Accuray Incorporated

Good afternoon and welcome to the Accuray Report's first quarter fiscal 2022 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ken Mobeck, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Anthony, and good afternoon, everyone. Welcome to Accurate's conference call to review financial results for the first quarter of fiscal year 2022, which ended September 30, 2021. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Josh Levine, Accurate's Chief Executive Officer, Suzanne Winter, Accurate's President, and Brandy Green, Accurate's Interim 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 include are set forth 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. The forward-looking statements on this call are based on information available to us as of today's date, and we assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to two questions and then re-queue with any follow-ups. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our fiscal first quarter, referred to our fiscal first quarter, ended September 30, 2021. Additionally, there will be a supplemental slide deck to accompany this call, which can be accessed by going directly to Accuray's investor page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Josh Levine.

Josh? Thanks, Ken, and thank you to everyone joining us on today's call. I'm joined today by Suzanne Winter, our president, and Brandy Green, our interim CFO. By any measure, Accuray had a very strong fiscal first quarter. Our performance reflects the visible impact of the investments in innovation we have made to our product portfolio, how those new technologies are being received by customers around the world, and a laser-like focus on commercial execution, all of which are driving accelerated revenue growth in our business. Revenue for the quarter came in at $107.4 million, which translates to 26% year-on-year growth and represents the largest fiscal first quarter revenue number the company has ever recorded. Gross order volume for the quarter was $70 million, which translated to 39% year-on-year growth. While Suzanne will provide more details regarding regional contributions during her prepared remarks, I can confirm that the strength in orders and revenue results were reflected across all of Accuray's operating regions. Underpinning this strength is the impact of our latest Radizak technology upgrades, ClearRT, our helical KVCT imaging platform, and Synchrony, our real-time motion tracking and beam delivery adaptation capability. We have seen significant customer interest in both of these technology additions and very strong attachment rates for both, with new Radizak orders as well as upgrade activity for installed base systems. The cadence of our new technology innovations is continuing to drive both current and, we believe, future growth in our business. We continue to see strong contribution from our China JV during Q1. China gross order volume for fiscal year Q1 was 16.3 million, representing 139 percent growth versus prior year, and we generated revenue of 25.5 million, which represented year-on-year growth of 732 percent. Additionally, We continue to make good progress on our TNGEN-produced Type B product and are on track to launch a phased market introduction in the summer of calendar year 2022 with subsequent shipments expected pending regulatory clearance by the end of that year. Last week, we participated in the ASTRO Conference in Chicago. This was the first in-person opportunity to interact with the U.S. radiation oncology community in 24 months. Accuray had strong customer interest at the meeting, as well as strong interest and participation at our investor event. As we shared in our Astro Investor Day presentation, we're excited about the momentum and progress we see occurring with our business today, as well as the long-term growth opportunities we have in front of us. We are launching important technology upgrades across both of our platforms that are designed to further enhance current treatment capabilities in delivering hypo- and ultra-hyper-fractionated stereotactic radiosurgery, and stereotactic body radiotherapy more effectively, safely, and efficiently. And now I'll turn the call over to Suzanne Winter for some more details on commercial highlights during the quarter.

