Earnings Call: Q4 2020

Aug 13, 2020

Good afternoon. Welcome to Accuray Report Fourth Quarter And Fiscal Year Twenty 20 Financial Results Conference Call. After today's presentation there'll be an opportunity to ask Please note that this event is being recorded. I would now like to turn the conference over to Joe Diaz from Lytham Partners Please go ahead. Thank you, Kate, and good afternoon everyone. Welcome to Accuray's conference call to review financial results for the fourth quarter fiscal year 2020, which ended on June 30, 2020. 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 and Shig Hamamatsu, after a Senior Vice President And 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 set forth in the press release we just issued after the close after the market close this afternoon, as well as in our filings with the Securities And Exchange Commission. The forward looking statements on this call are based on information available to us as of today's date, and 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 law. Accordingly, you should not put undue reliance on any forward looking statements. A few housekeeping items for today's call: There will be a slide presentation accompanying today's call, which can be accessed on the link provided in today's earnings release or by going directly to the company's investor page at acuray.com. Also, during the Q And A session, we requested participants limit themselves to two questions and then re queue with any follow ups. Finally, all references we make to a specific quarter in the prepared remarks are to our fiscal year. Statements regarding our fourth quarter refer to our fiscal 4th quarter ended June 30, 2020. With that, let me turn the call over to Acura's President and Chief Executive Officer, Josh Levine. Josh? Thanks, Joe, and thank you to everyone joining us today Joining Chigenai on today's call is also Suzanne Winter, our Chief Commercial Officer and Head of R&D, who will be joining us during the Q And A session. Despite the challenging environment caused by COVID-nineteen, we concluded the fiscal year on a strong note and feel good about our full year fiscal 2020 performance. We generated 10% year on year order growth, aggressively managed expenses and working capital and positioned the business for future growth. With that said, It's clear that the macro environment is requiring our team to find new and creative ways to engage customers and manage the business. The intensity of the COVID-nineteen situation is highly variable by region and local markets, continuing travel and customer access restrictions in certain markets and the resulting logistics and bunker construction schedules related to installation project timeline have been impacted at both our distributor and end user levels. As a result, we expect continued uncertainty of revenue conversion timing for at least the first half of fiscal twenty twenty one. Despite these headwinds, we're demonstrating a high degree of adaptability Our commercial team continues to successfully respond to customer specific conditions and requirements. Sales, clinical application support, and even some service related diagnostics and troubleshooting interactions are being conducted through video conference platforms that enable customer communication and support in real time. On balance, we believe we are operating very effectively within the constraints of the COVID environment and I'm proud of our commercial team's ability to adapt and the dedication of our entire organization during these challenging times. From an internal focus perspective, we've been taking actions across an array of operational and financial areas to help ensure the continuity of our business. Operationally, we are continuing to work aggressively with critical supply chain and logistics partners to ensure that we can support our production and service activities, activities globally, while maintaining maximum flexibility related to production schedule changes tied to revenue conversion timing. We exercised great financial discipline in fiscal 2020 and maintained our focus on cash flow management with minimal compromise to commercial activities and advancing future innovation. While Sid will discuss our balance sheet position in greater detail in his prepared remarks, These actions allowed us to finish fiscal 2020 with a stronger cash position than our initial internal forecast anticipated. As we exited the 4th quarter, we were able to prepay $10,000,000 of our term loan and renegotiate the covenants related to the remaining debt with the lender in the 1st week of the fiscal 2021 first quarter. Thinking about our strategic growth opportunities, we are still awaiting final completion of the tender process for While the timing of Type A shipments remains uncertain, our belief is that we will begin to see initial revenue impact sometime in the first half of fiscal 'twenty one. Turning to the Type B segment of the China market. We continued to advance our plan to produce a made in China product for the Type B segment. Operationally, we have made significant progress in readying our production capability in Tangen. The JV Manufacturing facility there is now complete. With manufacturing qualification and in country required testing, finishing sometime in the 1st calendar quarter of 2021. Based on estimates of the product registration process timelines, We expect that we will begin shipping the Tangen produced