Accuray Inc (ARAY) 2010 Q1 法說會逐字稿

Good day Ladies and gentlemen and welcome to the First Quarter 2010 Accuray Incorporated Earnings Conference Call. My name is Shanelle and I'll be your operator for today. (Operator's Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Tom Rathjen, Vice President of Investor Relations. Please proceed.

Thank you, Shanelle. Hello and thank you for joining us this afternoon for Accuray's conference call for the first quarter of fiscal 2010. Joining us today is Dr. Euan Thomson, Accuray's President and Chief Executive Officer, and Derek Bertocci, Accuray's Senior Vice President and Chief Financial Officer.

As we have done in past quarters, we will again be reporting the backlog data, which is found in the pdf file on the Investor Relations page of the Accuray website at accuray.com. Please log onto 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 statement 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 factor section of our annual report on Form 10-K, as updated from time to time on our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission.

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

Euan?

Thank you, Tom. And thanks everyone for joining on our First Quarter Fiscal 2010 Conference Call. I'll start the call with a recap of some of the business highlights of the quarter, then I'll comment on the current state of the sales environment for the CyberKnife, reviewing both the US and international markets. I'll provide an overview of clinical highlights, a reimbursement update, and finally I'll review the recent corporate news and then turn the call over to Derek, who will give a detailed review of our financial results and outlook.

So to begin, I'd like to provide a review of the financial highlights for the first quarter of our fiscal year 2010. During the quarter Accuray had total revenues of $50.6 million, a 9% decrease over the same period last year. However, revenue from sources excluding Platinum contracts shows a 9% increase year-over-year. Derek will speak on that topic, but the solid growth in revenue excluding these legacy contracts is an encouraging sign of our strength and our current ongoing business. Revenue performance for the quarter was slightly above expectations, and we're therefore maintaining our fiscal 2010 revenue guidance of $215 million to $230 million.

First quarter revenue was higher than we expected due to the late clearance of one order for shipment at the end of the quarter. In addition, we satisfied final obligations on two previously installed systems and were able to take revenue on these. One of these systems was previously sold under a Platinum contract; the other was a Q3 2009 international installation that had additional non-standard acceptance requirements. The result was some additional revenue in Q1 that might otherwise have been recognized in Q2.

Services revenue was $19.7 million in the first quarter, nearly 39% of total revenue and representing an increase of 24% over the same period last year. We continue to see growth in this recurring revenue stream that is very positive, since it represents a steady predictable revenue flow from long-term contracts.

A total of $58.8 million was added to backlog during the quarter, a value that includes orders for nine CyberKnife Systems. The market climate for the CyberKnife remained solid during the first quarter. Interest in robotic radiosurgery remains strong, with potential customers appreciating both the economic and clinical benefits of a CyberKnife installation.

Our US sales forces feels that there is now some evidence that confidence in capital expenditures seems to be slowly returning to the market. Overall, the US market remains steady but cautious, with hospital customers continuing to carefully evaluate capital purchases focusing on a strong return on investment with minimal risk.

Our international business remains strong, particularly in Europe, where momentum continued in the first quarter. We expect these markets to remain robust as clinical data increases demand for radiosurgical procedures with the CyberKnife.

During the first quarter of fiscal 2010, we reported a loss of $3.3 million or $0.06 per share, which is comparable to the same period last year. During the first quarter, four CyberKnife Systems were installed. A total of six CyberKnife Systems were shipped. The worldwide installed base at the end of the quarter was 180 systems. Of the four new CyberKnife systems installed in the first quarter, two were in the US and two outside the US. Both of the international installations were in the European sales region.

This number is lower than our recent quarterly installation rate but is in line with our annual installation plan. Historically, installations in the first quarter have been lower than in other quarters; five systems were installed in Q1 of each of the past two years. We expect installation rates to increase again significantly during the remainder of fiscal year 2010.

