Accuray Inc (ARAY) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 Accuray Incorporated earnings conference call. My name is Deanna, and I'll be the operator for today. At this time, all participants are in a listen only mode. Later we will conduct a listen and question's. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Deanna. Hello, and thank you for joining us for our conference call this afternoon as we review Accuray's first quarter fiscal 2013. Joining us today is Josh Levine, Accuray's President and Chief Executive Officer, and Derek Bertocci, Accuray's Senior Vice President and Chief Financial Officer. Please note that today we will be referring to information which can be found in a summary slide deck on the investor relations page of the Accuray website, at accuray.com/investors.

Before we begin I need to remind you that our call and associated presentation include forward-looking statements that involve risk and uncertainties. There are a number of factors that could cause actual results to different materially from our expectations, including risk related to our ability to achieve future growth in orders, revenue and sustained profitability, anticipated trends in gross margins and operating expenses, as well as the impact of the release of new technologies.

These and other risks are more fully described in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2012, our Form 10-Q that will be filed soon, and as updated in our other filings with the Securities and Exchange Commission. We assume now obligation to update any forward-looking statements.

And now I would like to turn the call over to our President and Chief Executive Officer, Josh Lavine. Josh?

Thank you, Tom, and thanks to everyone for joining us today as we review our fiscal first quarter. As most of you know, I recently joined Accuray, having arrived after the close of the first quarter. So today, I will provide an overview of some of the highlights of quarter and have Derek provide details of the financial results. I will discuss our successful launch of two new exciting products at the recent American Society for Radiation Oncology, or ASTRO, trade show, what we believe these products mean for Accuray's growth, and some comments around my plans as we move the Company forward.

ASTRO is the largest and most important annual event for the radiology oncology industry, attracting clinicians and hospital administrators from around the world. It is the most significant sales event of the year and generates the largest number of sales leads. This year's ASTRO was held in Boston at the end of October.

In spite of Hurricane Sandy, the Accuray booth attracted a large audience, with about 700 people gathered around for the unveiling of our two new technology platforms. Our sales and marketing teams conducted nonstop product demonstrations, adding to the growing number of perspective customers. As evidence of customer enthusiasm, a 33% increase in sales leads was generated compared to last year.

This year, Accuray's products were well represented, with 90 clinical and technical abstracts describing the clinical benefits and outcomes of patients treated with either the CyberKnife or TomoTherapy systems. TomoTherapy customers demonstrated the ability to create high quality treatment plans that maximally spare nearby healthy tissues for simple to complex targets throughout the body, enabling the treatment of the full spectrum of patients.

Of note, this year's program featured ten presentations on CyberKnife prostate SBRT that included an 1,100 patient multicenter study, with outcomes reported at five years that were comparable to outcomes reported from longer courses of radiation therapy and surgical treatments for prostate cancer. This expanding foundation of clinical evidence further supports the advantages to patients, clinicians and payors of the four to five day noninvasive outpatient treatment course of CyberKnife SBRT in the treatment of prostate cancer.

The headline at ASTRO was Accuray's introduction of two new technology platforms, the CyberKnife M6 Series and the TomoTherapy H Series. Both products offer significantly faster throughput, increased precision, and the capability of treating larger patient populations, all of which improve the patient experience, provide greater economic benefits to our customers, and position the systems to be more competitive as mainstream treatment options.

The new CyberKnife M6 Series is available a multileaf collimator, which provides new efficiencies in the delivery of full body radio surgery and expands treatment to patients with larger tumors. With the new MLC, the CyberKnife can now also deliver IMRT treatments quickly and easily with a wide range of beam angles, all within a standard treatment window.

These new capabilities build upon the unique value of the CyberKnife provides the customers. [It is] the only system on the market that automatically corrects for any tumor movement throughout treatment. In other words, the well respected radio surgery capabilities of CyberKnife are now available to a wider customer base and can be offered to a larger patient population.

