Accuray Incorporated

Good afternoon, ladies and gentlemen, and welcome to the Accurate Fiscal Third Quarter Financial Results Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Michael Polivio with EVC Group. Sir, you may begin.

Thank you, Carmen, and good afternoon, everyone. Welcome to Accurate's conference call to review financial results for the third quarter of fiscal year 2019-2020. which ended March 31, 2019, as well as recent corporate developments. Joining us today on the call are Josh Levine, Accurate's President and Chief Executive Officer, and Shig Hamamatsu, Accurate's Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements that involve risks and uncertainties, including statements regarding our fiscal 2019 guidance, including factors that could affect such guidance, expectations regarding market conditions in China, expectations related to new product releases, and 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 risks associated with the adoption of the CyberKnife, Tomotherapy, and Redis Act systems, commercial execution, operationalizing the China Joint Venture, and overall strategy in China. timing of China user license issuances and the company's ability to take advantage of the issuance of such licenses, 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 just after the market closed this afternoon, as well as in our filings with the SEC. 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 that reflect actual performance or results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. Two housekeeping items. First, during the Q&A session, we request the participants limit themselves to two questions and then re-queue with any follow-ups. Second, all references we make to a specific order in the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended March 31, 2019. Now, I'd like to turn the call over to Accurate's President and CEO, Josh Levine. Josh, please go ahead.

