Q1 2023 Accuray Inc Earnings Call

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Good afternoon, and welcome to the Accuray first quarter fiscal 2043 financial results Conference call. All participants will be in listen only mode could you need assistance. Please signal a conference specialist by pressing Star then zero on your <unk>.

Telephone keypad. After today's presentation, there will 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 note this event is being recorded.

Now I would like to turn the conference over to Ken Mo back Accuray, Vice President Finance.

Please go ahead.

Thank you operator, and good afternoon, everyone. Welcome to Accuray's Conference call to review financial results for the first quarter of fiscal year 2023, which ended September 32022. 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 always Pervades 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.

Yes.

As well as in our filings with 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 statement as a result of new information or future events, except to the extent required by applicable securities law Accordingly.

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.

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 first quarter refer to our fiscal first quarter ended September 32022.

Additionally, there will be a supplemental slide deck to accompany this call, which can be accessed by going directly to accuray's investor page at investors are accurate.

With that let me turn the call over to <unk>, Chief Executive Officer, Suzanne Winter is that thank.

Thank you Pat and good afternoon, and thank you for joining the call.

I am proud of how the accuray team delivered a solid first quarter. This fiscal year, despite the challenging macro economic operating environment and as such we are reiterating fiscal year guidance on revenue and EBITDA.

I'll start this afternoon as a reminder, the long term plan, we laid out at the end of fiscal 2022 focused on growing our business faster than the market by delivering differentiated solutions to improve care and the outcomes for all stakeholders growing and improving our service offering and.

Finally, enhancing margins and cash flow.

Fiscal Q1, we have made significant progress in advancing that growth strategy in the quarter, we introduced new innovative solutions from our investments in R&D and we continue to execute on our commitment to delivering a robust product pipeline of differentiated solutions, which will deliver revenue share.

Growth and shareholder value over the next several years.

Well we are early in the execution of our plan, we are already starting to see the impact.

Intended the Astro show in San Antonio, Texas, where it was wonderful to see the radiation oncology community getting nearly back to pre COVID-19 level of attendance and evaluating new technology at.

At the show, we launched vital and integrated and automated surface guided radiotherapy solution for breast cancer patients operatic back just yet.

This development was the achievement of our partnership with feedback.

In addition to synchrony adaptive deliberate gas clear Archie ultra.

So a high quality imaging provides that exact customers with the most comprehensive toolset to treat breast cancer.

This is important because one in eight women diagnosed with breast cancer in their lifetime and as a result breast cancer represents one of the highest procedure volume in a typical radiation therapy department.

Additionally, at Astro, we demonstrated our newest education.

The online adaptive capability in partnership with research a leader in treatment planning and OIS system.

Artemis excuse is not exactly clear our T heal uncle, Sam T images with Ray searches.

Powered algorithms to adapt the treatment plan to changes in the patient's condition that can occur between treatment.

Arguments in combination with accuray's proprietary synchrony technology that corrects for changes during treatment delivery represents a powerful competitive advantage for accuray and will be a critical tool in the delivery of shorter regimen treatments and deliberate treatment Joe's over five or less traction.

Yeah.

As we execute our growth strategy, we have placed a high priority on key industry partnerships, such as sea Bad research.

Lab Limbus, AI, all of which have substantially broadened our markets have enabled us to provide best in class solutions to key medical centers globally.

Earlier this month, we announced a new global commercial partnership with GE healthcare.

G Health care, a global innovation leader and our strategic focus on personalized oncology solutions chose accuray because of the strong brand and leadership in precision radiotherapy.

The agreement will allow both companies to advance personalized cancer care and offer solutions throughout the care pathway from precision diagnostic precision treatment delivery and planning to precision monitoring post treatment, our joint pool is to leverage the expertise and commercial footprint.

Best in class technologies of both companies to advanced care.

<unk> global reach.

And reduce the time between cancer detection and treatment.

At Astro, we held a clinical session for analysts and investors were T. U S opinion leaders discussed innovation in the future of radiotherapy.

At this session, we announced support for clinical evidence generation that will help them train significant ways, one driving the adoption of FBR tea and Srs into clinical practice to demonstrating the impact of accuray's technology.

