Accuray Incorporated (ARAY) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to the Accuray Second Quarter Fiscal 2021 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ken Mobeck, Vice President of Finance at Accuray. Please, go ahead.
Ken Mobeck: Thank you, Gary, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the second quarter of fiscal year 2021, which ended December 31, 2020. During our call this afternoon, management will review recent corporate developments.
Josh Levine: Thanks, Ken, and thanks to everyone joining us on today's call. Accuray's fiscal 2021 second quarter performance continues to reflect the positive momentum our business is making, despite the headwinds created by the COVID-19 environment. Highlights from our second quarter performance include: the beginning of system revenue conversion related to the China Type A licenses awarded to Accuray Systems, receiving 510(k) approval for ClearRT, our Helical kVCT imaging on Radixact and the continued adoption of our latest innovations like Synchrony, real-time motion tracking and delivery adaptation on Radixact and our latest generation CyberKnife S7 system. Revenue for the quarter came in at $97.5 million, which included approximately $21 million of China-related system revenue. The bulk of the China-related system revenue recognized in the second quarter represents the beginning of revenue conversion related to Type A licenses awarded to Accuray Systems in the past 18 months, which have an aggregate estimate value of approximately $150 million.
Shig Hamamatsu: Thank you Josh and good afternoon everyone. I'll begin with some additional details on our financial performance for the second quarter and then focus on certain highlights for the period. Gross orders for the second quarter were $75.4 million as compared to $98.6 million in the prior year. As we generated double-digit gross order growth in the last two fiscal years due to pent-up demand for China Type A system triggered by the initial announcement of Type A quota back in October of 2018, we had anticipated that we would be focusing more on converting existing Type A orders to revenue this fiscal year as the volume of new China orders normalize which is what we saw occur in the second quarter. In addition, we continue to see some headwinds due to the pandemic particularly in the U.S. region which has affected the timing of order placement in the near term. Looking ahead to the third quarter, we expect to see a similar challenging year-over-year comparison for gross orders. The prior year third quarter included $25 million of Type A orders which is expected to be meaningfully lower in the third quarter of this fiscal year for the same reasons I just stated. We also anticipate our gross order volume in the second half of this fiscal year to be weighted more towards the fourth quarter, although we do anticipate a sequential increase in order volume from the second quarter to third quarter.
Operator: We will now begin the question-and-answer session. Our first question comes from Josh Jennings with Cowen. Please go ahead.
Unidentified Analyst: Hi guys. This is actually Neal on for Josh. Thanks for taking our questions. The first question I had was just I guess around ClearRT. Now that it's approved could you maybe just lay out kind of at a high level what the path forward is towards having I guess a broader adaptive therapy solution? And what steps would be to get there?
Suzanne Winter: Sure. Josh, it's Suzanne. Just a little bit about our phased product introduction. We shipped to our clinical site for our Phase 1 part of the introduction. We're getting feedback from our clinical sites then we'll go to a broader introduction in Q4. And we hope to follow-up with CE Mark and Shonin so that we can address broader markets. ClearRT is really going to be the fundamental difference and backbone of any adaptive therapy that will be developed in our innovation pipeline. One of the things we've certainly been watching to take a look at existing adaptive therapies that are out there now and still very -- well a good idea and a good first path at adaptive therapy changes is still is burdensome from a workflow standpoint and also very resource intensive. So, from that standpoint, I think we are happy to be a fast follower here and take a look at what we can improve on the next phase to ensure that it is more clearly adopted by clinicians.
Unidentified Analyst: Great. Thanks for that. Just a second question. Just in terms of the joint venture, the sales force team and leadership that's currently under CIRC, how is that I guess positioned versus the prior distributor sales force in terms of offering the current Type B offerings for ONRAD and TomoH? Our thought is that that would be a stronger effort versus prior but just wanted if you can check that.
Josh Levine: We agree, Neil. So again we're appreciative that the legacy distributor TomoKnife had done a terrific job looking back over the years of positioning our brands. What CIRC as a joint venture partner really brings us is strategic market access in a pretty powerful way. As you've heard us talk about they are a market-leading company in medical ready isotope production and sales and they've got active customer relationships in probably 7,000 or 8,000 hospitals across the country. So they are both a manufacturing partner for us in terms of the on the ground product being produced on the Type B in Tianjin. But they also are we think a very powerful partner in the context of commercial activity, strategic market access and visibility if you will across more than just the major population centers because the big upside here for us when we think about the Type B product is the opportunity that exists in small to medium-sized facilities out in the provinces. And that's where CIRC has an existing strength in terms of market position, customer relationships that will be very valuable in the context of helping us ramp up the Type B product.
