Q2 2022 Accuray Inc Earnings Call

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Good afternoon, and welcome to the Accuray second quarter fiscal 2022 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I'd now like to turn the conference over to Ken Mo backup Vice President of Finance. Please go ahead.

Thank you Gary and good afternoon, everyone. Welcome to Accuray's Conference call to review financial results for the second quarter of fiscal year 2022, which ended December 31, 2021. During our call. This afternoon management will review recent corporate developments joining us entre.

<unk> call are Josh Levine, Accuray's, Chief Executive Officer, Suzanne Winter, Accuray's, President and Brandy Green accurate interim 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 as of 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 law. 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.

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, 2021. Additionally, there will be a supplemental slide deck to accompany that.

This call, which can be accessed by going directly to accuray's investor page at investors Dot accurate dot com.

With that let me turn the call over to <unk>, Chief Executive Officer, Josh Levine, Josh Thanks, Ken and thanks to everyone. Joining us on today's call I'm joined today by Suzanne Winter, our president and Brandy Green our interim CFO .

Accuray's fiscal 2022 second quarter performance continues to reflect the strong revenue momentum our business is generating but also highlighted the operational headwinds and associated costs created by the Covid environment.

Driving our accelerated revenue growth is the continued adoption of our new technology upgrades on the <unk> platform, which are having a positive impact across all regions.

Revenue in fiscal.

Q2 was $116 3 million, which represented 19, 3% year over year growth.

Gross order volume for the quarter was $85 4 million, which represented 13, 3% year over year growth Susie.

Suzanne will provide more specifics regarding the regional performance details during her prepared remarks.

On the operational end of our business like many companies across a broad range of industries. In Q2, we saw increasing pressures related to global supply chain headwinds and logistics constraints and collectively these challenges had a negative impact on cost inputs to our income statement disc.

Despite these impacts our sourcing and production teams successfully mitigated many risks in these areas that allowed us to overachieve, our production forecast, which resulted in product revenue growth for the quarter, a 45% over prior year.

Following our guiding principle of prioritizing patient continuity of care above all else. We also executed successfully in support of our commitment to maintaining availability and delivery of critical service parts for our installed based customers to ensure device uptime and patient treatment continuity.

Brandy will be providing greater detail in her prepared remarks about the collective impact of service margins for the quarter, which is where these impacts were most strongly felt.

While service margins were impacted the overall support and cross functional teamwork that took place in the quarter was extraordinary and I'm extremely proud of our team and what they accomplished.

We believe Q3 and Q4 will remain challenging in terms of the intensity of parts shortages and we will continue to see pressure on our service margins with that said our teams are working cross functionally to preserve production capacity and identify and mitigate risks to stay ahead of supply gaps that could impact production.

And at present, we are maintaining a line of sight to be able to fulfill our latest revenue forecast requirements.

We will continue to prioritize and focus on our installed base customer needs to ensure that we have service parts of the necessary stocking levels and in the right locations globally to maintain existing devices and minimize the risk of treatment disruption for patients.

And now I'll turn the call over to Suzanne winter for more details on commercial highlights during the quarter.

Thank you Josh.

The macroeconomic challenges, we have seen very strong demand within the quarter and are very pleased with our top line performance for the quarter and the first half it.

It represents our fifth consecutive quarter of delivering above expectations in both orders and revenue. These results demonstrate the strength of customer demand for both cyber knife S. Seven and rat exact combo therapy platforms and the growing recognition by customers that are new product innovations provide a newsstand.

Third of accuracy and precision needed for the growing trend of FBR T treatments as.

As we have discussed the growing use of ultra hypo fractionated treatments deliver a higher dose of radiotherapy over only one to five treatment sessions, representing a paradigm change offering significant benefits for patients providers and health care costs as discussed delivering S. P. R. T treatments can.

Very substantially across all commercially available linac platforms any error in the precision or accuracy. If the treatment plan or delivery can have significant impact on long term patient outcomes and quality of life, especially given the higher dose over fewer fraction treatment paradigm.

Our customers are telling us they clear our tea and synchrony on rat exact and our latest product introduction bolo ultra treatment planning are becoming the standard of care and a critical requirement to deliver the highest quality assurance standards required for Srs and SPR T treatment planning and delivery.

These new product introductions are driving our win rates strengthening our average selling price and accelerating installations.

