Accuray - Earnings Call - Q2 2025

Executive Summary

• Accuray delivered a solid Q2 FY25: revenue $116.2M (+8% YoY), GAAP diluted EPS $0.02, and adjusted EBITDA $9.6M; gross margin expanded to 36.1% aided by China JV deferred margin release.
• Product revenue rose 19% YoY to $61.2M on strong China, APAC, Japan, and CyberKnife demand; service revenue declined 1% YoY to $55.0M due to prior-year ERP catch-up effects but grew sequentially.
• Guidance raised: FY25 revenue to $463–$475M (from $462–$472M) and adjusted EBITDA to $28.5–$31.0M (from $28–$30M); management assumes minimal tariff impact and a U.S. market recovery in H2 FY25.
• Orders moderated: gross product orders $76.8M (book-to-bill 1.3), backlog $463.1M (~6% lower YoY); near-term narrative hinges on continued China deliveries, Helix traction, and H2 U.S. recovery, with tariffs/FX inflation as watch items.

What Went Well and What Went Wrong

What Went Well

• Strong product momentum: product revenue +19% YoY; CyberKnife revenue grew “well above 50% YoY” and 12 Helix orders booked after CE mark, with breakthrough wins in Pakistan, Northern Africa, and APAC.
• China execution: ~54% YoY China revenue growth, 10-point market share gain in CY2024; regulatory approvals (CyberKnife S7, Radixact SynC) and significant Tomo C deliveries enabled deferred margin release.
• Margin and profitability: gross margin 36.1% (vs. 33.5% YoY) with ~2.4 pts benefit from China margin release and ~2.9 pts from pricing/operational efficiencies; operating expenses fell 7% YoY to $37.2M.

Management quotes:

• “Our strong Q2 performance reflects outstanding execution... evidenced by the strong momentum in Tomo C System deliveries... and breakthrough wins of our new Helix system” — Suzanne Winter, CEO.
• “We delivered a strong Q2... working both from a top line and margin expansion standpoint” — Ali Pervaiz, CFO.

What Went Wrong

• Orders down YoY: gross orders $76.8M vs. $93.9M prior-year quarter; backlog $463.1M (~6% lower YoY), indicating moderation amid strong shipments.
• Service revenue −1% YoY; CFO flagged prior-year ERP catch-up inflated the base, normalizing to +2% on a comparable basis, but higher service costs/parts consumption offset margin gains by ~2.7 pts.
• Regional variability: EIMEA and AMS revenue down YoY with Japan front-half weighted; management expects stronger H2 but acknowledged quarter-to-quarter swings and FX/inflation pressures.

Transcript

Operator (participant)

Good day, and welcome to the Accuray Fiscal 2025 second quarter financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jesse Chew. Please go ahead.

Jesse Chew (SVP, Chief Legal Officer, and Corporate Secretary)

Thank you, Operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the second quarter of fiscal year 2025, which ended December 31, 2024. During our call this afternoon, Management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Accuray's President and Chief Executive Officer, and Ali Pervaiz, Accuray's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements.

Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are outlined in the press release we issued just after the market closed this afternoon, as well as our filings with the Securities and Exchange Commission. We base the forward-looking statements on this call on the information available to us as of today's date.

We assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to two questions and then re-queue with any follow-ups. Second, all references to a specific quarter in the prepared remarks are to our fiscal year quarters.

For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2024. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Suzanne Winter. Suzanne.

Suzanne Winter (President and CEO)

Thank you, Jesse. Good afternoon, and thank you for joining us today. I'm very pleased to report on another strong quarter of performance across key financial metrics, which is enabling us to innovate and expand our efforts to improve outcomes for cancer patients around the world, which is our mission. We saw strong year-over-year revenue and adjusted EBITDA results this quarter, reflecting significant progress on our FY 2025 priorities.

These include advancing cancer care through innovation, expanding our service solutions business, and improving patient access to radiotherapy in developing markets where we believe we can grow faster than the market and achieve number one or number two market share in the long term. Finally, we advanced operational efficiencies and pricing actions to improve margins and long-term profitability. Revenue for the quarter was solid, growing 8% year-over-year with outstanding product revenue performance compared to the prior year period.

