ViewRay, Inc. (NASDAQ:VRAY) Q4 2022 Earnings Call Transcript

ViewRay, Inc. (NASDAQ:VRAY) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good afternoon, ladies and gentlemen. And welcome to the ViewRay Q4 2022 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. This call is being recorded on Monday, February 27, 2023. I would now like to turn the conference over to Matt Harrison, Director of Investor Relations. Please go ahead.

Matt Harrison: Thank you, operator. And welcome to ViewRay’s fourth quarter conference call. Joining me today are Scott Drake, our President and Chief Executive Officer; and Bill Burke, our Chief Financial Officer. Earlier today, ViewRay issued a press release and appendix for today’s call, both of which are available on our website. Going forward, we will be providing an appendix of key metrics, which will be filed with our 8-K in lieu of an earnings presentation. Today’s call is being broadcast and webcast live. A replay will be available on our website for 14 days. Before we begin, I would like to remind you that the discussion during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company’s most recent filings with the SEC.

Also, the discussion will include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure and two years of historical results can be found in our appendix and exhibit of our current report on Form 8-K filed today with the SEC. I will now turn the call over to Scott.

Scott Drake : Thanks, Matt. Good afternoon, everyone, and thank you for joining us to review our 2022 fourth quarter and full year results. Before we begin, I’d like to welcome our new Chief Financial Officer, Bill Burke. Bill previously served as CFO of Haemonetics and brings over 25 years of global financial and operational experience to ViewRay. He and I have known each other and worked together for many years. And he is a significant addition to our team. Welcome, Bill. I’ll start today’s call by covering key patient metrics. I’ll highlight our full year financial performance and some key innovation, clinical and commercial wins. Following my comments, Bill will cover our financial performance and guidance. Finally, I’ll provide closing thoughts and open the call for Q&A.

As we’ve stated many times, therapy adoption is the precursor to our growth as a company. To date, MRIdian has treated over 29,000 patients. This number continues to grow rapidly as we expand the footprint of MRIdian centers and accelerate patient throughput. The vast majority of these patients were treated in five or fewer fractions with highly effective, virtually side effect-free therapy, allowing them to get back to health and get back to life quickly. The stark contrast between MRIdian and conventional treatment is what drives our team to pursue therapy adoption day in and day out. We ended the year with 56 MRIdians in the ground with about 80 more in backlog or some stage of installation. Turning to our full year financial results with major milestone by crossing over $100 million in revenue, driven by 46% top line growth.

This performance is a testament to the great work our team has done. As projected, gross margin improved about 1,000 basis points. Gross margin was also at an all-time high for the company, and we will continue to drive this crucial metric higher. We finished the year with 32 orders, which reflects the impact of our clinical and commercial success. And the backlog increased to $380 million. On the clinical front, we’re pleased to share that the MIRAGE results were accepted in JAMA Oncology, a leading publication in the field. As a reminder, MIRAGE was a Phase 3 randomized controlled trial conducted by UCLA comparing MRIdian versus conventional SBRT for localized prostate cancer. JAMA Oncology highlighted that MRIdian significantly lowered acute grade 2 GU toxicity and GI toxicity was zero.

Acute toxicity for these patients takes the form of sexual dysfunction and the life-altering effects of incontinence. We’re pleased to see the great work by UCLA get picked up in this major publication. This adds to the growing body of evidence supporting the adoption of MRIdian therapy and is already helping our commercial efforts. 2022 yielded many strategic wins across the organization. On the innovation front, A3i, our next-generation feature set, was launched. Customer feedback on workflow, ease of use, throughput and brain treatment are resoundingly positive. Our clinical pipeline continues to take steps forward. Customers are proving critical value in both tough-to-treat and more common cancers alike. Through the SMART pancreas trial, we saw positive survival signals and the safety of MRIdian when treating with a belated short course therapy in this deadly disease.

We also announced LAP-ABLATE, a Phase 3 global multicenter randomized controlled trial in locally advanced pancreatic cancer. This trial is intended to demonstrate the survival benefits of MRIdian and change therapeutic guidelines for how pancreatic cancer is treated. We are also driving increased patient and clinician engagement through our market awareness efforts. Patient efficacy groups like PanCAN and ZERO have begun to highlight our data and are requesting educational events from our customers. This is driving greater levels of awareness and adoption. I’ve seen firsthand that when patients learn that highly effective, short course, virtually side effect-free therapy is available, they will demand it and travel for it. To further our efforts in patient awareness, we entered into a partnership with Katie Couric Media to leverage a trusted source and highlight that such therapy is available today to a broader and broader patient population.

These results are evidence that our strategy is working as intended. Our innovation pipeline enables our clinical pipeline. Clinical data drives commercial demand, and market awareness amplifies the effect. All of these efforts drive therapy adoption, the precursor to revenue growth, margin expansion and P&L leverage. I’m proud of the work that we’ve done over the past year and all that was accomplished. Our team hit several major milestones and delivered on our promises despite significant macro challenges that persist. We very much look forward to 2023, another promising year for ViewRay, our customers and most importantly, cancer patients who need and deserve personalized precise therapy. With that, I’ll now turn the call over to Bill.

