Accuray Inc Q4 FY2023 Earnings Call

Hello, and welcome to the Accuray Fourth Quarter and Fiscal 2023 Financial Results Conference Call. Please note, this event is being recorded. I would like now to turn the conference over to Jesse Chew, Senior Vice President and Chief Legal Officer. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the fourth quarter of fiscal year 2023, which ended June 30, 2023. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are outlined in the press release we issued just after the market closed this afternoon as well as in our files with the Securities and Exchange Commission. We base the forward-looking statements on this call on the information available to us as of today's date. We assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to 2 questions and then requeue with any follow-ups. Second, all references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our fourth quarter refer to our fiscal fourth quarter ended June 30, 2023. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Suzanne Winter. Suzanne?

Thank you, Jesse, and thank you all for joining the call. Today, I will provide highlights from our fourth quarter and then reflect on my first year as CEO, both on our accomplishments and the areas of focus for FY '24 and beyond. Our fourth quarter performance was strong with total company revenue growing 8% year-over-year. Notably, both product and services revenue contributed materially to the growth within the quarter, up 8% and 7% year-over-year, respectively. As we mentioned on last year's call, we believe that our service business is a huge long-term opportunity for both revenue and margin growth, and we are encouraged by what we have seen in the early stages of our plan. From a region review, fourth quarter revenue growth was led by the Americas region with 28% year-over-year growth and the APAC region growing 9% year-over-year. EIMEA revenue grew 1% and Japan declined 7%, but was flat excluding the impact of foreign exchange. Foreign exchange has significantly impacted our Q4 revenue, especially in Japan, where in this quarter alone, foreign exchange had an overall negative $1.8 million impact on revenue. From a product view, in Q4, demand for the delivery of the Radixact platform was strong with 40% growth in Radixact and Tomo system shipments compared to a year ago. Customer reception continues to be strong for our latest innovations on the Radixact platform, including ClearRT CT imaging, Synchrony real-time motion correction and VOLO Ultra treatment planning. Q4 order performance was solid with a book-to-bill ratio at 1.4. We are very pleased with these results as it means that we have booked more orders than we have shipped during the quarter and that we are building our backlog. Orders growth in Q4 was led by APAC and EIMEA. APAC ended the year with 53% growth in orders booked, followed by EIMEA with 12% growth year-over-year. Within the quarter, we also booked several strategic and multisystem orders from key institutions globally. The MedStar Health System at Georgetown purchased 2 new CyberKnife S7 systems for their stereotactic radiosurgery and SBRT patient care. Our fleet within the NYU health system has significantly expanded with the purchase of 2 Radixact systems that will be placed in their Winthrop University Hospital campus. The Bologna Bellaria Hospital in Italy is a highly influential academic center and recognized as one of the top neuro hospitals worldwide. They chose the CyberKnife S7 for their SRS/SBRT system over competitive systems. In India, Ganga Ram Hospital, a well-respected hospital in Delhi, purchased a Radixact system with ClearRT and Synchrony. And finally, we won a 2-system order at Macau Central Hospital for both the CyberKnife and Radixact system. The success in these highly competitive sales situations gives us further confidence that our innovative solutions are winning against competitive offerings. Further, these sites have the potential to become powerful references for new customers evaluating our innovative technology. Ali will discuss more of the Q4 financials, but we saw product margins temporarily challenged this quarter, driven by deal mix and direct material inflation versus the prior year. Service margins also declined driven mainly by FX. However, we were encouraged to see the improved pricing actions we have put in place in FY '23 starting to demonstrate impact as customers appreciate the value of our solutions. Adjusted EBITDA grew 1% year-over-year; however, it is very important to note that these results included a one-time unplanned Q4 bad debt reserve of $2 million resulting from the Genesis Care bankruptcy announcement. Without this reserve, Q4 adjusted EBITDA grew 40% year-over-year and put us well within our full-year adjusted EBITDA guidance. Finally, I was very pleased with the strong management of our balance sheet this quarter as we grew our cash position year-over-year and saw the second consecutive quarter of positive free cash flow generation. Free cash flow generation and strengthening our capital position remain a priority for our team. Moving on to our full-year performance and reflecting on my first year as CEO, I remain incredibly proud of what our teams accomplished and remain humbled by our mission. Throughout the year, I was able to visit with customers and employees from around the world. I was able to see firsthand the impact our solutions have on people treated with our products. I also saw the incredible talent and tireless dedication of our customer-facing teams that support our clinician partners to ensure the highest