The new TomoTherapy H Series builds upon the distinct architecture of the TomoTherapy system, resulting in a clinically efficient system that provides superior performance, enabling treatment of a broad range of patients from routine and simple radiation therapy applications to more complex IMRT and SBRT cases. The new series offers advanced dynamic jaws hardware and VoLO treatment software that improves patient throughput through treatment time reductions of 50% to 70%.

VoLO streamlines the treatment planning process, giving the user feedback in minutes rather than waiting overnight. With enhanced throughput, and more efficient treatment planning, the Tomo H Series improved the quality of treatment for the patient while improving economic value for the customer. The new TomoTherapy H Series can now become the workhorse solution in a single vault setting.

The two new technology platforms launched at ASTRO will be integral to our strategic growth agenda, and we expect it will result in both order and revenue growth, which should help us achieve our goal of sustained profitable. And now I will turn the call over to Derek for a more detailed look at our financials for the quarter. Derek?

Thank you, Josh. In reviewing the quarter will discuss our non-GAAP results. We believe they are the best indicator of progress in our on going operations and trends that may influence future results. Our press release provides details of the adjustments between GAAP and non-GAAP results. I will specifically make mention if I refer to GAAP results.

From a overview standpoint, our first quarter reflected good progress on a number of fronts. We also saw the effect of our normal seasonal slowdown in certain areas and some one time events. New orders for products of $51.6 million were up 31% from the prior year quarter. This was driven by an increase in the flow of orders for TomoTherapy systems, particularly in Asia Pacific markets and Japan. As Josh mentioned, the new TomoTherapy and CyberKnife systems we introduced at ASTRO were well received, and we will work to capitalize on them to grow new orders in the future.

Accuray and TomoTherapy applied different standards in determining bookings and backlog prior to the acquisition in June 2011. During the first year after the acquisition, we believed that our book to bill ratio was the best way to assess the potential impact of new order flow on business growth prospects. We now have new order data covering more than one year that were determined using consistent standards. As such, and in response to input from the investment community, we will henceforth focus on the direct comparison of new orders and backlog on a year over year basis asthe best reflection of the change in Accuray prospects for business growth.

As we had indicated on our Q4 conference call, total first quarter revenue of $82.7 million was down substantially, 13% below the level achieved in the prior year quarter. This was driven by 28% decline in product revenues. An unusually high number of TomoTherapy systems were shipped in the first quarter last year, immediately after the close of the acquisition. During the first quarter of this year, shipments of TomoTherapy systems were at more normal levels.

Service revenue continues to grow, up 10% from the prior year quarter, reflecting the continued sale of systems to new customers. These sales are particularly important since they increase of the base of installed systems, which drives service revenue growth. Our installed base increased by 25 units to 667 systems during the first quarter.

Our total gross margin declined 33.2% from 36.4% in the first quarter of the prior year, mainly due to a change in revenue mix. Service revenue represented 51% of total revenue in the first quarter, up from 40% in the first quarter the prior year. Given the lower gross margin on service revenue, the change in revenue mix resulted in a drop in the total gross profit margin.

The service gross margin of 16.7% was up from 12.1% in the prior year due to the continued improvement in reliable of TomoTherapy systems. The service gross margin declined from 19.9% reached in the immediately preceding fourth quarter due mainly to high parts usage on TomoTherapy system in Japan.

Accuray took over service responsible for these TomoTherapy systems in Japan as of July 1 and has begun to retrofit systems as required with our newer more reliable components. We expect this retrofit process will run through the second quarter ending December 31. When complete, this should significantly improve reliability on these systems and reduce service costs.

The gross margin on product revenue was 50.1%, down from 52.6% in the prior year's first quarter, due mainly to the lower level of production, which resulted in higher overhead costs per system. Operating expenses of $45.2 millions in the first quarter were approximately unchanged from $44.7 million in the prior year's first quarter, but down significantly from $51.6 million in the immediately preceding fourth quarter. The reductions were across all functions andrelate to our efforts to control expenses as well as the timing of certain activities.

