Good morning, everyone. Suraj Kalia, Senior Medical Device Analyst at Oppenheimer. Pleased to have with us Suzanne Winter, CEO, and Ali Pervaiz, CFO of Accuray. Suzanne, the floor is all yours. I'll resurface probably four, five minutes towards the end for Q&A.
Very good. Thank you, Suraj, and thank you. It's a pleasure to be here at the conference. I'm gonna talk a little bit about Accuray. We are a global leader in high-precision radiotherapy and radiosurgery. Quick picture of our headquarters based in Madison, Wisconsin. I will, of course, put our forward-looking statement up for all to see. But just a little bit about our vision. You know, for people that have been diagnosed with cancer, at least 60% of them will receive radiation therapy as a course of treatment, either in addition to surgery or chemotherapy, or as a first-line treatment.
Our vision for our company and what we are dedicated to is developing the technology to really expand the ability to cure cancer with radiation therapy, and improve and extend the lives of those that have been diagnosed. You know, it's something that is a part of everything that we do within the company, and is a major part of our mission, and what we discuss on a day-to-day basis. Cancer incidence continues, and you know, in the U.S. in 2024, we are expecting 2 million folks to be diagnosed with cancer. And the incidence continues globally, with an estimated 20 million cases by 2050, growing at 77%, so it's a continuing problem.
You know, what we also see is a global disparity in the access to the best care, and specifically, radiation therapy. You know, if we look at the landscape for the business, it's really dominated by three companies, very high barriers to entry. Accuray is one of those three companies, and we have an infrastructure in place to be able to service and support customers worldwide. Clinical trends for radiation therapy are toward higher-precision, shorter-duration treatments, which is good for the patient. In the past, treatments could last 35-40 sessions, where patients would have to come back to the hospital and get treatments that many times. Now, with something called SBRT, stereotactic body radiation therapy, it can be done in five sessions, and so very exciting.
But what that means is the need for higher precision, to be able to provide those level of treatments. For us, installed base growth is a major key performance indicator for the business, because that drives our annuity of service revenue that can last between 10-12, plus years with a customer. We look at the markets in two different ways: the developed markets, which really is replacement market of older-age systems, and there is pent-up demand in terms of the age of the systems that exist, not only in the U.S., Western Europe, and Japan. But a source of new to vault growth is in the emerging markets, like China, Latin America, India, where radiation therapy has been limited in terms of the access for patients.
You know, our goals is to really close those gaps to cancer care in really three different areas. One, continuing to innovate, our devices and our solutions to advanced care, to really go after the big pain points in radiation therapy. But it's also equally important for us to drive patient access in those emerging markets where patients do not have access to radiation therapy, and where we believe there is high potential, an underserved market. And then finally, of course, by continuing to provide the highest level of service and support, to our customers so that no patient needs to be rescheduled because of any system down. You know, overall, this is our snapshot.
You know, we have over 1,000 systems that are in our installed base, which we service and support, and that is continuing to grow at 5%+ install base growth year-over-year. We have two major platforms. One is helical. It's based on TomoTherapy. It's the Radixact platform. And then we also have the CyberKnife platform, which is a fully robotic system that you'll see there on the right. You know, we've done quite well in FY 2023 with $448 million of total revenue and 9% revenue growth coming from our products. So I think exciting times within the company.
We've been included in the Russell 2000 this past year, and I am very proud of how we have managed the supply chain with all the challenges that we have seen in the past couple of years. And really have a new milestone in FY 2023 of 24% growth of shipments over the prior year. I told you, we have a new headquarters location in Madison, Wisconsin, and this is from Silicon Valley in California.... We have a tremendous executive team. This is a relatively new team to Accuray with just tremendous experience, not only in healthcare, but in capital equipment and in radiation therapy.
All of us within the leadership team have incentives that are aligned with shareholders, but this is the team that is making a difference here and really driving the growth for Accuray. You know, our key pillars are, again, innovation continues to be at the heart of everything that we do, and differentiates us in the marketplace. But also expanding service revenue. This is an area that has been flat for Accuray for almost a decade. And really deriving the service revenue with our installed base growth, we believe is going to be a big growth driver for the company.