Our clinical program continues to make progress. During the quarter, the results of a prostate study from Naples, Florida were published. This study involves 112 patients with a median follow up time of two years. Results of the study showed that these patients not only had a 97% sustained PSA response, indicating excellent disease control, but 81% of patients also had preservation of erectile function at two years.

This compares favorably to other modalities in the treatment of prostate cancer, including surgery and conventional radiation therapy that generally reported a 50% to 70% rate of preserved erectile function. The results of the Naples study contribute to the growing clinical data supporting the use of the CyberKnife Robotic Radiosurgery System in treating prostate cancer. Reflective of growing clinical confidence, CyberKnife prostate procedures recorded a 21% year-over-year growth in Q1.

In addition to increasing demand for prostate cancer treatments, our data indicates that year-on-year CyberKnife treatments for lung cancer increased by 23% worldwide for Q1. With liver procedures experiencing a 22% increase over the same period. To date, CyberKnife has treated over 4,000 patients with prostate cancer and over 11,000 lung cancer patients worldwide and over 3,000 patients have now received CyberKnife treatment for liver cancer.

Importantly, there's a close link between the clinical expansion of applications that we are seeing and academic evidence of CyberKnife Radiosurgery. For example, 28 CyberKnife abstracts have been accepted for presentation at the upcoming meeting of the American Society for Radiation Oncology, ASTRO, taking place next week in Chicago. This is a 27% increase in the number of abstracts presented at last year's ASTRO. Seven of these abstracts are describing experience of CyberKnife prostate radiosurgery, with the other 20 focused on experience in CyberKnife lung, spine, pancreas, head and neck and intracranial treatments. During Q1, the total number of CyberKnife peer reviewed publications surpassed 400.

Turning to reimbursement, there was also encouraging news during the quarter for those patients selecting CyberKnife for treatment of their prostate cancer. Two Medicare regions, First Coast, covering Florida, Puerto Rico and the US Virgin Islands, and Highmark, which covers the Mid-Atlantic States, announced that they would cover radiosurgery for prostate cancer. This marks the third time this year following the Palmetto Decision in January where the Medicare contractor has decided to overturn its initial proposal to deny coverage of CyberKnife for prostate patients. In fact, in the Highmark region, in addition to prostate cancer, the final policy adds coverage of breast, cervical and ovarian cancer under certain criteria. The Accuray team will continue to work with physicians, patients and payers to obtain appropriate coverage of CyberKnife technology for all treatments.

Finally, before turning the call over to Derek, I'd like to provide you with and update on recent corporate events. As we've announced, Accuray added two new members of its -- to its Board of Directors. Lou Levine, who is the former CFO of Genentech brings a strong background in corporate finance, accounting and corporate strategy. Dennis Winger, a former CFO to Applied Biosystems, also adds strength to the financial and operations expertise of our board. We are delighted to have these two skills veterans as part of our Board of Directors and look forward to their important contributions in guiding the growth and the evolution of Accuray.

In other corporate news, we recently announced a regionalized management strategy for the Americas. We have created an Americas region, and will strengthen the autonomy of our existing regions in Japan, Asia-Pacific and Europe. Under this structure, each region has control and accountability for revenue and profitability plus the responsibility to establish a full range of services including sales, marketing, and operations to meet the needs of their local customers. We expect this regional focus to encourage cooperation between functional groups within each region and to increase our speed of response and focus on local market conditions. We believe that this structure will enhance revenue generation, profitability and customer satisfaction.

With that I'll now turn the call over to Derek for the financial review. Derek.

Thank you, Euan. This afternoon I will review our financial and operating results for the first quarter of fiscal 2010. During our conference call for the fourth quarter of fiscal 2009, we indicated that revenue for our first quarter would be lower than in our recent quarters. Our Q1 revenue came in at $50.6 million, a 9% decline from the first quarter of last year. Total revenue for the quarter was just above the top end of the range we originally anticipated, as previously explained by Euan.

Our loss in the first quarter of $3.3 million, or $0.06 per share, was virtually the same as the loss of $3.2 million, or $0.06 per share, in the first quarter of the prior year. The current period loss was driven by the decline in revenue and gross margin from the prior year offset by actions that we have taken that lowered operating expenses significantly.