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Bill Burke : Thank you, Scott, and good afternoon, everyone. Today, I will review our fourth quarter and fiscal ’22 financial results and provide our 2023 guidance. Full details can be found in today’s press release, and we will be filing our 10-K subsequent to this call. Before I begin with the financials, I’d like to make a few comments. I’m excited to be part of the ViewRay team, which has graciously welcomed me as a teammate. I want to thank Zach for his ongoing support as we continue with the transition. The past seven weeks have been a journey, learning about the amazing technology and experiencing the excitement, both internally and externally, about MRIdian’s opportunity to become the standard of care for cancer treatment and the positive impact MRIdian is having on patients’ lives.

I’ve quickly learned that ViewRay is positioned to create long-term value anchored by its leading technology and clinical evidence. During each quarter, we intend to install multiple MRIdian systems. Each individual installation represents a significant percentage of revenue for that quarter. There are elements of our business where we have limited influence, including customer site construction as well as permitting and other items, which are often required in connection with the sale of MRIdian. Timing of these uncontrollable events may impact the installation process and quarterly results, but in no way impacts long-term value creation, which we measure in years. At this stage in the company’s maturity and scale, annual results are a far more relevant barometer than quarterly measurement.

Quarters are relevant in our business from a supply chain and resourcing perspective as we pace our installations throughout the year to satisfy these requirements for continued growth. Now moving on to financial results and guidance. Revenue in the fourth quarter grew 70% compared to the same period in the prior year to nearly $34.7 million, highlighted by 85% growth in product revenue, which was driven by five revenue units, an increase of two units compared to the prior year. We also grew service revenue by 23%. Revenue in fiscal ’22 grew 46% compared to the same period in the prior year to approximately $102.2 million, including 53% growth in product revenue primarily driven by an increase of six revenue units to 16 units in fiscal ’22.

We also grew service revenue by 26% as the installed base continues to grow. Gross margin in the fourth quarter was approximately 13% compared to minus 1% in the same prior year period. Gross margin was led by product margin of 14% compared to minus 5% in the same period last year, demonstrating the benefits of leveraging our expense base with additional revenue units. Gross margin on service was 3%, a decline from 9% in the same prior year period due to higher freight costs in the current quarter and a onetime item that benefited the prior year. Sequential service gross margin from the third to fourth quarters declined by 200 basis points from 5% to 3%. The sequential decline was due to higher consumption of service parts in the fourth quarter compared to the third quarter.

We do not anticipate the decline in the fourth quarter to be a trend in 2023. Gross margin in fiscal ’22 was approximately 10% compared to an essentially breakeven gross margin in the same prior year period. Gross margin was led by product margin of 10% compared to approximately 1% in the same prior year period, once again driven by the benefits of leverage from additional revenue units. Gross margin on service was 6%, an improvement from minus 1% in the same prior year period due to efficiency gains with the growth of the installed base. We continue to improve our gross margin, and we are well positioned to see gross margin expansion, mainly attributable to growth in revenue units in the short term and with our cost down initiative contribution in the longer term.

In the fourth quarter, other income and expense was an expense of $1.8 million compared to income of $2.1 million in the same prior year period. For fiscal ’22, other income expense was approximately zero compared to a $6.4 million expense in the same prior year period. Other income was primarily impacted by the reduced warrant liability on our balance sheet from a lower year-over-year share price at the end of the period. Another notable driver was higher interest earned on our cash balance, offset by increased borrowing costs. Net loss for the fourth quarter was $27.8 million or $0.15 per share compared to a net loss of $27.1 million or $0.16 per share in the same prior year period. Net loss of fiscal ’22 was $107.3 million or $0.59 per share compared to a net loss of $110 million or $0.67 per share in the same prior year period.

We ended fiscal ’22 with $142 million in cash and cash equivalents. Our cash usage for fiscal ’22 was $77.3 million. Excluding term loan net proceeds from the November debt refinancing, cash usage for fiscal ’22 was $91.2 million. Cash usage for the year was a combination of ongoing operating expenses and some impact from working capital as there was a deferral of certain customer collections pushed into future periods, partially offset by higher accounts payable. We regularly deal with elongated collection time frames. And this has been exacerbated by higher interest rates, foreign currency and inflation, but we have high confidence in collection. Now turning to our fiscal ’23 guidance. We expect revenue growth to be in the range of 25% to 40% with similar growth in system and service revenue.

