Q4 2023 Accuray Incorporated Earnings Call
Hello, and welcome to the Accuray fourth quarter and fiscal 2023 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask.
Questions to ask a question you May Press Star then one on your Touchtone phone. Please note. This event is being recorded.
I would like now to turn the conference over to Jesse to senior Vice President and Chief Legal Officer. Please go ahead.
Thank you operator, and good afternoon, everyone. Welcome to Accuray's Conference call to review financial results for the fourth quarter of fiscal year 2023, which ended June 32023.
During our call. This afternoon management will review recent corporate developments.
Joining us on today's call are Suzanne Winter, Accuray's, President and Chief Executive Officer, and Ali Pervaiz 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 closed this afternoon as well listen our files with the Securities and Exchange Commission.
We base our forward looking statements on this call on the information available to US as of today's date, we assume no obligation to update any forward looking statements as a result of new information or future events, except to the extent required by applicable securities laws.
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 fourth quarter referred to our fiscal fourth quarter ended June 30th 2023.
Italy, there will be a supplemental slide deck to accompany this call, which you can access by going directly to accuray's Investor Relations page at investors <unk> accurate dot com.
That let me turn the call over to <unk>, Chief Executive Officer, Suzanne Winter Suzanne. Thank you Cathy and thank you all for joining the call today I will provide highlights from our fourth quarter and then reflect on my first year as CEO both on our accomplishments in the areas of focus for FY 'twenty four and beyond.
The quarter performance was strong with total company revenue growing 8% year over year, notably both product and services revenue contributed materially to the growth within the quarter up 8% and 7% year over year, respectively.
We mentioned on last year's call. We believe that our service business is a huge long term opportunity for both revenue and margin growth and we are encouraged by what we have seen in the early stages of our plan.
From a regional review.
Quarter revenue growth was led by the Americas region with 28% year over year growth in the APAC region growing 9% year over year.
EMEA revenue grew 1% and Japan declined 7%, but was flat excluding the impact of foreign exchange Foreign exchange has significantly impacted our Q4 revenue, especially in Japan and this quarter alone Foreign exchange had an overall negative $1 8 million dollar impact to revenue.
From a product in Q4 demand for the delivery of the rat exact platform was strong with 40% growth erratic back tomo system shipments compared to one year ago.
Customer reception continues to be strong for our latest innovations on the Rad exact platform, including clear our T. C. T M. A G synchrony real time motion correction and vulnerable altra treatment planning Q.
Q4 order performance was solid with a book to Bill ratio of 1.4, we are very pleased with these results as it means that we are booked more orders than we have shipped during the quarter and that we are building our backlog.
Whereas growth in Q4 was led by APAC and EMEA APAC ended the year with 53% growth in orders booked followed by EMEA with 12% growth year over year.
Within the quarter, we also booked several strategic and multi system orders from key institutions globally.
That star Health system at Georgetown purchased two new cyber knife F. Seven systems for their stereotactic, Radiosurgery and FBR T patient care.
Our fleet within the NYU health system has significantly expanded with the purchase of two out exact system that will be placed into Winthrop University Hospital campus.
But the ammonia, but lauria hospital in Italy is a highly influential academic center and recognized as one of the top neuro hospitals worldwide. They chose the cyber knife at seven for their Srs SPR <unk> system over competitive systems.
In India, It's gone go wrong Hospital, a well respected hospital in Delhi purchased a rat exact system with clear our tea and synchrony and finally, we wanted to system order at Macau Central Hospital for both the cyber knife and rat exact system.
The success in these highly competitive sales situations gives us further confidence that our innovative solutions are winning against competitive offerings. Further these sites have the potential to become powerful references for new customers evaluating our innovative technology.
Ali will discuss more of the Q4 financials, but we saw a product margins temporarily challenged this quarter driven by deal mix and direct material inflation versus the prior year.
Service margins also declined driven mainly by FX. However, we were encouraged to see the improved pricing actions. We have put in place in FY2023 are starting to demonstrate impact as customers appreciate the value of our solutions.
Adjusted EBITDA grew 1% year over year. However, it's very important to note that these results included a one time unplanned Q4 bad debt reserve of $2 million, resulting from the Genesis care bankruptcy announcement.
Without this reserve Q4, adjusted EBITDA grew 40% year over year and put us well within our full year adjusted EBITDA guidance.
Finally, I was very pleased with our strong management of our balance sheet. This quarter as we grew our cash position year over year and saw the second consecutive quarter of positive free cash flow generation.
