Yahoo Finance Accuray Incorporated (NASDAQ:ARAY) Q3 2024 Earnings Call Transcript
Accuray Incorporated (NASDAQ:ARAY) Q3 2024 Earnings Call Transcript May 1, 2024
Accuray Incorporated misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.013. ARAY isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Accuray conference call to review financial results for the third quarter of fiscal year 2024 which ended March 31 of 2024. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jesse Chew. Please go ahead.
Jesse Chew: Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the third quarter of fiscal year 2024, which ended December 31, 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 close this afternoon as well as in our filings with the Securities and Exchange Commission.
We based 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 re-queue with any follow-ups. Second, all references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended March 31, 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: Thank you, Jesse. Good afternoon, and thank you all for joining the call. Let me start by saying that we are disappointed, with our quarterly results and have faced near-term challenges here in the second half of our fiscal year that, were greater than anticipated and have impacted our near-term results, and outlook. However, we are confident that we remain on track, to achieve the goals that we laid out at our fall 2023 Investor Day, which includes 4% to 6% revenue CAGR and doubling our adjusted EBITDA, by the end of fiscal year '26. Fiscal 2024, remains an important year for our company as we are making a substantial entrance into some of the fastest growing markets in radiation oncology, introducing advanced capabilities and investing in a sustainable infrastructure, to grow our service business, all of which we believe will contribute to revenue and adjusted EBITDA growth, over the next few years.
The quarter did not play out as expected, due to a few key factors. First, we had expected to ship three additional systems this quarter, which pushed to Q4, which would have had a meaningful impact on both our top line, and adjusted EBITDA. Additionally, in the U.S., which is one of our largest and highest margin markets, we saw a substantial slowdown, due to longer capital equipment budget cycles. We had expected the region to ramp in the second half of the fiscal year, but it is becoming much more evident that there is a broader weakness in capital equipment budgets in 2024. We believe these reduced budgets and lower capital deployment priority for radiotherapy equipment, have both contributed to slow demand in the near term. Finally, while pleased to have received regulatory approval to market the Tomo C equipment into China, we still await approval for the precision treatment planning system that, is used with the Tomo C.
As previously discussed, the regulatory submission for the Tomo C system, was a separate submission from the precision treatment planning system. This was done by design to provide the quickest go-to-market strategy for the system, allowing us to take orders and build our order backlog. Furthermore, we strategically separated the regulatory submissions, so we could gain a separate, accurate-owned license approval for the precision treatment planning system, which gives us greater optionality within the China market into the future. As a reminder, we cannot report our full margins on the Tomo C shipments until we receive this approval, which allows our joint venture to ship systems to the end-user customers. This represents the final steps to execute our full market launch, including installation at customer sites.
Despite these headwinds, we expect to retrieve these revenues in associated, adjusted EBITDA in the coming quarters, which will set us up for a return to growth, above the overall addressable market in FY '25 and on track with a three-year plan we communicated at our Investor Day. Going deeper into our U.S. business, we believe this is mainly a timing issue and not a reflection of underlying demand. We expect the potential for strong replacement of the aged installed base will continue to drive demand. The age of many units have exceeded recommended guidelines, and are nearing the end of parts availability for service and support. As we mentioned in the last earnings call, we saw longer customer installation timelines in the U.S. during Q2, and this has continued in Q3, where we saw installation cycles and backlog conversion continuing, to take longer to materialize than originally anticipated.
This impacted both product, and to a lesser extent service revenue in the U.S. To understand this in greater depth, we surveyed our U.S. customers to validate the slowdown and installation and capital equipment purchasing activity. Further, a leading Wall Street analyst published a research report in March, which surveyed U.S. hospital administrators on capital equipment priorities, which also supports our observations. Some of these include spending for radiotherapy, was rated lower on the priority list in calendar year 2023, with gradual improvement expected in 2024. Many customers that were allocated capital budgets, were required to resubmit for additional capital due to higher costs. Finally, this market dynamic is expected to improve, with gradual recovery entering our fiscal year '25 through fiscal year '26, when capital equipment budgets are expected to increase and radiotherapy is reprioritized.
