Why Accuray Incorporated Shares Jumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Accuray (NASDAQ: ARAY  ) , the developer of radiosurgery and radiation therapy systems such as CyberKnife and TomoTherapy, jumped as much as 16% after reporting better-than-expected second-quarter results.

So what: For the quarter, Accuray delivered a 20% increase in year-over-year revenue to $93.6 million, which included gross product orders of $80.3 million, a 102% increase over the year-ago quarter. The company also ended the quarter with a product order backlog of $362 million, a 30% jump from this time last year. Most importantly, net loss shrank dramatically to just $0.07 per share from $0.40 in the second quarter of fiscal 2013. By comparison, Wall Street had expected a much wider loss of $0.20 per share. On the heels of its strong product sales, Accuray also boosted its 2014 revenue guidance to a new range of $340 million to $350 million from its prior forecast of $325 million to $345 million.

Now what: I know I say this a lot with medical device companies, but Accuray is one of those companies with a really "cool" lineup of products, but that's failed to meaningfully capitalize on those products to drive bottom-line growth. I'm encouraged by Accuray's growing product backlog and narrowing losses, but the skeptic in me won't be fully convinced until I see consistent profits. Given that Accuray shares have nearly tripled from their April 2013 lows and the company still isn't profitable, I'm skeptical of how much extra upside might be left in the tank.

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  • Report this Comment On January 31, 2014, at 2:56 PM, PauvrePapillon wrote:

    Former CEO Euan Thomson had excellent communication skills - at or near that elite level of the best CEOs in the world. He did a terrific job selling the IPO. He understood the industry and its various technologies. He understood how to place Accuray in a position from which it could compete and win. He understood the various technical issues and how to interface between customers and the R&D team. He did a tremendous job leading the effort which ultimately created the best two radiation delivery platforms in the industry and he, thus, handed his successor a winning hand.

    But he had four major weaknesses:

    One – He couldn't (or wouldn’t) control costs. He either didn’t know who to fire or was reluctant to fire them.

    Two – He had two incompetent CFOs. He either didn’t know who to hire or, again,

    was reluctant to fire people who were not performing. Bertocci wasn’t a

    McNamara-level disaster but he was lousy on conference calls, interfacing with

    investors and, again, keeping costs down.

    Three – He didn't know how to organize a sales force or who to hire to organize

    a sales force.

    Four – He was reluctant to market CyberKnife aggressively and counter Varian’s

    misinformation claims decisively.

    All of these weaknesses can be related back to Thomson’s NHS experience. They

    are all pretty typical of a guy that doesn’t want to get down in the mud and

    wrestle with the unpleasant side of the business. He acted more like an NHS,

    i.e., government, manager than a start up CEO when it came to these four

    issues.

    A year ago, current CEO Josh Levine, was in some ways, the mirror image opposite of Thomson: no advanced degrees, no real technical understanding of the product, no idea how to solve R&D issues, not a great communicator, couldn’t get out more than five sentences without falling back on mental place keepers such as “quite frankly”.

    Based on results, Levine has brought his communication skills up several levels.

    He is now much more precise, concise and authoritative in his presentations and well as analyst interactions. Did you notice he had not a single “quite frankly” in

    his last conference call?

    Give him kudos also for integrating a massive volume of technical information

    over the past year. Accuray shareholders don’t expect Levine (and don’t really

    need him) to earn a Ph.D. in nuclear physics. They do expect (and need) him to

    understand the nuances of the therapeutic radiation space – at least from a commercial standpoint. Again, based on results, Accuray shareholders should be pleased with how quickly their new CEO has come up to speed.

    The skills that Levine did bring to the table, i.e., ability to organize a sales force, not afraid to let people go, a small business perspective on keeping costs down, not afraid to market CyberKnife and Tomo aggressively, are all now bearing fruit for Accuray shareholders.

    In some respects, it’s a shame that Thomson didn’t recognize and correct the areas where he - and Accuray - needed to improve. He did create a lot of value for his shareholders both in terms of an exciting IPO launch and a very effective and successful product development campaign. Further, the wisdom of the Tomo acquisition, difficult as it was, is now evident.

    But the BOD made the right move. They couldn't wait forever for Thomson to figure these things out and Levine was available and exactly what the company needed. Not only is Accuray in much better shape, Levine is showing personal growth and improvement as well. Right now, this is a good fit all the way around.

    And that is why Accuray shares are back in the 10s.

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