In the second quarter of fiscal 2013, we expect operating expenses to increase substantially due to a peak in R&D program activity, significant marketing activity related to the launch of the two new products introduced in October at ASTRO, and costs related to the departure of Accuray's former CEO. Once these activities are completed, we expect operating expenses to trend back towards the level incurred in the first quarter of fiscal 2013.

Our net loss was $16.9 millionor $0.23 per share during the first quarter on a non-GAAP basis,compared to $11.1 million or $0.16 per share during the first quarter of the prior year.

In determining our financial results under GAAP, during the first quarter we recorded a $12.2 million charge to write down the value of intangible assets recorded upon the acquisition of TomoTherapy in June 2011. These intangible assets related to in-process research and development technology created by CPAC, a company invested in by TomoTherapy and accounted for a variable interest entity. The impact of this write-down is excluded from our non-GAAP results.

And now I would like to turn the call back over to Josh.

Thanks, Derek. I want to take a few minutes and discuss the progress that I'm making on my strategic and operational review of the business. I've been spending considerable time looking at the business from an outside-in approach, gaining important inputs from customer interaction, plus ongoing exposure to a broad range of internal and external information sources. In addition to spending time with our customers, I'm having valuable conversations with thought leaders, provider organizations and our employees. The scope of my review is on both strategic and operational elements and is generating significant insights about all aspects of our business and our industry.

Some early observations are that Accuray enjoys a strong and positive reputation for outstanding technology invasion. A primary element of our strategy will be to translate our differentiated technological features into customer benefits, both clinically and economically. Going forward you can expect us to be a more customer driven and focused organization. We will prioritize creating value for our customers, which will be driven by our ability to link our outstanding technology more effectively for to customers' unmet needs.

Simply put, we will place greater value on strategic marketing, with emphasize on driving customer value, and become a more aggressive and formidable competitor. During this period, I realize that the investment community has many questions regarding our forecast and financial guidance, with an understandable desire for greater insight into how I see the business evolving.

Rather than rush into quick judgements about the business, I believe I owe it to our shareholders, employees and customers to be thoughtful in my assessments. At the end of this review period, I look forward to providing guidance on our strategic agenda and associated financial metrics. Until then, I'm ask for your continues patience. And we will now be happy to take your questions.

(Operator Instructions) Our first will come from the line Steve Beuchaw, Morgan Stanley.

Hi, good afternoon. Thanks for taking the question.

Hi, Steve.

I wonder if you guys could clarify just on the orders in the quarter if there was any contribution, perhaps outside the United States, of the new products, and if so could you mention that contribution so far?

So we obviously did not receive approval for the new CyberKnife model, so there were no orders taken from that. There were some discussions with customers, but those will be mainly impacting orders we think going forward.

And then on the trajectory of growth over the course of the year, Josh, I understand you don't want to go into a tremendous amount of depth into what the impact was, but I think you are pretty clear on the prior quarter that what we would see in the first quarter in terms of orders would reflect some sort of drag associated with the uncertainty ahead of ASTRO as customers are wrestling with the lack of detail around what these new systems may look like. So all that said, is it still the right way to think of this year as the year of accelerating order trends? And is the growth that we saw in the order trend here in the first quarter a logical proxy for the balance of the year? Thanks.

Steve, I listened -- obviously before I joined the Company, I listened to the guidance and the specific dialog and the discussions in the year end earnings release, and I think Derek at the time as well as my predecessor talked about tough -- what were tough year on year comps when you looked at first quarter this year verses first quarter prior year. And I -- obviously I think that was accurate, and it was reflective of the reality that we had experienced coming out of the TomoTherapy acquisition, given their backlog and their pipeline.