Unidentified Analyst: Okay. Thanks. That’s it for me.
Operator: The next question is from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.
Brooks O'Neil: Good afternoon, everyone, and congratulations on what I think is a terrific quarter in light of the challenging conditions.
Josh Levine: Thanks Brooks.
Brooks O'Neil: So I was hoping to just get a little color. Obviously, we see the COVID impact underlying some of the numbers. So if you could just maybe you Suzanne, Josh could walk us around the key markets outside of China in terms of what you're seeing right now? And then specifically I'm curious about the U.S. market and how you see the impact of the pushout of the APM until the start of the next year impacting the business in the next 12 months?
Josh Levine: Yeah. Brooks, it's Josh. I'll take those. So COVID let's just start at home so to speak in terms of the Americas region, primarily being U.S. We're in a different place than we were let's say during the summer or at the end of the summer when hospitals had been locked down for a period of time in some cases an extended period of time and then we're opening back up late summer I'll call it early fall. We have not seen widespread visibility of lockdowns in the U.S. market similar to that existed last year. So I don't think we're at least by visible signs we're not there where we were last year. With that said, it's -- this is -- the intensity of the COVID cases and ICU capacity varies pretty highly from area to area or region to region across the country. And there's -- that variability if you will really makes it difficult to identify in a broad sense painting an outcome or recovery timelines with a single brush so to speak. I think that if -- one thing I can confirm is cancer patients are being treated. You've heard us say before that cancer is not taking a vacation for the coronavirus and that is still very much the case. And we have active patient treatment taking place in our install base throughout the country. And so there's really -- it's a -- I think that it's likely that we will continue to see let's say for the first half of calendar 2021, a slowdown and a continued slowdown in terms of timing or go-slow approach from an order activity standpoint. And I'd say what I just described for the Americas region is reasonably similar in the other developed markets. So I would say, fairly consistently similar with regards to Western Europe, the Eurozone markets primarily. And so I'd say the Americas and EMEA are kind of in that same place. We talked in the prepared remarks about order activity in Japan, which is really showing a remarkably robust I think trajectory or at least backdrop, again given an environment where they're seemingly as challenged with the COVID situation as anywhere else geographically but there are clearly decisions being made there with regards to allocation of resources around capital expenditures et cetera. So we're encouraged by that. The second part of your question, I believe Brooks was around the APM model. And while we're – we understand the reasons behind the delay in implementation for the APM model until January 2022. We don't think it affects longer term, the overall trajectory or the impact that that decision will have on our business. And you've heard us talk about before the fact that the business is coming based on the reimbursement changes. The business is moving in the direction of hypofractionation and ultra hyperfractionated treatment delivery. Our portfolio is getting stronger by the quarter, as you've seen the cadence of our new innovations that we're launching. And we think we're extremely well positioned going forward in the context of the environment that the APM implementation will continue to or impact in a positive sense relative to its impact on us.
Brooks O'Neil: That's great. That's great color. If I could just ask a second probably two-part question I apologize. But can you give us a little more color on the China revenue? How many systems kind of what you expect over the next few quarters on the Type A side? And I know you mentioned the commentary about joint venture production 12 to 18 months out. Do you expect any milestones on the Type B side in the next say 12 months?
Josh Levine: Yes. Okay. So on the quarter we just reported, we took four orders on the order side from the China JV. They were two Type A and two Type B. On the revenue side in the quarter, we booked nine systems, seven were Type A, two were Type B. And of the seven that we – on the revenue side that we booked I think – I know we had CyberKnife and TomoTherapy and Radixact products as well as two TomoH devices on the Type B side. So as we've talked before, it's not as if we don't have anything to sell and respond to the market with regards to Type B today, we've got ONRAD, we've got TomoH. Both are active in the qualification universe if you will of the Type B approved products. So we're continuing to see some activity there. And I would expect that that will continue which will be helpful quite frankly until we're ready to have our Tianjin-produced product coming out of the factory with CIRC in about 18 months.
