Accuray Incorporated (NASDAQ:ARAY) Q2 2023 Earnings Call Transcript

Accuray Incorporated (NASDAQ:ARAY) Q2 2023 Earnings Call Transcript February 1, 2023

Operator: Good day and welcome to the Accuray Second Quarter Fiscal 2023 Financial Results. Please note, this event is being recorded. I would now like to turn the conference over to Jesse Chew, Senior Vice President, General Counsel and Corporate Secretary. Please go ahead.

Jesse Chew: Thank you, operator and good afternoon, everyone. Welcome to Accuray’s conference call to review financial results for the second quarter of fiscal year 2023 which ended December 31, 2022. 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 set forth 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.

The forward-looking statements on this call are based on information available to us at today’s date and 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. As a few house Keeping items for today’s call. First, during the Q&A session, we request that participants limit themselves to 2 questions and then requeue with any follow-ups. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2022.

Additionally, there will be a supplemental slide deck that accompany this call which can be accessed by going directly to Accuray’s investor page at investors.accuray.com. With that, let me turn the call over to Accuray’s Chief Executive Officer, Suzanne Winter. Suzanne?

Suzanne Winter: Thank you, Jesse. Good afternoon and thank you for joining the call. I am very pleased with our excellent performance in the second quarter and our position going into the second half of the fiscal year. During the quarter, we delivered strong revenue and EBITDA performance, delivered a robust book of orders across all regions and made significant progress on our FY ’23 strategic agenda of driving above-market revenue, margin expansion and profitability initiatives and the formation of strategic partnerships that can create value for all stakeholders. We are doing this while navigating persistent macroeconomic and foreign exchange headwinds which Ali will elaborate on later in the call. I’d like to start by expressing my thanks to the Accuray team that continues to deliver new levels of performance.

While we have seen some improvements in the supply chain environment over the course of the past year, our teams continue to battle and ride the challenge every day, driven by accountability to Accuray’s higher purpose of ensuring that our customers have access to the highest precision radiotherapy tools available, so they can provide advanced cancer care to improve lives. Over this past year, we have taken actions to improve the flexibility of our supply chain and customer-facing teams, so that we will fulfill new demand as well as maintain smooth operations and satisfaction in our installed base of customers. These initiatives have put Accuray in a better position to manage the ongoing headwinds with teams performing at the highest level.

This is why I’m especially proud of a couple of key accomplishments within the quarter. The first, we delivered a record system shipments in the second quarter with 29 new systems delivered which represents a historical milestone for the company. Second, we are proud to be recognized by the 2022 IMV service track report for achieving best in-service in radiation oncology based on IMV’s annual survey of new radiation oncology professionals. These are shining examples of the talent, agility and dedication of our global Accuray team. We continue to make significant progress in advancing our innovation-driven growth strategy. Our product pipeline is the strongest in the company’s history and we continue to focus on solving clinical challenges and enhancing the value of our portfolio.

I am very pleased with the Q2 orders performance which included 34 new systems and represents 13% sequential orders dollar growth. These results reflect both growing customer demand for Accuray Solutions and to the positive impact from our commercial initiatives. We believe these factors will continue to grow Accuray’s revenue faster than our addressable market for FY ’23 and beyond. Sharing key highlights in the regions, the Americas region delivered another quarter of outstanding order performance with 92% year-over-year growth driven by the adoption of our latest innovations. ClearRT, the industry’s only helical CT imaging technology and Synchrony, Accuray’s exclusive real-time adaptive radiotherapy delivery are capabilities that are differentiated and driving win rates.

In the U.S., in Q2, we saw that 100% of Radixact orders included the options for ClearRT and Synchrony, up from 80% in Q1. In Japan, Accuray has gained the number 2 market share position. And in Q2, we continued our strong competitive win rates. Nearly 50% of Q2 orders in Japan were replacements of the competitors’ aged installed base. Additionally, the Japan team won a 7 Radixact systems public tender in a highly competitive battle against the number 1 market share leader. Our Japan team continues to drive share gain in this largely replacement market. We also had strategic wins in the EIMEA region. With a competitive replacement Radixact win in Belgium and University Hospital. Additionally, we celebrated a second CyberKnife system win and strategic endorsement at the prestigious Euro Radio Surgery Center in Munich.

Dr. Alexander Muacevic, Director of the facility is quoted saying he believes that CyberKnife is the number 1 technology for delivering radiosurgery and purchased the additional CyberKnife so they could accommodate the growing patient demand for ultraprecise radiosurgical care. Turning to China. Our joint venture continues to be a long-term value driver for Accuray and we continue to dominate market share in the premier of Type A radiotherapy market segment with greater than 75% market share. In Type B, we advanced our progress completing our NMPA regulatory submission of Tomo C. Tomo C will be our domestic China made JV product that will compete in the Type B segment which is the largest segment of the China market with an estimated annual market potential of $600 million.