In our developed markets, where it is largely a replacement market. We have been successful in on seeding the incumbent linac manufacturers installed base with approximately 25% of our global system orders, replacing a competitive system.

We have also been strategically focused on ensuring that we secure our own installed base and upgrade them to our latest performance platforms in Q2, 56% of orders in developed markets represented a trade in and trade up to our latest cyber knife as seven or rat exact performance platform.

In the emerging markets, where radiation therapy is underpenetrated. The majority of system orders were sold to new customers, allowing us to further our vision of expanding patient access to advanced radiotherapy care, where it was previously unavailable.

Looking at our regional performance, we had balanced execution across our four regions with standout performance in the Americas region, which delivered the highest quarterly revenue for that region in our company's history there.

The region finishes the first half with 27% year over year order growth.

America America's region orders at the half were split evenly between cyber knife at seven and rat exact home of therapy platforms. Additionally, 100% of rat exact orders included clear, our tea and synchrony capabilities in the configuration.

And the Japan region, Japan continued its strong orders performance with 23% year over year growth in Q2, Japan's installed base grew by five 6% in Q2 and has achieved the number two market.

In partnership with brain lab.

We demonstrated the brain led elements, contrary and capability with the cyber knife, a combined solution that provides a powerful tool for neurosurgeons.

Our innovation strategy is strengthened by our commitment to best in class solutions through strategic partnerships.

In summary, we are very pleased with the strong first half top line performance. We are executing our vision of expanding the curative power of radiation therapy to improve patient outcomes and quality of life through investment in R&D and continued cadence of meaningful innovation and new product introductions that will.

Now us to play offense gained share and strengthen the value of our solutions.

Now.

Tobias prioritization really is towards fulfillment, making sure that service parts.

Our available and being delivered and trying to manage the costs related to that as tightly as we can without impacting customers.

Got it thank you very much congrats on the quarter.

Your next question is from <unk> <unk> with BTG. Please go ahead.

Hi, Thank you for taking the questions and congrats on a really strong revenue and order book this quarter.

I wanted to ask a follow up here on the supply chain.

Macro headwinds certainly has been a concern for a lot of the Niagara call last quarter.

Sounded like the team is working very hard but things have remained on track I'm just curious what sort of change in the last couple of months.

Have anything to do with you know a record revenue that had a very strong order book and kind of working through some of your inventories at that because some of it and are there things you can do outside of them you know.

Some of these are supply chain costs to kind of offset some of the headwinds there.

So.

Again to your point we are.

We had a strong quarter from a revenue standpoint and.

I'd say shipments.

Not not unlike many capital equipment company shipments arent, usually linear throughout the quarter and we you know we typically see more heavily weighted shipments of product.

Go into revenue towards the latter part of the quarter.

We saw an increase in intensity of shortages in supply chain shortages.

As we got deeper into the quarter in Q2, it actually accelerated I think.

In December , especially.

At a level and at a rate that I'm not sure anybody could have been prepared for with that said.

We have line of sight right now I talked a little bit about in my answer to the previous question. Some of the things in the levers we're operating two with regards to you know.

Providing more predictability for the production side of the house, so that they know what and have line of sight to being able to close gaps.

That are being escalated invisible sooner than later in the quarter. So I'd say we're doing.

For a company our size, we're doing a lot and we're being pretty effective at it in.

We're trying to get ahead of this and.

No.

The.

Again, I don't I don't know that it's possible for anybody to predict what will happen with regards to win win. This release, we're assuming that we're going to continue to see strain and pressure on the supply chain side of this probably through the end of this fiscal year, So Q3 Q4 and that.

Right now, we're maintaining a line of sight to be able to fulfill and do everything we can to fulfill our latest revenue forecast requirements. So.

I mean, that's that's really kind of the story at this point.

Yeah.

Mr. Johnson.

Tom and his team is working to I guess I'll ask my follow up here on the revenue guidance increase nice to see until upright, but tell me you beat.

Patient by the handling.

Behind all of that well more than 10 million or so about $13 million for parts is concerned.

It looks like you're already more than halfway to that revenue for.

For the fiscal year, I'm curious, how you're thinking about cadence.

Perhaps that's.

You know if there's any conservatism built in.

Felt like around there.

And thanks for taking the question.

