Accuray Results Weren't Bad, But There's Still No Growth

Accuray (NASDAQ:ARAY) has put another quarter in the books, and nothing has really changed for the better. There are understandable explanations (or excuses) for the ongoing underwhelming performance, including supply issues and COVID disruptions in China, but the reality is that there has always been some “short-term issue” here to explain away weak performance, but the performance has never improved on a sustained basis.

That’s a grim opening, but with the shares down another 30% since my last update, it’s hard to have a rosy outlook here. It’s not so much that I’ve turned bearish, but there’s only so many times you can talk about progress and potential in the underlying business in the absence of real underlying evidence of progress in the financials. I’ve said in the past that Accuray needs quarterly orders around $100M to really make a go of it, and the company hasn’t been there since the summer of 2021 (and has never achieved it two quarters in a row, I believe).

Is there upside here if management can execute on opportunities in China and Japan? Yes. But that upside has to be weighed against the risk/likelihood that this company continues to drift until it runs out of cash and that any future acquisition is at a fire-sale price.

 

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Accuray Results Weren't Bad, But There's Still No Growth

Accuray Making Progress, But Not Enough To Swing Sentiment

When I last wrote about Accuray (NASDAQ:ARAY) in early February, I said that the challenges the company was facing over the next 12 months from supply-chain issues and ongoing COVID-19 disruptions in China would likely mask any progress at the company. So it has been, as the shares have declined about 25% or so (worse before a recent rally in the shares) and the Street remains largely disinterested in this name.

There is ample cause for skepticism on Accuray; despite several important product/technology advances and progress in the under-penetrated Chinese market, there has been almost no revenue growth over the past decade ($430M versus $409M) and profitability is still inadequate.

On the other hand, those technological and product improvements aren’t trivial, and the radiation oncology market is changing more than some investors may appreciate. The Chinese market should improve as lockdowns ease, and changes to both Accuray’s product line-up and the rad-onc market should drive above-market performance.

All of that said, I completely understand investor skepticism on this name. Although the shares look undervalued (even on low expectations), I will not quibble with investors who want nothing to do with this name, and it’s one that I’d only recommend for more risk-tolerant investors willing to accept the risk that nothing ever really changes here.

 

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Accuray Making Progress, But Not Enough To Swing Sentiment

Accuray Once Again Hits The Reset Button On Its Progress

 

Some things just never change, and Accuray’s (ARAY) inability to string together sustained success is one of them. Sympathizers will note that the latest issues hitting the company (supply chain costs/disruptions) are outside their control, and I largely agree, but it doesn’t change the basic fact that calendar/fiscal 2022 was supposed to be the start of real evidence of the new and improved Accuray on multiple fronts – product quality, order intake, market share, and in the financials.

I’ve long since made my peace with what Accuray is (and what it isn’t), I still believe the market undervalues the stock – the progress here has been frustratingly slow, and with many cases “two steps forward, and almost-two steps back”, but I do believe there has been progress. Moreover, compared to a lot of med-techs with lackluster growth prospects (and not as many potential long-term drivers of upside), I believe Accuray’s travails are more than compensated for in the discounted share price.

 

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Accuray Once Again Hits The Reset Button On Its Progress

More Progress Evident At Accuray, But Sustainability And Follow-Through Remain Key

 <This article was published a couple of months ago, but somehow fell through the cracks for me and I never posted it here.>

On multiple occasions, I’ve lamented Accuray’s (ARAY) inability to sustain, let alone build upon, past success, and the tape tells the tale – the stock’s five-year and 10-year returns are pretty dismal, as investors have grown weary of the “wait until next year” story that has long dominated the name.

That said, I saw reasons for more bullishness in my last update on the company, and fiscal first quarter results (reported earlier in November) were better than expected. Along with improved visibility on the R&D pipeline and progress in China, the shares are about 40% higher now, but still not overvalued relative to what mid-single-digit revenue growth and low-to-mid-teens EBITDA margins should support.