Finally generate clinical data to assist with reimbursement.

Key opinion leaders discuss plans for a clinical registry is do you think accuray technology at prostate cancer breast cancer and in Euro functional cure.

For the quarter, we delivered $96 5 million in revenue driven by strong demand in Japan.

Revenue for the quarter reflected a 10, 5% increase in units year over year.

We were unable to recognize three planned system shipments due to delivery delays of critical sub components from a few suppliers.

Supply chain conditions have generally improved we continue to navigate and actively support a few key suppliers.

However, our teams understand the issues and are proactively addressing short mid and long term solution until conditions improve.

Additionally, as expected China revenue was a headwind down 55% year over year, primarily due to the impact there zero Covid policy.

Despite the macro headwinds underlying customer demand is strong this is evidenced by improving demand trends. We are seeing in orders, we booked 32, new system orders for Radick back the cyber knife, seven driven by the Americas and APAC regions.

Reported orders growth overall was flat the grew approximately six 5% once adjusted for FX compared to the extraordinary quarter last year, which grew approximately 38% due to pent up demand following COVID-19.

We continue to be encouraged by the commercial traction of new innovations like there are T synchrony and Bravo trials that are driving our trade in trade up with rates and capturing competitive bunkers at 22% of our system orders came from displacing competitive system.

Despite the impact on revenue in China due to their Covid Lockdown, we are encouraged to see signs of improved performance within the China market.

China region orders grew 33% year over year lifted by wins with our current product the type B segment.

And the type of ACI.

We're pleased to see the reactivation of the type a bidding after a long delay.

Customers that was holding Taipei licenses second round of bidding.

We initiated the feeding processes, allowing them to begin escalation planning, including 18 accurate system, which we expect to see delivered over the first three quarters of the challenging year 2023.

Finally, I am pleased with the significant progress our regulatory and operations team.

May two advanced our JV type b product towards market clearance I am pleased to announce that all product testing has been completed and.

A R and M. P. A regulatory submission has been received by the agency. One month ahead of expectations and it's 4 million process for review our JV partners are initiating targeted market introductions with a full launch beginning in the spring of calendar year 2023.

We continue to make progress on our surveys suggest that this will be a transformational journey for our service business over the next several years and we are already beginning to see improvement in service margin and expect to announce new service and support solutions in the second half of 2023.

Finally, our margin and profitability expansion plans have been activated.

We have identified three pillars for <unk>.

First pricing.

Capture higher value for our innovation.

Second.

Using our product and service costs, and lastly, optimizing our operating expense.

I'll leave will speak more about our margin or profitability execution plan.

Overall I am pleased with the performance of our teams to the border.

Now I'll turn it over to all lead to discuss the financials.

Thank you Suzanne and good afternoon, everyone I'd like to start by thanking our global cross functional team, who executed with dedication to deliver a solid first quarter of fiscal 2023, despite ongoing challenges, including supply chain shortages COVID-19, lockdown in China, the warranty claim globally inflationary pressure in <unk>.

Headwinds in our non U S markets total revenue for the first quarter was $96 $5 million, which was down 10% compared to the prior fiscal year, mainly driven by supply chain constraints and a $5 $8 million foreign exchange headwind on a constant currency basis.

Product revenue for the first quarter was $44 $6 million, which was down 16, 4% from prior year and down 11, 4% once adjusted for the impact of FX compared to a tough comparison in Q1 last year when product revenue grew 69% due to pent up demand after COVID-19 delays.

We were unable to ship three <unk> units in the quarter, representing approximately $6 million due to last minute shortages for critical components, but we're able to fulfill our customers' demand in early October .

Service revenue for the quarter was $51 $9 million, which was down 5% from prior year, but up one 7% once adjusted for the impact of FX, which had a $3 $7 million impact.

Orders for the first quarter were $69 $8 million, which is flat from prior year and up six 5% or $4 $7 million once adjusted for the impact of FX.