Thanks, Michael. Good afternoon, everyone, and thank you for joining us on today's call. Accurate's third quarter performance was highlighted by 12% year-over-year gross order growth. The quarter was driven by strength in China and continued momentum for both of our delivery systems and software offerings. We also saw strength in competitive bunker takeouts, which for a fifth straight quarter represented over 20% of our gross orders. On a year-to-date basis, gross orders grew 18%. Also during the quarter, we substantially completed the $15 million cost savings initiative announced in the second quarter and should realize the full benefit in fiscal year 2020. Our third quarter highlights also included the execution of our joint venture agreement in China, which we believe will uniquely position us to succeed in that market, which represents the single largest growth opportunity in radiotherapy. We made progress during the third quarter in operationalizing the joint venture with our partner China Isotope and Radiation Corp., and I'll be providing some more color and detail on this later in my prepared remarks. I'll provide a review of our regional gross orders performance in the quarter, highlight progress with the China joint venture and the China market opportunity as a whole, and then conclude with an update on our latest product innovations. I'll then turn the call over to Shig for a more detailed review of our financial performance. Gross orders of $83.6 million in the third quarter increased 12% year-over-year due to our strong performance in our APAC region, specifically China, where we continue to see demand for our Type A products. As you're aware, end-user customers are still awaiting the issuance of licenses, which we believe will begin by late May or early June. During the third quarter, we took 10 orders from our China distributor, and the composition of the orders were primarily for Type A products. In our Americas region, gross orders were down slightly in Q3 compared to the prior year, but have grown 13% on a year-to-date basis. While the growth in the Americas during the first nine months is encouraging, it's still a bit early to characterize this trend In our EMEA and Japan regions, gross orders declined on a year-over-year basis due to tough prior year comparisons. With that said, both EMEA and Japan continued to be strong contributors to our overall gross order number, and each contributed over 20% of the total gross orders in the third quarter. By order type, approximately 25% of overall orders in the third quarter were competitive takeouts. 60% were for new vaults, and 15% were replacements in our own installed base. All three of these metrics are consistent with our historical ranges. Turning now to China, when we look at the overall level of LINAC market penetration compared to mature markets around the world, it is clear that China is currently operating at a significant deficit in terms of clinical treatment capacity. To put this in comparative perspective, in the U.S. we have roughly 12.4 LINACs installed per million people. Western Europe has roughly 6 to 7 LINACs per million, and China is estimated currently to be at 1.4 LINACs per million. When China's disease incidence forecasts are taken into account, the current level of radiotherapy treatment capacity represents both a significant concern as well as an opportunity. While the near-term addressable market today is defined by the roughly 1,400 radiotherapy license quota outlined by China's Ministry of Health last October, To keep pace with future patient treatment needs, China will likely need a total of 5,000 plus Linux over the next decade. Given Accuray's current installed base of 900 devices, you can see why we are so excited about China as an overall growth catalyst for our business. We continue to make operational progress on executing our joint venture strategy. Last week, the JV obtained the business license certification. Having this license certification means we can now begin to apply for the medical device radiation safety license, as well as hire employees to staff the JV from a basic infrastructure perspective, which in commercial terms moves us closer to order generation. We expect the JV to have the radiation safety license to sell and take orders sometime during this summer. During the early stages of ramping the JV, we will continue to work with our current distributor, Tomanife, to take and convert orders to revenue to ensure there will be no disruption to our near-term opportunities. Once licenses begin to issue, this initial transition phase will allow us to maximize orders and revenue while we operationalize the JV to support our longer-term strategy for the China market. In the first phase of this transition, we anticipate the JV will begin selling Type A and our current Type B Accuray therapy, Accuray radiotherapy devices much like a distributor. In the second phase of the strategy, the JB will manufacture and sell a locally branded made in China Type B radiotherapy device. This locally produced product would replace our current Type B Tomo H offering. We believe this two-phase strategy, in parallel with our current distributor Tomo Knife continuing their sales responsibility over the next year, will allow AccuRay to best maximize both near and longer term opportunities. To enable longer term market penetration, Our manufacturing partner, China Isotope, has active selling relationships in almost 10,000 China hospitals across more than 30 provinces. China Isotope's customer relationships are also diverse by hospital type, including many institutions beyond the Tier 1 academic and research-based hospitals, which have been Accuray's strength historically. As a result, we believe that the customer base that China Isotope currently serves will provide Accuray with improved strategic market access that should help diversify and expand our overall market opportunity. In the near term, Accuray's order and revenue activity in China will continue to be partially governed by two processes, the license application and issuance process and the tender process. Based on the latest information, the China Ministry of Health is nearing completion of its implementation of license application infrastructure and it is expected that the initial batch of type A licenses should start to flow soon, most likely in late May or early June. We then anticipate it will take approximately six to eight additional weeks for the tenders to be awarded and the first units to go to revenue. We therefore continue to expect our order activity in China will benefit fiscal 2019 with the bulk of the revenue benefit occurring in fiscal 2020. As we communicated on our last call, we do anticipate some quarter-to-quarter variability in order flow as this licensing and tender process becomes fully activated, which Shig will cover in more detail shortly. Turning to our product development roadmap, our current upgrade strategy is focused on further increasing the speed and utility of our devices and continuing to extend AccuRay's historical strength in the overall precision of our treatments. The VoloOptimizer software upgrade for CyberKnife, which was introduced at Astro last fall, is now on approximately 30% of compatible CyberKnife systems in our installed base. The VoloOptimizer reduces treatment times by up to 50%, allowing CyberKnife treatments to be performed in 15 to 30 minutes, depending on the disease site. The reduction in treatment planning times is even greater at approximately 90%. We believe the availability of the Volo upgrade on CyberKnife will be both a catalyst to our installed base replacement cycle and allow us to attract new customers to the CyberKnife platform. Currently, approximately 100 systems in our CyberKnife installed base are the latest generation M6 platform that is MLC compatible and capable of realizing the full benefits of enhanced treatment times of the Volo optimizer. This means a reasonable number of the roughly 250 CyberKnife systems in our installed base are high-value trade-in, trade-up targets for our latest generation CyberKnife platform. For Radisact, AccuRay is bringing the motion synchronization capability currently found on CyberKnife to our extremely versatile Radisact IGRT system. We expect to have our first shipment of this important feature, which we call Synchrony, for Radisact by the end of our current fiscal year. The broader commercial launch will be towards the end of the calendar year. Synchrony corrects for target motion during treatment delivery in real time without the need for gated treatments or uncomfortable patient positioning devices designed to restrict patient movement. The result is efficient treatment deliveries that enable tighter dosing margins, improved sparing of healthy tissues, and greater patient comfort. As the original innovator of motion tracking and synchronization with our CyberKnife system, Accurate fully intends to extend our leadership in this important area by transitioning this capability to our Radisac platform. In addition to Synchrony, we are in active development on enhanced imaging upgrades for both our Radisac and CyberKnife systems that will improve soft tissue resolution and contrast. We believe these upgrades will expand the market opportunity for both of our treatment delivery platforms. We anticipate an enthusiastic customer reception for both our synchrony motion tracking and synchronization upgrade for Radis Act and the Volo Optimizer for CyberKnife at the upcoming Estro conference in Milan later this week. And now I'd like to turn the call over to Shig for a deeper dive into our financial performance in the third quarter and our outlook.