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Accuray Posts Wider-than-Expected Loss

Zacks Equity Research

Despite reporting dismal first-quarter fiscal 2014 results, Accuray Incorporated’s (ARAY) improvement in gross order raised investor confidence in the stock, which jumped almost 13% on Nov 8 to close at $7.70. The stock also achieved its 52-week high of $7.87 on the same day.

ARAY’s first-quarter fiscal 2014 loss of $15.5 million or 21 cents per share was narrower than the year-ago loss from continuing operations of $21.9 million or 31 cents per share. However, the loss was wider than the Zacks Consensus Estimate of a loss of 19 cents per share.

Revenues of this radiosurgery systems maker dropped 7% from the year-ago quarter to $76.6 million. The top line also missed the Zacks Consensus Estimate of $83 million. Revenues from products decreased 27% year over year to $29.6 million, retaining its declining trend.

On the other hand, revenues from services grew 12% over the comparable prior-year period to $47.1 million. The upsurge was driven by higher number of installed base and conversion of customers into the Emerald and Diamond service contracts.

Despite the revenue miss, a 17% year-over-year growth in gross orders to $63.4 million was the highlight of the quarter. Accuray added net new system orders worth $60.1 million, leading to a total system backlog of $347.8 million, up 18% year over year. The company shipped 13 and installed 14 new CyberKnife and TomoTherapy systems during the quarter, taking the aggregate global installed base to 706 units.

On a positive note, gross margin jumped 590 basis points (bps) to 34.5% from 28.6% in the year-ago quarter due to improvement in service margin. Gross margins from product and services were 37.1% and 33.0%, respectively, in the fiscal first quarter versus 40.9% and 16.8% in the year-ago quarter. An improving gross margin in the service business following the acquisition of TomoTherapy looks promising in the near term.

Selling and marketing along with general and administrative expenses increased 12% to $14.5 million, while research and development (R&D) expenses significantly dropped by 30% to $13.0 million. We are encouraged by the fact that operating expenses decreased 12.5% to $38.8 million from $44.3 million a year ago, owing mainly to Accuray’s restructuring activities. Operating expenses were within the company’s estimated plan of spending $40 million on operational activities.

Financial Condition

Accuray exited the quarter with cash, cash equivalents and investments of $161.6 million, lower than $174.4 million as of Jun 30, 2013. Long-term debt inched up to $199.9 million as of Sep 30, 2013 from $198.8 million as of Jun 30, 2013.


The Calif.-based company reiterated its revenue outlook for fiscal 2014. Revenues are expected in the range of $325 to $345 million. The fiscal 2014 Zacks Consensus Estimate for revenues of $331 million lies within the guided range.

Our View

We are impressed with Accuray’s achievement in improving product order momentum in the first quarter of fiscal 2014. This is indicative of healthy adoption of the company’s new products. Additionally, Accuray’s restructuring efforts and healthy service revenues and gross margin are also helping it to stabilize.

However, we were disappointed with the overall fiscal first-quarter results, which missed the Zacks Consensus Estimate at both fronts. Although the bottom line performed better year over year, a declining top line poses concern. Management needs to improve its higher-margin product revenues and aggressively remediate its structural issues for new offerings to fully contribute to sales.

Moreover, ARAY remains susceptible to weak global markets and reimbursement uncertainties, and faces stiff challenges from competitors’ product offerings. A lot remains to be done to bring Accuray back on the growth track.

Currently, ARAY carries a Zacks Rank #3 (Hold). Other medical instrument companies such as CryoLife Inc. (CRY), Natus Medical Inc. (BABY) and Cynosure, Inc. (CYNO) are worth considering. All these stocks carry a Zacks Rank #1 (Strong Buy).

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