Accuray Q1 2024 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Accuray's First Quarter 2024 Conference Call. All participants will be in listen only mode. Please note that this event is being recorded. I would now like to turn the conference over to Jesse Chu, Senior Vice President and Chief Legal Officer. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the Q1 of fiscal year 2024, which ended September 30, 2023. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Actuarial's President and Chief Executive Officer And now Lee Pervez, Acthar's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward looking statements.

Speaker 1

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 close 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.

Speaker 1

A few housekeeping items for today's call. 1st, 2nd, All references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our Q1 refer to our fiscal Q1 ended September 30, accuoray.com. With that, let me turn the call over to Accuoray's Chief Executive Officer, Suzanne Winter. Suzanne?

Speaker 2

Thank you, Jesse. Good afternoon and thank you for joining the call. The Accuray team had a strong start to the fiscal year Delivering on both revenue and EBITDA in the quarter. We are making great progress toward our fiscal year 'twenty four priorities, which include achieving above Pricing and operating efficiencies and competing more effectively by leveraging strategic partnerships in new product development In the quarter, we saw continued customer adoption of Accuray CyberKnife, RadXact and to enable advanced radiotherapy treatments like stereotactic radiosurgery and for patients around the world. This was driven by growth in demand for these treatment regimens which require an extremely high degree of Accurate systems are capable of delivering stereotactic radiotherapy treatments to targets anywhere in the body.

Speaker 2

During the quarter, we grew global revenue by 8% year over year with product revenue growing 17% year over year, demonstrating better than expected customer demand in our Q1 versus the same period last year. As a reminder, revenue in radiation particularly in capital equipment can vary from quarter to quarter, but we are encouraged by the strong start in Q1. Order backlog at $489,000,000 is robust, representing greater than 2 times fiscal year 'twenty three product revenue. This gives us confidence in our ability to deliver on our strategic goals of faster growth in the market and gaining share this fiscal year and beyond. We also expanded our installed base of customers within the quarter to 10 40 systems representing 5% year over year growth.

Speaker 2

As we've discussed in the past, installed base growth is a critical key performance indicator for this long cycle business Because it's directly linked to service contract revenue, which is initiated at the 13 months following an average warranty period. This Service contract revenue continues annually for the subsequent 10 to 12 years and provides a long tail of recurring revenue. Additionally, Installed customers also represent market opportunity for new feature upgrades as well as incremental services and support like advanced training, which will further expand our service business. Finally, new order growth was also solid outpacing Product revenue shipments. While we don't guide on orders, we are very pleased to deliver to our 1.2 book to bill target.

Speaker 2

We see this as a strong metric to gauge future growth and grow our backlog. In October, we participated in the American Society of Radiation Oncology community, we were able to drive tremendous interest in our new product innovations designed to advance care in the premium segment of the market. We showcased our new VitalHold product, which strengthens our product portfolio for the treatment of breast cancer, adding surface guided breast Additionally, we introduced Alliance Plus value added service and support solutions to help ensure customers maximize the Flexible financing options to customers for capital equipment acquisition. Finally, and most exciting, we unveiled our latest The Cenos online adaptive capability. Cenos leverages artificial intelligence the specific patient cases where there is an immediate need for a change in a treatment plan.

Speaker 2

Accuray's CNOs is designed to provide a faster and more practical approach to refining treatment plans compared with other industry offerings. Zenos was developed with our partnership with Limbus AI, A leading healthcare technology company that specializes in the creation of AI based algorithms to advance cancer care. With the addition of Cenos, we believe that the Radixact system can help ensure that treatments change as patients Change to minimize dose to healthy tissue and personalized treatments. First, with SYNCHRONY, which is designed to track, Detect and correct treatment delivery due to motion that occurs during treatment. 2nd, with PreciseArt offline tools to manage Changes to treatment plans needed between treatment sessions and now with the addition of CNO's online adaptive, Clinicians have the ability to modify a treatment plan on the day of treatment based on patient changes detected on the daily imaging scan.

Speaker 2

We believe that our comprehensive adaptive toolset including SINOS will be a key differentiator for Accuray RadXact versus competitive products and expected to further increase our win rates and momentum for upgrading the aged tomotherapy installed base. CNO's 5 10 pending and we expect to This product available for customer order in the spring of 2024. Overall in speaking and surveying the U. S. Radiation oncology community, It was clear there was a positive outlook backed by technology developments and emerging clinical data that demonstrate the curative impact of high precision radiation therapy.

Speaker 2

This gives us confidence that the long term future for radiation oncology is very strong despite some Short term headwinds due to the higher installation costs and longer cycles that have delayed some projects in the U. S. During the quarter, we also made significant progress on our second growth pillar of improving patient access in global segments where radiation therapy is underpenetrated and where workflow and patient throughput is a critical priority to manage the large patient backlog. In early October, we gained regulatory clearance for our domestic manufacturer Tomo C platform focused on the Type B segment in China. This represents a key milestone for Accurig.

