Q3 2023 Accuray Incorporated Earnings Call
[music].
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And welcome to the accurate third quarter fiscal 2023 financial results Conference call.
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Thank you operator, and good afternoon, everyone. Welcome to Accuray's Conference call to review financial results for the third quarter of fiscal year 2023, which ended March 31st 2023 during our call. This afternoon Maxwell will review recent corporate developments.
On today's call are Suzanne Winter, Accuray's, President and Chief Executive Officer, and Ali Pervaiz accuracy, 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.
Based on forward looking statements on this call and 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.
2023.
Italy, there will be a supplemental slide deck to accompany this call, which you can access by going to wrap it to accurate investor relations page at investors the accurate dot com with that let me turn the call over to <unk>, Chief Executive Officer Suzanne Winter.
Thank you Jessie good afternoon, and thank you for joining the call.
Let me start by saying that I'm very pleased with our third quarter results, which demonstrate meaningful progress in achieving the long term agenda that I set forth when assuming the role of CEO just under a year ago I'm enormously proud of the Accuray team who are laser focused on our main priorities driving above market.
Revenue growth expanding profitability through operational efficiencies and pricing discipline and leveraging strategic partnerships to more effectively compete in a global radiation therapy market.
During this quarter, we grew global revenue by 23% year over year. We also achieved a new milestone in systems manufactured and shipped within the quarter, representing a 67% unit growth compared to the prior year period.
Although we continue to face headwinds from the supply chain, which had a negative impact on our margins customer demand for the installation of cyber knife rat exact in tomo therapy systems is robust.
Our operations and regional teams are consistently performing at the highest levels collaborating closely with our supplier partners to minimize supply chain disruptions and working with our customers to ensure timely delivery and installation.
Organization has rallied around converting our backlog of orders into customer installations. So theyre more institutions have access to accuray products to deliver advanced care to their patients.
We are experiencing strong demand for accuray products fueled by our new product innovations, including clear, our tea and synchrony on robotics apt as well as the cyber knife S. Seven our commercial priority is on converting the aging installed base of systems for the most recent performance capabilities. So our customers.
The latest generation of high precision robotic and helical radiation therapy tools to provide advanced care and help our customers achieve strong competitive positioning in their market.
In the quarter global product revenue grew 45% year over year, driven by the developed markets America's product revenue more than doubled EIA EMEA delivered 66% product revenue growth and we achieved almost 150% product revenue growth in Japan, where we are number two in.
Market share.
Expanding our service revenue is a critical pillar in our revenue growth and in Q3 Global service revenue grew by 4%.
Emerging markets like APAC played a significant role in driving growth, particularly in China, where our JV team C. N N C. Accuray increase the number of executed service contracts for their expanding base of installed systems, resulting in a strong 28% growth in service revenue.
Orders were solid with 34, new system orders, representing a 3% growth in units year over year and consistent with our target of 1.2 book to Bill performance. Although we saw some orders in the U S region push out of Q3 to future quarters due to delays in purchasing cycles.
U S order backlog grew 8% within the quarter compared to the same period, a year ago, indicating continued growing demand from U S customers.
Our next strategic priority is driving profitability expansion in Q3, adjusted EBITDA grew 54% year over year, Despite FX, which had a $4 $1 million negative impact to our top line versus last year, and inflation, which impacted our margins by $2 $2 million.
While we are still in the early stages of our margin expansion initiatives. We are already seeing the results of our strategic pricing actions being reflected in higher average sales prices for new orders, which we expect will impact our revenue and gross margin in future quarters.
Additionally, Ali and I are driving operational rigor and review of every area of our business spotlighting areas, where we can build efficiencies reduce waste and improve our return on capital all.
All these actions are helping us in the short term to navigate the FX and inflation headwind and reduce volatility from the current environment, while positioning us to accelerate profitability in the long term when these macro conditions improve.
Expanding patient access to Accuray technologies worldwide is a fundamental part of accuray's vision, particularly in regions, where technology penetration is currently low.
