Q2 2024 Accuray Inc Earnings Call

Good day and welcome to the Accuray second quarter fiscal 2024 financial results.

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Jim Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Jesse to Senior Vice President 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 second quarter of fiscal year 'twenty 'twenty, four which ended December 31st 2023.

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 I'll leave pervasive accurate 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 market close this afternoon as well as in our filings with the Securities and Exchange Commission.

We 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. That's the result of new information or future events, except to the extent required by applicable securities laws Accordingly.

Accordingly, you should not put undue reliance on any forward looking statements.

He has to be added 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 it a quarter in the prepared remarks are to our fiscal year quarters. For example statements regarding our second quarter refer to our fiscal second quarter ended December 31st 2023.

Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to the accuracy of Investor Relations page at investors the Accuray Dot com.

With that let me turn the call over to Acuras, Chief Executive Officer, Susanna Winter Susanne.

Thank you Jessie good afternoon, and thank you all for joining the call Accuray delivered another strong quarter with outstanding order growth driven by our new product introductions and both top and bottom line performance consistent with our expectations for the first half.

Before I get into the details of the quarter I want to highlight a few key points from the three year outlook, we introduced at our Astro Investor Day. In October. These include driving revenue growth through innovation through advanced care.

Broadening our product portfolio to compete in the global value segment.

Decelerating growth in our recurring service solutions business and improving profitability, while strengthening our balance sheet I'm proud to say that in the first half of FY 'twenty. Four we have made good progress on each of these strategic pillars and advanced significant growth catalysts that will be realized in the coming quarters.

We believe new product launches like vital whole for the rat exact till mostly in China heal.

Helix, our helical value segment product and she knows online adaptive capability will be growth catalyst and begin to accelerate revenue and profitability growth in Q4 and into FY 'twenty five and beyond.

Reflecting on Q2, I am extremely pleased with order performance, which at 94 million represents 19% year over year growth and a very strong book to bill ratio of 1.8.

We believe 1.2 book to Bill ratio is a healthy target. So at 1.8, we are very pleased with these results, which were driven by customer adoption of our new product innovation and high impact commercial strategies.

We received shown in market clearance for vital hold in Japan with a full introduction at the Japanese Society for radiation Oncology Conference, where we received seven orders at the close of the conference.

Vital hold enhances breast cancer treatments by enabling surface guided therapy designed to protect the heart and lungs and as a result of our joint development with sea bad.

We believe this will further strengthen our number two market share position in Japan.

Additionally, we are advancing progress on gaining market clearance for C notes online adaptive capabilities on our precision treatment planning solution.

This clearance is expected in the second half of the fiscal year for the U S market and we believe it will enhance our competitive win rate and allow us to build our order backlog for trade in trade up replacements and upgrades for our installed base of Brad exact systems.

So you know its leverages AI technology and as a result of our partnership with Limbus AI and we are encouraged by continued customer interest since Astro. We believe it will help drive higher competitive win rates and installed base growth for the rat exact platform.

Now turning to our tomo system in China, Q2 was our first quarter since regulatory approval to market the system in China and was an important indicator of customer response, we saw overall, 44% year over year order growth in the China region within the quarter and while this partially.

Some pent up demand for Tomo C. We expect order activity to continue to be strong towards fiscal year end with revenue and margin growth beginning in Q4 and into FY 'twenty five pending customer installation timing.

As a reminder, Thomas C expands our portfolio in China with a domestic made product and enhances our access into the type b market, which represents approximately $600 million annually over the next five years.

Additionally, our Q2 performance and service was outstanding with 8% revenue growth year over year as we have discussed the service business is a strategic area of focus for the company and each service contract represents a recurring revenue stream over the 10 to 12 year life of the system after the warranty period.

Although we remain in the early innings of our service transformation I am very pleased to see impact from the strategic actions, we've put in place to improve commercial performance and enhance our offerings.

Finally, Q2 global demand for installation was strong and we ended the quarter with 6% growth year over year in our global installed base of systems.

This was led by the APAC region, which celebrated the milestone of 250 systems installed and remains one of our fastest growing install base regions at 13% year over year growth as.

As we look at our business model going forward, we see installed base growth as a leading performance indicators and the primary driver behind future service contract revenue as service revenue growth, we expect to benefit from scale and see a significant bottom line impact from improving margins.