Additionally, I was also pleased with our adjusted EBITDA performance at $9.6 million, which was driven by pricing and operational improvements, as well as TomoTherapy system deliveries to end customers from our joint venture facility in Tianjin. Turning to orders in Q2, I'm very pleased with our book-to-bill results, which are encouraging, especially given the strength of our product shipments this quarter. EIMEA led the way with 7% orders growth, balanced in both developed and emerging markets within the region. Last quarter, we gained CE mark for the new Accuray Helix platform, which is manufactured in Madison, Wisconsin, and in Q2, we booked 12 new Helix system orders with key breakthrough wins from Pakistan, Northern Africa, and key markets in APAC. Turning to product revenues, we were up 19% versus last year, growing faster than the market, driven by strong demand for our solutions across the portfolio.

Here, our new product innovation is focused on advancing the capabilities of our existing systems and always looking to improve patient care in the markets where we compete. The CyberKnife system, which remains the only truly robotic radiotherapy system dedicated to SBRT and stereotactic radiosurgery treatments, grew revenue well above 50% year-over-year, so great performance here. Another key driver for revenue growth was our overall performance in China, which was one of the standout stories for this quarter. Our team delivered over 50% revenue growth year-over-year in China. Our strategy in China is working, driven first by our differentiated product portfolio and service growth, and I'm very pleased with the performance of our joint venture partner, China Isotope and Radiation Corporation, or CIRC, which is one of the largest state-run entities.

Additionally, we are very encouraged that in the most recent China market data for calendar year 2024, although the overall market declined versus the prior year, we gained 10 percentage points of market share and are disrupting competitive market share dynamics, according to Ipsos, a global leader in market research, as well as official China government bidding and local government procurement websites. In the Type B market, we saw strong adoption of the TomoTherapy system, which positively impacted revenue and adjusted EBITDA in the quarter. We were able to complete significant TomoTherapy customer deliveries, allowing us to realize deferred margin, which has built up over the past several quarters as we waited for National Medical Products Administration regulatory approval. As a reminder, the TomoTherapy product is manufactured in our JV Tianjin facility specifically for the China market.

Again, we've invested heavily in understanding regional customer trends and developed the right product with our JV partner to address the unique needs of the Type B market, which is estimated to be $3 billion in market potential over the next five years. During the quarter, we also continued to see positive customer reception to our technology in the premium Type A segment in China. With the recent approvals for the CyberKnife S7 and Synchrony and ClearRT now available on the Radixact system, customers have access to advanced capabilities which are critical to performing SBRT and stereotactic radiosurgery treatments. We also saw standout revenue performance in Japan, where we continue to hold the number two market share position with over 40% growth in the quarter versus last year.

Revenue was down in EIMEA and AMS regions in the quarter compared to last year, but as we have discussed in the past, regional performance can vary significantly from quarter to quarter, and I expect both of these regions to show stronger revenue growth in the second half. Moving on to our service business, our Q2 service contract revenues grew modestly on a comparable basis and were up sequentially from last quarter. Service revenue remains the largest long-term growth opportunity driven by a growing installed base of global customers who contract service from Accuray throughout the life of their system. This service revenue opportunity, which is predominantly a recurring revenue source, will further grow by retaining existing customers, winning new customers, and expanding new solution offerings like CyberComm accelerated commissioning for the CyberKnife, which continued to contribute materially within the quarter.

We expect that our service business will be a growing part of our overall revenue and a primary catalyst for expanding margins as we benefit from higher pricing, increased scale, and improved operating leverage in the upcoming years. Finally, we're very proud of our clinical research and the academic recognition of clinical innovation leveraging our technology to advance cancer care. For example, in December, the International Journal of Cancer highlighted the CyberKnife system as an effective and time-efficient treatment option for brain stem metastases. Additionally, in October, we announced the publication of the Accuray-sponsored PACE-B trial in the New England Journal of Medicine, which showed groundbreaking potential for SBRT to change the way prostate cancer is treated. In summary, I'm proud of our team and the progress we're making towards achieving our longer-term goals.

Operationally, we continue to strengthen our corporate leadership and are excited to welcome Lionel Peralta as Chief Operations Officer to the team. Lionel has a proven work history in driving growth while improving productivity and brings more than 25 years of leadership experience in supply chain, business process improvement, and manufacturing optimization. This experience will be instrumental in transforming our supply base, driving operational excellence, and optimizing working capital. I'm pleased with our strong Q2 and first-half performance, which demonstrates the execution of our strategy. With a solid first half behind us, we're raising our full-year fiscal 2025 guidance for revenue to $463 million-$475 million, from $462 million-$472 million, and adjusted EBITDA to $28.5 million-$31 million, from $28 million-$30 million.