In Q3, our global installed base of customers grew by over 4% driven in large part by installations in the APAC region, China grew its installed base by 29 systems compared to the number of systems at the end of Q3 last year.
Our C N N C. Accuray commercial team has been executing targeted prelaunch market activities for our tomo C type b product with the made in China designation.
Regulatory approval by the National Medical products administration in China for the Tomo product is expected at the end of the calendar year and the response from Kols to the feature set has been strong.
In South Korea, we conducted our first users meeting with over 100 participants attending since transitioning our commercial service operations from indirect to direct the decision to go direct in service in South Korea aligns with our commitment to get closer to our customers in target markets, where we believe.
We can improve the local technical and clinical support of our installed base.
In Japan, we were very busy this quarter installing 10, new systems in Q3 and growing the installed base by 9% year over year to 143 systems.
Six out of these 10 systems were competitive replacements and will help to build up our reference base.
Although Japan is considered a developed and highly penetrated market. It is still in the early adoption phase of using shorter course S. P. R. T treatments for prostate cancer compared with the U S or western Europe .
In March Accuray held a dedicated SBR T course for prostate cancer in Tokyo led by World Class Faculty from N Y U and the Royal Marsden, along with our Chief Medical Officer, Dr. Seth Blacksburg.
This interactive hands on course received a tremendous response, which we expect will generate additional demand for accuray technology in the Japanese market.
We are committed to driving advanced education to support clinicians worldwide on the use of F. B R. T treatments to advanced care and we plan to take the course on the road with China is the next stop.
EMEA continues to be our largest customer base growing 5% year over year and achieving the 350 installed base milestone.
As mentioned earlier in the U S product revenue doubled compared to a year ago with solid customer demand for our differentiated platforms. In fact cyber knife was recently featured in the journal of the society of mechanical engineering as one of seven robots can save your life.
Our final strategic priority is leveraging our commercial partnerships with the goal of increasing our commercial scale and improving solution value for our customers.
Our partnership with GE healthcare continues to advance on multiple commercial fronts.
In the quarter, we held a joint oncology innovation workshop in our EMEA region and our commercial teams in the U S are working together building joint customer strategies.
We are seeing growth in commercial momentum and are building a sales funnel from a combined activities.
Additionally, we are in the early phases of expanding beyond the U S to other target regions as well and finally at the European Society of radiation oncology Astro in Vienna, taking place in May we will align marketing themes to promote our commitment to interoperability within the radiation therapy department with it.
We'll of ensuring open access to the best technologies available for each unique patient treatment.
I'm excited to see our partnership is progressing and the expanding areas of collaboration between our companies.
I will now turn it over to Ali who will speak more about our financial performance.
Thank you Suzanne and good afternoon, everyone I want to begin by thanking our global cross functional teams, who executed with an unwavering dedication to deliver robust third 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.
For the third quarter was $118 million, which was up 23% compared to the prior fiscal year and the highest reported revenue quarter in the company's history exhibiting strong demand for our innovations net revenue on a constant currency basis was $122 million, which represents a 27% increase versus the same period in the prior fiscal year.
Product revenue for the third quarter was $63 million up 45% from the prior year and up 50% on a constant currency basis.
As Dan mentioned this product revenue included 30 systems, which is a new record number of system shipments in the company's history, breaking last quarter's system shipments of 29 units.
Like last quarter. It is important to note that we achieved this while continuing to navigate ongoing supply chain issues, which speaks to the hard work and commitment of our cross functional teams.
Service revenue for the quarter was $55 million up 4% from the prior year and up 8%.
Once adjusted for the negative impact of foreign exchange, which had a $2 2 million dollar impact on the top line in Q3.
Gross orders for the third quarter were approximately $74 million, which represented a book to bill ratio of 1.2, consistent with our target as a reminder, our book to Bill ratio is defined as gross orders for the period divided by product revenue for the period.
We continue to monitor the book to Bill ratio is the right metric to ensure a healthy growth of our backlog and the focus of our teams to book profitable orders that will convert to revenue within 30 months.