From a region perspective, the E M. B a region continues its outstanding performance in both orders and revenue with 30% and 11% growth year over year, respectively.

The APAC region had 42% order growth year over year, with China, delivering 44% growth, reflecting strong demand Rev.

Revenue in APAC was impacted in Q2, primarily due to customer tender timing in Australia, and Taiwan, which resulted in APAC revenues being down 8% year over year. We expect this to resolve by our fiscal year end, along with backlog conversion of new tomo see orders in China to accelerate revenue.

Recovery starting in late Q4.

Japan delivered positive order growth and on a constant currency basis was up 8% year over year. However, the negative impact of FX versus last year reduced actual order growth to two 4%.

Service revenue in the region grew by 10% on a constant currency basis, but total revenue was down 29% due to lower product shipments, which we expect will offset with higher volume in the second half.

On the positive side the region continues to lead with key competitive wins at 50% of new orders coming from competitive replacements.

The Americas region showed a strong sequential order growth of 72% from the prior quarter. This is the direct result of focused commercial strategies to help customers with value added solutions to retain and grow the installed base.

In Q2, we saw longer customer installation timelines in the Americas region with revenues down 15% year over year, but we are encouraged by the strong 17% sequential quarterly revenue growth and are cautiously optimistic that conditions will improve over the coming quarters.

Operationally, we are executing on our margin expansion plan.

He will discuss our progress in greater detail as were seeing strong progress in the financial initiatives, we laid out at the beginning of the year and at our Investor Day, specifically, we're seeing positive trends in pricing initiatives across our product and service solutions a reduction in operating costs and lower service costs do.

Improved parts consumption.

This is had a direct impact on service margin, which has improved by 160 basis points in the first half of the year compared to the same period last year and gives us a higher degree of confidence in our longer term margin expansion plan.

Margin expansion remains a cultural transformation and over the last 18 months, we have implemented new organizational structures with P&L accountability, new operating mechanisms to ensure we gain incremental price for our differentiated solutions, ensuring a faster and more predictable revenue cycle.

And continuing to drive cost efficiencies, while increasing customer satisfaction value.

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 employees and cross functional teams, who continue to amaze us with their incredible work ethic and ability to execute on our strategy.

And to the financials product gross orders for the second quarter were approximately $94 million, which is a 19% increase versus the prior year and 18% once adjusted for the impact of foreign exchange. This.

This is the strongest order volume we've had in the last two fiscal years and as Suzanne mentioned it speaks to the market's confidence in our products and new innovations.

We're proud of our commercial teams across the globe. They were able to contribute to the strong result. This further strengthens our backlog and is a clear sign of the health and vitality of the future of our business.

This order intake represents a book to bill of 1.8, mostly driven by customer timing and improved pricing, which grew order margin rate by eight points sequentially across our product portfolio.

Net revenue for the second quarter was $107 million, which was up 3% sequentially and down 7% versus the prior year net revenue on a constant currency basis for the second quarter was $106 million, which represents an 8% decrease versus the prior year net revenue for the first half of the fiscal year is flat to the prior year.

Service revenue for the quarter was $56 million up 8% from the prior year and up 7% on a constant currency basis, primarily driven by an increase in contract revenue and higher installation training and spare parts volume as expected.

This lift in service revenue exceeds our year over year installed base growth of 6% illustrating that our pricing actions and our service contracts.

We're now starting to be reflected in our P&L.

Service revenue for the first half of the fiscal year is 3% up versus prior year, driven by contract revenue, which was up 6% for the house.

Product revenue for the second quarter was $52 million down 19% from the prior year driven by six fewer unit shipments versus last year as discussed in our last earnings call.

Revenue profile in fiscal year 'twenty four is more backend loaded towards the second half, which is a result of the timing of our new product introductions.

Revenue for the first half of the fiscal year is down 3% versus the prior year.

Moving to the backlog we ended the second quarter with the product order backlog of approximately $492 million, which represents greater than two years of FY2023 product revenue. This reported backlog is up 1% sequentially and 4% lower than the prior year due to 19 orders representing $40 million that age to beyond 30.

<unk>, which we do not include in our reported backlog in.

In Q2, we had three orders that aged in for approximately $5 million and contributed to product revenue within the quarter. Finally, we had no order cancellations in the quarter.

Our overall gross margin for the quarter was 33, 5% compared to 37, 4% in the prior year.