Youre right. The demand has been very strong in the first half probably was front.

Front loaded in terms of the momentum that we're seeing I think were being cautious.

Driving through the uncertainty of the supply chain.

Talent is here in the back half of the year, but I can tell you demand is very strong and that hasn't been the issue. We also have a sizable backlog with customer orders and installation readiness and a desire to complete installation, which is why we've raised the guidance on the high end, but it is a wider range just because of the.

<unk> around supply chain, so assuming we're able to navigate like we have them in the first two quarters will be at the higher end of that range.

Thank you Suzanne.

The next question is from Josh Jennings with Cowen. Please go ahead.

Hi, good afternoon, thanks for taking the questions.

First one is just on the new order growth pace in the first half of fiscal 'twenty two.

Significantly outpace the market rate and.

Seemingly getting sure I just wanted to ask about.

The sustainability of share gain trajectory and I guess specifically.

Clearly the new technology launches like clarity and synchrony on <unk> are still in very early innings in polo.

Are you seeing a nice ASP lift that's helping on the new order growth.

Results.

For one and then two are you seeing any benefit from.

Any disruption on the variance of Siemens.

Merger.

But any details you can share just around the share gains you've enjoyed in the first half and the sustainability.

Any color on those two elements that I pointed out thanks kit.

There's no question that the new product innovation is driving our win rates and driving our order momentum and we are also seeing a price lift on those products that include you know the latest innovations like clear our team like synchrony like Volvo Altra, and so we do expect.

<unk> that as we continue to innovate across both platforms that we'll be able to see some price.

<unk> game.

On the on the configuration and that really just reinforces our strategy of increasing our spend in R&D and meaningful product innovation to help continue to differentiate accuray technology from competition in terms of the Siemens Varian.

I think that you know we haven't seen a big change from previous earnings call. We.

We do believe that that merger it probably has a stronger benefit for the Siemens D I business versus really pulling any business over to Varian. However, you know I think their platform is based on conventional linear accelerator technology, and I think as the trends toward FBR.

T and the need for better imaging better motion tracking and adaptive.

Adaptive delivery like synchrony, and theyre going to be challenged in terms of the runway for that platform.

And we see that as an opportunity for accuray technology, we're positioned very nicely to gain share.

Okay.

Okay.

The next question is from Frank <unk> with Jefferies. Please go ahead.

And Mr. P&L disconnected. The next question is from Jason Wittes with loop capital. Please go ahead.

Hi, Thanks, taking the questions. So if I look at your EBITDA guidance it looks like.

The reduction is entirely due to the shortages and it's and I guess, if I'm if I'm teasing it out it looks like specifically to service gross margin not necessarily the product gross margin my thinking about that correctly.

Yes, yes.

The the impact from a cost input standpoint, Jason we're very definitely more strongly felt on the service margin side combination of inflationary.

Inflationary costs related to higher price.

Prices related to inventory that we're purchasing to support production.

Early buys.

<unk> for longer.

<unk>.

Purchase order hard purchase order requirements, but also higher logistics costs higher freight for sure and especially.

Especially in the area of service the replacement parts network and our service organization, we supply our existing installed base through a network of regional stocking locations. There were 37 of them around the world. So it's at any given point in time, we've got a lot of parts inventory and a lot of different.

<unk> around the world and making sure that we have what we need at the stocking levels that we need it and where they need to be from a geographic.

Orientation perspective.

Create.

Created certainly incremental freight costs for us from an expediting standpoint in the quarter.

Okay got it so.

Those comments it sounds like on the product side at least.

The margins have been a little more stable and more closely closely in line with historic ranges. Yes is there a catch up there or is that just looking sorry go ahead.

No I was going to ask is is that probably going to be sustainable or is there is there a catch up to be had there.

In terms of is there some risk there in those gross margins as well over time I think I think if you go back to the prepared remarks that brandy walk through one of the things that from an impact standpoint that we're seeing some quarter to quarter variability with is the accounting treatment related to the China JV.

And.

We arent depending on when in the quarter.

The devices ship and.

And when they are installed or sold through if you will to the end user.

At the time of shipment.

We basically take the revenue and the costs and the deferred more the margin is deferred until the China JV sells through to the end user and so it isn't always 100% guaranteed debt, we'll have in the same quarter those activities taking place.

