Bears Target Accuray As Company Fails To Deliver Print E-mail
By Brian Wilson, Lead Contributor   
Monday, 07 January 2013 08:51
The radiation oncology company that sells the CyberKnife and TomoTherapy systems,  Accuray Incorporated (NASDAQ: ARAY), saw major trauma last Friday’s trading following preliminary Q2 2013 earnings results.

The stock dropped from $6.76 per share to $5.41 per share – a 20.23% decrease in a single trading session. JPMorgan analysts exacerbated the selloff with their ratings downgrade on the stock from neutral to underweight. The downgrade was a direct reaction to the company’s preliminary Q2 2013 results.

Although they are just estimates at this point in time, the numbers are quite bleak from an investor viewpoint. Very discouraging to everyone was the decrease in expected revenues for the quarter to $72-75 million, down from $102.9 million in Q2 2012. The company states that this will be primarily caused by 45-50% declines in sales revenue, offsetting the slight gains that are expected to be made in service revenue for Accuray products. Also disappointing is the company’s expectation of declines in net order backlogs, which are set to decline to $275-280 million in fiscal year 2013.

The company’s reasoning behind the weak performance is that there are “manufacturing and supply related issues” which are delaying new products launched in 2012. Also blamed are salesforce transitional issues. While their acquisition of TomoTherapy could cause some issues for the short term, the market is simply not buying the argument enough.

At the very least, it’s apparent that the company is looking to address its problems with a company restructuring which will adjust for the underwhelming performance that CyberKnife has demonstrated in the radiation oncology treatment market thus far. Accuray expects to cut about 13% of its staff in an effort to drop operating expenses significantly, which is expected to save at least $40 million in expenses each year according to the company’s estimates. This would hypothetically be enough to lop off the bulk of the company’s operational losses (currently estimated to be $63-69 million), although this transition will take a few years and a few million dollars. The restricting costs are estimated to be somewhere near $3-4 million before the end too.

Also worth noting is the recent departure of former CEO Euan Thomson, which occurred in October 2012. The exit of the CEO from a company that is supposed to be in a strong growth stage is often considered a major red flag, especially after so much previous success. While the market didn’t react too bearishly to Mr. Thomson’s move at first, we might see renewed speculation about his motivations as anticipation for the Q2 2013 report builds. Was the TomoTherapy acquisition a bad idea? Is CyberKnife going to have troubles with sales growth indefinitely?

Thomson was replaced by Joshua Levine, who will have the very stressful job of restructuring a company during a period of very weak performance. Not only do investors want to see Accuray become a profitable company, but they want to see growth in the CyberKnife and TomoTherapy lines. This means that investors should keep a close eye on growth in product revenue rather than service revenue. While Service revenue can help keep the company afloat, it’s clear that Accuray has to sell more CyberKnife and TomoTherapy units to succeed in the future.

Short interest on ARAY was not particularly interesting in 2012 and actually saw a decline after the resignation of former CEO Thomson, although there was an enormous increase in short sale volume on January 4th (the same day that the company put out Q2 2013 estimates). Investors can probably assume that there are new bears that are moving into ARAY due to its negative sales growth and shaky restructuring effort that the company intends to perform. While there is potential for the company to beat their own forecasts by a significant margin when Q2 results do arrive, the bearish trend is not really worth fighting at this point. ARAY may be more buyable in the future, but the market has little reason to reverse the current direction/perception on ARAY.

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