Thank you, Josh. We are very pleased with our first quarter performance with 32 new system orders and with all four regions executing extremely well. The Americas region led the growth with greater than 200% growth in order volume driven by strong customer demand for ClearRT and Synchrony as differentiated technologies that will allow them to provide ultra-hypofractionated SBRT and IMRT treatments for their patients and allow them to compete more effectively within the new ROAPM reimbursement environment. Our results give us confidence of two things. One, that we're beginning to see market recovery in capital equipment budget spend with some pent-up demand from U.S. reflected in Q1 results, and two, the positive impact of commercial initiatives we are driving in this important region. In the EIMEA region, highlights include a seventh system RADxACT win from our distribution partner in Turkey, which is building an oncology network which will strengthen our market position in this subregion and expand access to new markets leveraging RADxact's helical delivery platform as a differentiated capability compared to conventional C-arm radiation therapy systems. The Japan region continued to deliver orators' growth with 28% year-over-year growth within the quarter, with key competitive wins at Hsinchu and Nagoya Universities. Finally, our APAC region orders grew 67% year-over-year, driven primarily by outstanding commercial execution in China, with eight new systems, including three Type A and five Type B. Outside of China, we won a second trade-in trade-up to RADEXACT at the Royal Brisbane Women's Hospital, which will become a strong reference site in our ANZ subregion. We expect Q1 order growth to significantly outpace global market growth and will result in market share gain, especially in the U.S. market. Our new product introductions drove the momentum, with 15 new ClearRT orders bringing the cumulative orders to 59 since we began market launch less than a year ago. Approximately 50% of new RADxACT system orders purchased ClearRT as an option. Additionally, our commercial focus on upgrading our aged installed base to the latest performance capabilities is showing results, with 54% of developed market orders and 60% of U.S. orders being comprised of trade-in, trade-up orders of our existing installed base. As you heard from Josh, revenue growth for the quarter was outstanding, with strong performances from the U.S. and China, reflecting some pent-up demand which demonstrates that our customers are prioritizing radiation therapy equipment installations. Shipments to China included nine Type A systems, including a CyberKnife for Beijing Union Medical College and another at Beijing Hospital, both premier institutions highly connected to the China Ministry of Health and serving the senior government. We believe these strategic Type A customer installations will help Accuray to continue to drive our solid brand and technology awareness in the China market. Other key highlights for the quarter included a very successful exhibition at both U.S. and European radiation oncology conferences, where we highlighted our latest product innovation. In addition to ClearRT and Synchrony for RadExact, we received 510K approval for VoloUltra, the latest Accuray product enhancement for RadExact's precision treatment planning system. VoloUltra translates Volo technology introduced for the CyberKnife platform to RADxACT and increases the speed, ease of use, and quality of treatment planning for RADxACT, allowing for treatment times of less than 15 minutes and positioning it as a superior workforce solution within a department. For the CyberKnife, in partnership with Raysearch, We introduced the Ray Station for the CyberKnife radiosurgery platform, allowing seamless integration within the radiation oncology department and full connectivity across multiple vendor radiation therapy and OIS systems. Also breaking clinical news from the estro scientific sessions was the two-year follow-up data from the PACE-B trial. PACE-B is a large, multicenter, international trial of patients who have localized prostate cancer. At Estro, Dr. Allison Tree from Royal Marsden Hospital in London reported on the long-term outcome of patients treated after two years, a timeframe where side effects may occur. Dr. Tree reported that patients treated on CyberKnife experienced more than two times less urinary side effects than those treated on a conventional LINAC system. This important randomized control study supports the differentiation of Accurate technology from competitive radiation therapy platforms and underscores the clinical value of proprietary Accurate capabilities like synchrony, 4D tumor tracking, and adaptive delivery. This Accurate-only technology provides the precision that is critical to provide ultra-hypofractionated SBRT treatments so that patients have the best potential for improved outcomes and quality of life. As we discussed during our Investor Day presentation, the clinical use of ultrahypofractionated treatments is expected to rapidly grow, and randomized studies like PACE-B demonstrate that Accura's unique high-precision technology is differentiated from conventional radiation therapy platforms and positions us to benefit greatly from this growing clinical trend. In summary, an outstanding start for the organization in Q1 as we execute on our long-term growth strategy, combined with positive signs of improved global capital equipment recovery and an outstanding reception to our new product introductions, which are driving customer interest in Accurate Technology. And now I'd like to turn the call over to Brandi for her review of the financial details.