Gross orders on a constant currency basis were approximately $77 million.
Moving to the backlog we ended the third quarter with a backlog of approximately $507 million, which is 13% lower than prior year due to nine orders representing $26 million at aged beyond 30 months within the quarter.
In Q3, we had five orders as back into revenue within the quarter, representing approximately $12 million of orders. Finally, we continue to see low order cancellations with two quarter cancellations within the quarter for approximately $5 million.
Our overall gross margin for the quarter was 32, 8% compared to 36, 2% in the prior year with the year over year decline, mainly driven by FX headwinds, which had a $4 1 million dollar impact the topline, which translates to roughly three five points of gross margin pressure and continued inflationary pressure of approximately $2 2 million.
Which translates to one eight points of gross margin pressure.
Adjusting for the impact of FX and inflation, our gross margin rates are in line with prior year and prior quarter.
Operating expenses in the third quarter were $36 $4 million, which included nonrecurring charges of $8 million for restructuring charges and $1 $1 million of ERP and ERP related expenditures compared to $35 $1 million in the third quarter of the prior fiscal year.
Excluding nonrecurring charges total operating expenses were down 2% compared to the same period of the previous year showcasing focused cost control as we continue to push our teams to prioritize return on investment.
Operating income for the quarter was $2 $3 million compared to negative $3 million from the prior year.
Adjusted EBITDA for the quarter was $8 $3 million compared to $5 4 million for the prior year period, representing 54% growth year over year, despite the FX headwinds, which impacted our topline by $4 $1 million in Q3, we.
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 $89 million compared to $68 million at the end of last quarter, which is an increase of $21 million, reflecting substantial collections and focus on optimizing working capital.
Net accounts receivable were approximately $77 million down $12 million from last quarter as we focused our regional teams are timely collections, our net inventory balance was $151 million down $5 million from prior quarter as we drive actions to bring our inventory back to healthier levels to improve our cash position.
While we delivered strong results in Q3, and continuing to navigate supply chain constraints the headwinds associated with foreign exchange has had a $16 million impact to our top line year to date in fiscal 2023, most of which would have flowed down to adjusted EBITDA.
We are reiterating our full year guidance with revenue in the range of $447 million to $455 million and an.
<unk> EBITDA range of $26 million to $30 million, the lower end of the range assumes that FX and supply chain headwinds do not materially improve over Q3.
We will continue to monitor key currencies as we close out Q4 and FY2023.
Those are our key financial highlights and with that I'd like to hand, the call back to Suzanne. Thank you Ali.
This quarter represents another strong period of execution and demand for our highly innovative solutions I'm extremely proud of the accuray teams and while we are still in the early innings of our journey. The teams remain laser focused on execution, making steady and meaningful progress against our long term goals.
We strongly believe that the investments we are making to serve our customers more effectively while focusing on improving operational and financial discipline, all matched with a best in class team will play accuray in the strongest position to transform radiotherapy for patients and health care providers worldwide.
I will now turn it back over to the operator for Q&A.
We will now begin the question and answer session.
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At this time, we will take our first question, which comes from Brooks O'neil with Lake Street Capital markets. Please go ahead with your question.
Good afternoon, and congratulations on a terrific quarter.
I would first like to drill down just a little bit in China, and I'm, hoping you could give us just a little overview.
Sort of the macro.
Environment that you see there talk a little bit about what you're expecting to take paid market and then just help us to understand a little bit more about the sort of the time schedule.
For your growth in the type B market with your joint venture partner.
Thank you Brooks for the question, yes in China. So we have continued to see China open up get back to normal from the Covid Lockdowns that we saw at the end of the calendar year, and and I would say, where we're starting to get back to normal you know in terms of the <unk>.
<unk> effort that our joint venture is doing on the ground. You know things were looking at now is major milestones. One of course is the tomo C approval. That's our joint venture developed type B product, we're still expecting approval at the end of the calendar year.
And really impact to.
