Q2 2023 Accuray Inc Earnings Call

Good day and welcome to the Accuray second quarter fiscal 'twenty twenty-three financial results 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 todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Jeff Jesse Chew Senior Vice President General Counsel and corporate Secretary. Please go ahead.

Thank you operator.

Well the update conference call to review financial results for the second quarter of fiscal year 2023, which ended December 31st.

John all the best National ones.

Development joining us on today's call are Stan winter at least President Chief Executive Officer.

I'll be providing accurate as chief financial officer.

We began I would like to remind you that all of the performance.

Actual results may differ materially from those contemplated or implied by these forward.

Factors that could cause results to differ materially are set forth in the press release issued after the market closed.

As well as in our balance sheet.

The forward looking statements on this call are based on information available to us.

Right.

No obligation to update them.

As a result of information future events.

All right.

Accordingly, you should not put undue reliance on any one.

A few housekeeping items for today's call.

First during the Q&A session.

So two questions and then re queue with any follow ups.

Second all references we make tweaks.

Order and dependent upon our fiscal year quarters. For example statements regarding my second one.

Our fiscal second quarter ended December 31st.

Thank you.

Additionally, there will be a supplemental slide deck.

This call, which can be accessed by going directly to equity.

Is that accurate.

With that let me turn the call him back.

Sure.

Thank you Jessie good afternoon, and thank you for joining the call I'm very pleased with our excellent performance in the second.

And our position going into the second half of fiscal year.

During the quarter, we delivered strong revenue and EBITDA performance.

Robust book of orders across all regions and made significant progress on our FY2023 strategic agenda are driving above market revenue margin expansion and profitability and yes, you did.

Formation of strategic partnerships that can create value for us.

We are doing this while navigating persistent macroeconomic and foreign exchange headwinds, which Ali will elaborate on later in the call.

I'd like to start by expressing my thanks, the accuray team that continues to deliver new levels of performance.

Well, we have seen some improvements in the supply chain environment over the course of the past year. Our teams continued to battle and rise to the challenge every day driven by accountability to accuray's higher purpose of ensuring that our customers have access to the highest precision radiotherapy tools available. So they can provide advanced.

Cancer care to improve lives.

Over this past year, we have taken actions to improve the flexibility of our supply chain and customer facing teams. So that we fulfill new demand as well as maintain the operations and satisfaction in our installed base of customers.

These initiatives have put after in a better position to manage the ongoing headwinds with teams performing at the highest level.

This is why I'm, especially proud of a couple of key accomplishments within the quarter. The first we delivered a record system shipments in the second quarter with 29, New systems delivered which represents a historical milestone for the company.

Second we are proud to be recognized by the 2022 I am the service track report for achieving best in service and radiation oncology based on the IMD Annual survey U S radiation oncology professional fees.

These are shining examples of the talent agility and dedication of our global Accuray team.

We continue to make significant progress advancing our innovation driven growth strategy.

Pipeline is the strongest in the company's history, and we continue to focus on solving clinical challenges and enhancing the value of our portfolio.

I am very pleased with the Q2 orders performance, which included 34, new system and represents 13% sequential orders dollar as well.

These results reflect the growing customer demand for accurate solution.

And the positive impacts from our commercial initiatives.

We believe these factors will continue to grow accuray's revenue faster than our addressable market for FY2023 and beyond.

Sharing key highlights in the regions the Americas region delivered another quarter of outstanding order performance with 92% year over year growth driven by the adoption of our latest innovations.

Where our T. The industry's only helical C P imaging technology, and synchrony accuray's exclusive real time adaptive radiotherapy delivery, our capabilities that are differentiated and driving win rate.

And then you asked in Q2, we saw that 100% of rat exempt orders included the options for clear, our tea and synchrony up from 80% in Q1.

In Japan, and Korea have games, the number two market share position and in Q2, we continued our strong competitive win rates.

50% of Q2 orders in Japan, where replacement of the competitors' aged installed base.

Additionally, the Japan team one seven Rad exact system public tender in a highly competitive battle against the number one market share leader.

