.



Moving on to our service business. I was very pleased with our service revenues for the quarter, which grew at 5% year-over-year, driven mainly by increased contract revenue, which grew 5% year-over-year.

As a reminder, service contracts are a source of recurring revenue that comes from providing high-touch service and support to our existing installed base of global systems. This growth was faster than our growth of our installed base, which globally grew 2% year-over-year and reflects our emphasis on providing the highest value support to our customers as well as increased price for enhanced service contracts as customers are increasingly including innovations like ClearRT and VitalHold in their system configuration.



Service remains one of the largest growth opportunities, both from a revenue and margin perspective.

Our strategy of penetrating new higher-growth markets is contributing materially and offsetting slower growth in the developed markets. We saw 7% growth in our non-U.S. markets and are developing a deep infrastructure in key markets that have created highly innovative products like Tomo C that fit well within high demand environments.



In August, we received CE Mark for the new Accuray Helix platform, which represented a major milestone for the company. Helix was developed for India and other emerging markets where access to advanced radiotherapy treatments has been historically limited. I was pleased that during the ASTRO conference, we were able to finalize several orders for Helix, and I anticipate these orders and revenue conversion in the coming quarters.

During the quarter, our new order book-to-bill ratio was solid at 1.1, and we continue to book more new product orders versus product shipments in order to maintain a healthy backlog of approximately 2x FY '24 product revenue.



And finally, we saw a very strong reception at the ASTRO Conference for Cenos online adaptive solution and our full adaptive suite of the Radixact system. Cenos will be the latest innovation on the Radixact system and with ClearRT, VitalHold and Synchrony positions the Radixact system against competitive systems.



We believe our Adaptive suite, including Cenos will be a key differentiator for Accuray because we will be the only player in the radiotherapy space that can adapt treatment plans between, during and on the day of treatment and provide the best opportunity for outcome and quality of life. Regulatory submission is expected to occur in our fiscal Q4, at which point we can take orders in Europe with expected clearance and revenue starting at the end of calendar year 2025 in EIMEA and the U.S.



Additionally, in October, we announced the publication of the Accuray-sponsored PACE-B study in the New England Journal of Medicine. The PACE-B trial compared patients treated with SBRT to conventional radiotherapy for localized prostate cancer. The study is groundbreaking and should change the way prostate cancer is treated.



Further, we are committed and investing in translating research into practice and last week sponsored an SBRT and Prostate Cancer Symposium in Miami with a prestigious international faculty of experts in conjunction with NYU Health System. The demand for practical education is significant, and we were pleased to see approximately 250 attendees from over 24 countries at this educational hands-on session.



Finally, on the operational side, we advanced progress on our margin expansion and productivity initiatives and saw overall cost efficiencies year-over-year after excluding a prior year onetime benefit to our service margins associated with our transition to a new ERP system. We are now past our first full year of ERP implementation. And despite some challenges, which were identified in September, the ERP system is fully integrated and believe this will allow us to be much leaner and more efficient as we enter a pivotal growth stage for our company in the coming years.



In summary, I'm proud of the foundation we have set for future growth. We achieved strategic customer wins in the marketplace and penetrated new markets. With a solid start to the year, we are modestly raising full year fiscal 2025 guidance based on the underlying trends we see and are confident in the outlook. We believe we are well positioned to achieve our goals in top line growth, drive share gain in the markets where we compete and expand margins in FY '25 and beyond.



I'll now turn it over to Ali, who will cover our financials.

[Ali Pervaiz, executive]

Thank you, Suzanne, and good afternoon, everyone. As we kick off the first earnings call of FY '25, let me start by thanking our global cross-functional teams who helped us deliver a solid first quarter. Our results give us the confidence to modestly raise our full year revenue and adjusted EBITDA guidance. With approximately half of our business tied directly to capital equipment, we experienced longer sales cycles and timing of installation, which can create some variability in orders and revenues from quarter-to-quarter.



Having said that, the underlying demand trend we are seeing as we enter high-growth markets remains very positive and gives us confidence in our product backlog and customer timing in FY '25 and beyond. Additionally, while multiple factors can have outsized impact to our gross margin and adjusted EBITDA on a quarterly basis, we believe our underlying margin expansion efforts are starting to pay off as our fiscal year unfolds.