And then we are continuing to become more operationally efficient, and Ali is gonna talk a little bit more about that, and then how that relates to our profitability expansion, and strengthening our balance sheet, as we move forward. Again, innovation has been at the heart of Accuray, especially when Accuray combined with TomoTherapy, a separate company, back in 2011, 2012. But a very high percentage of our sales is funneled back into R&D to fuel that innovation because we believe that that will continue to drive our growth. You know, just some innovation highlights from our most recent ASTRO meeting: ClearRT, better imaging in radiation therapy. We believe that this is a competitive advantage and a an opportunity for continued innovation. ClearRT has seen great adoption within the marketplace, so we're excited about the response.
We've also introduced VitalHold, which is allowing surface-guided radiation therapy, specifically for breast cancer therapy, and it is now available in all of our major markets, with China coming in a couple of years. But breast imaging is a major part of radiation therapy departments, and so this providing a very comprehensive breast package from Accuray that we are seeing just good customer adoption. You know, we continue to add additional value to our service solutions. We also have financial services under Accuray Financial Services, to help our customers to be able to finance their capital equipment.
And then finally, we introduced something as a works in progress called Cion, and it is the ability to change the treatment plan for patients in between their sessions to accommodate any changes in their condition. It's exciting. We had great response at ASTRO, so we're excited to take that to the next step. If we look at the global market opportunity, there's a large market, $3.5 billion, of which Accuray addresses... You know, in the past, we had primarily been addressing the premium and specialty part of the market. This year, we have introduced in China a product, Tomo C, and we've also introduced the Helix product, both of which will address the value segment of the market. This is in the emerging markets.
This is the area that we see growth, are these emerging markets, and are looking at about 8%-10% growth compared to the developed markets, where at this point, we have a 26% market share. But it's flat to low single-digit growth. So we're excited about the ability to penetrate the value segment. Here's just a quick snapshot of the two products that we have introduced for this value segment. The Tomo C is something that we have developed with our joint venture partner in China. We got our clearance for the system in the fall of FY 2023. We're awaiting the clearance on the treatment planning, but we are already starting to take orders, and we're excited about the response there. The Helix is for the rest of world. This is manufactured out of Madison, Wisconsin.
We are gonna be very targeted in the markets that we go after, starting in India, and then going after other high-potential, emerging markets. I'll hand it over to Ali, who'll talk a little bit about financials.
Great. Thanks, Suzanne. Good morning, everyone, and thanks for joining us today at the conference. You know, I'd really like to start off by recapping our Q2 and fiscal 2024 first half. Overall, I would say we had a strong performance, both from an operational and a financial standpoint, despite all the macroeconomic headwinds related to inflation and some of the foreign exchange headwinds, primarily with the weakening of the Japanese yen. In Q2, we delivered orders of $94 million, which was a 19% year-over-year growth, and represents a book-to-bill ratio of 1.8, which really indicates a strong, robust, growing backlog, which is a healthy indicator, we believe, of the future vitality of our business.
Revenue was at $107 million, which was down 7% on a reported basis, with the service business being up 8%, really being offset by our product business, which had six fewer revenue shipments versus last year, due to customer timing. Our OpEx was down 1% versus prior year, and down 8% once adjusted for some of the restructuring and ERP-related expenses, which really showcases strong cost discipline across the company. And lastly, our adjusted EBITDA was $2 million per our expectations. For the half, orders were up 6%, with a healthy book-to-bill of 1.5, again illustrating strong backlog growth. Revenue was flat to prior year, as we expect a strong second half, driven by customer timing.
Our OpEx was flat on a reported basis, and adjusted EBITDA was about $8.5 million, in line with expectations. We reiterated our fiscal year 2024 guidance during the last earnings call, and feel that we have, you know, really good growth catalysts in the second half of this year, driven by the timing of our NPI releases, and strong customer demand. We continue to be encouraged by our IB growth, which secures our service contract annuity business, showcasing really predictable revenue growth and continued indications of margin expansion, as we work towards lower cost to serve. Suzanne, if we move to the next page.
