Accuray Inc (ARAY) 2009 Q1 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Accuray Inc. conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you. Mr. Rathjen, you may begin your conference.

Thank you, Nicole, and good morning, everyone. Thank you for joining us on Accuray's first-quarter fiscal year 2009 conference call. Joining us this morning are Dr. Euan Thomson, Accuray's President and Chief Executive Officer, and Holly Grey, Senior Vice President and Interim Principal Financial Officer.

As we did last quarter, we will again be referring to financial data which is found on two slides in a PDF file on the Investor Relations page of the Accuray website at accuray.com. Please log on to this site to view this information.

Before we begin I need to remind you that except for the historical information the information that follows contains certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include the matters described in the Risk Factors section of our report on Form 10-K for the 2008 fiscal year as updated from time to time by our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission.

And now I would like to turn the call over to our President and Chief Executive Officer, Dr. Euan Thomson.

Thank you, Tom. Thanks to everyone for joining us on our delayed fiscal first-quarter 2009 conference call. I will start this call by explaining the reason for and the results of the audit committee investigation that caused this delay. I will then give a brief recap of some of the business highlights of the quarter and I will then turn the call over to Holly Grey, our Interim Principal Financial Officer, who will provide a detailed report of our financial results.

Since we are already in the closing stages of our second fiscal quarter 2009 and it's only a matter of weeks before next conference call, we will not be taking questions today. I would like to begin this call by expressing my disappointment in the delay in the release of our financial results, which is a sentiment that I'm sure you share. I'm happy to report that our first-quarter financial results on Form 10-Q will be filed at the close of market today.

As we have previously disclosed, toward the end of the fiscal first-quarter a former employee of Accuray made certain allegations about possible improprieties in the handling and the counting of certain inventory items. The response of Accuray's audit committee was correctly to initiate a thorough investigation into those allegations.

Those were three areas of concern to the investigation. Firstly, were the reserves for certain excess and obsolete inventory work properly taken during the appropriate quarter? Secondly, whether expenses relating to the inventory were properly taken during the appropriate quarter. And thirdly, whether certain inventory was properly scrapped during the quarter in which it was determined to be unusable.

Outside counsel and accountants were engaged to assist the audit committee with our investigation to ensure independence. We can now report that the investigation has been officially completed. I'm pleased to say that the audit committee concluded that although certain weaknesses existed in the Company's financial reporting of inventory, all inventory items have been appropriately accounted for in all material respects. There is therefore no need for the Company to restate its financials from prior fiscal quarters or years.

The weaknesses identified during the investigation related to a combination of inadequate communication and reporting procedures. Recommendations to address these weaknesses have been made and an action plan is already under development to be implemented as quickly as possible. And I'm comfortable that this issue is now behind us.

Unfortunately, the timing of the investigation resulted in a delay of the filing of our quarterly financial statement. However, I would like to assure all of our investors that every effort was made by the audit committee and the independent investigation team to expedite the completion of the investigation without compromising its accuracy.

I will now give an overview of Q1 starting with some of the financial highlights. As we previously reported, total revenue for the quarter was $55.9 million, a 15% increase over the same period last year. Our recurring services revenue grew to $15.9 million in the quarter, or 28% of total revenue, representing an increase of 127% over the same period last year. We continue to see this growth in recurring services revenue as very positive since it represents steady, predictable revenue from long-term contracts.

Our net loss for the quarter was $3.2 million, or $0.06 per diluted share. This loss was driven primarily by non-recurring employee separation expenses of $2.1 million and inventory write-downs of $1.3 million included in expenses for the quarter. Holly will provide additional details of these expenses in her comments.

During the quarter we added 12 new orders to backlog, representing a total value of $58.6 million. Importantly, new orders contributed $21 million directly to noncontingent backlog. Combined with $18 million of contingent backlog that shifted to noncontingent backlog, we had another successful quarter in improving the quality of our backlog. Noncontingent backlog remains approximately 70% of the total and there was only one cancellation in the quarter, this being from contingent backlog.

During Q1 we shipped nine CyberKnife systems. Five of these were installed in the United States bringing the worldwide installed base to 145, and we shipped for units internationally. Since the end of the first quarter we have announced the milestone of our 150th CyberKnife installation.

Supporting future growth, our clinical programs also continue to produce good results in Q1. Once again we saw increasing utilization for extracranial radiosurgery with lung cancer and prostate cancer treatments increasing year-on-year by 65% and 59%, respectively. We will provide six-month utilization data on the second-quarter call next month.