Japan team continues to drive share gains and this is largely replacement market.

We also had strategic wins in the EMEA region with a competitive replacement ran exactly the Belgium is Charlevoix University hospital.

Additionally, we celebrated second cyber knife system win and strategic endorsement at the prestigious Euro radio surgery Center in Munich.

Dr. Alexander watch it.

Director of the facility was quoted saying he believed and cyber knife is the number one technology for delivering radio surgery and purchased the additional fiber night. So they can accommodate the growing patient demand for ultra precise babies surgical care.

Turning to China, our joint venture continues to be a long term value driver for accuray and we continue to dominate market share in the Premier Taipei radiotherapy market segment with greater than 75% market share.

In fact D. We advanced our progress completing our N M P. A regulatory submission until let's see.

<unk> will be our domestic China, many J D product that will compete in a type D segment, which is the largest segment of the China market with an estimated annual market potential of $600 million.

With respect to accuray's Premier brand reputation and awareness.

Second it will also help drive success in share gain and Pelosi and the type B value segment upon introduction.

Further we believe our success with the telephone C product in China will have translation potential globally as we enter new geographies to the value segment product, allowing accurate to compete in the large $1 $3 billion annual global value market segments.

Additionally in November the Ministry of Health Central bidding process for type a licenses resumed after delays due to COVID-19 lockdown.

Teen Accuray systems were awarded to customers during the central bidding process and are expected to convert to revenue over the next few quarters.

Despite the impact of the challenges of the Covid Lockdown in China demand for radiotherapy system installation and training remains very high we saw this firsthand in accuray's, 10th annual cyber knife users meeting in November where training participation rates were tremendous.

For 100 participants attending in person and 850 participants joining the training online and.

We continue to accelerate our top line through growth initiatives. We are equally laser focused on profitability. We made solid progress on our margin and profitability expansion plans and saw early indicators of positive impact of our service margin in Q2, an area, where we think we have tremendous.

Opportunity.

As we have mentioned on recent calls the leadership team and I are focused on three main pillars.

Pricing discipline, and our commercial efforts, including new value added service offerings.

Reducing product and service costs through efficiency, and optimizing operating expenses, which will have a meaningful impact in the near term.

Finally, establishing strategic partnerships are central to our growth agenda, allowing us to provide best in class solution and expand the scope of our commercial access in Q2, we advanced key strategic partnerships. Most recently with feedback introducing the vital whole breast package that.

Allow accuray to offer the most comprehensive breast package in the marketplace Research also continues to be a very strong partner for us in treatment planning solutions oncology information system and with the development of Artemis adaptive radiotherapy.

It's clear our T imaging and researches industry, leading digital technology in auto contrary algorithms.

Illusion will further differentiate accuray is the only company that offers a comprehensive adaptive radiotherapy solution that can correct for patient changes both during treatment with synchrony and between treatments with Artemis, both with precision speed and patient experience.

Finally, we're very excited to have announced a commercial partnership with GE healthcare. This partnership pairs to industry technology leaders together with the alliance goal of providing personalized ultra precision solution throughout the care continuum from diagnosis to treatment.

<unk> Yep.

Our commercial teams are engaged leveraging our respective strengths and developing customer pipeline. We believe the GE partnership will be a powerful value driver for patients providers and shareholders.

I will now turn it over to Ali who will speak more about our financial performance.

Thank you Suzanne and good afternoon, everyone.

I'd like to begin by thanking our global cross functional teams.

Sydney to deliver a strong second quarter of fiscal 2023, despite ongoing macroeconomic challenges, including supply chain shortages global inflationary pressure and FX headwinds in our non U S markets net revenues for the second quarter was $148 million, which was down 1% compared to the prior fiscal year, primarily due to supply chain constraints.

And $6 $1 million of foreign exchange headwinds net revenue on a constant currency basis was $129 million, which represents a 4% increase versus the same period in the prior fiscal year.

Product revenue for the second quarter was $63 $3 million, which was up 4% from the prior year and up 8% after adjusting for the impact of FX as Suzanne mentioned this product revenue represented 29 system upgrades, which is a record number of system shipments in the company's history.