Speaker 2

This approval unlocks the ability for our China team Shipments to customers are expected to occur in fiscal Q4 pending availability of the Precision treatment planning system. We believe Tomo C will become a major contributor to our China business as we now have access to the Type B The Type B market is the largest and fastest growing segment compared to the Type A segment where we have dominant market shared today. TomoC is differentiated as the only CT product with helical delivery available in China and we expect You may have also heard that we announced at our Investor Day at ASTRO the preliminary introduction of Helix, Our global value segment product at the Indian Cancer Congress meeting that was held last week in Mumbai, India. The introduction of Helix, which is designed and manufactured in Madison, Wisconsin is another strong addition to our product portfolio to target this high potential underserved market. With TomoSee and Helix, we can now compete in the growing global value market segment and double the addressable Within the quarter, we were also proud to announce a strategic win at the Royal Marsden in the UK which we believe will further strengthen In our business, brand reputation is extremely important as customers make investments in technology and long term partnerships that The Royal Marsden is a global thought leader in radiation medicine and also the principal investigator site for the PACE trials for prostate cancer.

Speaker 2

At ASTRO, the Royal Marsden team presented groundbreaking 5 year follow-up data from the PACE B trial that compared prostate cancer outcomes for 5 session SBRT treatment with conventional radiation therapy delivered in 20 sessions. These results are expected to have a significant clinical impact and drive adoption of SBRT as The new standard of care for low and intermediate risk prostate cancer based on its benefit to patients. This study essentially eliminates the burden of time and cost for 15 additional treatment sessions. The Royal Marsden just completed the purchase of their second RadXact system this year adding to the 2 CyberKnife systems currently in their equipment fleet. This represents just one of the wins which we believe are significant for Accuray because they demonstrate that clinical innovation Powered by high precision technology is becoming essential to providing advanced care.

Speaker 2

Accuray Technology is uniquely positioned to deliver stereotactic radiosurgery and SBRT and is driving preference at top cancer centers around the world. During the quarter, I was also very pleased with our operational performance. We continue to drive margin improvement through commercial by gaining price for our innovations and by reducing costs through operational rigor and greater efficiencies across every area of our business. Last quarter and at our Investor Day in October, we discussed cost optimization as a pillar in our profitability expansion plan. Last week, we announced a restructuring which included a 6% reduction of our workforce across the organization.

Speaker 2

While these decisions are always We are confident that these actions to simplify our organization in combination with improved processes from our investment in a new ERP system which went live during the quarter will strengthen our position for the future and is in line with the plan we laid out last year when Ali and I took over. Additionally, we will focus investments in areas that are critical to our growth strategy like commercial and customer support resources to maximize our latest Finally, in Q1, we further enhanced our executive team with the hiring of new leadership in R and D, Global Service and and IT and Cybersecurity. These executives come with significant operating experience from such leading companies in our sector As Varian, GE Healthcare and ABB, we will be leveraging their leadership experience to further position the company to win and gain share through innovation and unparalleled service and support. I will now turn it over to Ali, who will speak more about our financial performance.

Speaker 3

Thank you, Suzanne, and good afternoon, everyone. I would like to begin by thanking our global employees and cross functional teams who executed with dedication to reporting challenges as part of the go live and data migration process. Despite these expected challenges and learning how to navigate a brand new ERP environment, The team has worked around the clock to ensure a successful implementation, which we are all very proud of. Our new ERP system We'll be able to provide us with the right data driven visibility to run the business in a more efficient and cost effective manner. Turning to the financials.

Speaker 3

Net revenue for the Q1 was $104,000,000 which was up 8% versus the prior year. Net revenue on a constant currency basis for the Q1 was $103,000,000 which a 6.5% increase versus the prior year. Product revenue for the Q1 was $53,000,000 up 17% from the prior year and up fifteen on a constant currency basis, representing system shipments of 24 units, which is a 14% increase versus the prior Service revenue for the quarter was $51,000,000 down 1% from the prior year and down 1% on a constant currency basis, With an increase in contract revenue being offset by lower installation, training and spare parts revenue, which we expect to bounce back in Q2. Product gross orders for the Q1 were approximately $64,000,000 and represented a book to bill ratio of 1.2. As a reminder, Our book to bill ratio is defined as gross orders for the period divided by product revenue for the period.