As Suzanne mentioned, China margin deferral is one of the factors that has had an outsized impact to our quarterly results in the last couple of years. As a reminder, due to JV accounting rules, we must defer approximately 50% of the margin associated with the shipment revenue that we have made to the joint venture and do not realize that margin until the joint venture ships that product to their end customer. This phenomenon has driven volatility in terms of timing of revenue and associated margin.



Given all the Tomo C shipment to date, as the deferred margin starts to release to the P&L beginning in Q2 and through FY '25, we expect to have approximately $3 million to $4 million benefit, which is included in our fiscal year 2025 adjusted EBITDA guidance. We have provided additional details in our supplemental deck on the impact of this deferral historically and moving forward. We expect this margin deferral timing to be less of a factor moving beyond fiscal year '25 as joint venture volumes normalize and to have a nominal impact.



Turning to the financials. Net revenue for the first quarter was $102 million, which was down 2% versus the prior year and down 2% on a constant currency basis. Product revenue for the first quarter was $48 million, down 9% from the prior year and down 9% on a constant currency basis. Service revenue for the quarter was $53 million, up 5% from the prior year and up 6% on a constant currency basis. As Suzanne mentioned, this was driven by contract revenue, which is the annuity part of our service business, which makes up greater than 90% of our service revenue, and we are encouraged by this trend as it is higher than our IB growth and illustrates price accretion as part of our margin expansion actions.



Product gross orders for the first quarter were approximately $55 million and represented a book-to-bill ratio of 1.1 with a trailing 12-month ratio of 1.5. Our book-to-bill ratio is defined as gross product orders for the period divided by product revenue for the period. As Suzanne mentioned, we continue to believe that the book-to-bill ratio is the right metric to ensure healthy growth of our backlog as we add more product orders than shipments in the quarter.



We ended the first quarter with a reported order backlog of approximately $469 million, defined as orders that are younger than 30 months. This represents greater than 2 years of FY '24 product revenue. As part of our diligence in ensuring a high-quality backlog, we canceled only 1 unit, representing approximately $3 million of orders due to evolving customer dynamics.



As mentioned before, over the last couple of years, we have redefined our order booking criteria focused on deals with higher profitability that convert to revenue within 30 months and as a result, have seen lower age-outs and faster order to revenue conversion. Our overall gross margin for the quarter was 33.9% compared to 38% in the prior year. As a reminder, there was a onetime cost benefit that led to lower parts consumption last year, primarily due to the timing of the ERP implementation. Sequentially, we saw improvements in both product and service margins.



Operating expenses in the first quarter were $36.6 million compared to $37.3 million in the first quarter of the prior fiscal year. Operating loss for the quarter was $2.1 million compared to operating income of $2.2 million from the prior year. Adjusted EBITDA for the quarter was $3.1 million compared to $6.5 million from the prior year due to the timing of the onetime parts consumption dynamics related to the ERP implementation mentioned earlier. We described the reconciliation between GAAP net income and adjusted EBITDA in our earnings release issued today.



Turning to the balance sheet. Total cash, cash equivalents and short-term restricted cash amounted to $60 million compared to $69 million at the end of last quarter, primarily due to the buildup of inventory as we prepare for the launch of Helix. Net accounts receivable were approximately $92 million, flat compared to the prior quarter. Our net inventory balance was $155 million, up $17 million from the prior quarter as we ramp up manufacturing for increased shipments in the coming quarters. As we go into fiscal year '25, there is a significant emphasis on optimizing working capital, including overall inventory, which will benefit our cash position.



Lastly, related to the balance sheet, we're also focused on addressing our capital structure and refinancing needs to ensure we have flexibility to grow the business for the years to come.



In summary, we are pleased with our Q1 results. And given the momentum we are seeing thus far, we are raising our previous full year FY '25 revenue guidance range of $460 million to $470 million to an updated range of $462 million to $472 million and raising our previous full year adjusted EBITDA guidance range of $27.5 million to $29.5 million to an updated adjusted EBITDA range of $28 million to $30 million.



This guidance range assumes that the U.S. market will begin its recovery in the second half of fiscal year '25, delaying system revenue and associated margin and adjusted EBITDA to the back half of the year. Those are our key financial highlights.



And with that, I'd like to hand the call back to Suzanne.