It's important to note. This was achieved while continuing to navigate the supply chain issues, which really speaks to the hard work of our cross functional teams.

Service revenue for the quarter was $51 $5 million, which was down 7% from prior year on flat once adjusted for the negative impact of FX, which was $4 $1 million.

Gross orders for the second quarter were $79 million, which is an increase of 13% sequentially and a decrease of 7% from the same period in the prior fiscal year and represented a healthy book to bill ratio over 1.2.

As mentioned in prior calls we believe the book to Bill ratio is the right metric to monitor to ensure a healthy growth of our backlog and to focus our teams to book orders don't convert to revenue in 30 months.

Most orders on a constant currency basis were $82 $6 million.

Moving to backlog, we ended the second quarter with a backlog of approximately $550 million, which is 11, 4% lower than prior year due to $41 $4 million of orders in Asia beyond 30 months within the quarter, mainly driven by customer installation timelines we.

We had no order cancellations within the quarter as discussed in prior quarters, our global commercial teams continue to be focused on converting all orders regardless of age to revenue in Q2. This resulted in $6 $5 million of orders converting to revenue within the quarter.

Previously aged out.

Our overall gross margin for the quarter was 37, 4% compared to 36, 7% from the prior year.

<unk>, which is an increase of 70 basis points, despite the FX headwinds.

This showcases our focus on margin expansion through pricing and cost discipline are starting to take shape.

Operating expenses in the second quarter were $40 3 million, which included nonrecurring charges of $1 $9 million for restructuring charges and <unk> $5 million of ERP in Europe people related expenditures compared to $38 $6 million in the second quarter of prior fiscal year.

Excluding non recurring charges total operating expenses.

Expenses were down 2% compared to the same period.

Prior year illustrating good cost control as we continue to push our teams to focus on return on investment.

Operating income for the quarter was $2 $7 million compared to $4 million from the prior year adjust.

Adjusted EBITDA for the quarter was $8 $5 million compared to $6 8 million in the prior year, which represents a 24% growth year over year, despite the FX headwinds, which impacted our topline by $6 $1 million.

A 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 short term restricted cash amounted to $68 million compared to $81 million at the end of last quarter net accounts receivable were $89 million probably dollars from last quarter as we had quite a few shipments in the last months before our net inventory balance was $156 million.

Up 3 million from prior quarter, primarily due to three units in finished goods, which we expect to ship out to customer sites in early Q3.

Although we continue to battle the budget constraints, we are taking firm actions to bring our inventory back to healthier levels in the coming quarters optimize our cash and working capital.

While we delivered strong results in Q2, and continuing to navigate through supply chain constraints.

Ben associated with foreign exchange has had a $12 million impact on our top line in the first half of fiscal 'twenty to 'twenty three.

Currently we are reiterating our full year guidance with revenue in the range of 447, 455, and $8 of EBITDA target range of $26 million to $30 million. We will continue to closely monitor the impact of FX was flat.

Why change as we enter the second half of our fiscal year.

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

Thank you Ali and.

In summary.

Again, thank our teams for their unwavering support of our customers. So they can provide the highest level of care to patients. While we expect to continue to navigate the uncertainty of the macroeconomic conditions, we've seen over the last year and we remain encouraged by continued customer demand for Accuray technology.

And our robust product pipeline as well as market trends that favor accuray's technology, and where we are positioned to win and take share.

As an organization, we are strengthening our fundamental advancing multiple growth catalysts and creating new strategic partnerships 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 Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press star.

And then two at this time, we will pause momentarily to assemble our roster.

Okay.

Our first question comes from Maurice I bolt with.

B T. I G. Please go ahead with your question.

Hi, Good evening, Suzanne and Ali Congrats on a very nice quarter.

I wanted to start here and try to understand a little bit more about what drove that record product revenue. The record shipments that you mentioned in the quarter was this a bit of a backlog that had been building up in some geographies, what really drove kind of the strength in that metric this quarter.