You may recall, we experienced a one time cost benefit in Q1 related to lower parts consumption due to the ERP implementation and expected it to offset in Q2 as reflected in our results.

Gross margin for the first half was 35, 7%, which was slightly below the first half of the prior year, mainly due to product mix, we expect gross margins to improve in the second half as we realize better service pricing along with the full benefit of the restructuring actions taken in Q2.

Operating expenses in the second quarter were $39 $9 million compared to $43 million in the prior year down 1%, excluding ERP implementation costs and severance payouts operating expenses were down 8% in the prior year illustrating continued cost discipline and focus on return on investment.

Operating income for the quarter was negative $4 million compared to an operating gain of $2 $7 million from the prior year due to lower standard margins severance and ERP implementation costs.

Adjusted EBITDA for the quarter was $2 million compared to $8 $5 million from the prior year adjusted EBITDA for the first half of fiscal year 'twenty, four was $8 $5 million versus $10 4 million in the prior year with the decrease mainly driven by lower product volume, we expect adjusted EBITDA to grow in the second half with the full benefit of the restructuring actions taken in Q2.

Who along with higher product revenue volume, we describe 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 $73 million compared to $77 million at the end of last quarter net accounts receivables were approximately $77 million flat to the prior quarter. We are very pleased with the strong focus on collections, which resulted in a DSO of 66 days.

Compared to 71 days in the prior year.

Our net inventory balance was $155 million up $5 million from the prior quarter due to the timing of system shipments. Our teams are continuing to focus on optimizing working capital to improve our cash position.

In summary, we are pleased with our Q2 results and are reiterating our full your FY 'twenty guidance of 460 to 470 million on revenue and 27% to $30 million on adjusted EBITDA.

With total revenue of 211 million and adjusted EBITDA of $8 5 million in the first half we're expecting a very strong second half with revenue in the range of $250 million to $260 million driven by executing on our strong backlog new product introductions and service gross and adjusted EBITDA of $18 five to $21 5 million, resulting from higher <unk>.

Product volume and our margin expansion efforts starting to deliver.

As a reminder.

The full year guidance, we provided last August assumed in part FX staying consistent with our assumptions coming into the fiscal year. However year to date in fiscal year 'twenty four we have particularly seen the Japanese yen continued to weaken versus the beginning of fiscal year 'twenty four.

This is noteworthy given the strong product volume, we're expecting to contribute to revenue in the second half from the Japan region. We are closely monitoring FX as it pertains to our full year guidance and we'll update you again in the spring.

Additionally, as stated in our last earnings call the timing of our new product introductions, along with the recognition of the China margin deferrals will result in a greater amount of revenue and margins being recognized in Q4 with that in mind, we expect third quarter revenue performance to be in the range of $112 million to $118 million with an expected adjusted EBITDA range of six.

$6 million to $9 million.

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

Thank you Ali.

In closing we remain confident in our long term strategy and pipeline of innovation, we have exciting growth catalysts in high impact commercialization strategies that we believe will allow us to deliver above market growth over time.

Operationally, we remain laser focused on capital deployment, improving margins and profitability, while strengthening our balance sheet, so that we maximize financial flexibility and create shareholder value.

I would like to end by thanking our entire accuray team for their dedication and passion, we know that the work we do makes a major difference in the lives of the patients we serve.

Together, we are moving the organization forward and fulfilling our company mission of creating a better future for people diagnosed with cancer.

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

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

We're using a speaker phone please pick up your handset before pressing the keys if at any time. If your question has been addressed and you would like to withdraw your question. Please press Star then two.

Our first question comes from Murray five bolt with B T. I G. Please go ahead.

Good afternoon, thanks for taking the questions Suzanne and Ali.

I wanted to start here I guess on the guidance I'm you know you talked about a big second half and noted that you know with your fiscal third quarter guidance, it's implying a rather large you know bolus and fiscal fourth quarter help me understand what gives confidence in that what are kind of the inputs.

Operator: Thank you for watching. I hope you enjoyed this video. If you did, make sure you hit the subscribe button below. I'll see you next time. Good day, and welcome to the AccuRAE second quarter fiscal 2024 financial results. All participants will be in listen-only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone.

From the various geographies that you're most excited about and Ah Yeah, I guess I'll leave it there on the first question.

