All right, good morning, everyone. Welcome to day one of Jefferies New York Healthcare Conference. My name is Young Li, one of the MedTech analysts on the US team. Pleased to be joined by management from Accuray. We have Suzanne Winter, President and CEO, and Ali Pervaiz, SVP and CFO. This will be a moderated Q&A session. We don't have a breakout, so if you have any questions, feel free to raise your hand, and I'll call on you. Suzanne, Ali, welcome, and thanks for joining us.
Thank you. Thanks for inviting us.
Great, so I guess to start, I guess why don't we start a little bit high level? So Accuray is the third largest player in radiation oncology. You go up against, you know, two much larger global competitors, Varian Siemens and Elekta. I guess, you know, what's Accuray's unique value prop for customers, and, you know, how do you differentiate against the big two, and what are the key indications that Accuray excels at?
Perfect, and again, thanks for inviting us to the conference. Yes, just from the overall competitive landscape, the radiation therapy market is, you know, really concentrated into three major players. Accuray has always differentiated itself with some very unique platforms that address really it, it. Historically, we've addressed the premium segment of the market in radiation therapy. Precision is incredibly important, obviously, so that, you know, our vision for our technology is really to focus on improving the precision, especially as clinical trends for radiation therapy have really moved in the direction of shorter duration treatments, so less, less treatments, but more powerful treatments, and so precision has become even more important. So we have really dedicated ourselves to delivering radiation therapy with the highest level of precision.
We have two major platforms. One is the CyberKnife platform, which is really the only robotic delivery system on the market, very unique. You know, as we look at our CyberKnife platform, it is gaining more and more popularity, especially in hospitals that are looking to build an SBRT or SRS stereotactic radiosurgery business. And right now, the CyberKnife, really 97% of the procedures done on the CyberKnife are for SBRT, these shorter duration treatments. Our other platform is the Radixact platform. Again, very unique. It's the only system on the market that has really a full CT with a linear accelerator on it, again, to deliver both shorter duration treatments, but also IMRT, and really a tremendous versatility of the system. So traditionally, we have just played in the premium markets.
That really has been more around the developed markets. As we enter into, you know, since Ali and I took over, we have focused, not only on innovation in the premium segment, but also going after emerging markets, where there're higher growth, where patients don't have access to radiation therapy. And so our first area where we have focused on is in China, and we have just introduced our Tomo C product for the value segment or the Type B segment, in China, and we've introduced the Helix, for the rest of the world, also a value segment product. We believe these two products will help us to compete in more of the market than we have in the past, and that would be comparable to what Varian and Elekta, you know, the two other competitors in this space.
So we believe that, you know, our establishment of branding in the premium segment will help us really with a halo effect in the Type B segment.
All right. Great. Very helpful overview. I guess maybe just to follow up on the geographic mix a little bit. So you know, APAC, including China and Japan, is around 40% of revs, flattish for the year so far. EMEA, slightly below 40%, grew around 6%, and Americas is the rest, around 20%. Mostly a US business, but it's down 25%. Maybe if you can address sort of the normalized growth profile for each of those markets and, you know, what's going on regionally this year to deliver those growth numbers?
Yep, that'd be great. Yeah, so we look at the global market really as two significant types of markets. The developed markets, like the U.S., like Western Europe, like Japan, is largely a replacement market. And the growth of those market segments are flat to low single digit growth. But the emerging markets, again, those areas where governments have made an investment in cancer care and where radiation therapy has been a challenge to get to the advanced care for patients, those particular markets, like China, like India, like certain countries in Latin America, are in the 8%-10% growth, and that's why we see that as being a very attractive segment of the market for us to go after. In the U.S., you know, it's true.
I think the U.S. is, you know, we have seen this year, there's been, you know, a slowdown, overall, I think, in, capital spending for radiation therapy, and we've talked extensively with our customers just to sort of understand the dynamic there. You know, it really is more of a delay, I think, in capital equipment purchases that are dedicated to radiation therapy, but it's a temporary phenomenon that we think will resolve, you know, over the next couple of years. But I think it's primarily due to high interest rates. It's very challenging.
Mm-hmm.
Tremendous scrutiny, I think, on capital spending. And then, you know, the other part of this in the U.S. is, there have been some U.S. dynamics, this past year with a couple of major freestanding clinics that, have filed for bankruptcy. So I think there was a bit of uncertainty in the U.S. market as those assets were sold, and those businesses restructured.
... Okay, got it. So I guess just given sort of the near-term challenges in the U.S., just wanted to hear a little bit more about, you know, your visibility and the outlook for a recovery.