As Derek alluded to, we did not receive US FDA 510k approval to ASTRO, and we didn't actually even have it at the show. We missed it just by a couple of days actually, but -- so we weren't able to be very expansive or aggressive, if you want to describe it that way, in our efforts on a pure selling basis or direct selling basis at the show. I think we -- certainly from a product highlight and feature standpoint, we gave people a pretty good sense about the significant leap in capabilities that the new system on the CyberKnife side, on the new system that it represented.

And we are pleased with what we saw in terms of order growth this quarter. The plan that was communicated as it relates to fiscal 13 guidance, I won't be commenting on, either reaffirming or suggesting changes in any way for reasons that I have already gone into with regards to my business assessment, strategically and operationally. But I think the way -- just from a flow standpoint, the way that it's been described, the year looks like it's -- and I would say again, based on what was communicated in the prior quarter, it looks like the year is -- the revenue growth and the order growth is certainly more heavily skewed to the back half of the year.

I think that's still a reasonable assumption in terms of flow. But -- and again, I think we're looking at what we generated in order growth this quarter, I think we feel pretty good about that. From a -- is it a proxy perspective for going forward? I think it is probably right now too early for me to answer the question a week outside -- or a week after ASTRO in terms linking the pieces.

Okay, I appreciate the commentary. Thanks, guys. Have a good night.

Thanks Steve.

The next question comes from the line of [Jason White], [Breen Capital].

Hi, thanks for taking my questions. Just a tack on to that, youmentioned I think you said 33% more interest out of ASTRO than last year. I assume that's the new products. Can I get a sense of how long that would take to translate into true orders?

And secondly, I believe that you had mentioned last quarter that the new systems would be available for upgrade, so if you were in the backlog you could upgrade the systems? Is that still the case, and what kind of interest did you get from ASTRO to make you related to that?

Let's -- Jason, thank you for the question. We'll -- Derrick and I will kind of split this. Let me answer the latter part of your question first, which is the upgradeability. The -- as far as the CyberKnife M6, that really should be thought of a completely new platform. And as such, upgradeability of that for existing CyberKnife customers, there really isn't a upgradeability capability there.

What about those in backlog? Sorry to interrupt.

We will be allowing customers and engaging customers in conversation about -- those in the backlog -- about upgrading to the M6 going forward, so the answer is yes.

Okay, thank you.

Jason, also, in terms of the time for a new order, the normal cycle, if you will -- and normal is really a tough word. It depends on where the customer is, and what their status is. If it is a large governmental institution, you may be looking at a multiyear budgeting cycle. If it is a private institution, they may be able to react quicker.

But you would normally see at least a year cycle expressing a first interest to placing an order. That being said, there is a pipeline of customers who have been in the process of learning about the TomoTherapy system or the CyberKnife system, and the new technologies would only make it more attractive for them. So to the extent those customers are already in the pipeline, there's a strong sense that they would be looking at the new systems.

Okay, and just one quick follow up, and that is, in terms of pricing, I guess my understanding from ASTRO was there's three levels for both the new Tomo platform and the new CyberKnife platform, and they start at about $0.5 million-plus from the old systems. Is that the right way to think about it.

The three platforms in each of the two product lines are designed to provide different price entry points and different feature sets. So -- and there is expected to be some significant range in that price. I think that you can think of the top end system being significantly more than the prior systems that existed, but at the lower end we would try and have systems that would be price competitive as need be with customers who may be are in markets were they don't want all the features.

Great, thank you guys.

Your next line comes from the line of Anthony Petrone, Jefferies.

Thanks, gentlemen. I'm going to have a couple on CyberKnife and a couple on Tomo. Derek, if you can clarify the 12% decline in CyberKnife orders on the quarter?I know last quarter we spoke about that, and there was a potential that at least some of that could be related to the anticipation of new launch at ASTRO. And then obviously we had some reimbursement uncertainty. So I don't know to what extent you could look at that number and credit some of that decline to the anticipation at ASTRO, and perhaps some hesitation due to the reimbursement proposal that was out in June ahead of the final announcement that we had a few weeks ago.

