Executive Summary / Key Takeaways

• Accuray (NASDAQ: ARAY) is strategically leveraging its differentiated CyberKnife and Radixact/TomoTherapy precision radiation therapy platforms to drive growth, particularly in high-potential emerging markets like China and APAC, offsetting temporary weakness in developed regions like the U.S.
• The company's joint venture in China and the successful launch of the locally manufactured Tomo C system are key catalysts, disrupting competitive dynamics and contributing significantly to revenue and margin expansion in FY25 as deferred profits are realized.
• The recurring service business, representing nearly half of total revenue, provides a stable base and is poised for margin expansion through installed base growth, pricing actions, and new value-added offerings, complementing product sales growth.
• While macroeconomic headwinds (tariffs, inflation, supply chain) and U.S. market softness present near-term challenges, Accuray's focus on operational efficiencies, working capital optimization, and strategic partnerships aims to improve profitability and resilience.
• A critical near-term focus for investors is the successful refinancing of significant debt maturities in May/June 2026, which become current liabilities in May/June 2025, as the company currently lacks sufficient cash on hand to repay these obligations.

Setting the Scene: Accuray's Foundation and Strategic Evolution

Accuray Incorporated operates at the forefront of radiation therapy and radiosurgery, designing, developing, and selling advanced systems for treating tumors throughout the body. Headquartered in Madison, Wisconsin, the company's mission centers on expanding the potential of radiation therapy to improve patient lives. Its foundational technologies, the CyberKnife and TomoTherapy platforms (including the modern Radixact System), have established Accuray as a player in the oncology systems group, its single operating segment.

The company's journey has been marked by a strategic evolution, particularly a pivot towards high-growth international markets to complement its presence in established regions. A pivotal move was the formation of a 49%-owned joint venture (JV) in China in January 2019. This JV was designed to manufacture and sell radiation oncology systems locally, positioning Accuray to capitalize on China's significant market potential, which it views as the world's largest growth opportunity for these systems. This strategic focus on expanding patient access in under-penetrated markets, alongside continuous technological innovation, forms the bedrock of Accuray's current strategy.

Technological Edge: Precision and Innovation as a Moat

Accuray's competitive differentiation is fundamentally rooted in its proprietary technology platforms, which offer distinct advantages over conventional linear accelerators and competing systems.

The CyberKnife System is highlighted as the only truly robotic radiotherapy system dedicated to SBRT and stereotactic radiosurgery. Its key technological advantage lies in its robotic arm and real-time image guidance, enabling sub-millimetric accuracy in targeting tumors anywhere in the body, even those that move with respiration. This precision allows for the delivery of very high doses of radiation in just 1 to 5 outpatient sessions (ultra-hypofractionation), a rapidly growing clinical trend supported by data like the PACE-B trial for prostate cancer. Management notes strong patient awareness and preference for the CyberKnife due to its branding and precision capabilities. R&D efforts are focused on expanding next-generation capabilities for CyberKnife to further advance SRS/SBRT and drive replacements in developed markets.

The TomoTherapy Platform, including the Radixact System, offers helical radiation delivery, providing precise dose conformity to the tumor while minimizing exposure to healthy tissue. Recent innovations on the Radixact platform, such as ClearRT kVCT imaging (providing diagnostic-like quality images for confident setup and monitoring), Synchrony real-time motion management (automatically adapting the beam to target movement), and VitalHold (expanding breast cancer treatment capabilities), enhance its versatility and performance. The upcoming Cenos online adaptive solution for Radixact is expected to be a key differentiator, positioning Accuray as potentially the only player capable of adapting treatment plans between, during, and on the day of treatment, aiming to improve outcomes and quality of life. Regulatory submission for Cenos is expected in fiscal Q4 FY25, with clearance and revenue anticipated from late calendar year 2025.

For emerging markets, the new Accuray Helix Platform has been developed, focusing on productivity, throughput, and economics while retaining the helical delivery advantage. This product, having received CE Mark, is targeted for markets like India, estimated to be a $100-$125 million opportunity, where it is expected to play well.

These technological advancements are supported by strategic partnerships, such as the agreement with Airbus (EADSY) leveraging data and predictive analytics to improve system uptime and serviceability, aiming to reduce customer downtime and parts consumption.