So there is going to be some quarter to quarter variability, Jason with regards to product margin based on some of those impacts, but I don't think that were looking at and we're not expecting dramatic falloff here or headwinds on the product margin side that is exactly right.

That's very helpful. And then my last question related to all of this in terms of if I heard correctly I think you did say that.

You did raise topline guidance.

Which is great I mean, obviously you had a very strong quarter.

In the second half doesn't look.

It doesn't necessarily carry the entire upside through.

Did I hear you correctly. When you said there there's also potentially some supply constraints and just placing units for the rest of the year I E essentially on revenue.

No I mean it.

The supply chain.

Supply chain variable here is really be.

The one the one key element to how high up is going to be if you want to call. It that for US again, we right now we believe we've got line of sight from a production capacity standpoint in terms of.

The game plan to be able to get to.

Our forecasted.

Revenue and so.

It's tied to tied to the revised guidance. So as we stand right now I think again, it's not it's not it's not without a lot of effort on a lot of people's parts from us.

Our product sourcing and production standpoint, but again, we feel pretty good about where we sit right now on the revenue side.

Great. Thank you I'll jump back in queue.

The next question is from Frank <unk> with Jefferies. Please go ahead.

Hello.

Can you hear me.

Yes, Thank you Ron great.

Great sorry about that guys.

So quick a quick one for me I guess first congrats on a really nice quarter.

<unk> beat on the topline.

I'm just sort of wondering I guess number one on the on the CMS Aro bundle I know, it's a little bit early in the implementation.

Of that but I'm wondering what your what youre seeing at this point or a reimbursement sort of in line with what youre expecting or.

And do you expect any sort of ASP pressures just kind of looking ahead, I guess more broadly across the industry. I guess, that's my first question a follow up to that thanks.

Thanks for the question Frank Yes, we're disappointed that it was further delayed implementation and got wrapped into some infrastructure initiative with it in December .

That being said it probably provided some additional breathing room for providers a little bit more time to prepare for the changes. The reality is though what we're seeing is the key trends are still the same there is an emphasis on value and outcomes over volume regardless of the timing of the CMS decision.

There are other drivers in the marketplace. For example, the commercial private payers are really already there the biggest Paris with two thirds of covered life at lives have already changed toward a reimbursement that favors the hyper fractionation. Additionally, just the aged equipment of the installed base.

In the U S and the need to upgrade to the older technology to newer performance technology to be able to provide ultra hypo fractionated treatments is still a growth catalyst. So we're nicely positioned to capitalize on these trends we are working very closely with Astro and add the med commitment sure that.

When the reimbursement rolls out that it's optimized to support FBR T.

Great.

Just really quickly just a follow up to that and have another one on asps do you sort of expect.

Your competitors to start working.

Working down pricing or or do you expect that to more or less stay the same based on that reimbursement change.

I think it's too early to tell at this time, Frank we're certainly very sensitive to what competitive moves may happen in the marketplace. We are just going to focus on differentiating our technology and the value it brings and priced appropriately.

Thank you and just one last one here on <unk>.

On tumor on AR.

The essential tremor epilepsy.

Touched on that during analyst day.

Obviously, you potentially expansive market I'm, just wondering if you could put any brackets around.

The potential market size entry milestones et cetera at this point.

We have not.

But we will be introducing formally introducing our partnership with brain lab at the radio surgery Society meeting in March so that will be the first time I think that we come to market together in that partnership and again that provides treatment planning that is more familiar to the neurosurgeon, but I think as we move.

Florida will be able to speak more about the market potential in those areas.

Great. Thank you very much.

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

Thank you operator, I'd like to thank the entire accuray team for their continued focus and commitment to great commercial and operational execution in the face of the challenging environment, we find ourselves in <unk>.

Despite the headwinds we highlighted this afternoon, the clinical impact related to our most recent product innovations have resulted in vastly improved strategic positioning for our technology and customer demand as you heard.

Suzanne remains very very high.

While we're not pleased with the impacts to margins and profitability right. Now we believe we're making the right actions and taking the right actions to ensure that we're improving and hardening critical internal processes that will make accurate a stronger company on the other side of the current supply chain challenges, which will drive positive cost productivity improvements overtime.

And we look forward to speaking with you all again in April for our fiscal third quarter earnings release.

Thank you very much.

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

Okay.

Okay.

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