Accuray Inc (ARAY) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter fiscal year 2011 Accuray Incorporated earnings conference call. My name is Yvette and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions). I would now like to turn the call over to Tom Rathjen, Vice President of IR. Please proceed, sir.

Thank you. Hello, and thank you for joining us this afternoon for Accuray's conference call for the second quarter of fiscal 2011. 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 the past quarters, we will again be referring to revenue and backlog data which are found in PDF files on the Investor Relations page of the Accuray website at accuray.com. Please log onto the 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, but are not limited to, revenue guidance, installations, gross margins, operating expenses, profitability, clinical acceptance, and regulatory approvals. These and other risks are more fully described in the risk factors section of our annual report on Form 10-K 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. Euan?

Thank you, Tom. Thanks to everyone for joining us on today's conference call to review our second quarter of fiscal 2011. Today I am pleased to announce a strong, profitable second quarter with solid order generation and backlog expansion. I will start with a recap of the business highlights of the quarter, I'll comment on the current sales environment for the CyberKnife, and then provide brief clinical and corporate updates.

During the second quarter we added 19 new CyberKnife orders to backlog, increasing total backlog by nearly 8% from the first quarter. Six CyberKnife systems were installed and six were shipped during the quarter. Our year to date book to bill ratio is approximately 1.4, continuing the positive book to bill ratio that we've reported in recent quarters which we believe is a continued indicator of future growth. During the past four quarters, 56 CyberKnife orders have been added to backlog. 32 units have been shipped and 32 units have been installed for customers around the world.

I'll now provide a brief review of the business highlights of the second quarter of our fiscal 2011, and I'll then turn the call over to Derek for a detailed financial review.

During the quarter, Accuray's total revenue was $54.2 million dollars. Revenue from sources excluding previously deferred Platinum revenue was $53.4 million, representing nearly a 7% increase over the same period last year. During the second quarter we recorded net income of $4.1 million or $0.07 per diluted share compared with a net loss of $1.2 million or $0.02 per diluted share in Q2 of last year. This significantly improved level of profitability was achieved through continued close management of operating expenses combined with consistent improvement in gross margins.

The 19 CyberKnife systems added to backlog during the quarter, contributed a total value of $90.2 million. It's worth noting that in contrast to other suppliers of radiation treatment equipment, very little of Accuray's business is replacement equipment. In fact, none of the 19 CyberKnife systems ordered in Q2 were replacement systems. As a result, each of these systems can also be viewed as an incremental source of future service revenue. Of the $90.2 million added to Q2 backlog, $26.8 million came from new service coverage.

As our service contract capture rate remains high, a positive book to bill ratio not only indicates future growth in product revenue, but also an acceleration in future service revenue. Of the 19 CyberKnife orders, 14 were for the latest VSI system. Derek will provide a more detailed analysis of backlog in a few minutes.

During the second quarter, six CyberKnife systems were installed, of which three were in the Americas region, two in the European region, and one in Asia. The worldwide installed base as of December 31, 2010 was 222 systems consisting of 139 in the Americas, 35 in the European region, 22 in Japan, and 26 in the Asia Pacific region.

In Q2 we once again observed little change in the competitive environment for the CyberKnife and our sales force reports only minor impact on CyberKnife business of the competitive product launches last year. As we've reported, in the last four quarters, Accuray has added orders for 56 CyberKnife systems to backlog.

The CyberKnife remains the clear choice for customers seeking an integrated, dedicated full-body radiosurgery capability and it remains well differentiated from gantry based radiation therapy systems that generally require supplementary components from third parties to enable limited radiosurgery treatments.

To deal with each region in turn, eight of the 19 systems added to backlog in the quarter were in the Americas region. However, while we observed some improvement in the capital market in the US, it's still a challenging financial environment and the capital spending by some hospitals remains cautious. Hospital budgets are becoming available, but movement is slow. The team reports that interest in the CyberKnife remains high and is expanding in parallel with the growing awareness and demand for extracranial radiosurgery capability.