Yeah. Yeah, yeah. So we've extensively talked with our customers just on what they are seeing, and, again, the underlying demand still is intact. I think, you know, what we have seen from our customers is, that if there was Capital Equipment funding that was allotted to radiation therapy, that the construction costs in getting the bunkers ready for the radiation therapy ended up being more expensive than the original budget, and sometimes 2 or 3 times the cost of the build-out. That's construction costs, you know, that's higher cost of capital. And so they've had to go back, and it's delayed the overall installation cycle.
But I do believe that, you know, the customers that we have spoken to, they feel like it'll resolve itself really in the second half of our fiscal year 2025 and going into fiscal year 2026, where they believe their capital equipment budgets will be prioritized again, and it will be back to sort of pre-COVID levels. Because the demand is there, they're busy, and there's aged equipment in the U.S. that needs replacement. And you know, as we talked about, the trend towards shorter duration treatments or SBRT continues to grow, and you know, with some of the aged equipment out there, they need to upgrade to the latest performance in order to be able to perform those procedures.
All right. I see. I guess, you know, wanted to hear a little bit about the, you know, higher interest and higher, you know, construction costs. Is that mostly just a U.S. issue? Do you think that can impact other countries as well?
Yeah. We've seen it mainly in the U.S., and I think that the macroeconomic conditions in the U.S. are different than what we're seeing in other regions, you know, and specifically around inflation and interest rates.
Mm.
And so, and I think that higher cost of construction and just access to capital is unique to the U.S. You know, and again, in radiation therapy, unlike imaging, you don't roll a system into it, you know, the department. It is a build-out. It is a construction project to prepare to receive the radiation therapy, and there's also downtime associated.
Mm-hmm.
When you upgrade to new equipment or you get new equipment, you have to stop treating patients and send them over to other machines to be able to get treatments. So you know, it's a significant project.
Okay, understood. So, you know, I think we sort of understand some of the revenue impacts there, but, I guess, how's the order growth trends in the-
Yeah
... Americas region?
Yeah. Yeah, I mean, I think, again, the underlying demand is still very strong. Now, I-- you know, it does affect our order rates in the U.S. as well, because you really... It, you know, most institutions will not give you an order unless there's capital equipment funds attached to it. But I would say that is less of an issue on our orders, and it's really the revenue and the installations that we're seeing more of the delay.
Okay, got it. And then I guess, you know, despite some of the near-term challenges, you still remain pretty confident in your fiscal 2026 LRP. Maybe if you can talk a little bit about the underlying assumptions that gets you to your LRP and sort of, you know, what gives you the confidence to reiterate it on the last earnings call?
Yeah. Yeah. No, absolutely. You know, I would say that our fiscal year 2024 is more of a transition year for us. There are a couple of growth drivers that take us into FY 2025 and give us the confidence of our long-range plan. You know, one of them is, you know, of course, our clearance for our Tomo C product for the Type B segment in China. We received the clearance for the system itself in the fall of last year. What we are waiting now for is for the treatment planning part of the system that will really unleash the full market launch in China.
We, we believe we're at the very end of that regulatory process, and, but once we get that clearance, that will allow us to really take off in the Type B segment, which is the largest and fastest growing part of China market. Same thing with our Helix product, which is the non-China value segment product, is also gonna be a growth driver for us. We, we showed it at the Indian Cancer Conference, at, at the end of last calendar year, 2023, in Mumbai, and, the reception was very strong. We expect our ability to start taking orders and shipping product to India, to occur in our first half of fiscal year 2025.
And then we continue to see strong customer adoption of our innovation that we have done on the Radixact platform in our developed markets. You know, as you know, Young, we have invested back in R&D, and it's a cornerstone to our overall strategy. We've introduced ClearRT imaging. We've introduced VOLO Ultra, which helps with the speed of procedures, and we have recently showed our Cenos online adaptive at the major shows. The response from customers has been outstanding. It's a work in progress, but we think that that will continue to give the edge to our Radixact platform moving forward. So again, we have a number of growth drivers, all of which, you know, are timing related, but that gives us the confidence going into FY 2025 and 2026 to really grow.
... Mm-hmm. Okay. I guess maybe just double-clicking on China a little bit. You know, it, it is viewed as a key growth driver for the company. It's around 20% of revs. You had the Tomo C product approval in early October of last year, now you're just waiting for the precision treatment plan. You know, it was a strategic decision to separate the submission.
Yeah.