To be clear, this is a name with above-average risk, and one where investors have to believe that past results are not predictive. Between improved product offerings (both hardware and software), changing reimbursement, and growth in the Chinese market, I believe there is a bull case still to be made, but there is no point in pretending that success here is assured.

 

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More Progress Evident At Accuray, But Sustainability And Follow-Through Remain Key

Accuray: As Usual, Two Steps Forward, One-And-Three-Quarters Steps Back

 

Accuray (ARAY) is probably one of the most exasperating companies and stocks I’ve ever followed, which is part of the reason I’ve always been willing to sell down my position whenever the stock runs up. For all of what should be positive drivers for the company and its technology/product offerings, steady progress towards growth and scale has always proved elusive.

I applaud management’s urge to be cautious with guidance, but I think we’re once again seeing “investor fatigue” here, as mid single-digit revenue and low single-digit order growth guidance aren’t going to get it done... particularly when compared to what should be a large China opportunity that is starting to bear fruit. While I do think these shares are valued too lightly today, I can’t really bring myself to invite other investors onboard this pain train.

 

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Accuray: As Usual, Two Steps Forward, One-And-Three-Quarters Steps Back

More 'Hurry Up And Wait' For Accuray, But The China Opportunity Is Coming Through

 

It’s been a rough go for Accuray (NASDAQ:ARAY) since my last update on the shares. The combination of a weaker tape for small-cap med-tech and a lackluster fiscal third quarter hasn’t been a good one for the shares, which have lost close to 20% of their value since that last article – despite not much real change in the outlook. I get that Accuray is a frustrating stock to hold, and it has been for some time – investors have been waiting years for the supposed advantages of the CyberKnife system, the improvements to the Tomo platform, and the opportunities in China to deliver, and we’re still not quite there yet.

That said, I do believe the opportunity in China is real, and the technological improvements to Accuray’s systems, as well as a shift toward more hypofractionation in radiation oncology could finally be the right combination to unlock the potential here. I continue to believe that $6 to $7 is a fair price for now, but if the opportunity in China lives up to its potential, a double-digit share price is not hard to imagine.

 

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More 'Hurry Up And Wait' For Accuray, But The China Opportunity Is Coming Through

Accuray Is Seeing Green Shoots For Its Large China Opportunity

It’s been a long, frustrating wait for shareholders, but Accuray (ARAY) investors are at long last seeing the company start to deliver on at least some of its opportunity in the Chinese radiation oncology market. In addition to starting to recognize real revenue in that huge market, Accuray has continued to deliver on an underappreciated innovation drive and some of those advancements should start impacting orders, sales, and profits in the relatively near future.

Accuray shares have shot up almost 80% since my last (positive) write-up on the company. As I’m not changing my model after a quarter that was close to in-line with my expectations, that makes the valuation argument a little more challenging in the short term. If the company stays on track such that double-digit revenue growth in FY’22 and high single-digit or low double-digit growth for a few years thereafter looks more probable than possible, I could easily see at least a doubling if not close to a tripling of the share price based on what the market has historically paid for that kind of growth from small med-techs.

 

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Accuray Is Seeing Green Shoots For Its Large China Opportunity

Amid COVID-19 Pressures, Accuray Looks Toward The Start Of Its China Ramp

Over the years there has been a dominant theme Accuray (ARAY) – just wait a little longer and the business will start ramping up. Whether it was the latest system innovation, new clinical studies, a change in reimbursement, supplanting aged rival systems, or the China opportunity, there’s always been something just on the horizon that was going to drive revenue inflection. For the last seven years, though, revenue has been stuck in a $50 million band between $369 million and $419 million, while rival Varian (VAR) has seen core oncology system growth of around 5%/year, and the shares have continued to glide down.

I’ve said before that I believe current Accuray management has done more to improve the business than is reflected in the share price, and I still believe that. But with the company on the cusp of revenue recognition from its Type A license backlog in China, I don’t expect much patience from the Street if this doesn’t finally light the fuse on a more meaningful and lasting revenue ramp (and operating leverage).