As we look to the second half of our fiscal year, we would expect similar seasonality as we have seen in the past years, with a larger portion of revenues and earnings coming in the fourth quarter, aligned with the timing of customer demand compared to Q3. In closing, we are confident that we are well-positioned to achieve our goals in top-line growth, drive share in the markets where we compete, and expand margins in FY 2025 and beyond. I will now turn it over to Ali, who will cover our financials.

Ali Pervaiz (CFO)

Thank you, Suzanne, and good afternoon, everyone. I would like to begin by thanking our global cross-functional teams who continue to execute tirelessly with their incredible work ethic and help us deliver a strong Q2, which gives us the confidence that our underlying growth strategy is working both from a top-line and margin expansion standpoint. As Suzanne mentioned, our revenue growth was broad-based during the quarter, led by a strong performance in our China, APAC, and Japan regions. The overall demand trend we see as we enter high-growth emerging markets remains positive and is expected to allow us to gain share in the coming years while steadily increasing our global install base, which will, in turn, help grow our service business. This focused top-line growth, while continuing to remain committed to our margin expansion efforts, is starting to pay off despite continued inflation and macro headwinds.

Turning to the financials, net revenue for the second quarter was $116 million, which was up 8% versus the prior year and up 8% on a constant currency basis. Product revenue for the second quarter was $61 million, up 19% from the prior year and up 20% on a constant currency basis, reflecting a 17% increase in unit volume over the same time period. Service revenue for the quarter was $55 million, down 1% from the prior year and down 2% on a constant currency basis. As a reminder, service revenue was unusually high in the same period of the prior year, primarily due to a catch-up of revenue related to the timing of the ERP implementation and cleanup of age-deferred revenue.

Adjusting for those one-time items, service revenue would have been up 2% and in line with contract revenue growth, which makes up greater than 90% of our global service revenue and is the annuity part of our revenue stream. Product growth orders for the second quarter were approximately $77 million and represented a book-to-bill ratio of 1.3, with a trailing 12-month ratio of 1.3. Our book-to-bill ratio is defined as gross product orders for the period divided by product revenue for the period, and we continue to believe that the book-to-bill ratio is the right metric to ensure healthy growth of our backlog as we add more product orders than shipments in the quarter. We ended the second quarter with a reported order backlog of approximately $463 million, defined as orders that are younger than 30 months. This represents approximately two years of FY 2024 product revenue.

As part of our diligence in ensuring a high-quality backlog, we canceled only one unit representing approximately $2 million of orders due to evolving customer dynamics. As mentioned before, over the last couple of years, we have redefined our order booking criteria focused on deals with higher profitability that convert to revenue within 30 months and as a result have seen lower age-outs and faster order-to-revenue conversion. Our overall gross margin for the quarter was 36.1% compared to 33.5% in the prior year. This increase was due to an approximately 2.4 percentage points or $2.6 million of incremental net China margin release associated with shipments from our JV partner to their end customers. Additionally, favorable pricing and efficiencies within our manufacturing operations contributed approximately 2.9 percentage points, offset by higher parts consumption and other service cost impact of approximately 2.7 percentage points.

Coming back to the China margin release, as a reminder, due to JV accounting rules, we must defer approximately 50% of the margin associated with the shipment revenue that we have made to the JV and do not realize that margin until the JV ships that product to their end customer. This phenomena resulted in an accumulation of deferred margin on our balance sheet as we were awaiting regulatory approval, which was obtained in June of 2024. Since then, the China JV started to make shipments to their end customers in our fiscal Q1 and delivered higher than anticipated shipments in Q2, allowing the release of that margin earlier than we expected. We have provided additional details in our supplemental deck on the impact of deferral historically and moving forward.

We expect this margin deferral timing to be less of a factor moving beyond FY 2025 as JV volumes normalize and to have a nominal impact. Operating expenses in the second quarter were $37 million compared to $40 million in the second quarter of the prior fiscal year, primarily due to higher ERP implementation costs incurred last year. Operating income for the quarter was $4.7 million compared to operating loss of $4 million from the prior year. Adjusted EBITDA for the quarter was $9.6 million compared to $2 million from the prior year, primarily due to higher shipments, higher release of deferred China margin, and lower operating expenses. Turning to the balance sheet, total cash, cash equivalents, and short-term restricted cash amounted to $64 million compared to $60 million at the end of last quarter. Net accounts receivable were approximately $87 million compared to $92 million in the prior quarter.

