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Accuray Lags 3Q Earnings Est

Accuray Incorporated’s (ARAY - Analyst Report) third-quarter fiscal 2013 adjusted loss of 37 cents per share was wider than the Zacks Consensus Estimate of a loss of 21 cents. Adjusted loss excludes one-time items such as acquisition, restructuring and integration-related expenses associated with TomoTherapy and Morphormics.

Results were higher than both the year-ago adjusted loss of 13 cents per share as well as the sequential quarter’s adjusted loss of 30 cents per share.

Reported net loss attributable to shareholders in the quarter was $31.2 million (or 44 cents a share) versus a loss of $14.9 million (or 21 cents a share) in the prior-year quarter.

In spite of a declining bottom-line in the quarter, management asserted that higher new order volumes in the third quarter along with healthy adoption of Accuray’s new products such as the CyberKnife M6 Series and TomoTherapy H Series systems should boost the company’s growth going forward.

Revenues

Adjusted revenues for the quarter were $70.6 million (down 30.5% year-over-year), which missed the Zacks Consensus Estimate of $78 million. Adjustments exclude deferred sales related to the TomoTherapy products and services. Reported revenues for the quarter were $70.5 million.

Adjusted revenues from products were $25.1 million (down 59%) in the quarter, mainly due to manufacturing and supply-related issues, which led to shipment delays of new products. Adjusted revenues from services were $45.5 million, (up 13.2% year over year), reflecting positive trends from the TomoTherapy business.

Orders

Accuray shipped 7 and installed 14 new CyberKnife and TomoTherapy systems during the quarter, taking the aggregate global installed base to 693 units.

The company added new system orders worth $44.1 million, net in the quarter, leading to a total system backlog of $297.9 million (up 6.5% year over year). Net new product orders jumped more than twofold sequentially, which led to backlogs increasing 7% over the prior quarter.  

Margins

Adjusted gross margin for the quarter was 31.4% versus 38.6% in the year-ago quarter due to a change in sales mix. Adjusted product and services gross margins were 34.7% and 29.5%, respectively, in the third quarter versus 53.5% and 16.1% in the year-ago quarter.

Improving service gross margin following the acquisition of TomoTherapy is encouraging. The company expects service gross margin to improve but it is likely to demonstrate quarterly fluctuations, going forward.

On an adjusted basis, operating expenses decreased to $39.8 million from $44.2 million a year ago, mainly due to the company’s restructuring activities. Operating expense was close to the company’s plan of spending $38 million on operational activities.

On an adjusted basis, selling and marketing along with general and administrative expenses were 41.2% of sales versus 24.8% in the year-ago quarter. On an adjusted basis, Research and Development (R&D) expenses, as a percentage of sales, inched up to 22.0% from 21.7% in the year-ago period.

Financial Condition

Accuray exited the quarter with cash, cash equivalents and restricted cash of roughly $184.1 million, up 18.9% year over year. Long-term debt was $197.7 million in the quarter, up 51.8%.

Outlook

The Calif.-based company lowered its revenue outlook for fiscal 2013. Revenues, on an adjusted basis, are expected in the range of $310–$318 million (earlier $320–$330 million). The fiscal 2013 Zacks Consensus Estimate for revenues and losses is $325 million and 88 cents per share, respectively.

Our View

We are impressed with Accuray’s achievement of improving product order momentum in the third quarter, reflecting healthy product adoption of new products. Additionally, the company’s restructuring efforts and healthy service revenues and gross margin are also helping it stabilize.

However, a lot needs to be done to bring the company back on track. We remain concerned over Accuray’s declining top and bottom line along with reduced full-year guidance. Management needs to improve its higher-margin product revenues and aggressively remediate its structural issues for new 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 Rank #2 (Buy). Other medical instrument companies such as Heartware International (HTWR - Snapshot Report),  Intuitive Surgical (ISRG - Analyst Report) and MAKO Surgical Corp. with a Zacks Rank #2 (Buy) are worth considering.
 

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