Thank you, Suzanne, and good afternoon, everyone. We started off FY22 with a strong financial quarter. Today I will focus on some of those highlights. As noted, gross orders for the first quarter were $70 million, up 39% over the prior year period. From a product mix perspective, the tumble therapy platform accounted for approximately 64% of gross orders for the quarter, and CyberKnife accounted for the remaining 36%. as compared to historical averages of approximately 60% tomotherapy and 40% CyberKnife. During the quarter, we had approximately $2.9 million of net cancellations, and we ended our first quarter with backlog of $602.9 million, an increase of 1% from September 30, 2020. Now turning to our income statement. Total revenue for the first quarter was $107.4 million, up 26% compared to the prior year, led by strong year-over-year growth in Americas and China. Product revenue for the quarter was $52.8 million, an increase of 69% compared to the prior year. From a product mix perspective, CyberKnife accounted for approximately 47% of revenue unit volume in the quarter. while tomotherapy platform accounted for the remaining 53%. As a reminder, the mix between CyberKnife and tomotherapy varies from quarter to quarter. However, historically, on an annual basis, our product revenue mix has been approximately 30% CyberKnife and 70% tomotherapy for the past several fiscal years. Service revenue for the quarter was $54.7 million up 1% compared to prior year. Now turning to gross margin. Overall, gross margin for the quarter was 36.8% compared to 41.5% in the prior year. Product gross margin for the quarter was 40.3% compared to 41.1% in the prior year. At the end of the quarter, per our JV accounting requirements, we deferred product gross margin on two systems sold to our China joint venture that have not yet been transacted through to the end customers. Excluding the timing difference on these two systems, our product gross margin for the quarter would have been 43.5%. Service gross margin for the quarter was 33.4% compared to 41.7% in the prior year. There are two primary drivers for the lower than planned service margin for the quarter. First, Parts consumption and operational costs were higher than normal, primarily related to increased system upgrades and travel than increased interest in our latest products. Second, we've experienced increased parts cost and logistical delays with our aftermarket supply chain due to the effects of the pandemic. Excluding the impact of these challenges, we estimate that our service gross margin for the first quarter would have been approximately 36.5% which is consistent with pre-pandemic levels. Moving down the income statement. Operating expenses for the quarter were $37.1 million, an increase of $7.2 million, or 24% from the prior year. The year-over-year increase in operating expenses was primarily due to the reinstatement of certain actions that were taken to preserve cash in response to the pandemic, including travel, marketing events, and compensation costs, which were reinstated back to near historical levels. We also experienced an increase in commission costs associated with increased revenue. Operating income for the quarter was $2.4 million compared to $5.5 million in the prior year. The operating impact of the China JV for the quarter was a loss of $0.3 million As a reminder, this item is reported in our income statement as a single line item called gain loss on equity investment right below our operating income. Adjusted EBITDA for the quarter was $5.4 million as compared to $9 million in the prior year period. On a trailing 12-month basis, we generated $34.3 million in adjusted EBITDA. The reconciliation between GAAP net income and adjusted EBITDA are described in our earnings release issued today. We ended the quarter with $105 million of cash in short-term restricted cash. The decrease in cash from the prior quarter was primarily driven by the payout of employee bonuses earned in the prior fiscal year, plus procurement of inventory in anticipation of fulfilling customer orders for the remainder of this fiscal year, both of which are seasonal in nature. Additionally, we paid $1 million on our term loan. In Q4, we early adopted ASU 2020-06, debt with conversion and other options, reclassifying the cash conversion option of our convertible notes issued in Q4 FY21 of $24.8 million from equity to long-term debt. The underlying value of the convertible notes has remained unchanged from Q4 FY21 when we changed most of our convertible notes due 2022 for convertible notes due 2026. The early adoption of this accounting standards update will reduce the accretion of debt discount on the convertible notes into our net income. And with that, I'd like to hand the call back to Josh for an update on our fiscal 2022 financial outlook. Josh?

Thanks, Brandi. Relative to financial guidance in FY22, we continue to believe our addressable market for global radiotherapy equipment and treatment planning will grow at approximately 4%. While some uncertainty related to the COVID recovery remains, we believe that we can and will exceed those market growth rates. Additionally, we are expecting revenue to be more balanced between our fiscal halves with increasing contributions from both China and the U.S. due to stronger end-of-calendar-year performance. As such, as we previously announced in our preliminary results for the first quarter of fiscal 2022, we are updating our expected revenue guidance to the $420 to $427 million range, with the midpoint of that range representing 7% year-on-year growth versus FY21. For FY22 adjusted EBITDA, our expected range is $33 million to $35 million. We continue to believe that our FY19 adjusted EBITDA finish of $23.7 million is the best comparison to our forward guidance, as it represents the last full pre-COVID year-end adjusted EBITDA reference point. As you're aware, we have had the last two fiscal cycles impacted by COVID and COVID-related spending cuts and aggressive cash preservation actions that made comparability against fiscal 2021 unusually challenging, especially related to adjusted EBITDA. We continue to demonstrate material improvements in operating leverage created over the last two fiscal cycles, mainly within SG&A, allowing us to increase our planned R&D spend in FY22, focusing on accelerating top-line revenue growth. And with that, operator, we're ready to open the line for questions.

