Struggling small-cap med-tech company Accuray (ARAY) continues to demonstrate why it's generally a bad idea to bother with troubled companies that continually have to explain their underperformance. Accuray has struggled to gain any traction on its much larger rivals Varian (VAR) and Elekta, and Thursday's big warning shows just how far this company has yet to go to become a real rival. While bulls will likely argue that the company is sweeping the deck and putting the worst behind it, I think it's getting harder and harder to maintain a bullish thesis.
A Really Big Mess For Fiscal Q2
There's a phrase on Wall Street would use to describe Accuray's second quarter, but it is unfortunately not printable here. Suffice it to say, the company has made a very big mess where it sleeps.
The company warned investors that instead of the $94 million or so in revenue that the Street was expecting (equivalent to an 8% to 9% year on year decline), revenue will instead be down to about $72 million to $75 million (down about 28%). Worse still, product revenue will be down by a startling amount, 45% to 50%.
Almost just as bad, Accuray is apparently struggling to deliver any momentum out of what had seemed like a strong ASTRO meeting. Net orders plunged 77% this quarter to about $16 million - less than half of the prior quarter's $36 million (which had been excused as buyers delaying ahead of ASTRO), and about one-quarter of analyst expectations.
Management cited manufacturing issues with the CyberKnife multi-leaf collimator as a contributing factor, but the reality is that the company is falling further and further off the radar at major cancer treatment centers, as Varian and Elekta appear to be capturing at least 85% and perhaps 90% of new orders in the market.
Will This Restructuring Hit The Mark?
Perhaps not surprising given the recent hiring of Joshua Levine as the new CEO, the company also announced a restructuring. The company is going to be reducing staff by about 13% (with more of the cuts in the U.S.) and generally realigning its marketing and sales strategy. Like it or not, this will include a greater focus going forward on the TomoTherapy systems, but this is just speculation on my part.
Management certainly doesn't expect the restructuring to change the company's fortunes overnight. With this warning about the second quarter, management is also cutting full-year guidance pretty substantially, taking revenue down to a midpoint of $325 million against a prior estimate of $406 million. Should management hit this new target, it still marks a 20% year-on-year decline - hardly an encouraging development for a company that is well past the point where it should be growing.
If there's still hope for Accuray, it is in the new management direction and new products. The new Tomo system looks to offer substantial efficiency gains (50% to 70%), while the new CyberKnife with a 40-leaf multi-leaf collimator should offer about 70% lower beam times, making the system much more competitive to Varian and Elekta systems on treatment time. Unfortunately, the CK systems are still quite expensive, and Accuray has not done a good job thus far of convincing centers that they really need to pay up for the system.
The Bottom Line
Accuray is in a tough spot. The company lacks the level of order throughput it needs to really be an efficient manufacturer, and I'm no longer confident that the price/performance advantages are going to be enough to convince hospitals to give their systems a chance. Worse still, the North American market is pretty much fully penetrated, and I have my doubts that premium-priced systems will go very far in markets like Brazil and China where most of the future growth is likely to be.
That said, CEO Levine deserves a chance to show if he can create a marketing strategy that will reverse the company's fortunes. What's more, a substantial cut to Gamma Knife reimbursement could make Accuray's products marginally more appealing relative to Elekta.
If Accuray follows the trajectory of struggling med-tech companies of the past, the bottom in the stock could be in the $4 range. With an acquisition of Accuray highly unlikely, investors need to hope now that the company is now hitting bottom (again) and that management has a workable strategy for future growth.
For my part, I had conservative expectations going into this disappointment, and I continue to believe that the stock could trade into the high single digits if the company can show solid order growth and share gains. That said, the very small holding I have in this stock (a legacy of the company buying TomoTherapy) has been an ongoing disappointment, and I may well be selling out soon instead of hanging around in the hopes that the company can gain any real ground on the twin Goliaths of the radiation oncology market.