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On July 3, we have updated our research report on Accuray Inc. (ARAY - Analyst Report). Despite being a loss-making company, we expect the company’s product revenues to improve further as medical centers continue to adopt the company’s innovative radiosurgery and radiation therapy systems on a global basis.

We are also encouraged about Accuray's narrower loss in the 2014-third quarter and upgraded guidance for total revenue for the full fiscal year.

Accuray posted 2014-third quarter loss of 6 cents, that was significantly narrower than the Zacks Consensus Estimate by 10 cents as well as the year-ago level by 36 cents. Revenues of $97.1 million also beat our benchmark by $15.1 million.

Product revenues surged 88.0% to $47.0 million, mainly driven by enhanced commercial effort and improvement in the company’s order to revenue conversion process. Product backlog at the end of the reported quarter was $354 million, approximately 19% higher than the backlog at the end of the prior-year quarter.

Service revenues stood at $50.0 million, up 10.0% from the year-ago quarter. The upside was driven by the increase in the company’s installed base and shift of customers.

Product and services gross margins were 46.3% and 35.8%, respectively, in the third quarter versus 26.5% and 29.5% in the year-ago quarter.

Product gross margin improved on higher volume and stronger average product revenues. The significantly higher service gross margin represents continued improvement in TomoTherapy Systems reliability, which continues to drive demand for lower as well as higher-margin service contracts.

For fiscal 2014, Accuray raised its total revenue guidance to a range of $355 to $365 million from the previous range of $340 to $350 million provided on Jan 30, 2014. The current Zacks Consensus Estimate of $354 million lies below the revised guided range.

However, Accuray is exposed to significant competition in the radiation oncology market, which is characterized by rapid technological changes. It also faces reimbursement uncertainties for its products.

Currently, Accuray retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the medtech industry are Hologic Inc. (HOLX - Analyst Report), Navidea Biopharmaceuticals, Inc (NAVB - Snapshot Report), and Symmetry Medical, Inc. (SMA - Analyst Report). All of them retain a Zacks Rank #2 (Buy).

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