Despite these challenges, we believe that we will deliver the best fourth quarter in the company's history from a revenue perspective, and given that we are in a long cycle capital equipment business, where a shift in product volume from one quarter to the next can have a sizable impact on a result. We think it makes sense to look at our business, both for the quarter and on a trailing 12-month basis to showcase the longer-term performance, which Ali and I will start to share moving forward. I am very encouraged by the 21% global order growth in Q3, which is 8% growth on a trailing 12-month basis, as well as the book-to-bill ratio of 1.8 for the quarter, both of which are strong leading indicators for the future growth of our business. Orders represent a strong signal that customers are adopting our product innovations, and growing at a rate that is faster than the market, which we expect will ultimately translate into share gain and positive impact of revenue, margin, and adjusted EBITDA into the future.
Another key performance metric is the growth of our global installed base. Our installed base grew 4% year-over-year, and service contract revenue grew 2% year-over-year and 4% on a trailing 12-month basis. Install base growth means that in addition to upgrading our existing install base, we are adding 4% net new customers into the Accuray base, which we expect will further drive growth and service contract revenue over a 10 to 12-year period following the one-year warranty period. Reflecting on our regional performance, I'm very pleased with the strength of the EIMEA region, which is our largest region and a strategic focus for the company, with growth-driven from fast-growing emerging markets, which is a key part of our strategy, to drive patient access.
EIMEA grew 5% in revenue, and 29% in orders on a trailing 12-month basis. We expect the EIMEA region to end the fiscal year, with double-digit revenue and order growth year-over-year, and gain market share in key sub-regions. APAC is fast becoming our second-largest region, with 7% revenue growth, and 14% order growth on a trailing 12-month basis. Once we obtain the final step in regulatory approval for the Precision Treatment Planning System for the Tomo C, which we expect to obtain by our fourth fiscal year-end, we will unlock deferred revenue and margin and unleash our China team to deliver pent-up installation demand and drive market traction. The Japan region, where we are number two in market share, 60% of our Q3, total orders are from replacing competitive systems.
The region was down 11% on revenue, and 8% on orders on a trailing 12-month basis, primarily due to the impact of unfavorable effects. Japan continues to be a highly profitable region for Accuray, but we are taking additional commercial actions here, including increased pricing and enhanced offerings to help offset the negative impact of FX, which is expected to be realized over time. Finally, as I mentioned in my opening comments, the U.S. performed at a slower pace than we expected in Q3. The Americas region, Q3 revenue was down 38% year-over-year and down 15% on a trailing 12-month basis. And we expect the region to gradually recover, but be down in Q4 and for the full fiscal year. Orders were up 7% for the quarter, but down 19% on a trailing 12-month basis.
Our strategy in the U.S. during this time, where it is extremely challenging for our customers is not to retreat, as we expect from other industry players, but instead get even closer to our U.S. customers offering enhanced solutions, including flexible financing, increased user engagement activities to improve satisfaction, flexing our commercial partnerships, and increasing our field support. Cancer care continues to be a top profit driver for hospitals, and while capital allocation is tight and shifting forward, we remain committed to being the valued radiotherapy partner now and in the future. Our focus will be on building our backlog of orders so that when capital equipment conditions improved, we will be well positioned to take share within this important region.
Other key highlights for the company include the inauguration of our new training center, the Accuray Innovation and Partnership Hub, located in Genolier, Switzerland. This new facility is the most recent addition to the Accuray network of training centers, with other locations in the U.S. and Japan, as well as China through our joint venture. These sites are located strategically around the world, to make it easier for medical care teams to obtain state-of-the-art clinical education. We expect our investment in these global training centers, will generate new training revenue that will contribute to growth and service in the coming quarters. In addition, furthering our strategic pillar of advancing patient access into under-penetrated high-growth countries, the full introduction of the Tomo C in the China Type B market is an important milestone for the company.
