Accuray Incorporated

Good day, and welcome to the Accuray Fiscal 2024 Fourth Quarter Financial Results 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 remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. 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 Jesse Chu, Senior Vice President and Chief Legal Officer. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Accurate's conference call to review financial results for the fourth quarter of fiscal year 2024, which ended June 30th, 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 silence 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 of Accordingly, you should not put undue reliance on any forward-looking statements. If you'd ask, keep your 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 paired remarks are to our fiscal year quarters. For example, statements regarding our fourth quarter refer to our fiscal fourth quarter ended June 30, 2024. Additionally, there will be a supplemental slide deck that updates the call. With that, let me turn the call over to Accurate's Chief Executive Officer, Suzanne Winter. Suzanne?

Thank you, Jesse, and thank you all for joining the call. Today, I will provide highlights from our fourth quarter and fiscal 2024, both on our accomplishments and the areas of focus for FY25 and beyond. I am pleased with our solid performance in the fourth quarter, with total company revenue growing 14% year over year, reflecting the strong operational and commercial execution. This growth was driven by a record number of system shipments within the quarter, representing 20% more than our previous highest shipment milestone. Momentum going into FY2025 remains elevated, particularly in the international markets, which represented more than 80% of our revenue for the fiscal year, and reflects the strategy we laid out at the beginning of FY24 of entering emerging markets where patient access to radiation therapy is under-penetrated and where we can become the number one or number two player over time. In the quarter, we saw shipments accelerate nicely, both to new customers and by closing open opportunities from the prior period. We also saw orders growth up 8% versus last year, largely driven by emerging market growth in APAC and Latin America. China, which despite remaining headwinds from the anti-corruption campaign, grew orders by 80% in the quarter year over year, driven by pent-up demand for the new Tomo C product, which recently received approval for our precision treatment planning system, making our Tomo C product ready to ship to end customers. Gaining share in Latin America is a priority for us. And this region saw order growth of more than 400% within the quarter, including a four-system competitive replacement win in Mexico. Finally, I was very pleased with our global Q4 book-to-bill ratio, where even with record revenue shipments was healthy at 1.2. We believe the book-to-bill metric continues to represent a strong leading indicator for future revenues. Product revenue contributed materially to the growth within the quarter, up approximately 28% year-over-year, driven by strong demand in China, which grew product revenue by 55% compared to the prior year, and the rest of APAC, which grew significantly year-over-year. EIMEA, our largest region, delivered 27% year-over-year product revenue growth, The Japan region was up 1% for the quarter year over year, and excluding headwinds from FX, grew product revenue by 13%. Japan is a very strong market for us, and we have put in several initiatives to help mitigate the impact of foreign exchange. We remain the number two market share player and continue to drive share gain on our path to becoming number one in this developed market. Finally, the Americas region, as we had expected, continued to show weakness in Q4 with product revenue down 50% year-over-year, driven by customer delays in installation. We believe we felt the greatest impact in FY24 and are cautiously optimistic that we will see conditions improve in the U.S. market and show year-over-year growth starting in the second half of FY25. Service revenues for the quarter were down slightly due primarily to unfavorable effects in Japan and reduced training and spare parts revenue. However, I am encouraged that recurring service contract revenue is up 4% year-over-year as we start to see the results of our strategy of driving install-based growth by penetrating emerging markets like China, where service revenue grew 22% year-over-year. During the quarter, we received final approval on our precision treatment planning system for China, which was the final step in our approval process for the TomoC platform. As of late fourth quarter, we now have the ability to sell and ship full systems to TomoC customers in the Type B segment. As a reminder, with this final approval, we can now fully record margin at time of delivery from our joint venture site in Tianjin to the end customer for all of our single-seat shipments in China. With this approval behind us, we are now able to fully compete in the Type B market, which represents approximately $3 billion in market potential over the next five years. Ali will discuss more of the Q4 financials, but I wanted to touch briefly on margins, which continues to be an area of focus. Although our overall Q4 adjusted EBITDA margins were within the range we expected, We believe that several factors that negatively impacted margins were transitory in nature and masked underlying productivity improvements we have achieved from our