Accuray (NASDAQ:ARAY) Q3 2026 Earnings Call

0:00 Day, and welcome to the Accuray Third Quarter Fiscal Year twenty twenty six Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Steve Monroe, Vice President of Financial Planning and Analysis. Please go ahead. Thank you, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the third quarter of fiscal year twenty twenty six, which ended 03/31/2026.

0:49 During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Steve Leneve, Accuray's President and Chief Executive Officer and Ali Purvais, Accuray's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward looking statements. Actual results may differ materially from those contemplated or implied by these forward looking statements. Factors that can cause these results to differ materially are outlined in the press release we issued just after the market closed this afternoon, as well as in our filings with the Securities and Exchange Commission. We base the forward looking statements on this call on the information available to us as of today's date.

1:35 We assume no obligation to update any forward looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward looking statements. A few housekeeping items for today's call. All references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended March 31. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com.

2:20 As you review our prepared remarks and guidance today, please note that our outlook represents our current estimates and reflects the operating environment as we understand it today, including among other things, current tariff impacts and geopolitical conditions. As always, the situation remains dynamic and we'll continue to update investors as visibility improves. With that, let me turn the call over to Accuray's Chief Executive Officer, Steve Leneve. Steve? Thank you, Steve. Good afternoon and thank you for joining us. Since joining Accuray last October, I've spent time with teams across the company and in our key markets. What stands out is the strength of our technology, the commitment of our people, the conviction health care providers and patients have in our solutions, and the scale of the opportunity ahead of us.

3:13 Turning to the quarter. Total revenue was approximately $105,000,000 up 3% sequentially, but down 7% year over year. In the third quarter, we had product shipments planned to certain customers in The Middle East, North Africa and Pakistan that have been delayed indefinitely due to increased geopolitical disruption in The Middle East, which is also impacting our service revenue in those regions. We don't know how long this regional dynamic might continue. Additionally, our business in China continues to face headwinds that we discussed during our last earnings call, which pertained to geopolitical tensions and ongoing tariff uncertainty. These are markets that remain strategically important to Accuray over the long term, but the current environment has added volatility and uncertainty that is largely outside of our control and difficult to predict.

4:10 That said, restating our strategy, we are prioritizing investment in innovation, product reliability, service solutions, workflow efficiency, and partnerships that expand our reach and strengthen our platform. Additionally, we are relentlessly focused on executing on our transformation program initiatives that did not take effect until the middle or end of the third quarter, which, coupled with the geopolitical factors I've mentioned, have masked their impact to date. While we remain confident in our ability to execute against our transformation plan, the current geopolitical environment, including the conflict involving Iran and its ripple effects across The Middle East, as well as my earlier comments about our business in China has created significant unpredictability for both the product and the service sides of our business.

5:08 Given such uncertainty, we believe the responsible approach is to withdraw our financial guidance at this time. We will provide an update on the business when we report fiscal fourth quarter results. Now turning to our transformation plan and the progress we've made. As a reminder, in mid December, we launched a comprehensive strategic operational and organizational transformation plan. This plan was designed to sharpen accountability, tighten cost control, and accelerate execution, while positioning Accuray for sustainable, profitable growth over the long term. The foundation of this plan was to establish clear product and service strategies supported by a set of critical enablers we believe are necessary to execute at a higher level.

5:59 The first of those enablers was rightsizing our cost structure while improving efficiency through better processes and the use of our ERP system and business intelligence tools. This was paired with an organizational realignment that centralized key functions, outsourced non core activities, and reinforced accountability, speed, and commercial focus across the business by reducing approximately 15% of our workforce. At the same time, we reallocated engineering resources toward higher ROI programs, particularly those that integrate third party solutions and more directly reflect the voice of the customer. Taken together, these actions were designed to structurally improve operating profitability by approximately $25,000,000 on an annualized basis, with roughly $12,000,000 expected to benefit fiscal twenty twenty six.

6:59 As of the end of the third quarter, we have already achieved approximately $10,000,000 of those improvements, and we are well on track to exceed the $12,000,000 we originally targeted for fiscal year twenty twenty six. We continue to believe that at least $25,000,000,000 of these improvements should be realized in fiscal year twenty twenty seven. We remain encouraged by the pace, the quality of execution, and the sustainability of these actions to date. And we will provide an updated view on these annualized improvements on our fourth quarter earnings call. To put some color around what this looks like in practice, let me briefly highlight a few initiatives that are already underway. First, we are expanding and diversifying our service portfolio to better monetize our installed base and enhance customer value.