Free cash flow generation and strengthening our capital position remain a priority for our team.
Moving on to our full year performance and reflecting on my first year as CEO I remain incredibly proud of what our teams accomplished and remain humbled by our mission.
Throughout the year, it was able to visit with customers and employees from around the world I was able to see firsthand the impact our solutions have on people treated with our products.
I also saw the incredible talent and tireless dedication of our customer facing teams that support our clinician partners to ensure the highest level of care.
Additionally, I am enormously proud of our urbanization and the progress we made this year against each of our strategic growth objectives.
And as an organization I believe we showed incredible resilience and resourcefulness that is the cornerstone of accuray's culture as we drive our vision to expand the curative power of radiotherapy solutions to extend and improve lives of those diagnosed with cancer.
I believe we've demonstrated the operational resilience expected from companies with much greater scale, we were able to navigate significant headwinds from supply chain inflation geopolitical pressures and an $18 million foreign exchange headwind to revenue.
Excluding the impact of FX alone would have put us $10 million higher than the high end of our revenue guidance range, demonstrating strong underlying growth of the business.
Despite these challenges we ended the year delivering multiple impressive accomplishments, including the highest revenue in the company's history.
We surpassed the 1000, just a milestone installed globally, which grew our user base by 5% relative to FY 'twenty, two driving future recurring service revenue.
In FY2023 we shipped from our factory in Madison, Wisconsin, 109 system is the highest number of system shipments in the company history, representing 24% year over year unit growth.
Finally, we drove underlying adjusted EBITDA growth of 14% year over year with the exclusion of the Genesis care reserve referred to earlier.
And generated positive free cash flow for the year.
Execution by our team has been almost flawless this entire year and I believe they've done an excellent job in this high demand environment.
At the beginning of the year I laid out four major pillars of our strategic growth plan. Our first pillar was growing revenue faster than the markets. We compete in by driving innovative solutions to advanced radiotherapy.
Slide 23, we executed several new product introductions that strengthened our portfolio and further differentiated accuray technology, notably vital whole surface guided radiotherapy for breast cancer treatments with introduced for the rat exact system at both Astro and Astro meetings to strong customer reception.
With the addition of vital whole to the rat exact platform. We now offer the most comprehensive solution for breast treatments, which typically represents the highest volume of patients treated in the radiation oncology department.
I'm also pleased to announce that we have received five 10-K approval for full commercialization in the U S and the ability to take orders from final holds in the European Union.
Also we advanced the Thomas C product, which we jointly developed with our C. N N C. Accuray joint venture, which we believe will allow us to compete fully in the type b value segment of the China market.
Discuss the type B market represents a major opportunity for us and is the largest and fastest growing segment within China with a potential for nearly 2000 system and over $3 billion in market potential over the next five years tomassi with successfully submitted for regulatory approval and no.
Member of last year and was followed by targeted market introductions at two major medical conferences in Q4.
These events allowed us to introduce the Thomas C platform to key opinion leaders and created significant interest that we expect to capitalize on upon full commercialization during the second half of FY 'twenty four.
These new products in combination with the cyber knife <unk>, seven and strong demand for clear our T imaging synchrony and volatile Walter on the rat exact system.
Rove, 9% full year growth in product revenue and 12% growth when you exclude the impact of FX.
We believe the market for radiotherapy systems grew in the low single digit range over the course of FY 'twenty, three and that we gained share across all regions.
EMEA and Japan, led with highest product revenue growth with 31% and 51% year over year, respectively, and non China APAC at 2% growth the.
The Americas region grew 3% in FY 'twenty, three and ended the year with very strong growth in the second half.
China product revenue declined to 18% as a result of first half COVID-19 lockdown, but edge with positive growth in the second half versus the second half of FY 'twenty two.
Our next strategic pillar is expanding and growing our service business we.
We set out a multiyear plan to strengthen our service business, which represents a recurring revenue stream and margin expansion opportunity.
Our service revenue has essentially been flat over the last decade, and currently represents 48% of our global revenue.
In FY2023 our overall service revenue showed underlying positive growth of 5% when excluding the impact of foreign exchange, which is very encouraging.
Service contract revenue growth is largely gated by the growth of our installed base in FY2023 we saw meaningful year over year growth in our global installed base of users growing 5%.
Driven by 7% in the EMEA region, 10% growth in Japan, and 15% growth in the APAC region with strong installation activity in China.
U S continues to see radiotherapy capacity consolidation across the market and what's the only sub region, where we saw a decline in our installed base our focus in the U S. As a long term approach, where we have focused our commercial investment with a goal of ensuring the highest level of service and customer satisfaction for our older.
