Q1 2024 Accuray Inc Earnings Call
Good afternoon, and welcome to be accurate first quarter 'twenty 'twenty four conference call.
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I would now like 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 first quarter of fiscal year 'twenty 'twenty, four which ended September 32023.
Our call. This afternoon badge, but will review recent corporate developments.
For today's call are Suzanne Winter, Accuray's, President and Chief Executive Officer, and Al We Pervaiz accurate Chief Financial Officer.
Before we begin I will.
I'd 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 Securities and Exchange Commission.
He based on 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.
Accordingly, you should not put undue reliance on any forward looking statements.
A few housekeeping item for today's call first during the Q&A session. We request that participants limit themselves to two questions and then re queue with any follow ups.
All references to a specific quarter in the prepared remarks are to our fiscal year quarters.
For example statements regarding our first quarter with Brookfield, our fiscal first quarter ended September 32023.
Additionally, there will be a supplemental slide deck that accompanies this call.
Once you get that by going directly to accurate the investor Relations page at investors thought accurate dot com.
With that let me turn the call over to Acuras, Chief Executive Officer, Suzanne Winter Susanne.
Thank you Jessie good afternoon, and thank you for joining the call.
Accuray team had a strong start to the fiscal year delivering on both revenue and EBITDA in the quarter.
We are making great progress toward our fiscal year 'twenty four priorities, which include achieving above market revenue growth through new product innovation and commercial execution.
Standing margins and profitability through enhanced pricing and operating efficiencies and competing more effectively by leveraging strategic partnerships and new product development and market access.
In the quarter, we saw continued customer adoption of accuray's cyber knife rat exact and tomo therapy platforms to enable advanced radiotherapy treatments like stereotactic radio surgery and S. P. R T for patients around the world. This.
This was driven by growth in demand for these treatment regimens, which require an extremely high degree of precision.
Accuray systems are capable of delivering stereotactic radiotherapy treatments to targets anywhere in the body.
During the quarter, we grew global revenue by 8% year over year with product revenue growing 17% year over year, demonstrating better than expected customer demand in our first quarter versus the same period last year.
As a reminder, revenue in radiation oncology, particularly in capital equipment can vary from quarter to quarter, but we are encouraged by the strong start in Q1.
Order backlog at $489 million as robust representing greater than two times fiscal year 'twenty three product revenue. This.
This gives us confidence in our ability to deliver on our strategic goals of faster growth in the market and gaining share this fiscal year and beyond.
We also expanded our installed base of customers within the quarter to 1040 systems, representing 5% year over year growth as we've discussed in the past installed base growth is a critical key performance indicator for this long cycle business, because it's directly linked to service contract revenue.
New which was initiated at the 13 month following an average warranty period.
This service contract revenue continues annually for the subsequent 10 to 12 years and provide the long tail of recurring revenue.
Additionally, installed customers also represent a market opportunity for new feature upgrades as well as incremental services and support like advanced training, which will further expand our service business.
Finally, new order growth was also solid outpacing product revenue shipments, while we don't guide on orders. We are very pleased to deliver to our one two book to Bill target. We see this as a strong metric to gauge future growth and grow our backlog.
In October we participated in the American Society of radiation oncology conference or Astro, where attendance was at historic highs with over 9000 attendees from the radiation oncology community, we were able to drive tremendous interest in our new product innovations designed to advance care in the premium segment of the market.
We showcased our new vital whole product, which strengthens our product portfolio for the treatment of breast cancer, adding surface guided breast treatment capabilities to our current Rad exact platform. This product comes from a successful development partnership with C. Red.
Additionally, we introduced alliance plus value added service and support solutions to help ensure customers maximize the clinical and operational potential of their equipment.
Further we announced accuray's financial services, which provides a full range of flexible financing options to customers for capital equipment acquisition.
Finally, and most exciting we unveiled our latest introduction to the rat exact the C notes online adaptive capability.
Dino Leverages artificial intelligence or AI to provide automatic contouring algorithms and remote clinical collaboration capabilities for the specific patient cases, where there was an immediate need for a change in their treatment plan Acura.
Accuray's. She knows is designed to provide a faster and more practical approach to refining treatment plans compared with other industry offerings.