I guess just kinda curious, you know, how's the early feedback from the product approval? How has sort of orders been since approval, and what's the latest on the treatment planning approval timeline?
Yep. Great questions. You know, again, it's always difficult to predict a regulatory process, but we believe we're at the tail end of it, and we believe that just from our conversations and questions and answers back and forth with the agency. I think you have a good feeling when you've exhausted any additional questions from the agency. So we do believe that we're at the very tail end, and that will again allow us to, you know, really do a full market launch. It will allow our JV partner to be able to ship systems to customers and begin installation, which will be important, and again, for the full market launch, to get a critical mass of users out there using the Tomo C system.
The response, because we've been doing market launch activities, has been very strong. Again, it's the only system in the Type B segment that is a full CT tomo unit, and that's what they – you know, it is the Tomo C, but they call it a CT tomo because it's a strong differentiator. Now, when we went into China, our strategy was really to establish the brand in the Type A premium segment, and we have done very well there.
Mm.
We have greater than 75% market share, and that continues. And now, to enter into the Type B segment, again, we believe that branding will have a halo effect in our ability to penetrate the Type B segment.
All right. Great. I guess, you know, what about the China healthcare anti-corruption campaign? You know, how has that impacted your base business or maybe potentially the Tomo C launch? You know, when do you think some of those pressures will ease? And what about just a general slowdown in the macroeconomy in China?
Yeah. You know, no, I think the anti-corruption campaign has been a... You know, it, it has affected all of sort of med tech, and certainly in the Capital Equipment markets. You know, and what we have seen it, it manifest itself is in delays in processing, and especially we've seen that, I think, in the Type A segment, you know, in just being able to go through the bidding process. But you know, we feel, you know, and we're in close contact with our JV partners that are on the ground, they believe- ... that it will be trailing off, you know, and ending. But they also believe that there'll be changes that-
Mm
... move forward additional scrutiny. So I think we're watching and cautiously optimistic that-
Mm
... you know, we're completing it, but, but also knowing that it also may be sort of the new, the new reality in terms of just timelines for some of these decision-making processes.
Okay. I guess maybe just to round it off, can you sort of level set us on China a little bit, the maybe orders or revenue contribution for, fiscal 2025 once you have all the tomo approvals? You know, is it fair to assume that China will be the biggest, contributor or best lever for growth in the LRP?
We do think China will be a strong growth driver for us. It's very important for us, though, that we have balanced regional growth and regional contributions, so that we're not overly reliant on any subregion. But we do think that, you know, the launch of the Tomo C, you know, will be a very strong growth driver for us. But we also believe that the Helix will be-
Mm-hmm
... a strong growth driver for us in, rest of world-
Mm
... in those areas, again, that are emerging markets. You know, and we also believe that in the premium segment, we're gonna continue to gain share. You know, in Japan is a perfect example, replacement market, developed market. They have done just an extraordinary job with the new innovation on the Radixact to displace competition. And so, you know, our strategy really is threefold. One is continue to gain share in the premium and developed markets, go after emerging markets, you know, with our value and access products, and then the third leg of our strategy is really our service business. We believe there's tremendous growth potential-
Mm-hmm
... in our service business, and that's a key cornerstone, in terms of really investing back into service and offerings that we can provide to our customers that are already installed. And so, you know, that's-
Mm
... something we haven't talked about yet, but, you know, Accuray has traditionally been more of a break-fix, you know, just service contract only, in terms of the way we've approached our service business, and we believe there's, you know, again, tremendous growth potential there.
Okay, great. You know, we tend to focus a little bit disproportionately on revenue growth, but Accuray also has a margin expansion story. You know, you have cost reductions, OpEx restructuring, improving price on the service side. Maybe if you can talk about some of the big buckets for margin expansion and, you know, what's sort of more within your control versus external factors.
Yeah, very important to us. I'll let Ali talk a little bit about our margin expansion plans.
Yeah, no, thanks for the question, Yang. You know, in terms of margin expansion, about 18 months ago, we launched a margin expansion activation within the company, and it's really been a cultural transformation for us. And the approach has really been four-pronged. I think number one, it's all about pricing and pricing accretion, not only for the product side of the house, but also for the service side of the house. And so we have really spent a lot of time providing tools to our commercial team, so they actually understand sort of what the profitability is associated with some of the configurations and offerings that they are putting out there in the field. And we've also aligned all of their incentives to ensure that we can actually gain that price.