The sales pipeline remains strong with a growing number of academic centers demonstrating interest in CyberKnife technology. I can report that two major US academic centers were among the eight new backlog orders in the Americas in Q2. In line with our usual policy, we will name them once the CyberKnife systems are installed. We also added one major academic center in Latin America to our customer base.

The European region remains particularly strong for Accuray with eight orders in the second quarter setting a sales record for the region. The markets facing financial challenges in Europe are not the countries driving our growth. The team reports no signs of the region slowing down. Three of the eight orders came from major academic centers, one in the UK, one in Germany, and one in Russia.

Japan continued to demonstrate signs of a growing sales pipeline during the second quarter following Shonin approval for our fourth generation CyberKnife system. In the meantime, business remains steady with one new order being placed in the second quarter. The Asia Pacific region held steady in Q2 with two new orders. We now have 26 CyberKnife systems installed in APAC.

Moving on to other areas of corporate development, during the second quarter the FDA granted 510K approval for our lung optimized treatment product that was introduced at the most recent ASTRO conference. Physicians now have greater flexibility in delivering radiosurgery to patients with lung cancer without the need for implantation of invasive markers.

Lung radiosurgery with the CyberKnife can now be completely non-invasive, regardless of lung tumor location. We believe lung cancer remains a significant driver for future clinical growth and with the addition of lung optimized treatment we would expect an increase in the number of lung cancer patients receiving CyberKnife treatment.

Of particular clinical significance, the first five-year outcome study on prostate cancer patients treated with the CyberKnife has now been published. The multicenter study published in this month's issue of Radiation Oncology found that 93% of patients had no recurrence of their disease at a median follow-up of five years, a rate that compares favorably to results obtained with traditional treatment modalities including surgery and conventional radiation therapy.

In addition to demonstrating high five-year cancer free survival rates, the study also found low levels of urethral and rectal toxicity. Assessment of erectile function preservation was not a specific focus of this study, but previously published studies have evaluated this critical endpoint. Studies that employed newer MRI based planning techniques have reported that erectile function was preserved in 81% of patients at the two-year time point. For comparison, published rates of erectile function preservation at two years for other commonly used prostate cancer treatments such as surgery and conventional radiation therapy typically range from 50% to 70%.

CyberKnife radiosurgery is a more convenient treatment regimen, complete in only five short outpatient treatment sessions and therefore compares favorably to other more invasive procedures that require hospitalization, anesthesia, and lengthy recovery as with surgery -- or the 30 to 40 hospital visits required with typical radiation therapy. This published report is just the leading edge of CyberKnife prostate treatment data with thousands of additional patient outcomes to follow in currently ongoing studies that are rapidly maturing.

We are also happy to announce that the Accuray sponsored CyberKnife prostate radiosurgery multicenter study, led by the teams at Swedish Cancer Center in Seattle, and the Beth Israel Deaconess Hospital in Boston involving 23 centers, has completed its patient accrual target of 294 patients. We expect expanding fields of data to be helpful in encouraging greater acceptance of CyberKnife prostate radiosurgery by patients, physicians, hospitals, and insurance providers.

Last month we announced the creation of a medical affairs function to accelerate further data collection, utilization, and referral patterns, and to provide strategic guidance on clinically driven processes, innovations and initiatives. The new Medical Affairs Department, led by Dr. Omar Dawood, will further medical research through the development and support of clinical studies and project [goals] globally while strengthening relationships with key opinion leaders and academic centers worldwide.

And as we announced earlier this month, Eric Pauwels has joined Accuray as our Chief Marketing Officer. Eric brings 25 years of healthcare industry experience to Accuray and we welcome him to the team. We look forward to his valuable contribution as we expand the worldwide markets for CyberKnife in radiosurgery.

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

Thank you, Euan. Revenue for the second quarter of 2011 was $54.2 million, up 42% from the prior quarter. Revenue was down 5% from the second quarter of the prior year. However, excluding revenue previously deferred for systems sold with legacy Platinum service agreements, revenue was $53.4 million, up 7% from the comparable figure for the second quarter of the prior year.