To our P&L in the back half of FY 'twenty four as a result, I will say, though that the teams are out and doing targeted sort of prelaunch activities and they did a a lunch or very targeted marketing.
A presentation to Kols in February and we are expecting our first major show to be the China medical equipment a meeting in May.
And where we will have the time, let's see on the show floor and so we're very excited about the response at least initially from Kols on our feature set so that'll be an important part of our business and the other thing that we're looking at is for the formal announcement of the new 14th five year plan, that's where they officially tell us what the core.
Those are for type a and type B I think we're getting a little bit more information on what the definition of the products for type a and type b.
But we want to participate in both as you know we have a very strong historical market share in type a we want to continue that it's greater than 75% market share that is really the high end of branding, which we think will not only help us to get more type of business, but also a halo effect on the type b.
When we come to market with the tomo product and again the only other thing the Thomas C product because it is a joint venture developed product will be considered made in China designation, which will be important for our ability to compete. So you know we're excited about the prospects in China and again those are the two milestones that were law.
Looking at for greater acceleration.
Perfect and then if I could just ask Ali.
Maybe.
In terms of things under your control I understand the FX impact, but what are the two or three biggest areas of opportunity for margin expansion that you see going forward.
Yes, Brooks thanks for the question.
Our focus continues to be an expanding our margins and we sort of laid this out in the past in which we're really focused on pricing, we're really focused on our service business and getting.
Our service margins back up to pre Covid levels, and then from a product standpoint, we're really tackling product Cogs.
And then obviously, you're taking a look at Opex and so the combination of all of that's really going to help us on our margin expansion journey I think what I will tell you is that we are starting to see some really positive indications on the pricing front and which we are seeing accretion on orders that we're putting into our backlog, which will reflect in our P&L once the dose.
Orders go to revenue.
Great. Thank you very much and again congratulations you guys are doing an amazing job.
Brett.
Our next question will come from Neil Chatterji with B Riley. Please go ahead with your question.
Good afternoon, and thanks for taking our questions and congrats on the strong quarter.
Maybe just on Japan, So obviously strong growth there.
Competitive wins and sounded like a successful interactive cores.
Well it might be still early kind of in that shift.
Could you just maybe just elaborate on those.
Any dynamics, there and what's helping to drive that strength.
Yeah, we have a tremendous.
A tremendous team in Japan.
And I think they have are employed at the exact right strategy you know for that market. It is a developed market is fairly penetrated in terms of radiation therapy. You know most of the work that they're doing now, especially in getting these competitive wins is making sure that the key opinion leader.
Within Japan, our our technology and clinical advocacy associated with bringing advanced radiation therapy to the Japanese patients.
That is why they were incredibly interested in.
Advanced education on F. B R. T. We think S. P. R T and that's the shorter duration higher powered radiation therapy treatments.
Is the future of radiation therapy, we think it's good for patients the clinical data supporting that and it's obviously reduced sessions reduced cost to the health care system.
But it does require training it does require confidence to be able to perform S. P. R. T and so we do think the U S is a little more advanced in terms of the application of S. P. R T and prostate cancer.
Cancer and so what we did is we have we support a fantastic SPR T course by NYU Winthrop. That's held every year here in the U S and we basically worked with them to package a specific course for Japan.
That hands on training have that practical discussion and we brought over a lot of the faculty from our U. S course. It was so well received we think that's going to be incredibly important to the adoption of FBR tea, which really favors accuray technology and again you know I think it was so successful that we're gonna take it on the ROE.
Road in some form or fashion for other markets like China, where there has been a high demand for it as well.
Great Thanks for that color.
Maybe just one quick follow up.
Just in terms of.
No potential impact that youre seeing or might expect from the positive PK trial data just curious to hear what you're expecting there.
Yeah, I think it's again more and more long term clinical data is starting to come out from the use of S. B R T and prostate cancer and again you know long term data is important because you know not only is it on making sure that you know.