You know, moving to fiscal year 2024, our guidance communicated earlier this year was in the range of $460 million-$470 million, which represents a 3%-5% growth, and an Adjusted EBITDA of $27 million-$30 million, which is again, a significant growth over the prior year. You know, moving to our financial strategy in fiscal year 2024 and beyond, it's really focused on three main pillars. The first one is really around predictable revenue growth by focusing on bringing in high-quality orders that are going to convert to revenue within 30 months, resulting in high single-digit unit volume growth, which will further contribute to our service revenue growth as well.
Secondly, it's all about margin expansion to really unleash Adjusted EBITDA CAGR of 20%-25%, over the next three years, which we believe is gonna result in a doubling of our Adjusted EBITDA as a percentage of revenue, over that particular time horizon. And then lastly, it's about strengthening the balance sheet by improving our cash position, through really working capital optimization and exploring avenues to improve our capital structure, and reducing our overall debt. You know, as stated earlier, I would just say that delivering margin expansion is you know, a key, key, key priority for us. And again, like I said, is gonna double our Adjusted EBITDA. How that's really gonna happen is through...
I would say we have headwinds associated with foreign exchange and product mix, and we really expect that to be offset by some of the pricing actions that we're taking. On the product side of our house, and also within service, we think service has a strong runway to continue to be able to grow through you know better profitability associated with our contracts, and then really reducing our overall cost to serve. As part of our margin expansion strategy, we have actually really taken a programmatic approach to reducing our overall COGS, and really combating inflation.
And then overall from a cost discipline standpoint, we believe by really activating all of those four different pillars, we can really double our Adjusted EBITDA as a percentage of revenue over the course of the next three or so years. You know, I spoke about strengthening our balance sheet. It's all about working capital optimization, and the way that we think about it is really you know in three different areas. You know, number one, around really increasing our overall inventory turnover.
You know, as we went through COVID, we really did have a deliberate strategy to be able to increase our overall inventory levels, to be able to satisfy our customer base, and ensure that we weren't gonna have any hiccups from a manufacturing standpoint. And that was an effective strategy. Now we believe that we can really work towards optimizing our overall inventory by increasing the turns, and we think that's really gonna help us from an overall cash optimization standpoint. Our region teams are very focused on overall reducing our DSOs, and we think, you know, they've actually done a tremendous job in terms of having a DSO of 78 days in fiscal year 2022, and we think we have more runway over there.
And then, you know, we continue to work with our vendors on, you know, our payable strategy as well, and I think as we sort of couple all of that, that's really gonna help put us in a strong cash position. Last year, we ended cash about $89 million, and we think, again, with the strong back half of this year, we think we can continue to grow that balance as well, which, you know, will give us some optionality in terms of what we can, really do in terms of reinvestment to the business, or, or a strategic debt repayment.
So overall, you know, just recapping, you know, we strongly believe that if we focus on our financial strategy, which is around predictable revenue growth, around having margin expansion and strengthening our balance sheet, and if we couple that with a high-performing culture, a strong operating framework, and have the ability to be able to allocate our capital in a strategic way, we think there's a lot of value to be created for our shareholders, for our customers, and our employees. Suzanne, back to you.
Yep, and just wrapping it up, and then we'll go back to Suraj and open for question and answers. But, you know, we are, we're excited about where we're at, right now. We have the strongest product portfolio than we have had really in the history of the company. We're excited by the customer adoption of our new innovation. We are doubling our TAM, you know, by going into the value segment and really going after, parts of the market, that are in emerging areas, as well as driving patient access. We think there are significant growth opportunities in the service business, and we're going to continue to take a look at ways that we can drive not only installed base growth, but come up with value-added service, solutions for our customers.