I continue to model Accuray on the assumption of revenue acceleration from virtually no growth over the last six years (below 1%/year) to around 6% on an annualized basis. That level of growth should put the company on a path to double-digit FCF margins down the line, and it should likewise support a near-term fair value in the mid-to-high single-digits. Even so, this is a company that has been a serial disappointment, and while it may be different this time, that’s typically not a winning strategy in investing.

 

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Amid COVID-19 Pressures, Accuray Looks Toward The Start Of Its China Ramp

Accuray Idling On The Runway Ahead Of A Significant Chinese Revenue Launch

I have said it before and I'll say it again - while it doesn't really show up in the share price, the current CEO of Accuray (ARAY) has done a good job with this business, not only in stabilizing the financial situation, but also reprioritizing/refocusing the R&D efforts and repositioning the company for sustainable growth. The company was never going to win the head-to-head battle with Varian (VAR) in markets like the U.S. and Europe, but taking a page out of Willie Keeler's book ("hit 'em where they ain't"), Accuray has refocused on opportunities in Japan and China where its system designs have some meaningful potential advantages.

Still, factors outside the company continue to weigh heavily on performance, as disruptions related to COVID-19 and the Chinese tendering process have continued to delay the anticipated revenue ramp. The business is profitable now and the shares are up a bit from my last update, but the key catalyst remains a significant ramp in China - the timing of which management pushed back again by another quarter. While this has been a frustrating wait, and major competitors like Varian and Elekta (OTCPK:EKTAY) are certainly targeting China's large market opportunity, I believe Accuray shares remain undervalued albeit with well above-average risk.

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Accuray Idling On The Runway Ahead Of A Significant Chinese Revenue Launch

COVID-19 Saps Some Of Accuray's Momentum, But Execution Remains Strong

I feel bad for Accuray (ARAY) management. This team has done a lot of work to improve the company over the years and brought the company to the cusp of a potentially transformative opportunity... only to see COVID-19 slam the brakes on that progress. While delays in converting orders from China into actual placements and revenue are frustrating, I don't view this as an execution issue, nor do I view this business as lost, just delayed.

How bad things will get over the next quarter or two, and possibly even the next year or two, is a big unknown. While hospitals are continuing to provide radiotherapy to patients, the COVID-19 crisis has brought new procurements and installations to a dead stop and has scrambled the budgets for many centers. The arguments for radiotherapy, and for Accuray's systems, remain unchanged, though, and I think the worst that will happen is that business, revenue, and profits get "pushed to the right" and delayed. That does reduce the near-term fair value of the shares, but the 40% drop since my last article far exceeds my estimate of that impact.

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COVID-19 Saps Some Of Accuray's Momentum, But Execution Remains Strong

Positive Commentary Around China Has Reignited Hope For Accuray

If you look at a long-term chart of Accuray (ARAY), you’ll see a few spikes - periods where investors thought that the company had finally gotten its various ducks in a row and was about to start generating real share growth and leverage. There’s a new hope around Accuray again, but it’s up to management to follow up with a sequel more like The Empire Strikes Back than The Holiday Special.

I still want Accuray to succeed, but the reality is that for all of the good things this management team has done, executing on growth opportunities has proven elusive thus far. Maybe the China opportunity will finally unlock the potential that long-suffering long-term investors have held on to, and it’s certainly true that even with this recent spike in the share price, the valuation doesn’t anticipate an especially significant, durable growth ramp. If Accuray can execute (and build) on what management has characterized as a $100 million-plus opportunity in China over the next couple of years, further upside is certainly possible.

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Positive Commentary Around China Has Reignited Hope For Accuray

Accuray Drifting, And Critical Mass Seems Far Away

Another quarter is in the books and not a lot has changed for Accuray (ARAY). This remains a perpetually frustrating story as the company has meaningfully improved the functionality of its systems, but those improvements haven’t shown up in orders, revenue, market share, or profits. While new data, reimbursement, and product enhancements could give a spark to CyberKnife, and China remains an attractive opportunity in concept, it’s going to take still more time for those to develop into real drivers.