We expect Accuray’s premier brand reputation and awareness in the Type A segment will also help drive success in share gain of Tomo C in the Type B value segment upon introduction. Further, we believe our success with the Tomo C product in China will have translation potential globally as we enter new geographies with a value segment product allowing Accuray to compete in the large $1.3 billion annual global value market segment. Additionally, in November, the Ministry of Health Central bidding process for Type A licenses resumed after a delay due to COVID lockdown. Eighteen Accuray systems were awarded to customers during the central bidding process and are expected to convert to revenue over the next few quarters. Despite the impact of challenges of the COVID lockdown in China, demand for radiotherapy, system installation and training remains very high.

Photo by National Cancer Institute on Unsplash

We saw this firsthand at Accuray’s 10th annual CyberKnife users meeting in November, where training participation rates were tremendous with over 100 participants attending in person and 850 participants joining the training online. As we continue to accelerate our top line through growth initiatives, we are equally laser-focused on profitability. We made solid progress on our margin and profitability expansion plans and saw early indicators of a positive impact to our service margins in Q2, an area where we think we have tremendous opportunity. As we have mentioned on recent calls, the leadership team and I are focused on 3 main pillars: pricing discipline in our commercial efforts, including new value-added service offerings, reducing product and service costs through efficiencies and optimizing operating expenses which will have a meaningful impact in the midterm.

Finally, establishing strategic partnerships are essential to our growth agenda, allowing us to provide best-in-class solutions and expand the scope of our commercial access. In Q2, we advanced key strategic partnerships, most recently with C-RAD, introducing the VitalHold breast package that will allow Accuray to offer the most comprehensive breast package in the marketplace. RaySearch also continues to be a very strong partner for us in treatment planning solutions, oncology information systems and with the development of Artemis adaptive radiotherapy that combines ClearRT imaging and RaySearch’s industry-leading digital technology and auto contrary algorithms. This solution will further differentiate Accuray as the only company that offers a comprehensive adaptive radiotherapy solution that can correct for patient changes both during treatment with Synchrony and between treatments with Artemis, both with precision, speed and patient experience.

Finally, we’re very excited to have announced a commercial partnership with GE Healthcare. This partnership pairs 2 industry technology leaders together with the aligned goal of providing personalized ultraprecision solutions throughout the care continuum, from diagnosis to treatment to survivorship. Our commercial teams are engaged leveraging our respective strengths and developing customer pipeline. We believe the GE partnership will be a powerful value driver for patients, providers and shareholders. I will now turn it over to Ali, who will speak more about our financial performance.

Ali Pervaiz: Thank you, Suzanne and good afternoon, everyone. I’d like to begin by thanking our global class functional team to execute with the intensity to deliver a strong second quarter of fiscal 2023 despite ongoing macroeconomic challenges, including supply chain shortages, global inflationary pressure and FX headwinds in our non-U.S. markets. Net revenue for the second quarter was $114.8 million which was down 1% compared to the prior fiscal year, primarily due to supply chain constraints and $6.1 million of foreign exchange headwinds. Net revenue on a constant currency basis was a $120.9 million which represents a 4% increase versus the same period in the prior fiscal year. Product revenue for the second quarter was $63.3 million which was up 4% from the prior year and up 8% after adjusting for the impact of FX.

As Suzanne mentioned, this product revenue represented 29 systems upgrades which is a record number of system shipments in the company’s history. It’s important to note that this was achieved while continuing to navigate unprecedented supply chain issues which really speaks to the hard work of our cross-functional teams. Service revenue for the quarter was $51.5 million which was down 7% from prior year but flat once adjusted for the negative impact of FX which was $4.1 million. Gross orders for the second quarter were $79 million which is an increase of 13% sequentially and a decrease of 7% from the same period in the prior fiscal year and represented a healthy book-to-bill ratio of over 1.2. As mentioned in prior calls, we believe the book-to-bill ratio is the right metric to monitor to ensure healthy growth for our backlog and to focus our teams to book orders that will convert to revenue within 30 months.

Gross orders on a constant currency basis were $82.6 million. Moving to backlog. We ended the second quarter with a backlog of approximately $515 million which is 11.4% lower than prior year due to $41.4 million of orders that aged beyond 30 months within the quarter, mainly driven by customer installation timelines. We had no order cancellations within the quarter. As discussed in prior quarters, our global commercial teams continue to be focused on converting all orders regardless of age to revenue. In Q2, this resulted in $6.5 million of orders converting to revenue within the quarter that had previously aged out. Our overall gross margin for the quarter was 37.4% compared to 36.7% in the prior year which is an increase of 70 basis points despite the FX headwinds.

