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Accuray Incorporated’s (ARAY - Analyst Report) second-quarter fiscal 2013 adjusted loss of 30 cents per share was narrower than the Zacks Consensus Estimate of a loss of 34 cents. Adjusted loss excludes one-time items such as acquisition and integration-related expenses associated with TomoTherapy and Morphormics. The year-ago adjusted loss was 10 cents per share.

Reported net loss attributable to shareholders in the quarter was $29.2 million (or 40 cents a share) versus a loss of $10.4 million (or 15 cents a share) in the prior-year quarter.

Revenues

Adjusted revenues for the quarter were $77.7 million (down 24.5% year-over-year), which surpassed the Zacks Consensus Estimate of $74 million. Adjustments exclude deferred sales related to the TomoTherapy products and services. Reported revenues for the quarter were $77.8 million.

Adjusted revenues from products were $33.2 million (down 48%) in the quarter, mainly due to manufacturing and supply-related issues, which also led to a decline in net product orders. Adjusted revenues from services were $44.6 million, (up 16.1% year-over-year), reflecting positive trends from the TomoTherapy business.

Orders and Margins

Accuray shipped 14 and installed 17 new CyberKnife and TomoTherapy systems during the quarter, taking the aggregate global installed base to 677 units. The company added new system orders worth $17.9 million in the quarter, leading to a total system backlog of $279.0 million (up 7.9% year over year). However, backlog decreased 5% sequentially, reflecting a marked slowdown mainly due to shipment delays and a lack of sales force execution.  

Adjusted gross margin for the quarter was 36.7% versus 39.6% in the year-ago quarter, due to a change in sales mix. Adjusted product and services gross margins were 50.0% and 26.9%, respectively, in the quarter. Service gross margin more than doubled year over year following the acquisition of TomoTherapy. The company expects service gross margin to improve but it is likely to demonstrate quarterly fluctuations, going forward.

On an adjusted basis, operating expenses were $48.1 million compared with $43.8 million a year ago, mainly due to the restructuring activities. On an adjusted basis, selling and marketing along with general and administrative expenses were 40.0% of sales versus 25.5% in the year-ago quarter, driven by new product launches. On an adjusted basis, Research and Development (R&D) expenses, as a percentage of sales, increased to 22.0% from 17.2% in the year-ago period.

Financial Condition

Accuray exited the quarter with cash, cash equivalents and restricted cash of roughly $97.4 million, down 35.9% year over year. Long-term debt was $81.6 million in the quarter, up 5.3%.

Restructuring

Management cited manufacturing and supply-related issues along with a lack of marketing focus and sales force transitional problems as the reasons behind the disappointing fiscal second-quarter results.

In an effort to remediate the shortfall, the company announced a restructuring initiative for its operations. Management will setup a cost structure that will enhance marketing capabilities and overall business processes to boost sales. Accuray will also cut workforce by 13%, mostly in the U.S.

Based on these restructuring efforts, Accuray expects to incur a non-recurring charge of $3–$4 million in the third quarter of fiscal 2013. Further, the company anticipates adjusted operating expenses to be $38.0 million per quarter through the fourth quarter of 2013.

The positive impact from the restructuring will likely begin from the fourth quarter of this fiscal year and the company is hopeful that it will manage to save roughly $40 million of operating expenses in the year compared with fiscal 2012.

Outlook

The Calif.-based company also provided an outlook for fiscal 2013. Revenues, on an adjusted basis, are expected in the range of $320–$330 million. The fiscal 2013 Zacks Consensus Estimates for revenues and losses are $324 million and 94 cents per share, respectively.

Our View

Although management is optimistic regarding adoption of the company’s latest technology unveiled at the ASTRO meeting, Accuray needs to aggressively remediate its structural issues for these offerings to fully contribute to total sales. Moreover, Accuray remains susceptible to the weak U.S. and European markets, reimbursement uncertainties and faces stiff challenges from competitive product offerings.

Currently, the company carries a Zacks #4 Rank (Sell). While we are negative on Accuray, medical instrument companies such as Abiomed Inc. (ABMD - Analyst Report),  IDEXX Laboratories, Inc. (IDXX - Snapshot Report) and Cyberonics (CYBX - Analyst Report) with a Zacks Rank #2 (Buy) are worth considering.
 

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