level of care. Additionally, I am enormously proud of our organization and the progress we made this year against each of our strategic growth objectives. And as an organization, I believe we showed incredible resilience and resourcefulness that is the cornerstone of Accuray's culture as we drive our vision to expand the curative power of radiotherapy solutions to extend and improve the lives of those diagnosed with cancer. I believe we demonstrated the operational resilience expected from companies with much greater scale. We were able to navigate significant headwinds from supply chain, inflation, geopolitical pressures and an $18 million foreign exchange headwind to revenue. Excluding the impact of FX alone would have put us $10 million higher than the high end of our revenue guidance range, demonstrating strong underlying growth of the business. Despite these challenges, we ended the year delivering multiple impressive accomplishments, including the highest revenue in the company's history. We surpassed the 1,000 system milestone installed globally, which grew our user base by 5% relative to FY '22, driving future recurring service revenue. In FY '23, we shipped from our factory in Madison, Wisconsin, 109 systems, the highest number of system shipments in the company's history, representing 24% year-over-year unit growth. Finally, we drove underlying adjusted EBITDA growth of 14% year-over-year with the exclusion of the GenesisCare reserve referred to earlier and generated positive free cash flow for the year. Execution by our team has been almost flawless this entire year, and I believe they've done an excellent job in this high-demand environment. At the beginning of the year, I laid out 4 major pillars of our strategic growth plan. Our first pillar was growing revenue faster than the markets we compete in by driving innovative solutions to advanced radiotherapy. In FY '23, we executed several new product introductions that strengthened our portfolio and further differentiated Accuray technology. Notably, VitalHold surface-guided radiotherapy for breast cancer treatments was introduced for the Radixact system at both ASTRO and ESTRO meetings to strong customer reception. With the addition of VitalHold to the Radixact platform, we now offer the most comprehensive solution for breast treatments, which typically represent the highest volume of patients treated in the radiation oncology department. I am also pleased to announce that we have received 510(k) approval for full commercialization in the U.S. and the ability to take orders for VitalHold in the European Union. Also, we advanced the Tomo C product, which we jointly developed with our CNNC-Accuray joint venture, which we believe will allow us to compete fully in the Type B value segment of the China market. As discussed, the Type B market represents a major opportunity for us and is the largest and fastest-growing segment within China with a potential for nearly 2,000 systems and over $3 billion in market potential over the next 5 years. Tomo C was successfully submitted for regulatory approval in November of last year, and was followed by targeted market introductions at 2 major medical conferences in Q4. These events allowed us to introduce the Tomo C platform to key opinion leaders and created significant interest that we expect to capitalize on upon full commercialization during the second half of FY '24. These new products in combination with the CyberKnife S7 and strong demand for ClearRT Imaging, Synchrony and VOLO Ultra on the Radixact system drove 9% full-year growth in product revenue and 12% growth when you exclude the impact of FX. We believe the market for radiotherapy systems grew in the low single-digit range over the course of FY '23 and that we gained share across all regions. EIMEA and Japan led with highest product revenue growth with 31% and 51% year-over-year, respectively, and non-China APAC at 2% growth. The Americas region grew 3% in FY '23 and ended the year with very strong growth in the second half. China product revenue declined 18% as a result of first half COVID lockdown but ended with positive growth in the second half versus the second half of FY '22. Our next strategic pillar was expanding and growing our service business. We set out a multiyear plan to strengthen our service business, which represents a recurring revenue stream and margin expansion opportunity. Our service revenue has essentially been flat over the last decade and currently represents 48% of our global revenue. In FY '23, our overall service revenue showed underlying positive growth of 5% when excluding the impact of foreign exchange, which is very encouraging. Service contract revenue growth is largely gated by the growth of our installed base. In FY '23, we saw meaningful year-over-year growth in our global installed base of users growing 5% driven by 7% in the EIMEA region, 10% growth in Japan and 15% growth in the APAC region with strong installation activity in China. The U.S. continues to see radiotherapy capacity consolidation across the market and was the only subregion where we saw a decline in our installed base. Our focus in the U.S. is a long-term approach, where we have focused our commercial investment with a goal of ensuring the highest level of service and customer satisfaction. For our older installed systems, specifically the early generation TomoTherapy systems, our commercial strategy is set around working closely with these customers to offer compelling solutions and actively upgrading these legacy systems. We expect this will generate net positive growth in the