We anticipate that revenue and gross profit margins will be higher in future quarters. Revenue recognized during the first quarter of fiscal 2010 from sales made under Legacy Platinum contracts totaled $10.2 million. Revenue from all non-platinum contracts was $40.4 million for the first quarter of fiscal 2010, up 9% from the comparable non-platinum revenue in the first quarter of the prior year, which demonstrates growth within our current ongoing business.

Taking a closer look at first quarter total revenue, $30.3 million were associated with CyberKnife product sales. Services revenue was $19.7 million, representing 39% of total revenue. Our services revenue is generally derived from long-term maintenance agreements of four year or five year terms and is recognized evenly over the length of the contract, providing stability and predictability to our revenue stream as our install base continues to grow.

Fiscal first quarter 2010 services revenue represents an increase of 24% year-over-year, demonstrating the growing importance of this recurring revenue stream. Shared ownership arrangements produced $481,000 of revenue during the first quarter.

At the end of Q1, Accuray had two systems operating under shared ownership agreements. Other revenue for our first quarter was $94,000, mainly associated with Japanese upgrades.

Prior to fiscal 2006, we sold CyberKnife Systems in the US with Platinum service agreements, which entitled customers to specified upgrades over the term of their Platinum service agreements. Until the CyberKnife System -- until the CyberKnife at all contractually specified future upgrades had been installed, all revenue and cost of sales are deferred for systems sold under our Platinum service agreements. After all required upgrades are installed; revenue and cost of sales are recognized evenly over the period of service coverage that remains under the original Platinum service agreement. Final upgrades under Platinum agreements are usually requested by customers and installed several years after the installation of the system. As a result revenue and cost of sales for systems and service are usually recognized over the last one to two years of a normal five year Platinum service term.

Exiting the first quarter, all upgrades have now been installed on each of the 30 systems sold with Platinum service agreements. We have fully recognized revenue on 21 of these systems and are recognizing revenue over the remaining term of the service contracts on the nine remaining systems. As I previously mentioned, during the first quarter we recognized approximately $10.2 million of legacy Platinum revenue, of which $5.4 million was associated with CyberKnife systems. Platinum service revenue recognized during the first quarter was $1.5 million for service work provided during the first quarter and $3.3 million for service work provided in the first -- in prior quarters.

We anticipate recognizing approximately $24 million of Platinum revenue in the current fiscal year with a remainder of approximately $5 million to be recognized in fiscal 2011. In fiscal 2009, we recognized $60 million of revenue for systems sold with Platinum service agreements.

When Accuray is responsible for installation of the CyberKnife systems, we recognize revenue only after the installation is complete. When our international distributors are responsible for installation, we recognize revenue upon shipment to or proof of sell-through to the end customer. As a result, there can be a difference between the number of systems installed in a quarter compared to the number for which revenue was recognized.

During the first quarter we recognized revenue on six units including three in the US and three internationally. Of the US revenue units, two were new installations and one resulted from installation of final upgrades on a system sold under a Platinum contract. Installation was completed on four systems during the first quarter, two in the US and two in international markets. Both of the international installations were from our European sales region.

This brings the worldwide CyberKnife installed based 180 units at the end of the first quarter with 117 in the Americas, 20 in Europe, 21 in Japan, and 22 in the rest of Asia. We report new orders in our order backlog, because this information can provide insights about future system shipments and revenue. The time between receipt of an order and installation of a system varies significantly due to customers' different schedules for construction and availability of facilities.

In the past, we included sales orders in reported backlog that contained contingencies. Over time we concluded that including contingent orders in backlog was reducing the usefulness of backlog as a predictor of future system shipments and revenue. Accordingly during our conference call in January 2009 to report results for our second quarter fiscal 2009, we provided advanced notice that we intended to change our reporting of new orders and backlog in fiscal 2010 to exclude all orders that contained contingencies.