Yeah, no. Thanks Murray Yeah. So there are a couple of major drivers of the guidance and really our confidence in the Q4 you know one for sure is to tell most of the we had just a tremendous order quarter you know in China, and really Q4 is about the time with customers.

Operator: To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Jesse Chiu, Senior Vice President, Chief Legal Officer. Please go ahead.

Jesse Chiu: Thank you, operator, and good afternoon, everyone. Welcome to Actuary's conference call to review financial results for the second quarter of fiscal year 2024, which ended December 31st, 2023. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Acura's President and Chief Executive Officer, and Ali Pervaiz, Acura's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes four forward-looking statements. The actual results may differ materially from those contemplated or implied by these forward-looking statements.

Going from order to delivery and so we believe Q4 will be heavily weighted them as a result of the tomasi them. The other is vital whole you know.

We had very strong vital hold introduction in Japan, and so we do expect that there will be shipments related to those new orders that come in Q4, and then there is some seasonality in customer timing around to Japan. They have a very strong Q4, so those three things really have weighted or.

Q4, and then just from an EBITDA perspective, with Thomas C delivery is the China market, our China margin deferral that we would recognize then in Q4 and also we'll see the full benefit of some of the restructuring actions that we've taken.

Jesse Chiu: 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 as in our filings with the Securities and Exchange Commission. We base the forward-looking statements in 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.

Okay and that all starts to hit there and remind me until we'll see I think we were waiting on a treatment planning system approval has that been secured at this point or is that something we're still waiting on.

Jesse Chiu: If you have questions for today's call, first, during the Q&A session, we request that participants limit themselves to two questions and then requeue with any follow-ups. Second, all references to a specific quarter and the prepared remarks refer to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter and December 31st, 2023. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to the Accurate Investor Relations page at investors.accurate.com. With that, let me turn the call over to AACRA's Chief Executive Officer, Susanne Wintour. Okay?

We're still waiting on it you know and that also adds a little bit to the Q4, we were expecting it at the end of March. It is looking like it's going to be either in the April or early may timeframe.

Okay, and you'll be able to start recognizing revenue after that comes in.

Correct.

Okay, and then sorry for my second question here I'm glad to hear that you know some of the efforts you've made on service margin are paying off I mean would you say at this point you know the service margin expansion efforts are sustainable or should we continue that to think of that metric as well as a little bit lumpy.

Susanne Winter: Thank you, Jesse. Good afternoon. And thank you all for joining the call. AccuRate delivered another strong quarter with outstanding order growth driven by our new product introduction, and both top and bottom line performance consistent with our expectations for the first half. Before I get into the details of the quarter, I want to highlight a few key points from the three-year outlook we introduced at our Astro Investor Day in October. These include driving revenue growth through innovation to advanced care, broadening our product portfolio to compete in the global value segment, accelerating growth in our recurring service solutions business, and improving profitability while strengthening our balance sheet. I'm proud to say that in the first half of FY24, we've made good progress on each of these strategic pillars and advanced significant growth catalysts that will be realized in the coming quarters. We believe new product launches like Vitalhold for the RADxAX and Tomosy in China.

No of course volumes and things can can make a difference so how should we be thinking about kind of a floor on that service margin.

Yeah. Thanks for the question Maria So I would say or contract revenue is definitely something that is sticky and the pricing that we've introduced under contract revenue is going to be.

Be something that's certainly sustainable going forward.

And so that makes it the lion's share of our service revenue. So that will continue what is I guess I'm a little bit more.

Or volatile quarter over quarter is revenue related to our installation are training and so you know that can really vary quarter over quarter, but really excited about is seeing this contract revenue grow grew about 6% for the half and that's really going to continue to add to our top and buy.

Line.

Oh, Okay. Thank you for that great deal a great great detail I appreciate the.

Questions. Thanks.

Thanks Corey.

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

Susanne Winter: Helix, our Helical Value Segment product, and CNOS Online Adaptive Capability will be growth catalysts and begin to accelerate revenue and profitability growth in Q4 and into FY25 and beyond. Reflecting on Q2, I am extremely pleased with order performance, which at 94 million represents 19% year-over-year growth and a very strong book-to-bill ratio of 1.8. We believe 1.2 book-to-bill ratio is a healthy target, so at 1.8, we are very pleased with these results, which were driven by customer adoption of our new product innovation and high-impact commercial strategies. We have shown market clearance for vital hold in Japan with a full introduction at the Japanese Society for Radiation Oncology Conference, where we received seven orders at the close of the conference. Vital Hold enhances breast cancer treatments by enabling surface guided therapy designed to protect the heart and lungs and as a result of our joint development with C-RAD.

