ARAY - NASDAQ

Good day, and welcome to the Accuray First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Steve Monroe, Vice President of Corporate Financial Planning and Analysis. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the first quarter of fiscal year 2026, which ended September 30, 2025. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Steve LaNeve, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's 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 outlined in the press release we just issued after the market closed this afternoon as well as in our filings with the Securities and Exchange Commission. We base the forward-looking statements on this call on the information available to us as of today's date. 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 laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call. All references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our first quarter refer to our fiscal first quarter ended September 30, 2025. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Steve LaNeve. Steve?

Thank you, Steve. Good afternoon, everyone, and thank you for joining us today. It's a privilege to address you on my first earnings call as Accuray's CEO. I want to begin by recognizing the remarkable dedication and expertise of the entire Accuray team whose commitment and innovative technologies have made a meaningful difference in patients' lives around the world. I have also genuinely appreciated the transition time that Suzanne is making for me as I onboard. Today, I'm excited to share why I chose to join Accuray and my high level of conviction in Accuray's success as we enter the next phase of transformational growth. Accuray is one of just a few companies operating at the intersection of technical sophistication and human impact. I have a tremendous amount of respect for what the Accuray radiation delivery systems can do to prolong life and for being indispensable in treating malignant and nonmalignant disease. I've spent my first several weeks at the company listening to and learning from many different stakeholders, and I continue to be incredibly impressed with Accuray's foundation and technology. This makes me more confident than ever about the potential to enhance our performance, market position and our long-term growth prospects. Here's why I have this belief. I've come to Accuray with over 40 years of global experience in med tech and biotech, including capital equipment and have held executive leadership and CEO roles at high-performing, well-differentiated and impactful publicly traded companies, including Roche Diagnostics, Becton Dickinson, Medtronic, ETEX, Bone Biologics Corporation and most recently at Globus Medical. The common thread across my experience was driving top line growth profitably while meaningfully improving patients' lives with innovative technology. This was achieved by creating clear strategic and financial goals, solid execution against these goals, consistently identifying avenues to optimize operations and grow margins and disciplined cost management. I am encouraged by what I've seen so far at Accuray, and I'm even more optimistic about the tremendous opportunities ahead. This is where our transformation plan comes in. Our immediate goal is to identify key strategic, operational and financial areas that we believe are necessary to position Accuray to compete more effectively, drive margin expansion, enhance organizational responsiveness and agility and ultimately position Accuray for sustainable, profitable growth. In short, continue to build a performance-based culture. As mentioned in our news release a couple of weeks ago, Steven Mayer, one of Accuray's Board members and our transformation Board sponsor will support us with this set of initiatives. Stephen brings extensive experience leading complex corporate transformations and will be instrumental in helping us to prioritize our resources, sharpen our focus and reinforce our culture of continuous improvement. The management team and I look forward to working closely with Stephen to execute on these goals. In the near term, as we implement key changes during the current fiscal year, we expect to reach a high single-digit adjusted EBITDA margin as a percentage of revenue on a run rate basis within 12 months. Furthermore, we are confident that our transformation efforts will enable us to expand our adjusted EBITDA margin as a percentage of revenue to double digits over the medium to long term and drive sustained and profitable growth for our company. We look forward to presenting more details on our transformation plan in early 2026, and we'll be updating you on the progress being made toward our goals on a regular cadence. I will now turn the call over to Ali to review the first quarter results. Ali?

