Accuray (NASDAQ:ARAY) is actually within the working for being one of the crucial irritating shares I’ve adopted. Whereas the corporate has made plenty of sensible strikes to enhance its product portfolio and enhance its progress prospects, market share has been frustratingly gradual to observe and the inventory has languished for years as the corporate hasn’t been in a position to actually shut a lot of the hole with Varian (owned by Siemens Healthineers (OTCPK:SMMNY)) or Elekta (OTCPK:EKTAY). Since my final replace, regardless of two comparatively respectable quarters, the shares are down one other 20% with none apparent damaging catalysts.

Set towards that is the chance that income may ramp considerably in a short while. Administration has a strong observe document with income steering and if their projections are correct, income ought to speed up about 7% sequentially subsequent quarter and over 20% the quarter after that, resulting in an 18% year-over-year comp in FQ4’24 that ought to draw some optimistic consideration.

The story right here stays a lot the identical because it has – the central query being whether or not the corporate can replicate the numerous (market-leading) market share it holds in China’s Kind A market with its entry into the extra value-priced Kind B market (value roughly $600M) and set up a brand new, larger, bar for income progress and expanded margins. Early indicators are optimistic, and the shares aren’t costly, however it is a consummate “present me” inventory after years of false begins and a irritating lack of progress.

Will Execution In China Lead At Final To Significant Development?

I’ve talked about this earlier than in numerous notes on Accuray, however the firm has truly achieved rather a lot to enhance itself over the previous decade. From product reliability to therapy occasions to value-added planning software program, the corporate has fastened nearly all the points that was cited as vital roadblocks to wider adoption of the corporate’s techniques. On the identical time, there was ongoing progress in consciousness of the worth of hypofractionation and ultra-hypofractionation (treating most cancers with larger doses of radiation over fewer periods).

And but … Accuray’s market share actually hasn’t budged and income progress over the trailing decade is a stagnant 2% or so. Whereas quarter-to-quarter comparisons aren’t all the time honest and there’s imperfect overlap evaluating Accuray, Elekta, and Siemens Healthineers (they’ve totally different reporting schedules), Accuray nonetheless solely has round 7% to eight% of the market … a lot because it has for the previous decade and the corporate has struggled to attain aggressive takeaways in vital markets like america.

China is meant to be totally different. Regardless of its small measurement, Accuray has been fairly profitable in profitable share in China’s Kind A market (taking on 80% of accessible licenses in a few years), and now the corporate is concentrating on the a lot bigger Kind B market. Whereas the Kind B market places a a lot larger premium on worth/pricing, Accuray’s partnership with China Isotope & Radiation (or CIRC) provides the corporate a robust native manufacturing, distribution, and repair functionality that ought to make it a really aggressive participant on this $600M annual market.

Orders are beginning to roll in for the Chinese language Tomo C system, serving to drive 18% year-over-year gross order progress, together with 44% progress in China. As these techniques begin delivering within the fiscal 4 quarter of this 12 months, the affect to the revenue assertion must be significant, placing worthwhile income progress again on the desk as a driver for the shares.

Simply 20% share of China’s Kind B market would have a transformative impact on an organization with annualized income round $425M, and the chance isn’t restricted to China. Accuray has taken the identical primary Tomo C idea and launched its value-priced Helix platform in India, and whereas not more likely to be as massive of a marketplace for Accuray within the close to time period, India is actually massive sufficient to matter to Accuray (to say nothing of different potential creating markets).

Execution Stays Very important

Even with the enhance that Chian can probably present to Accuray, the corporate can’t relaxation on its laurels. Varian is an distinctive operator in radiation oncology and has been for many years; they’re the incumbent in most markets that matter they usually’re troublesome to beat on product efficiency or service, significantly now as a part of Siemens Healthineers the place merchandise may be developed at the side of imaging techniques.

Elekta is a extra “gettable” rival, however hardly a sitting duck. Elekta has struggled of late, with orders down 17% 12 months over 12 months (together with a 50% drop in China) and gross margins down about 10 factors over the previous decade, however Elekta continues to be greater than 4x Accuray’s measurement when it comes to orders and income and spends twice as a lot on R&D and 3 times as a lot on gross sales and advertising.

With this, Accuray must be sensible and decide its battles. Accuray has achieved effectively in Japan and this stays a high-priority market (and one the place Elekta has much less traction). In additional aggressive markets just like the U.S., Accuray is making an attempt to concentrate on upgrading and refreshing its put in base and competing for selective vault share acquire alternatives, significantly in circumstances the place there’s extra curiosity within the hypofractionation capabilities of Accuray’s system and newer choices like adaptive planning capabilities.

Larger acceptance of hypofraction may but develop into a tailwind for Accuray, but it surely’s taking a very long time to develop in america. Quite a few research have proven that numerous varieties of most cancers (together with mind, breast, and prostate) may be handled simply as successfully with a hypofractionated method and with improved affected person high quality of life and decrease prices. Whereas payors and physicians are usually on board, establishments are dragging their toes as hypofractionation means taking successful to what is usually a profitable “meeting line” enterprise of their radiation oncology division. A brand new reimbursement proposal that mitigates among the affect on hospitals may assist speed up adoption, but it surely possible gained’t come into play for at the very least one other 12 months.

I’d additionally notice once more that the corporate has a partnership with GE HealthCare (GEHC). It’s laborious to say that this settlement has made a serious contribution to the enterprise to this point, but it surely hasn’t harm it both and administration has spoken of the GE relationship resulting in an improved reception from potential hospital clients (GE could make the intro’s into hospitals the place Accuray has no current presence, making it considerably of a much less missionary gross sales effort).

The Outlook

Every part appears on observe for a major ramp to shut this fiscal 12 months; projected fiscal third quarter income will possible be down modestly 12 months over 12 months, earlier than accelerating considerably within the fourth quarter. Then comes the query of follow-through – can the Kind B enterprise in China speed up additional all through 2025 and might the corporate generate higher ends in Japan and the U.S. such that extra significant income progress turns into viable?

Proper now I’m above the Road and on the excessive finish of administration’s steering for FY’24 and I’m likewise a bit above the excessive finish of the printed Road vary for FY’25 income. I hope I’m truly conservative and excessive single-digit (or higher) income progress comes into play. If not, it’ll be laborious to discover a motive to stay bullish, as slow-growth small-cap med-tech is simply not a spot the place success is simple to seek out.

Modeling mid-single-digit long-term income progress and FCF margins that regularly transfer towards 10% is sufficient to assist a $4 honest worth on a reduced money move foundation, and a ten% or higher EBITDA margin in FY’25+ can likewise assist a good worth of $6 or extra.

The Backside Line

Given the lengthy historical past of false begins and dashed expectations, I perceive why the Road isn’t in a rush to pile into these shares. The U.S. market is trying slightly lackluster now, with Accuray and Elektra administration each sounding pretty cautious on the near-term prospects, and it stays to be seen how shortly China can develop into a real driver for the corporate (and the way lengthy the momentum will final). The items are in place for this to develop into a way more thrilling inventory within the second half of this 12 months, however that is nonetheless actually solely a inventory appropriate for risk-tolerant traders.