Hi, Marie Thank you for the question Yeah, I would say our revenue was really driven by two regions. The EMEA region as well as the Japan region, but we did start to see some recovery in China as well and so again really working through our supply chain to be able.

To manufacture as much product as possible and be able to fulfill that demand our customer demand continues to be very very strong and you know again.

Working through our supply chain to make sure that we can fulfill demand is at the top of our priority list.

Okay, that's great and and while we're talking about supply chain challenges I know, you're navigating quite well right now, but what are the specific components or or issues, you're dealing with there and I guess as a as a partial follow up on China are you expecting any impact in the fiscal third quarter from.

Sort of the reopening of the lunar new year any of the COVID-19 dynamics around that quarter and thanks for taking the questions. Yes. Thanks Marie Yeah in general just from a supply chain standpoint, I would think that we are seeing you know over the course of this past year, some easing of supply chain and certainly from our standpoint, you know instead of.

Dealing with you know to two dozen supply chain vendor issues I think we've narrowed it down to you know less than a half a dozen now those half a dozen are those challenges are still real you know we're working very closely with those suppliers. We're micromanaging those operations were helping to source material.

You know we're building in the flexibility I think overall in our supply chain.

Redesigning, where we need to you know at the same time, you know that it continues to be a headwind and you know we battle. It every single day.

In terms of China, I would say that you know we are seeing some recovery.

Opening up.

The Covid Lockdown, our orders have been very strong in the first half. So that is a good indication I think of things starting to turn them in China and so you know we are expecting that the second half of the year, we're going to see some recovery.

Wonderful thanks, so much.

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

Hi, good afternoon, thanks for taking my questions.

Wanted to just start off and ask about the Americas order growth.

Big Big performance for that region and wanted to just.

At a reminder, better understand the strategic initiatives that are in place to kind of drive growth of orders in the Americas region. I know you have the technology portfolio. That's in play, but with any other strategic initiatives that were successful and that could continue through the remainder of fiscal 'twenty three and beyond.

Yeah, Josh Thanks for the question the Americas region is obviously the largest health care market globally. You know we have doubled down in terms of our investment in commercial organization and initiatives.

One of the big growth catalysts is the very large replacement market. This is largely a replacement market in the U S. It's a mature market them. You know we have an older aged installed base I would say our sales teams are firmly focused on ensuring customer satisfaction within.

That installed base, but also encouraging upgrading those systems through trade up trade in trade up.

Two our latest performance capabilities, so that they can start to provide advanced care like ultra hyper fractionation.

Added sovereign knife radio surgical capabilities until we do it you know we do expect to continue to see the return on those investments and that focus.

Thanks for that.

I ask about the type a wins in China and the revenue conversion cycle here it seems like it's.

Great.

Revenue opportunity in the back half and into early fiscal 'twenty four.

One just can be any more details you can share just on that.

November bidding process and just within the type a.

A word channel just what should we expect next as there is are there more rounds to go and is there more opportunity for accurate.

Yeah again, thanks for that question Yeah, no. The type a we were very encouraged to see the bidding the central bidding process resumes you know after a period of time during Covid, where you know it was delayed and so this is very encouraging and I think it's a good sign of recovery in China and you know this is the bidding.

Process is the next step to you know being achieving the funding for the systems and beginning of the installation and so for US. It's very strategic you know it is the opportunity to place 18 more systems into the China market, you know, which again just is that critical.

Mass of Premier our systems at Premier institutions within the market that we think will drive the the branding for accuray within that sub region.

No we do expect there'll be additional bidding central bidding processes that will.

Will happen throughout the year, we don't have any visibility at this time into timing and certainly there's a new five year plan that will be announced that will get a better indication I think of type a and type b market sizes.

Great if I could just sneak one more in just while we're on China and just.

Everything you.

Downloaded today on the progress with the regulatory submission and some of the completion of production and testing it too.

Factoring facility things are on track, but should we still be thinking about a fiscal 'twenty four.

Crude oil and launch maybe just refresh any timelines you'd have us thinking about for that.

Tom will see through the JV in China. Thanks, Yeah, I think no additional information from what we've discussed in the past you know a typical regulatory cycle. You know is about 12 months and again, we can never predict you know the regulatory cycle, but if we assume that it will be typical yes, we have.