Install system, specifically the early generation tomo therapy system, our commercial strategy et cetera, working closely with these customers to offer compelling solutions and actively upgrading these legacy system. We expect this will generate net positive growth in the U S. I V in the coming years and Bill.
From a tailwind to revenue growth and margin conversion.
Additionally, in FY 'twenty, three we captured more value for our services through improved pricing and enhanced offerings.
What we're hearing from customers is that they continue to experience labor shortages and staff turnover since COVID-19 in FY2023 we added service and support offerings to address those pain points, including remote training courses and incremental onsite training, which contributed to incremental service revenue.
In Madison, Wisconsin, We are building a new state of the art customer training center and in Europe , We're investing in the innovation center and generally a Switzerland, where we will showcase the cyber divest seven and rat exact systems. Both sides will provide the ideal environment to deliver high value education and training.
<unk> to customers from around the world starting in FY 'twenty four.
We expect growth from the installed base and expanded value added service and support solutions to drive top and Bottomline impact over time.
The third pillar was expanding margin and profitability and improving our balance sheet.
Last year Ali and I laid out a multi year multi faceted plan to drive margin expansion and cost efficiencies with the goal of leaving no stone unturned, we made good progress against our goals with actions that helped us to navigate the impact of inflation logistics costs and foreign exchange.
And our service business, we improved full year service margins by 1% year over year, driven by improved service contract pricing incremental service offerings, and reducing full year parts consumption.
Product margins for the year declined 660 basis points versus last year, primarily driven by deal mix direct material inflation and FX. However, we're encouraged to see an improvement in average system sales price associated with the inclusion of new product innovations like clear our T synchrony and.
Volvo ultra, allowing us to increase price and capture more of the value chain.
Additionally, despite year over year revenue and unit increase we held operating expenses flat and removed many operating costs by driving process efficiencies and through restructuring actions. Additionally.
Additionally, we began the process of consolidating our facilities by reducing our footprint in higher cost geographic areas, while fueling investment in Madison.
As of July 31 has become the new headquarter location for Accuray.
We're in the early innings of where we want to go but we've made solid progress and are confident that our continued execution of these margin and profitability expansion initiatives will take further shape and provide greater contribution of the coming years.
Strengthening our balance sheet and driving the highest return on capital remains just as big of a priority.
In FY2023 we invested in key strategic priorities, while improving our cash position and generating positive free cash flow for the full year.
One major area of investment that aligns with our goal of simplifying and building a more durable business with transitioning the company to a new ERP system. This replaces our legacy system that was largely manual and old dating back to Accuray's 2011 acquisition of the tomo therapy business.
The organizational effort has been a shining example of a focused all hands on deck Endeavour I'm proud to say that we remained on schedule on budget and went live on August 1st This investment will empower our teams with better data and analytics to support more effective decision, making that is integral.
All to building, a mature and durable foundation for future growth.
Finally in FY2023 we entered into several strategic partnerships to help us bring best in class solutions to the market faster improve our sales funnel and enhance our win rate. We continued our strong partnerships with great search and treatment planning oncology information and adaptive planning systems we.
Executed on our partnership with C red for surface guided radiation therapy for breast treatments.
Rain lab continues to be an important partner for neuro surgical solutions in data registries for the cyber knife and finally, our development partnership with Limbus AI will provide innovative online adaptive capabilities for our precision treatment planning system.
We're also proud and excited to have entered into a commercial collaboration agreement with GE healthcare to complement their precision oncology solutions, our partnership with GE healthcare has been strong with regional teams actively driving customer strategies and positioning oncology solutions to the market.
We set out to measure our success of this partnership with increased sales funnel and improved win rates to date. The GE health care partnership has driven an increase in our near term FY 'twenty four sales funnel and nearly $40 million of total short and long term opportunity pipeline.
Additionally, the partnership has positively influenced the win rate and several of the key Q4 wins mentioned earlier by more strongly positioning accuray within the C suite of health systems. The GE partnership continues to evolve and we expect the contribution to grow and impact.
In summary, we're proud of our FY2023 performance and the foundation, we have set for future growth.
We achieved strategic customer wins in the marketplace and forged key partnerships that have improved our competitiveness.
While we are early in our transformation, we end the year positioned to drive further growth margin and profitability expansion and gained share over the coming years.
I will now turn it over to Lee who will cover our financials.
Thank you Suzanne and good afternoon, everyone.