version of Radixact in the fourth quarter of calendar 2021 or roughly 15 months from now. Additionally, the Tangen Training Center is also now complete and devices and equipment to support training are scheduled to be installed and in place by the end of this month in order to support a grand opening of that facility by mid September. Turning to one of our more important R and D development projects, During the fourth quarter of fiscal 2020, we achieved full commercial release of the Synchrony Motion Management upgrade on Radixact, and we are very encouraged by the strong interest in Synchrony from existing Radixact customers who are treating complex SBRT cases. During fiscal Q4, we shipped a total of 9 Synchrony upgrades and installed 3 of these upgrades in the Japan market alone. We now have 5 customer locations that are actively treating patients with Synchrony equipped Radixact, and our expectation is that we will have an additional 10 customer sites going live by the end of our current quarter. We believe the added clinical value that Synchrony can bring to Radixact will be a strong driver of trade in trade up opportunities for existing tomo installed base replacement sales. The importance of the Synchrony introduction on Radixac cannot be overstated in terms of clinical impact. In order to share with you how truly unique Synchrony's motion management capability is, and the significance of the clinical impact it will have on the Radixact platform, we have some visuals to share with you as I walk through my prepared remarks. As background, Synchrony uses artificial intelligence, employing predictive algorithms to automatically adapt to the known position of treatment targets as they move during the rhythmic motion associated with Synchrony also has the ability to adjust the targets that move intermittently as can often occur during treatment of prostate cases. This unique ability to adapt the treatment delivery beam in real time to a moving target enables clinicians to reduce margins resulting in significantly less radiation dose to healthy tissue, which can lead to better outcomes when treating lesions in the lung, liver and other anatomical sites that move with respiration. It also allows for improved clinical confidence in utilizing hyperfractionated treatment plans to deliver SBRT cases. Going to our first slide, we have provided a comparative example of a lung case with and without Synchrony. Prior to Synchrony, the 2 conventional approaches of treating tumors or lesions that are affected by target motion are gating and the ITV or internal target volume method, both of which require clinicians to utilize larger treatment margins. In gating, the radiation beam is turned off except when the target moves into a narrowly defined target window. Because BMO time associated with gating results in less efficiency and overall treatment time, typically during gating, the target window is widened but in doing so, that means that more healthy tissue is exposed to unwanted dose. With the ITV method, the beam targets the entire envelope or range of target motion, delivering a large amount of dose to healthy tissue. While this approach is more time efficient than gating, This method creates significantly greater radiation exposure to healthy tissue. Looking at the highlighted treatment locations in the side by side comparison in the slide, it's striking to see how much smaller the treatment margins are on the left side of the slide, utilizing Synchrony versus the gating or IPV approach. Because Synchrony enables clinicians to deliver larger doses with smaller treatment margins and faster treatment times, Clinicians experienced with Synchrony report greater clinical confidence in using hyperfractionated treatment plans for their more challenging SBRT cases Turning to our second slide. We have provided a case study for a recent case performed at Frederick Medical Center in the medical college of Wisconsin, of a forty five year old male patient with lung metastases. This is a great example This patient was treated fiducial free, utilizing SBRT in 3 fractions with 30% less treatment volume. Beem on time, for this case, was only 9 minutes because the beam synchronization takes place automatically and in real time Treatment delivery remains highly efficient from a timing and workflow standpoint, with no need to ever pause the treatment beam, mechanically restrain the patient to ensure proper positioning or requiring the patient to hold their breath for uncomfortably long periods to interrupt the respiration cycle. Customer sites in Japan, Italy and the U. S. Have successfully delivered fiducial free SBRT treatments for lung patients, using hyperfractionated SBRT treatment plans with Beaumont time of less than 10 minutes. Synchrony on the Radixact platform, is driving clinical confidence and expanding the universe of patients who historically might not have been treated with hyperfraction at SBRT because of already compromised pulmonary or respiratory function. Looking forward in fiscal 'twenty one, we believe the COVID environment will continue to be a catalyst for radiotherapy treatments utilizing high dose, shorter duration treatment timelines. Both of Accuray's treatment platforms are uniquely capable of supporting these requirements. Going forward, we expect the accelerated use of hyperfractionated treatment driven first by changes in U. S. Based reimbursement with the proposed alternative