You know it was developed with our partnership with Olympus AI, a leading health care technology company that specializes in the creation of AI based algorithms to advanced cancer care.
With the addition of C knows we believed that the rat exact system can help ensure that treatments change as patients change to minimize dose to healthy tissue and personalized treatment.
First with synchrony, which is designed to track detect and correct treatment delivery due to motion that occurs during treatment.
Second with precise art offline tools to manage changes to treatment plans needed between treatment sessions and now with the addition of C notes online adaptive clinicians have the ability to modify a treatment plan on the day of treatment based on patient changes detected on the daily imaging scan.
We believe that our comprehensive adaptive tool set including CNS will be a key differentiator for accuray rat exact versus competitive products and expect it to further increase our win rates and momentum for upgrading the aged tomo therapy install base. So he knows there's five 10-K pending and we expect to have this product available for <unk>.
Customer order in the spring of 'twenty 'twenty four.
Overall speaking and surveying the U S radiation oncology community. It was clear there was a positive outlook backed by technology developments and emerging clinical data that demonstrate the curative impact of high precision personalized radiation therapy. This gives us confidence that the long term future for radiation oncology.
<unk> is very strong despite some short term headwinds due to the higher installation costs and longer cycles that have delayed some projects in the U S.
During the quarter. We also made significant progress on our second growth pillar of improving patient access and global segments, where radiation therapy is underpenetrated and we're workflow and patient throughput is a critical priority to manage the large patient backlog.
In early October we gained regulatory clearance for our domestic manufactured Thomas C platform focused on the type B segment in China. This represents a key milestone for accuray. This approval unlocks the ability for our China team to drive orders and build backlog in the type B market segment, which represents.
Approximately $600 million in annual market opportunity.
Shipments to customers are expected to occur in fiscal Q4 pending availability of the precision treatment planning system.
We believe tomo C will become a major contributor to our China business as we now have access to the type b market. The type B market is the largest and fastest growing segment compared to the type a segment, where we have dominant market share today.
Thomas C as differentiated as the only C T product with helical delivery available in China, and we expect strong commercial execution from our China team.
You May have also heard that we announced at our Investor day at Astro their preliminary introduction of helix, our global value segment product at the Indian Cancer Congress meeting that was held last week in Mumbai, India. The.
The introduction of helix, which is designed and manufactured in Madison, Wisconsin.
It was another strong addition to our product portfolio to target this high potential underserved market.
With Thomas C and helix, we can now compete in the growing global value market segment and double the addressable market potential with tailored product solutions that are designed for the unique needs of high potential emerging markets.
Within the quarter. We were also proud to announce a strategic win at the Royal Marsden in the UK, which we believe will further strengthen our brand.
And our business brand reputation is extremely important as customers make investments in technology and long term partnerships that last for many years. The Royal Marsden is a global thought leader in radiation Medicine and also the principal investigator site for the pace trials for prostate cancer at Astro.
The Royal Marsden team presented groundbreaking five year follow up data from the pace B trial that compared prostate cancer outcomes for five session S. P. R. T treatment with conventional radiation therapy delivered in 'twenty sessions.
These results are expected to have a significant clinical impact and drive adoption of S. P. A R. T as the new standard of care for low and intermediate risk prostate cancer based on the benefit to patients.
This study essentially eliminates the burden of time and cost for 15 additional treatment sessions.
The Royal Marsden, just completed the purchase of their second rat exact system. This year, adding to the two cyber knife systems currently in their equipment fleet.
This represents just one of the wins, which we believe are significant for accurate because they demonstrate the clinical innovation powered by high precision technology is becoming essential to providing advanced care.
Accuray technology is uniquely positioned to deliver stereotactic radiosurgery and S. B R. T and is driving preference at top cancer centers around the world.
During the quarter I was also very pleased with our operational performance. We continue to drive margin improvement through commercial execution by gaining price for our innovations and by reducing costs through operational rigor and greater efficiencies across every area of our business.
Last quarter and at our Investor Day in October we discussed cost optimization as a pillar in our profitability expansion plan.
