Shares of Accuray Incorporated (ARAY) reached 52-week high of $10.71 after the market closed on Jan 31 following the release of its turnaround fiscal 2014-second quarter results and promising guidance.
Accuray posted a much narrower loss of $5.4 million, or 7 cents per share for the quarter compared with a loss of $25.5 million, or 35 cents per share for the same quarter in the prior fiscal year as well as the Zacks Consensus Estimate of a loss of 20 cents per share. The narrower loss can be attributable to higher revenues and a substantial fall in operating expenses during the quarter.
Total revenue grew 20.4% to $93.6 million, surpassing the Zacks Consensus Estimate of $81.0 million significantly. Product revenues surged 36.1% to $45.1 million while Service revenues rose 8.7% to $45.5 million.
The improvement in Product revenues was attributable to impressive rise in product orders. Gross product orders almost doubled (102%) to $80.3 million in the quarter while net product orders (gross orders less cancellations and age-outs) soared 232% to $59.4 million in the second quarter.
At the end of the quarter, product backlog was $362 million, up roughly 30% from the backlog at the end of the fiscal 2013-second quarter. The increase in Service revenues was driven by the higher installed base and conversion of customers to emerald and diamond service contracts.
Total gross profit surged 43.4% to $38.2 million while total gross margin improved 660 basis points (bps) to 40.8% from 34.2% in the year ago quarter. The overall gross margin comprised of product gross margin of 44.7% and service gross margin of 37.1% compared with product gross margin of 44.0% and service gross margins of 26.9% for the fiscal 2013-second quarter.
The improvement in Product gross margin was attributable to higher volume and stronger average selling prices. On the other hand, the rise in Service gross margin was attributable to TomoTherapy Systems reliability improvement, which led to lower parts consumption and sales of higher margin service contracts.
Operating expenses dipped 20.5% to $38.9 million in the fiscal second quarter due to continued expense control. It is even lower than Accuray’s guidance of about $40 million per quarter. As a result, operating loss significantly narrowed to $716 thousand from $22.3 million a year ago.
Financial Condition
Accuray exited the quarter with cash, cash equivalents and investments of $159.6 million, which is lower than $174.4 million as of Jun 30, 2013. Long-term debt inched up 1.2% to $201.1 million as of Dec 31, 2013 from $198.8 million as of Jun 30, 2013. Consequently, long-term debt-to-capitalization ratio increased 290 bps to 67.9% from 65.0% as of Jun 30, 2013.
Guidance
For fiscal 2014, Accuray upgraded its total revenue guidance to a range of $340 to $350 million from the prior range of $325 to $345 million based on its performance in the first half of fiscal 2014 and optimism triggered by the continued momentum of converting orders to revenue. The current Zacks Consensus Estimate of $344 million lies within the guided range.
However, Accuray expects lower net orders in second half of fiscal 2014 compared with the net orders in the first half of the fiscal year. With this, Accuray expects to end the fiscal year with net product orders of $215 to $225 million, reflecting a 25–31% growth over the prior fiscal year.
Our Take
We are impressed with Accuray’s achievement in improving product order momentum in the second 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, Accuray remains susceptible to weak global markets and reimbursement uncertainties, and faces stiff challenges from competitors’ product offerings.
Currently, Accuray carries a Zacks Rank #3 (Hold). Some better-ranked medical instrument stocks include Natus Medical Inc. (BABY), ABIOMED, Inc. (ABMD), and AngioDynamics Inc. (ANGO). Natus Medical carries a Zacks Rank #1 (Strong Buy), while both ABIOMED and AngioDynamics carry a Zacks Rank #2 (Buy).
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