Wanted to begin by thanking our global employees, who executed tirelessly to deliver a strong fourth quarter and fiscal 2023, despite the macroeconomic headwinds basically you're including supply chain shortages global inflationary pressure and unfavorable currency fluctuations in our non U S markets and that revenue for the fourth quarter was $118 million, which was up 8%.
Prior year net revenue on a constant currency basis for the fourth quarter was $120 million, which represents a 9% increase versus prior year on a full year basis total revenue was $448 million, which is up 4% from prior fiscal year.
On a constant currency basis total revenue for the fiscal year was $465 million and represents an 8% increase versus prior fiscal year.
As Suzanne mentioned earlier foreign exchange headwinds at $18 million negative impact on the topline in fiscal year 'twenty three as a reminder, coming into fiscal year 'twenty. Three we had a we have provided a revenue guidance range from 447 million to $455 million and our revenue results adjusted for the impact of foreign exchange exceeded the high end of that range by 10.
Yeah.
This underscores how fiscal 'twenty three was a successful year from an operational execution standpoint, and we are very pleased with where we finished on the topline.
We have a cross functional team to thank for this tremendous accomplishment of record revenue and unit shipments in the company's history in any fiscal year.
Product revenue for the fourth quarter was $62 million up 8% from the prior year and up 9% on a constant currency basis, representing system shipments of 29 units.
On a full year basis product revenue was $233 million up 9% from the prior year.
What are your product revenue adjusted for the impact of foreign exchange headwinds was $240 million, representing a 12% increase versus the prior year.
Service revenue for the quarter was $56 million up 7% from the prior year and up 9% once adjusted for the negative impact of foreign exchange.
On a full year basis service revenue was $214 million relatively flat when compared to the prior year full year service revenue adjusted for the impact of foreign exchange headwinds was $225 million, representing a 5% increase versus the prior year.
Gross orders for the fourth quarter were approximately $88 million and represented a book to Bill ratio of one four on a full year basis gross orders were $311 million and represented a book to Bill ratio of one three as a reminder, our book to Bill ratio is defined as gross orders for the period divided by product revenue for the period, we believe that.
Book to Bill ratio is the right metric to ensure a healthy growth of our backlog and focus of our teams to build profitable orders that will convert to revenue within 30 months.
Moving to the backlog we ended the fourth quarter with a backlog of approximately $511 million, which is a 1% increase sequentially and 9% lower than the prior year due to 14 orders representing $34 million that aged beyond 30 months within the quarter, primarily related to customer timing in.
In Q4, we had seven orders age back into revenue within the quarter, representing approximately $15 million of orders given the importance of the backlog to our business. We will continue to look for ways to simplify this metric further.
Finally, we had no order cancellations in the quarter.
Our overall gross margin for the quarter was 31, 9% compared to 39, 1% in the prior year with the decline mainly driven by inflationary pressure of $3 million, which translates to approximately two five points of gross margin pressure and approximately $2 million of foreign exchange, which translates to approximately one five points of gross margin pressure.
The remaining variance driven by deal mix.
On a full year basis, our overall gross margin was 34, 4%.
<unk> to 37, 2% in the prior year with the decline mainly driven by the negative impact of foreign exchange, which had an $18 million impact on revenue, which translates to roughly three points of gross margin pressure and approximately $5 million of inflationary pressure, which translates to one point of gross margin pressure.
Our overall gross margin on a full year basis would have been above prior year by approximately one five points, excluding the impact of inflation and foreign exchange.
Yeah.
Operating expenses in the fourth quarter were $38 1 million, which included nonrecurring charges of approximately $4 million for restructuring and ERP related expenditures and $2 million of unexpected bad debt reserve compared to $41 million in the fourth quarter of the prior fiscal year.
Excluding nonrecurring charges total operating expenses were down 12% compared to the same period of the previous year.
Operating expenses for the full year were $151 $6 million, which included nonrecurring charges of $3 $1 million for restructuring $2 $1 million of ERP related expenditures and $2 million of unexpected bad debt reserve compared to $151 $8 million in the prior fiscal year.
Excluding nonrecurring charges total operating expenses were down 5% versus prior year showcasing focused cost control as we continue to push our teams to prioritize return on an investment.
Operating income for the quarter was negative $5 million compared to $2 million in the prior year operating income for the full year was $2 4 million compared to $8 1 million in the prior fiscal year.
Adjusted EBITDA for the quarter was $5 2 million compared to $5 2 million for the prior year period adjusted EBITDA in the fourth quarter includes incremental bad debt reserve.
