Accuray Incorporated (ARAY) Q1 2027 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Accuray First Quarter Fiscal 2027 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to Steve Monroe, Vice President of Financial Planning and Analysis. You may begin.

Thank you, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the first quarter of fiscal year 2027, which ended September 30, 2026. During our call this afternoon, management will review financial results for the quarter as well as recent corporate developments. Joining us on today's call are Steve LaNeve, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's Chief Financial Officer. Before we begin, I would like to remind everyone that our discussion today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause actual results to differ materially are outlined in today's earnings release and in our filings with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements, except as required by law. In addition, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in today's earnings release. There is also a supplemental slide presentation available on the Investor Relations section of our website. With that, let me turn the call over to Steve LaNeve.

Thank you, Steve. Good afternoon, everyone, and thank you for joining us. The end of our first quarter of fiscal 2027 marks approximately 1 year since I joined Accuray. Over the past year, we have made significant progress against the transformation plan we laid out. We made changes across the company to strengthen our financial foundation, lowered our cost structure, improved our organization, sharpened our commercial focus and positioned Accuray for sustainable growth. But rather than spending time looking back, today, I want to focus on where we are going. As I said on our last call, fiscal 2026 was a year of transformation. Fiscal 2027 is about execution. During the first quarter, we made significant progress across several areas. We continue to expand our global installed base, which enlarges the foundation for recurring service and solutions revenue and enables margin expansion. Service revenues increased, service margins improved. Operating expenses remained well controlled. We strengthened our financial position, and we continued to advance our product innovation road map through strategic partnerships. At the same time, our product orders and revenue performance did not meet our expectations, with geopolitical and other market factors in China representing a key headwind to product sales performance. Importantly, we continue to see strong underlying commercial opportunities across the business. We have a sizable pipeline, a high degree of customer and distributor engagement and a growing portfolio of innovations that we believe further differentiates our solutions in the marketplace. Our priority now is execution, converting that pipeline and customer interest into orders, translating orders into product revenue and leveraging our installed base to drive an increasingly durable stream of recurring service revenue and company-wide profitability. Strategic partnerships and innovation. Over the past year, we have been deliberate about where Accuray can differentiate and where partnerships can help us move faster rather than relying primarily on internal product development, which Accuray had done historically. During the first quarter, we took 2 important steps forward in this regard. We entered into a definitive agreement with RaySearch to accelerate our online adaptive radiation therapy strategy, combining Accuray's treatment delivery and imaging capabilities with RaySearch's treatment planning and workflow software initially on Radixact with a planned extension to CyberKnife. Online adaptive radiation therapy allows treatment plans to be adjusted immediately before treatment based on the patient's anatomy at the time of delivery. The solution is designed to support more personalized treatments while helping clinics work more efficiently. We also advanced our collaboration with Samsung NeuroLogica to pursue volumetric imaging capabilities for CyberKnife, bringing together their imaging expertise with our strengths in robotic radiosurgery, precision treatment delivery and real-time motion management. Leading practitioners have emphasized that volumetric imaging can enhance visualization of patient anatomy in the treatment environment and support future clinical workflows. Professor Nicholas van As of the Royal Marsden spoke on our behalf during ASTRO where he noted that seeing the target and surrounding anatomy together at the time of treatment could help us make more informed decisions for each patient. Looking further ahead, this could open up new possibilities for adapting treatment to the patient's anatomy of the day alongside real-time motion management during delivery. That perspective reflects the opportunity we see in bringing advanced imaging, adaptation and motion management together in the broader direction we heard from clinicians at ASTRO. Professor Van As presented long-term results from randomized Phase III PACE-A trial comparing surgery with stereotactic