payment model second, the growing body of clinical data that demonstrates clinical safety and efficacy of hyperfractionation versus conventional treatment And lastly, the benefit of shorter treatment regimens for both the patient and the provider in terms of user experience. Covering both short and longer term horizons, we believe Accuray's portfolio is very well positioned to meet the clinical needs of our customers and their patients. In closing, while the COVID 19 environment continues to be challenging, we are focused on managing the activities that we can control. Ensuring the health and safety of our employees, ensuring continued support for our customers and their patients, and focusing on those elements, both operationally and financially that will drive Accuray's business continuity. Now I'd like to turn the call over to Shib for his review of the financial details. Shib? Thank you, Josh. And good afternoon, everyone. I'll begin with some additional details on our financial performance for the fourth quarter as well as our fiscal year 2020 and then focus on certain highlights for the period. Gross orders for the fourth quarter were 94 point $3,000,000, which was $377,300,000, an increase of 10% over the prior year The Americas and Japan regions were the primary drivers of this year over year growth, with growth rates of 64% and 10% respectively. From a product mix perspective, the chemotherapy platform accounted for approximately 70% of gross orders for the 4th quarter and CyberKnife accounted for the remaining 30%. For the full year, total therapy platform accounted for approximately 60% of gross orders and CyberKnife accounted for 40%. Which was consistent with the which was better than our expectation going into the quarter as we had approximately $5,000,000 of aging activities during the quarter. During the 4th quarter, we had cancellations of approximately which was offset by one point we generated $75,000,000 orders in the 4th quarter, which represented a 17% increase over the prior year. For the full year, net orders were $281,000,000, an increase of 29% over the prior year. We ended a 4th quarter with a backlog of $603,000,000, representing an increase of 22% from June 30 2019. Overall, the team has done a great job in generating new orders and age ins in this challenging environment. With that said, as and as Josh had indicated, we continue to anticipate that COVID 19 disruption will adversely impact revenue conversion timing in the near term. Although the depth and extent to which COVID 19 will impact individual markets could vary on a number of factors. We expect to see higher than normal level of age outs in the coming quarters Total revenue for the fourth quarter was $95,000,000, down 19% compared to the prior year. On a full year basis, total revenue was $382,900,000, down 9% from the prior year. On a regional basis for the full year, we saw year over year decline, revenue decline in all regions, primarily due to the impact of the pandemic, except with Japan where revenue grew by 4%. The growth in Japan came primarily from an increase Product revenue for the quarter was $40,400,000, On a full year basis, product revenue was $167,300,000, a decrease of 15% from the prior year. From a product mix perspective, CyberKnife accounted for approximately 25% of the quarter's revenue unit volume or as a tomotherapy platform accounted for the remaining 75%. For the full year, CyberKnife accounted for approximately for approximately 30% of total product revenue and tomotherapy platform accounted for approximately 70%. Which was consistent with the prior from the prior year. On a full year basis, service revenue was $216,000,000 a decrease of 3% from Turning now to gross margin. Our overall gross margin for the quarter was 42% compared to 39.1% in the prior year. On a full year basis, our overall gross margin was 39.1% compared to 38.8% in the prior year. Quarter gross margin for the quarter was 45% compared to 40.7% in the prior year. The year over year increase in product gross margin is due to better pricing within a thermal therapy platform, as well as stronger upgrade volume related to Synchrony on Radixact. Full year product gross margin was 42.7%, compared to 40.7% in the prior year. Service gross margin for the quarter was 39.8%, compared to 37.4 percent in the prior year. Q4 service gross margin benefited from cash preservation actions we implemented during the quarter as well as reductions in travel and other operating costs due to the pandemic. On a full year basis, service gross margin was 36.4% compared to 37.2% in the prior year. That year over year decline in service gross margin was primarily due to higher than normal level of parts consumption, we experienced in the first half of fiscal 2020, which has been reduced and began to stabilize in the second half. Moving down to income statement. Operating expenses for the quarter were $35,300,000, a decrease of 7.3 was primarily driven by cash preservation actions we implemented in response to the pandemic, which included position eliminations and the company wide elimination of the annual incentive bonus. The spending in the 4th quarter also reflected curtailment of costs associated with the impact of COVID-nineteen, particularly travel, marketing events and related expenses. All branding expenses for the quarter included approximately $1,000,000 of severance charge as part of the cost reduction actions