We reminded investors of this intent again during our third quarter conference call in April 2009. During our conference call in August 2009 to report results for our fourth quarter of fiscal 2009, we again reminded investors of our intent to change reporting of backlog, and also stated that we intended to review our criteria for including orders in reported backlog.

We found that some orders were not proceeding to shipment in a predictable manner. Accordingly we refined our criteria for including an order in reported backlog with the goal of including only orders with characteristics that in prior orders have shown a pattern of predictably proceeding to shipment. We believe this refinement provides investors with better insight about our backlog and its future conversion to revenue.

As a result, and as we indicated in our last call, we will only report contracts as backlog that meet these refined criteria. While many non-contingent contracts already met the refined backlog criteria, there were others that did not. Most of those contracts that are now not included in reported backlog did not meet the refined criteria because we had not received a deposit for the order. Those orders were generally from international distributors, and we have not always required a deposit on such orders.

It should also be noted that there were no cancellations in the first quarter of orders previously reported as part of non-contingent backlog or under the current refined definition of backlog. We believe that our reported systems backlog on average will ship and convert to revenue over the following 12 months. Please note that in addition to shipments from current backlog, we also believe that we will book and ship orders for some systems within the following 12 months.

Once criteria are fulfilled, contracts will be re-entered into reported backlog. For comparative purposes, if we were to apply our current refined definition of backlog to the backlog as of the end of our fiscal fourth quarter, it would yield a backlog of $282.2 million. At the end of the first quarter of fiscal 2010, Accuray's total backlog was $290.5 million, representing a 3% sequential increase based upon the refined backlog criteria.

During the first quarter of fiscal 2010, nine orders for CyberKnife systems met the refined criteria for entering into backlog. We also added $14.3 million on renewal of service contracts and other product revenues, representing a total addition to backlog of $58.8 million. Backlog was comprised of $98 million of contracts for the sale of CyberKnife Systems, $181 million associated with long-term service agreements, and $11 million for CyberKnife shared ownership programs.

A chart reflecting our backlog has been placed on the Investor Relations page of the Accuray website. Again, we feel this backlog refinement will provide a metric that is more useful and predictable in developing financial models.

Our gross profit margin was 42.8% during the first quarter, a sequential decrease of 3.3%. The decline was due principally to lower than normal margins on system sales, unusually high costs for service repair parts and significant upgrades under our Diamond service contracts that carried low profit margins. We anticipate that margins on system sales and service repair parts expense will run at more normal rates in the future. The cost of upgrades are amortized over the term of the Diamond service agreement utilized for the upgrades; therefore, this component of cost of sales will run higher for several quarters, reducing overall gross margin slightly.

Operating expenses for the first quarter were $25 million, or approximately 50% of total revenues. Research and development expenses totaled $7.7 million, or approximately 15% of total revenue reflecting, Accuray's ongoing commitment to the continued advancement of the CyberKnife's capabilities as well as clinical studies.

Operating expenses in Q1 were $7.4 million, lower than in Q1 of the prior year and $1.1 million down sequentially from our fourth quarter reflecting the benefit of our earlier workforce reduction and our ongoing efforts to manage expenses. Non-cash, stock-based compensation expense totaled $3.1 million during the quarter. It represents the fair value of stock options and restricted stock amortized over their vesting periods.

The fair value of stock options is determined on the date of grant using the Black Sholes Option Pricing model. Fair value of restricted stock equals the market price of the stock on the date of grant. The vesting periods for most of the stock option and the restricted stock grants is four years, therefore, the stock-based compensation expense in any quarter mainly relates to grants made in prior periods.

Reviewing Accuray's balance sheet, total cash and investments at the end of the first quarter was $152.6 million. As of September 30, 2009, Accuray's total assets were $257.6 million. The strength of our balance sheet provides us with the ability to pursue our business goals without the need to raise capital, an important distinction in a time of economic challenge.

Moving to guidance, we are reiterating the annual revenue guidance that we provided last quarter, which is a range of $215 million to $230 million. Now I would like to turn the call back to Euan.