Last week, we announced a restructuring which included a 6% reduction of our workforce across the organization. While these decisions are always difficult. We are confident that these actions to simplify our organization in combination with improved processes from our investment in a new ERP system, which went live during the <unk>.
Quarter will strengthen our position for the future and is in line with the plan, we laid out last year, when Ali and I took over.
Additionally, we will focus investments in areas that are critical to our growth strategy like commercial and customer support resources to maximize our latest product innovations and to further drive our market position and customer adoption.
These actions will put accuray in the strongest position to navigate the macro environment invest in strategic areas of revenue and margin growth and create long term shareholder value.
Finally in Q1, we further enhanced our executive team with the hiring of new leadership, and R&D Global service and support and I T and cyber security.
These executives come with significant operating experience from such leading companies in our sector is varian GE healthcare and a b b.
We will be leveraging their leadership experience to further position the company to win and gain share through innovation and unparalleled service and support.
I will now turn it over to Ali who will speak more about our financial performance.
Thank you Suzanne and good afternoon, everyone I would like to begin by thanking our global employees and cross functional teams, who executed with dedication to deliver a solid first quarter. While also undergoing a full scale European implementation, which presented quite a few operational and reporting challenges as part of the go live and data migration process. Despite.
Despite the unexpected challenges and learning how to navigate a brand new ERP environment. The teams worked around the clock to ensure successful implementation, which we were all very proud of.
Our new ERP system will be able to provide us with the right data driven visibility to run the business in a more efficient and cost effective manner.
Turning to the financials net revenue for the first quarter was $104 million, which was up 8% versus the prior year net revenue on a constant currency basis for the first quarter was $103 million, which represents a six 5% increase versus the prior year.
Product revenue for the first quarter was $53 million up 17% from the prior year and up 15% on a constant currency basis, representing system shipments of 24 units, which is a 14% increase versus the prior year.
Service revenue for the quarter was $51 million down 1% from the prior year and down 1% on a constant currency basis with an increase in contract revenue being offset by lower installation training and spare parts revenue, which we expect to bounce back in Q2.
Product gross orders for the first quarter were approximately $64 million and represented a book to Bill ratio of 1.2 as a reminder, our book to Bill ratio is defined as gross orders for the period divided by product revenue for the period.
As Suzanne mentioned, we believe the book to Bill ratio is the right metric to ensure a healthy growth of our backlog and it is also a good indicator of future business vitality.
Moving to the backlog we ended the first quarter with an order backlog of approximately $489 million, which represents greater than two years of FY2023 product revenue.
This reported backlog is 9% lower than prior year due to 14 orders representing $31 million in Asia beyond 30 months, which we do not include in our reported backlog. It is important to note that these wars age outs, primarily related to customer timing and we fully expect these to convert to revenue in the coming quarters.
Q1, we had four previously aged out orders for approximately $9 million contribute to product revenue. Finally, we had four order cancellations of $9 million in the quarter, all coming from the Japan region due to a termination of a distributor, which we expect to win back through our existing distributors in the coming quarters.
Our overall gross margin for the quarter was 38% compared to 35, 9% in the prior year, primarily due to lower parts consumption and associated freight expenses versus last year.
Q1, gross margin was up 611 points versus the prior quarter, primarily due to lower service parts consumption and freight.
It's important to note that service parts consumption was lower in Q1, partially due to the timing of the ERP implementation within the quarter, providing a one time cost benefit in Q1, which we expect to be offset in Q2.
Operating expenses in the first quarter were $37 $3 million compared to $36 $8 million in the first quarter of the prior fiscal year.
Operating income for the quarter was $2 $2 million compared to an operating loss of $2 $2 million from the prior year.
Adjusted EBITDA for the quarter was six and a half million dollars compared to $1 $9 million from the prior year. 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 $77 million compared to $19 million at the end of last quarter with the decrease primarily driven by lower unit shipments compared to prior quarter.
Net accounts receivables were approximately $77 million up $3 million from the prior quarter, our net inventory balance was $150 million up $5 million from the prior quarter due to lower shipments in Q1.
Our teams are continuing to focus on optimizing working capital to improve our cash position.