The gross profit margin of 54.3% was up 9 percentage points from the 45.3% gross profit margin in the second quarter of the prior year. This reflects improved profitability on both system and service revenue resulting from higher ASPs on system sales and ongoing internal efforts to manage cost of sales.

While we increased research and development expenditures as previously forecast, we continued to manage operating expenses effectively, holding them to $25.8 million for the quarter, which is approximately 8.8% below the level from the prior year's second quarter.

The overall result was a net income of $4.1 million or $0.07 per diluted share for the second quarter compared to a net loss of $1.2 million or $0.02 per share for the second quarter of the prior year. During the second quarter, 19 new orders for CyberKnife systems were added to backlog. Offsetting the new orders, two orders were cancelled during the quarter, both due to dissolution of the purchasing groups.

During the second quarter, two orders aged beyond 2.5 years in backlog. The customers have not cancelled these orders. However, under our backlog policy, orders may not remain in backlog for more than 2.5 years. Accordingly, we have removed the value of these two orders from our reported backlog.

In summary, net orders to backlog totaled 15 systems in the second quarter and 21 systems year to date. We recognized product revenue on eight new systems during the second quarter and 14 year to date. Net orders to backlog totaled $83.8 million during the second quarter, $53.6 million for systems and $30.2 million for service. Our book to bill ratio for systems was 1.5 for the second quarter and 1.4 year to date.

We calculate our book to bill ratio by comparing the net dollar value of orders received to revenue recognized. The book to bill ratio reflects growing customer demand for the CyberKnife and Accuray's potential for future revenue growth. We anticipate that order backlog for CyberKnife systems will generally convert to revenue over a 12 month period though this period can range from as little as one quarter to well beyond four quarters due to customer schedules. Charts reflecting our backlog have been placed on the Investor Relations page of the Accuray website.

CyberKnife product revenue totaled $34.4 million and service and other revenue totaled $19.9 million, both up from the prior quarter, but down from the second quarter of the prior year. Excluding revenue previously deferred for systems sold with Platinum service agreements, product revenue totaled $33.9 million, up 87% and 5% from the prior quarter and second quarter of the prior year respectively.

The increase in product revenue was due to higher average selling prices that we have been able to secure and maintain with the release of CyberKnife VSI. Excluding revenue previously deferred for systems sold with Platinum service agreements, services revenue totaled $18.4 million, up 9% and 10% from the prior quarter and the second quarter of the prior year respectively.

The increase in services revenue was due to an increase in the installed base under service contracts. Average service revenue per system remained stable during the second quarter. We had no net movement of customers to less expensive service plans.

We sold systems with Platinum service agreements through fiscal 2006. For such systems, all product and service revenue and related costs of sales were deferred until the last promised upgrade was installed. Once this was completed for each system, we began to recognize the deferred revenue and cost of sales over the remainder of the service contract.

We recognized $60 million of Platinum revenue in fiscal 2009, $29 million in fiscal 2010, and expect most of the remaining Platinum revenue to be recognized in fiscal 2011. For systems still covered by Platinum service agreements in fiscal 2011, we recognized $1.5 million of revenue in the second quarter and $4.2 million year to date.

Platinum revenue recognized in the second quarter included $0.4 million of systems revenue deferred from prior quarters, $0.4 million for service work deferred from prior quarters, and $0.7 million for service work provided during the second quarter. Approximately $0.8 million of Platinum revenue is expected to be recognized as revenue during the second half of fiscal 2011.

Our gross profit margin improved for both product and services revenue. Product margins improved to 61.8% from 50.8% in the second quarter of the prior year, largely due to the shipment of VSI systems in the second quarter of fiscal 2011. Additional features and capabilities enable VSI systems to garner a higher average price than earlier models. Service margins improved to 39.6%, from 36.5% in the second quarter of the prior year, due mainly to greater efficiency derived from increases in the number of systems covered by service contracts and lower expense for repair parts.