There's there's tumor control, but it also has an impact on what are the long term side effects to patients and every time, we get this long term clinical data specifically on patients treated on the accuray technology, the cyber knife, we're seeing reduced impact in quality.
They have life compared to.
Other technologies. This particular trial pace a was S. P. R T compared to prostatectomy, so removal of the prostate surgery and you know I think it just illuminate more choices for patients if they are diagnosed with prostate cancer to really.
Understand what their options are and you know and have that discussion with their clinical partner.
Okay.
Great. That's it for me I'll jump back in the queue.
Yeah.
And our next question will come from Marie Thibault with <unk>. Please go ahead with your question.
Hi, Good evening Susanna Li Thank you for taking the questions congrats on a great quarter and especially good work on the progress on the on the working capital nice to see.
I wanted to start here and ask a little bit about I think I heard a mention of some purchase delays pushing out some orders here in the quarter and I wanted to hear a little bit more about that if that was anything sort of a one time situation or if that was a wider trend what you're seeing there on the ground.
Thanks for the question Marie Oh, Yeah, No I think we're watching it to see whether it is a temporary dynamic in the U S or if this is something that you now proceed for more quarters, but we did see some delays in the U S. I think that.
In Q3, we saw some of the orders.
Two Q3 not loss, we're still the vendor of choice, but customers, taking a little bit longer in their sales process to get it approved.
And so you know that was unique to the U S. We aren't seeing that in other parts of the world really for you know in general and so we are taking a look at it but I think there are a couple of different a couple of different areas that is causing the delay one I think theres more approvals required to I think there's more interac.
With the it department and making sure that cyber security approvals are in place before they sign off and then third you know I do think the cost of capital obviously is more expensive for a lot of these health care systems, and so just making sure that you know that all of that is in place has.
<unk> has put a little bit longer timeframe, I think I'm getting some of these across the finish line.
Yeah, absolutely all makes sense and good to hear you're watching it and then I wanted to ask you know given such a such a strong revenue result in the quarter. Just curious why you decided to maintain the revenue outlook for the year certainly it sounds like a lot of this is sustainable and you've been pushing and making progress on.
The installation side, so help us understand a little bit about how you came to that guidance maintenance and thanks for taking the question. Yeah. No I think first of all I think we are enormously proud of where we are and what we've already sort of absorbed as I only had pointed out we've had a 16 million dollar impact to the top line as a result of FX just year to date.
Now that has been significant and we have held our guidance I think that you know if FX continues to be an issue in Q4 or supply chain is.
As it was in Q3 that I think we're heading more toward the lower end of the guidance. If things improve then obviously were more to the mid and high end of the guidance.
So you know, we're we're cautiously optimistic that things will improve but we'll continue to watch that.
Alright, Thank you Susanne.
Yeah.
And our next question will come from Josh Jennings with Cowen. Please go ahead with your question.
Hi, good afternoon, thanks for taking the questions.
To ask about.
True next month and I believe the plan was to showcase Artemis.
<unk>.
Just wanted to know.
We should we expect.
And coming out of that meeting and then is the online adaptive.
Platform going to be introduced and will it be commercialized in the back half of the calendar year internationally.
Yeah. So you will see you will see Artemis on our shelf floor at Astro Josh.
Our big introductions really at Astro or a full launch of the vital hold for the European market.
Our collaboration with C. Red for the deep inspiration breath hold so that'll be on major display artist Artemis will also be a in the booth will be showing our collaboration with research on the online adaptive.
In terms of that timing you know the full launch really will be more in the astral timeframe.
Probably a clearance CE mark being first by the end of the calendar year and so I expect that we will probably not see impact from that product launch until the back half of FY 'twenty four but we certainly will be featuring that is that's an area of tremendous interest I think for our customers.
The other thing that you'll see at the show is we're gonna be having a symposium.
That will be specific to the use of ultra hyper fractionation for breast and prostate where we'll be having a key opinion leader panel that'll be discussing that and we will be highlighting a lot of the clinical research like pay say like pace be that that demonstrates the clinical <unk>.