Thanks, Steve, and welcome to the Accuray team. We look forward to working closely with you as we execute on our transformation plan. Before discussing our financial highlights, I wanted to call out some major wins during the quarter. In September, we launched our Stellar product at ASTRO. This was more than a product debut. It was a statement. Stellar represents our commitment to adaptive radiotherapy and our belief that every patient deserves precision care. The reception at ASTRO was overwhelmingly positive, and we're already seeing strong interest from both existing and new customers. This is the kind of innovation that sets Accuray apart. Other highlights in the quarter include the announced signing of a memorandum of understanding with the University of Wisconsin School of Medicine and Public Health to advance online adaptive radiotherapy on the Accuray helical radiation treatment delivery platform. As part of the MOU, the 2 parties outlined their intent to collaborate on clinical research, education and training and adaptive technology development to help empower medical care teams to raise the bar in the personalization and precision of cancer care. Another highlight was the announcement of first patients treated in Melbourne, Australia using our CyberKnife system. Aligned with the Accuray mission to expand the curative power of radiation therapy, the recent treatment using a CyberKnife system fills an unmet cancer need in Australia to improve community access to this powerful technology while limiting the patients' need to travel long distances for care. Both these events provide further testament to the high level of interest and adoption of our technology, both in the U.S. as well as globally. Turning to the first quarter results. Net revenue for the first quarter was $94 million, which was down 7% versus the prior year and down 9% on a constant currency basis. As you know, due to the long sales cycle and relatively low unit volumes in the product side of our business, quarterly product revenues can be volatile. With that said, product revenue for the first quarter was $37 million, which was below expectations, mainly due to slower performance in our EIMEA and China regions. Year-over-year product revenue was down 23% and down 24% on a constant currency basis. On the other hand, as you know, our installed base generates a relatively predictable, higher-margin, valuable revenue stream, which continues to grow and which we intend to emphasize strategically. Service revenue was again a highlight of the quarter with revenue of $57 million, up 7% from the prior year and up 4% on a constant currency basis. This increase was driven by contract revenue growth of 10% year-over-year, which was higher than our installed base growth of 2% over the same period, illustrating that our pricing actions are taking effect. Product orders for the first quarter were approximately $40 million and represented a book-to-bill ratio of 1.1 with a trailing 12-month ratio of 1.2. Gross orders were also lower than our expectations for the first quarter, which was largely due to timing of receipt of customer orders for certain projects in China and the Americas regions. We ended the first quarter with a reported order backlog of approximately $396 million, defined as orders that are younger than 30 months. This represents over 18 months of product revenue, giving us strong visibility and confidence in future revenue conversion. As part of our diligence in ensuring a high-quality backlog, we canceled 1 unit representing approximately $2 million of orders to maintain a high-quality backlog. Our overall gross margin for the quarter was 28.3% compared to 33.9% in the prior year. This decline was primarily driven by product gross margins, which were 20.3% compared to 32.9% in the prior year. The key elements that unfavorably impacted product gross margins were sales mix, both geographical and by product of $2.9 million or 7.8 points, incremental costs associated with the tariffs announced earlier this year of $1.1 million or 3 points and a onetime obsolescence charge associated with aged inventory of $0.7 million or 1.7 points. Service gross margins were 33.5%, 1.4 points lower than the prior year, primarily driven by lower parts consumption in Q1 of fiscal year '25 due to a supplier credit obtained in that quarter. Overall, we continue to be focused on margin expansion in our service business driven by higher pricing and reducing our cost to serve. Operating expenses in the first quarter were $37.9 million compared to $36.6 million in the first quarter of the prior fiscal year. The increase was largely due to $3.3 million in restructuring and post-financing costs recorded within operating expenses this quarter. This was partially offset with $1 million of realized savings from restructuring actions. Operating loss for the quarter was $11.3 million compared to a loss of $2.1 million in the prior year. During the first quarter of fiscal 2026, we also had some onetime items that impacted financial results during this period. The company initiated a restructuring plan aimed at reducing costs, aligning resources with strategic priorities and streamlining operations. This resulted in $2.8 million in restructuring charges, which included $1.5 million in severance-related costs and $1.3 million in consulting costs directly related to the restructuring plan. Adjusted EBITDA for the quarter was a loss of $4.1 million compared to an income of $3.1 million in the prior year. This was largely due to the product gross margin challenges discussed earlier. We described the reconciliation between GAAP net income and adjusted EBITDA in our earnings release issued today. Turning to the balance sheet. Total cash, cash equivalents and short-term restricted cash amounted to $64 million compared to $57 million at the end of last quarter, primarily due to the net decrease in primary working capital. Net accounts receivable were $54 million, down $29 million from the prior quarter due to lower revenues and collection of certain past due receivables. Our net inventory balance was $156 million, up $14 million from the prior quarter as we ramp up for increased manufacturing in the coming quarters. Turning to guidance. Although we have had a slower-than-anticipated start for the first fiscal quarter of fiscal year '26, we have confidence in our cross-functional teams to execute the plan we had set out in the beginning of the fiscal year. With that in mind, we are reiterating our fiscal year '26 guidance with revenue in the range of $471 million to $485 million and an adjusted EBITDA range of $31 million to $35 million. We plan to provide more details behind the new transformation plan, which is expected to meaningfully improve our adjusted EBITDA as a percentage of revenue on our fiscal Q2 earnings call. And with that, I'd like to hand the call back to Steve.

Thank you, Ali. At this point, as Ali indicated, guidance is unchanged. However, in the next 90 days, I will have a better feel for the organization, the progress of the transformation initiative and the external market dynamics in order to make an assessment of revenue and adjusted EBITDA guidance for the fiscal year at that time. As I begin my tenure, I see the path to deliver the adjusted EBITDA guidance with increased earnings momentum going into FY '27, even with the ongoing geopolitical and macroeconomic uncertainties. In closing, I'm extremely excited to have joined Accuray at this critical time of transformation for the company. My underlying goal is to foster a performance-driven culture that pairs innovation with execution, strengthens operational discipline and drive sustainable, profitable growth while creating long-term value for the patients, providers and shareholders we serve. I will now turn it back over to the operator for Q&A.