U.S. installed base in the coming years and become a tailwind to revenue growth and margin conversion. Additionally, in FY '23, we captured more value for our services through improved pricing and enhanced offerings. What we're hearing from customers is that they continue to experience labor shortages and staff turnover since COVID. In FY '23, we added service and support offerings to address those pain points, including remote training courses and incremental on-site training, which contributed to incremental service revenue. In Madison, Wisconsin, we're building a new state-of-the-art customer training center. And in Europe, we're investing in the innovation center in Genolier, Switzerland, where we will showcase both CyberKnife S7 and Radixact systems. Those sites will provide the ideal environment to deliver high-value education and training solutions to customers from around the world starting in FY '24. We expect growth from the installed base and expanded value-added service and support solutions to drive top and bottom line impact over time. The third pillar was expanding margin and profitability and improving our balance sheet. Last year, Ali and I laid out a multiyear, multifaceted plan to drive margin expansion and cost efficiencies with the goal of leaving no stone unturned. We made good progress against our goals with actions that helped us navigate the impact of inflation, logistics costs and foreign exchange. In our service business, we improved full-year service margins by 1% year-over-year, driven by improved service contract pricing, incremental service offerings and reducing full-year parts consumption. Product margins for the year declined 650 basis points versus last year, primarily driven by deal mix, direct material inflation and foreign exchange. However, we're encouraged to see an improvement in average system sales price associated with the inclusion of new product innovations like ClearRT, Synchrony and VOLO Ultra, allowing us to increase price and capture more of the value chain. Additionally, despite year-over-year revenue and unit increase, we held operating expenses flat and removed many operating costs by driving process efficiencies and through restructuring actions. Additionally, we began the process of consolidating our facilities by reducing our footprint in higher-cost geographic areas while fueling investment in Madison, which as of July 31, has become the new headquarter location for Accuray. We're in the early innings of where we want to go, but we've made solid progress and our confidence that our continued execution of these margin and profitability expansion initiatives will take further shape and provide greater contribution over the coming years. Strengthening our balance sheet and driving the highest return on capital remains just as big a priority. In FY '23, we invested in key strategic priorities while improving our cash position and generating positive free cash flow for the full year. One major area of investment that aligns with our goal of simplifying and building a more durable business was transitioning the company to a new ERP system. This replaces our legacy system, which was largely manual and old, dating back to Accuray's 2011 acquisition of the TomoTherapy business. The organizational effort has been a shining example of a focused, all hands on deck endeavor. I'm proud to say that we remained on schedule, on budget and went live on August 1. This investment will empower our teams with better data and analytics to support more effective decision-making that is integral to building a mature and durable foundation for future growth. Finally, in FY '23, we entered into several strategic partnerships to help us bring best-in-class solutions to the market faster, improve our sales funnel and enhance our win rate. We continued our strong partnership with research and treatment planning, oncology information and adaptive planning systems. We executed on our partnership with C-RAD for surface-guided radiation therapies for breast treatment. Brainlab continues to be an important partner for neurosurgical solutions and data registries for the CyberKnife. And finally, our development partnership with Limbus AI will provide innovative online adaptive capabilities for our Precision Treatment Planning system. We're also proud and excited to have entered into a commercial collaboration agreement with GE Healthcare to complement their precision oncology solutions. Our partnership with GE Healthcare has been strong with regional teams actively driving customer strategies and positioning oncology solutions to the market. We set out to measure our success of this partnership with increased sales funnel and improved win rates. To date, the GE Healthcare partnership has driven an increase in our near-term FY '24 sales funnel and nearly $40 million of total short- and long-term opportunity pipeline. Additionally, the partnership has positively influenced the win rate in several of the key Q4 wins mentioned earlier by more strongly positioning Accuray within the C-suite of health systems. The GE partnership continues to evolve and we expect the contribution to grow and impact. In summary, we're proud of our FY '23 performance and the foundation we have set for future growth. We achieved strategic customer wins in the marketplace and forged key partnerships that improved our competitiveness. While we are early in our transformation, we end the year positioned to drive further growth, margin and profitability expansion and gain share over the coming years. I will now turn it over to Ali, who will cover our financials.