Thank you, Derek. As we've mentioned our first quarter of the fiscal year has traditionally been our slowest quarter. However, we are pleased with the ongoing strength and the demand for the CyberKnife, which we expect to see reflected in upcoming quarters as the year progresses.

We'll now be happy to take your questions.

(Operator Instructions). Your first question comes from the line of Josh Jennings of Jefferies and Company. Please proceed.

Good afternoon. Thanks for taking the questions. I guess my first one is just if we looked in the reconfigured backlog -- in the CyberKnife System backlog of around $99 million, and just using an ASP of $4 million you'll have -- figure about 25 systems in backlog. So if you add those four installations this quarter and the six that you placed with international distributors, and that adds up to about 35 installations for the year. Now are you guys still expecting to grow your installation number in fiscal 2010 over 2009?

Yes, we are expecting to have more installations this year than last year.

And that's some confidence in some of the backlog that just needs to have deposits put in from the international distributors?

It is from -- mainly from backlog that exists plus there will be -- we have some orders that we have a pretty high confidence will come in during the coming year.

Great, just one follow-up then. I guess with your discussion with hospital customer, I think, Euan, on your comments, you mentioned that you've seen some stabilization in the hospital purchasing environment. Can you just give us a little bit more color in terms of your sense of change in a positive direction in terms of hospital budgetary constraints in the US compared to the first half the year and what you're seeing now in Q3 both in the US as well as Europe and Asia?

Yes, definitely. So topically we have reports from our US sales force that projects, which were at least temporarily put on hold during the time of economic uncertainty, have now got budgets which they are prepared to look at spending. So we're definitely seeing at least the early stages of budgetary free-up.

Internationally, I think we always saw less impact internationally, where particularly in Europe, which as we said many times currently leads our strongest region, and their health care expenditure tends to be more centralized, and it was less impacted at least in the short term by the economic downturn.

Your next question comes from the line of Erik Schneider of UBS. Please proceed.

Hi. Thanks for the information again on the legacy revenue in particular. I think it's helping us really sort of get to what underlying revenue growth is. If we go back a year ago, can you provide the same detail on the composition of that legacy revenue, particularly with respect to service? What proportion was for services within the quarter versus cumulative from previous quarters?

I don't -- we don't have that right at our hands, Erik. We will get you the breakout of the portion of service that was from services current versus prior period.

Okay. And then in any given rolling four quarter period, sort of what proportion of orders or products revenue do you expect to come from simultaneous order and shipments versus things that flow through backlog and sit there for a while?

It will vary from quarter to quarter. But I think we are using as a guidepost that it will be in the sort of one to three system range.

In average per quarter.

Correct.

Okay --

It's not a precise metric, unfortunately, it's something that varies quite a bit from quarter to quarter. But it's definitely a regular and reproducible part of our business.

And I took from your commentary that you expect R&D and SG&A dollars to stay -- barring an acceleration in sales with respect to the SG&A spending, but -- to stay basically in line with what you say this quarter in terms of dollars?

Generally there will be some variation from quarters. The fall quarter obviously being that it -- ASTRO occurs in the quarter, it will be an increase in the marketing expense component. But we are looking at trying to keep the expense level down close to the level we had it in the first quarter.

Okay. Thank you.

(Operator Instructions). Your next question is from the line of Mark Arnold of Piper Jaffray. Please proceed.

Good afternoon.

Hi, Mark.

I've got a question and then a follow-up as well. Just on the backlog criteria, I want to make sure I understand both the backlog and then also the new orders, the nine new orders that met the criteria in the quarter. Were all of those nine systems new orders if you hadn't changed your backlog definition from the last quarter? Or are some of them orders that would have been in contingent backlog based on the old definition and are now moving in -- or are now moving in to backlog under your refined definition?