Brooks O'Neil: Great. Any color on Type B? And what you expect from Type B in terms of orders ramping up or whatever?
Josh Levine: Well I mean, again we're taking Type B orders today with our current product offering. So the products that I mentioned before TomoH and ONRAD are active. They're in the approved products list for Type B. The JV and our dealer network there are actively taking and can take orders for those products and they are doing so. And as you saw in the quarter and it's been fairly consistent over the last year or so or 18 months we're showing – again it's admittedly modest unit volume level but we're not a non-presence if you will in Type B today. We're – and we'll continue I would imagine Brooks at that pace or cadence if you will until we have our own product the China-produced product available in about 18 months.
Brooks O'Neil: Okay. That’s great. Thank you for taking my questions.
Josh Levine: Sure.
Operator: The next question is from Marie Thibault with BTIG. Please go ahead.
Marie Thibault: Hi. Congrats on the strong quarter. I may start with a follow-on to Brook's question about the China revenue. Wanted to get a little more insight into how you envision, I guess, kind of, the cadence of some of this rolling out? I know you said that there's a total value of $150 million in those orders. So how we should think about kind of the lumpiness or not lumpiness of that revenue recognition, as well as kind of the second tranche of awards that you also have in hand?
Shig Hamamatsu: Hey, Marie, thanks for the question. I'll take that. And, yes, so again, we're not going to be able to give specifics on quarterly cadence. But, as we said earlier, we think it's going to be a rollout of the remaining revenue out of the $150 million we talked about over the course of the next 18 to 24 months. Now, as Josh just mentioned, we shipped $18 million of Type A, which was part of the $21 million we talked about. And so, what I could probably say is, is it going to be a big fluctuation from quarter-to-quarter in the next few quarters? We're not seeing that necessarily. But, again, we do expect the amount or the revenue number of units shipped from quarter-to-quarter vary. So I will just leave it at that, Marie.
Marie Thibault: Okay. Clear enough. I appreciate that. And then, perhaps we could talk a little bit about the replacement tailwinds. You've certainly been vocal about the older age of your installed base. So I'd love to hear what you're hearing from some of your legacy customers who are thinking about replacements and possible timing on when we may see some of that start to turn in a bigger way?
Suzanne Winter: Yes. Marie, we started to see some of the tailwind, even this quarter, at 26% of our total orders were trade-in and trade-up. And, I think, we're excited about the response that we're getting with the introduction in ClearRT. And so, I think, that with Synchrony is providing a really good rationale for our customers to make the investment to upgrade. So we only expect as we move forward that that percentage may increase as well.
Marie Thibault: Fantastic. Thank you.
Operator: The next quarter is from Anthony Petrone with Jefferies. Please go ahead.
Anthony Petrone: Hi. Thanks. Maybe a couple on China to stay there and then a couple on COVID. I guess, on the -- I'm going to shift to the spend side, Josh and Shig, just on China the JV. You mentioned recently at the JPMorgan Conference, you want to add up to an additional 100 headcount to the 100 base, get up to 200 by fiscal 2023. I'm just wondering what the cadence of adding those -- adding to the infrastructure is through 2023. Should we expect the bolus near term? Will it be sort of evenly loaded through 2023? And then, I'll have two follow-ups.
Shig Hamamatsu: Yes. Anthony, I'll take that question. Thanks for the question. And I think what we see is more of an even gradual build of that additional headcount at the JV level. And just to remind you, as they get at it to JV operations, they don't run through our expenses. It's not going to show up as Accuray's P&L expense in COGS or OpEx, rather the impact of that for us would be picked up through the 49% equity interest pickup towards the bottom of income statement. So I just want to make that clear. And, I guess, you have next question.
Anthony Petrone: Sure. And, again, well, one would be on the headcount adds. I mean, I fully understand that there's ownership in the JV, but funding of the new headcount maybe just a refresh on how actually the funding will go and how the funding of growth of the JV will blend those three?
Shig Hamamatsu: Yes. At this point, the best way to think about how to fund that at the JV level is that they are self-funded. And so, the initial capitalization was completed when we formed the JV effectively. As you recall, our partner provided the cash capital. We provided the in-kind capital. So they are fully capitalized and they're going to fund additional headcount through their own operations.
Anthony Petrone: Got it.