We recently showcased both the Tomo C and the CyberKnife Systems at the China Medical Equipment Fair Meeting, the largest Medical Equipment Expo held in Shanghai, China, with over 300,000 participating. We also continue early market launch efforts for Helix, our non-China access product, first in India, where we are awaiting regulatory approval for the full market launch, which is expected by the calendar year-end 2024. As part of our margin expansion strategy, we also announced today that we are entering into a collaboration agreement with IUCT-Oncopole in Toulouse, France, and Airbus, a leader in aerospace industry, to develop an artificial intelligence, AI-driven solution for predicting radiotherapy system performance. We will collaborate to develop a failure prediction methodology, which will allow us to monitor component-level performance to predict and proactively address system issues.
We expect that this will translate into a better patient experience and reduced operating costs, and further strengthen service margins by reducing parts consumption. Finally, at the end of this week, we will head to ESTRO, the European Society of Radiation Ecology's Annual Meeting. This year's ESTRO Meeting is particularly meaningful, as we recognize and celebrate 30 years of collaborating with healthcare professionals and industry partners, to develop groundbreaking technologies that expand the application of radiation therapy and access to patients who may benefit from care. Highlights from ESTRO will include CyberComm, a new physics service solution offering intended to substantially reduce the CyberKnife S7 system's commissioning time and enable customers to begin treating patients significantly faster.
Cenos, a works in progress designed to provide customers with the ability to perform online adaptation of their treatment plan to account for changes that may occur between treatment sessions. In addition to demonstrating product innovation, we also believe that driving clinical innovation is an important pillar in our strategy to advance care. At this year's ESTRO, we will drive thought leadership with a symposium, led by an elite panel of key opinion leaders on the use of stereotactic radiosurgery and SBRT treatments where Accuray precision technology is well positioned to deliver. In summary, while we are disappointed with the Q3 results, we understand the current challenges. I remain confident in our long-term strategy and the value of our differentiated solutions.
In the near term, we expect to fuel the success of our strongest growing regions, where we will continue to grow and increase share as we look to see signals for improvement in U.S. conditions. We have meaningful growth drivers in both product and services, and we believe the strength of our innovation pipeline, investment in new service solutions, expected near-term regulatory clearances, and the continued focus on margin expansion and improving our balance sheet, will position us well for substantial growth and increasing profitability. I will now hand it over to Ali to discuss the financials.
Ali Pervaiz: Thank you, Suzanne, and good afternoon, everyone. While the third quarter posted macro challenges, most notably with the slowdown of the U.S. market and foreign exchange headwinds with the yen. We remain confident in the long-term strategy we laid out during our Investor Day last fall. We are proud of our global cost functional teams to continue to execute on our strategy, despite these headwinds and are grateful for their commitment and dedication to our mission. Turning to the financials. Product growth orders for the third quarter were approximately $89 million, which is a 21% increase versus the prior year and 23% was adjusted for the impact of foreign exchange and represents a book-to-bill ratio of 1.8 million.
This strong orders performance was driven by our EIMEA region, which had a 76% growth in our non-China APAC region, which had growth of 123% versus prior year. On a trailing 12-month basis, gross orders grew by 8%, which represents a book-to-bill ratio of 1.5, illustrating our customers' confidence in our innovations and NPIs, which continues to enhance our product backlog. Moving to the backlog. We ended the third quarter with a product order backlog of approximately $503 million. This reported backlog is up 2% sequentially and down 1% versus the prior year. We had no order cancellations in the quarter. Net revenue for the third quarter was $101 million, which was down 14%, versus the prior year and down 13% on a constant currency basis, primarily due to eight fewer revenue shipments within the quarter.