The "so what" for investors is that this differentiated technology portfolio provides Accuray with a competitive moat, enabling it to command potentially higher pricing for advanced features, expand the addressable market by treating more complex cases or offering more convenient treatment schedules, and drive market share gains, particularly in regions where these capabilities are highly valued. The continuous innovation pipeline is crucial for retaining existing customers through upgrades and winning competitive displacements.

Competitive Landscape: Battling Giants and Innovators

The radiation therapy market is intensely competitive, dominated by larger, well-capitalized players with extensive installed bases and resources. Accuray competes directly with global giants like Siemens Healthineers (SHL) (via its acquisition of Varian Medical Systems) and Elekta AB (EKTAY), as well as specialized innovators like Ion Beam Applications SA (IBAB) (primarily in proton therapy) and RefleXion Medical Inc.

Siemens Healthineers/Varian holds the largest market share globally (30-35%), leveraging a broad portfolio and integrated digital health solutions. Elekta is also a significant player (20-25% share), strong in Europe and emerging markets, with a focus on AI-driven planning. These competitors benefit from greater scale, which can translate to higher gross and operating margins (Siemens 50-55% gross, Elekta 45-50% gross) compared to Accuray's TTM gross margin of 31.48%. Their larger scale also provides more robust cash flow generation and lower debt reliance (debt-to-equity ratios around 0.4-0.6 for Siemens/Elekta vs. Accuray's 4.32 TTM).

Accuray positions itself by emphasizing its unique technological capabilities. While Siemens and Elekta offer systems capable of SRS/SBRT, Accuray highlights the robotic precision of CyberKnife and the integrated adaptive features of Radixact (Synchrony, ClearRT, Cenos) as key differentiators. For instance, CyberKnife's real-time tracking offers superior precision for moving tumors, and the helical delivery of TomoTherapy/Radixact provides distinct dose distribution advantages. In the value segment, products like Tomo C and Helix are designed to compete on productivity and economics while still offering advanced features like helical delivery, disrupting competitive dynamics in emerging markets.

Accuray's strategy in China, leveraging the JV to produce the locally branded Tomo C for the large Type B market, is a direct response to the competitive landscape, aiming to gain significant market share (gained 10 points in China in CY24 according to Ipsos data). Similarly, the focus on India with Helix targets another high-potential market where traditional competitors may have less tailored offerings.

However, Accuray's smaller scale presents vulnerabilities, including potentially higher operating costs and less financial flexibility compared to its larger rivals. Its negative net margins (0.14% TTM, but quarterly can be negative) contrast with the profitability of Siemens and Elekta. The reliance on single-source suppliers and exposure to macroeconomic headwinds like tariffs and FX fluctuations also pose greater relative risks due to its size. Despite these challenges, Accuray's targeted innovation and strategic focus on underserved markets represent its path to gaining share and improving its competitive standing.

Recent Performance: Signs of Progress Amidst Headwinds

Accuray's recent financial results demonstrate progress, albeit influenced by macroeconomic factors and strategic timing. For the three months ended March 31, 2025 (Q3 FY25), total net revenue was $113.243 million, a 12% increase compared to $101.132 million in the prior year period (14% constant currency). This growth was driven by both product and service segments. Product revenue increased 16% year-over-year to $57.320 million, primarily due to higher TomoTherapy system shipments. Service revenue grew 9% year-over-year to $55.923 million, benefiting from increased spare parts sales and higher contract revenues from the expanding installed base.

For the nine months ended March 31, 2025, total net revenue was $330.962 million, up 6% from $312.262 million in the prior year. Product revenue for this period was up 8% to $166.878 million (driven by both TomoTherapy and CyberKnife shipments), while service revenue increased 4% to $164.084 million. Service contract revenue, the recurring portion, showed stronger growth, increasing 5% year-over-year in Q1 FY25 and 4.5% for the full FY24, outpacing installed base growth and reflecting pricing actions.

Geographically, performance varied. China was a standout, with revenue growing 25% in Q3 FY25 and 37% for the nine months ended March 31, 2025, driven by higher shipment volume to the JV and increased service revenue from the growing installed base. APAC also saw strong growth (96% in Q3, 91% for nine months). EIMEA revenue increased 7% in Q3 but decreased 13% for the nine months, while Japan revenue decreased 12% in Q3 and 1% for the nine months. The Americas region saw a 4% revenue decrease in Q3 and an 11% decrease for the nine months, reflecting continued weakness due to reduced budgets and longer installation timelines.