We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Starts and 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brooks O'Neill with Lake Street Capital Markets. You may go ahead.

Hi, this is Michael Haug, spelling for Brooks O'Neill. My first question, I'm hoping that you can provide some details on where you think hospital systems are in terms of preparedness for the new ROAPM reimbursement model.

Mike, can I ask you to restate that, please? I didn't hear the whole question.

Yes. I'm hoping that you can provide some details on where you think hospital systems are in terms of preparedness for the new ROAPM reimbursement model.

I think quite frankly it varies across the board. I think that there are some institutions that have been more rapid in embracing hypo and ultra hypo fractionation. They're larger utilizers from a product technology and case mix standpoint of SBRT in general. I think they by nature or by kind of their more proactive approach are probably better prepared in the current environment for what's coming in January of 2022. I think there are others that are probably not as prepared. And as you might imagine, those represent, you know, really ideal targets for us to be telling our story about why the Accuray product lineup is really, really uniquely positioned to be able to assist in this transition to the ROAPM.

Perfect. Thank you. And an additional question is, the current labor market has actually been impacted with any worker shortages at all?

No, not from an operational standpoint. Again, the headwinds that people see now related to labor challenges and supply chain, et cetera, you know, we're cognizant of that. We have not really had significant problems in those areas. We continue to execute well. Both Suzanne and I have terrific faith in our operations team. And so, no, we really haven't seen anything, Mike, that gives us pause or concern at this point.

Okay, that's helpful. And then last question for me. is are you seeing any disruptions due to the supply chain, and do you have any plans on how you can combat these disruptions if there are any?

Again, I mean, there's really no company that you can see or look at today that isn't feeling some impact of these macro-level kind of trends. But, again, we are working diligently. Our ops team is working diligently, our sourcing team, is working diligently to make sure that we can continue to supply, continue to install equipment and be ready to install equipment and recognize revenue. And, you know, we're really proud and excited about the work that they're doing in keeping pace with, you know, these, you know, kind of the macro level headwinds that people are seeing.

Perfect. Thank you for taking my questions and congratulations on a great quarter. Thank you.

Our next question comes from Josh Jennings with Cohen. You may go ahead.

Hi, good afternoon. Congratulations on a strong start to fiscal 22. Just two questions, follow-up from the Astro Investor Day. The first is it's great to hear about the progress and the plans in your journey towards a true online adaptive solution. And you talked about two parallel investments paths of development and internal one with your precision arc planning system and also the collaboration with research. And just wondering, as we think about this development path over the next 12 to 18 months, I'm sure we'll be thinking about updates to the investment community on the progress there. And are there any key milestones we should have on our radar?

Yeah, I don't know that there are any key milestones that you need to have on your radar, but, I mean, it is our goal, especially based on the very positive feedback of what we did show to customers at the Astro, that we're on the right track. We are pursuing, again, a solution for our customers that have research treatment planning as well as customers that have our precision treatment planning. You know, we think that the basis of our advantage is will be the use of ClearRT and Synchrony as inputs into the online adaptive, and that's something that's unique to the industry. And also, we got great feedback in terms of what within the market is a vulnerability of current offerings, and so our goal is to improve upon what is available to the market at this time. So I would say, no, our overall goal is, again, to have something at Astro next year.

Fantastic. And just one follow-up, as we're all looking to try and value the China JV and as that opportunity is and that collaboration is going to be unleashed in 2022, I think one of the underappreciated elements is the Type B system and the opportunity that Accurate has to sell that China manufactured type B system into other global value segments. You touched on that during the investor day, but was hoping you could build a little bit on that $300 million annual opportunity that you cited. And just where does Accurate stand today in terms of selling into that global value segment with the Tomo H or OnRat systems? Our assumption is that it's it's a de minimis or immaterial impact to your orders and sales. But just wanted to get a sense of the baseline and then potentially how you see this type B system manufactured in China driving penetration in that $300 million annual opportunity. Thanks for taking the questions.