During the second quarter, operating expenses totaled approximately $25.8 million, an increase of $1.4 million from the first quarter, but down $2.5 million from $28.3 million in the second quarter of the prior year. The increase in operating expenses from the first quarter was driven by growth in spending on R&D which we had previously forecast. We expect even more significant growth in R&D spending in the second half of fiscal 2011 from the level in the second quarter which will be focused on the development of new CyberKnife technologies.

Also, as we previously indicated, we anticipate sales and marketing expenses will rise in the second half of fiscal 2011 as we work to increase global awareness of the benefits of treating cancer patients with CyberKnife radiosurgery.

Accuray's balance sheet remains strong with cash and investments ending the quarter at $152 million, up $11.1 million in the second quarter and $0.8 million fiscal year to date. We are reconfirming the guidance provided at the beginning of the fiscal year and expect total annual revenue to be in the range of $210 million to $225 million. Total revenue, excluding amounts related to Platinum contracts, is expected to be in the range of $205 million to $220 million in fiscal 2011, up from $193 million in fiscal 2010.

Our business is inherently lumpy and often challenging to predict because product revenue is dependent upon our customers' construction schedules as they build or renovate facilities to house their new CyberKnife systems. Based upon the number of orders placed into backlog over the last four quarters and ongoing sales activity, we expect quarterly installations and revenue in the second half of fiscal 2011 to be stronger than in the first half. We believe that Q3 growth will be modest with revenue close to our Q2 results, while Q4 is expected to reflect the strongest revenue of the year.

Our gross profit margins have improved on both product and service revenues from fiscal 2010. We expect our overall gross profit margin will be in the range of 49% to 51% for fiscal 2011, up from 46.9% in fiscal 2010. We believe that we have opportunities to further advance the lead role of the CyberKnife in radiosurgery through continued investment in R&D. We also believe that we have opportunities to increase global awareness for the benefits of treating cancer patients with CyberKnife radiosurgery. We believe that progress towards these goals will be critical to maximizing the long-term growth in revenue and profitability of Accuray for our shareholders. Importantly, we plan to increase our spending in these areas as previously discussed.

While we plan significant further increases in spending on R&D in the second half of fiscal 2011, and also plan to raise spending on sales and marketing during that period, we now anticipate that the Company will be profitable for the fiscal year 2011. Based on the strong order flow we achieved over the last four quarters and ongoing sales activity, plus the developments in R&D and global awareness that we are pursuing in fiscal 2011, we are making good progress towards our longer term goal to achieve revenue growth while maintaining solid gross profit margins and prudent management of operating expenses. We believe these are the elements essential to generate pretax profits of 10% or possibly more.

Now, I'd like to turn the call back to Euan.

Thank you, Derek, and we'll now be happy to take your questions.

(Operator Instructions). Robert Labick, CJS.

Good afternoon. Congratulations on a nice quarter. First, I wanted to ask, Derek, you touched on this in your remarks, maybe you could expand a little. We saw pretty good trends or as you said, stabilizing trends, in revenue per service contract. I know there's other stuff in there. Could you talk a little bit about Diamond Plus? I know it's still early in that program. Is that part of the stabilization there? And where do you see this trending as we go forward in the adoption of Diamond Plus in the Diamond plan?

So the trend, as I indicated, has stabilized. I think that for purposes of why they're stabilized, I think customers, perhaps a few customers, had some budgetary issues that they were trying to deal with as they came out of the severe financial downturn. We have brought out the Diamond Plus program because it provides some additional features to customers. We are seeing that that is gaining traction with customers. That product is priced at the same as the old Diamond program, so it's a way to provide increased value to the customers as they stay on that program.

Looking forward I think at this point what I would suggest that we anticipate is it will maintain customers at the level that they're at and it won't necessarily go up, but we don't anticipate it will go down.

Okay, great Thanks. And then just for the follow up, slightly different. You discussed obviously the R&D has, as you'd said before, gone up a little bit and expect to go up in the second half. How much of that is related to Siemens? And can you give us an update on that relationship?

So the increase in R&D was approximately $1.3 million. All of that was internal projects. The update on the Siemens project is that that project has been delayed if you will. The Siemens Healthcare Division went through a management reorganization and the work that we had originally anticipated doing on that project has been -- has not occurred. At this point that's the status of the situation with the Siemens Development Project. As far as the distribution activity, that is proceeding as we anticipated.