Gross profit increased to $31.627 million in Q3 FY25 (27.9% margin) from $29.074 million (28.7% margin) in the prior year. For the nine months, gross profit was $107.988 million (32.6% margin) compared to $104.469 million (33.5% margin). Margins were impacted by factors like increased net deferred gross profit on sales to the JV and higher parts consumption costs (partially due to a supplier quality issue in Q4 FY24), offset by higher volume, pricing, and operational improvements.

Operating expenses decreased 9% in Q3 FY25 to $30.580 million and 6% for the nine months to $104.383 million, reflecting lower compensation, reduced consulting costs (post-ERP implementation), and disciplined expense management.

Income from the equity method investment (JV) increased significantly, reaching $2.297 million in Q3 FY25 and $3.829 million for the nine months, reflecting the JV's improved performance driven by higher system shipments and service revenue in China.

Net loss for Q3 FY25 was $1.297 million ($0.01 per share), an improvement from a $6.342 million loss ($0.06 per share) in the prior year. For the nine months, net loss was $2.714 million ($0.03 per share) compared to a $18.932 million loss ($0.19 per share) in the prior year. Adjusted EBITDA for Q3 FY25 was $6 million, up from $1.1 million in the prior year, driven by higher shipments, better service margins, and lower OpEx.

Liquidity and Capital Structure: The Looming Debt Maturity

As of March 31, 2025, Accuray held $77.824 million in cash and cash equivalents. While net cash provided by operating activities for the nine months ended March 31, 2025, was positive at $12.568 million (driven by non-cash items and favorable changes in accounts receivable and deferred revenue, partially offset by increases in inventory and decreases in accounts payable), the company faces significant debt obligations in the near future.

The Credit Facilities (Term Loan Facility and Revolving Credit Facility) mature on May 6, 2026, and the 3.75% Convertible Senior Notes ($100 million aggregate principal amount) mature shortly after on June 1, 2026. On their respective maturity dates, the company is required to pay $50 million on the Term Loan Facility, any outstanding balance on the Revolving Credit Facility (which had a $17 million outstanding balance at March 31, 2025), and $100 million on the Notes.

Crucially, these debt obligations will be reclassified from long-term to current liabilities on May 6, 2025, and June 1, 2025, respectively. The company explicitly states that it does not currently have sufficient cash and cash equivalents to repay the outstanding debt under the Credit Facilities and the Notes.

Management believes that current cash resources and anticipated cash flows are sufficient to fund operations for at least the next 12 months, but this assessment is subject to the significant uncertainty created by macroeconomic conditions. The company is actively working with potential lenders to refinance the existing debt and has engaged an advisory investment banking firm to assist with this effort.

The ability to refinance depends on market conditions, the company's financial performance, and other factors. Failure to refinance prior to the debt becoming current could significantly reduce the company's cash position, impact its ability to support business growth, and could adversely affect its ability to continue as a going concern. The Credit Facilities also contain financial covenants (consolidated fixed charge coverage ratio and consolidated senior net leverage ratio) that the company must comply with, dependent on future operating performance. Failure to comply could lead to default and acceleration of the debt. While the company has obtained waivers/amendments in the past, there is no certainty they will be available or on favorable terms in the future.

This upcoming debt maturity represents a critical financial hurdle that needs to be successfully addressed for the company to execute its long-term growth strategy.

Outlook and Future Trajectory

Accuray's outlook for the remainder of fiscal year 2025 and into FY26 reflects a balance of strategic opportunities and external challenges. For the fourth quarter of fiscal year 2025, the company expects revenues in the range of $121 million to $129 million and adjusted EBITDA in the range of $9.5 million to $12 million.

