Accuray Incorporated (ARAY) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon everyone and welcome to the Accuray Reports Third Quarter of Fiscal 2021 Financial Results Conference Call. All participants will be in a listen-only mode. At this time I’d like to turn the conference call over to Ken Mobeck, Vice President of Finance and IR. Sir, please go ahead.
Ken Mobeck: Thank you, Jamie, and good afternoon, everyone. Welcome to Accuray’s conference call to review financial results for the third quarter of fiscal year 2021, which ended March 31, 2021. During our call this afternoon, management will review recent corporate developments. Joining us on today’s call are Josh Levine, Accuray’s President and Chief Executive Officer; Shig Hamamatsu, Accuray’s Senior Vice President and Chief Financial Officer; and Suzanne Winter, Accuray’s Chief Commercial Officer and Senior Vice President of R&D.
Josh Levine: Thank you, Ken, and thanks to everyone joining us on today’s call. Accuray’s fiscal 2021 third quarter performance continues to reflect the positive momentum our business is making despite the headwinds created by the COVID-19 environment. Positive highlights from our third quarter include the continued conversion of China Type A system revenue, excellent progress in the phased introduction for our ClearRT Helical kVCT Imaging upgrade on Radixact including regulatory approval for that in Japan 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 $102.6 million, which was an increase of 3% from the prior year. Overall fiscal Q3 revenue included approximately $25 million of China-related system revenue consisting of nine Type A and one Type B systems. The third quarter saw continued execution related to China Type A revenue conversion, while the number of Type A system shipments will vary from quarter-to-quarter. We expect revenue related to the remainder of Type A licenses will be recognized over the course of the next several quarters.
Shig Hamamatsu: Thank you, Josh, and good afternoon everyone. I’ll begin with some additional details in our financial performance for a third quarter and then focus on certain highlights for the period. Gross orders for the third quarter were $87.4 million an increase of $12 million or 16% from the second quarter, but down from $106 million in a prior year third quarter. As we continue to see some headwinds due to the pandemic, particularly in the Americas region, which has affected the timing or order placement in the near-term. In terms of the sequential increase from the second quarter of this fiscal year, it was driven by double-digit order growth from each of the regions outside of the Americas. From a product mix perspective, the TomoTherapy platform accounted for approximately 80% of order unit volume for the quarter, and CyberKnife accounting for the remaining 20%. As Josh highlighted earlier, we continue to see a strong innovation driven order momentum during the third quarter, as we saw a significant portion of our gross orders included Synchrony on Radixact, as well as CyberKnife S7. Additionally, we see the first batch of ClearRT orders as we execute it well on its space commercial launch.
Operator: Our first question today comes from Josh Jennings from Cowen. Please go ahead with your question.
Josh Jennings: Hi, good afternoon, gentlemen. Thanks for taking the questions. I wanted to start off just, Shig your last kind of segment there, in your prepared remarks talking about the headwinds in revenue conversion outside of China, but China obviously Type A license revenue conversion being super strong, and buffering the revenue conversion disruption caused by the pandemic, can you help us understand, I know that it’s a wild card scenario to degree in terms of trying to predict, but that – the backlog that could have converted to revenue here in fiscal 3Q and fiscal Q4 and in fiscal 2022, I mean that, that will ultimately convert, I just want to make sure that there isn’t risk of the revenue conversion disruption leading to age-outs, and that we should see that bullets are that backlog really start to flow through even stronger in other regions outside of China in the coming quarters.
Shig Hamamatsu: Yes, I think you’re seeing this right way Josh, appreciate the question. I think my comment really refers to, we certainly have a visibility China, which has given us a pretty good baseline on revenue conversion and we continue to see that over the next several quarters will expect in China. I think, was just – as we look at AMS – excuse me that the Americas were referring to, and, places like India. I think we’re just being cautious with respect to what’s going on. But I think, in other areas, we see improvements, as well. So, I’m just talking about, a little bit of balance there amongst the regions. And, we are really glad to see us returning to year-over-year growth in Q3, 3% growth, I think we got a pretty good feel for Q4, again, by for good reasons. And especially as we look to, next year, we like, while we are to start to deliver more consistent growth year-over-year.
Josh Levine: Hey, Josh, just to add emphasis to Shig’s comments, just to be clear, we’re not seeing orders cancel out of the backlog, that that’s just I want to be definitive about that. This is really more just kind of the reflection of timing, timing differences, perhaps from what we originally expected, with regards to some of the other regions. And, again, just given where you see flare ups right now in other parts of the world, we just think we’re being prudent around, baking that into the thought process. But, again, to Shig’s point earlier, China is creating some real buoyancy for us relative to offset in the other regions.