body radiation therapy or SBRT for localized prostate cancer. The trial randomized 123 patients and at a median follow-up of 8 years, the estimated 5-year freedom from biochemical or clinical failure rate was 94.8% with SBRT and 94.1% with prostatectomy. These findings are notable because they provide evidence supporting SBRT as an effective nonsurgical treatment option with disease control comparable to prostatectomy. Importantly, the study also evaluated patient-reported quality of life outcomes. At 5 years, the median sexual function score had declined 42 points for patients treated with surgery compared with 17 points for patients treated with SBRT. Based on these results, the investigators concluded that SBRT had significant advantages over surgery in preserving sexual function and sexual quality of life at 5 years. For Accuray, these clinical developments reinforce where we believe radiation oncology is heading toward greater precision through motion management, personalization and adaptation with an increasing focus on protecting healthy tissue and preserving quality of life. By combining our strengths in precision treatment, delivery and real-time motion management with enhanced imaging and adaptive capabilities, we believe we can further differentiate our platforms and deliver greater value for clinicians and patients. Commercial and operational execution. Our focus now is translating innovation and clinical differentiation of this type into stronger commercial performance. Over the past year, we have made significant changes to strengthen our commercial organization and improve execution. We changed our commercial leadership, realigned our sales and marketing organizations, expanded our sales enablement capabilities and created a dedicated channel management organization designed to improve both our relationships with distributors and their performance. Our new commercial leadership team has also made important changes in the U.S. organization and enhanced our go-to-market approach with channel partners. We expect these actions to increase commercial accountability, improve pipeline conversions and drive more consistent execution, particularly across Eastern Europe and APAC. At the same time, the continued growth of our installed base is increasing the scale and strategic importance of our services and solutions business. Our installed base has now surpassed 1,100 systems globally, supporting more than $230 million of recurring annual revenue and creating an increasingly meaningful and durable foundation for the company. The opportunity extends beyond revenue growth. As the installed base expands, we also have an opportunity to improve the profitability of that recurring revenue stream. Service gross margin improved by 410 basis points in Q1 compared with FY '26 trailing 12-month service gross margin of 31%. We continue to focus on pricing discipline, contract renewals, remote diagnostics, parts consumption and a greater mix of higher-margin solutions to drive further improvement. We have also increased the rigor of our services and solutions operating model with a focus on sustaining margin expansion over the next several years. Taken together, growth in the installed base, increasing recurring service revenue and continued margin expansion provide an important source of stability and earnings leverage as we work to return product orders and revenue to stronger levels. In addition, our efforts over the last year to lower our cost structure continue to bear fruit. Our operating costs, excluding restructuring costs, were approximately $13 million lower than in the first quarter of last year. We told you last year that we expected our transformation efforts to result in at least $25 million of annualized profitability improvement, and we have significantly exceeded that amount on an annualized basis from operating cost reductions alone. These are areas within our control. The opportunity now is to pair this operating discipline with stronger product and order performance. The financial foundation. Supporting these priorities is a stronger financial foundation. During the quarter, we received a $15 million cash investment associated with our previously announced TCW financing transaction. Following quarter end, stockholders approved the proposals necessary to advance the broader transaction, including the previously announced exchange of $40 million of term loan debt for convertible preferred equity. These actions are intended to reduce leverage, enhance liquidity and provide greater flexibility to execute our strategy. We also welcomed Richard Randy Meier to our Board of Directors. Randy brings more than 30 years of extensive health care, financial and operational leadership experience, and we look forward to benefiting from his perspective. Looking ahead, Ultimately, our strategy comes back to our purpose, expanding the curative power of radiation therapy to improve as many lives as possible while building a stronger, more competitive and more profitable Accuray. With that, I'll turn the call over to Ali to discuss our first quarter financial performance in more detail.