[Operator Instructions]. Our first question comes from Marie Thibault from BTIG.

Nice to be working with you, Steve. Welcome. I wanted to start here on sort of a high level and understand what you're seeing out there in terms of the capital equipment purchasing environment, the ordering environment. You did talk a little bit about product revenue and some of the recognition, of course, but wanted to understand if you're seeing things get better, get worse, stabilize in the various regions on the ordering front.

Marie, thanks so much for the question. That answer really varies by region. Obviously, this particular quarter, we did see a slowdown in EIMEA and in China, mainly due to some of the geopolitical and macro issues that we are starting to see ease up a little bit. The U.S., we feel okay about from an overall capital equipment standpoint. And then we continue to see growth in our APAC business. And so it really does vary by region. And so I think overall, we're still going to continue to work with our region teams to gain a better pulse in terms of how capital equipment is shaping up as we look into the rest of fiscal year '26.

Okay. That's very helpful, Ali. And as part of that, I also wanted to ask on net orders. Certainly, a bigger difference between gross orders and net orders than we're used to seeing this quarter. Did some of that have to do -- I heard about the cancellation, but did some of that have to do with age-outs maybe related to China? Just any detail on that?

We did have read outs, but I would say they weren't out of the [indiscernible]. And at the end of the day, I tend to focus more on gross orders because that truly is a representation of new business that's coming in. And so we reported new gross orders from across the globe of about $40 million, which was lower than expectation and primarily related to timing of customer receipts in both the Americas and in China.

Okay. And if I may sneak in one other. Just wanted to hear the latest on kind of tariff mitigation efforts. I know that you have a number of initiatives to sort of offset some of that. So any progress or any updates on those?

We continue to take a look at the duty drawback program, which is something that will allow us to at least regain tariffs that we've paid on any equipment that does not remain in the U.S. And so that is a program that is very active for us. We have in the past sort of spoken about implementation of a foreign trade zone, which is certainly something that we continue to take a look at to see does that make sense for us as this tariff environment is pretty fluid, but that is certainly something that is on the table as well. And so it's certainly is a pretty fluid situation, Marie, as you know, the headlines change quite frequently, but we keep a pretty close pulse on it. And so I think that's sort of what's happening from a tariff standpoint. Marie, I will take the opportunity because I know we did reiterate guidance this particular earnings call as well. I think it's important to highlight that we're really pleased with the continued growth in our service business, and we expect that to continue through the year. Product revenue was obviously slower than anticipated in Q1 due to what I highlighted in the prepared remarks in terms of slower performance in EIMEA in China. And we do expect that to continue in the second quarter. But with geopolitical macro issues starting to ease, we're confident that a lot of these orders that we will not deliver in the first half will actually shift into the second half based upon customer schedules and feedback that we've gotten from our teams on the ground as well as our JV partner in China. So with that, I think it's really important to highlight that we do expect first half revenue to be closer to about 40% of our full year guidance and the second half to be about 60% of our full year guidance because we are seeing some of these -- some of this product demand shift to the second half. Obviously, we're going to keep a close pulse on it to see if there's any other dynamics that happen from each of the different regions, but this is what we're seeing right now.

That's really helpful, Ali. And I appreciate that, especially the 40-60 split, we'll make note of that. I know in the past, it's been 45-55. So certainly helpful to have that split now. If I could then maybe follow up with one more question just on the margin side. I heard the commentary about product and geography mix impacting product gross margins. It sounds like that should also continue into fiscal second quarter and then possibly improve in the second half. Is that the right way to think about that as well, Ali?

I think that's the right way to think about it, Marie. We did have more deals that went into emerging markets that contributed to revenue in Q1. We expect something similar in Q2. And then as we start to execute on our backlog that has more for developed markets, those come with a better margin profile. I think at the end of the day, Marie, we've spoken about this in the past and which really we just want to be able to continue to make sure that we're getting our installed base to increase, and that's really going to help our service business grow. And you saw that as a highlight in terms of service grew by about 7% this quarter and contract revenue grew by about 10%. And so I feel really good about the way that our service business is positioned right now and moving forward.

[Operator Instructions]. At this time, there are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Steve LaNeve, President and CEO, for any closing remarks.

Thank you all for joining our call today, and we look forward to speaking with you again in February when we report our fiscal 2026 second quarter earnings results. This concludes our earnings call. Thank you.