In summary, we are pleased with our Q1 results and are reiterating our full year FY 'twenty four guidance range of 460 to 470 million on revenue and $27 million to $30 million on adjusted EBITDA. We expect first half revenue performance to be approximately 45% of the range of our guidance with a stronger second.
Have some of our new product introduction and start to contribute to revenue.
Given the timing of our new product introductions, along with the restructuring actions. We took in October that will contribute to lower opex in the second half we expect our EBITDA performance in the first half of fiscal 2024 to equate to approximately 30% of the range of our guidance. Those are a few financial highlights and with that I'd like to hand, the call back to Susanna. Thank.
Ali I'm very pleased with our Q1 results and our strong start to the year. We are now offering the broadest and most innovative product portfolio in our company's history and are poised to capitalize on promising clinical trends and opportunities in the competitive landscape.
We have a defined revenue and margin expansion plan and we are executing.
Finally, we have an incredible leadership team in place that I believe is second to none in the industry in closing I would like to thank the entire accuray team for the strong Q1 performance the meaningful progress we have made against our strategic priorities and their ongoing dedication and passion to advancing our mission and creating value for all stay.
Holders.
I will now turn it back over to the operator for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed I mean.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
Our first question comes from young Li with Jefferies. Please go ahead.
Oh, all right great. Thanks, so much for taking my question.
I guess to start maybe.
So with guidance.
Very strong results this quarter.
Where you're holding guidance.
One quarter into the fiscal year.
Just wanted to understand the.
The level of conservatism.
Got it.
That guidance reiteration.
Maybe if you can talk a little bit about what youre seeing with them.
Our order funnel into the rest of the year.
Thanks for the question young and Yeah, No I think we've had a very strong start here in Q1, and I would say that we're cautiously optimistic you know at the same time, we don't want to get too much ahead of ourselves I'm you know a couple of things that I think we're taking a look at is in both U S and China U S.
I think you know as we talked about here there was some slowing and some extended sales cycles and so we expect that that will improve in the back half of the year and of course, if some of the discussion in China from the anti corruption campaign.
Campaign, we also expect to resolve itself in the back half of the year, but of course, we're taking a look at that we will know more as we get into the first half of the year and take a look at our guidance, but I mean overall, we feel very good about our performance and the new products that we have introduced at Astro.
The customer response, and the momentum as well as what we're seeing operationally in terms of our margin improvement. So I would say that we yeah. We are taking a more conservative approach to how we take a look at guidance and we will know more in the next quarter.
Yeah.
Alright, great very helpful and I.
I guess for my follow up maybe just on the.
With the China U.
Community.
Approval came a few months.
That's good.
Some numbers.
Got it.
I guess I'm just kind of wondering if you can maybe talk a little bit more about the.
The contribution this year.
The plan for logs and Hum.
How's the.
So far since approval.
Yep Yep no it sounds good.
Tennessee is a a very large growth catalyst for our business. We are very excited about the approval of the ton lets see it did come in a little bit earlier than expected which is fantastic.
What that means is that now our China team can begin to take our customer orders and build the backlog.
And so they are doing that now we've already had an internal launch ceremony in China, where we had local Tien tsin government officials. It was a very big event and so I think there's a lot of anticipation and excitement around the product partially because it's the only product in the type b space that is domestic.
Made that is a full C T helical delivery product and so we believe the demand for the product is going to be strong. So what we expect you know into Q2 and the back half of the year is again beginning to take orders for the Tomo C. And then of course from order to a customer she.
Net they're several months and we expect that revenue will start to hit for ton lets see them in Q4, and that's the shipments to customers in the meantime, though we will be shipping Thomas C to our partner so that they can start to begin building the product we ship parts to.
<unk> our partner in Tianjin and then they begin the manufacturing process and a buildup of finished goods. So again a lot of excitement around the approval of Thomas C. We think will have the opportunity to get.
Great market traction as well as gain market share in the type B space.
Thank you very much.
Our next question comes from Brooks O'neil with Lake Street Capital markets. Please go ahead.
Good afternoon, congratulations on a terrific start to the year.
Try to keep it to two questions. The first one is inflation is a huge topic globally can you just talk a little bit about the pricing environment.
And then maybe comment briefly about where they were.