Thank you very much good afternoon, everyone.

Love to get just any additional color you can offer on the response to tell them mostly in China.

Perhaps if you seen any response outside of China, and then the other market to be a good thing to hear about that as well.

Thanks, Brooks I mean, I know I think we were very pleased with one quarter under our belt since we've gotten the regulatory approval of the tomo see you know as we expected there some pent up demand there from an orders perspective, but we actually have our our entire China JV leadership team here this week.

And so we're spending a lot of time with them getting I think details on you know how the yeah. The next quarter's book and so we feel pretty confident that the market response is very strong I'm you know again, it's a a domestic made product you know we come into the market with you know a halo effect of our.

Our market share in the type a market and again this is a helical product them within the type B segment, and so we think it's differentiated and we've got the right commercial infrastructure in place to do very well.

Susanne Winter: We believe this will further strengthen our number two market share position in Japan. Additionally, we are advancing progress on gaining market clearance for CINO's online adaptive capabilities on our Precision Treatment Planning Solution. This clearance is expected in the second half of the fiscal year for the U.S. market, and we believe it will enhance our competitive win rate and allow us to build our order backlog for trade-in, trade-up replacements and upgrades for our installed base of RADxAC systems. CNOS leverages AI technology and is a result of our partnership with Limbus AI, and we are encouraged by continued customer interest since Astro.

Well I was just curious any response in India or is it too early to say okay. So so sorry that was the second part of your question I think it's still early but we did a we did show the helix at the India Conference in Mumbai in November and no that was good response to that we are still waiting for regulatory approval.

Well to be able to build our order funnel, but I think the response was very positive.

Right and then I'll just tack on one more is the.

Obviously, you mentioned the 50% takeaway success, you're having in the Japanese market.

Susanne Winter: We believe it will help drive higher competitive win rates and install-based growth for the RADxact platform. Now, turning to our TomoC system in China, Q2 was our first quarter since regulatory approval to market the system in China and was an important indicator of customer response. We saw overall 44% year-over-year order growth in the China region during the quarter. And while this partially represents some pent-up demand for TomoC, we expect order activity to continue to be strong towards fiscal year-end, with revenue and margin growth beginning in Q4 and into FY25, pending customer installation timing. As a reminder, TomoSea expands our portfolio in China with a domestically-made product and enhances our access to the Type B market, which represents approximately $600 million annually over the next five years.

What's your feeling about your opportunity to achieve some competitive takeaways in any other market I'm thinking, particularly about the United States.

Yeah no. Thanks for the question Yeah, Japan definitely leads in terms of the overall percent of orders coming in that are competitive takeaways you know in the Americas market. We are very firmly focused on trade in trade up of our installed base, primarily because theyre more aged systems.

That being said you know this past quarter, we did have some competitive takeaways and so you know we do feel strong that we can compete and win and even if it's not a replacement every sale as competitive Brooks.

Every time, we win we feel good about our ability to be.

Absolutely that's great congratulations I'm looking forward to that.

Susanne Winter: Additionally, our Q2 performance and service was outstanding, with 8% revenue growth year over year. As we have discussed, the service business is a strategic area of focus for the company, and each service contract represents a recurring revenue stream over the 10 to 12 year life of the system after the warranty period. Although we remain in the early innings of our service transformation, I am very pleased to see impact from the strategic actions we put in place to improve commercial performance and enhance our offering. Finally, Q2 global demand for installation was strong, and we ended the quarter with 6% growth year over year in our global installed base of systems. This was led by the APAC region, which celebrated the milestone of 250 systems installed and remains one of our fastest growing installed base regions at 13% year over year growth.

Rest of the year.

Thanks.

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 the spring for our fiscal 2024 third quarter earnings release, Thanks for joining the call.

Susanne Winter: As we look at our business model going forward, we see installed base growth as a leading performance indicator and the primary driver behind future service contract revenue. As service revenue grows, we expect to benefit from scale and see a significant bottom-line impact from improving margins. From a region perspective, the EIMEA region continues its outstanding performance in both orders and revenue, with 30% and 11% growth year-over-year, respectively. The APAC region had 42% order growth year over year, with China delivering 44% growth, reflecting strong demand.

