Accuray (ARAY) Q4 Loss Wider Than Expected, Revenues Beat

Accuray Inc. (NASDAQ:ARAY) reported a loss of 6 cents per share in the fourth quarter of fiscal 2017, wider than the Zacks Consensus Estimate of loss of a penny. However, the figure was relatively narrower than the loss of 9 cents in the year-ago quarter.

Total revenue in the fourth quarter increased approximately 18% year over year to $112.1 million and beat our estimate of $111 million. The year-over-year growth was primarily driven by solid prospects in the Americas and APAC regions.

Accuray also reported its fiscal 2017 results. For the fiscal, total revenue decreased 3.9% on a year-over-year basis to $383.4 million. Service revenues (53.2% of net revenues) totaled $203.8 million, while product revenues (46.8% of net revenues) totaled $179.6 million in the fiscal.

Notably, Accuray carries a Zacks Rank #4 (Sell), hinting at probabilities of underperformance in the near term.

Accuray Incorporated Price, Consensus and EPS Surprise

Segment Analysis

Product Revenues: Revenues at the segment increased 38% to $60.6 million. System order conversions of backlog to revenue in the Americas and APAC regions buoyed growth in the segment. Solid performances in the CyberKnife, TomoTherapy Systems and Radixact platforms are the key highlights of the segment.

Service Revenues: Revenues at the segment saw a modest year-over-year increase of 1% to $51.5 million. Per management, lackluster performance at the segment was primarily due to lower installations.

Gross Order Update: In the reported quarter, gross product orders totaled $85.7 million, increasing 5% on a year-over-year basis. At the end of the quarter, product backlog was $452.8 million, approximately 12% higher year over year. Gross order performance was favorably impacted by the company’s flagship Radixact System and the CyberKnife System with the InCise Multileaf Collimator.

Other Highlights

Radixact Platform Drove Sales: The company’s new TomoTherapy product platform, also known as Radixact, continued to contribute to the company’s top line. Radixact represented majority of Accuray’s TomoTherapy order mix in the reported quarter, up 25% on a sequential basis from the third quarter.

APAC and Japan witnessed stellar performances at the Radixact and TomoTherapy platforms. Radixact orders in Japan have been extremely positive to date.

The Precision System: Accuray also announced its new precision treatment planning system recently. The system leverages on the company’s flagship Radixact and CyberKnife system platforms. The company also plans to build on this technology with Precision 2.0 upgrade by fiscal 2018. This will provide significant improvements in treatment speed and overall throughput of the already existing CyberKnife system.

IBMS Data Management System for TomoTherapy: Accuray also announced 510(k) clearance for the new IBMS data management system for TomoTherapy. It is a centralized database that shares and makes data accessible between multiple accurate systems adding flexibility and improving workflow efficiency in the radiation therapy department.

Margin Details

Gross margin (as a percentage of net revenues) contracted 80 basis points (bps) in the fourth quarter to 36.4%. This was primarily due to reduced product gross margins. Product gross margins decreased due to unfavorable product and channel mix.

Operating expenses in the fourth quarter were $40.4 million, almost flat with $40.3 million in the year-ago period.

Guidance

Accuray issued guidance for fiscal 2018.

The company projects full-year revenues in the band of $390 million to $400 million. This represents growth in the band of approximately 2% and 4% on a year-over-year basis. Furthermore, product revenues are expected to increase in the band of 5% to 10% year over year and service revenues are likely to remain flat with fiscal 2017.

The company expects a 5% increase in gross orders in fiscal 2018. The product system backlog is expected in the band of $445 million to $460 million.

Adjusted EBITDA for fiscal 2017 is anticipated in the range of $25 million to $30 million, up 23% to 47% year over year.

Our Take

Accuray reported wider-than-expected loss in the fourth quarter of fiscal 2017, primarily due to lackluster performance in the service revenue segment. The company issued solid fiscal 2018 guidance. Of the recent developments, orders for the newly unveiled Radixact System, solid revenue performance in APAC and Japanese regulatory approval for Radixact are key positives in our view. However, unfavorable product mix, declining service revenues, sluggish macro economic conditions and pricing headwinds are major concerns. Notably, China and Europe saw sluggish revenues in the fourth quarter. Accuray’s significant international presence helps broaden its customer base. However, fluctuations in currency exchange rates, particularly with a strong dollar, will continue to adversely impact the company’s backlog and top line in the coming quarters.

Key Picks

A few better-ranked stocks in the broader medical sector are Edwards Lifesciences Corp. (NYSE:EW) , IDEXX Laboratories, Inc. (NASDAQ:IDXX) and Cogentix Medical, Inc. (NASDAQ:CGNT) . Notably, Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while IDEXX Laboratories and Cogentix Medical have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences delivered an average earnings beat of 10.8% over the trailing four quarters.

Cogentix Medical registered a positive earnings surprise of 200% in the last reported quarter.

IDEXX Laboratories delivered an average earnings beat of 9.3% over the trailing four quarters.

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