TomoTherapy slump confirmed by third quarter numbers

TomoTherapy slump confirmed by third quarter numbers

Madison, Wis. – In an attempt to educate investors shortly after TomoTherapy became a public company, co-founder Thomas Mackie predicted that his company’s sales would be “lumpy.”
Due to a number of factors, including the shaky global economy impacting international sales channels, TomoTherapy has been taking its lumps in terms of sales, profits, and stock price.
The University of Wisconsin-Madison spin off has released admittedly disappointing third quarter financial figures that include a $13 million net loss, or 26 cents a share, on revenues of $27.4 million.
The performance, which was well below analysts expectations, compares to a $2.6 million profit, or five cents per share, on revenue of $59.2 million during Q3 2007.
As a result, TomoTherapy’s stock price now has dropped from its 52-week high of $22.58 per share to $3.08 at the close of trading on Tuesday, Oct. 28. The downward trend continued this morning, as the per-share price dropped 35 cents to $2.73 on the NASDAQ Stock market.
TomoTherapy is the latest Wisconsin technology company to see its stock price plummet, following Merge Healthcare and Sonic Foundry, which have faced delisting from the Nasdaq.
Soft orders
In TomoTherapy’s case, declining sales for its Hi-Art radiation therapy system, which it is marketing globally, is the main culprit. Following a $6.9 million second quarter loss, CEO Fred Robertson said third quarter results were essentially in line with expectations, but disappointing nonetheless. He attributed the softening in the flow of orders to economic uncertainties, challenges in order forecasting and execution, and a heightened competitive environment.
The Hi-Art is the marriage of a CT scanner and a radiation therapy device. It can help clinicians precisely target radiation to cancer tumors and evaluate their size and position on a daily basis, while avoiding large doses of radiation to surrounding healthy tissue.
However, TomoTherapy’s orders also have been impacted by a radiation therapy device developed by the California-based Varian, whose current stock price of $31.30 per share also is significantly less than its 52-week high of $78.27. Another competitor on the global stage is the Swedish firm Elekta. Both competitors are significantly larger than TomoTherapy.
The average cost of the Hi-Art ranges from $2.7 million to $2.8 million, so it represents a major capital expense for hospitals and health systems. The temptation to delay a purchase as part of a cost reduction exercise in tough economic times is a contributing factor to TomoTherapy’s sales slump, Robertson said.
To meet expectations for a profit of nine to 15 cents in the fourth quarter, Robertson said TomoTherapy is slowing its rate of spending to get expenses more in line with projected revenue trends. The company expects sales of $70 million to $90 million in Q4, with full-year guidance of between $190 million to $210 million, and a net loss of 36 to 43 cents a share.
TomoTherapy, which has more than 700 employees, reported $233 million of revenue in 2007.
“With respect to the remainder of 2008, the fourth quarter is expected to be substantially greater than each of the first three quarters due to typical seasonality, as we experienced in 2007,” Robertson said.
The company closed the third quarter with $142 million of cash, and one of the reasons it anticipates a profitable fourth quarter is because its shipment schedule now is based on an improved process for tracking the status of orders from backlog to delivery.
High value, few sales
The Madison-based TomoTherapy netted about $180 million in its May 2007 initial public offering, but in August of that year Mackie noted that its public status creates expectations for consistently stronger quarterly financial performances when the longer view is a better way to evaluate its financial condition.
Mackie, who also serves as TomoTherapy’s chairman of the board and director of research, said the company’s circumstances require it to educate investors. Given the small numbers of high-valued equipment, Mackie said it would be difficult to be meet quarterly expectations.
“Public companies have an expectation, and we’re trying to educate the marketplace that we sell high-value pieces of equipment, and so our revenues are based on relatively few numbers of orders,” he said. “They’re still significant, but we’re lumpy, and so we’re looking for the markets to value us on our backlog rather than quarterly sales.”
When Mackie made these statements, the backlog stood at $200 million worth of Hi-Art units. Even though the value of new sales orders received during the third quarter was $37 million, a 50 percent decrease from the third quarter of 2007, TomoTherapy had a revenue backlog of $232 million at the end of Q3 2008.
The backlog includes firm orders that have installation sites identified and that the company believes are likely to ship within the next two years. The majority of the backlog, which does not include revenue from service contracts, should be converted into revenue within the next year.
Two new software products that are sold as options with the Hi-Art System, StatRT and TomoDirect, also are expected to boost sales. They are designed to add functionality to the Hi-Art; StatRT, for example, enables an entire radiation therapy treatment – CT scanning, planning, and treatment delivery – to be done in one sitting.
The company also has launched the Compact Particle Acceleration Corp., its proton development arm, for research and development purposes, but it incurs costs associated with its new subsidiary. In the third quarter of 2008, TomoTherapy’s operating expenses increased to $22.5 million, including $3.3 million linked to CPAC.
Sales agenda
TomoTherapy recently announced changes to its management team. Chief Financial Officer Stephen C. Hathaway plans to retire when his employment contract expires on March 31, 2009, and the company still is looking for a permanent replacement for Mary Elizabeth Klein, who resigned in August as vice president of global sales. Shawn Guse, a member of TomoTherapy’s management team, has filled that position on an interim basis.
Robertson said search firms have been hired for both positions, and the company hopes to make hiring decisions by year’s end.
“We remain intensely focused on improving our sales performance,” he added, “and hiring a top-notch sales executive is a top priority.”