Susanne Winter: Revenue in APAC was impacted in Q2 primarily due to customer tender timing in Australia and Taiwan, which resulted in APAC revenues being down 8% year over year. We expect this to resolve by our fiscal year end, along with backlog conversion of new TOMOC orders in China to accelerate revenue recovery starting in late Q4. Japan delivered positive order growth and, on a constant currency basis, was up 8% year-over-year. However, the negative impact of FX versus last year reduced actual order growth to 2.4%.

Susanne Winter: Service revenue in the region grew by 10% on a constant currency basis, but total revenue was down 29% due to lower product shipments, which we expect will be offset by higher volume in the second half. On the positive side, the region continues to lead with key competitive wins, with 50% of new orders coming from competitive replacements. The Americas region showed a strong sequential order growth of 72% from the prior quarter.

Susanne Winter: This is the direct result of focused commercial strategies to help customers with value-added solutions to retain and grow the installed base. In Q2, we saw longer customer installation timelines in the Americas region, with revenues down 15% year-over-year, but we are encouraged by the strong 17% sequential quarterly revenue growth and are cautiously optimistic that conditions will improve over the coming quarters. Operationally, we are executing on our margin expansion plan. Ali will discuss our progress in greater detail, as we're seeing strong progress on the financial initiatives we laid out at the beginning of the year and at our investor day.

Ali: Specifically, we're seeing positive trends in pricing initiatives across our product and service solutions, a reduction in operating costs, and lower service costs due to improved parts consumption. This has had a direct impact on service margin, which has improved by 160 basis points in the first half of the year compared to the same period last year, and gives us a higher degree of confidence in our longer-term margin expansion plan. Margin expansion remains a cultural transformation, and over the last 18 months, we have implemented new organizational structures with P&L accountability, new operating mechanisms to ensure we gain incremental price for our differentiated solutions, ensuring a faster and more predictable revenue cycle, and continuing to drive cost efficiencies while increasing customer satisfaction. I will now turn it over to Ali, who will speak more about our financial performance. Thank you, Suzanne, and good afternoon, everyone.

Ali: I want to begin by thanking our global employees and cross-functional teams who continue to amaze us with their incredible work ethic and ability to execute on our strategy. Turning to the financials, product growth orders for the second quarter were approximately $94 million, which is a 19% increase versus the prior year and 18% once adjusted for the impact of foreign exchange. This is the strongest order volume we've had in the last two fiscal years, and as Suzanne mentioned, it speaks to the market's confidence in our products and new innovation. We're proud of our commercial teams across the globe that were able to contribute to this strong result.

Ali: This further strengthens our backlog and is a clear sign of the health and vitality of the future of our business. This order intake represents a book-to-bill of 1.8, mostly driven by customer timing and improved pricing, which grew order margin rates by eight points sequentially across our product portfolio. Net revenue for the second quarter was $107 million, which was up 3% sequentially and down 7% versus the prior year. Net revenue on a constant currency basis for the second quarter was $106 million, which represents an 8% decrease versus the prior year. Net revenue for the first half of the fiscal year was flat compared to the prior year.

Ali: Service revenue for the quarter was $56 million, up 8% from the prior year and up 7% on a constant currency basis, primarily driven by an increase in contract revenue and higher installation, training, and spare parts volume, as expected. This lift in service revenue exceeds our year-over-year install-based growth of 6%, illustrating that our pricing actions and our service contracts are now starting to be reflected in our P&L. Service revenue for the first half of the fiscal year was 3% up versus the prior year, driven by contract revenue, which was up 6% for the half. Product revenue for the second quarter was $52 million, down 19% from the prior year, driven by six fewer unit shipments versus last year, as discussed in our last earnings call. The revenue profile in fiscal year 24 is more back-end loaded towards the second half, which is a result of the timing of our new product introduction. Product revenue for the first half of the fiscal year is down 3% versus the prior year.

Ali: Moving to the backlog, we ended the second quarter with a product order backlog of approximately $492 million, which represents greater than two years of FY23 product revenue. This reported backlog is up 1% sequentially and 4% lower than the prior year due to 19 orders representing $40 million that aged beyond 30 months, which we do not include in our reported backlog. In Q2, we had three orders that aged in for approximately $5 million and contributed to product revenue within the quarter. Finally, we had no order cancellations in the quarter.