And again, we place the highest importance on turning this business into a profitable business with a strong balance sheet as we gain scale. So, you know, and we're doing this by really solving again the biggest problems within cancer care, and our goal is to you know really drive not only a difference in patient lives, but also the role that radiation therapy plays in their treatment. So with that, Suraj, let me hand it back over to you, and-
Oh, perfect. Suzanne, Ali, thanks a lot for that. Suzanne, let me throw a couple of questions your way, and Ali, I'll have a couple your way also. One of the things, Suzanne, in the current environment that is a topic for... And I'm sure you guys get this a million times a day, is the CapEx environment, right? Interest rates are high, CapEx environment. Talk to us in terms of how, if there is any shift you're seeing, specifically in terms of the sales cycle, how long it's taking from PO to rev rec. However you want to define it, how would you characterize the current environment where we are?
Yeah, no. Thanks for the question, Suraj. You know, I would say it varies very much by region. I think we've seen the biggest impact probably in the U.S. market, and not so much on the orders, because I think our orders are strong in the U.S. But actually, we have seen a lengthened cycle from order to install, and partly that has been from inflation. And inflation as it relates to the installation costs to prepare the bunker for when the radiation therapy system is placed in the bunker. And that has gone up tremendously, and what we have seen is our customers have had to go back to administration to get additional budget. And so, you know, interest rates, I think, are a factor.
It'll certainly be a positive move when interest rates start to head down. It has not prevented us from moving forward on any of the projects. Nothing has been canceled, you know, in terms of overall programs, but we have seen a lengthening of the overall sales cycle. I would say mainly in the U.S., we haven't really seen as much of an impact. But we are doing things to try and help our customers with that challenge. I talked a little bit about Accuray Financial Services, and maybe Ali can add a little bit more, but, you know, the idea is really to give them different options, so that they don't have to use CapEx to purchase equipment. They can do operational leases. There are other ways for them to access capital.
Yeah, I think maybe just building, Suzanne, on the Accuray Financial Services, you know, we heard from our team in the Americas region, and we sort of heard from our customers that this was certainly a solution that they were looking for. And so, you know, we had the ability to be able to partner with a bank and actually come up with a private label offering for Accuray Financial Services. And I think that what that really does for us is that, you know, it allows our customers, as Suzanne mentioned, to be able to you know, really get away from more of a CapEx model and make it more OpEx related.
They'll have the ability to be able to finance not only the equipment that they purchase from Accuray, but any other surrounding things, such as construction costs. They also have the ability to be able to, you know, roll in our service contracts within it. So it really provides, I think, a lot of flexibility for our customers, and it's a solution that's actually been really well-received, and it's something that we, you know, continue to also look at outside the U.S. in terms of how we can leverage something like that to allow our customers access to our technologies.
Got it. Got it. Ali, I'll get to you, actually, I'll ping-pong between the two of you. So, Ali, just, obviously, book-to-bill has been very strong, right? It almost seems like you guys are on an uptrend. Help us understand from 1.2 to 1.8, you know, over the span of 2-3 quarters, is it in the current environment of high interest rates, right? That's pretty strong, you know, it telegraphs a very strong acceptance, and order intake. Backlog is also strong. Help us understand the dynamics here. Is it more because of some competitors no longer being on the market? Is it just the organic strength of Tomo? Is it more systems per site? How should we think about this uptrend in the book-to-bill? What's the real driver?
... Yeah, no, it's a great question, Suraj. I think maybe all the factors that you mentioned likely play a part, in that. Now, you know, I would say, number one, deal timing is very customer-driven. I think as a result of it, our book-to-bill ratio, you know, on a quarterly basis can fluctuate. But I think overall, the message that Suzanne and I are providing to our commercial organizations is that, look, we wanna bring in strong orders that are profitable in nature, they're accretive to, our backlog, and that are gonna convert to revenue in a relatively quick manner. We don't want to bring in orders that are just going to, you know, continue to sit in the backlog. Again, so that's been the strong focus with the teams.