Josh Levine: Anthony, we really don't expect any incremental or surprise capital calls from where we sit today. I mean, again, what Shig just highlighted, I think, is our strong belief, very confident belief that this is self-funded on their end. Just to be more -- a little bit more granular, most of it if, not the vast majority of all of the commercial operational side of the -- let me back a commercial piece of the infrastructure is actually in place today, full representation if you will on the strategic marketing side and sales and marketing side in general. I think the head count that you'll see added over time now is really more on the operational side with specific emphasis on the manufacturing operation and perhaps some regulatory -- additional regulatory manpower in efforts related to product registration approval and manufacturing qualification and validation approval. So by functional area it's really heavily indexed to more of the ops the manufacturing ops and regulatory piece.
Anthony Petrone: Okay. And a follow-up here would be also just I guess on the multiyear outlook from a segment basis, you sure have material out there suggesting this can sort of approach the 4000 linac opportunity in China. And by 2026 when you back out the existing tender both the 2018 and I guess the prior 2015 tender you're looking at almost 2000 additional units. And so, when you sort of think about that multiyear opportunity where does the confidence come in, in that outlook? And what is the expectation for a follow-on tender from the 2018 one in terms of timing?
Josh Levine: Well I mean I think if you look at traditionally how the government -- the Central Government handles the 5-year planning process the 14th 5-year plan is probably in development and active process, if you will, from a development standpoint as we speak. I can't predict when it would be announced obviously. But we certainly believe that there are -- we know that there are on the Type A side at least another call it in round numbers maybe 90, 95 additional Type A devices that were identified in the original quota that will probably roll over -- very certainly roll over into the next 5-year plan if they're not captured in this 5-year plan. Although -- we also know that as we mentioned in the last earnings release, we believe that applications have already been captured online in the Central Government's Ministry of Health Application -- Electronic Application process that would indicate that there are -- there's a third batch of Type A licenses that have been applications have been received for and not yet announced which we believe likely will occur sometime maybe in April/May kind of time frame. But as you were talking about the big upside here is Type B. And there would be -- I think every bit of the same kind of unit volume quota impact that we saw in the original quota announcement which was something that had been in round numbers ultimately increased to about 1400 Type B devices in the Type B quota. We would think that at least that many would be represented again in the next 5-year plan. So the magnitude of the market opportunity in China is it can't be overstated. And the fact that we have -- we still believe a very unique strategy in terms of our participation in that market and the value of core segment of the market opportunity there is what gives us quite frankly the confidence to feel like we're on the right path.
Anthony Petrone: Now with that all good to hear. Thanks.
Operator: The next question is from Jason Wittes with Northland. Please go ahead.
Jason Wittes: Hi. Thanks for taking the questions. Just more questions on China. You gave some indication in terms of what the comp was for China revenues last quarter -- or the year ago quarter. Could you tell us what the comp is for the upcoming quarter and for the year for China revenues?
Josh Levine: Yes. I think we referenced orders against the prior year in...
Jason Wittes: I'm sorry orders if you could. Yes.
Shig Hamamatsu: Yes. So what I said I think Jason was last year Q3 -- just bear with me for a second. I believe last year Q3 we had something like a $25 million of Type A orders last year Q3. So that will be a tough comp for us again this year. I mean, this -- next quarter excuse me that was my commentary I think.
Jason Wittes: Could you also add revenues? I mean, you did provide revenues for this quarter. So I'd be curious to know what the revenue contribution was for next quarter and for the year, just so we can kind of track the progress of China, which I think is at least the way I'm pretty critical to the outlook for I guess most of us here?
Shig Hamamatsu: Yes. So again, I don't think we specifically talk about China revenue contribution in the context of last year Q3 Jason.
Jason Wittes: Okay.
Shig Hamamatsu: But the way to think about it is we had a small unit of -- B units in last year Q2. So we're talking about the low -- probably mid single-digit China revenue last year Q3.
Jason Wittes: Okay. And I guess that's kind of the tone for the -- if I look at last year that was the tone probably -- the contribution was something in the mid single-digits, is that the right way to think about it?
Shig Hamamatsu: That's the way to think about it, because again, we didn't have a Type A revenue as we were waiting for the tender to complete. So we had a small contribution from B units second half of last year. So that's the way to think about it.
Jason Wittes: Okay. And then looking at the P&L, I guess you're indicating that OpEx is going to go up in the second half. I assume that's more in the fourth quarter than the third quarter. But I also assume -- can we assume that this is going back to sort of post-COVID levels or is there still going to be -- in those numbers as you described is there still a pretty large COVID impact on those -- expected in those numbers?