Thank you, Suzanne, and good afternoon, everyone. I want to start by expressing my gratitude to our global employees who worked diligently to deliver a strong fourth quarter and fiscal 2023, despite the economic challenges we faced throughout the year, including supply chain shortages, global inflation, and unfavorable currency fluctuations in our non-U.S. markets. Net revenue for the fourth quarter reached $118 million, reflecting an 8% increase compared to the previous year. On a constant currency basis, net revenue for the fourth quarter was $120 million, which signifies a 9% year-over-year increase. For the full year, total revenue amounted to $448 million, up 4% from the prior fiscal year. Adjusted for currency impacts, total revenue for the fiscal year was $465 million, marking an 8% increase compared to last year. As Suzanne previously noted, foreign exchange effects contributed to an $18 million negative impact on our revenue in fiscal year 2023. We had provided a revenue guidance range of $447 million to $455 million for fiscal year 2023, and our results adjusted for foreign exchange exceeded the upper limit of that range by $10 million. This highlights how fiscal 2023 was a successful year in terms of operational execution, and we are delighted with our top-line performance. We owe this significant achievement of record revenue and unit shipments to our dedicated cross-functional team. Product revenue for the fourth quarter was $62 million, which is an 8% increase from the previous year and up 9% on a constant currency basis, with system shipments totaling 29 units. For the full year, product revenue was $233 million, up 9% from the prior year. When adjusted for foreign exchange impacts, full-year product revenue reached $240 million, indicating a 12% increase year-over-year. Service revenue for the quarter was $56 million, reflecting a 7% increase compared to last year and a 9% increase once adjusted for negative currency effects. For the full year, service revenue totaled $214 million, remaining relatively flat with the previous year. However, when adjusted for currency impacts, full-year service revenue reached $225 million, representing a 5% increase compared to last year. Gross orders for the fourth quarter were around $88 million, resulting in a book-to-bill ratio of 1.4. For the full year, gross orders reached $311 million, with a book-to-bill ratio of 1.3. Our book-to-bill ratio reflects gross orders for the period divided by product revenue for that period. We believe that this metric is crucial for ensuring healthy backlog growth and driving our teams to secure profitable orders that will convert to revenue within 30 months. Regarding our backlog, we concluded the fourth quarter with approximately $511 million, which is a 1% sequential increase but 9% lower than the previous year, primarily due to 14 orders worth $34 million that aged beyond 30 months within the quarter, largely related to customer timing. In Q4, we had 7 orders that returned to revenue within the quarter, totaling around $15 million. Given the critical nature of the backlog to our business, we will continue to seek ways to streamline this metric further. Additionally, we had no order cancellations in the quarter. Our overall gross margin for the quarter was 31.9%, down from 39.1% the previous year, with the decline mainly due to $3 million in inflationary pressure, equating to roughly 2.5 points of gross margin decline, and around $2 million from foreign exchange, which corresponds to about 1.5 points of gross margin decline, with the remaining variance resulting from deal mix. For the full year, our overall gross margin was 34.4%, compared to 37.2% last year, again primarily impacted by foreign exchange. We experienced an $18 million revenue impact, translating to about 3 points of gross margin pressure, and roughly $5 million from inflation, resulting in 1 point of gross margin pressure. Excluding the impacts of inflation and foreign exchange, our overall gross margin on a full-year basis would have exceeded the previous year by about 1.5 points. Operating expenses for the fourth quarter totaled $38.1 million, including nonrecurring costs of around $0.4 million for restructuring and ERP-related expenses and $2 million in unexpected bad debt reserves, compared to $41 million in the same quarter last year. When excluding nonrecurring charges, total operating expenses declined by 12% compared to last year. For the full year, operating expenses reached $151.6 million, inclusive of nonrecurring charges of $3.1 million for restructuring, $2.1 million for ERP-related expenses, and $2 million in unexpected bad debt reserves, compared to $151.8 million the previous fiscal year. Excluding nonrecurring charges, full-year operating expenses decreased by 5% compared to last year, demonstrating effective cost control as we encourage our teams to prioritize return on investment. Our operating income for the quarter was negative $0.5 million, down from $2 million the prior year. For the full year, operating income was $2.4 million, compared to $8.1 million in the previous fiscal year. Adjusted EBITDA for the quarter was $5.2 million, unchanged from the prior year's quarter. The fourth quarter adjusted EBITDA includes an additional bad debt reserve of roughly $2 million tied to the unexpected U.S. bankruptcy of one of our customers, GenesisCare, which operates 6 CyberKnife systems and 8 TomoTherapy/Radixact Systems in the U.S. and filed for bankruptcy on June 1, 2023. At that time, GenesisCare owed Accuray about $2 million for past due service contracts for their installed base of 14 Accuray systems. While we are actively working to recover the past due amounts, we reserved $2 million in Q4. For the full year, adjusted EBITDA is $24 million. Without the unexpected impact from the GenesisCare bankruptcy reserve, adjusted EBITDA for fiscal 2023 would have been $26 million, falling within our guidance range. We outlined the reconciliation between GAAP net income and adjusted EBITDA in our earnings release today. Turning to our balance sheet, total cash, cash equivalents, and short-term restricted cash stood at $90 million, compared to $89 million at the end of the last quarter. Net accounts receivable totaled approximately $75 million, a decrease of $3 million from the last quarter. Our net inventory balance was $145 million, down $5 million from the prior quarter as we optimized working capital to enhance our cash position. In summary, fiscal 2023 presented significant macro challenges. Nonetheless, our team achieved record revenue and unit volume in the company's history. We reported revenue of $448 million within our guidance range. Adjusted for currency impacts, revenue would have exceeded the high end of our guidance by $10 million at $465 million. This further emphasizes the strong execution and performance attained throughout fiscal 2023. Had it not been for the unexpected bad debt reserve related to GenesisCare's bankruptcy and the ongoing depreciation of the Japanese yen in Q4, our adjusted EBITDA would have surpassed $26 million within our guidance, highlighting the company's solid fundamentals. Reflecting on my first year as CFO, I am immensely proud of the financial discipline and operational rigor established throughout our organization. The remarkable efforts from all our teams were key in delivering strong results in fiscal 2023. Last year, Suzanne and I laid out a vision for the future of the company, and I am pleased to report that we are making a strong start with ongoing initiatives aimed at improving our operational structure. Looking ahead to fiscal 2024, I am confident that the new product innovations we plan to introduce in the second half will position us well for sustained top-line growth and profitability. Furthermore, we will build on the foundations set in fiscal 2023 while focusing on fortifying our balance sheet and making strategic investments that will enhance value for our shareholders and employees. Those are our key financial highlights. Now, I will hand the call back to Suzanne.