margin expansion initiatives. From a product perspective, the later timing of the approval of precision treatment planning system in China delayed when we could recognize full margin. With the clearance now behind us, We have begun shipping Tomasita customers and shipped our first system late in Q4 FY24 and expect the majority of shipments to accelerate starting in Q2 of FY25 based on customer readiness. This represents approximately $4 million of margin that was deferred at the end of FY24. Within service, margins were mostly challenged by foreign exchange, which impacted our Japanese business performance materially, where we have a large installed base. In addition, in Q4, we experienced an isolated supplier quality issue that caused a $2.4 million increase in parts consumption costs. We are working closely with the supplier and expect this to be resolved and recover the majority of these costs over the fiscal year. Once adjusted for the China margin deferral and the supplier quality issue, our Q4 growth margins would have been improved versus the same period in the prior year. Finally, region mix was a headwind to margin as we experienced weakness in the U.S. market, which is a higher margin market for us. As discussed, we believe this is a temporary challenge in the U.S. market and are encouraged by the Q4 order performance in the U.S., which grew 9%, suggesting signs of gradual improvement. Moving into FY25, we will be monitoring the timing of border-to-revenue conversion as a leading performance indicator for recovery in the U.S., as this significantly contributes to slowed revenue growth in FY24. Reflecting on our full-year performance, I remain incredibly proud of what our teams accomplished and remain humbled by our mission, which is centered around advancing care and radiation therapy through innovation. expanding patient access to radiotherapy globally, delivering superior service and support to our customers. We remain confident based on the positive secular trends in our industry, as well as our ability to execute well and gain share in the markets we participate in. While global revenue is flat for the year, I am encouraged by the strong momentum in our international and emerging markets. Excluding the Americas region, International revenues grew 10% year-over-year for fiscal 2024. China revenue grew 27% year-over-year, whereas the rest of APAC grew 14% year-over-year. Our EIMEA region grew 8.5% year-over-year, driven in large part by higher growth sub-region markets like India, Middle East, and CIS or the Commonwealth of Independent Countries. Japan was down approximately 11% year-over-year, driven largely by the impact of FX. And as I mentioned before, the Americas region, most notably the U.S., continued to lag other regions, declining 26% year over year. Despite the near-term challenges in capital equipment budget cycles, we believe that the long-term potential of the U.S. market remains intact, with the advanced age of the U.S. installed base of radiotherapy systems providing a catalyst for upgrade and replacement opportunities. We expect to see gradual improvement in the U.S. in the second half of FY25 into FY26 where we estimate more of a full recovery. Moving on to service revenue for the full fiscal year, overall revenue was down 1% year-over-year. However, recurring contract revenue grew 4.5% year-over-year. As we mentioned on prior calls, We believe that our service solutions business is a huge long-term opportunity for both revenue and margin growth. The expansion of recurring service contract revenue demonstrates underlying performance improvements from the early stages of our plan. These include growth of our installed base, impact of pricing actions, investments that will improve system uptime and serviceability performance, like our agreement with Airbus, which will leverage data and predictive analytics to help reduce customer downtime and reduce parts consumption. Finally, we introduced new service solution offerings like CyberCom for the CyberKnife system, physics solutions like our partnership with True North, and advanced education offerings, which we will deliver in our global education centers like the newly opened Innovation and Partnership Club in General Nié, Switzerland. We expect these areas will drive top-line and margin improvements while increasing overall customer operational improvements and satisfaction. As we have articulated in the past, there are four major pillars of our strategic growth plan. Our first pillar is driving top-line growth through innovation to advance radiotherapy and solve our customers' biggest needs. During the year, we had several product introductions that strengthened our portfolio. and further differentiated accurate technology. Customer adoption of our new product innovation has been strong. Notably, this included a 31% year-over-year growth in CyberKnife system orders. We believe the rapidly growing clinical trends toward shorter course of latest treatments in one to five sessions backed by clinical data over the long term for areas like prostate, lung, and neurotreatments is driving the increase in CyberKnife system demand. Additionally, many CyberKnife system customers report strong patient awareness for CyberKnife system versus other treatment platforms, with many specifically requesting to be treated on the CyberKnife system due to its strong branding and high precision capabilities. A key area of focus for R&D investment will be the expansion of next-generation capabilities for the