mentioned earlier. On a full year basis, operating expenses were $138,000,000 or down 15% from the prior year. Operating income for the quarter was $4,600,000 compared On a full year basis, operating income was $11,900,000 compared to $600,000 in the prior year. While our fiscal 2020 operating income benefited partially from cash preservation actions taken in response to the pandemic, The year over year growth of $11,000,000 demonstrates improvement in operating leverage that positions us well in the post COVID environment. Operating impact of the China JV for the quarter was a loss of $400,000. Gain or loss on equity investment right below our operating income line. On a full year basis, the operating impact of the JV was a loss of $100,000. Adjusted EBITDA for the quarter was $9,000,000 which was consistent with the prior year and excludes $1,000,000 $800,000, an increase of 13% compared to $23,700,000 in the prior year. The adjustments between GAAP net income and adjusted EBITDA are outlined and quantified in our press release issued today. We ended a quarter with $109,000,000 of cash and short term restricted cash, which was an increase of $17,000,000 from the prior quarter. We generated $19,000,000 of operating cash flow during the quarter as we continue to focus on working capital management. Our strong cash position exited the 4th quarter allowed us to reduce the term loan balance by $10,000,000 immediately after the fiscal fourth quarter, And at the same time, we negotiate the key debt covenant thresholds to a lower level that positions as well going into new fiscal year. While we are pleased with our 4th quarter performance, we continue to expect an uncertain near term demand environment for future system orders and revenue, as COVID 19 continues to put constraints on capital expenditures at hospitals. Accordingly, we anticipate our first half that's called 2021 orders and revenue to decline year over year. As we manage the near term headwinds in revenue conversion, we will focus on operational efficiency, margin expansion, and working capital management. We are focused on inventory and supply chain management, and so far, product availability has been strong, thanks to the great work of our supply chain and manufacturing teams and our partners, while ensuring our overall inventory position is reduced to an to an appropriate level in this uncertain environment. We are also working closely with our customers and suppliers to ensure a healthy and appropriate balance of our receivables and payables. We believe the $19,000,000 of operating cash flow we generated in the fourth quarter demonstrates of operational efficiency and ability to manage working capital in this challenging environment. And with that, I'd like to hand the call back to Josh. Thanks, Shig. Even with the uncertainties created by the COVID environment, we are encouraged by our Q4 and full fiscal year operating results. We are demonstrating daily that we have the ability to successfully adapt to this new external environment, and we are excited about our future I want to thank all of our employees across the globe for their energy and contributions they're making to support our customers and their patients during these unprecedented times. And with that, ready to open up the call for your questions. You. Our first question is from Josh Jennings from Cowen. Thanks. Good afternoon and congratulations on such a strong new order results despite the pandemic. I was hoping to start off, Josh, just to hear your thoughts on the Siemens variant, combination. And what that potentially does to duration oncology market from a competitive standpoint, do you expect any more consolidation between advanced imaging manufacturers and radiation therapy companies. And if you could remind us just about your relationship with Hitachi, what that exactly how that sits today and whether or not, just help us understand what their radiation business looks like internationally outside of their proton therapy business. Yes, Josh. There's a, there's obviously a bunch of, bunch of components to that question. Let me start with this kind of Siemens variant, situation. The, I mean, I think, I think to some degree, there's an inflection point here. I think that there will be, undoubtedly during some period, taking place of integration, there's going to be some, likely disruption or distraction factor, we certainly would expect that to occur. And I think that we're going to be opportunistic in trying to take advantage during that period of time of, of, you know, just from a commercial perspective, the competitive dynamics and be opportunistic to the degree that we can and taking advantage of it. On, the part of the question around, you know, is there more to occur in this regard? I mean, I think we believe strongly that there's that imaging and imaging capability is, a growing in important area related to radiotherapy treatment. We have, as you know, we have a significant amount of activity taking place in our development roadmap around that kind of technology upgrade ourselves. But, as you think about diagnostic imaging and you think about radiation therapy, it that the combination of these pieces together create a true end to end kind of oncology care strategy or oncology care services strategy related to what is important to customers and their patients. So I mean, while it's difficult to predict, specifics or timing, I think that, that the