Ali: Our overall gross margin for the quarter was 33.5% compared to 37.4% in the prior year. As you may recall, we experienced a one-time cost benefit in Q1 related to lower parts consumption due to the ERP implementation and expected it to be offset in Q2, as reflected in our results. Gross margin for the first half was 35.7%, which was slightly below the first half of the prior year, mainly due to product. We expect gross margins to improve in the second half as we realize better service pricing, along with the full benefits of restructuring actions taken in Q2. Operating expenses in the second quarter were $39.9 million compared to $40.3 million in the prior year, down 1%, excluding ERP implementation costs and severance payouts.

Ali: Operating expenses were down 8% compared to the prior year, illustrating continued cost discipline and focus on return on investment. However, operating income for the quarter was negative $4 million compared to an operating gain of $2.7 million from the prior year due to lower standard margins, severance, and ERP implementation costs. Adjusted EBITDA for the quarter was $2 million compared to $8.5 million in the prior year. Adjusted EBITDA for the first half of fiscal year 24 was $8.5 million versus $10.4 million in the prior year, with a decrease mainly driven by lower product volume.

Ali: We expect Adjusted EBITDA to grow in the second half with the full benefit of the restructuring actions taken in Q2, along with higher product revenue volume. We describe the reconciliation between gap 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 $73 million compared to $77 million at the end of last quarter.

Ali: Net accounts receivable were approximately $77 million, flat to the prior quarter. We are very pleased with the strong focus on collections, which resulted in a DSO of 66 days compared to 71 days in the prior year. Our net inventory balance was $155 million, up $5 million from the prior quarter due to the timing of system shipments. Our teams are continuing to focus on optimizing working capital to improve our cash position. In summary, we are pleased with our Q2 results and are reiterating our full year FY24 guidance of $460 to $470 million in revenue and $27 to $30 million in adjusted EBITDA. With total revenue of $211 million and adjusted EBITDA of $8.5 million in the first half, we're expecting a very strong second half with revenue in the range of $250 to $260 million, driven by executing on our strong backlog, new product As a reminder, the full-year guidance we provided last August assumed, in part, FX staying consistent with our assumptions coming into the fiscal year. However, year-to-date in fiscal year 24, we have particularly seen the Japanese yen continue to weaken versus the beginning of fiscal year 24.

Ali: This is noteworthy given the strong product volume we're expecting to contribute to revenue in the second half from the Japan region. We are closely monitoring FX as it pertains to our full year guidance, and we'll update you again in the spring. Additionally, as stated in our last earnings call, the timing of our new product introductions, along with the recognition of the China margin deferrals, will result in a greater amount of revenue and margins being recognized in Q4. With that in mind, we expect third-quarter revenue performance to be in the range of $112 to $118 million, with an expected adjusted EBITDA range of $6 to $9 million. Those are the key financial highlights, and with that, I'd like to hand the call back to Suze. Thank you, Ali.

Susanne Winter: In closing, we remain confident in our long-term strategy and pipeline of innovation. We have exciting growth catalysts and high-impact commercialization strategies that we believe will allow us to deliver above-market growth over time. Operationally, we remain laser focused on capital deployment, improving margins, and profitability while strengthening our balance sheet so that we maximize financial flexibility and create shareholder value. I would like to end by thanking our entire Acura team for their dedication and passion. We know that the work we do makes a major difference in the lives of the patients we serve.

Operator: Together, we are moving the organization forward and fulfilling our company mission of creating a better future for people diagnosed with cancer. 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 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Our first question comes from Marie Thibault with BTIG. Please go ahead. Good afternoon.

Marie Thibault: Thanks for taking the questions, Suzanne and Ali. I wanted to start here, I guess, on guidance. You know, you talked about a big second half and noted that, you know, with your fiscal third-quarter guidance, it's implying a rather large bolus in the fiscal fourth quarter. Help me understand what gives you confidence in that. What are the kinds of inputs from the various geographies that you're most excited about? And, yeah, I guess I'll leave it there on the first question. Yeah, no, thanks, Marie.

