Accuray Incorporated

Good afternoon and welcome to the Accurate Conference call to review financial results for the third quarter of fiscal year 2024, which ended March 31st of 2024. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. 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 and 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 Mr. Jesse Chiu. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Accurate's conference call to review financial results for the third quarter of fiscal year 2024, which ended March 31st, 2024. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Accurate's president and chief executive officer, and Ali Pervez, Accurate's chief financial officer. Before we begin, I would like to remind you that our call today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are outlined in the press release we issued just after the market closed this afternoon, as well as in our filings with the Securities and Exchange Commission. We base the 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 items for today's call. First, during the Q&A session, we request that participants limit themselves to two questions and then re-queue with any follow-ups. Second, all references to a specific quarter and the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended March 31, 2024. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accurate's investor relations page at investors.accurate.com. With that, let me turn the call over to Accurate's Chief Executive Officer, Suzanne Winter. Suzanne?

Thank you, Jesse. Good afternoon, and thank you all for joining the call. Let me start by saying that we are disappointed with our quarterly results and have faced near-term challenges here in the second half of our fiscal year, that were greater than anticipated and have impacted our near-term results and outlook. However, we are confident that we remain on track to achieve the goals that we laid out at our fall 2023 investor day, which includes 4% to 6% revenue CAGR and doubling our adjusted EBITDA by the end of fiscal year 26. Fiscal 2024 remains an important year for our company as we're making a substantial entrance into some of the fastest-growing markets in radiation oncology, introducing advanced capabilities and investing in a sustainable infrastructure to grow our service business, all of which we believe will contribute to revenue and adjusted EBITDA growth over the next few years. The quarter did not play out as expected due to a few key factors. First, we had expected to ship three additional systems this quarter, which pushed to Q4, which would have had a meaningful impact on both our top line and adjusted EBITDA. Additionally, in the U.S., which is one of our largest and highest margin markets, we saw a substantial slowdown due to longer capital equipment budget cycles. We had expected the region to ramp in the second half of the fiscal year, but it is becoming much more evident that there is a broader weakness in capital equipment budgets in 2024. We believe these reduced budgets and lower capital deployment priority for radiotherapy equipment have both contributed to slow demand in the near term. Finally, while pleased to have received regulatory approval to market the TOMOC equipment into China, we still await approval for the precision treatment planning system that is used with the TOMOC. As previously discussed, the regulatory submission for the TOMOS SEEDS system was a separate submission from the precision treatment planning system. This was done by design to provide the quickest go-to-market strategy for the system, allowing us to take orders and build our order backlog. Furthermore, we strategically separated the regulatory submissions so we could gain a separate, accurate-owned license approval for the precision treatment planning system, which gives us greater optionality within the China market into the future. As a reminder, we cannot report our full margins on the TOMO fee shipments until we receive this approval, which allows our joint venture to ship systems to the end-user customers. This represents the final step to execute our full market launch, including installation at customer sites. Despite these headwinds, we expect to retrieve these revenues and associated adjusted EBITDA in the coming quarters, which will set us up for a return to growth above the overall addressable market in FY25 and on track with the three-year plan we communicated at our investor day. Going deeper into our U.S. business, we believe this is mainly a timing issue and not a reflection of underlying demand. We expect the potential for strong replacement of the aged installed base will continue to drive demand. The age of many units have exceeded recommended guidelines and are nearing the end of parts availability for service and support. As we mentioned in the last earnings call, we saw longer customer installation timelines in the U.S. during Q2, and this has continued in Q3, where we saw installation cycles and backlog conversion continuing to take longer to materialize than originally anticipated. This impacted both product and, to a lesser extent, service revenue in the U.S. To understand this in greater depth, we surveyed our U.S. customers to validate the slowdown in installation and capital equipment purchasing activity. Further, a leading Wall Street analyst published a research report in March which surveyed U.S. hospital administrators on capital equipment priorities, which also supports our observations. Some of these include spending for radiotherapy was rated lower on the priority list in calendar year 2023 with gradual improvement expected in 2024. Many customers that were allocated capital budgets were required to resubmit for additional capital due to higher costs. Finally, this market dynamic is expected to improve with gradual recovery entering our fiscal year 25 through fiscal year 26 when capital equipment budgets are expected to increase and radiotherapy is reprioritized. Despite these challenges, we believe that we will deliver the best fourth quarter in the company's history from a revenue perspective, and given that we are in a long-cycle capital equipment business where a shift in product volume from one quarter to the next can have a sizable impact on our results, we think it makes sense to look at our business both for the quarter and on a trailing 12-month basis to showcase the longer-term performance, which Ali and I will start to share moving forward. I am very encouraged by the 21% global order growth in Q3, which is 8% growth on a trailing 12-month basis, as well as the book-to-bill ratio of 1.8 for the quarter, both of which are strong leading indicators for the future growth of our business. Orders represent a strong signal that customers are adopting our product innovations and growing at a rate that is faster than the market, which we expect will ultimately translate into share gain and positive impact to revenue, margin, and adjusted EBITDA into the future. Another