As discussed in our prior earnings call our book to Bill ratio, which is defined as gross orders divided by product revenue was $1 six in the first quarter, which was at a healthy level compared to the industry standard of one point to 1.3.

We are making excellent progress and our teams continue to focus on booking orders that are expected to convert to revenue in a more time efficient manner prior to 30 months.

Moving to backlog as a reminder, we reported product order backlog, which is 30 months or younger we ended the first quarter with backlog of approximately $538 million, which is $10, 7% lower than prior year due to $51 million of order backlog to aged beyond 30 months within the quarter, mainly driven by customer installation delays.

Had minimal cancellations, but only one unit canceled $1 $5 million and $3 $5 million of FX and other adjustments our global commercial teams are focused on converting all orders regardless of timing of the backlog to revenue in Q1. This resulted in a $5 $9 million of orders converting to revenue within the quarter that had aged out previous.

Got it.

Our overall gross margin for the quarter was 35, 9% compared to 36, 8% in the prior year, which is a decrease of 90 basis points driven by unfavorable product mix and continued product cost inflation and service FX impact, which was partially offset by improved service margins, which signals that our pricing and cost discipline actions.

We're taking shape in the service business.

Operating expenses for the quarter was $36 8 million compared to $37 $1 million in the prior year showing good cost control as we continue to push our teams to drive cost discipline and we focused on return on investment.

Operating income for the quarter was minus $2 2 million compared to $2 $4 million from prior year adjusted EBITDA for the quarter was $1 $9 million compared to $5 4 million in the prior year, primarily due to lower revenue, which had an impact of $5 $8 million on the top line and higher than expected FX impact, particularly in Japan.

And in India.

The reconciliation between GAAP net income and adjusted EBITDA as described in our earnings release issued today.

Turning to the balance sheet total cash cash equivalents and short term restricted cash amounted to $81 million compared to $88 $7 million at the end of last quarter net.

Net accounts receivable were $77 million down $17 million from last quarter as we had strong collections performance.

Our net inventory balance was $153 million up $26 million from prior year as we have built up our inventory to navigate through the ongoing supply chain challenges to fulfill our customer demand, while ensuring healthy service levels.

And so again as Suzanne mentioned earlier, we've activated our margin expansion plans that are focused on three critical areas first area as pricing discipline to capture the right value for our innovations we've aligned our commercial team's incentive plans to focus on capturing value and margin on incoming orders arm them with the tools to ensure the right.

Profitability levels.

Within the service organization, we're adjusting pricing and service contracts that are up for renewal and working on the past offerings to accommodate the needs of our customers specifically in the areas of training and installation.

The second area is to focus on reducing our overall product costs. Our sourcing organization is working with key suppliers to drive productivity on high cost parts and our engineering teams are focused on cost down projects. Some in partnership with our JV partner.

Additionally, the teams are focused on lowering our overall inbound and outbound logistics costs. We believe the reduced costs with these focused projects will also improve service margins in the coming quarters.

Lastly, we are optimizing our operating expenses by ensuring we're getting the right return on the investments, we're making in the business and are re looking at all our direct and indirect spend.

We've identified key areas of opportunity we are confident that taking these actions will get us back on track to pre COVID-19 margin levels.

It is important to note that we recently amended our credit facility for Q2, and the remainder of FY 'twenty three to provide more flexibility as we position ourselves for accelerated growth and investment while taking into account the headwinds of the current supply chain and foreign exchange environment.

As most of that and I had highlighted earlier supply chain constraints and the headwinds associated with foreign exchange are the two biggest factors that have impacted our business performance in Q1.

We're doing everything we can to manage through the supply chain challenges in the current foreign exchange environment FX impact alone.

$8 million negative impact to our top line compared to where exchange rates were last year in our non U S markets.

We are reiterating our full year guidance and we will closely monitor the impact with macroeconomic trends, particularly in FX.

Those are our key financial highlights and with that I'd like to hand, the call back to Suzanne.

Thank you Ali and summary, I'd like to thank our team for their unwavering support of our customers. So they can provide the highest level of care to patients.