CyberKnife system to further advance the use of stereotactic radiosurgery and SBRT and drive replacement of our installed base in the developed markets like the U.S., Europe, and Japan. Customer reception also continues to be strong on our RADxACT platform. which represents approximately 70% of product orders in FY24, driven by clear RTCT imaging, synchrony real-time motion management, BioHoles, which expands our breast treatment capabilities, and CNOS, online adaptive functionality, that we introduced as a works in progress and are planning a full introduction at ESRO 25. Beyond penetrating the China market, we also intend to serve other high potential markets where patient access to radiotherapy is challenged, particularly India, where we introduced our new Accurate Helix product at the Indian Cancer Congress last fall. Today, we are announcing that we have obtained CE mark clearance for this product with a press release to follow, and we'll ship our first unit to India in the coming months. Our next strategic pillar was expanding and growing our service business. We set out a multi-year plan to strengthen our service business, which represents a recurring revenue stream and margin expansion opportunity. Our service revenue has been essentially flat over the last decade and currently represents 48% of our global revenue for fiscal 24. Service contract revenue growth is largely gated by growth of our installed base. In FY24, we saw an expansion of our global install base in three of our four regions, driven by meaningful growth in the APAC region and healthy growth in both EIMEA and Japan regions. We're taking a longer-term approach in the U.S. with focused commercial investment, expanding our commercial footprint with the goal of ensuring the highest level of service and customer satisfaction. So we're best positioned in competitive replacement cycles as well as upgrading our own install base. Expanding margin and profitability and improving our balance sheet was our third pillar. In 2023, Ali and I laid out a multi-year, multi-faceted plan to drive margin expansion and cost efficiencies with the goal of leaving no stone unturned. While we have made good progress against our goals with actions that have helped us to navigate the impact of inflation, logistics costs, and foreign exchange fluctuations, we are still in the early innings of improvement and believe that we've laid out a strong foundation to show material improvement to margins as macro factors improve and as we increase scale. Finally, in FY24, we strengthened our existing strategic partnerships with GE Healthcare and Research and also created new ones, like our product development partnerships with CRED, Lindus AI RAD Formation, and service partnerships with Airbus and TrueNorth. We believe these alliances help us bring best-in-class solutions to the market faster, improve our sales funnel, and enhance our win rate. I wanted to take a moment and highlight some of the key milestones in FY2024 that have put us in a more favorable position going into FY2025. We enter FY25 with a strong backlog of orders, which at $487 million represents over two years of product revenue potential. From a demand perspective, we saw global orders grow by 10% year-over-year for the full year, with an annual book-to-bill ratio of 1.5, exceeding our goal of 1.2. On the operational side, we completed the first full year on our new SAP ERP system without major negative disruption. I'm extremely proud of our team, because this was a foundational milestone for the company. I expect continued productivity benefits and better data and analytics to help us make improved operational decisions to drive further efficiencies. As I've mentioned on past calls, working capital will be a key part of cash flow improvements, and we delivered a $21 million reduction in total net inventory from Q3 and $7 million reduction for the fiscal year. This remains a priority for us going into FY25. And finally, entering into the Type B market in China has been a long journey for us, and I am pleased with how we have worked as a cross-functional team to ramp up our joint venture manufacturing site in Tianjin, completing the first 10 system builds of Tumasi, and executing our first customer shipment of Tumasi in June to Shandong Hospital. With these key milestones behind us, I believe we are well-positioned to execute our strategic growth plan in FY 2025, The U.S. remains challenging, and we will continue to monitor key performance indicators. Additionally, we will closely watch China market conditions, including any remaining slowdown due to the anti-corruption campaign, in addition to the timing of the China stimulus program, which we believe can be a potential tailwind aimed at replacement opportunities. These factors could impact demand for installations in FY25, but believe these are timing-related and difficult to predict exact timing and trajectory, and therefore remain prudent in our guidance as we wait to see stronger signals of U.S. market recovery. And in summary, I'm proud of the foundation we've set for future growth. We achieved strategic customer wins in the marketplace, penetrated new markets, and forged key partnerships that enhance our solutions and improve our competitiveness. While we are still early in our transformation, we end the year to drive top-line growth, gaining share in the markets where we compete with strong growth in margin and profitability over the coming years. I will now turn it over to Ali, who will cover our financials.