Still holding to potential impact in the back half of FY 'twenty four.

From an approval for the tomo product.

Great. Thanks again.

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

Hi, Thanks for taking the questions and congrats on the strong quarter.

Maybe just first off you talked about the the Munich center, adding the second cyber knives.

I'm just curious if you could just remind us how often you see that dynamic of centers, adding multiple library systems.

Yeah. That's a great question I think we're seeing it more and more we're also seeing them centers that are starting to get the combination of the cyber knife and erratic exact and I think that that is a commercial strategy that our teams are showing how our how our sites can really build up their patient referrals how they can.

Build their business by having this combination of a radio surgery system and the cyber knife, but also a workhorse system like the rat exact them. So I think we're going to continue to see it more and more but we're absolutely thrilled with this center in Munich, primarily because they're very well known for radio surgery. The first system.

Really bought for intra cranial type of applications and he is buying the second system now for more extra cranial more full body.

F B R T type of applications and so again, we think it's a strong endorsement and a site that we can use for strategic referenced.

Great great.

Maybe just one follow up here.

Yes regarding kind of the the customer installation delays with age outs just curious if there's any updated insight.

The construction environment, whether that's related to semi worker shortages of supply machines.

Any update there yeah, yeah, Yeah, no I think that's a great question you know I would say the age out is really you know driven largely by systems that we had in the backlog that are in Russia that have you know aged out you know still orders that you know we hope we'll go to installation.

But you know because of the timing and what's going on there have aged out also I think that in general you know Covid had a impact on the length of time for some of our backlog we are firmly focused on or new orders.

Trying to put it through the lens of orders that we believe will go to installation with them 30 months. So that we don't have this sort of dynamic, but I would say in general we're not seeing them.

Increased length of time for installations, and I think it's very region dependent but you know there's some good research that is out there on the capital equipment spend them and I think that there's a couple of key cadillac's one radiation oncology is a revenue generator for the hospital, so it's well positioned.

For priority in capital equipment spend you know, it's also a strategic service line and oncology you know as acute care area and then the third is there is a large replacement market opportunity and in that research that was done you know how all the equipment seem to be a key.

He one of the key points of prioritization of capital equipment fun. So you know again, we think that that will drive priority amongst.

The installation dollars that are needed.

Great. Thanks, I'll jump back in queue.

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

Thank you.

Congratulations on what I think is a terrific quarter under the circumstances.

I have.

I am pleased to hear you talk about competitive win Suzanne and I Wonder if you could just amplify a little bit on what you think the dynamics are that are leading to competitive wins in.

And that clearly are expecting just to call out the victims, but if you could just highlight.

What do you think is leaving your wins versus tablets competitors that would be great.

Thank you for the question Brooks Yeah, No. We're excited I think about our competitive wins.

Obviously, a lot of it is driven by our new product innovations you know, we talked a little bit and you know on the in the basic.

That's part of a call on how many systems are ordering clear our tea for example, in synchrony and Volvo Ultra as well you know that is driving a lot of the differentiation of our products compared to competition and and I think that that's gaining traction you know we're seeing the ing.

Kris and growing demand for our products and the same thing in.

For the cyber knife you know it continues to be a very unique product that just based on the technology is able to do things that other platforms are not able to do that being said I think there's disruption in the competitive landscape that is allowing us to get the <unk>.

Look you know that maybe we wouldn't have gotten you know five years ago and we are we are in a very strong position and you know I think that with the growing use of S. P. R T and ultra hyper fractionation the need for precision is never been more important.

And you know, we bring unique product innovation to the table that others cannot so all of those things I think are just helping us along with commercial focus you know and a little bit more of a commercial swagger I think and knowing that we can win against them you know previous market leaders.

Yeah. That's fantastic. So my second question I know you talked a little bit about it in the prepared remarks, but you know increasing your service revenue and driving margin improvement our key strategic objectives.

Give us any additional color on you know what.

Where you feel you are.

That we might be able to see progress.