Mark Arnold, Piper Jaffray.

Great quarter, guys. I think -- I guess I just wanted to focus on your new customers and those placing orders here in the most recent quarter. I know your sales people work closely with customers kind of putting together pro formas for the system, patient volumes, referrals, etc., when people are evaluating a purchase. Has there been any change in the volume types of patient cases that these customers are expecting to treat now versus say the past couple of years?

I think it's a little early to say. And I don't know if you're referring particularly to sort of [advances] with Lung Optimized Treatment and the prostate data and the announcement of the CyberKnife capabilities to treat partial breast radiation treatment at ASTRO last year. But all those things are relatively recent. What we tend to do with pro formas is make them very, very customer specific, so we get right down to the detail of exactly which physicians are keen to refer patients to CyberKnife for treatment at that particular center.

So we don't necessarily track macroscopic changes and I haven't heard of any distinct feedback from the sales force other than they're kind of excited to roll some of these new clinical techniques out.

Okay. I didn't want to ask about the financials because to me that's pretty self explanatory, it was a great quarter here. But just following up on that, Euan, I mean you guys have had some really good data come out on lung, you've had great data come out here on the low risk prostate cancer patients. So I guess I'm just trying to -- I think you hit it on the head what I was getting at, but I'm just trying to gauge as to how people making new purchases or placing new orders are thinking about that data and how it's impacting their decision making.

I think it's all at this point incremental improvement. You're right to ask the question focused on the pro forma, that's definitely the first place it would go in. One of the first things we're looking for as well is kind of added traction with those clinical techniques amongst our existing user base. It's kind of you can think of new clinical data somewhat like a new product.

The first place we roll it out anyway is amongst our existing customers and we look for the impact and the validation there. Because in the end, it's probably our existing customers who will give the greatest validation to people that are considering buying the CyberKnife in the future. So that's kind of where we're focusing our efforts right now. And as it impacts the market, then we'll give you feedback.

Can I just ask, the lung optimization, can you give us a sense for the early pickup of that, I guess it's a software product, kind of post ASTRO?

Not specifically in terms of the number of systems we've kind of pushed, are putting out onto the market, but certainly qualitatively speaking I can say, yes, it's being very well received, very easy to understand for people. The idea of moving into an environment where the CyberKnife can be used without implanted metal fiducials and all that implies in terms of being completely non-invasive is very well understood by the user base. And I think I can say a fair amount of excitement around that.

Josh Jennings, Jefferies.

Thanks for taking the questions, guys. And great quarter here. Just to be clear, these 19 orders for new systems is a record number, right?

It is certainly the largest number since we established our current backlog criteria.

Okay. And maybe just in terms of ASTRO and the buzz that was generated there by Accuray for one, but also just around stereotactic radiosurgery for two and hyper fractionation, do you think this record number here was driven partly by ASTRO? Do you think there's still more flow through from some of the buzz that you created going on to the next two quarters?

I think the sales cycle for the CyberKnife is still relatively long. And I always say there's no CyberKnife ever sort of walked out the door by itself without a great deal of effort from the sales team and the marketing team and all the people that get involved in talking to customers.

So I think what we're really seeing is a kind of a convergence of a number of factors. I think a general level of awareness and excitement about radiosurgery as a whole, which I think we have created as a result of our clinical programs, I think that's critical. I think the VSI product has definitely been impactive and it provides faster treatments and is more customer friendly. The quality of the treatment is high and that's obvious to those people that review it.

So I think the VSI product has been impactive and I would also say that the team that we've got behind it worldwide as we move into kind of a new regionalized environment with dedicated resources, dedicated market resources and market support of our sales teams, and general evolution in the quality of our sales teams, I think we've had an impact on the market as well. So I'd really point to all of those factors.

Great, and you may have mentioned this in your prepared comments, I was a little bit late to the call, but six new CyberKnife systems were installed. Systems revenue of $34 million would suggest that you did ship some to some international distributors and I just wanted to clarify that we're still on track to increase the level of installations in fiscal '11 over fiscal '10. Thanks a lot.