Inflation in general.
Positive or negative for you in your business.
Hey, Brooks. Thanks for the question you know I would tell you in general in terms of inflation, we're certainly seeing that the supplier price increases have slowed down I think that being said.
We did see about a two and a half million dollar headwind related to inflation that hit our P&L. This particular quarter. So its certainly not eased up for US we do have quite a few specialty.
You know supply parts that go into our products that certainly have more exposure to inflation.
So it is definitely a topic that still remains for us and we continue to monitor it really closely.
Right. So my second question is.
A couple of years ago, well, there was tremendous excitement about reimbursement changes that seem to recognize.
Patient and provider benefits of your high dose radiation therapy could you guys just give us a quick update on the state of any discussions about moving reimbursement is that patient and provider friendly direction or back.
At this point thanks a lot.
Yes, Brooks so at our Investor day in Astro, We had a couple of speakers that are kind of gave the state of the state in the U S. On you know where our O E. P. M was and what some of the changes are in reimbursement in the Ro APM. As you know is sort of put on on on hold and we were waiting to see.
See if there would be any movement and the positive movement as that Astro has come up with their own reimbursement model, which they are proposing.
That actually does take into account exactly making equity between you know.
Shorter duration treatments like S. P. A R T compare to conventional treatments so that the U S hospitals are not losing money by going to add more advanced care, which is the again the shorter duration treatments, which is better for the patient better for the health care system. Overall, so you know that is a legislative.
Process. So it probably will still take one year plus to be able to go through but at least there's alignment from the industry are comping. The Astro industry Conference and you know it's basically their design. So we are very hopeful and not only in <unk>.
Getting this through the legislation legislative process, but also the signal that it sends to U S customers that this is the movement and it is toward the shorter duration treatments and we see that as a positive thing for our technology.
Absolutely makes sense, thanks, a lot and looking forward to the rest of the year.
Thanks Brooks.
Again, if you have a question. Please press Star then one.
Our next question comes from Neil Chatterji with B Riley. Please go ahead.
Hi, This is Brian Kearney on for Neil.
Congratulations on the strong quarter and thanks for taking our questions. I guess just first maybe can you provide an update on our pending application for those online adoptive solution and.
Can you talk about any feedback that you've received since the introduction of Astral.
Yeah. Thanks for the question, we had a lot of momentum and interest foreseen announced then we we showed it for the first time and some private downloads at the Astro Conference and I will tell you that the feedback was excellent and you know we had a number of demonstrations sign up.
And we were standing room, only and they were all booked up really by the end of the first day. So we take that as a very positive sign them now we went into the show at with Pheno is five 10-K pending you know our expectations just based on timelines is that that will be available to order. Some time in Q3 with <unk>.
Men's in the summertime.
But the feedback was very positive first of all again, another tool to be able to make that radiation therapy treatments more precise by adjusting to patient changes and this one being an online adaptive tool now there are adaptive tools that are out there in the marketplace, but they are.
Great acquire a lot of resources they require additional treatment time, and so really we learned a lot from the feedback from the existing offerings on what to do differently.
He knows and what to improve upon them. So that was the kind of feedback that we got from customers. So we are we're really excited about its ability to make a difference in patient care, but also differentiate the rat exact platform.
Thanks for the color that's helpful.
And then.
Maybe I can just ask for you to comment on the market potential for helix and what kind of uptake you're expecting.
And I just want to sure I heard you that the market potential for India.
Yes, yes, yes, yes, yes, yes, so in India, you know, we see that as another target site for value segment product and that is with the introduction of the helix. We think this is a product that is uniquely tailored for that value segment.
Within India, and we think the opportunity is approximately $100 million to $150 million annually and so we are going to be taking a look at the high potential high growth emerging markets, where helix can can do very well compared to.
<unk> of offerings. So we are excited about this being sort of our next focus after China.
Great. Thanks.
Thanks for taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Suzanne winter for any closing remarks.
Very good. Thank you very much well. This concludes our earnings call. We look forward to speaking with all of you again in February for our fiscal year 2024 second quarter earnings release, Thanks very much.
The conference has now concluded.
You for attending today's presentation you may now disconnect.