Approximately $2 million related to the unexpected U S bankruptcy.
One of our customers Genesis care, who owns and operates <unk> cyber knife systems, and eight tomo therapy Slash right exact systems in the United States and filed for bankruptcy in Texas on June one 2023.
As of this date Genesis care or aggregate approximately $2 million of past due amounts for annual service contracts related to their installed base of 14 Accuray system.
While we continue to work diligently to recoup the past few amounts we reserved $2 million in Q4.
For the full year adjusted EBITDA is $24 million without the unexpected impact related to the reserve for the Genesis care bankruptcy adjusted EBITDA for FY 'twenty, three would have been $26 million and within our guidance range. We described a 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 $90 million compared to $89 million at the end of last quarter net.
Net accounts receivables were approximately $75 million down $3 million from last quarter.
Our net inventory balance was $145 million down $5 million in the prior quarter as we optimize working capital to improve our cash position.
FY2023 posted significant challenges from a macro standpoint. Despite these challenges our team was able to deliver record revenue and unit volume for the company in its history with.
With this outcome, we delivered revenue of $448 million, which is within the guidance range.
Adjusting revenue for the impact of foreign exchange, we would've exceeded the high end of our guidance by $10 million with revenue at $465 million.
This really illustrates the strong execution performance of the company was able to achieve in FY2023.
From an adjusted EBITDA standpoint, it has not been for the unexpected bad debt reserve associated with the <unk> bankruptcy and continued deterioration of the Japanese yen in Q4, we would have finished with adjusted EBITDA over $26 million within our guidance, which again points to the strong fundamentals of the company.
As I reflect on my first year as CFO I'm extremely proud of the financial discipline and operating rigor, we were able to put in place across our entire organization.
The enormous efforts from all our teams played an integral role in achieving our strong results in fiscal 'twenty three.
Last year, Suzanne and I laid out a plan for the future of this company and I'm happy to say, we are off to a very strong start with the ongoing efforts to improve our operating structure.
Looking forward to FY 'twenty four I firmly believe that the new product innovations, we will introduce in the second half will position us nicely to drive an extended period of topline growth and profitability.
In addition, we will build upon the fundamentals of established in FY 'twenty, three while focusing on strengthening our balance sheet and making the right investments to provide further value for our shareholders and employees those.
Those are our key financial highlights and with that I'd like to call that I'd like to hand, the call back to Susan Thank you Ali.
If by 'twenty four we will enter the next phase of our transformation.
Radiotherapy patient procedures are well on their way to returning to pre COVID-19 levels, but gaps in care continued to manifest cancer incidence continues to rise with an estimated 25 million cases by 2030 still.
Still 10 million will die from cancer annually and the disparity globally for access to radiotherapy treatments continues to present a challenge.
<unk> vision is to conquer cancer by helping to close the gap to cancer care globally. We will do this first by advancing care to a solution innovation to address the biggest pain points and radiotherapy.
Drive patient access in the highest potential underserved markets. So that all patients have access to the best therapy available and finally delight our customers with the highest level of operational performance and customer care and support regardless of where they are in their journey.
FY 'twenty four is an important year for accuray is we anticipate the introduction of multiple growth drivers that will contribute to both top and bottom line over the coming years.
Our new product introduction cadence includes the full market introduction of the tomo system in China.
Introduction of the online adaptive capability for precision treatment planning and targeted market introduction of our new value segment product, which is designed for select high potential emerging markets.
Additionally, we expect greater impact from the service growth initiatives and margin expansion and profitability actions, which we began in FY2023.
Accordingly for FY 'twenty four we are guiding to a revenue range of $460 million to $470 million and an adjusted EBITDA range of 27% to $30 million, we expect flat to low single digit growth in the first half of the year, followed by accelerating mid to high single digit growth.
In the second half of the year aligned with the introduction of our new product innovations.
We believe these innovation growth drivers will enhance our solutions and set us up for strong future growth and margin conversion in the coming years.
In closing I'm proud of what we've accomplished this year and our prospects for FY 'twenty four and beyond we will continue to advance our strategic growth pillars into the next phase of execution. So that we can advance our leadership position to become the new trusted partner radiotherapy.
I invite you to join us for our Investor day that will be held in conjunction with the American society of radiation oncology in October to hear more about the next phases of accuray strategic growth over the coming years.
I'll 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 to withdraw.
Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Of course.
Our first question today will come from Josh Jennings of Cowen. Please go ahead.
Hi, good afternoon, congratulations on the fourth quarter results and our full year results.