Pre-market indications are that Accuray is going to sell off on fiscal first quarter results, but I didn’t find them all that bad. Still, I don’t see that near-term spark to shift sentiment or drive investors to take another look at the shares, so while I think Accuray probably deserves to trade closer to the mid-single-digits, the company is still a long way from critical mass in orders or revenue and catalysts are slow to emerge.

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Accuray Drifting, And Critical Mass Seems Far Away

Accuray's 'Wait 'Til Next Year' Story Wearing Thin

It has been a long time since Accuray (ARAY) has shown any sustained momentum in the business, and it looks like the market is largely out of patience. Although the company hit an all-time high for quarterly revenue, it still can’t reliably hit the $100M/quarter order target I believe it needs to reach to achieve any real momentum in the business, and the share price is at an all-time low.

Does a record high quarterly revenue figure and a record low share price mean that there is a fundamental disconnect between the market and the company? There are a lot of good things I can say about this management team, but they haven’t been able to change the underlying competitive dynamic much (Varian (VAR) has only gotten stronger) and pretty much all of the company’s eggs are now in the “China will change things” basket.

I don’t believe Accuray’s China business will drive a fundamental shift in the business and I disagree that Accuray has particularly attractive prospects as a buyout candidate. Although I do think the shares should trade in the mid-single digits, and that’s considerably higher than today’s price on a percentage basis, this is a speculative call at this point.

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Accuray's 'Wait 'Til Next Year' Story Wearing Thin

Accuray Executing More Consistently, Now Waiting For China To Kick In

As I have said in the past, although the share price really doesn’t reflect it, Accuray’s (ARAY) CEO has done a good job of stabilizing and turning around this business. Product quality and service delivery issues are long since resolved, margins have improved noticeably, and debt has skillfully managed. On top of that, the company has been rolling out product and software upgrades that meaningfully address competitive weaknesses and improve the value of the system to hospitals, and the company has successfully closed a long-awaited JV for the large China market.

And now… we wait. Outside of the China opportunity Accuray remains an “is what it is” business, with the company picking up only modest market share (primarily from Elekta (OTCPK:EKTAY) and old Siemens installations). Not much has really changed about the U.S. market, where Accuray is still generally a distant afterthought, and the Japanese business can’t do it all alone. I do believe these shares remain undervalued, but a lot is riding on the China opportunity, and both Elekta and Varian (VAR) are keenly focused here too, while ViewRay (VRAY) chips away a bit at the U.S. market opportunity.

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Accuray Executing More Consistently, Now Waiting For China To Kick In

More Encouraging Progress From Accuray

Small-cap radiation oncology system manufacturer Accuray (ARAY) has frustrated more than a few investors and analysts over the years, as this company has struggled to gain real traction against Varian Medical Systems (VAR) and Elekta (OTCPK:EKTAY) (to a lesser extent) in the roughly $5.5 billion market for radiation oncology systems. While Accuray has always offered systems with some compelling technologies and capabilities, getting everything in line in terms of system reliability, performance, pricing, software, and marketing support has been a real challenge.

Maybe, just maybe, 2019 will be the year where things finally start to really come together for the company. Orders are coming in better than expected, and if the logjam in China’s market opportunity breaks up, Accuray could be poised to see significant benefits. I don’t believe enough has changed yet for me to move my fair value range from $5.50-6.50, but I do have more confidence that this story is developing in a more positive direction.

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More Encouraging Progress From Accuray

A Renewed Spark At Accuray, But Follow Through Is Critical

One of the perennial challenges in investing is maintaining a healthy balance of skepticism and realism while still allowing for the possibility of upside (and avoiding poisonous cynicism), and that can be particularly challenging when you’re dealing with companies with spotty track records. Accuray (ARAY) has had moments in the past when it looked like the story was finally coming together and the company was poised to generate meaningful forward progress, but those moments were all too brief and the company has struggled to post any real growth since the merger of TomoTherapy and Accuray in 2011.