I don't think we actually talked about the break out of the orders betweenthe two product lines, Anthony. In terms of the orders, I did indicate that the order growth was driven by TomoTherapy. So to the extent that implies that the CyberKnife order growth wasn't driving it, that's an accurate statement.

As far as the CyberKnife growth and why, I think that there was probably an anticipation of a new CyberKnife technology, perhaps being more of an advance than perhaps they were anticipating with the TomoTherapy technology. But I guess that would be my only comment.

Sure. And I was just referring to the commentary in the press release, the 12% decline in CyberKnife orders. The next question would be just overall the on strategy, the pricing strategy, just to follow up there. Accuray has typically been at the higher end of the market in terms of pricing. It sounds like that will be the case for the new systems. I am just wondering, Josh, with you coming onboard, how you view pricing as a strategy? In other words, will you continue to want to be at the very high ends of the market, or will there be some flexibility in pricing going forward?

So, Anthony, I think if I just refer back to the one of the previous questions that Derek answered, when you think about the information that we presented at the investor conference at the show, there's a range -- call it base model and then add on features from there, in both the TomoTherapy H Series and CyberKnife. And it really is at the -- I'll call it the fully loaded version or the upper end of the range vis-a-vis capabilities and feature set that we are talking about a price point premium type of positioning.

So I think the view that we have is what we have offers us a lot of flexibility. We can flex up in terms of feature set and price. We can flex down or toward the base model end, if you want to describe it that, of either range. And so we -- getting -- capturing price full price for premium features and capabilities and premium feature set in my mind is important, but we recognize right now that we have to grow.

And we have got a balance -- finding the right balance, Anthony, between driving the top line, driving volume, and improving the business's profitability. I think as I shared in the previous comments in Boston, we recognize that we are not getting a hall pass in terms of being able to do one or the other, we are going to have to do a little bit of both. So I would say that we are flexible in our thought processes. I think the product line-ups and the way we are structuring them in terms of feature sets and price sets across the range offer us a lot of flexible, and we want to take advantage of that.

That's helpful --

One thing, Anthony, just as a follow up point stand on what Josh said. In terms of pricing, we are clearly trying to recognize the value of the new technologies we are bringing to the market. We are also conscious of the balance between price and volume. And so the goal was really to maximize up our gross profit, not necessarily gross profit margin. So I think that you should look at this as an opportunity for us with the new technologies to potentially increase our volume, andthere by get more profit dollars, but not necessarily improve the gross profit margin.

That's all very helpful. My last one and I'll get back in queue. Derek, can you provide a update on how many of the Tomo users have converted to a Diamond Plus service contract? Thanks again.

The conversion at this point is in the 35% to 40% range atthis point.

Thanks.

Your next question comes from the line of Charles Croson, Sidoti & Company.

Hi, guys thank you for taking the questions. Sorry if I repeat some stuff. I got in a bit late from jury duty, but again, thanks for taking the question. First one I got here real quick, to Derek, just kind of teasing out a little bit more about that the growth in orders you guys might expect over the next few quarters. You said that typically even though these are new -- the new technologies or the new systems I should say, somewhat -- it probably wouldn't be as difficult for newer customers to understand the upgrades as opposed to just coming on to getting involved in the system.

Would that suggest, though, that since it's would take anywhere from a year for them to commit to giving a purchase order, would that suggest then that maybe we would expect the growth and purchase orders to take place more towards the back half of the year? Just trying to tease that out a little bit more, if you could comment on that. Thanks.

So we do have significant pipeline of customers that we are working on all the time, and I think those customers who are at various stages in their evaluation process, there may be some slight interruption as they evaluate the new technologies, so that could cause some delay. But I think on -- in general, we would expect that the customers that are in the evaluation process will be able to see the benefit of the new technologies. There will be potentially some delay if they choose to move to one of the higher level offerings that behave now, where they might have to go back to some finance committee to get approval for a higher purchase price. I think certainly as time goes on, those steps would all be within the time frame once we get to the latter part of this year.