Thank you, Ali. In FY '24, we will enter the next phase of our transformation. Radiotherapy patient procedures are well on their way to returning to pre-COVID levels, but gaps in care continue to manifest. Cancer incidence continues to rise with an estimated 25 million cases by 2030. Still, 10 million will die from cancer annually, and the disparity globally for access to radiotherapy treatment continues to present a challenge. Accuray's vision is to conquer cancer by helping to close the gap to cancer care globally. We will do this first by advancing care through solution innovation to address the biggest pain points in radiotherapy. Second, drive patient access in the highest potential underserved markets so that all patients have access to the best therapy available. And finally, delight our customers with the highest level of operational performance and customer care and support regardless of where they are in their journey. FY '24 is an important year for Accuray as we anticipate the introduction of multiple growth drivers that will contribute to both top and bottom line over the coming years. Our new product introduction cadence includes the full market introduction of the Tomo C system in China, introduction of the online adaptive capability for precision treatment planning and targeted market introduction of our new value segment product, which is designed for select high-potential emerging markets. Additionally, we expect greater impact from the service growth initiatives and margin expansion and profitability actions, which we began in FY '23. Accordingly, for FY '24, we are guiding to a revenue range of $460 million to $470 million and an adjusted EBITDA range of $27 million to $30 million. We expect flat to low single-digit growth in the first half of the year, followed by accelerating mid- to high single-digit growth in the second half of the year aligned with the introduction of our new product innovations. We believe these innovation growth drivers will enhance our solutions and set us up for strong future growth and margin conversion in the coming years. In closing, I'm proud of what we've accomplished this year and our prospects for FY '24 and beyond. We will continue to advance our strategic growth pillars into the next phase of execution so that we can advance our leadership position to become the new trusted partner of radiotherapy. I invite you to join us for our Investor Day that will be held in conjunction with the American Society of Radiation Oncology in October to hear more about the next phases of Accuray's strategic growth over the coming years. I will now turn it back over to the operator for Q&A.