Wanted to start I know within your fiscal 'twenty guidance, you don't guide to orders, but.
Your line of positive tailwind to play for.
Tomorrow.
It was great to just just hear about.
The sales funnel system sales funnel that where it stands today versus the beginning of last year and may be just a synopsis of some of the drivers of new order growth.
Our in place here as we enter into fiscal 'twenty four.
Thanks for the question, Josh, Yes, we feel very strong about the new product innovations that we'll be introducing in FY 'twenty. Four in addition to just the continued customer demand for the Rad exact innovations, including clear, our tea and synchrony and now.
Baidu hold which we now have the five 10-K approval. So we do expect that to.
Positively.
Impact our orders we saw great book to Bill ratio in FY 'twenty, three we expect to continue to see that and.
And continue to grow our backlog so the new product innovations overall, we feel very strongly.
Talk a little bit about our our partnership with GE healthcare that has had a positive impact in our sales funnel. So as we get a full year under our belt of that relationship. In addition to our new product innovation.
We think it's just going to be good news for the orders.
Excellent.
Maybe just to ask about the revenue guide.
Relative to expectations for the radiation oncology market.
Sure broadly in fiscal 'twenty three.
I know, it's hard to forecast market growth, but because the expectation here within 3% to 5% revenue growth target. Okay, great. We'll take share again in fiscal 'twenty four thanks for taking the questions.
Yeah. Thanks for the question, Josh and yes, we do expect to take share we think the overall market and while there isn't one good source for it as we take a look at others' results. We expect this to be a flat to low single digit market.
Again, when we took a look at the overall guidance you know Ali and I have been here now for a year and we've done a deep dive into the business and we've really gone into granularity of all of the drivers within the business. We think this is a realistic guidance you know we have new product innovation.
That is occurring in the second half of the year, we have some product mix changes. This year. The rat exact was really performed very well that changed the product mix a little bit and so as a result, we're taking these into account.
In setting the revenue guidance.
And then in terms of the EBITDA guidance, you know same assumptions on the revenue range.
But our range also includes parts consumption.
Assumptions, we made some good progress on reducing parts consumption and we're assuming different productivity levels based on that range and then the only other thing I would say is we are going to incur the cost of commercialization of new product introductions in the first half of the year that also.
<unk> the revenue range first half to second half.
I appreciate it.
Our next question comes from young Li with Jefferies.
Please go ahead.
Alright, great. Thanks for taking our questions.
Congrats on all the progress the team has made over the past year.
I guess maybe to start.
Yeah.
The overall.
Capital environment, the financial health of customers worldwide.
Some of them here.
Companies in this space.
Some headwinds recently.
Last quarter, you had some push out of orders in the U S.
I guess I'm just kind of wondering.
How has that macro environment changed.
This quarter and more recently.
What do you think about the outlook going forward.
It relates to potentially longer selling cycles more approvals.
Great. Thanks for the question.
I think it varies by region and certainly we're understanding the dynamics in each one of the regions.
Just to talk about the you know.
Some of our competitor companies that have discussed their results. Some of their results really are based on supply chain issues that they've had to deal with so on the one hand, we feel very good about the way we've handled the supply chain headwinds, especially in comparison to the market leader.
But in terms of it being a.
A signal to market demand, we still see procedures on the upswing, we see an increase in hyper fractionation procedures, which we think is a good thing for our business and our technology is we're positioned.
And at the same time, we're looking at those markets that are growing and we do see the emerging markets like China, We do expect that to grow which is part of why we want to compete in a bigger part of the market.
Then just the premium segment, which we think is sort of low low single digit growth.
Again, I talked about the U S market last time I do think that in general our customers are sweating their assets you know, they're holding on to them as long as possible they have to fight hard to get capital.
Prioritized within within the.
Hospital budget.
But overall I wouldn't say that that's going to be a major headwind.
Okay, that's very helpful color.
I guess, maybe to follow up on China in total.
Wanted to hear.
Maybe just update with the regulators.
The communication process going on.
For them the approval timing.
And then maybe if you can talk a little bit about the.
Second half.
For revenue.
How much is in guidance for margin.
Margin contribution.
Great and I'll start and then I'll hand over to Ali to talk about margins, but.
In general the conversation with the regulators in China has been very positive we continue to supply them with additional information when asked.
I think we remain on track one never knows how long the regulatory process is going to take but there are no red flags in terms of.
There being a major delay them. So again, assuming a you know what we have built into the guidance. We are expecting at the mid range of our guidance to have an approval by the end of the calendar year and have a second half impact to both orders and revenue.
