Accuray Posts Narrower-Than-Expected Loss

’s (ARAY) fourth-quarter fiscal 2013 adjusted loss remained flat year over year at 20 cents per share. However, it was narrower than the Zacks Consensus Estimate of a loss of 21 cents. Adjusted loss excludes one-time items such as acquisition, restructuring and integration-related expenses associated with TomoTherapy and Morphormics.

Reported net loss in the quarter was $18.7 million or 25 cents a share versus a loss of $20.3 million or 28 cents in the prior-year quarter.

For fiscal 2013, adjusted loss of $1.12 a share was wider than the Zacks Consensus Estimate of a loss of $1.10 per share and the year-ago adjusted loss per share of 59 cents. Reported net loss attributable to shareholders in fiscal 2013 was $103.2 million or $1.41 a share versus a loss of $72 million or $1.02 in the prior-year quarter.

Revenues
Adjusted revenues for the quarter went down 45.6% to $84.9 million, which was in-line with the Zacks Consensus Estimate of $85 million. Adjustments exclude deferred sales related to the TomoTherapy products and services. For fiscal 2013, adjusted revenues fell 21.2% to $316.2 million, missing the Zacks Consensus Estimate of $317 million.

Adjusted revenues from products decreased 36.6% to $38.6 million in the quarter, mainly due to manufacturing and supply-related issues, which led to shipment delays of new products. However, adjusted revenues from services grew 16.6% to $46.3 million, reflecting positive trends from the TomoTherapy business.

Orders
Accuray shipped 14 and installed 15 new CyberKnife and TomoTherapy systems during the quarter, taking the aggregate global installed base to 700 units. The company added net new system orders worth $71.6 million, leading to a total system backlog of $317.4 million, up 12% year over year.

Margins
Adjusted gross margin for the quarter declined to 34.6% from 39.6% in the year-ago quarter due to a change in sales mix. Adjusted gross margins from product and services were 41.7% and 28.7%, respectively, in the fourth quarter versus 52.8% and 19.9% in the year-ago quarter. Improving gross margin in the service business following the acquisition of TomoTherapy is encouraging. The company expects service gross margin to improve but it is likely to demonstrate quarterly fluctuations, going forward.

On an adjusted basis, selling and marketing along with general and administrative expenses decreased 12.9% to $25.0 million. On an adjusted basis, research and development (R&D) expenses significantly dropped 31.9% to $14.6 million.

On an adjusted basis, operating expenses decreased 21.4% to $39.4 million from $50.1 million a year ago, mainly due to the company’s restructuring activities. Operating expense was close to the company’s plan of spending $38 million on operational activities.

Financial Condition
Accuray exited the quarter with cash, cash equivalents and restricted cash of $177.1 million, higher than $145.1 million as of Jun 30, 2012. Long-term debt increased to $198.8 million as of Jun 30, 2013 from $79.5 million as of Jun 30, 2012.

Guidance
The Calif.-based company divulged its revenue outlook for fiscal 2014. Revenues are expected in the range of $325 million–$345 million on both reported and adjusted basis. The fiscal 2014 Zacks Consensus Estimate for revenues and loss per share is pegged at $361 million and 46 cents, respectively.

Our View
Despite a bottom line beat, we remain concerned over Accuray’s declining top line. Management needs to improve its higher-margin product revenues and aggressively remediate its structural issues for new offerings to fully contribute to total sales. Moreover, ARAY remains susceptible to the weak global markets, reimbursement uncertainties and faces stiff challenges from competitive product offerings. A lot needs to be done to bring the company back on track.

However, we are impressed with Accuray’s achievement of improving product order momentum in the fourth quarter, reflecting healthy product adoption of new products. Additionally, the company’s restructuring efforts and healthy service revenues and gross margin are also helping it stabilize.

Currently, ARAY carries a Zacks Rank #4 (Sell). Other medical instrument companies such as Given Imaging (GIVN), Luminex (LMNX) and Masimo (MASI) with a Zacks Rank #2 (Buy) are worth considering.

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