And so on the product side, we're actually starting to see... We're not starting to see, we're actually seeing a lot of pricing accretion for each of our individual product platforms, which is coming into our backlog. And typically, our backlog converts somewhere between 12-18 months, and so we're gonna start to see some of that conversion come into play and really start to hit our P&L. So we're pleased about all the traction we're getting on the product side of the house. On the service side of the house, we did something similar, in terms of, you know, really going in and taking a look at all of our existing contracts and understanding the profitability, and ensuring that, you know, we have common sense clauses in there, such as CPI, et cetera.
And, you know, over the last couple of quarters, we have started to see a lot of that come into the PNL. Unfortunately, that's being overshadowed with some of the macro headwinds in terms of foreign exchange. But we are pleased with what we're seeing in terms of pricing impact, both on the product and the service side, and there's a lot more to go. The second big bucket is really all about service growth, just like Suzanne pointed out. And so along with pricing, it's all about also introducing more customer-centric offerings, such as trainings or accelerated installs, and those come at a higher margin as well.
As we introduce those offerings to our customers, we're getting some really good reception, and we think that's really gonna help expand our service business moving forward, which, as Suzanne mentioned, is gonna be a cornerstone for us over our long-range plan period and is really gonna help contribute to more margin accretion. Young, you know, you alluded to this whole focus on COGS reduction, and that is all about operational excellence, right? So having a lean mindset and really taking a programmatic approach to figuring out how we're going to reduce margins on our product side of the house. And so we're working constantly with our suppliers to really understand, you know, where there's opportunity over there, but then also with our engineering teams internally, to determine, hey, these are particular parts that are high value.
How do we ensure that we continue to have the highest level of quality, but then also reduce that overall cost? And so that has become a center of attention with our engineering teams, and we're starting to see a lot of traction over there as well, which we think that over the course of the next couple of years is really gonna start to have a meaningful impact on our PNL. That's not only gonna help the product side of the house, but it'll also help the service element because obviously, you know, as our products go in for preventive maintenance or break-fix, like Suzanne mentioned, we'll have lower cost products or lower cost parts to be able to replace that.
And then lastly, you know, it's all about just having the right cost discipline, and I'm actually really proud of the team in terms of just being very disciplined in terms of how we're actually spending our OpEx dollars and making sure that there's a right return on investment. So those are really the four pillars that we've activated, and we are starting to see traction. Again, they are being unfortunately overshadowed by a lot of the macro factors, such as foreign exchange. But I think once that dissipates, it's gonna have a meaningful impact to our P&L.
Mm-hmm. All right, great. I mean, you know, you think the LRP is intact. You reiterated it, you know. You have new products coming. Markets should improve in the next fiscal year, coming quarters. I guess, is it fair to assume that, you know, you have sort of an outsized fiscal 2025 and fiscal 2026 for the company?
Yeah. No, I think that, there's no question, that in order for us to remain on track, you know, we expect to see growth in the FY 2025 and FY 2026, and we believe by the end of FY 2026, you know, we'll be on track, to what we've discussed. And again, as a result of all of the growth drivers, that we have, we've put in place, that we think will be realized. You know, the one area that we're gonna continue to look at, of course, is the US market, and, the rate of recovery there, because I think that will sort of, dictate a little bit of, when we start to see the, you know, the inflection point.
But yes, absolutely, we think the growth drivers are intact, the underlying demand is there. It's aligning with clinical trends that are happening within the industry, and, you know, we remain confident.
Okay, great. I guess maybe just one final question.
Yeah.
Just wanted to ask, you know, from your view, what's sort of the biggest misconception for Accuray among the investor community? What's the most underappreciated part of the story?
Great question. You know, I think the many folks who may have looked at Accuray in the past, I think they believe that they understand the story. Something that I think is underappreciated is really the investment in innovation that we have done over the last, you know, at least five years, since I have been here, and really focused on the Radixact platform, as well as our CyberKnife platform, and developing these access products for these emerging markets. You know, I think the other, you know, the other misconception is that we're a small niche player. You know, we have over 1,000 systems that are in use globally. We have very strong, four strong regions.
We have a new leadership team in place that has come to us with big company experience, you know, many from Medtronic, GE Healthcare, you know, that really understand what good looks like. They're attracted to the company, not only for the technology, what we do for patients, but also, you know, the understanding that they can have an impact, just based on the experiences that they have had, to really improve overall operational efficiency, margin expansion within the company, and really take this company to a new level.
All right, great. Well, thank you so much for the, for the time and the Q&A. It's a very interesting story, and looking forward to more updates in the future. And thank you to everyone else that's here and, on the webcast. Hope you enjoy the rest of the conference.
Very good. Thank you.