Thank you, Steve, and good afternoon, everyone. Before I begin, I want to thank our teams around the world for their tremendous commitment and focus as we continue to transform the business and position Accuray for the future. As Steve discussed, our first quarter results reflect continued progress in strengthening the underlying economics of the business while also highlighting the need to drive improved product volume and orders to accompany our growing service revenues and margins. Turning to the financials. Net revenue for the quarter was $86.5 million, which was down $7.4 million or 8% versus the prior year and down 7% on a constant currency basis. As Steve mentioned, product revenues continue to be impacted by geopolitical factors and market issues in China. This was partly offset by year-over-year growth in our services and solutions business. Service revenue was $59.2 million, up $2.4 million or 4% from the prior year and up 5% on a constant currency basis. Approximately $0.8 million of the increase was attributable to service contract pricing actions. The remaining $1.6 million was driven by nearly 3% growth in our global installed base and higher training and other service solutions revenue. Our contract capture rate, defined as a percentage of active systems covered by a service agreement was 90%. Overall, we're pleased with the performance of our service business, which continues to demonstrate the strength of its recurring revenue model and our ability to drive growth through pricing, installed base expansion and additional service solutions. Product revenue for the first quarter was $27.3 million, down $9.8 million or 26% versus the prior year on both a reported and a constant currency basis. Product revenue reflected 12 units and several upgrades shipped during the quarter across our sales regions. As Steve mentioned, improving commercial execution and driving higher product volumes are key priorities for fiscal 2027, and we remain focused on strengthening our pipeline and converting that pipeline into orders and shipments. Product gross orders for the first quarter were $19.8 million and represented a book-to-bill ratio of 0.7 in the quarter. The trailing 12-month book-to-bill ratio is 1.1. We ended the first quarter with a reported order backlog of approximately $272 million, defined to include only orders younger than 30 months. As we've stated previously, we view a book-to-bill ratio of 1.2 as a healthy level to support backlog growth and improving order performance remains a key priority. We are focused on strengthening our commercial pipeline and improving revenue conversion as the changes we've made across our sales organization, distributor network and commercial processes begin to gain traction. Overall, gross profit for the first quarter was $26.1 million, representing gross margins of 30.1% compared to gross margins of 28.8% in the prior year. Service gross profit was $20.8 million, representing a gross margin of 35.1% compared with 33.9% in Q1 of the prior year and 31% for all of fiscal 2026. Service contract pricing actions improved margins by approximately $0.8 million or 1.4 points and our lower labor cost structure contributed approximately $1.6 million or 2.6 points. These benefits were partially offset by tariffs and inflationary pressures on materials and freight, which had an unfavorable impact of approximately $2 million or 3.3 points. We've seen meaningful improvement in our service margins over the past 2 quarters, reflecting the benefits of pricing, better parts management, labor efficiencies and the transformation initiatives we implemented during fiscal 2026. We see further opportunity ahead as we continue to improve pricing and reduce our cost to serve, and we expect service margins to improve over the next several years. Product gross profit was $5.3 million, representing a gross margin of 19.4% compared with 20.8% in the prior year. Product margins were impacted by lower fixed cost absorption due to reduced volumes as well as tariffs and purchase price variances. As product shipments and revenue increase, we expect to see improved fixed cost absorption and corresponding improvement in product gross margins. Operating expenses were $62.6 million compared with $38.3 million in the prior year. The current year includes a $35.4 million noncash goodwill impairment charge and restructuring expenses of $0.4 million. The prior year first quarter included restructuring expenses of $2.8 million. Excluding the goodwill impairment and restructuring expenses, operating expenses for the first quarter were $26.8 million, a decrease of $8.7 million or 25%. This decrease resulted from our efforts to implement a substantial reduction of our cost structure as part of our transformation programs over the last year. As we mentioned earlier, the transformation initiatives we began in fiscal 2026 are delivering meaningful and measurable results. In the first quarter, these actions contributed approximately $13 million of year-over-year bottom line improvement and importantly, have created a structurally lower cost base for our business. While headcount reductions and continued headcount discipline have been a significant driver, the improvement extends well beyond headcount. We are seeing benefits from more effective use of strategic partners, greater focus on our product development and marketing investments and continued