Yeah, no, thanks, Josh, for the question. Absolutely, the market that we talked about for a value segment product is incremental to what we're participating in now. You know, the $300 million that we talked about at Investor Day really was the annual opportunity in two locations, India and also Brazil. We think that both of those segments, there's a larger market opportunity that we just haven't been able to participate in. And so while we are on track with our Type B product for China, we do think that that same sort of a feature set will do very well in other value segment markets. So the $300 million we talked about really I think is tip of the iceberg in terms of emerging market opportunity, but those are two places that we'll focus on.

Great. Thanks for those answers.

Again, if you have a question, please press star, then 1. Our next question comes from Anthony Patrone with Jefferies. You may go ahead.

Great, and thanks for getting us in queue here. Maybe a follow-up to Josh's questions on neurosurgery specifically, and when we think about that opportunity, just wondering what the investment behind neurosurgery will be, just as you referenced at Analyst Day, that would be my first question. And then the second question would be on just RO bundle, any details from last night's announcement that were a surprise, or is everything sort of as planned? Thanks.

Yes, Anthony, Suzanne and I are going to divide and conquer. I'll take the second question, which is the ROAPM update. So I think the big takeaway was, they did confirm that they are going forward on January 1st. I think there might have been some continued speculation out there about, given COVID environment, et cetera, was that going to happen? And the answer is they are going to push the start button come January 1st. There were some elements that were also part of the informational release that that gave them some latitude in certain data collection activities. You'll remember that one of the components of the ROAPM was a quality system, a quality metrics measurement that was going to be self-reported. They have invoked a kind of this moment in time, again, I think because of more than anything else, probably the COVID environment, and that they're considering that or kind of defining that as a public health emergency, that they've relaxed the requirements for the collection and submission of those quality measures. And so they've given kind of this first year of the model, they've relaxed the requirements on that piece. The 2%... payment fee withhold, again, that was tied to quality measures, was also relaxed, so there's been a little bit of a, I'll call it a reprieve, if you will, on that piece of the fee schedule. Again, those were probably, I think the last piece of the three was, you know, the requirement around the conducting of peer review audit and feedback on treatment plans specifically. They've also made that optional in this first year of the model. So you've got those kind of provisions that they've made allowances for, again, given kind of probably most related to the COVID environment, but The program is going to start up on January 1st. We think that that's important for a variety of reasons, and we like how we're positioned given where our product lineup is and what we think is going to be important to customers from a clinical practice standpoint under this new model.

Thank you. And then the follow-up is just on neurosurgery, the investment there.

Yeah, so Anthony, so yeah, what we talked about at Investor Day, again, an incremental market opportunity in neurosurgery. We talked about a total potential market of $600 million, and really that represents a replacement market opportunity for aging gamma knives that we think through 2026, there'll be approximately 180 systems that are going to get to greater than 10 years, and we'll be looking for trade-outs. The CyberKnife S7 now with what we showed with Brain Lab having a treatment planning and contouring interface that is familiar to neurosurgeons, we believe will be a competitive advantage. The fact that the CyberKnife treats both brain and spine and GammaKnife only does brain And also we think an improved patient experience without the use of a head frame will be preferred and will put us in a strong competitive position to be able to penetrate some of these replacement opportunities.

Maybe a tailwind for the AIM.

This concludes our question and answer session. I'd like to turn the conference back over to Josh Levine for any closing remarks.

Thanks, operator. I'd like to thank the entire Accurate team for their continued focus and commitment to great operational and commercial execution. Beyond the tremendous contribution by our team, the clinical and portfolio impact related to our most recent innovations have resulted in improved competitive positioning for Accurate products. As a result of these factors, I believe the business is positioned to grow at the fastest rate we have in over a decade, and I've never been more excited about the future of Accurate as FY22 unfolds. We look forward to speaking with you again in January associated with our fiscal second quarter earnings release. Thank you very much.

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