Yes, absolutely.

Great.

Yeah, it's absolutely a key priority. We also think we have tremendous opportunity in the service business as well as margin expansion I'll, let Ali talk a little bit more about what were those areas.

Yeah absolutely.

<unk> you know on the service side.

We are we think there is a massive opportunity to continue to increase the top line on that annuity business.

It's through enhanced offerings that could be around training that are more tailored to our customers' needs.

And we think the bigger opportunity in service beyond just the top line growth is around margin expansion.

And you don't really.

Is focused on just really optimizing that business and making sure that we focus on two of the big cost drivers over there, which is really around parts consumption.

And our hearts consumption and understand that a little bit better and really focus on parts that were utilizing quite a bit.

And you know actually try and optimize those and then when it comes to after utilization really drive that down.

Yeah.

Fantastic that's great. Thanks for taking my questions.

Our next question comes from Jason Wittes with loop capital. Please go ahead hi, thank.

Thank you for taking the questions.

First of all you know that.

Two things in terms of what's.

Driving this quarter and it looks like should drive through the rest of the year. One I think you guys had mentioned replacement cycle or replacements at least I mean, where are we in terms of replacement cycle and I don't know if you can even give us any kind of color in terms of how many.

Oh the system sold.

Regionally were replacements and then secondly, you do have quite a bit of.

New innovations are offering at this point.

Can you give us any kind of indication in terms of what the take rate is for those and what that might be doing to S piece.

Yeah, I'll start and then I'll hand over on the ASP question to Ali, but yeah, I see it in our mature markets and our developed markets like the U S. Like Western Europe like Japan, you know it is largely a replacement market and so you know the goal really for our teams is.

<unk> elite on bringing our aged I be up to the latest performance you know I would say through Covid you know the average do use of our systems have gone from 10 year life to 12 to 12 and a half year life and so there is this is a growing demand and growing.

Catalysts for us to be able to bring those customers to the latest revision and certainly our N P either supporting that as well as the clinical trends you know with that you know it drives a higher value and higher pricing and you know I'll, let ali speak a little bit more to that.

So just to reiterate Suzanne point, the majority of the trade in trade up and activity is really happening.

Within our mature markets, but going to your pricing question.

That's part of our margin expansion initiatives right pricing is at the cornerstone.

Our margin expansion initiative, and we've actually done quite a bit over there in terms of changing.

Changing things around commercially number one we've actually aligned our commercial teams.

Incentive to ensuring that we can reach the profitability targets for new incoming orders and we've actually armed them with tools. So that you know as they are positioning confer.

Configurations to our customers, we can optimize it sort of that.

We meet our customers' needs, but then we're also optimizing our margins. So I think those two things coupled together are really driving a focus not only on bringing in volume, but bringing in profitable orders volume.

Actually we are starting to see some pretty positive signs of that reflected in our overall ESP for.

For the quarter, so that is very encouraging and so all of that fills our backlog with good healthy orders and those are and we're just focused on converting those orders into revenue.

Oh, Okay. That's helpful and maybe just a quick follow up.

Maybe with the exception.

China, you know I wouldn't say, we're in a post COVID-19 world, but we did you know we have been talking to hospitals.

And a lot of them are saying, what we've kind of held back in last three years, and we're now kind of going back in.

Reinvesting, where we haven't notably in some capital equipment products.

Is that your sense as well in terms of you know, what's going on especially in mature markets.

Yeah, I would say its highly dependent on the institution I think a big factor is also how old is their equipment because I do think that that's what's driving certain institutions them to you know to be able to upgrade their equipment.

But I would say and I again I go back to the research that we've done in this area are really surveyed the C level in capital equipment, I would say about a third of them have already seen some capital.

Shipment easing, but the rest are feeling like at least by the second half of calendar year 'twenty three and into 'twenty four we should get back to pre COVID-19 levels.

Okay, great. Thanks, I'll jump back in queue.

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

Thank you very much and this concludes our earnings call. We are looking forward to speaking with you all again in April for our fiscal year 2023 third quarter earnings release, Thanks for joining us.

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

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