strategy or the potential value proposition that results is, would likely create some tailwind for for more consideration of these types of combinations, on the question around Hitachi, Hitachi has been a distribution partner of ours in Japan for many years. That relationship is now non exclusive. And, the Tanshi is actually been in the process of exiting their, diagnostic imaging business. I deal hasn't closed yet, but that that business, I believe, is, being purchased by Fuji film. And, we're strong in Japan. It's probably our strongest, from a market penetration, region of the world. We're continuing to do well there. We're considering and looking at a variety of options to, from a distribution standpoint at present. We're still involved with Hitachi, but obviously as they transition their business to Fuji, it becomes, probably something that is a catalyst for us looking at other options or, possible combinations. So, and I think I'll leave it at that. Great. And then just one follow-up on hospital capital equipment budgets. There's been a lot of concerns around how they'll shape up in the back half here. But can you provide any color on what you're hearing from your hospital customers and anything on new water trends you experienced already in July August? Thanks a lot for taking all the questions. Sure. Look, I think while procedure activity, some of the other procedures that had been, put on hold, directivity in general is starting to come back. I think it's safe to say or fair to say that most hospitals right now are are in kind of a holding pattern on large capital equipment, CapEx spending. Those those that are moving forward with those kind of decisions are places where either they're at capacity with their current current product and technology capability or are moving in a direction where, they need to be able to treat a different mix of patients or they're at the end of, useful life cycle of the equipment they've already had historically, their legacy equipment. And so again, it's hard to kind of put everyone in the same, box with regards to one size fitting all. But, as our strength coming through, the fourth quarter showed, there were still people obviously placing orders for equipment. And, we would expect that to continue. I think it's more difficult to predict, in the near term, you know, and maybe an intermediate term, what, what, you know, what the trends look like. But again, I think that any one of a number of those 2 or 3, kind of variables I talked about are creating a catalyst for people to continue on with, CapEx investments in this kind of equipment. So, which is encouraging. Thanks, Josh. Our next question is from Brooks O'Neil from Lake Street Capital Markets. Go ahead. Good afternoon and congratulations on the terrific results in this environment. I was hoping to maybe pick Suzanne's brain a little bit in terms of how you guys see your hospital and clinic customers balancing 3 big things that are going on out there in the world. Number 1 is obviously COVID 19. Number 2 is this movement that you guys talked about towards Adaptive radiotherapy, something that's probably transforming cancer care, both here and around the world. And then third is the reality that at some point, our friends at CMS will get off their get us to the APM and the reality that they need to, that these hospitals need to prepare for that and be in a position where they can still play and deliver cancer care in their communities, whether obviously, we're talking U. S. On that factor. But Suzanne, what are you seeing out there right now? It's Haybrook Yes, no, I think you're absolutely right. It's a balance. I think it's a real challenge for all of our customers and trying to make sure that they're providing the best care, but getting access to capital. I would say here in the short term, and I say the short term, the next couple of quarters for sure. There's just uncertainty. And so, where we are focusing is exactly what Josh had just talked about. Are those customers that can access capital because they lack capacity or it's going to be very clear that the ROAP at some point is going to go into effect. But not only that, I think the COVID environment in general has put on, magnified the importance of shorter duration treatments. And so having technology, that's going to allow them to do hypo frac nation and ultra hypothyroximation is going to be critically important for them to remain, relevant and competitive within their own marketplace. So, we're working with our customers to be able to build that kind of an argument so that they can go and, propose to their administration. That being said, still really hard, as the COVID continues, there, everyone's sort of holding back. Until the end of the tunnel, and then may release, release additional capital equipment funds. So it's for sure a balance. I think the only other area that we are, being opportunistic are in underpenetrated market. Again, where radiation therapy is not available and to where the government sees it as being strategically important. So, again, it just means being close to our customers as much as possible and helping them with lots of abilities to try and navigate this environment. That's fantastic. I appreciate that. And then maybe obviously there were some comments in the prepared remarks about China, but in my opinion, China is a huge opportunity for you guys and a huge wildcard in terms of when we're actually