Expect to continue to navigate the uncertainty of the macroeconomic and geopolitical conditions and reiterate guidance with expected revenue in the range of 447 million to $455 million and adjusted EBITDA in the range of 26 million to $30 million, we remain encouraged.

First by the growing customer demand for Accuray technology, and our robust product pipeline and remain optimistic about market trends that favor accuray technology, and where we are positioned to win and take market share.

As an organization, we are strengthening our fundamentals advancing key growth catalysts in China, and creating new strategic partnerships like our partnership with GE healthcare all of which we believe will create long term and meaningful value for patients health care providers employees and our shareholders.

I will now turn it back over to the operator for Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

You are using a speakerphone please pick up your handset before pressing the keys.

Any time your question has been addressed and you would like to withdraw your question. Please press Star then two.

Please limit yourself to two questions and you may rejoin the queue.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Brooks O'neil with Lake Street Capital. Please go ahead.

Hi, This is Charlie moms staying on for Brooks O'neil just a couple of quick questions for me.

First one is when do you think the <unk> partnership can contribute to revenue and do you think <unk> can help with hospital accounts or do you need to integrate more products to generate meaningful revenue.

Great. Thank you for the question, Yes, we're very excited with our key partnership and while it's early in the partnership and we do think in the short term.

We'll be able to deploy.

Deliver differentiated solutions from precision diagnostics to precision treatment delivery together I think we will have better visibility in the marketplace for our solution. They obviously had a very strong commercial muscle a little past the ability to see more of the market is greater.

Customer access five member team with relationships that they have on the idea of level on the government. So in the short term, but you know key performance indicators that we're gonna be looking for is an increase in our order funnel growth.

Developments up some key strategic referenced like them as well as just the ongoing operating mechanisms and then long term that should we should start to see it in the financials.

And we should have an opportunity I think to look for more opportunities for synergy joint solution development.

Okay, Great. Thank you and then my last question is you guys recently issued a press release with the submission of <unk> in China. One is the expected approval and can you say when you expect initial orders to contribute to revenue.

Yes. Thank you for the question, Yeah, where we are very enthusiastic about the fact that things are starting to move in China. As you know this was an area that we were waiting to complete the submission for our JV developed made in China high speed product and so the fact that it is in the regulatory process.

Very exciting now typical process there and of course, we can never predict a regulatory process, but it is probably 12 months.

It historically and so what we would be expecting is 12 months from now you know we would have regulatory clearance to be able to take orders and be able to see in a shifting position.

Okay. Thank you that's it for me and congrats on a great quarter.

Thank you.

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

Hi, good evening, Thanks for taking my questions I wanted to just follow up with the multilayer question on the <unk> partnership.

I wanted to better understand I guess the benefit.

Process for both accurate and GE, where you both looking for for partners on the other side of the radiation oncology.

Imaging expense.

The reason I ask is it seems like a big validating signal that she has decided to partner with accurate.

And then secondarily.

One of the I guess.

<unk> risk to that she was really a combination clearly has been the potential for that entity to leapfrog.

Competition with the integration of advanced imaging platforms into their into radiation oncology systems, and so wanted to just better understand what's on the table and we talked a little bit about this at Astro.

Everything from MRI integration.

Two improving the current.

Our T C P imaging to full diagnostic grade to functional imaging.

And incorporating them into accuray's platforms.

In terms of what we should be thinking about to the R&D collaborations and what they could produce longer term. Thanks for taking the questions.

Thanks for the question, Josh just to kind of Peel back. The two parts of your question you know from GE healthcare standpoint, I think one of the strategies that they are looking at is to have a.

The strategic area of care pathway that they're focused on oncology is one of those areas.

And so they chose to partner with accurate because we have an outstanding brand niche.

Premium high performance markets in terms of submillimeter precision they see the clinical trend towards shorter duration treatment and I think they see also an opportunity for them to shorten the time between diagnostics to treatment and so you know together.

Here, we are two U S based companies happen to be in Wisconsin, which is fantastic.

And then we have the opportunity in the short term for commercial collaboration so I think at a minimum it is presenting.

One the company one based solution to our customers for those customers that are building comprehensive cancer Center.

For both diagnostic imaging and treatment delivery.