Okay, that's helpful and clarifies that. And then if I can ask on the sales force restructuring had the previous quarter, can you go back into that a little bit? I know you are trying to model that more on the international distributor model. Can you go on how that has been going and what might to need still to be done for the rest of the year?

So the sales force restructuring I think you are referring to is the US sales force team. Essentially we -- as you remember we restructured the team into four-man teams from two-manteams and went from ten to five regions in anattempt to make sure that each region had the compendium of both selling product -- selling skills, technical demonstration skills, new client or new customer pursuit skills, as well as deal closing skills. That's the four different players.

And that organization became fully staffed sometime during the summer. And so we're now a month probably having it fully staffed. I think that the evaluation of that and the progress their are making will take some time, the team is certainly -- we are focusing on that team and making sure that team gets the appropriate attention to try and make sure that team brings the capabilities that they need to the marketplace.

As far as that team, it was similar if you will to some of the structures we had in some of the foreign countries where because of the nature of the members we had, implicitly we ended up with the right mixtures more regularly in some of the international markets than we did in the US.

Okay --

Charles, this is Josh. Let me expand a little bit on what Derek just said. A couple of points I think are worthy of note. One is that when you look at the structure of the US sales organization and the mix of skills that Derek highlighted in each one of those four-man -- I'll call them pods if you want to think of them in that way. A lot of that -- the bulk of that, quite frankly, the thought process was motivated by the two new systems and technology platforms that we launched at ASTRO. We thought that -- quite frankly that skill set and that range of skill sets lined up best with what the new products were going to require in terms of, quite frankly, just driving growth.

So that's one point I think I'd highlight. The other one is, this is a -- as you might imagine, given what we have said now over the course of the last three weeks, or3.5 weeks that I have been here, we are going to transition, and I would suggestion are already transitioning, to being a substantially more customer-focused market-driven company. Culturally, internally here at Accuray and in our field sales organization.

From a marketing standpoint, from a field commercial organization standpoint, these are areas that while I'm not an expert today on Accuray's business and on the technical aspects of our products, these are areas that from a career and experienced standpoint, I am highly comfortable in and comfortable with, and they are going to get a lot -- quite frankly, a lot of my personal attention going forward. We have a terrific Chief Commercial Office in Kelly Londy. I think she has built a great team, and we have -- they are trained. They are going to continue to get trained. And we -- I think we are going to be fine with the organization that we have.

Again, it's probably too early today -- as Derek described before, too early today to draw definitive assessments about specific people or specific areas of the country and how they are doing, but in general, I have a lot of interaction with this group at ASTRO, spend a lot of time with them in the booth. Spent, quite frankly, a lot of time with them outside of the booth. And I think that -- I was -- quite frankly, I was very impressed, and I know that's a short study, window if you want to describe it that way, butI'm pretty confidence that we've got the team that can carry us forward and drive the kind of growth we are looking for.

Okay, Derek and both Josh, thank you so much for the detailed answers there. I will hop back in the queue the. Thank you again.

I just wanted to add one other comment. It was an answer that I made, and I wanted to clarify to Anthony earlier. The portion of TomoTherapy customers that have moved to the new contracts covered both the Emerald and Diamond contracts when I said the 35% to 40%. I think there may have been some misclarification that it was just Diamond. Both Diamond and Emerald.

Deanna?

There is no more questions at this time. This concludes the question and answer portion for today. I will now turn the call back to Josh Lavine for closing remarks.

We want to thank you for joining us on this afternoon's call. I would like to acknowledge Accuray's employees globally for their continued dedication to improving the lives of cancer patients worldwide, and we look forward to speaking with you on our next call. Thank you very much.

And thank you again, ladies and gentlemen, for your participation. This concludes today's conference. You may now disconnect, and have a great day.