going to see things start to move. So any other color, either Josh or Shig or Suzanne could give about what you're seeing and hearing from people in China, and when we're going to break that logjam, that would be extremely helpful. Yes, Brooks, again, you've heard us say this before. We don't think this is a matter of if, we think this is a matter of when. And there's no question that the COVID situation has, impacted the timing of this, but we still believe from a visibility and kind of an encouragement standpoint based on our people on the ground there and the things they're hearing that this is something from an activity standpoint in terms of the Type A impact that we should start to see some beginnings of revenue, revenue impact on this. Between now and the end of this calendar year. So again, nothing nothing definitive beyond what we've said before, but the tendering process, which is really kind of the administrative aspect of what was the remaining work that needed to be done on the Type A licenses from our understanding is now complete. Which means that, there should be some news here sometime soon. Okay. And Type B, you're pretty excited about too, I think, right? We are. Type B is we've made, while it's, you know, it really hasn't had the the visibility that the Type 8 part of the discussion has. We've made a lot of progress. And, I think that we're going to be able to compete certainly for our fair share of what is really by comparative, context, the much bigger opportunity longer term in China on the type B side. Our next question is from Anthony Petrone from Jefferies. Go ahead. Hi, this is Diana in for Anthony. Thank you for keeping our questions. We have 2 and I'll just ask them upfront if that's okay. So I was wondering if you had an update on Radonca volumes. Are center seeing volumes back up to pre COVID levels at this point? And then regarding the arrow bundle, are you expecting to be implemented for January 1, 2021, or will that be delayed? Thank you. Brianna, this is Josh. So I got the first question regarding patient volumes. The data that we get off of our installed base equipment suggest that from a patient volume, a treatment volume standpoint, we're actually seeing, pretty stable numbers and numbers that would be consistent with what we were driving, or seeing coming through those devices from a throughput standpoint in the pre COVID timeframe. So at the end of the day, radiotherapy and radiation oncology is a revenue generating service line, clinical service line for hospitals around the world. And they, while they're doing it and providing these services, obviously, under different protocols now from a patient and an employee safety standpoint, no one really that I can identify or very, very few people have ever turned off, if you will, their radiotherapy capability during this time. It was one of the only areas of the hospital that they were consistently moving forward with. So, no real drop off in patient, patient volume, from a treatment perspective. And was your second question related to, the APM discussion? Yes. So the auto bundle, if it was going to be implemented in January January 1, 2021 or if that will be delayed? No, I think the answer is there's a reasonable degree of certainty at this point that it's going to be probably longer out than that in terms of time frame, but sometime still in a, an overall window that would be probably some in the first half of calendar twenty twenty one. So while not in January, sometime not too far beyond that. Okay. Thank you so much. Our next question is from Tycho Peterson from JP Morgan. Go ahead. Hi guys. This is Casey on for Tycho. A few of my questions have been answered, but just one, maybe on OpEx. How should we be thinking about that moving forward in terms of, any more sort of levers you can pull for more OpEx reductions in maybe the first half of twenty twenty one? Thanks. Yes, sure. Yes, no problem. Thanks for the question. And obviously, given no guidance, I can't be specific, to the number in 2021. But what I can do is kind of give you a sense of our OpEx run rate in Q3, Q4 looking backwards here in 2020, because I know that in Q3 and Q4, there were some noise in our OpEx in terms of one offs here and there. So if you look at Q3 of FY2020, We reported $31,000,000 of OpEx, but that included a benefit of about $500,000 related to elimination of bonus accrual. So our Q3 run rate, in true sense, we're about 35,000,000 dollars, I would say, looking backwards. In Q4, we just reported, we reported about $35,000,000 And, I had a earlier remark, in my section that had $1,000,000 of severance in there, which I consider one time. And there are a few things, although I didn't specify in my prepared remarks, but I would say there's about $1,500,000 to $2,000,000, including $1,000,000 of severance that in there in Q4. So I would say Q4 OpEx run rate exiting the year was about $33,000,000. So hopefully that gives you a sense of what the run rate is on OpEx, ahead of it in the fiscal 2020. Gotcha. Thank This concludes our question and answer session. I would like to turn the conference back over to Joshua Levine for closing remarks. I'd like to thank everyone for joining the call this afternoon, and we look forward to speaking with you again in October when we host our annual Astro School 2021 first quarter results. Thanks very much. The conference has now concluded. Thank you for attending today's presentation.