This showcases our focus on margin expansion through pricing and cost discipline is starting to take shape. Operating expenses in the second quarter were $40.3 million which included nonrecurring charges of $1.9 million for restructuring charges and $0.5 million of ERP and ERP-related expenditures compared to $38.6 million in the second quarter of prior fiscal year. Excluding nonrecurring charges, total operating expenses were down 2% compared to the same period in the prior year, illustrating good cost control as we continue to push our teams to focus on return on investment. Operating income for the quarter was $2.7 million compared to $4.1 million from the prior year. Adjusted EBITDA for the quarter was $8.5 million compared to $6.8 million in the prior year which represents a 24% growth year-over-year despite the FX headwinds which impacted our top line by $6.1 million.

The reconciliation between GAAP net income and adjusted EBITDA is described in our earnings release issued today. Turning to the balance sheet. Total cash, cash equivalents and short-term restricted cash amounted to $68 million compared to $81 million at the end of last quarter. Net accounts receivable were $89 million, up $12 million from last quarter as we had quite a few shipments in the last month of the quarter. Our net inventory balance was $156 million, up $3 million from prior quarter, primarily due to 3 units in finished goods which we expect to ship out to customer sites in early Q3. Although we continue to battle supply chain constraints, we are taking firm actions to bring our inventory back to healthier levels in the coming quarters to optimize our cash and working capital.

While we delivered strong results in Q2 and continue to navigate through supply chain constraints, the headwinds associated with foreign exchange have had a $12 million impact on our top line in the first half of fiscal 2023. Currently, we are reiterating our full year guidance with revenue in the range of $447 million to $455 million and EBITDA target range of $26 million to $30 million. We will continue to closely monitor the impact of FX and supply chain as we enter the second half of our fiscal year. Those are our key financial highlights. And with that, I’d like to hand the call back to Suzanne.

Suzanne Winter: Thank you, Ali. In summary, I’d like to again thank our teams for their unwavering support of our customers so they can provide the highest level of care to patients. While we expect to continue to navigate the uncertainty of the macroeconomic conditions we’ve seen over the last year, we remain encouraged by continued customer demand for Accuray technologies and our robust product pipeline as well as market trends that favor Accuray technology and where we are positioned to win and take share. As an organization, we are strengthening our fundamentals, advancing multiple growth catalysts and creating new strategic partnerships. I will now turn it back over to the operator for Q&A.

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Q&A Session

Operator: Our first question comes from Marie Thibault with BTIG.

Marie Thibault: Congrats on a very nice quarter. I wanted to start here and try to understand a little bit more about what drove that record product revenue, the record shipments that you mentioned in the quarter. Was this a bit of a backlog that had been building up in some geographies? What really drove kind of the strength in that metric this quarter?

Suzanne Winter: Hi, Marie. Thank you for the question. Yes, I would say our revenue was really driven by 2 regions, the EIMEA region as well as the Japan region. But we did start to see some recovery in China as well. And so again, really working through our supply chain to be able to manufacture as much product as possible and be able to fulfill that demand. Our customer demand continues to be very, very strong. And again, working through our supply chain to make sure that we can fulfill demand. It was at the top of our priority list.

Marie Thibault: And while we’re talking about supply chain challenges, I know you’re navigating quite well right now. But what are the specific components or issues you’re dealing with there? And I guess, as a partial follow-up on China, are you expecting any impact in the fiscal third quarter from sort of the reopening, the Lunar New Year, any of the COVID dynamics around that quarter?

Suzanne Winter: . Yes, in general, just from a supply chain standpoint, I would think that we are seeing over the course of this past year, some easing of supply chain. And certainly, from our standpoint, instead of dealing with 2 dozen supply chain vendor issues, I think we’ve narrowed it down to less than half a dozen. Now those half a dozen — those challenges are still real. We’re working very closely with those suppliers. We are micromanaging those operations. We’re helping to source materials. We’re building in the flexibility, I think, overall in our supply chain. We’re redesigning where we need to. At the same time, it continues to be a headwind and we battle it every single day. In terms of China, I would say that we are seeing some recovery with opening up since the COVID lockdown.

Our orders have been very strong in the first half. So that is a good indication, I think, of things starting to turn in China. And so we are expecting that the second half of the year, we’re going to see some recovery.

Operator: Our next question comes from Josh Jennings with Cowen.

Joshua Jennings: I wanted to just start off and ask about the Americas order growth, the big performance for that region. And I wanted to just get a reminder or better understand the strategic initiatives that are in place to kind of drive growth of orders in the Americas region. I know you have the technology portfolio that’s in play but any other strategic initiatives that were successful and that could continue through the remainder of fiscal ’23 and beyond?