Accuray Incorporated

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter fiscal year 2019 Accurate Incorporated Earnings Conference call. At this time, all participants are in a listen-only mode to prevent background noise. If anyone needs assistance during the conference, just press star and zero for an operator. Later, we will have a question and answer session. And as a reminder, this conference is being recorded. Now it's my pleasure to turn the call to Doc Shark. Please go ahead.

Thank you, Carmen, and good afternoon, everyone. Welcome to Accurate's conference call to review financial results for the second quarter of fiscal 2019, which ended on December 31, 2018, as well as recent corporate developments. Joining us today are Josh Levine, Accurate's President and Chief Executive Officer, and Sheik Hamatsu, Accurate's Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind you that our call today includes forward-looking statements that involve risk and uncertainty, including statements regarding our future business plans and strategies. There are a number of factors that could cause actual results to differ materially from our expectations, including, but not limited to, risk associated with the adoption of the CyberKnife, Tomotherapy, and Radisac systems, commercial execution, future order growth, future revenue growth, and macroeconomic factors outside of the company's control. These and other risks are more fully described in the news release we issued after the market closed this afternoon, as well as in our filings with the Securities and Exchange Commission. The forward-looking statements on this call are based on information available to us as of today's date, and we assume no obligation to update any forward-looking statements. Two housekeeping items. First, during the question and answer session, We request that questioners limit themselves to two questions and then re-queue with any follow-ups. Second, all references we make to a specific quarter and prepared remarks are to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2018. Now, I'd like to turn the call over to ACTER-A's President and Chief Executive Officer, Josh Levine.