key performance metric is the growth of our global installed base. Our installed base grew 4% year-over-year, and service contract revenue grew 2% year-over-year and 4% on a trailing 12-month basis. Install base growth means that in addition to upgrading our existing install base, we're adding 4% net new customers into the Accuray base, which we expect will further drive growth in service contract revenue over a 10 to 12 year period following the one year warranty period. Reflecting on our regional performance, I'm very pleased with the strength of the EIMEA region, which is our largest region, and a strategic focus for the company with growth driven from fast-growing emerging markets, which is a key part of our strategy to drive patient access. EIMEA grew 5% in revenue and 29% in orders on a trailing 12-month basis. We expect the EIMEA region to end the fiscal year with double-digit revenue and order growth year-over-year and gain market share in key subregions. APAC is fast becoming our second largest region with 7% revenue growth and 14% order growth on a trailing 12-month basis. Once we obtain the final step in regulatory approval for the precision treatment planning system for the Tonal Sea, which we expect to obtain by our fiscal year end, we will unlock deferred revenue and margin and unleash our China team to deliver pent-up installation demand and drive market traction. The Japan region, where we are number two in market share, 60% of our Q3 total orders are from replacing competitive systems. The region was down 11% on revenue and 8% on orders on a trailing 12-month basis, primarily due to the impact of unfavorable FX. Japan continues to be a highly profitable region for Accuray, but we are taking additional commercial actions here, including increased pricing and enhanced offerings to help offset the negative impact of FX, which is expected to be realized over time. Finally, as I mentioned in my opening comments, the U.S. performed at a slower pace than we expected in Q3. The Americas region Q3 revenue was down 38% year-over-year and down 15% on a trailing 12-month basis, and we expect the region to gradually recover but be down in Q4 and for the full fiscal year. Orders were up 7% for the quarter, but down 19% on a trailing 12-month basis. Our strategy in the U.S. during this time where it is extremely challenging for our customers is not to retreat, as we expect from other industry players, but instead get even closer to our U.S. customers, offering enhanced solutions, including flexible financing, increased user engagement activities to improve satisfaction, flexing our commercial partnerships, and increasing our field support. Cancer care continues to be a top profit driver for hospitals, and while capital allocation is tight and shifting forward, we remain committed to being the valued radiotherapy partner now and in the future. Our focus will be on building our backlog of orders so that when capital equipment conditions improved, we will be well positioned to take share within this important region. Other key highlights for the company include the inauguration of our new training center, the Accuray Innovation and Partnership Hub, located in Genollier, Switzerland. This new facility is the most recent addition to the Accuray network of training centers with other locations in the U.S. and Japan as well as China through our joint venture. These sites are located strategically around the world to make it easier for medical care teams to obtain state-of-the-art clinical education. We expect our investment in these global training centers will generate new training revenue that will contribute to growth and service in the coming quarters. In addition, furthering our strategic pillar of advancing patient access into under-penetrated high-growth countries, the full introduction of the TomoC in the China Type B market is an important milestone for the company. We recently showcased both the TomoC and the CyberKnife systems at the China Medical Equipment Fair meeting. the largest medical equipment expo held in Shanghai, China, with over 300,000 participating. We also continue early market launch efforts for Helix, our non-China access product, first in India, where we are awaiting regulatory approval for the full market launch, which is expected by the calendar year end 2024. As part of our margin expansion strategy, We also announced today that we are entering into a collaboration agreement with IUCT Ancopole in Toulouse, France, and Airbus, a leader in aerospace industry, to develop an artificial intelligence, AI-driven solution for predicting radiotherapy system performance. We will collaborate to develop a failure prediction methodology, which will allow us to monitor component-level performance to predict and proactively address system issues. We expect that this will translate into a better patient experience and reduced operating costs and further strengthen service margins by reducing parts consumption. Finally, at the end of this week, we will head to ESTRO, the European Society of Radiation Oncology's annual meeting. This year's ESTRO meeting is particularly meaningful as we recognize and celebrate 30 years of collaborating with healthcare professionals and industry partners to develop groundbreaking technologies that expand the application of radiation therapy and access to patients who may benefit from care. Highlights from ESTRO will include CyberComm, a new physics service solutions offering intended to substantially reduce the CyberKnife S7 system's commissioning time and enable customers to begin treating patients significantly faster. CNOS, a works in progress designed to provide customers with the ability to perform online adaptation of their treatment plan to account for changes that may occur between treatment sessions. In addition to demonstrating product innovation, we also believe that driving clinical innovation is an important pillar in our strategy to advance care. At this year's ESTRO, we will drive thought leadership with a symposium led by an elite panel of key opinion leaders on the use of stereotactic radiosurgery and SBRT treatments where accurate precision technology is well positioned to deliver. In summary, while we are disappointed with the Q3 results, we understand the current challenges. I remain confident in our long-term strategy and the value of our differentiated solutions. In the near term, we expect to fuel the success of our strongest growing regions where we will continue to grow and increase share as we look to see signals for improvement in U.S. conditions. We have meaningful growth drivers in both product and services, and we believe the strength of our innovation pipeline, investment in new service solutions, expected near-term regulatory clearances, and the continued focus on margin expansion and improving our balance sheet will position us well for substantial growth and increasing profitability. I will now hand it over to Ali to discuss the financials.