Product revenue for the third quarter was $50 million, down 21% from the prior year, driven by eight fewer unit shipments as previously mentioned. While Q3, product revenue did not play out as we expected, due to three system shipments being pushed out related to customer process delays, it is important to highlight that our China business had a 17% product revenue growth on a trailing 12-month basis. And the EIMEA region had a 7% product revenue growth on a trailing 12-month basis, which showcases the strong growth of these regions, which are vital to the long-term strategy for our company. Service revenue for the quarter was $52 million, down 7% from the prior year and down 6% on a constant currency basis, primarily driven by $3 million of lower revenue related to installation, and training primarily tied to lower new U.S. installations, and lower spare parts volume.
Although noncontract service revenue was lower in Q3, we expected to pick back up in Q4, with an increase in global customer installations. Notably, the service contract revenue portion, was up 2% versus the prior year, and up 4% on a trailing 12-month basis, which showcases growth in the annuity part of the service business, as our installed base continues to expand globally at 4% in Q3, versus the same period in the prior year. Our overall gross margin for the quarter was 28.7%, compared to 32.8% in the prior year. The key factors here were related, to increased China margin deferral of $3.2 million or 3.2 points and an unfavorable impact of foreign exchange on revenue of approximately $1.3 million or 1.3 points. As a reminder, due to joint venture accounting rules, we defer 49% of the margin related to shipments to our JV partner, and that margin is deferred until our partner sells through to their end customer.
This margin impact is purely timing related, and is not an indication of the future profitability of our business. China deferral and foreign exchange together had an approximately 4.5 point downward impact to our Q3 margins. Margin expansion continues to be a focal point and part of our cultural transformation, and we are confident this will be reflected more positively in our P&L in the coming quarters. We're seeing the impact of our pricing efforts in our service business, with better contract pricing of approximately $2 million in Q3 versus the prior year. Additionally, with our focus on reducing our cost of goods sold, we're seeing lower impact of inflation as we work with our suppliers, and internal teams to drive product COGS down further.
Operating expenses in the third quarter were $33.6 million, compared to $36.4 million in the prior year, down 8% as we realize the full benefit of our restructuring actions, and as we drive cost discipline within the company, with a strong focus on return on investment. Operating loss for the quarter was $4.6 million, compared to an operating income of $2.3 million in the third quarter of the prior year. Adjusted EBITDA for the quarter was $1.1 million, compared to $8.3 million from the prior year, primarily driven by $17 million of lower revenue, compared to the prior year. 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 $61 million, compared to $73 million at the end of last quarter, with the decrease driven by lower product shipments, and the timing of those shipments.
Net accounts receivable was approximately $73 million, which is $4 million lower than the prior quarter. We continue to have a strong focus on collections, which resulted in a DSO of 66 days. Our net inventory balance was $160 million, up $4 million from the prior quarter, due to the delay in system shipments. In summary, our third quarter results were negatively impacted by a slowdown in the U.S. market, timing of three revenue shipments, and further deterioration of the Japanese yen. Although the timing of the three revenue shipments is a temporary phenomenon that we expect to recover from in Q4, as Suzanne mentioned, we believe the U.S. market slowdown will persist for at least the near term. Additionally, the Japanese yen, continues to be a headwind greater than we expected, especially as we have a considerable amount of system shipments to that region in Q4, and a significant installed base that contributes to contract service revenue.
Taking all these factors into consideration, we are adjusting our fiscal year '24 financial guidance. We now expect revenue in the range of $432 million to $437 million and $19 million to $22 million of adjusted EBITDA. Those are key financial highlights. And with that, I'd like to hand the call back to Suzanne.
Suzanne Winter: Thank you, Ali. In summary, while some business has shifted into FY '25, due to the U.S. market dynamics, we continue to make major advances in long-term growth and profitability drivers. We remain focused on executing our plan, to advance care and access with our innovative solutions that, make a difference every day in the lives of people diagnosed with cancer. Finally, I'd like to thank everyone in our global teams that work tirelessly to provide the highest level of service, and support to our customers. I am grateful for their commitment and dedication to our mission. I will now turn it back, over to the operator Q&A.
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