7:51 During the quarter, we launched new training and educational solutions, which can be included in service agreements or sold standalone. Additionally, we will launch packages to add software solutions to our service agreements, which we believe strengthens recurring revenue opportunities and improves customer engagement over time. Our strategy is to better leverage our substantial and growing installed base and to drive significant value creation through our service business. Second, we are making meaningful progress toward a more structured and disciplined distributor partnership model. In markets where distributors are essential to our reach, we are implementing clear performance standards, improved transparency, stronger alignment, and better support models to drive consistent, high quality execution.

8:45 During the quarter, we advanced this effort with several concrete actions, including the appointment of a vice president of distributor partnerships, a new and strategically important role for Accuray focused on elevating distributor performance and accountability globally. Third, we are implementing systems, processes and controls to help ensure we are fully and appropriately compensated for the work our service teams deliver every day. During the quarter, we have made enhancements to our service systems, which are designed to improve cash conversion and margin quality. Fourth, we continue to optimize pricing across our product and service portfolio to better reflect the clinical and economic value our technology and our service solutions deliver.

9:38 This work is designed to support competitive wins at appropriate margins and is expected to translate into stronger sales quality and margin expansion over time. Finally, an essential element of the transformation is strong commercial leadership. I am very excited that Paul Maielli has joined Accuray as Chief Commercial Officer. Paul brings more than two decades of experience leading and scaling global capital medical device businesses across The Americas, EMEA, and APAC regions. His track record strongly aligns with Accuray's priorities in terms of building effective commercial operating models, reactivating the installed base, expanding service and solutions monetization, and accelerating capital equipment sales, specifically in the areas of imaging, navigation, and robotics.

10:35 In prior roles, his leadership helped drive the reversal of revenue decline trends and helped deliver double digit annual growth. Paul and his team will play a critical role in strengthening our top line, improving profitability, and supporting sustainable long term value creation. With our internal transformation well underway, I'd like to now turn to strategic partnerships, which is an area that is playing an increasingly important role in shaping Accuray's future. A core principle of our transformation is focus. We are being very deliberate about where we invest our internal resources and where partnering allows us to move faster, scale more efficiently, and deliver greater value to our customers.

11:23 Over the past several months, we've made meaningful progress aligning with partners that strengthen our execution today and fortify our long term position as an innovative leader in radiation medicine. One of the most exciting areas of progress is how we are leveraging partnerships with the goal to convert one of Accuray's most distinctive capabilities, real time adaptation to patient and tumor motion during treatment into a durable clinical evidence engine. Radiation medicine is entering an era where precision is increasingly defined not just by the treatment plan created in advance, but by what happens during treatment itself. Recent high impact prostate SBRT data have reinforced that delivery side factors, including intrafraction motion management, can meaningfully impact outcomes.

12:22 Accuray's installed base gives us access to one of the largest repositories of real world motion tracked treatment data in the industry, spanning hundreds of thousands of treatment fractions across multiple disease sites. By pairing these insights with a multicenter registry sponsored by the Radiosurgery Society, We are working to define the clinical value of real time correction, inform future product development, and help shape emerging standards of care. Importantly, this effort strengthens our differentiation, supports our product roadmap, and reinforces our focus on clinically meaningful innovation. Our new partnership strategy is built around creating an ecosystem of aligned partners that amplifies our strengths.

13:15 We are building a constellation of strategic collaborations with many leading organizations, including the University of Wisconsin Madison, Tata Consulting Services, as well as many others. Each bring distinct capabilities across imaging, software, workflow innovation, clinical research, treatment continuity, and operational execution. Together, these partnerships allow us to deliver more comprehensive solutions to radiation medicine teams while improving speed to market and capital efficiency. This partnership driven model is an important pillar of our transformation and a key component of how we intend to create enduring value for customers and shareholders alike.