System revenue will be seasonally weighted to the back half of the fiscal year at about 60% of total revenue. This growth includes two planned turnkey units for approximately $15 million late in the fourth quarter. Revenue on these two turnkey units is primarily recognized at customer acceptance. A slight variation from our expected timeline may result in an update to our guidance but would not reflect any underlying concerns in the health of the business. We are initiating adjusted EBITDA as a guidance metric in fiscal ’23, which will be a substitute for providing cash flow guidance as in prior years. We believe adjusted EBITDA is a more consistent and predictable measure of our business. Working capital or growth capital is critical for the company and our greatest pressure point, particularly within our supply chain and with elongated collection times.

We estimate our adjusted EBITDA for fiscal ’23 to be in the range of a $70 million to $80 million loss and includes $7 million to $10 million of nonrecurring engineering costs related to our product cost down initiatives. For comparison, the adjusted EBITDA loss in fiscal ’22 was approximately $78.2 million. On the strength of revenue guidance, we expect gross margin in the mid to-high teens predicated largely on the number of A3i upgrades. We also anticipate experiencing operating expense leverage as revenue grows at a more significant rate than operating expenses despite short term investments related to our product cost down initiatives. We expect to continue making strides growing into our overhead structure. With that, I’d like to pass the call back to Scott for a few closing comments.

Scott Drake : Thanks, Bill. Four years ago, we chose to lead and differentiate with clinical data, and we are delivering on that promise. We are the only company in the space leading with meaningful clinical data, and we are very happy we put this stake in the ground. Four years ago, MRIdian was perceived to be a niche therapy with limited patient application. Our customers have now treated tens of thousands of patients, over 65 tumor types across the expanse of tough-to-treat and more common cancers. Four years ago, we heard from our customers a desire for increased throughput. Today, top quartile customers treat over 300 patients a year, and that is before the benefits of A3i take effect. Four years ago, virtually 100% of our customers were academic centers.

Now approximately 40% of our customers are community hospitals. Over the past four years, we have made significant progress. Our strategy is clearly working, and we are well positioned to drive greater levels of therapy adoption in the years ahead. With that, I’ll open the call for Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. Your first question comes from the line of Rick Wise from Stifel. Your line is now open.

Rick Wise : Good afternoon. Hi, Scott, hi, Bill. Maybe I’ll start off with orders. You obviously had a good solid fourth quarter, nine new orders, which we had heard before. But help us think through your order expectations for the year ahead and particularly related to the Chindex order. And I feel like if memory serves, you had talked about China representing potential upside to consensus models. So several things. Help us think about the first quarter orders in that context. What are you assuming as you’re thinking and giving us guidance for the year? And how would we sort of think about order cadence as the year unfolds?

Scott Drake : Yeah. Thanks, Rick. I would tell you from an order perspective, I think we’ve had a pretty good track record of momentum over the past few years despite the macro challenges that we faced. Q4 was a record for the company with nine orders. And given what we’ve already announced in Q1, we’re going to surpass what we did in Q4. So we feel very good about the commercial momentum in the business. I think that’s a consequence. As we’ve talked many times, it all originates with our innovation pipeline, which enables our clinical pipeline. That’s amplified with market awareness, and all of that culminates in therapy adoption, which drives orders in every other metric in our business. So I feel very good about where we’re at in terms of the commercial prospects of our business.

We don’t guide to orders as, Rick, I know you know well, and we do that for a very good reason. It is the most difficult metric, I believe, in the company to actually forecast. But it is an indicator and an important one in terms of the future growth of the business. But we feel very good on that front. As it relates to the other embedded question, China, we encourage investors to still think about it in terms of upside or risk mitigation in terms of the plans that we have put out there. On one hand, we are very excited about the opportunity to penetrate China, which is the second largest and fastest-growing market. But on the other hand, what I think we’ve learned in other parts of Asia, Europe and the U.S. The real catalyst in our business is getting a system in the ground and treating patients.

That is what really agitates a market. And I don’t think we’re going to have that in a demonstrable way in China for some period of time.

Rick Wise : Got you. Scott, we’ve heard from a lot of medtech companies so far this earnings season talking about the macro picture, supply chain inflation, freight, FX. And I think the message in general has been the macro environment, yeah, everybody’s got some specific issues. But the macro environment seems to be stable, if not improving, hearing a lot about improving. To what extent are macro headwinds stable or I hope, easing or do you expect in ’23? Maybe help us understand what that could mean for ViewRay in terms of component availability. You’ve highlighted several times the complexity of judging installation times and again, how — what’s embedded in the kind of guidance you’ve given us?

Scott Drake : Yeah, Rick, great question. We try to take all of these kind of positive signals and the challenges and bake all of that into our guidance and thinking for the year. Obviously, from a revenue standpoint, we’re coming off of a year that really exhibited pretty significant momentum with 46% growth on the top-line. And now our backlog of around $380 million really represents quite an opportunity for us to continue to grow nicely in ’23 and beyond. At the same time, we have shared in our prepared remarks and prior to this call that those macro challenges continue. While I would say the supply chain issues overall have improved, we still face those challenges unequivocally. And even though we’re chasing fewer components today, it really only takes one or two of those components to be a problem in our business.