Accuray Incorporated — Form 10-Q Summary
Business context and reporting period. Accuray designs, sells and services CyberKnife radiosurgery and TomoTherapy radiation therapy systems. This filing covers the three months ended September 30, 2014, the first quarter of fiscal 2015; comparisons are with the same quarter of fiscal 2014 unless noted. Financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Product revenue | $33.0 million | $29.6 million |
| Service revenue | $49.4 million | $47.1 million |
| Total revenue | $82.4 million | $76.6 million |
| Gross profit / margin | $27.8 million / 33.7% | $26.5 million / 34.5% |
| Operating loss | $15.3 million | $12.3 million |
| Net loss / diluted loss per share | $21.7 million / $0.28 | $15.5 million / $0.21 |
| Cash used in operations | $14.7 million | $11.3 million |
- Revenue increased 7%; product revenue rose 12% and services 5%. Product units recognized in revenue increased 8%.
- Gross profit increased 5%, but gross margin declined about 0.8 percentage point. Service gross margin fell 2 points, which management attributed mainly to foreign exchange and higher field-service personnel costs.
- Operating expenses rose 11% to $43.1 million, including a 24% increase in selling and marketing and a 9% increase in R&D. Net other expense increased to $5.5 million from $2.5 million, chiefly due to $2.1 million of higher foreign-currency translation expense and $0.7 million of additional noncash interest expense. Interest expense on convertible notes was $4.1 million.
- At September 30, cash and cash equivalents were $107.3 million and short-term investments were $45.4 million, totaling $152.7 million. Current assets were $335.8 million and current liabilities $164.9 million.
- Long-term debt carrying value was $197.4 million; the notes’ aggregate principal was $215.0 million. Accumulated deficit was $376.7 million. Total liabilities were $379.1 million.
- Investing activities provided $31.0 million, primarily from net sales and maturities of investments. Cash increased $14.9 million during the quarter, including a negative $3.3 million currency effect.
Material changes and operating trends
- Product revenue growth reflected more systems sold and a higher average selling price from product mix; upgrade revenue also increased. Service growth reflected a larger installed base and customer conversion to higher-priced maintenance contracts.
- Product backlog was $364.0 million, slightly below $364.7 million at June 30, 2014, but above $347.8 million a year earlier. Gross orders were $58.8 million versus $63.4 million; net orders were $32.3 million versus $60.1 million.
- Age-outs and cancellations totaled $20.4 million, compared with $3.3 million a year earlier; negative foreign-currency effects reduced gross orders by $6.1 million. Backlog is not a GAAP measure and does not assure future revenue.
- Cash used in operations increased year over year. The quarter included a $13.1 million inventory increase to support expected sales and a $13.2 million decrease in accrued liabilities, primarily from payment of prior-period bonuses.
- Compared with June 30, cash and investments together increased from $171.9 million to $152.7 million? The filing reports the two balances separately: combined liquidity was $171.9 million at June 30 and $152.7 million at September 30, a decrease of $19.2 million. Cash alone increased as investments matured or were sold.
Outlook, management commentary and risks
- Management stated that current cash, investments and expected cash flows should fund operations for at least the next 12 months. About $60.2 million of cash and cash equivalents was held at foreign subsidiaries and considered indefinitely reinvested.
- Management expected age-outs in Q2 FY2015 to remain comparable to Q1 levels, with age-outs from Q4 expected to return to levels comparable to the FY2014 quarterly average. Process improvements may reduce age-outs over time, but management cautioned they may not have the intended effect. No numerical revenue or earnings guidance was provided.
- The CyberKnife M6 multi-leaf collimator (MLC) had experienced supplier yield and durability problems, delaying its launch. Internal testing was completed to management’s satisfaction and field evaluation had begun; further delays remained possible. Backlog included $37.6 million of MLC-related orders and $29.2 million of CyberKnife orders with an M6 upgrade option contingent on regulatory approval.
- Key business risks include extended sales, construction and installation cycles; customer cancellations and backlog age-outs; regulatory and reimbursement changes; foreign-currency exposure; dependence on some single-source components; and the company’s history of losses. Management warned that additional financing, if needed, might not be available on acceptable terms.
- Convertible notes carry a combined $215.0 million principal amount, with maturities in 2016 and 2018 and potential cash, stock or mixed settlement features. Management identified leverage as a risk to financial flexibility and future cash flows.
- Legal matters include the Rotary Systems appeal, for which a decision was anticipated by year-end 2014; Sarif Biomedical patent litigation, with trial scheduled for April 2016; and Cowealth arbitration, with a hearing set for January 2015. Management estimated possible losses in certain proceedings, beyond accrued amounts, at zero to $0.5 million in aggregate where estimable; outcomes remain uncertain.
- The company reported no material changes in contractual obligations outside the ordinary course and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of September 30, 2014.
Important facts for investors to verify
- Whether backlog converts to revenue, particularly given elevated age-outs and cancellations, and how order intake develops.
- Whether the MLC completes field evaluation and receives required regulatory approvals without further delay, and the effect on related orders.
- Whether operating cash burn and losses improve, and whether management’s stated 12-month liquidity outlook remains supported by cash flows and available liquidity.
- The implications of $215.0 million in convertible-note principal, including interest, maturity, settlement choices and possible dilution.
- Developments in the Rotary Systems, Sarif Biomedical and Cowealth matters, including any change in estimated exposure.
- The effect of foreign-exchange movements on earnings, backlog and liquidity, and whether service-margin pressure persists.