Accuray Incorporated — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended September 30, 2013. Comparisons are with the three months ended September 30, 2012, unless otherwise noted. Accuray designs and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems and related services.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Product revenue | $29.6 million | $40.6 million | Down 27% |
| Service revenue | $47.1 million | $42.1 million | Up 12% |
| Total revenue | $76.6 million | $82.7 million | Down 7% |
| Gross profit / margin | $26.5 million / 34.5% | $23.7 million / 28.6% | Margin up 5.9 percentage points |
| Operating expenses | $38.8 million | $44.3 million | Down 13% |
| Operating loss | $(12.3) million | $(20.6) million | Loss narrowed |
| Net loss attributable to stockholders | $(15.5) million | $(24.1) million | Loss narrowed |
| Net loss per share, diluted | $(0.21) | $(0.34) | Improved |
| Cash used in operating activities | $(11.3) million | $(13.2) million | Use decreased |
Product revenue fell primarily because fewer systems were recognized (13 versus 15), upgrade revenue declined, and more sales had extended payment terms that defer revenue until payment. Service revenue rose with the installed base, higher-priced maintenance contracts, installation work and spare-parts sales. The gross-margin improvement was driven by higher service margins, including improved TomoTherapy reliability; lower product margins, mainly from mix, partly offset the gain. The prior-year net loss included $14.3 million of discontinued-operation losses, including a $12.2 million CPAC intangible-asset impairment; the current quarter had no discontinued-operation loss.
Liquidity, balance sheet and debt
- At September 30, 2013, cash and cash equivalents were $62.4 million and short-term investments were $99.2 million, totaling $161.6 million. About $42 million of cash was held at foreign subsidiaries and considered indefinitely reinvested.
- Current assets were $334.2 million and current liabilities were $162.8 million. Inventory was $88.0 million, up from $81.6 million at June 30, 2013.
- Long-term debt carrying value was $199.9 million. The notes’ aggregate principal was $215 million: $100 million of 3.75% convertible notes due August 2016 and $115 million of 3.50% convertible notes due February 2018. Interest expense on the notes was $3.4 million for the quarter.
- Cash and cash equivalents decreased by $10.9 million during the quarter. Investing activities used $1.5 million, including $3.2 million of capital expenditures; financing provided $0.6 million.
- Accumulated deficit was $335.2 million. Product backlog was $347.8 million at September 30, 2013, compared with $294.3 million a year earlier; backlog is not assurance of future revenue.
Outlook, commentary and risks
- Management expected cash use for the balance of fiscal 2014, primarily from operating losses and capital expenditures, but stated that available resources and anticipated cash flows were sufficient to fund operations for at least 12 months. No specific revenue or earnings guidance was provided.
- Accuray expected service revenue to continue increasing as its installed base grows. Management cited cost-control initiatives and reorganization as drivers of lower research and development costs, and cost controls as a driver of lower general and administrative costs.
- The CyberKnife M6 multi-leaf collimator (MLC) faced supplier low yields and durability shortcomings in initial units. Management expected a limited release in June 2014, but warned that project complexity could cause further delays. M6 systems with fixed and iris collimators continued to be booked and installed.
- Other material risks include continued losses, product acceptance and competition, manufacturing and supplier capacity and quality, regulatory compliance, extended-payment customer defaults, foreign-exchange exposure, and reliance on third-party spare-parts logistics. International sales represented 49% of revenue, down from 57% a year earlier.
- Management estimated possible aggregate legal losses, in excess of accrued amounts, of zero to $3 million where estimable. The Best Medical trade-secret case had a summary judgment in Accuray’s favor and a $512,090 fee award, but an appeal remained pending. Other disclosed proceedings included Best Medical patent litigation, Rotary Systems litigation and a Sarif Biomedical patent claim.
- Accuray reduced goodwill and accrued liabilities by $1.3 million after identifying an acquisition-related tax-benefit liability recorded in error; management concluded the error was not material to prior or current periods.
Investor verification priorities
- Track product revenue, system revenue recognition and the effect of extended payment terms on revenue and receivables.
- Verify MLC manufacturing yield, durability, regulatory progress and the timing of the expected June 2014 limited release.
- Monitor operating cash burn, inventory growth, liquidity relative to debt service, and management’s 12-month funding assessment.
- Assess whether higher service revenue and margins can persist and whether product margins recover.
- Review backlog conversion and cancellations, material litigation developments, and any changes to the disclosed legal-loss range.