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Following its disappointing first quarter fiscal 2013 results, we are downgrading our recommendation on Accuray Incorporated (ARAY - Analyst Report) to ‘Underperform’ with a price target of $6.

The company’s adjusted loss per share of 23 cents was wider than the Zacks Consensus Estimate of a loss of 20 cents in the reported quarter. Moreover, adjusted revenues of $83 million (down 13.3% year-over-year), also trailed the Zacks Consensus Estimate of $87 million.
 
Further, we remain concerned about the declining Cyberknife sales. Net orders for the CyberKnife products dropped 12% in the quarter. Accuray is totally dependent on the CyberKnife and TomoTherapy systems sales for its long-term profitability. Hence, any disruptions to the sales of these products will lead to a loss of customers, which will be unfavorable to top-line growth.  
 
Moreover, margin contraction is also a major cause of concern for the company. Adjusted gross margin for the quarter was 33.3% versus 36.4% in the year-ago quarter, due to change in sales mix. Additionally, adjusted operating loss was $17.7 million compared with a loss of $9.9 million, a year ago. 
 
Accuray remains susceptible to the weak U.S. and European markets and reimbursement uncertainties. It also faces stiff challenges from competitive product offerings of Varian Medical Systems Inc. (VAR - Analyst Report) and Integra LifeSciences Holdings Corporation (IART - Analyst Report). 
 
Despite these shortcomings, we must take into account that Accuray is a renowned supplier of radiosurgery offerings and provides non-surgical treatment option for patients diagnosed with cancer. Globally, more than 200,000 people have been treated with the company’s technology.
 
We are upbeat about the compelling prospect in radiation oncology rendered by the TomoTherapy acquisition.  New products are expected to drive long-term growth for the company. In addition, Acurray is focusing on investing in emerging markets to expand its business.
 
The stock carries a short-term Zacks #3 Rank (Hold rating). 

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