Speaker 3

As Suzanne mentioned, we believe the book to bill ratio is right metric to ensure healthy growth of our backlog and is also a good indicator of future business vitality. Moving to the backlog, we ended the first quarter with an order of approximately $489,000,000 which represents greater than 2 years of FY 'twenty three product revenue. This reported backlog is 9% lower than prior year due to 14 orders representing $31,000,000 that aged beyond 30 months, which we do not include in our It is important to note that these orders aged out primarily related to customer timing and we fully expect these Finally, we had 4 order cancellations of $9,000,000 in the quarter, all coming from the Japan region due to a termination of a distributor, which we expect to win back to our existing distributors in the coming quarters. Our overall gross margin for the quarter was 38% compared to 35.9% in the prior year, primarily due to lower parts consumption and associated freight expenses versus last year. Q1 gross margin was up 6.1 points versus prior quarter primarily due to lower service parts consumption and freight.

Speaker 3

It's important to note that service parts consumption was lower in Q1, partially due to the Operating expenses in the Q1 were $37,300,000 compared to $36,800,000 in the Q1 of the prior fiscal year. Operating income for the quarter was $2,200,000 compared to an operating loss of $2,200,000 from the prior year. Adjusted EBITDA for the quarter was $6,500,000 compared to $1,900,000 from the prior year. We described the reconciliation between GAAP net income and adjusted Net accounts receivable were approximately $77,000,000 up $3,000,000 from the prior quarter. Our net inventory balance was $150,000,000 up $5,000,000 from the prior quarter due to lower shipments in Q1.

Speaker 3

Our teams are continuing to focus on optimizing working capital to improve our cash position. In summary, we are pleased with our Q1 results and are reiterating our full year FY 'twenty four guidance range of $460,000,000 to $470,000,000 on revenue And $27,000,000 to $30,000,000 on adjusted EBITDA. We expect first half revenue performance to be approximately 45% of the range of our guidance with a stronger second half as some of our new product introductions start to contribute to revenue. Given the timing of our new product Along with the restructuring actions we took in October that will contribute to lower OpEx in the second half, we expect our EBITDA performance in the first half of fiscal twenty twenty four To equate to approximately 30% of the range of our guidance. Those are key financial highlights.

Speaker 3

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

Speaker 2

Thank you, Ali. I'm very pleased with our Q1 results and our strong start to the year. We are now offering the broadest and most Innovative product portfolio in our company's history and are poised to capitalize on promising clinical trends and opportunities in the competitive landscape. We have a defined revenue and margin expansion plan and we are executing. Finally, we have an incredible leadership

Operator

We will now begin the question and answer session. Our first question comes from Young Lee with Jefferies. Please go ahead.

Speaker 4

All right, great. Thanks so much for taking our questions. I guess to start maybe just with guidance, I mean very strong results This quarter, by your holding guidance, it's 1 quarter into the fiscal year. Just wanted to understand the, I guess the level of conservatism embedded in that guidance reiteration and maybe if you can Talk a little bit about what you're seeing for the order funnel into the rest of the year?

Speaker 2

Thanks for the question, Young. And, yes, no, I think we've had a very strong start here in Q1 and I would say that we're cautiously optimistic. At the same time, we don't want to get too much ahead of ourselves. A couple of things that I think we're taking a look at is Both U. S.

Speaker 2

And China. U. S. I think as we talked about here, there was some slowing and some extended sales cycles. And so We expect that that will improve in the back half of the year.

Speaker 2

And of course, some of the discussion in China from The anti corruption campaign, we also expect to resolve itself in the back half of the year. But of course, we're taking a look at that. We will know more as we get into the first half of the year and take a look at our guidance. But I mean overall, we feel very good about our performance And the new products that we have introduced at ASTRO, the customer response and the momentum, In terms of our margin improvement. So I would say that we are taking a more conservative approach to how we take a look at guidance And we will know more in the next quarter.

Speaker 4

All right, great. Very helpful. And I guess, for my follow-up, maybe just on the China Tomo Sea opportunity. The approval came a few months earlier than expected. There's some numbers In the guidance.

Speaker 4

I guess I'm just kind of wondering if you can maybe talk a little bit more about the Contribution this year, the plan for launch and how's the tone been so far since approval?

Speaker 2

Yes, yes. No, sounds good. No, the Tumosi is a very large growth catalyst for our business. We are very excited about the approval of the Tomo C. It did come in a little bit earlier than expected, which is fantastic.

Speaker 2

What that means is that now our China team can begin to take customer orders And build the backlog, and so they are doing that now. We've already had an internal launch ceremony in China where we had Local Tianjin government officials, it was a very big event. And so I think there's a lot of anticipation and excitement around the product, Partially because it's the only product in the Type B space that is domestic made, that is a full CT helical delivery product. And so we believe the demand for the product is going to be strong. So what we expect into Q2 and the back half of the year is again beginning to take Orders for the Tomo C and then of course from order to customer shipment, there are several months And we expect that revenue will start to hit for TomoSee in Q4 and that's the shipments to customers.