Our first question today will come from Josh Jennings of Cowen.

Congratulations on the fourth quarter and full year results. I wanted to start by noting that while you do not provide guidance on orders for fiscal '24, we see many positive factors at play. It was encouraging to hear about the current state of the sales funnel compared to the beginning of last year. Could you provide a summary of the key drivers of new order growth as we move into fiscal '24?

Thanks for the question, Josh. Yes, we feel very strong about the new product innovations that we'll be introducing in FY '24 in addition to just the continued customer demand for the Radixact innovations, including ClearRT and Synchrony and now VitalHold, which we now have the 510(k) approval. So we do expect that to positively impact our orders. We saw great book-to-bill ratio in FY '23. We expect to continue to see that and continue to grow our backlog. So the new product innovations overall, we feel very strongly. We talked a little bit about our partnership with GE Healthcare that has had a positive impact on our sales funnel. So as we get a full year under our belt of that relationship in addition to our new product innovation, we think it's just going to be good news for the orders.

Excellent. And maybe just to ask about the revenue guide relative to expectations for the radiation oncology market. You took share broadly in fiscal '23. I know it's hard to forecast market growth. But is the expectation here with that 3% to 5% revenue growth target that Accuray will take share again in fiscal '24?

Yes. Thanks for the question, Josh. And yes, we do expect to take share. We think the overall market, and while there isn't one good source for it, as we take a look at other results, we expect this to be a flat to low single-digit market. Again, when we took a look at the overall guidance, Ali and I have been here now for a year, and we've done a deep dive into the business. And we've really gone into granularity of all of the drivers within the business, we think this is a realistic guidance. We have new product innovation that is occurring in the second half of the year. We have some product mix changes this year. The Radixact performed very well, which changed the product mix a little bit. As a result, we're taking these into account in setting the revenue guidance. And then in terms of the EBITDA guidance, the same assumptions on the revenue range, but our range also includes parts consumption assumptions. We made some good progress on reducing parts consumption, and we're assuming different productivity levels based on that range. The only other thing I would say is we are going to incur the cost of commercialization and new product introductions in the first half of the year, which also impacts the revenue range from our first half to second half.

Our next question comes from Young Li with Jefferies.

Congrats on all the progress the team has made over the past year. I guess maybe to start on just the overall capital environment, the financial health of customers worldwide, some of the peer competitive companies in this space had some headwinds recently. Last quarter, you had some pushout of orders in the U.S. I guess, I'm just kind of wondering how has that macro environment changed this quarter and more recently? And what do you think about the outlook going forward as it relates to potentially longer selling cycles with more approvals?

Great. Thanks for the question. I think it varies by region. And certainly, we're understanding the dynamics in each one of the regions. Just to talk about some of our competitor companies that have discussed their results. Some of their results really are based on supply chain issues that they've had to deal with. So on the one hand, we feel very good about the way we've handled the supply chain headwinds especially in comparison to the market leader. But in terms of it being a signal to market demand, we still see procedures on the upswing. We see an increase in hypofractionation procedures, which we think is a good thing for our business and our technology as we're positioned. At the same time, we're looking at those markets that are growing. We do see the emerging markets like China, and we do expect that to grow, which is part of why we want to compete in a bigger part of the market than just a premium segment, which we think is sort of low single-digit growth. Again, I talked about the U.S. market last time. I do think that, in general, customers are sweating their assets. They're holding on to them as long as possible. They have to fight hard to get capital prioritized within the hospital budget. But overall, I wouldn't say that, that's going to be a major headwind.