I can see not only our technology, but FBR T in general.
Great. Thanks for that and then just wanted to ask.
About the sales funnel.
With your competitor you really kind of making their announcement earlier in the quarter did you see any opportunity there I believe they represent a small percentage of the market.
Any disruption from the competitor could represent opportunity how are you viewing that and then just from a higher level of just and maybe should we expect.
The business to grow.
Orders on a constant currency basis for the full year fiscal 'twenty three thanks for taking my questions. Great. Thank you. So you know of course, we always look for opportunities.
I would say in general if you raise a little different than we are and that they serve in a premium specialty in a more of an academic segment.
And but certainly I mean, I think we're taking a look at anyone who are too.
Who maybe are evaluating either technology, either cyber knife or an MRI linac to see if there's an opportunity there and of course.
We're going to we're going to be opportunistic.
As we move forward.
Just in terms of the orders I think we are you know.
From an overall standpoint, we are expecting that from at least a unit standpoint, we are going to be you know and growth.
<unk> to last year, and we continue to look at the book to Bill ratio as an important metric for us. So that we are booking you know at least 1.2 of what we ship out the door.
So that we've got a strong backlog to pull from moving forward.
Great. Thank you.
Again, if you ask a question or follow up you May Press Star then one could join the queue.
Our next question here will come from Jason Wittes with loop capital. Please go ahead with your question. Thanks for taking my questions.
Solid quarter congrats on that so that's why I've seen in a while from you guys through great execution, especially with the headwinds and on that topic, you kind of cover the FX piece on the guidance because it does look conservative given the performance thus far.
But you also mentioned supply issues.
I mean already you're kind of navigating that quite well what do you need to see to.
What are the headwinds still there that are hurting you and do you is there any chance for improvement there as the year progresses.
Thanks for the question, Jason So yeah, let me just put a Q3 a little bit in perspective, you know order.
Narrowly historically, we have usually seen our Q4 B you know one of the strongest quarters.
Of our fiscal year, and Q3 being a weaker or beginning of the year, we actually had a very strong Q3.
All of that was due to several.
Shipments that we had planned for Q4 that we brought into Q3 really be based on customers needing to spend their money and so given that I think the historical sort of hockey stick in the back half of the year, we expect it actually to be sort of similar a from a quarter standpoint, which is our expectation.
Patients overall last Q4, we shipped 23 units, we do think we're going to show significant growth in units over FY.
But you know, we're watching we're watching and and from a supply chain standpoint, I think we have navigated tremendously actually supply chain, but it continues to be a challenge. It continues to be a headwind. It continues to be something that we need to micromanage them a handful of suppliers as we move forward and.
So given that are you know that's.
That's sort of.
What what influenced our guidance.
Okay. That's helpful. Thank you and then.
The topic of view Ray they basically have announced that they were basically looking to sell the company and potentially even emerge.
It makes sense a merger between Accuray and D. Ray is that something you'd look at and you know.
What kind of what kind of things you'd look at it and how it how it how do you think that kind of business with the operator, yeah. No I. Appreciate the question and of course, you know we can't really comment I'm you know, it's always we're going to do what's in the best interest of our stakeholders I'll tell you. We are very focused on our business and making sure that we are executing.
And I'm driving to the strategic areas of focus that we laid out for the fiscal year.
Okay, and then if I could just sneak in one last one.
Thomas He has pretty much been is out there I wonder if you could just kind of give us kind of the.
<unk> kind of discussed the feature set that is being offered with it and how it's gonna be positioned versus.
The more premium offerings, especially in China, Yeah, I mean, I think they're fine tuning still the way, they're positioning the product, but I will say that the helical aspect of the system is very appealing for the type b market. So that is a major differentiator.
Okay. Thank you very much.
And this concludes our question and answer session.
I'd like to turn the conference back over to Suzanne Winter for any closing remarks, great. Then I just want to thank everyone for attending this concludes our earnings call and we look forward to speaking with all of you again in August for our final fiscal year 2023 earnings release.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.