Accuray Posts Narrower-than-Expected Q3 Loss - Analyst Blog

Accuray Incorporated's ARAY fiscal 2014-third-quarter loss of $4.7 million or 6 cents per share was significantly narrower than the year-ago loss of $31.2 million or 42 cents per share as well as the Zacks Consensus Estimate of a loss of 16 cents.

Total revenue for the quarter came in at $97.1 million, up 37.7% year over year. Revenues also surpassed the Zacks Consensus Estimate of $82 million.

Despite reporting bottom and top-line beat, third-quarter results failed to impress investors. Shares of ARAY fell 6.3% following the earnings release to close at $7.99 till the last reported session.

Revenue Details

Product revenues during the quarter surged 88.0% to $47.0 million, mainly driven by enhanced commercial effort and improvement in the company's order to revenue conversion process.

Service revenues stood at $50.0 million, up 10.0% from the year-ago quarter. The upside was driven by the increase in the company's installed base and shift of customers toward higher value service contracts.

Orders

Gross product orders declined 16.0% to $45.2 million during the quarter. Gross product orders, less cancellations and age-outs, totaled $38.6 million, a decrease of 12.5% from the third quarter of fiscal 2013.

Both gross and net order volumes were lower year over year due to the lack of new orders in the company's U.S. business.

Product backlog at the end of the reported quarter was $354 million, approximately 19% higher than the backlog at the end of the prior-year quarter.

Margins

Gross profit for the quarter escalated nearly 98.0% to $39.7 million. Gross margin expanded 1,250 basis points (bps) to 40.9% from 28.4% in the year-ago quarter. Product and services gross margins were 46.3% and 35.8%, respectively, in the third quarter versus 26.5% and 29.5% in the year-ago quarter.

Product gross margin improved on higher volume and stronger average product revenues. The significantly higher service gross margin represents continued improvement in TomoTherapy Systems reliability, which continues to drive demand for lower as well as higher-margin service contracts.

Total operating expenses decreased 10.9% to $40.2 million from $45.1 million a year ago. Operating expenses were close to the company's plan of spending $40 million on operational activities.

Research and Development (R&D) expenses declined 12.3% to $13.8 million during the quarter. As a percentage of sales, R&D expenses contracted 810 bps to 14.2% from 22.3% in the year-ago period.

Selling and marketing expenses rose 21.1% to $15.3 million, however, as a percentage of sales, it decreased 210 bps to 15.8% during the quarter. General and administrative expenses decreased 33.7% to $11.1 million, whereas, as a percentage of sales, it fell 1,230 bps to 11.4% from 23.7% in the year-ago period.

ARAY reported adjusted EBITDA of $7.8 million compared with a loss of $19.9 million in the third quarter of fiscal 2013, representing an impressive improvement of 139.3%. The improvement came on the back of revenue growth, margin expansion and operating expense control.

Financial Condition

ARAY exited the quarter with cash, cash equivalents and restricted cash of roughly $174.0 million, down 5.5% from $184.1 million in the year-earlier quarter. Long-term debt increased marginally by 0.6% to $198.8 million from $197.7 million a year ago.

ARAY generated a positive cash flow from operations of $13.7 million in the quarter under review.

Outlook

For fiscal 2014, ARAY raised its total revenue guidance to a range of $355 to $365 million from the previous range of $340 to $350 million provided on Jan 30, 2014. The current Zacks Consensus Estimate of $350 million lies below the revised guided range.

Our View

We are encouraged by ARAY's fiscal 2014-third-quarter results, which beat the Zacks Consensus Estimate at both fronts. Moreover, ARAY revised its fiscal 2014 revenue guidance upward, reflecting a favorable momentum in the business.

Additionally, the quarter was also marked by EBITDA profitability, positive cash flow from operations and working capital reduction. ARAY's CyberKnife and TomoTheray systems continue to generate positive feedback from customers and contribute to revenue growth.

However, with respect to orders, both gross and net order volumes were lower year over year in the quarter due to the lack of new orders in the U.S. ARAY remains susceptible to the weak U.S. and European markets, reimbursement uncertainties and faces stiff challenges from competitive product offerings.

Currently, ARAY carries a Zacks Rank #2 (Buy). Other medical instrument companies worth a look are Delcath Systems, Inc. DCTH, RTI Surgical Inc. RTIX and Edwards Lifesciences Corp. EW. While Delcath Systems and RTI Surgical sport a Zacks Rank #1 (Strong Buy), Edwards Lifesciences has the same Zacks Rank as ARAY.