I guess maybe to follow up on China and Tomo C, wanted to hear the latest update with the regulators, how the communication process is going, confidence on the approval timing. And then maybe if you can talk a little bit about the second half fiscal '24 revenue impact. How much is in guidance for Radixact margin contribution?

Great. And I'll start, and then I'll hand over to Ali to talk about margins. But in general, the conversation with the regulators in China has been very positive. We continue to supply them with additional information when asked. So I think we remain on track. One never knows how long the regulatory process is going to take, but there are no red flags in terms of there being a major delay. Again, assuming what we have built into the guidance, we are expecting at the midrange of our guidance to have an approval by the end of the calendar year and have a second half impact to both orders and revenue. Obviously, FY '25 will be a full year of Tomo C in the marketplace in China. As a result, part of our guidance in the first half is that China, for the most part, remains flat from a revenue standpoint, but then strong double-digit growth in the second half.

Yes. Overall, revisiting our full guidance as mentioned by Suzanne in her prepared remarks, we anticipate low single-digit growth in the first half and mid- to high growth in the second half. Regarding our overall margin, we are exiting fiscal year '23 with product margin facing challenges, mainly due to foreign exchange impacts and persistent inflation in the near term. We expect product margins to remain under pressure for the immediate future, although our teams are focused on strategies for margin expansion. The positive aspect has been our service margin, which has increased by a point year-over-year. We believe this will be instrumental in driving our margin expansion efforts in fiscal year '24 and beyond.

Our next question comes from Marie Thibault of BTIG.

I wanted to follow up regarding foreign exchange. I heard your comments about an $18 million impact from foreign exchange for the full year. I remember the first half was around $12 million. Could you share what it was for the fourth quarter of this fiscal year? Additionally, I would like to understand the adjusted EBITDA guidance for fiscal '24. If I add back the bad debt, your figure for this year would be around $26 million. This makes the range you've provided for fiscal '24 seem quite attainable considering the progress you've made previously. I would like to gain a better understanding of that metric.

Sure. Yes. Ali can fill in.

Yes, Marie. You're correct. The overall effect of foreign exchange on revenue in fiscal year '23 was $18 million, with $1.8 million specifically in Q4. Regarding the bad debt reserve related to GenesisCare, if we include that, we would have reported $26 million, indicating strong operational performance. Moving into fiscal year '24, our guidance, as Suzanne mentioned, is between $27 million and $30 million. There are various factors that will contribute to this. From a revenue perspective, we anticipate increased volume, though this will come from products with lower margins as we enter the value segment, meaning we may not see a significant increase. While we expect to see growth in volume, it won't necessarily translate into additional EBITDA dollars in the same manner as in previous years. The key to driving EBITDA within our suggested range will be our service business and improving productivity around parts consumption, as Suzanne highlighted. We've experienced productivity growth in parts consumption from fiscal year '22 to '23 due to our expanding installed base, and we expect similar results in fiscal year '24. That's where we foresee gaining some momentum for EBITDA.

Let me just add to that, too, Marie. Just a little bit about the volume and the product mix. We're excited by the number of units that we shipped this year, just significant growth; 24%. We're also really excited about our installed base growth, and that is going to drive the recurring future service revenue. So even though we may not see the service revenue in FY '24, it is something that is going to continue to be accretive in our service business moving forward.

Okay. That's really helpful. I appreciate that detail both of you. I wanted to follow up here on China. In other parts of med tech, we've seen that as China has reopened post-COVID, there's been kind of a rebound in the recovery in procedures and installs and things like that. Wanted to hear if that was a dynamic here as you ended your fiscal fourth quarter and whether we might see some tailwinds from that on the Type A side in China.

Yes. Thanks, Marie. Yes. No, I think we ended the second half of this year with China being in positive territory, at least from a product revenue standpoint. We think going into the first half, there's going to be some pent-up demand for the Type B product, but we are going to continue to maintain the Type A business. In the second half, that's when we think we'll be able to fulfill the pent-up demand to really drive the growth rate for the year for China. So China overall was down for us last year but it actually grew in its service revenue. They were just wildly installing new systems, which was great. Their installed base grew, and that's driving their service revenue. So that was really important but product revenue was down primarily because of the lockdowns in the first half. So we'll see a little bit of a dynamic. I do think they're coming back, but we are going to see this first half, second half sort of waiting for the Tomo C to get cleared.