It also allows us to work with key opinion leaders to see how we do shorten that time between treatment and diagnostic.

Diagnostic to treat but longer term I think there's the opportunity for sure. They are a global leader in imaging imaging is becoming much more important in radiation therapy that is why we're seeing such a great uptake from clear our team to help with the planning I don't think it will ever go away completely with the same products, which.

As you're aware diagnostic entertainment health care products.

Reside, but certainly I think there is an exchange of technology that as this commercial partnership progressive is an opportunity for synergy.

Thanks again.

The next question comes from Neil Chatterji with B Riley.

Please go ahead.

Hi, guys. Thanks for taking my call.

Questions.

You know I guess, congrats on getting that the China JV registrations submitted.

Just curious.

On your view in terms of just any kind of.

Geopolitical risks with China, and any potential for that to slow down the regulatory process or.

Having the domestic partner and see and see what.

Kind of helps shield you from that.

Then I have one follow up.

Thank you thanks for the question Neil.

Obviously, we're watching that very closely I think the good news is part of our competitive advantage is that we do have a JV partner in China that is it stays like that the team partially and you know that we think gives US an advantage you know even in the midst of.

Geopolitical conditions.

Whether it'll help US you know in the regulatory submission process unclear.

Certainly we'll be watching that but I think it does give us the opportunity to hedge a little bit of what's happening.

Got it that's helpful color.

And then just in terms of the you kind of talked about.

Partnership strategy in that.

No kind of eating.

Customer.

Relationships just kind of curious.

You can get maybe an update on the status of the Limbus AI partnership for you know for automated contouring.

And whether that integrated offering and it remains on track for kind of other from early 2023 launch and then what your expectations are for that.

Yeah no. Thank you for the question, Yeah, I think even coming out of Astro the importance of being able to correct for changes that happened with the patient is becoming very important, especially in the shorter duration of treatment. So you got to get it right because they're more powerful treatments over fewer.

Fractionation skewer our appointment.

And so we do have a partnership with research research is a leader in treatment planning. They also habitat.

Very strong AI backed algorithm.

Our treatment planning and so we have decided to put best of breed technologies together.

With that in order to bring this to market as quickly as possible and so we did show them both at our booth and in the research to demonstrate the fifth at Astro and we are continuing to develop that we are expecting and again, we have regulatory approvals are always difficult to judge, but we are expecting to see.

Or times of 2023 to have.

The ability to do a full market launch can be a ship that position.

Got it and I'm, sorry, I was I was kind of asking specifically on the limbus AI.

Oh.

Okay. Yeah. So let me say is another partnership that we have sale outside of what we are doing with research. We are also working hard on the online adaptive capability on our own precision treatment planning system. So that will follow what we introduce with racer. So what we're trying to do is give our customers as many options.

If possible if their preference is to go with research and they have an option if their preference is to stay with accuray precision treatment planning. They also will have an online adaptive platform. So I would say that is going to bag and I will say probably anywhere from three to six months problems of research introductions.

Great. Thank you.

The next question comes from Marie Thibault with <unk>.

Please go ahead.

Hey, good afternoon, Suzanne and Ali this is Sam on for Murray.

Thanks for taking the questions.

Maybe just following up on some of these partnerships here.

Multiple ones ongoing at the moment I guess, how significant of a differentiator because some of these be and driving competitive wins or faster trading and trade ups.

Or is it something that could have the same impact that synchrony and clear our T had when those are initially rolled out.

And thank you for the question Yeah, I think that the partnership that we have with C. Rad for example, which we introduced at Astro is now providing us with a.

With vital halt which is a breast cancer a package now I would say that that is very important to driving trade to trade up and the system and it has been something that our customers have been asking for it especially on the rat exact and so what it does is improve the first facility now theoretically exact system.

Even more because breast cancer patient.

<unk>, 25% to 30% of a typical radiation therapy departments are very high percentage.

The patients that come through the door and so being able to have this solution. In addition to clear our tea and synchrony is now really creating a true workforce solutions for patients that have simple.