Thank you, Doug. Good afternoon, everyone, and thank you for joining us on today's call. Accuray's second quarter performance extends the positive results we reported for Q1. Gross orders of $100.2 million were up 29% year over year. Our gross order growth was driven by strong demand for our RataZak platform, a sequential rebound in quarterly CyberKnife orders, which represented almost 50% of gross order dollars, and a bolus of orders from China. The CyberKnife growth can be attributed to customer demand for the system's unique real-time tracking and motion synchronization capabilities that spare healthy tissue through extremely precise treatments. Radizak continues to gain recognition from customers as a versatile and efficient workhorse system while also providing best-in-class treatment precision. Since the launch of our Radizak treatment system roughly 24 months ago, we have now taken 120 orders for this system. More than half of which have come from single or dual vault customer locations. Our results in the second quarter are consistent with this historic trend, with approximately 50% of the RATAS Act orders for single or dual vault sites. Overall, approximately 25% of orders in the second quarter represented competitive takeouts, 55% were for new vaults, and 20% were replacements in our installed base, which are all within our historical range. On a regional basis, our second quarter gross order growth was driven by our Americas and APAC regions. The Q2 Americas results provide an encouraging data point as we are seeing the benefit of additional sales resources and new territory coverage models associated with the US sales organization restructuring that we fully implemented in the second half of our last fiscal year. APAC was the most significant contributor to our gross order growth in the second quarter, reflecting the impact of pent-up demand from customers who had been waiting for the formal announcement of final Type A and B radiotherapy quotas and licenses. The mix of the systems that represented the majority of the 16 systems in Q2 orders was strongly weighted to Type A radiotherapy systems. While the China-related order demand in Q2 was strong, We believe there will be some quarter-to-quarter variability in order flow through the end of the fiscal year with revenue generation beginning in fiscal 2020 as the type A and B licensing process becomes fully activated. AccuRay's CyberKnife and Tomotherapy radiotherapy systems have strong brand strength and a high awareness in Tier 1 academic and research-based hospitals in China and carry strong endorsement from many key opinion leaders in the radiation oncology community. This awareness and support for our premium products was instrumental in driving strong win rates during the period of time when Type A licenses were last being issued and we believe we are well positioned to see continued momentum in the Type A segment. As many of you know, approximately 87% of the roughly 1,400 devices covered by the quota announced by the Ministry of Health in October 2018 were for the Class B market. During the second quarter, we also continued to advance the negotiation process, supporting the establishment of a joint venture with a Chinese manufacturing and commercial partner that would allow us to produce a locally manufactured, Chinese-branded Type B product and broaden AccuRay's market access within the Type B market segment. Accurate did not meaningfully participate in the Type B market under the previous quotas, and this represents the largest growth opportunity in the China market over the next decade, which we will capitalize on through the execution of this joint venture strategy. We are in the final stages of negotiation related to the China JV strategy, and we look forward to providing more details in the coming weeks. While Shiv will discuss our financial performance and outlook in more detail, I do want to provide a few financial highlights for the quarter. Accuray's total revenue for the second quarter was $102.2 million. For the first half of the year, revenue grew 4%, which is consistent with our guidance range for the full fiscal year. We also generated positive EBITDA of $4.2 million during the second quarter, and we remain focused on driving our business to sustainable profitability going forward. as announced during our last call, we have implemented a cost reduction initiative in the second quarter with an annual cost savings target of $15 million. We believe that this action at current rates of revenue growth creates a level of operating leverage going forward that should allow us to achieve gap net income profitability on a full year basis in fiscal 2020. As we identified in our Q1 earnings release, the reductions in workforce primarily occurred in functional areas that are not impacting our ability to achieve commercial objectives or advance our product innovation pipeline. We anticipate we will fully recognize the benefits of these cost savings by the end of our current fiscal year. Turning to an update on our product development pipeline, at ASCRO in late October, we generated strong market interest in the introduction of our new VoloOptimizer software for the CyberKnife system, which can dramatically reduce treatment planning and delivery time. This new software coupled with the Multi-Leave Collimator for CyberKnife can dramatically reduce treatment delivery time by as much as 50%, enabling treatments depending on disease site in just 15 to 30 minutes. The Volo Optimizer also reduces planning times by up to 90%. We are making Volo available to our existing customer base through various upgrade packages. We believe that Volo reduces overall treatment times and mitigates workflow constraints which likely impacted customer decision making to purchase the CyberKnife in the past. We currently have Volo installed at roughly a half a dozen customer locations at present and the positive feedback has exceeded our expectations with regards to improved speed and overall efficiency gains. I am also pleased to report that during the quarter we received FDA approval on our 510K application for motion synchronization on our RataZak treatment system. Accuray is the original innovator of motion synchronization, which has been a unique functional feature of the CyberKnife platform. As with CyberKnife, we will market this feature under the brand name Synchrony, and we expect to launch this important feature for Radisact by the end of our current fiscal year. With Synchrony on Radisact, Accuray will have the only two radiotherapy systems able to provide true motion tracking and beam synchronization and correction during treatment. This technical capability brings the beam to the tumor not the tumor to the beam, enabling tighter dosing margins and healthy tissue sparing during the treatment. We also believe the precision and accuracy that Synchrony provides will expand hypofractionated and re-treatment opportunities for patients and physicians. A third innovation under development is KDCT imaging on Radizak as part of our continuous effort to provide our clinicians with the best possible imaging capability. Our imaging roadmap leverages the unique benefits of the RADIS Act architecture as well as the cost and throughput benefits of CT technology. We believe innovations in diagnostic imaging will continue to expand where it's possible with this technology to help support delivering improved treatments efficiently, including the promise of online adaptive therapy. We intend to continue to make significant product development investments in this area. Volo, Synchrony, and KVCT imaging upgrades will combine to substantially strengthen AccuRay's current product portfolio positioning, which is already well aligned to operate effectively both clinically and operationally in a value-based care reimbursement environment. Under this scenario, providers will be reimbursed based on quality, cost-efficient care versus the current reimbursement model that rewards the number of treatments required to achieve an outcome. Our product's ability to effectively support hyper-fractionated treatment delivery improves the patient experience and reduces overall treatment regimen timeframes which benefits both patient and payers. With reimbursement trends moving in this direction, we are focused on capitalizing on this emerging dynamic. And now I'd like to turn the call over to Shig for a deeper look at our financial performance.