discipline around discretionary spending. With the primary restructuring activity now substantially complete, our focus shifts from restructuring the cost base to sustaining these efficiencies and maintaining the discipline we've established. We believe this provides a stronger foundation for continued improvement in profitability as we move forward. In the first quarter, the company recognized a gain on extinguishment of debt of approximately $59.6 million in connection with its July 2026 financing transaction. The transaction added a substantive contingent conversion feature to the outstanding debt, resulting in extinguishment accounting and initial recognition of the replacement loans at fair value. The gain primarily reflects the difference between the net carrying amount of the existing loans and the fair value of the replacement loans. This gain on extinguishment of debt caused a significant increase in the carrying amount of the company's equity without a corresponding increase to the company's fair value, requiring an interim goodwill impairment test to be performed. As a result, the noncash goodwill impairment charge of $35.4 million was recorded. While additional fair value versus carrying value goodwill adjustments may occur in future quarters, these noncash items have no impact on the company's strategic plan, strategic focus, operational model or financing agreements. Operating income for the first quarter was a loss of $36.5 million compared to a loss of $11.3 million in the prior year. Excluding the goodwill impairment charge, operating income was a loss of $1.1 million. The goodwill impairment and gain on extinguishment of debt did not have an impact on adjusted EBITDA, which was $2.5 million in the first quarter compared to a loss of $4.1 million in the prior year. We described the reconciliation between GAAP net income and adjusted EBITDA in our earnings release issued today. Turning to the balance sheet. Total cash, cash equivalents and restricted cash at quarter end were $50.4 million, including $8.1 million of restricted cash related to required postings for cash flow hedging and tariffs. This compares with $48.8 million of total cash, cash equivalents and restricted cash at the end of fiscal 2026, which also included $8.1 million of restricted cash. Net accounts receivable was $50 million, down $17.4 million from the prior quarter. Our net inventory balance was $146.1 million, down $1 million from the prior quarter. Accounts payable were $33.1 million, down $7.5 million from the prior quarter. We continue to focus on driving down our net working capital in order to generate additional liquidity that we can deploy across the business. At the end of the first quarter, we had $5 million outstanding on our revolving credit facility. As a reminder, in July, we announced the transaction with TCW designed to meaningfully improve our capital structure, including the exchange of $40 million of debt for equity and a $15 million cash investment from TCW during the quarter. Following quarter end, our stockholders approved the proposals necessary to move forward with the transaction. Upon completion, we expect to have a stronger balance sheet, a lower interest burden and greater financial flexibility as we execute our strategy and continue the transformation of the business. To summarize, the first quarter demonstrates that the actions we have taken are translating into tangible financial results. We are seeing service revenue growth, higher service margins and a meaningfully lower structural cost base. With that foundation in place, our focus is increasingly on commercial execution and driving higher product volume. As we improve orders and product shipments, we believe there is meaningful opportunity to generate additional operating leverage from the more efficient business model we have built. While we are not providing guidance at this time, we are clear on what we need to accomplish. The team is executing against the focus set of priorities, maintaining the discipline we established through our transformation and working to convert the progress we have made into sustainable improvements in profitability and financial performance. With that, I'll turn the call back over to Steve.

Thank you, Ali. I'll close where I started. fiscal 2027 is about execution. We have made significant progress positioning Accuray for the future, and we are focused on translating that progress into stronger performance. Our installed base and our growing recurring revenue service business remain a unique and valuable strategic asset. At the same time, the customer engagement we are seeing, the clinical evidence supporting motion management and the precision radiation therapy it helps to deliver and the opportunities created by our innovation strategy reinforce our confidence in the direction we are taking. We know what we need to execute, and our team is focused on delivering. I'll now turn the call back to the operator for Q&A.

[Operator Instructions] It seems we have no questions for the question-and-answer session. I'd now like to turn the call over to Steve LaNeve, President and CEO, for closing remarks.

Thank you all for joining our call today. We look forward to speaking with you again early next year when we report our fiscal 2027 second quarter results. This concludes our earnings call. Thank you.

This concludes today's meeting. You may now disconnect.