And actually, you know, several years ago, our book-to-bill was actually quite a bit higher, right? And so we actively have sort of worked towards bringing that back to 1.2 because we do think that is a strong indicator of, you know, just a responsible way to be able to grow our backlog. You don't wanna grow it too much, but again, I think really what we're focused on is profitability and conversion timing. I would say that over three or four quarters, we probably expect it to hover right around 1.2-1.5, but there is some sort of volatility and fluctuation quarter to quarter when you take a look at it. Suzanne, anything else you would add to that?
No, I think that's exactly right. And just to put a little bit more of a slant on it, anything above one is good.
Mm-hmm
... from the standpoint of we are building more than we are shipping out, building more orders for the backlog than we are shipping out. We think the ideal is 1.2. The fact that we were 1.8 is exciting because we have put in place order intake criteria, and to be able to be as high as 1.8 is very important to us. But we do want to make sure that we're booking orders, that we have line of sight to go into the ground, be installed within a 30-month period of time, because we believe that that means predictability, and again, we've gotten the order off the street, but, you know, until it's in the ground, you know, that's when we'll be happy.
Fair enough, fair point. So, Suzanne, obviously, doubling the TAM, right, involves going into the value segment-
Yes
... which by definition means Tomo C, which by definition means China, which by definition now means geopolitical risk.
Mm-hmm.
Connect the dots for us in terms of sensitivity and how should we think about with everything going on that we see-
Yeah
... what are the buffers in place, so to speak?
Yeah. No, no, I think it's a great question. So let me just talk a little bit about our China business. In the past, we had primarily been in what was the Type A segment of the market, which was the premier segment of the market. We did very well in that segment of the market, getting 75%+ market share. And we believed the bigger part of the China market was the Type B market. It was also growing faster than the Type A, and I think that trend will continue in China. So with our joint venture partner, we developed this product that it would be considered made in China, but also have a feature set that we believed would do very well in the Type B segment of the market.
China will continue to be a very important part of our business moving forward, but that being said, we don't want to be heavily in, you know, as a percent of contribution in any region. We want balanced performance across our regions, and so while China is important, and we've certainly seen the dynamics of the past couple of years, and are forecasting, you know, how we will do moving forward, we also have been very strong in other regions, like EIMEA has been a very strong region for us. It's part of why we introduced the Helix, because part of our EIMEA region is India.
India we see as a very high growth market, and the Helix product, manufactured in Madison, Wisconsin, similar feature set to the TomoC, we also believe is another strong market with great potential. So we're gonna continue to look at all areas, you know, of the globe. You know, there are always hot spots, you never know what the next one will be, but we are trying to balance our risk by participating in other high-growth areas as well.
Got it. And Ali, I know we are coming up on time. I'll just throw one your way. So in one of your slides, Ali, I don't have the numbers off the top of my head, but you specifically talked about COGS improvement, NPI, and product mix. Help us understand those levers, specifically in terms of gross margin, to go from 33.5% to, you know, whatever years down the line you all are thinking. How should we think about those levers, and your ability to titrate these levers-
Yep
... to get to a certain point?
Yep, yep. Yeah, look, I mean, I think, as we penetrate into the value segment, we do expect that to have a little bit of pressure on our product margins. We are going to combat that by, having a programmatic approach to reducing our COGS. And so we are really focused on that because we do need to, you know, try and reverse the trend on overall inflation. We expect that to be fully offset by lowering our cost to serve in our service business, so we do expect, a little bit of accretion at a gross margin level, at a combined gross margin level, for our overall portfolio. But I mean, I think really, it's all about volume leverage, and I think really that volume leverage is going to, provide more accretion to Adjusted EBITDA as a percentage of revenue.
Like I mentioned, we expect that to double over the course of the next three years, going from 5%-10%.
Got it. Got it. Perfect. Suzanne, Ali, we are up on time. Always a pleasure to connect with you guys. You know, congrats on all the progress. You know, and I'm sure we'll continue this conversation. Thank you so much.
Very good. Thank you, Suraj.
Thanks, Suraj.
Take care.