Accuray’s fiscal first quarter got things off to a good start and there are credible reasons to believe that this fiscal year could be the start of a long-awaited meaningful improvement in the company’s financials. Even modest growth expectations would support a price above $5.50 and a fair value into the high single-digits is not unreasonable, but successful execution and delivery has long proven elusive for this company and I’m not confident enough to go all-in recommending Accuray shares on a “it’s different this time … really!” thesis.

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A Renewed Spark At Accuray, But Follow Through Is Critical

Still Not Much Momentum At Accuray

Small-cap oncology system manufacturer Accuray (ARAY) reported a decent fiscal fourth quarter, but it’s hard to see much momentum in the business or any real sign that this company is becoming a more disruptive force within the radiation oncology market. Although I continue to give management high marks for improving the underlying efficiency of the business and cleaning up the balance sheet, I just don’t see signs that Accuray is really gaining on Varian (VAR) (or even Elekta (OTCPK:EKTAY)) in any meaningful way, and I don’t see anything on the horizon that would drive a sudden shift in sentiment among customers.

Valuation remains undemanding, and I still believe the acquisition of Accuray by a Chinese or Japanese company is conceivable, but med-tech stocks most often trade on the basis of revenue growth and it looks like Accuray has a long row to hoe to generate enough revenue growth to get investors excited about the shares.

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Still Not Much Momentum At Accuray

Accuray Moves Back From A Spark To A Damp Squib

Accuray’s (ARAY) consistently inconsistent performance means that I can’t honestly say I’m surprised that its fiscal third-quarter results were disappointing, but it does continue a very frustrating trend. Accuray continues to struggle to attain and maintain any momentum in the slow-growing radiation oncology market, despite solid clinical data and some attractive system performance characteristics. While the earnings-driven sell-off does take the share price back below my estimates of fair value, these shares really aren’t going to work unless and until the company can show that it can achieve operating profitability and something more than just low single-digit revenue growth.

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Accuray Moves Back From A Spark To A Damp Squib

A Spark At Accuray - Will It Catch Fire This Time?

The problem with small-cap radiation oncology company Accuray (ARAY) is not that it never has good quarters. The problem is that the company has never been able to put together a good run. With two pretty good quarters in the hopper, though, maybe the actions that management has taken over the past couple of years are starting to make a real difference in order flow and revenue conversion.

I'm still skeptical (and still a shareholder), but if management is playing it safe with guidance, there might be some actual momentum in the business now. I will explain my thinking later in this piece, but I'm now more comfortable with a valuation approach that suggests a fair value in the mid-$7s, making Accuray worth a look if you can take on the risk that this is yet another head fake in what has been a frustrating pattern of "two steps forward, 1.9 steps backward" for many years.

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A Spark At Accuray - Will It Catch Fire This Time?

Can Accuray Build Some Momentum?

Small-cap radiation oncology specialist Accuray (ARAY) has long been an exercise in patience (and/or frustration, depending on whether you’re a “glass half-full” investor), but the strength in the shares since October’s earning release (up more than 30%) has been nice to see. The biggest question, though, remains unchanged – can Accuray string together a meaningful run of good quarters, exceed guidance, and establish a reasonable basis for believing that the company can grow to be both a viable competitor to Varian (VAR) and Elekta (OTCPK:EKTAY) and a profitable company?

I remain in the camp of “disappointed optimist”; I continue to hold my small position in these shares in large part because I believe the clinical benefits of Accuray’s platform are meaningful and underappreciated. The question of whether Accuray’s management can translate those benefits into tangible profits and cash flow for shareholders remains firmly open. Valuation likewise remains very tricky – I don’t believe the shares are all that cheap if the company can’t generate more than 4% long-term annualized revenue growth, but the story changes if and when mid-to-high single-digit revenue growth becomes plausible.

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Can Accuray Build Some Momentum?