As we recently announced, Derek Bertocci has been recruited as Accuray's Chief Financial Officer. He will start on January 1st. We are delighted to have Derek join our management team and expect his considerable experience in working with public companies to be a valuable asset to Accuray at this important point in our corporate evolution.

I would like to thank Holly Grey for her outstanding work these past several months as our Interim Principal Financial Officer. Holly will continue to play an important role in the Company as our Senior Vice President of Finance.

As I mentioned at the start of this call, we are now in the closing stages of our fiscal second quarter. We will discuss issues relating to the current state of the Company's progress on our second-quarter conference call in late January. While we obviously cannot discuss the second quarter, I can however confirm at this stage we continue to expect our revenue for fiscal 2009 to be in the range of $230 million to $250 million.

With that I will now turn the call over to Holly for her financial review. Holly.

Thank you, Euan. This morning I will review our financial operating results for the first quarter of our fiscal 2009. As Euan mentioned, total revenue for the fiscal first quarter was $55.9 million, a 10% sequential increase and a 15% increase over the first quarter last year. Accuray recorded a net loss of $3.2 million for the quarter or a loss of $0.06 per diluted share, compared to a net income of $2.3 million or $0.04 per diluted share during the same period last year.

The loss for the quarter was driven primarily by nonrecurring employee separation costs of $2.1 million and a nonrecurring inventory reserve charge of $1.3 million.

As Euan discussed, the independent inventory investigation performed by the audit committee has been concluded. To reiterate, the scope of the investigation focused on the following three items. One, whether inventory reserves for excess and obsolete inventory were accounted for appropriately both in timing and amount. Two, whether certain inventory items were appropriately expensed in the given quarter. And three, whether certain inventory was appropriately scrapped when it was determined to be unusable.

The scope of the investigation that was completed was thorough and exhaustive and the results concluded that inventory was properly accounted for in all material respects. Therefore, none of our previously filed quarterly or annual results will be to be adjusted or restated as a result of this independent investigation.

Included in our fiscal -- Q1 2009 results is a total inventory reserve charge of $1.4 million, of which $1.3 million is nonrecurring as a result of a higher than normal failure rate of certain parts coming back from the field occurring in the first-quarter. Moving forward, we do not anticipate having to make this type of nonrecurring reserve adjustment in the future.

During the first quarter of fiscal 2009 Accuray recorded a non-cash stock-based compensation charge of $5 million or $0.09 per diluted share. As a reminder, these are non-cash charges which are calculated in compliance with Generally Accepted Accounting Principles. The charge is based upon the calculated fair value market value of the stock at the date of grant. Also included in the stock-based compensation expense in the first quarter was approximately $850,000 of the nonrecurring employee separation costs.

Taking a closer look at the first quarter revenue, CyberKnife product sales generated $37.5 million. Services revenue grew 34% sequentially to $15.9 million, or 28% of total revenue for the quarter. Our services revenue is generally derived from long-term maintenance agreements of four- or five-year terms whose revenue is radically recognized over the service term providing stability and predictability to our revenue stream as our installed base grows.

Fiscal first quarter 2009 services revenue represents an increase of 127% year-over-year reinforcing the growing importance of this recurring revenue stream. Shared ownership arrangements produced $1 million during the first quarter, an anticipated 55% decline from the same period last year. Exiting the first quarter, Accuray had a total of three shared ownership units. The year-over-year and sequential decline in shared ownership revenue was expected following the buyout of 10 shared ownership units in fiscal 2008.

Other revenue for the fiscal first quarter was $1.5 million consisting primarily of upgrades for units installed in Japan.

First quarter revenue contribution from legacy platinum accounts converted from deferred revenue was $18.5 million. This number is higher than in past quarters because it includes revenue recognized in full for two legacy platinum systems for which all upgrades were delivered during the quarter and for which the contract concluded within the first quarter. As a result, we were able to take all revenue previously deferred for these two legacy systems in one lump sum.

Exiting the first quarter all of the 30 original legacy systems have been installed, revenue for six systems is now fully recognized, and we continue to recognize revenue on 17 systems over the course of their contracts. Of the remaining seven units we have yet to recognize any revenue on, most have two or fewer upgrades remaining and we estimate that the majority of those upgrades will be delivered by the end of fiscal 2010.