Civil cases very complex. So we are very encouraged by that I think with every one of our partnerships. We're looking to have it at our ability to access more customers increase the versatility of our system.

And also deliver a differentiated value proposition.

Got it really helpful. There are two Suzanne maybe I can just ask one more on the order environment you know another strong quarter here from a gross order standpoint.

I guess, maybe how does that.

Works on a geography standpoint, you know any areas of relative strength or weakness in the quarter year.

Yeah, I mean, I can say in this quarter, we saw the strength in orders really coming out of the U S and the APAC region, specifically, China, which was very nice to see you know I would say, we're watching in a region by region to sort of see the impact of some of the market dynamics.

I would say the only thing that we started to see that in the U S is from a revenue standpoint. It seems like there were some U S customers that were delayed by a quarter of some of the escalations that they were seeing primarily because they were saying their own supply chain challenges during the installation as well as higher cost.

Ah Ah Ah construction.

Construction and again, it's not that demand you know.

Stop it by any means the demand is very strong, but I think that it was flowing some of the installation timeline. So that's something that we're going to continue to watch. It. We look forward to see you know if it's a temporary installation yeah I wouldn't say there were some late breaking news in the U S on the Ro APM.

But again, the new reimbursement model and that looks like CMS is making a very strong statement that it is that it is.

It is very much alive.

And that it is going to happen. So I do think that that may have some impact in the U S market. So I'm excited to see that but well wait to see how that plays out.

Great. Thanks for taking the question.

The next question comes from Jason <unk> with loop capital. Please go ahead. Thanks.

Alright, thanks, taking the questions first off it's encouraging to hear the order rate has picked up in China can you give us a sense of.

How much China is in the backlog and kind of what's your outlook is in terms of when those might be place and actually recognized as revenue.

Yes so.

So we did say in the script without giving specific numbers.

But what is public information is here, who has been successful in getting through the bidding process and so we know that their 18th system.

So customers that were holding time based licenses that once they get that approval to successfully get through a bidding process. They should we should be able to recognize that revenue over the next next several quarters. You know we don't have specific times at this point because it sort of hot off the press.

That is a very strong sign of.

Our ability to get clarity in terms of that revenue.

Trajectory.

Okay, that's helpful and.

You also mentioned I think on some of the Opex.

Opex.

Focused.

Comments.

Two things.

It sounds like you're putting in more.

Actually discounting, which youre going to put in more strict.

<unk>.

Our protocols for sales meeting.

There is some variance.

Sounds like you might be tightening or am I reading that correctly and then secondly in terms of service margins maybe you.

Also said is that something you're going to focus on.

Would that be.

Internal focus internally focused meeting just greater efficiencies and consolidation internally or is that also a relief.

Related to pricing.

Yeah, So it's a little bit of both and I'll, let al comment.

Yes, no. Thanks for the question. So I think number one on the Opex piece.

See that we actually had a pretty good finish.

Opex and it's because we're continuing to drive a lot of cost discipline with our teams.

As you know we are in a pretty volatile.

Macroeconomic environment and so we just want to make sure that.

We're scrubbing all of our costs, both direct and indirect to make sure that anything that we are making this afternoon has.

The right return so that's it on the Opex side and then on the service margin side, it's a little bit of both Jason I think.

On the top line, we are making sure that our offerings are getting the right pricing. We're also extending on introducing a couple of new offerings, which we think will help us from a margin standpoint, but then more importantly.

The service side.

There is.

Quite a bit of cost. So we're just making sure that we are being efficient with all of that cost specifically when it comes to parts consumption and then also taking a look at our.

Feel engineer utilization.

Okay, Great. That's helpful as well and then maybe just a quick follow up on the <unk> relationship.

I guess I wasn't sure it might've been stated before in the release, but.

Is there also R&D collaboration or is this strictly focused on distribution.

Pinpoint is a commercial agreement that primarily in the short term focus on distribution.

Got it thanks, a lot and come back to you.

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

I. Thank everyone for your attendance on the call. This concludes the earnings call and we look forward to speaking with you all again in January for fiscal.

2023 second quarter earnings release.

Okay.

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

Yeah.

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