Accuray Incorporated — Form 10-Q Summary
Business and period: Accuray develops and sells CyberKnife radiosurgery and TomoTherapy radiation therapy systems, related services and software. This unaudited report covers the three and six months ended December 31, 2013 (fiscal Q2 and first half of fiscal 2014); comparisons are with the periods ended December 31, 2012. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $93.6, up 20% year over year | $170.3, up 6% |
| Product revenue | $45.1, up 36% | $74.7, up 1% |
| Services revenue | $48.5, up 9% | $95.6, up 10% |
| Gross profit / margin | $38.2 / 41%, versus $26.6 / 34% | $64.6 / 38%, versus $50.3 / 31% |
| Operating loss | $(0.7), versus $(22.3) | $(13.0), versus $(42.9) |
| Net loss attributable to stockholders | $(5.4), or $(0.07) per share; prior year $(29.2), or $(0.40) per share | $(21.0), or $(0.28) per share; prior year $(53.3), or $(0.74) per share |
Services gross margin improved to 37% for Q2 and 35% for the first half, principally reflecting greater TomoTherapy reliability, a larger installed base and service-contract mix. Product gross margin was 45% in Q2 and 42% for the first half. Operating expenses declined year over year, notably research and development and general and administrative costs. Other expense rose, mainly because of interest on the 3.50% convertible notes issued in February 2013. Prior-period net losses included discontinued CPAC operations, deconsolidation and impairment charges; therefore, the net-loss comparison is not solely a measure of continuing-business improvement.
For Q2, Accuray recognized product revenue on 18 systems versus 11 a year earlier; for the first half, 31 versus 27. Q2 product growth reflected higher unit volume and upgrade revenue, partly offset by lower average selling prices from product and channel mix. Service growth reflected installed-base expansion and customer conversion to higher-priced maintenance contracts.
- Cash flow: First-half operating cash use was $12.9, improved from $41.8 used in the prior-year period. Investing activities provided $4.4, including $22.8 of investment sales and maturities offset by purchases of investments and $6.9 of capital expenditures. Financing provided $3.9. Cash and cash equivalents decreased $2.9 to $70.4.
- Liquidity: Cash and cash equivalents plus short-term investments totaled $159.6 at December 31, 2013, versus $174.4 at June 30, 2013. Current assets were $350.4 and current liabilities $174.2 (about 2.0 times current-liability coverage). Approximately $62.0 of cash was held at foreign subsidiaries and considered indefinitely reinvested.
- Debt and equity: Convertible-note debt had a $201.1 carrying value ($215.0 aggregate principal) and matures in 2016 and 2018. The notes carry coupons of 3.75% and 3.50%, respectively, and include conversion and specified repurchase provisions. Accumulated deficit was $340.6; stockholders’ equity was $95.2.
- Working capital indicators: Receivables rose to $73.8 from $55.5 and inventories to $88.2 from $81.6 since June 30. Deferred revenue was $96.5 current, and customer advances were $21.2.
Material changes, outlook and risks
- Product backlog was $362.0 at December 31, 2013, compared with $279.0 a year earlier. It included $32.2 of orders for CyberKnife M6 systems configured with an MLC or MLC upgrades. Backlog is not guaranteed to convert to revenue; customer, regulatory, reimbursement and cancellation factors may affect timing or realization.
- The MLC option for CyberKnife M6 had manufacturing-yield and durability problems, limiting available units. Management expected a limited release in June 2014 following supply-chain and quality-control changes, while noting the possibility of further delay. Accuray continued to book and install M6 systems with fixed and iris collimators.
- Management stated that current cash, investments and anticipated cash flows were expected to fund operations for at least 12 months. The company remained loss-making, and future profitability depends on sales, cost control and successful execution of its product plans. No specific revenue or earnings guidance was provided in the filing.
- Key business risks include MLC execution and supply, achieving profitability, reliance on successful sales of CyberKnife and TomoTherapy systems, foreign-currency exposure, customer payment risk, and dependence on single-source suppliers for certain components. International sales represented 63% of Q2 revenue and 57% of first-half revenue.
- Management estimated a possible aggregate loss range of zero to $2.0, in excess of accrued amounts, for certain legal matters where estimation was possible. Accuray prevailed in the Rotary Systems trade-secret case, but the plaintiff appealed. Best Medical litigation also remained active, including appeals and a separate patent matter; outcomes are uncertain.
- Management reported effective disclosure controls as of December 31, 2013 and no material change in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the MLC release met the expected June 2014 timing and quality, yield and durability requirements, and how any delay affected orders, installations and revenue.
- Whether backlog converts into recognized revenue, particularly the MLC-related orders and orders subject to regulatory or customer conditions.
- Whether improved service margins and lower operating costs are sustainable, and whether revenue growth can lead to profitability and positive operating cash flow.
- Receivables, inventory and deferred revenue trends, including the concentration of 12% of receivables with one customer and the impact of extended payment terms.
- Debt service, conversion and refinancing exposure under the $215.0 aggregate principal of convertible notes, and the availability of cash held overseas.
- Developments in the Best Medical, Rotary Systems and Sarif Biomedical proceedings and any resulting financial exposure.