Moving to gross margin. For the first fiscal quarter our total margin was 50.9%, a sequential decrease over last quarter's 52.8% gross margin. This decrease in margin for the first quarter was due to the aforementioned inventory reserve recorded in Q1 which represents a $1.2 million increase over reserve balances sequentially. Total operating expenses for the first quarter were $32.7 million or 58.5% of revenue.

Included in operating expenses are the aforementioned nonrecurring employee separation charges totaling $2.1 million. Our investment in research and development was $8.8 million, or 16% of total revenue, reflecting Accuray's ongoing commitment to this important area.

During the first quarter of fiscal 2009 Accuray booked 12 contracts into backlog with a value of $58.6 million. Of the seven contracts -- of the new contracts, seven were from customers outside of the United States and 11 of the 12 orders were with hospitals or from customers with pre-existing operational experience demonstrating the success of our sales force in focusing on this profile of customer.

Looking at installations, five CyberKnife systems were installed during the quarter, all of which were in the United States. This brought the worldwide CyberKnife installation base to 145 at the end of the first quarter. The geographical breakdown of our worldwide installed base at the end of the quarter was 95 in the Americas, 12 in Europe, 20 in Japan, and 18 in the rest of Asia. Since the end of the first quarter, as we announced, we reached a significant milestone with installation of our 150th CyberKnife systems.

As we frequently discussed, revenue is recognized upon installation of the CyberKnife system when Accuray is responsible for completing the install. For our international customers purchasing from distributors who are responsible for the installation, Accuray recognizes revenue upon shipment to the end customer. It is therefore important to note that a period of time often lapses between shipment and installation of the CyberKnife unit in these arrangements.

During the first quarter we recognize revenue on 10 units including three in Asia, one of which was in Japan, and seven in the United States. Of these United States revenue units five were new system installations and two were associated with legacy platinum accounts.

Moving to backlog, I would like to draw your attention to the two charts which have been placed on the Investor Relations page of the Accuray web site. At the end of the first quarter Accuray's backlog was $644 million compared to $647 million in the fourth quarter of fiscal 2008. Of total backlog, $358 million is associated with contracts for CyberKnife systems, $256 million associated with long-term service agreements, and $30 million for shared ownership program contracts.

In keeping with our effort to provide further transparency into our backlog segmentation, you will see $451 million or 70% of total backlog is associated with noncontingent contracts. Although this backlog category is relatively flat sequentially, we see it as a positive for two reasons. First, we have had strong revenue in the quarter and the majority of our revenue was converted from noncontingent backlog.

Second, the first quarter is typically the slowest of the year for new contract generation. $193 million or 30% of our backlog is associated contracts which may include standard contingencies such as Board approval or certificates of need. Of this contingent segment about 60% represent hospitals or customers with pre-existing operational experience.

The bar chart shown on our web site demonstrates trends in contingent and noncontingent backlog over the past nine quarters. Although there will be quarterly fluctuations, total backlog and noncontingent backlog as a percentage of total backlog, which is shown in blue, continues to increase annually. Of the 12 contracts that went into backlog during the first quarter, five of these went directly into noncontingent backlog.

In total, approximately $39 million flowed into noncontingent backlog this quarter through either new system contracts signed or clearance of contingencies for contracts already on hand. During the quarter there was only one order which was canceled out of backlog with a value of approximately $5 million coming out of the contingent category.

Reviewing Accuray's balance sheet, total cash and investments at the end of September 2008 was $162.1 million. This consists of cash and cash equivalents of $27.2 million, short-term investments of $91.5 million, restricted cash of $5.4 million, and long-term investments of $38 million. Deferred revenue was $102.8 million with $76.1 million in current deferred revenues.

Total assets at the end of the first quarter were $281.3 million and the Company continues to have no debt. The strength of our balance sheet provides us with the ability to fund our operations without the need to raise capital.

Now I would like to turn the call back to Euan.

Thank you, Holly. To summarize, the first quarter of f 2009 fiscal year was characterized by some strong achievements. Total revenue was $55.9 million and $58.6 million of new order value was added to backlog. Noncontingent backlog remained at approximately 70% of the total. Supporting future growth, our clinical programs also continued to produce the results. And while we continue to grow the clinical market for radiosurgery products, the CyberKnife maintains its position as the market leader.

Thank you for your time today, I look forward to speaking with you on our next call scheduled for late next month. I hope each of you will enjoy a very happy holiday season.

Thank you. This concludes today's conference. You may now disconnect.