For the full fiscal year 2025, the company is maintaining its adjusted EBITDA guidance in the range of $28.5 million to $31 million. This guidance incorporates several key assumptions:

• The U.S. market is expected to begin its gradual recovery in the second half of FY25, with a more normalized market anticipated in FY26. This timing impacts the conversion of U.S. backlog to revenue.
• The China margin deferral, related to shipments to the JV awaiting end-customer delivery, is expected to continue releasing through Q4 FY25, providing a positive impact on profitability in FY25 before normalizing in FY26.
• The guidance assumes minimal product shipments to China in Q4 FY25 due to existing tariffs, estimating a potential negative impact of $10 million to $15 million on Q4 revenue from this region. However, the company expects to offset a significant portion of this revenue impact through contributions from other regions and mitigation efforts.
• While headwinds from reduced China volume and increased tariff costs are expected to impact Q4 EBITDA, management is confident that operational efficiencies and mitigation actions will allow them to remain within the full-year adjusted EBITDA guidance range. The positive impact of tariff mitigation efforts is expected to be more significant in the second half of FY26.

Management expects similar seasonality in the second half of FY25 as in past years, with a larger portion of revenues and earnings typically occurring in the fourth quarter. The service business is expected to continue as a growth engine and catalyst for expanding margins in the coming years, driven by pricing, scale, and operating leverage, including potential future software-as-a-service offerings.

The strategic focus on high-growth emerging markets (China, APAC, India) is expected to continue driving top-line growth and installed base expansion, which in turn fuels the recurring service revenue stream. Operational efficiencies, including benefits from the completed ERP implementation and working capital optimization (inventory reduction), are expected to contribute to profitability improvements.

Risks and Challenges: Navigating a Complex Environment

Accuray operates in a complex global environment subject to numerous risks that could impact its ability to achieve its strategic objectives and financial guidance. Significant macroeconomic headwinds, including inflation, high interest rates, foreign currency exchange rate fluctuations (particularly impacting the Japanese Yen), and ongoing supply chain challenges and logistics costs, continue to pressure gross margins and profitability and are expected to impact cash from operations through calendar year 2025.

Market-specific challenges include the continued softness in the U.S. market, characterized by reduced budgets and longer installation timelines, which has negatively impacted revenue since FY24 and is expected to persist through FY26. The China market, while a significant opportunity, is subject to uncertainty from the anti-corruption campaign, the timing of stimulus programs, and the recently imposed tariffs, which are expected to significantly impact near-term product shipments to the region.

Financially, the most critical risk is the upcoming maturity of the Credit Facilities and Convertible Notes in May/June 2026. The company's current lack of sufficient cash to repay these obligations and the need to successfully refinance them before they become current liabilities in May/June 2025 pose a material risk to liquidity and the ability to continue as a going concern if refinancing efforts are unsuccessful or terms are unfavorable. Compliance with debt covenants is also a key factor to monitor.

Operational risks include reliance on single-source suppliers, potential quality issues with components (like the one experienced in Q4 FY24), and the ability to effectively manage growth and scale manufacturing and distribution. Regulatory risks persist, including the need for approvals for new products/modifications and compliance with diverse global regulations (FDA, NMPA, CE Mark, privacy laws like GDPR, PIPL, US state laws, DOJ data transfer rules).

Competitive intensity from larger, better-resourced players like Siemens Healthineers and Elekta AB, as well as innovators like Ion Beam Applications SA, poses ongoing pressure on pricing, market share, and the need for continuous innovation. While Accuray's technology is a differentiator, competitors are also investing in advanced features and integrated solutions.

Conclusion

Accuray is strategically positioned to capitalize on the growing global demand for advanced radiation therapy, particularly in under-penetrated emerging markets. The company's differentiated precision technology platforms, coupled with its focused market expansion strategy and efforts to grow the stable service business, provide a clear pathway for future revenue growth and profitability improvement. The successful launch of the Tomo C system in China and the introduction of new platforms like Helix underscore its commitment to tailoring solutions for diverse global needs and disrupting competitive dynamics.

However, the path forward is not without significant challenges. Macroeconomic headwinds continue to create volatility, impacting margins and operational costs. The softness in the U.S. market requires a patient approach, with recovery expected in the latter half of FY25. Most critically, the successful refinancing of the upcoming debt maturities is paramount to ensuring the financial flexibility needed to execute the company's strategic plan and sustain its operations. Investors should closely monitor progress on debt refinancing efforts, the trajectory of the U.S. market recovery, the impact of tariffs on China revenue, and the continued execution of operational efficiency and margin expansion initiatives as key indicators of Accuray's ability to translate its strategic vision into sustainable long-term value.