[Suzanne Winter, executive]

Thank you, Ali. In closing, I've never been more excited about our future and the market opportunity. The upward trends in cancer incidents continues globally and the need for innovative radiotherapy solutions to combat them and improve outcomes and extend life has never been more important. I would like to thank the entire Accuray team for all their hard work and the role they have played in the meaningful progress we have made against our strategic priorities and their ongoing dedication and passion to advancing our mission and creating value for all stakeholders.



I will now turn it back over to the operator for Q&A.

[Operator]

[Operator Instructions] First question comes from Marie Thibault with BTIG.

[Marie Thibault, analyst]

Very nice quarter. Suzanne, very happy to see you back and glad you're doing well health wise. I wanted to start here, I guess, with China. It is getting to be a pretty considerable portion of your total revenue, which is good to see. And I wanted to get a better understanding of the timeline for the rollout of Tomo C. How long we can expect this system to be a strong source of growth and revenue for the company? Is this a matter of years, quarters? Just how impactful can this launch be?

[Suzanne Winter, executive]

Company in the total market and really being a player in the Type B segment. We are very pleased with the reception to the Tomo C product and the fact that this is a made in China for China product for the company. So again, I think what we are seeing, at least in the short term is we have pent-up demand, which we are seeing, and we are able to release the margin deferral that's been on our balance sheet.



And so we're going to see that play out through Q2 through Q4. But we do believe that the product itself, we're going to gain market share within the Type B segment. But we also think we continue to be a market share leader in the Type A segment as well. Now Type A segment is a smaller segment, but we have the lion's share of that segment. And so we are going to continue to be a strong competitor there.

[Marie Thibault, analyst]

Okay. And I couldn't hear the first part of your comments, Suzanne, so it might have been a glitch on my end. But did you say sort of where your JV partner is in the launch of introducing Tomo C? Have they gone out to most of their target accounts, just a fraction of their accounts? It maybe just a qualitative detail on that.

[Suzanne Winter, executive]

No, I think they're still going out to a large number of accounts. I mean, again, the Type B segment is very large. But I think that they have been doing a soft launch for the past year as we waited for the approval. And so we are seeing some of that pent-up demand. But again, as we install, as we get customers up and running and we get a critical mass of units, we think that's just going to help our win rate within this larger market.

[Marie Thibault, analyst]

Got it. My follow-up here, I wanted to talk about service contract revenue growth outpacing installed base growth. Good to see as well. I know that's been something you've been targeting for a while. Can you give us any more details on what some of the enhanced value is that you're offering? What kind of pricing tailwind you're seeing? And I guess, importantly, is this a sustainable level going forward? Should we think about this low 50s range is kind of the range to think about going forward?

[Suzanne Winter, executive]

Yes. I think the service business is a tremendous initiative for the company, and it's really driven by installed base growth. So as we're penetrating these emerging high-growth markets, getting systems installed, getting new customers into our installed base, we're able to sell service contract revenue. So that's our business model. Now within that, we are also enhancing some of the service contracts that we're offering to customers.



Every time they buy a new system and it's a richer configuration, we are able to offer an enhanced service contract, which allows us to get higher pricing for the service contracts. So that's very positive. And that's just the recurring service contract revenue. The other big area of service growth that we've talked about is the non-contract revenue, the other enhanced services that we can bring to our customers, which may include additional educational offerings.



We just introduced something called CyberComm for the CyberKnife, which greatly reduces the time of commissioning of the system. So by the time they get it installed to the time that they can treat their first patient is reduced considerably, and we're able to charge additional for that type of value-added service. So we're going to continue to invest back into our service growth because we do believe that ultimately, we can improve top line as well as margin.

[Operator]

And the next question comes from Xuyang Li with Jefferies.

[Young Li, analyst]

Welcome back to Suzanne. It's good to see that you're feeling better. I guess to start, just wanted to ask a little bit about the guidance. I mean the increase was less than the B. I know it's early in the year, and there's some level of appropriate conservatism baked in. But maybe if you can talk a little bit more about how you arrived at that decision and what's sort of driving the cautiousness for the rest of the fiscal year?

