Accuray Incorporated — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended December 31, 2017. Financial statements are unaudited. Accuray develops and sells CyberKnife, TomoTherapy and Radixact radiation therapy systems, related software, and support services.
Financial performance
Amounts in $ millions, except per-share data and percentages.
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $100.3 | $87.5 | $191.3 | $174.0 |
| Product revenue | $47.1 | $35.4 | $86.0 | $71.0 |
| Service revenue | $53.2 | $52.1 | $105.3 | $103.0 |
| Gross profit / margin | $39.4 / 39.2% | $31.4 / 35.9% | $77.5 / 40.5% | $62.7 / 36.0% |
| Operating loss | $(1.0) | $(4.8) | $(3.1) | $(11.4) |
| Net loss | $(4.7) | $(9.4) | $(14.1) | $(19.3) |
| Basic and diluted loss per share | $(0.06) | $(0.11) | $(0.17) | $(0.24) |
| Cash used in operating activities | — | — | $(13.7) | $(11.0) |
Gross margins above are calculated from reported revenue and gross profit. Q2 operating expenses were $40.4 million, up from $36.2 million; R&D rose 23% to $14.7 million, while selling and marketing was essentially flat at $13.9 million and G&A increased 14% to $11.8 million. Six-month other expense increased to $10.3 million, including a $3.2 million debt-extinguishment loss.
Liquidity, debt and cash flow
- At December 31, cash and cash equivalents were $79.5 million and short-term investments were $24.5 million, or $104.0 million combined. Including restricted cash, cash, cash equivalents and restricted cash totaled $82.2 million.
- Six-month operating cash outflow was $13.7 million. Working-capital uses included $11.8 million of inventory growth and a $10.2 million increase in receivables, partly reflecting anticipated shipments and collection timing. Investing activities used $1.9 million; financing activities provided $11.7 million.
- Debt carrying value was $169.9 million ($39.5 million current and $130.4 million long-term). It included $85.0 million principal of 3.75% convertible notes, $40.0 million term-loan principal and $25.0 million drawn on the revolving facility, as well as notes due in February 2018.
- In December 2017, the company obtained a $40.0 million term loan, with a potential additional $20.0 million tranche subject to conditions, and amended its revolving facility: maximum availability fell from $52.0 million to $32.0 million and maturity was extended to December 2022. The term loan bears interest at 6.75% plus 90-day LIBOR; the revolving facility at 4.50% plus 90-day LIBOR. The company reported covenant compliance at quarter-end.
- After quarter-end, Accuray sold investments for $23.9 million in January 2018 and paid off the $13.0 million 3.50% notes and $26.6 million Series A notes at maturity on February 1, 2018, plus accrued interest. The company stated that available liquidity and expected cash flows should fund operations for at least 12 months.
Material changes and operating trends
- Q2 revenue increased 15% year over year, mainly from product revenue, which rose 33%. Management attributed the product growth to Radixact sales and improved backlog conversion in Europe and Asia-Pacific. Service revenue increased 2%.
- Q2 gross profit rose 25%, with product volume and unit mix contributing to higher product gross margin. Comparisons also benefited because TomoTherapy acquisition-related intangible amortization had been fully amortized in FY2017. Six-month gross profit increased 23%, partly offset by higher inventory reserves.
- Revenue outside the Americas represented 62% of Q2 revenue, compared with 55% a year earlier. For the six months, the share was 61%, versus 54%.
- Product backlog was $470.5 million at December 31, compared with $426.2 million a year earlier and $452.8 million at June 30, 2017. Six-month net orders increased to $103.7 million from $91.3 million; Q2 net orders declined to $52.6 million from $54.1 million. Backlog is not a GAAP measure or a guarantee of future revenue; cancellations, age-outs and currency movements can affect conversion.
- Six-month R&D spending increased 19%, primarily due to additional product-development headcount and consulting. The company reported a $464.5 million accumulated deficit and cautioned that it may continue to incur losses.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management’s liquidity outlook is based on its current business plan and revenue prospects and is subject to uncertainty.
- Key risks include continued losses and the ability to sustain margins, quarter-to-quarter volatility, long sales and installation cycles, backlog cancellations or age-outs, customer financing and collection risk, competition, regulatory approvals and reimbursement, and foreign-exchange exposure.
- Credit agreements impose financial covenants and restrictions on additional debt, liens, distributions and other activities. A covenant breach could accelerate debt and expose pledged assets to foreclosure. The company also identifies potential need for additional financing, which may be unavailable or dilutive.
- The Tax Cuts and Jobs Act was enacted in December 2017. Accuray expected no material transition-tax impact based on its preliminary assessment, but said it would continue evaluating the law. It maintained a full valuation allowance on U.S. deferred tax assets; gross deferred tax assets were expected to be remeasured from approximately $174 million to $117 million, offset by a corresponding valuation-allowance decrease.
- Management reported no probable and estimable losses related to litigation and no liability for software-license indemnities. It noted legal outcomes remain inherently uncertain. Annual goodwill testing found no impairment.
Most important facts for investors to verify
- Whether the improved product revenue and gross margins persist, and whether Radixact demand offsets weaker CyberKnife order trends.
- Backlog conversion, including cancellations, aging orders, installation delays and foreign-currency adjustments.
- Operating cash use and collection of receivables, alongside inventory levels and the company’s stated 12-month liquidity assessment.
- Post-quarter repayment of the February 2018 notes, remaining debt and interest burden, and ongoing compliance with credit-facility covenants.
- The final tax effects of the Tax Act and any material developments in litigation or other contingencies.