14:05 In addition to the momentum we're seeing across our transformation and partnerships, we are very excited about the upcoming European Society of Radiation Oncology, ISTRO, conference in Stockholm later this month. ISTRO is an important global forum for radiation medicine and a key opportunity to engage directly with our customers. At ISRO, we plan on highlighting a series of practical, customer driven product enhancements and new partnerships that reinforce our commitment to clinical excellence, workflow efficiency, and continuous innovation. As I've said before, these are areas where we believe Accuray can make the biggest difference for patients and where we can meaningfully differentiate ourselves in the market.

14:53 In summary, while the external environment remains challenging, the transformative progress we're making across execution, innovation, and partnerships gives us confidence that we are building a stronger, more resilient Accuray for the future. With that, I'll hand it over to Ali to take you through our financial results and key financial metrics. Thanks, Steve, and good afternoon, everyone. I would like to begin by thanking our global cross functional teams for their continued dedication and hard work as we execute on our transformation plan. Turning to the third quarter results. Net revenue for the quarter was $104,800,000 which was down 7% versus the prior year and down 10% on a constant currency basis.

15:39 On a sequential basis, revenue increased 3%. Product revenue for the third quarter was $49,700,000 down 13% versus the prior year and down 15% on a constant currency basis, representing the majority of the year over year decline. Similar to the first half of fiscal year twenty twenty six, most of this came as a result of ongoing macroeconomic headwinds in China, and more recently, geopolitical tensions in The Middle East. Service revenue for the third quarter was $55,100,000 down 1% from the prior year and down 5% on a constant currency basis. As a result of our global installed base and service network being negatively impacted by Middle East tensions, we had a $1,200,000 negative impact to service revenue.

16:25 The company's contract capture rate defined as a percentage of active systems covered by a service agreement continues to be at nearly 90% across our active installed base. As Steve discussed, optimizing pricing to reflect our true clinical and economic value has been a key piece of our transformation plan. This includes a significant focus on pricing on service contract renewals. While the pricing secured in renewals has an impact that spans over the next two to three years, we did experience $600,000 of price favorability within service revenues in the third quarter. Product gross orders for the third quarter were approximately $49,000,000 and represented a book to bill ratio of 1.0 in the quarter with a trailing twelve month ratio of 1.2.

17:11 We ended the third quarter with a reported order backlog approximately $356,000,000 defined to include only orders younger than thirty months. Our overall gross margin for the quarter was 24.1% compared to 27.9% in the prior year. This decline was primarily due to service margins, which were 26.1% compared to 33.3% in the prior year. Driving this decrease was higher net parts consumption of $3,200,000 which negatively impacted service gross margins by approximately 600 basis points. As we have mentioned in prior quarters, the timing of parts consumption can fluctuate quarterly depending on the volume and extent of service requirements.

17:58 In the third quarter, our higher than anticipated service parts consumption also required higher than average logistics and duties costs. Additionally, tariffs adversely impacted service margins by $800,000 or 150 basis points. Product gross margins in the third quarter were 21.9% compared to 22.7% in the prior year. The year over year incremental cost from higher tariffs was $2,600,000 which adversely impacted product gross margins by approximately five thirty basis points. Tariffs have been quite fluid recently and although IEPA tariffs have been invalidated, we continue to monitor how the tariff landscape evolves over the near term and how that impacts our profitability and cash flow.

18:52 Operating expenses in the third quarter were $34,400,000 compared to $30,600,000 in the third quarter of the prior fiscal year. The current year third quarter includes $6,500,000 of nonrecurring restructuring expenses, which includes severance costs and other costs directly related to our restructuring and transformation plans. Additionally, the prior year third quarter benefited from a $3,200,000 reversal of unrealized accrued compensation from the first half of fiscal year twenty twenty five. Adjusting for these discrete items, third quarter twenty twenty six operating expenses decreased $6,000,000 or 18% versus prior year, which illustrates that the cost actions taken as part of our transformation have taken hold.

19:38 As stated above, during the third quarter, we recognized $6,500,000 of nonrecurring restructuring expenses. As our transformation plan progresses, we expect restructuring costs to sequentially decrease from these third quarter levels in future quarters with a significant portion of the restructuring costs recognized by the end of the fiscal year. Operating loss for the quarter was $9,100,000 compared to income of $1,000,000 in the prior year. Adjusted EBITDA for the quarter was $3,800,000 compared to $6,000,000 in the prior year. We described the reconciliation between GAAP net income and adjusted EBITDA in our earnings release issued today. Turning to the balance sheet, total cash, cash equivalents and restricted cash as of quarter end amounted to $44,400,000 compared to $47,900,000 at the end of last quarter.