Our net inventory balance was $149 million, down $6 million from the prior quarter as we focus on a leaner approach to inventory management. Lastly, we continue to be focused on addressing our capital structure and refinancing needs to ensure we have flexibility to grow the business for the years to come. Given that we are an international business with a global supply chain, we are keeping a close eye on how tariffs being imposed by the new U.S. administration could impact our business. Considering everything we know as of the time of this call, we think it is a de minimis risk for the second half of the year, but it's also a fluid situation that we intend to monitor closely and will update you further as the situation develops.

In summary, we are pleased with our Q2 and first-half results and are raising our full-year FY 2025 revenue guidance range to $463 million-$475 million from the previous range of $462 million-$472 million and full-year adjusted EBITDA guidance range to $28.5 million-$31 million from the previous range of $28 million-$30 million. This revised guidance range assumes minimal tariff impact and that the U.S. market will begin its recovery in the second half of FY25, delaying system revenue and associated EBITDA to the fourth quarter of our fiscal year. Those are our key financial highlights, and with that, I'd like to hand the call back to Suzanne.

Suzanne Winter (President and CEO)

Thanks, Ali. Before Q&A, I want to sum up my view on the recent results, which show clear progress toward our full-year goals, setting the stage for sustained profitability in the long term. Product revenue growth was very strong, faster than the markets we compete in, driven by sales in China and Japan and strong demand for CyberKnife. While on a normalized basis, services revenue increased modestly. Margins benefited from our China margin release and deliberate operating efficiencies against some inflationary trends. Most importantly, I'm pleased that our financial performance improvements should help us to continue to innovate and expand our efforts to improve outcomes for cancer patients around the world.

I would like to thank the entire Accuray team for all of their hard work and the role they have played in the meaningful progress we have made against our strategic priorities and their ongoing dedication and passion to advancing our mission and creating value for all stakeholders. I will now turn it back over to the operator for Q&A.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Marie Thibault with BTIG. Please go ahead.

Marie Thibault (Analyst)

Hi, good evening. Thanks for taking the questions and congrats on a very nice quarter. I wanted to start here with China, 54% year-over-year growth. I wonder if you could detail for us what that is in terms of revenue and just how sustainable you think this demand is. You have some obvious catalysts like Tomo C coming onto the market. You have got new clearances in the Type A category. I just want to have an understanding of, can we see this demand continue for a couple of quarters, a couple of years? How would you kind of size this for us?

Suzanne Winter (President and CEO)

Thanks for the question, Marie. Yeah, we're very pleased with our performance in China, both in Q2 and really the full first half. I think we have been an outlier in the market compared to what a lot of other folks are seeing in China. The market data does show that the market was down, mainly due to market dynamics around the anti-corruption campaign. I think we were an outlier and outperformed the market for two major reasons. One is that our JV partner is executing very well and has really proven to be a very strategic partner for us and our success within this market. The other is the strength of our product portfolio.

We now have a very strong, broad portfolio with the clearance of Tomo C for the Type B segment, as well now the enhanced version of CyberKnife and Radixact with Synchrony and ClearRT. We feel good about the product portfolio and how we can compete within this market. We did expect the first half to be stronger just due to the normal historical seasonality in China. We are very pleased, and we are pleased with the market share gain that we have seen over this year. Our goal is to disrupt the competitive share dynamics within this market, and I think that is really important, especially as we look to go into other emerging markets.

Marie Thibault (Analyst)

Very helpful. Were you able to share a revenue number for us from China?

Suzanne Winter (President and CEO)

Yeah, and maybe we can do that when we're on the one-on-one calls, Marie, because I think it's.

Marie Thibault (Analyst)

Okay. Fair enough. I want to ask a follow-up. Very encouraging to hear that your outlook includes minimal impact from tariffs. Very good to hear. As well as recovery in the U.S. market in the second half of this fiscal year. Guess on the macro side, would love to understand what sort of feeds your confidence on that, what you're seeing today if you're starting to see green shoots. As well on the macro side, any impact you're building in for FX? I know, of course, the Japanese yen has recovered, but I know it is a big part of it, the euro as well. Any details on that as well? Thanks for taking the questions.

Suzanne Winter (President and CEO)

Let me start with the U.S. business, and then I'll hand to Ali more on the macro discussion. I want to remind you that we have said that we expected gradual recovery in the U.S. business in the second half, with FY 2026 being more of the normalized market conditions. We've built into the balance of the year what we have built in, we think is reasonable, and it's based on what we have high visibility to in the next six months. These are orders that are already in the backlog that are going into the installation phase. We think the assumptions for the second half are reasonable, with just final timing always being the only variable as it relates to just customer readiness. We had some key installations this quarter.