Yes, we do anticipate that we will have more installations than we would in fiscal '10.

(Operator Instructions). Tycho Peterson, JPMorgan.

Hey, thanks for taking the question. Just a question on partial breast and how you think about that market developing. Obviously that was one of the kind of points of excitement coming out of ASTRO for you guys. Can you just talk a little bit more about your market development efforts there?

I think that this is one that's a little bit different from some of the other markets which we've developed ourselves from scratch. I would say that prostate radiosurgery didn't exist without, before the CyberKnife and before Accuray's clinical programs built around it. I think that there are many other examples of programs that we've built.

Partial breast radiotherapy is a little different. The principal is that people believe that treating the entire breast with radiation treatment may not be necessary, it may be better to focus on the region immediately surrounding the cavity after a tumor has been removed. And that's been investigated over a number of years now using a variety of different technologies. And what we found out at ASTRO as a result of some work some of our customers have done was in fact the CyberKnife has very good, produces very good dose characteristics for that treatment.

It's possible to shape the radiation dose around the treatment cavity very well, avoid the radiation of the skin -- or reduce the radiation to skin for example and chest wall, and really have a very tailored approach. So our job now I think is to find a little bit more, get a little bit more practical experience working with some luminary customers to develop some particular CyberKnife based solutions to make it easy and streamlined to use for all customers. And then roll out some consolidated clinical programs as we've done in the past.

That's somewhat early phase for us. But at the same time I can say that market interest has been significant and we're hearing back from the field, both amongst existing customers and prospective customers that they have a very high level of interest around this.

Okay, and then just one follow up on the service business. You and others have talked more in the past couple of years about kind of building out these capabilities and in particular for you around the treatment planning services. Can you just talk about how much more headroom there is to kind of build out service at this point and how much you're investing there?

I think -- we were asked a question just now about the Diamond Plus and I think that really exemplifies where we're going with service. The treatment planning capability is part of that initiative. What we're really trying to do is to say that the service includes the whole range of technologies and support services that we can offer to the customer.

So I think it's a continuum. What we're aiming to do is to enable customers to get up and running fast and most of the services we've rolled out in Diamond Plus are part of that. Treatment planning would be included in that.

And then following on from that, we want to try and help them to keep their system up to date. We recognize CyberKnife is a very new technology. We always tell our customers, and it fits with our track record, that the CyberKnife is an upgradeable platform, that new clinical techniques are evolving all the time, and that we will continue to optimize the CyberKnife to make sure it's the best radiosurgery, piece of radiosurgery equipment on the market.

And we want to make those upgrades available to our customer base in a way that is least financially challenging. I think you can see some of the services and treatment planning, as I said, is one of them. In the same way as upgrades, we're just trying to make it as easy and streamlined for our customers to use the CyberKnife in the optimum way according to the clinical environment at the time.

Okay, and just I guess last one. As you're talking about upgrades, it got me thinking a little bit about replacements. Are we at the point now where you start to see some of the early systems being swapped out and replaced? Or how do we think about replacement cycle for you guys?

We haven't really given any forecasts specifically related to equipment replacement. We're definitely seeing that they are at the leading age of the early CyberKnife installations. CyberKnife customers are reaching a point where it may be in their interest to think about replacement, particularly since the CyberKnife has come such a long way in such a short space of time.

So I think it's a little bit early to model it from a financial standpoint, but we will keep you up to date as we start to embark on an equipment replacement phase. And I think it is a good question to ask and it's one that we will try and keep people informed over.

With no further questions in the queue, I would now like to turn the call back over to Euan Thomson, President and CEO, for closing remarks. You may proceed, Sir.

Thank you. So Accuray remains dedicated to expanding the use of CyberKnife radiosurgery as we improve the lives of cancer patients worldwide. As always, I want to take a moment to acknowledge Accuray employees and the tremendous contribution they make every day. Thank you for joining us today and we look forward to speaking to you on our next call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.