Well, there are some -- in that backlog, we're trying to report what meets the current definition. I will say that it is -- there are some orders that customers, for instance, admitted to us this quarter that did not meet the criteria, and which we know of already the issues that were outstanding have been fulfilled in October. So there are some orders that will transition from one quarter to a next in terms of meeting the criteria.

Okay, but just as it relates to the nine orders in Q1, were there -- was there some of that in those nine as well that as of June 30th wouldn't have met the criteria but did in Q1? Or are these all nine new fresh orders to backlog?

There is some transition of orders that met the criteria under our old definition in Q4 and -- but not under our new definition, just as there are some orders that we received in Q1 that probably would have met the definition under our old procedures but not under our new. And they have flown out to Q2, so there is sort of a shift of orders outward from both quarters.

Okay, and then just the follow-up was actually from the last -- the question asked prior to me coming on here. Maybe to ask it a little bit differently, and if I understood you right you said there would be one to three systems per quarter as kind of a range on the book and ship?

I think what we were trying to say is that and to just amplify that a little bit. There will be orders that we will get in a quarter that will shift in that quarter. And --

I understand. So just as a -- maybe to give us some idea of, or comfort level with that, can you tell us how many book and ship orders you had in fiscal '09?

I don't have that number. I apologize. Something we'll try and get together.

So maybe we can expand a little bit on the orders -- the difference between the total number of orders that are in backlog according to our current definition and the orders that were in the backlog by our old definition. Many of those are from international distributors that don't have the requirements Derek indicated in his pre-prepared remarks. They don't satisfy the requirement for a deposit.

Now it's -- I'd say it's relatively common that we get orders that go straight from that state to ship and also that we get orders from international distributors where they are negotiating with a customer until the last minute. And then once they've firmed up their arrangement with the customer, the customer is actually pretty far advanced with their installation schedule, and they're ready to take a system at the same as they essentially give us paperwork and maybe make their initial down payment or give an LC or satisfy our financial criteria.

So those orders go straight from -- in a single quarter, we could have all paperwork and all necessary finance to ship takes place almost simultaneously. And those are a regular and ongoing -- both those categories are a regular and ongoing part of our business.

Great, thank you.

I think that though we -- and Derek said this, the zero to three, that's a reasonable guide. You have to understand that there are definitely variables there.

Mark, one other -- just kind of amplification on your earlier question. In terms of orders flowing into the year that are not part of backlog, at the beginning of -- certainly of '09 there were -- our projection of what we would achieve or what we did achieve in '09, we did in fact book orders during '09 that shipped in '09 that were not orders in our backlog at the beginning of the year. And we don't have a precise number, but it was in the neighborhood of seven to eight systems.

Great, thank you.

Your next question comes from the line of Robert Manning. Please proceed.

I noticed there was a big drop in the SG&A expense at the same time there was the increase in the cost of sales. Was some of that cost shifting stuff that was originally stuff that was originally -- would have been cost of sales and now has moved over to SG&A? That SG&A just -- drop looked too big.

There was virtually none of that. Most of the drop in margin was due to the factors that we cited earlier. Some change in mix, which led to lower system margins and unusually high service parts cost and some upgrades that had lower margins than normal.

Is the -- what accounted for the very large decline in SG&A? Obviously there's a little bit less commissions, because you sold a little less?

Yes, it is. The biggest pieces are significant reduction in the staffing level here. That's the vast majority of it. And then it is a compendium of small changes, as we've just watched our expenses and tried to make sure that we're spending money on the things that are the most important for us each quarter.

Okay. Great, thank you.

(Operator Instructions). And there are no further questions. I would now like to turn the call over to Mr. Euan Thomson.

Thank you, so we had a better revenue quarter than we originally anticipated. We remain encouraged by the expansion of full body radiosurgery and the central role CyberKnife plays in changing clinical practice.

As always, I want to take a moment to acknowledge the outstanding contributions being made by Accuray employees around the world. Thank you for joining us today and we look forward to speaking with you on our next call.

Ladies and gentlemen, that concludes the presentation. Thank you for you participation. You may now disconnect. Have a great day.