OU Stephenson Cancer Center, which is the only NCI National Cancer Institute designated cancer center in Oklahoma, installed a Radixact, which was a competitive displacement. Also, Boston Medical Center, where they installed a CyberKnife and a trade-in trade-up. We are consistent with what we believe in the second half and going into FY 2026, and we are going to continue to monitor the market conditions. We will keep you posted on the upcoming calls. Ali can talk more about macro and.

Ali Pervaiz (CFO)

Yeah, absolutely. Marie, obviously, there's a lot going on in terms of just the macro. Obviously, a lot of uncertainty as it pertains to tariffs as well, which, as I mentioned during my prepared remarks, that's something that we are closely monitoring. We think that it has a de minimis risk over here in the second half. Again, of course, it is a pretty fluid situation, so we're going to continue to keep a close eye on it. I think beyond that, inflation is something that impacted us quite a bit over the last couple of years. Inflation has not gone away. It's probably increasing at a lower rate, but it still is impacting our P&L, both on the product and the service side. We have a lot of efforts going on internally as part of our margin expansion plan to combat that.

That is going to continue to remain a focus point for us because we really do, over the midterm, want to see our COGS come down as part of our margin expansion strategy, which will really help with overall margin expansion. Inflation is a big one that we are keeping an eye on and, again, combating some of that. In terms of foreign exchange, I think the biggest factor really is Japan. We have a significant install base over there. We enjoy number two market share, and we have really great service revenue. We want to be able to maintain that service revenue. We are taking pricing actions. That is certainly not enough to be able to combat all the weakness we have seen in the Japanese yen. It ebbs and flows between 150-160.

Again, just keeping a close eye on that right now and just making sure that we're factoring that into our models as we look into the future.

Marie Thibault (Analyst)

Thank you so much.

Operator (participant)

The next question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Brooks O'Neil (Senior Research Analyst)

Thank you very much. Good afternoon, everyone. Congratulations on a terrific second quarter. I'm just going to follow on a little bit with Marie's last question related to Japan. I think in our conversations in recent quarters, you've suggested Japan was a mature market, but it sounded like you had a pretty strong performance there this quarter. Are there any factors you'd call out for driving that?

Suzanne Winter (President and CEO)

Yeah, hi, Brooks. Yeah, I think the only thing to call out is we did expect the first half of the year in Japan to be the stronger half just based on, again, visibility to customer timing. It is a replacement market. It is a developed market. Most of their installations and wins are competitive displacements, so very strategic. We do think the first half was probably the stronger half within the year.

Brooks O'Neil (Senior Research Analyst)

Cool. Secondly, I'm very interested in your progress around the world beyond China and some of the other markets that you've developed in. Why don't you talk just a little bit about what you're seeing in India and the kind of opportunity you see there going forward?

Suzanne Winter (President and CEO)

Yep, absolutely. EIMEA, which includes India within the region, still remains our largest region and is very heterogeneous in terms of both developed and emerging markets. We are expecting strong second half growth from this region. In particular, in India, we did get CE mark for the Helix. We are still awaiting the local regulatory approval for the Helix targeted for India. We do expect it in the near term, and we do expect that it's going to have a meaningful impact in strategic markets like India. We were really thrilled to see the order performance of Helix in some of these other markets. We talked about that in our prepared remarks, but markets like Pakistan, like various countries within Northern Africa.

We do expect that we'll be able to penetrate some of these higher growth underpenetrated markets with this product and have similar success as what we see with the TomoTherapy, which is a similar value segment product, really a workhorse product for these markets.

Brooks O'Neil (Senior Research Analyst)

If I could talk to one more to follow on, would you say from a competitive position, those are differentiated in terms of price, but also in terms of clinical capability?

Suzanne Winter (President and CEO)

Yes. I would definitely say clinical capabilities. I will tell you that both the Helix and the Tomo C, the fact that it has a helical delivery is a differentiator. Also within those markets, a breakthrough high-end premium technology like CyberKnife is also very attractive to establish the Accuray technology brand. It is not pricing. It is technology.

Brooks O'Neil (Senior Research Analyst)

Great. Thank you very much. Congratulations again.

Suzanne Winter (President and CEO)

Thank you.

Ali Pervaiz (CFO)

Thanks, Brooks.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Suzanne Winter for any closing remarks.

Suzanne Winter (President and CEO)

Thank you all for joining our call. This concludes our earnings call, and we're looking forward to speaking with you again this spring for our fiscal 2025 third quarter earnings release.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.