The next question comes from Aaron Wukmir of Lake Street Capital Markets.

This is Aaron on the line for Brooks. I want to just talk a little bit about actually, just to get your view on the supply chain challenges that have sort of been impacting you over the past couple of quarters. How long do you see these as sort of a constraint? And what can we sort of expect going forward with these challenges?

Yes, Aaron, thanks for the question. I don't think it's too dissimilar from what we've discussed in the past. We have certainly seen supply chain improve in certain elements, but we continue to play whack-a-mole with a few problematic suppliers. It's just taking up a lot of our time to be able to make sure that they have what they need to be successful. So kudos to our operations teams that are working with our suppliers to make sure that we have what we need. That's kind of where you saw the inventory build happen last year. I would anticipate perhaps maybe a little bit more of an inventory build as we continue to secure parts early on, just to make sure that we don't run into any challenges from a supply chain perspective. We want to try and come ahead of that as much as possible.

Our next question comes from Neil Chatterji of B. Riley.

I would like to stay focused on the top line guidance for fiscal '24. I want to clarify the various factors at play here. Is China and the Tomo C products aligned with midyear, and are they the main reason for the possibly weaker first half and stronger second half? Additionally, how should we assess the advantages of your partnerships, like those with GE, Brainlab, or the VitalHold clearance? Any further insights on these aspects would be appreciated.

Thanks for the question, Neil. Yes, so let me just talk through a little bit of the assumptions on the revenue. We expect growth from all the regions except for APAC in the first half. We expect that to be flat to maybe single-digit growth. We do expect that the other regions are going to benefit from VitalHold being cleared. We expect in Japan, VitalHold will get shown an approval hopefully by JASTRO which is in the November timeframe, that's what we're expecting. The assumptions that we built into the revenue range is that we begin to see the impact of VitalHold on revenue shipments. We expect all regions to grow, but really in the first half with the exception of China, APAC, and then second half growth driven by APAC/China. Tomo approval, we're expecting at the midrange by the end of the year and then the lower and higher range being either longer or better than that expectation. We expect FX and supply chain to remain the same as we ended FY '23. Again, anything worsening is at the low end, and anything better is at the high end. We're expecting very high unit growth again, but we're also managing these product mix trends more towards the Radixact and then ultimately adding the Tomo C, and we expect service growth. So those are all built into our midrange assumption.

Great. Maybe just one follow-up. I mean you talked about the new ERP system and kind of the better kind of analytics with that. Maybe just if you could elaborate on what kind of impact you would expect to see from that as we progress to fiscal '24.

Yes. Neil, good question. I think we're going to continue to learn as we sort of close the first quarter with the SAP implementation. But I mean, I think it's just better insight for our region teams to be able to understand better customer profitability, understand profitability at a deeper level from a channel perspective so that we can just make better decisions from a pricing perspective, right? I think it's just going to give us more visibility that's just been very, very manual to get to in the current state. So I think that's one piece. I think it's going to be very beneficial for our supply chain and operations teams to be able to understand kind of what the impact is of product COGS and where to focus our efforts where we think we're going to get the most bang for our buck. I think that's going to be helpful. It's going to be very helpful for my FP&A team to make sure that we understand where we are spending our OpEx dollars. Not that we don't have that visibility today; it's just going to provide that visibility at a much deeper level, which just comes with a lot of manual work today. So it is going to drive a lot of efficiencies. I don't think that's going to happen overnight. It's going to take several quarters to be able to get there. But really, we think that's the value in the implementation.

This concludes our question-and-answer session. I would like to turn the conference back over to Suzanne Winter for any closing remarks.

Thank you, operator. This concludes our earnings call. We look forward to speaking with you again in October for our fiscal 2024 first quarter earnings release, and I again invite you to join us for our Investor Day that will be held in conjunction with the Society of Radiation Oncology in October to hear more about the next phases of Accuray's strategic growth over the coming years. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.