Then you know, obviously FY 'twenty five being a full year of tomo see in the marketplace in China.
So as a result, you know part of our guidance in the first half is that China, China for the most part remains flat from a revenue standpoint, but then strong double digit growth in the second half.
And then from a margin standpoint same same sort of.
Yes, I mean, I think is just.
Overall, just going back to the full guidance just like Suzanne had mentioned.
Uh huh.
<unk> prepared remarks that we expect low single digit in the first half in terms of just overall growth and then we see mid to high in the second half.
And then when it pertains to our overall margin.
We're exiting fiscal year 'twenty three with product margin that is certainly true.
<unk> and those dynamics were primarily driven by the impact of foreign exchange.
Driven by the impact of inflation, which is unfortunately harrier to stay at least in the near term.
And so we think product margins are probably going to continue to be challenged at least in the near term while our teams continue to focus on margin expansion to really change the trend and that the highlight for US has really been our service margin, which is actually been up a point.
The year over year.
And we think that's really what's going to help.
Really lead our margin expansion effort in fiscal year, 'twenty four and beyond.
Alright, Thank you very much.
Our next question comes from Mary <unk> of BTG. Please go ahead.
Hi, I appreciate you taking the questions Tonight I wanted to ask one as a follow up on.
FX I certainly heard your.
Full year remarks on $18 million of headwind from FX. This year I recall, the first half was about $12 million.
Could you maybe missed it could you tell us what it was in this fiscal fourth quarter.
And then as part and parcel of that wanted to try to understand the adjusted EBITDA Guide for fiscal 'twenty for the add back of that bad debt you would have come in at about $26 million for this year. So certainly makes the range you've set out for fiscal 'twenty four look quite achievable given the progress you've made in the past so wanted to try to understand that.
Metric a little bit better.
Sure Yeah alleyway, yes.
Yes.
So and Youre right. So total impact of foreign exchange on revenue in fiscal year 'twenty three was $18 million in Q4, specifically that was $1 8 million.
And then as it pertains to.
The bad debt reserve related to Genesis care.
You are right. If we add that back we would have been at $26 million. So thats certainly points to good operational performance as we go into fiscal year 'twenty for our guide like Suzanne mentioned is $27 million to $30 million and.
I think theres, just a lot of different dynamics that are going to contribute to that rates from a revenue standpoint, we are going to see increased volume that increased volume is going to come with product that has a lower margin associated with it as we penetrate the value segment. So.
So we're not going to see that much of a lift we're going to see the volume, but we're not necessarily going to see that in terms of incremental EBITDA dollars in the same way that we have seen historically.
And then really I think what's going to help us drive EBITDA.
Within the guidance range that we had suggested is really going to be around our service business in our parts consumption and driving productivity around around our parts consumption just like Suzanne had mentioned.
We have enjoyed.
Roughly.
I would say productivity from fiscal year 'twenty, two to 'twenty, three and our overall parts consumption as our installed base of increase and we expect something similar going into fiscal year 'twenty four.
And I think that's really kind of where we think is good.
We're going to get some more tailwind from an EBITDA standpoint, and let me just add to that too Marie.
A little bit about the volume and the product mix. So we're excited by the number of units that we shipped this year just significant growth 24%. We're also really excited about our IP growth and that is going to drive the recurring future service revenue. So even though we may not see the service revenue.
And in FY 'twenty for it is it is something that is going to continue to be accretive.
In our service business moving forward.
Okay. That's really helpful. I appreciate that detail both of you.
Wanted to follow up here on China, and other parts of Med Tech we have seen that as China has reopened post COVID-19, there's been kind of a rebound in our recovery in procedures and installs and things like that wanted to hear if that was the dynamic here as you ended your fiscal fourth quarter and whether we might see some.
Tailwind from that on the Taipei side in China.
Thanks for taking a look here I think.
Thanks, Mary Yeah, No I think we ended the second half of this year with China being in positive territory at least from a product revenue standpoint.
And we think going into the first half there's going to be some pent up demand.
For the type B product, but we are going to continue to maintain the type of a business.
But then again in the second half that is one way that we think will be able to fulfill the pent up demand.
To really drive the growth rate for the year for China. So China overall was down for us last year, but but it actually grew in its service revenue. So they were just wildly installing new systems, which was great. Their installed base grew that's driving their service revenue. So that was really important but product revenue was down primarily because.