Josh Jennings: No, that makes a lot of sense and continued environment to be a little bit cautious. That makes a lot of sense to us. So, to my second question, and then I’ll get back in the queue. Just your announcement on naming a Chief Medical and Technology Officer, I believe this is the first Chief Medical Officer for Accuray since Dr. Adler was within that seat. Just wanted to see if you could help us understand what you’re signaling here. I think Dr. Pignol is the first radiation oncologist as the Chief Medical Officer at Accuray. Are we should we be thinking about a pursuit of more clinical evidence behind of Radixact, behind CyberKnife, and then also, you guys have been on an innovation crusade and him being the Chief Technology Officer? And how should we be thinking about next steps in the evolution of these platforms? Thanks. Wish him and the team. Thanks for taking the questions.
Josh Levine: Josh, thank you for that question. Quite, frankly, what you just articulated is exactly right. It’s that that’s exactly why this is – we’re so excited about this. For people in the space, from a clinical perspective, this is a world class, not just world class, radiation oncologist. This is a world class technology person. He’s got a Ph.D in Nuclear Physics. He’s done a lot of research across many, many dimensions, both clinically within the space, as well as with different products collaborated with a lot of different companies. So he’s, uniquely qualified in those areas, and quite frankly, it’s really the perfect degree of the moment in time for us to have this come together from a timing perspective, you are correct in your assessment that this is the first time we’ve had a Chief Medical Officer in the role since John Adler led the company back, literally decades ago. And we think that, that Jean-Phillipe is uniquely qualified to help really leverage and power up areas, the areas that you actually highlight Josh. The first is the clinical evidence piece. Our products are different. The way they operate is different. And we need to be able to show people what those differences translate into, relative to clinical outcomes, and the reduction of toxicity and how we fare relative to some of the things that are getting a lot of a lot of press lately things like MR Lynx and, biologically guided products. And so we are, I can’t – I cannot speak highly enough about Jean-Philippe, and I can’t communicate more excitement than I am right now. We’re thrilled to have this happen at this point, Jean-Philippe, is going to make a major impact for us.
Josh Jennings: That’s great. Congratulations on bringing them in. Thank you.
Operator: Our next question comes from Brooks O'Neil from Lake Street Capital Markets. Please go ahead with your question.
Brooks O'Neil: Hi, good afternoon, everyone. As you’ve highlighted the importance of ClearRT, could you just talk a little bit about how you anticipate that manifesting itself in the income statement? And that’ll, I guess, how, but also the timing of what you expect to see from ClearRT?
Shig Hamamatsu: Yes, and Brooks, thanks for the question. I’ll maybe I take that question first. And maybe Suzanne can chime in if she wants to. So what you heard earlier today in the prepared remarks in Josh’s section, that we actually got a 14 orders on ClearRT in Q3. And he gave us a little flavor of it. But the four units, four orders out of 14 related to customers trying to buy a new Radixact and they actually choosing an option to include ClearRT. So that’s one flavor of the how this can get sold right as a new option to, newly delivered Radixact or the other one that we are 10 orders, be they which the upgrade orders, really for existing install base for Radixact and they wanted to upgrade and buy as the standalone upgrade to their install base. So, I’m not get into the timing of those 14 units going to revenue, necessarily right now, Brooks, but as you can imagine, over the course of the next, I would say, a few, quarters, we’re going to start to deliver some of those as we get into full commercial launch. I mean Suzanne do you want add anything?
Suzanne Winter: That’s correct. We’re going to start to see shipments in our Q4 going into Q1. So that’s, we’ll start to realize there’s some tremendous pent up demand so….
Brooks O'Neil: That’s great. Okay, I’ll just ask my second, and I guess, Shig I want to pick on you again. You talked about the improvement in the cash flow in the balance sheet. I think there’s still maybe one tranche of your convertible securities out there. How are you thinking about the balance sheet and dealing with that that tranche over the next period of time?
Shig Hamamatsu: Yes. Thanks for your question. Brooks. Yes, I’m really, pleased to see that the team has done a tremendous job of managing and working capital, and we ended with $130 million cash. And as I consistently said, in the past, as we get into one-year window of the convertible notes, maturity, its due July 22. We’re going to start looking potentially refinancing. And I think, quite frankly, the cash position that we just reported end of Q3 position us a very well to do that successfully when we are ready to do it. So, I think we’re on the good track to actually accomplish that at the right time.