[Suzanne Winter, executive]

Yes. Thanks for the question, Xuyang, and I'll start, and then I'll turn it over to Ali as well. We feel we've had a good start to the year. Q1 is, as we've discussed, is usually our smallest quarter within the year, and we are very pleased with how we landed. And we're also pleased with what we see are some strong underlying trends, certainly out of our APAC region, which showed very strong growth, but also our continued optimism with the strength in the second half from some of our other regions like EIMEA and Japan and the U.S. And so we're lifting the guidance modestly, taking up the lower end of the guidance and something that we feel comfortable with. And as we go into Q2, Q3, we'll again take a look at the guidance.

[Ali Pervaiz, executive]

Yes. And I think maybe just adding on to that, Xuyang. I mean, just like Suzanne said, we're raising it up modestly. We're cautiously optimistic as we go into the year. I think it's going to be really important just to understand as we sort of also shared during earnings last time is that the way that we think about our revenue profile Q2 is a little bit better than Q4 is really sort of our big revenue quarter as we witnessed last year. So I think those are still 2 key phenomenon.



And then in terms of first half, second half performance for revenue, we still expect first half to be about 45% of our total guide. So the midpoint is $467 million and then also 55% in the second half.

[Young Li, analyst]

Great. Very helpful. I guess just a follow-up on China a little bit. It seems like there's pretty strong organic demand for Tomo C. I guess I'm just kind of curious. What are you seeing from sort of the stimulus impact side or anticorruption campaign? How much are those things impacting the revenue in the business in China?

[Suzanne Winter, executive]

Yes. No, thanks for the question because I know it's come up on other companies' calls who are also in the same area that we are, diagnostic imaging, for example. For sure, the anticorruption campaign, as we've talked about, has slowed down the process. I think the stimulus program that we were all hoping to start hasn't quite initiated yet. So overall, I do think that is creating a delay in some reduction in budgets.



That being said, I think it shows that we are gaining share in this market, even though budgets may be reduced. We have a unique partnership with the joint venture in China and our strategy of having a domestically produced product that we just got approval for, I think, is being driven by pent-up demand for radiotherapy in this segment and our strong partnership with our JV partner.



And so there's a lot of puts and takes and a lot still to continue to monitor, but it should not change the trajectory that we are seeing. But the response has been very positive, both in Type A and Type B. So we expect pretty good visibility.

[Operator]

And the next question comes from Brooks O'Neil with Lake Street Capital Markets.

[Brooks O'Neil, analyst]

This is Aaron on the line for Brooks. Brooks and I would also like to extend a welcome back to Suzanne. I guess I wanted to start with India. How have your orders sort of been tracking there? And do you sort of still expect to be in a shipping position at the end of the year?

[Suzanne Winter, executive]

Yes. Thanks for the question. Yes, India is another strategic area for us that we think has a lot of potential. We've certainly made an investment in commercial resources there for that reason. And we're excited about the potential of the Helix product, which is also a product that has been designed for high-growth emerging markets, again, less advanced features and more on productivity throughput and economics.



We do have CE Mark for the product, which is allowing us to at least start to take orders in India, and we have taken orders. And we expect that after we finalize the local regulatory testing that we expect to be completed in early Q3, we can be in a shipping mode and more of a full market launch there.

[Brooks O'Neil, analyst]

Understandable. Super helpful. And then I'm curious if you have any comments on the outlook of the election results and how that fares in sort of terms of the growth outlooks in foreign markets, specifically China?

[Suzanne Winter, executive]

No, thank you for that question. And certainly, we're watching as everyone to see the policies unfold. I will say one of the very strong points, I think, even with this new administration is there is a hypersensitivity to U.S. competitiveness. And Accuray products are a company headquartered in the U.S., and we're the only radiotherapy company that is headquartered here. We are made in the U.S. with the exception of our product, which is China for China. And so I think on a positive note, we know congressional Republicans have floated a lower corporate tax rate for companies with U.S. manufacturing and tax credits for onshoring.



So again, we're waiting to see what the impact might be. But we're also taking a look at who might be the new Head of Health and Human Services, FDA, CMS and trying to understand that impact to the overall health system and see what impact that may have on radiotherapy. And the good news is --certainly not good news, but the incidence for cancer continues to grow and radiotherapy is just such a strong therapy and cost-effective and noninvasive. So I think we're in a good position overall, but we're going to continue to monitor.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Suzanne Winter for any closing remarks.

[Suzanne Winter, executive]

Thank you all for attending. This concludes our earnings call, and we look forward to speaking with you again in February for our fiscal 2025 second-quarter earnings release.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.