Cause of the Lockdowns in the first half so we will see a little bit of a dynamic I do think theyre coming back, but we are going to see this first half second half sort of waiting for the tomo C to get cleared.
Very encouraging thanks, so much.
The next question comes from Aaron Wolf Mirror of Lake Street Capital Markets go ahead.
Hey, good afternoon, everyone. This is ann on the line for Brooks.
I wanted to just talk a little bit about.
Actually just to get your view on the supply chain challenges that have sort of been impacting you in the past couple of quarters you know.
How long do you see these as sort of a constraint and what can we sort of expect going forward. These challenges.
Yes, Hi, Erinn. Thanks for the question.
I don't think its too dissimilar from what we've discussed in the past we.
We have certainly seen supply chain.
Improve.
In certain elements, but we continue to play whack, a mole where the few problematic suppliers and.
Just.
Taking up a lot of our time to be able to make sure that they have what they need to be successful.
Kudos to our operations teams that are working with our suppliers to make sure that we have what we need.
That's kind of where you saw the inventory build happen.
Last year, and I would anticipate perhaps maybe a little bit more of an inventory build as we continue secured cards early on just to make sure that we don't run into any challenges from a supply chain perspective.
We want to be we want to try and come.
How did that as much as possible.
Great. Okay very helpful. That's that's going to be it for me congrats on the progress.
Thanks Darren.
Our next question comes from Neil Chatterji of B Riley. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions.
I mean, maybe just sticking with the top line guidance for fiscal 'twenty quarters, just wanted to make sure I kind of understand.
All of the kind of the puts and takes here.
Yes.
China.
The.
So most of the products kind of mid.
The year is that kind of the big driver of that softer first half stronger second half dynamic.
And then how should we think about.
Any of the benefits.
Various partnerships you have on HG or Brian my eyeball or with vital hold clearer.
Clearance.
Yes, just maybe any more color around that dynamic.
Thanks for the question Neil Yeah. So let me just talk through a little bit of the assumptions on the revenue.
We expect growth from all the regions, except for APAC in the first half we expect that to be flat to maybe single single digit growth. We do expect that the other regions are going to benefit from vital hold being cleared.
Expect in Japan are vital hold will get shown in approval hopefully by Jastrow, which is in the November timeframe. That's what we're expecting so the assumptions that we built in to the revenue range is that we began to see the impact of vital hold on revenue shipments, we expect all regions to grow yeah, but really in the in the first half.
With the exception of China, APAC, and then second half growth driven by APAC, China, and <unk> and tomo approval, we're expecting at the mid range by the end of the year, and then the lower and higher range being either longer for better than that expectation, we expect FX and supply.
To remain the same as we ended FY2023 so again anything worsening is at the low end anything better is at the high end and <unk>.
And we're expecting we're expecting very high unit growth again, but we're also managing these product mix trends more towards <unk>, and then ultimately adding the tomasi.
And we expect service growth. So those are all built into our mid range assumption.
Great.
Maybe just one follow up.
I mean, you talked about the new ERP system and better kind.
Analytics with <unk>.
Maybe just if you could elaborate what kind of impact you would expect to see from that.
Fiscal 'twenty four.
Yes Neil.
Good question I think.
We're going to continue to learn as we speak.
As we sort of close.
The first quarter with the SAP implementation.
But I think it's just better insight.
For our regional teams to be able to understand.
Better customer profitability understand profitability at a deeper level.
From a channel perspective, so that we can just make better decisions from a pricing perspective, right. So I think you're just going to give us more visibility. That's just been very very manual to get to.
Current state. So I think that's one piece I think it's it would be very beneficial for our supply chain and operations teams to be able to understand kind of what the impact is of product Cogs and where to focus our efforts, where we think we're going to get the most bang for our Buck. So I think that's going to be helpful. As can be very hopeful for.
My <unk> team to be able to make sure that we understand where are we spending our opex dollars not that we don't have that visibility today is just going to provide that visibility to much deeper level, which is comes with a lot of manual work today. So I'm just going to drive a lot of efficiencies I don't think thats going to happen overnight, it's going to take us several quarters to be able to get there but.
Really we think thats the value and the implementation.
Okay.
Great. Thanks, that's it for me.
This concludes our question and answer session I would like to turn the conference back over to Suzanne winter for any closing remarks.
Thank you operator. This concludes our earnings call. We look forward to speaking with you again in October for our fiscal 2024 first quarter earnings release, and I again invite you to join US for our Investor day that will be held in conjunction with the society of radiation oncology in October to hear more about the next phases of our strategic.
<unk> growth over the coming years.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
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