Brooks O'Neil: Great, perfect. Thank you very much.
Josh Levine: Thanks, Brooks.
Operator: And our next question comes from Anthony Petrone from Jefferies. Please go ahead with your question.
Anthony Petrone: Hi, and good afternoon. Maybe Josh just to sort of go back and revisit RO bundle. Just latest thoughts there on timing and rollout and sort of how do you think that, that impacts capital sales, just some renewed thoughts there. And then sort of when we think about, sort of overall China trends, just in relation to COVID, obviously, there’s still momentum on the Type A side, Type B reiterating the timelines here, sure – if we can just maybe just recap the opportunity a bit, how many licenses have been issued so far? How many are in the Type B opportunity and again, this goes back to the 2018 tender? And they may be just thoughts on when this tender will actually really get into full swing? Thanks.
Josh Levine: Sure, Anthony. So, just taking it in the order that you pose those; so as far as the timing of the RO-APM, there is no update or no change in timing from what we’ve communicated, and what the industry has heard from CMS most recently, which basically puts the – essentially the implementation of the RO-APM model in the January 1, 2000 – calendar 2022 time. And so again, no change to that from what we’ve heard or what we expect. And in the context of is this, what impact would this have on capital purchases? It’s – it would, again, as we’ve talked about in the past, it would lead you to believe that if a facility that knows they’re going to be participating in the model, they’re in a zip code that they’ve – that’s been identified as for inclusion in the model, and then the reimbursement approach. If they are dealing with equipment that is either functioning at capacity, or is not necessarily in a place where they are – as confident as they should be, or could be in delivering high dose SBRT and fractionated or ultra-hyperfractionated treatment regimens, then one would assume that it could be a catalyst for them to want to think about a different mix of equipment. But again, that’s going to vary, it’s going to really probably not possible to paint the entire market with the same brush on this. It’s going to vary from facility-to-facility. And I think so that that’s kind of the answer around the RO-APM is. The other wildcard here, again, is that while, I think we see an optimistic about the evolution of the COVID environment, again, if there are flare ups, or there are things that are beyond the markets control relative to market, facility access or things related to COVID. Those are also impacts, obviously, that could affect the capital, the capital side of equipment market purchases, but again, from where we sit right now, we think this is a relatively improving situation. We don’t see orders cancelling out of the backlog. We see facility access improving for our people, both on the service and the commercial side. And so, knock on wood, it’s, moving directly in the right direction. With that said, there are some markets that obviously are going to continue to be challenged, India would be a good example of it, big opportunity there, but they have more than they can handle right now vis-à-vis the COVID situation. With regards to your question on China and China trends, if you go back to the original quota in the previous five year plan, there were 1,208, Type B devices, and 188 Type A devices identified in the very original quota – on the current licenses issued to date, I’m going to shift to Shig here, I know him, let him answer the details on that one.
Shig Hamamatsu: Yes. Thank you, Josh. So Anthony, I’m going to go with a first Type A, and so the quota originally it was 188. And today, 90 of 188 have been issued 74, which we want. So that’s the 82% run rate that we talked about before. So, that even 98 remaining to be issued, and to understanding that the issuance of Type A license seems like they’re falling about a once a year issuance cadence, so it’s hard to say when this calendar year they want to issue, but we think sometime next three months to six months, they should be announcing the another batch of Type A license, and I know that the – some of our customers apply for that batch as well. So, we are anxiously waiting for the announcement as well. So that’s Type A. Type B, Josh is correct. Originally, the quota was 1,200. I believe that increased by additional 200 start going to that. So it’s actually a 1,400 Type B licenses, were originally available on their quota. Type B’s a bit hard to track centrally. How many of the 1,400 have been issued only because, as we said before the laws are issued, I think it’s quarterly at the provincial level. And so there’s a little bit of lack of a central data to say how many, but to our understanding, it has been flowing. And as you see on our P&L, every quarter we are reporting a few units not a large unit yet for us until we have a locally manufactured products in 15 months, but to understanding the Type B has been flowing at the professional level, without much disruption.
Operator: Ladies and gentlemen at this time I’m showing no additional questions. We’ll conclude our question-and-answer session. I’d like to turn the conference call back over to Josh Levine for any closing remarks.
Josh Levine: I want to thank everyone for joining us on the call this afternoon. And we look forward to speaking with you again in August when we report our full year fiscal 2021 results. Thanks very much.
Operator: Ladies and gentlemen, the conference has now concluded. We do thank you for attending today’s presentation. You may now disconnect your lines.