Susanne Winter: Yeah, so there are a couple of major drivers of the guidance and really our confidence in the Q4, one for sure is the Tomo C. We had just a tremendous order quarter, you know, in China, and really, Q4 is about the time when customers are going from order to delivery. And so we believe Q4 will be heavily weighted as a result of the Tomo C. The other is vital holds. You know, again, we had a very strong vital hold introduction in Japan.

Susanne Winter: And so we do expect that there will be shipments related to those new orders that come in Q4. And then there is some seasonality and customer timing in Japan. They have a very strong Q4. So those three things really have weighted our Q4. And then just from an EBITDA perspective, with Tomo C delivery, there is the China margin deferral that we would recognize then in Q4 and also we'll see the full benefit of some of the restructuring actions that we've taken. Okay, that all starts to hit there.

Susanne Winter: And remind me, on TOMO-C, I think we were waiting for a treatment planning system approval. Has that been secured at this point, or is that something we're still waiting on? We're still waiting on it, you know, and that also adds a little bit to Q4. We were expecting it at the end of March, but it is looking like it's going to be either in the April or early May time frame.

Susanne Winter: Okay, and you'll be able to start recognizing revenue after that comes, Correct. Okay. And then, sorry, for my second question here. Glad to hear that, you know, some of the efforts you've made on service margin are paying off. Ali, would you say at this point that the service margin expansion efforts are sustainable, or should we continue to think of that metric as a little bit lumpy? I know, of course, volumes and things can make a difference, so how should we be thinking about kind of a floor on that service margin?

Ali: Yeah, thanks for the question, Marie. So I would say our contract revenue is definitely something that is sticky. And the pricing that we've introduced for our contract revenue is going to be something that's certainly sustainable going forward, and so that makes it the lion's share of our service revenue. So that will continue. What is, I guess, a little bit more, I'll call it volatile quarter over quarter, is revenue related to our installations and our training. And so, that can really vary quarter over quarter, but I'm really excited about seeing this contract revenue grow. It grew about 6% for the half, and that's really gonna continue to add to our top and bottom line. Okay, thank you for that great deal of great, great detail. I appreciate the question. Thanks for listening! The next question comes from Brooks O'Neill with Lake Street Capital Markets. Please go ahead. Thank you very much. Good afternoon, everyone.

Marie Thibault: I'd love to get just any additional color you can offer on the response to Tomo C in China. And perhaps if you're seeing any response outside of China and any other market, it would be interesting to hear about that as well. Thanks, Brooks. Yeah, no, I think we're very pleased with, you know, one quarter under our belt since we got the regulatory approval for the TomoC. You know, as we expected, there's some pent-up demand there from an orders perspective, but we actually have our entire China JV leadership team here this week, and so we're spending a lot of time with them getting, I think, details on, you know, how the next quarters look. And so we feel pretty confident that the market response will be very strong. You know, again, it's a domestically made product. You know, we come into the market with, you know, a halo effect on our market share in the type A market. And again, this is a helical product within the type B segment.

Susanne Winter: And so we think it's differentiated and we've got the right commercial infrastructure in place to do very well. I was curious, any response in India, or is it too early to say? Okay, so sorry, that was the second part of your question. I think it's still early, but we did show the helix at the India conference in Mumbai in November, and there was a good response to that.

Susanne Winter: We are still waiting for regulatory approval to be able to build our orders funnel, but I think the response was very positive. Great. And then I'll just tack on one more.

Brooks O'Neill: Obviously, you mentioned the 50% takeaway success you're having in the Japanese market. What's your feeling about your opportunity to achieve some competitive takeaways in any other market? I'm thinking, most particularly, about the United States.

Susanne Winter: Yep, no, thanks for the question. Yeah, Japan definitely leads in terms of the overall percent of orders coming in that are competitive takeaways. You know, in the Americas market, we are very firmly focused on trade-in, trade-up of our installed base, primarily because they're more aged systems.

Susanne Winter: That being said, you know, this past quarter, we did have some competitive takeaways. And so, you know, we do feel strong that we can compete and win. And even if it's not a replacement, every sale is competitive, Brooks.

Brooks O'Neill: So every time we win, you know, we feel good about our ability to beat them. Absolutely, that's great. Congratulations! I'm looking forward to the rest of the year. Thanks. 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'll look forward to speaking with you again in the spring for our fiscal 2024 third quarter earnings release. Thanks for joining the call.