Speaker 2

In the meantime though, we will be shipping TomoC to our partners so that they can start to begin building the product. We ship parts to our partner in Tianjin and then they begin the manufacturing process and build up of finished goods. So again, a lot of excitement around the approval of Temasea. We think we'll have the opportunity to get Great market traction as well as gain market share in the Type B space.

Speaker 5

Thank you very much.

Operator

Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Speaker 5

Good afternoon. Congratulations on a terrific start to the year. I'll try to keep it to 2 questions. The first one is inflation is a huge topic globally. Can you just talk a little bit about the pricing environment?

Speaker 5

And then maybe comment briefly about whether inflation in general Is it positive or a negative for you and your business?

Speaker 3

Hey, Brooks. Thanks for the question. I would tell you in general in terms of inflation, we're certainly seeing that the supplier price increases have slowed down. I think that being said, we did see about a $2,500,000 headwind related to inflation that hit our P and L This particular quarter, so it's certainly not eased up for us. We do have quite a few specialty Supply parts that go into our products that certainly have more exposure to inflation.

Speaker 3

So it is definitely a topic That still remains for us and we continue to monitor it really closely.

Speaker 5

Great. So my second question is, A couple of years ago, there was tremendous excitement about reimbursement changes that seem to recognize Both the patient and the provider benefits of your high dose radiation therapy. Could you guys just give us a quick update on the State of any discussions about moving reimbursement in that patient and provider friendly direction or not At this point? Thanks a lot.

Speaker 2

Yes, Brooks. So at our Investor Day in ASTRO, we had a couple of Speakers that kind of gave the state of the state in the U. S. On where ROAPM was and what some of the changes are in reimbursement. And The ROAPM as you know was sort of put on hold and we were waiting to see if there would be any movement.

Speaker 2

And the positive movement is that ASTRO has come up with their own reimbursement model which they are proposing That actually does take into account exactly making equity between shorter duration treatments Like SBRT compared to conventional treatments, so that the U. S. Hospitals are not losing money By going to a more advanced care, which is the, again, the shorter duration treatments, which is better for the patient, better for the healthcare system overall. That is a legislative process. So it probably will still take 1 year plus to be able to go through.

Speaker 2

But At least there's alignment from the industry, the Astro Industry Conference and it's basically their design. So we are very hopeful, and not only in getting this through the legislative process But also the signal that it sends to U. S. Customers that this is the movement and it is toward the shorter duration treatments And we see that as a positive thing for our technology.

Speaker 5

Absolutely. Makes sense. Thanks a lot and looking forward to the rest of the year.

Speaker 2

Thanks, Brooks.

Operator

Our next question comes from Neil Chatterjee with B. Riley. Please go ahead.

Speaker 6

Hi. This is Brandon Carney on for Neil. Congratulations on the strong quarter and thanks for taking our questions. I guess just first, maybe can you provide any update on the pending application for the SINOS online adaptive solution? And can you talk about any key feedback that you've received since the introduction of ASTRO?

Speaker 2

We had a lot of momentum and interest for CNO's and we showed it for the first time in some private demos at the ASTRO Conference. And I will tell you that the feedback was excellent. And we had a number of demonstrations, Sign ups and we were standing room only and they were all booked up really by the end of the 1st day. So we take that as a very positive sign. Now we went into the show with CNO's 510 pending.

Speaker 2

Our expectations just based on timelines is that that will be available to order sometime in Q3 with shipments in the summertime. But the feedback was very positive. First of all, again, another tool to be able to make radiation therapy treatments more precise By adjusting to patient changes and this one being an online adaptive tool. Now there are adaptive tools that are out there in the marketplace, But they require a lot of resources. They require additional treatment time.

Speaker 2

And so really we learned a lot From the feedback from the existing offerings on what to do differently in CNOs and what to improve upon. So that was the kind of feedback that we got from customers. So we are really excited about its ability to make a difference in patient care, but also differentiate the Radixact platform.

Speaker 6

Thanks for that color. That's helpful. I guess, and then Maybe I can just ask for you to comment on the market potential for Helix in India and what kind of uptake you expect there?

Speaker 2

And I just want to make sure I heard you. The market potential for India? Yes. Yes. Yes.

Speaker 2

So, in India, we see that as another target site for value segment product and that is with We think this is a product that is uniquely tailored for that value segment Within India and we think the opportunity is approximately $100,000,000 to $150,000,000 annually. And so we are going to be taking a look at the high potential, high growth emerging markets where Helix Can do very well compared to competitive offerings. So we are excited about this being sort of our next focus after China.

Speaker 6

Great. Thanks. Thanks for taking our questions.

Operator

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

Speaker 2

Very good. Thank you very much. Well, this concludes our earnings call. We look forward to speaking with all of you again in February for our fiscal year 2024

Operator

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

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