20:30 The restricted cash was related to required postings for cash flow hedging and tariffs amounting to $6,400,000 in the current quarter as compared to $6,600,000 at the end of last quarter. Net accounts receivable were $64,600,000 up $3,600,000 from the prior quarter, largely due to higher sequential quarter revenue. Our net inventory balance was $156,600,000 up $5,700,000 from the prior quarter. At the end of the third quarter, we had $5,000,000 outstanding in our revolving credit facility. As Steve noted earlier, we continue to execute our transformation strategy and remain ahead of plan to achieve the $12,000,000 improvements we had originally forecasted.

21:16 By the end of the third quarter, we had already realized approximately $10,000,000 of these transformation related improvements, which were largely achieved through workforce and discretionary spend reductions as well as pricing realization. And with that, I'd like to hand the call back to Steve. Thank you, Ali. I remain excited about the opportunities ahead for Accuray and continue to have strong conviction in the differentiation of our technology and the value it brings to customers and patients. We believe the impact of our strategic focus and the transformation plan we initiated will become increasingly evident over the coming quarters, with 2027 and 2028 financial performance expected to reflect the benefits of the actions we are taking today.

22:02 As we look ahead, we believe our progress should be measured against a clear set of priorities. Number one, driving top line growth with our product and service business lines through a focused commercial strategy. Number two, relentlessly executing on our transformation plan to improve gross margins and strengthen EBITDA through tighter cost management. And number three, prioritizing innovation grounded in voice of customer as part of our product and service development programs. With that, I'll turn the call back over to the operator for Q and A. We will now begin the question and answer session. The first question comes from Marie Debeau with BTIG.

23:10 Please go ahead. Good evening. I just wanted to ask about the decision to remove guidance. I know that the Iran war started after your last quarterly earnings call, but your prior commentary had pointed to a close understanding of timelines in these various regions. Why not just revise the guidance to remove some of those specific customers or those revenue installs in those regions? Why remove entirely? Thank you, Marie. This is Steve. Appreciate the question. And obviously, we've spent a lot of time thinking through this very carefully. As we noted in our remarks earlier, the shipments to customers in The Middle East, North Africa Pakistan particularly have been delayed indefinitely due to these tensions.

24:05 And that directly impacts both product revenue and also the associated service revenue. And just given the dynamic nature of these disruptions and the difficulty in predicting when these installations will resume, we collectively felt it was more appropriate to withdraw guidance. EMEA is the largest region for Accuray. And then within EMEA, The Middle East and North Africa are the fastest growing subregions. And then giving the interdependencies that exist between other regions around the world, we felt this was the most prudent course of action. Okay. And then I know you're ahead of schedule on some of your cost cutting efforts, but it looks like adjusted EBITDA came in well below what we were expecting and certainly does not really keep you on track for your prior outlook. I understand that's been removed.

25:03 What's going on there? I know I think that excluded things like the restructuring charge. So what's going on there? And is there a way to see improving profitability despite some of this macro uncertainty? Hey, Marie. It's Ali. Thanks for the question. Look, we're really excited about the fact that the transformation is moving along well, and we are ahead just like you said. In terms of the savings, we've made a lot of progress to date. You sort of heard about the workforce reductions and the reorganization that we've done. We've made a lot of progress in terms of just overall cost and spend rationalization, and I think we just continue to execute on the transformation.

25:52 You know, the main pillars associated with the transformation are really related to continuing to focus on our service business, really have meaningful progress in our distributor partnership model, and, you know, focus on optimizing pricing. And I think all of those are going to take some time to come into play, and the timing of those are really hard to anticipate. And so we think we're still going to see a solid annualized benefit in fiscal year twenty seventeen. Thank you, Ollie. You took my question out of my mouth there. Was going to ask about the timing of some of those potential benefits. I'll hop back in queue. Thank you. Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Accuray's President and CEO, Steve Linnees, for any closing remarks.

26:45 Thank you all for joining our call today, and we look forward to speaking with you again in the summer when we report our fiscal twenty twenty six fourth quarter earnings results. This concludes our earnings call. Thank you again. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.