Shig Hamamatsu: Yes. Thanks for the question Jason. So the cadence of Q3 versus Q4, you're correct. I would expect the Q4 to be higher than Q3, which is the seasonality that we always saw in the past fiscal cycles. And I think the way we think about it in the second half run rate, I said $35 million to $37 million per quarter, it is more normalizing back to what we were pre-COVID. And if I -- the best way to think about this Jason is that, I would compare our annual run rate to what we had in FY 2019, which is the full pre-COVID fiscal year when we incurred $162 million of OpEx for the entire year. I would say when we start to run $35 million to $37 million second half of this year and that will probably equate to the annual run rate of something like $144 million or something like that which implies that we are still operating even after normalizing coming out of COVID was probably still operating about 10% below where we were in terms of OpEx pre-COVID cycle. Yeah.
Jason Wittes: Okay. That's helpful. I'll switch gears and on ClearRT, Josh I think you got approved congratulations. It does seem pretty incremental. But it sounds like it's going to be a controlled launch initially. Is that the way to think about it? And when do we -- when does it sort of go fully out to the field I guess?
Suzanne Winter: Yes. So it is a phased launch. And again, we're in Phase 1 of the launch, which is sending to our clinical sites. So the installation is going very well and we're at the point of just getting clinical evidence as well as finalizing final product parameters. And then we'll go to a full launch which will be in the Q4 time frame.
Jason Wittes: Q4, okay. And older Radixact machines upgradable to ClearRT as well and can you give us an indication of kind of what the price bump is for ClearRT?
Suzanne Winter: Yes. So the ClearRT will be available to the Radixact install base as an upgrade and it's also available to any TomoTherapy customer. There'll be an upgrade trade-in trade-up price as you get to the latest version with ClearRT.
Jason Wittes: So if I have a current system with ClearRT, it's just upgrade right? It's not a replacement.
Suzanne Winter: Yes. You are right. It's an upgrade.
Jason Wittes: And do you have an indication of kind of what the ASP is for an upgrade?
Shig Hamamatsu: Jason, not yet on ClearRT. So we'll probably in the next few months ramping up on commercial activity. So I think we should be able to talk about that a little bit more then.
Jason Wittes: Okay. And then also just related to that, I assume that upgrades are going to be available until that Q4 when the full rollout comes through.
Suzanne Winter: That's correct.
Jason Wittes: Is that the right way to think about it?
Suzanne Winter: Yes.
Jason Wittes: Okay. Last question. Just if I think about – obviously, we're very focused on China here. Japan, obviously, came in very nicely as well. In terms of more established U.S. and European markets, it sounds like the tone is that COVID is still largely impacting both the performance there, but also just kind of the visibility for the moment. Is that the right way to think about it?
Josh Levine: Yes. I would say that that's a fair representation. I think it's important to note though Jason that we're not seeing orders cancel out of the backlog, okay? So we are not -- again if you think about where the market was going back to last summer and even into -- in some places in the early fall, I don't see today in the developed market. So call it in the U.S. and Western Europe, I don't see that level of -- again there isn't any visible signs of a wall-to-wall lockdown in hospitals today. What's happening is time lines are pushing out. So timelines on projects that are already teed up orders in the backlog timing for revenue conversion is pushing out. Again, highly variable from institution to institution or region to region, but obviously, we're staying close to all those customers and we're ready to begin installation and push the go button on any of the or all of those projects that customers are -- when they give us the sign that they're ready to go we can react quickly. So -- but I think as you've described it that would be a good representation in terms of how we're thinking about it relative to impact.
Jason Wittes: Okay. Thank you. It’s very helpful. I will jump back in queue. Thanks a lot, guys.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Josh Levine for any closing remarks.
Josh Levine: Thank you, operator. In closing, we are pleased with the progress we see occurring with the business despite the challenging environment and we're strongly focused on taking advantage of the anticipated growth catalysts and opportunities we have in front of us. During fiscal third quarter, we have a number of investor conferences that we look forward to participating in including the BTIG Healthcare Conference in February and the Cowen Healthcare Conference in March. Lastly, we intend to report our fiscal 2021 third quarter results at the end of April. Thanks to everyone listening in to today's call.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
