Accuray Incorporated — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017 (Accuray fiscal 2018 first quarter); unaudited. Comparisons are with the three months ended September 30, 2016 unless otherwise noted. Accuray develops, sells, and supports CyberKnife and TomoTherapy/Radixact radiation therapy systems and related services.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $91.0 million | $86.5 million | Up 5% |
| Product revenue | $38.9 million | $35.6 million | Up 9% |
| Service revenue | $52.0 million | $50.9 million | Up 2% |
| Gross profit / margin | $38.1 million / 42% | $31.3 million / 36% | Margin up 6 percentage points |
| Operating loss | $(2.1) million | $(6.5) million | Improved $4.5 million |
| Net loss | $(9.4) million | $(9.9) million | Improved $0.5 million |
| Net loss per share | $(0.11) | $(0.12) | Improved $0.01 |
| Operating cash flow | $(13.0) million | $(6.8) million | Cash use increased $6.3 million |
Product gross margin rose to 43% from 34%, aided by a greater share of CyberKnife sales and the nonrecurrence of the quarterly $2.0 million TomoTherapy intangible-amortization charge, which was fully amortized in FY2017. Service gross margin increased to 41% from 38%, primarily on installed-base growth. Research and development expense increased 15% to $14.1 million, primarily reflecting product-roadmap hiring and consulting.
Financial position, liquidity, and debt
- At September 30, 2017, cash and cash equivalents were $67.9 million, short-term investments were $23.9 million, and restricted cash totaled $2.9 million. Cash, cash equivalents, and restricted cash declined $14.4 million during the quarter.
- Total debt carrying value was $158.0 million, versus $164.6 million at June 30, 2017. Current debt was $39.2 million and long-term debt was $118.9 million. Total liabilities were $345.3 million; stockholders’ equity was $48.6 million.
- In August 2017, Accuray issued $85.0 million of 3.75% convertible notes due 2022 through an exchange and cash offering, and exchanged or repurchased existing 3.50% notes due 2018. The transaction extended approximately $75.0 million of principal obligations to a later period and generated a $3.2 million debt-extinguishment loss.
- The company had a $52.0 million revolving credit facility, with potential increases subject to conditions. It reported compliance with facility covenants at quarter-end.
- Management believed available cash, investments, and anticipated cash flows would fund operations for at least the next 12 months. Approximately $59.5 million of cash and cash equivalents was held by foreign subsidiaries and intended to be permanently reinvested; repatriation could entail taxes.
Changes, outlook, and risks
- Revenue growth reflected higher system revenue, particularly in Europe, partly offset by lower Asia-Pacific system revenue. Service growth reflected the installed base and parts revenue. Revenue outside the Americas represented 60% of total, compared with 53% a year earlier.
- Gross orders were $55.6 million and net orders were $51.0 million. Product backlog increased to $465.0 million from $452.8 million at June 30, 2017. Management cautioned that backlog is not a reliable predictor of future revenue and can be affected by cancellations, age-outs, customer-site readiness, funding, regulatory approvals, and foreign exchange.
- Operating cash use increased, primarily due to an $8.8 million inventory build to support anticipated shipments and an $11.7 million decrease in accrued liabilities, including compensation-related items.
- Other expense increased to $6.6 million, primarily because of the $3.2 million debt-extinguishment loss. The prior-year quarter included a tax benefit related to completion of Swiss tax audits; the current quarter recorded tax expense of $0.8 million.
- No specific revenue or earnings guidance was provided. Management identified product adoption, clinical evidence, regulatory approvals, reimbursement, competition, and execution as factors affecting future performance. The company warned of quarterly volatility, long sales and installation cycles, margin pressure, leverage and financing risks, and foreign-currency exposure.
- Accuray planned to adopt the new revenue-recognition standard in fiscal 2019 using the modified retrospective method. Its preliminary assessment anticipated possible acceleration of some product revenue upon delivery, deferral of an installation element until performed, and capitalization of incremental contract-acquisition costs; it did not then expect a significant overall financial-statement impact.
- Management reported no probable and estimable losses from current litigation, no material change in risk factors other than those described in the filing, and no off-balance-sheet arrangements. Disclosure controls were judged effective as of September 30, 2017.
Important facts for investors to verify
- Whether the higher backlog converts to recognized revenue on schedule, given customer installation readiness, cancellations, age-outs, and regulatory or funding delays.
- Whether operating cash use moderates after the inventory build and accrued-liability payments, and whether the stated 12-month liquidity outlook remains supportable.
- The repayment or settlement plan for the remaining 3.50% notes due February 2018, and the borrowing-base availability and covenant requirements under the revolving facility.
- Whether improved product and service margins persist, including the effects of product mix, manufacturing costs, and the absence of prior-year intangible amortization.
- Potential dilution or cash settlement obligations from convertible notes, along with foreign-currency, reimbursement, supplier, and customer-credit risks.