Accuray Incorporated

Good day, ladies and gentlemen, and welcome to the Accurate Incorporated Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Michael Colivio. Sir, you may begin.

Thank you, Daniel, and good afternoon, everyone. Welcome to Accurate's conference call to review financial results for the fourth quarter and full fiscal year 2019, which ended June 30, 2019. In addition, during our call this afternoon, management will review recent corporate developments. Joining us today are Josh Levine, Accuray's President and Chief Executive Officer, and Sheik Hamamatsu, Accuray'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 2020 guidance. including factors that could affect such guidance, expectations regarding market conditions in China, expectations related to new product releases, 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 RADS 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 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 to 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 that participants limit themselves to questions and then re-queue with any follow-ups. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, Statements regarding our fourth quarter will refer to our fiscal fourth quarter ended June 30, 2019. Now, I would like to call over to Accurate's President and Chief Executive Officer, Josh Levine. Josh, please go ahead.

Thank you, Michael. Good afternoon, everyone, and thank you for joining us on today's call. Since we last talked with you in April, our team has continued to execute and build on our recent commercial momentum, advance our opportunities in China, reduce our overall operating costs, and achieve full-year operating profitability. This afternoon, we've reported results for our fourth quarter and full fiscal year 2019, highlighting this progress. We generated $97 million in system orders during the fourth quarter and $342 million in system orders for the full fiscal year. Year on year, orders grew 12% over fiscal 2018. For the fourth quarter, orders increased 1% as compared to last year's period, but that was against the top prior comparison as we recorded the largest US multi-system order in the company's history in last year's fiscal Q4. Regionally, Japan had the highest order growth rate during the fourth quarter at approximately 20% while the Asia Pacific region increased approximately 15% driven by the continued strength in China. In EMEA, orders grew in the mid single digits during the fourth quarter. This growth was highlighted by the receipt of the first multi-system, multi-clinic order that bundled both AccuRay and Research Labs system and software offerings placed by the Swiss Medical Network. Turning to our Americas region, orders were down in the fourth quarter based on the previously mentioned comparison to the prior year fourth quarter. Nevertheless, fourth quarter orders in our Americas region achieved their highest level for any quarterly period during fiscal 2019 Driven by contributions from the U.S. and Latin America. For the full fiscal year 2019, the 12% total order growth was driven by our Asia-Pacific region, where pent-up license demand in China resulted in orders nearly doubling on a year-over-year basis. EMEA continued to be the largest contributing region in terms of absolute dollars, although total orders for the year were off 2%. Our America's region was down 9% for the full year, given last year's multi-system order impact, while our Japan region continues to make solid contributions, representing approximately 20% of total company orders. On an order composition basis, approximately 20% of our fourth quarter orders were competitive replacements, 30% were trade-ins of older AccuRay systems, and approximately 50% were new bunkers. From a product mix perspective, both the CyberKnife and Tomotherapy platforms grew double digits year over year. Radizak continues to perform especially well and has reached a very significant milestone by recording the 100th system to revenue in the past 36 months. Our backlog continues to grow, increasing 4% year over year to $496 million. I'd like to turn now to our recent progress in China. During the fourth quarter, we booked eight orders from our China distributor The orders were primarily for Type A products. Recently, the Chinese Ministry of Health provided an update on the overall timing for the Type A radiotherapy license review and approval process. Tied to feedback from end-user customers, we have a growing sense that Accurate Type A products, covering both our CyberKnife and Radizak systems, represent a substantial number of the applications that have been received by the Ministry of Health from Tier 1 hospital facilities. While there's no definitive guarantee that all of these applications will be approved for a license, customer feedback does suggest that we continue to be competitively positioned to capture Type A devices. Based on the current understanding of the process and the projected timelines, we are cautiously optimistic that AccuRay's first shipment of Type A systems would occur sometime in the second half of fiscal 2020, and our inventory position will allow us to be highly responsive once licenses are issued. Shig will be reviewing in his prepared remarks how this updated timing is reflected in our fiscal 2020 guidance. We are very excited about our potential to build type A system revenue during the second half of fiscal 2020 and beyond. As for the type B segment, currently our Tomo H system has been defined as a type B product. The joint venture dealer sales organization is actively selling this device and we strongly believe our best opportunity to maximize our participation in the Type B product segment in China is through our joint venture with China Isotope and Radiation Corporation. Since forming the joint venture company in January, meaningful progress has been made with the new company reaching three important milestones. Over the past 120 days, the JV company has been granted the business license certification, the medical device operating permit, and most recently in July, the Radiation Safety License, which is the final business license required from a regulatory perspective to sell and service radiotherapy systems in China. The rapid and straightforward review and approval process related to these licenses reaffirms our view that our JV partner, China Isotope and Radiation Corp, has been a significant and helpful resource in expediting these approvals during a period of rising tensions in the U.S.-China relationship. Second, the JV has received its first two orders, which will in turn be recorded as accurate backlog during the first quarter of fiscal 2020. And lastly, in July, the new manufacturing and training facility located in Tianjin had its groundbreaking ceremony where our China-branded Type B system will ultimately be produced. Our current plan, based on facility readiness and regulatory approval timelines, is to be in full production with a locally manufactured product in approximately two years. To avoid short-term disruptions of our revenue conversion cycle in China while the JV ramps up, we will continue to work with our current distributor, Tomonite, to convert orders to revenue. We believe this two-phase strategy, in parallel with our current distributor continuing their sales responsibility over the next year, allows Accuray to best maximize both near and longer-term opportunities. Overall, we have met or exceeded all of the milestones for the first phase of the ChinaJB integration and ramp-up process, and we're very excited about the future impact of our overall ChinaJB strategy as a major growth catalyst for the company. Turning now to our product portfolio, we believe that the product development roadmap for both our CyberKnife and Radizak platforms are critical to our commercial momentum and accelerated growth going forward. To that end, we have some exciting news related to roadmap development projects. We have our first customer evaluation site underway for AccuRay's proprietary synchrony motion compensation technology for our RataZak platform. The site is Froedtert Hospital in suburban Milwaukee, which is the primary teaching affiliate of the Medical College of Wisconsin. They have successfully treated their first patient utilizing the synchrony technology on their RataZak system and the case details were impressive. The Froedtert clinical team delivered a three fraction fiducial free SBRT lung case utilizing synchrony. This technology enables continuous delivery of a radiation treatment beam to the tumor while the tumor is in motion by synchronizing the beam to the target on a continuous real time basis during the delivery of a treatment fraction. We will be putting out a joint press release with Froedtert containing more detail on this next week but we felt it was appropriate to share this exciting milestone on today's call. Successful patient treatment gives us confidence that we are on track for full commercialization of this proprietary technical capability early in the second half of fiscal year 2020. AccuRay is the only radiotherapy system provider to offer this unique solution and we expect synchrony for Radizac will be a catalyst for replacement of older tomotherapy systems as well as improving our strategic positioning in competitive selling situations. Additionally, with the proposed changes in future reimbursement captured in CMS's alternative payment model, we believe that more radiotherapy treatments will be performed with SBRT applications and hyper fractionated treatment regimens. These higher dose fractions will benefit from the improved precision and titer margins that are obtainable through AccuRay Synchrony technology which can help minimize toxicity and exposure to healthy tissue. Switching to our CyberKnife platform, we view our VoloOptimizer software upgrade as a significant benefit considering the proposed reimbursement changes by CMS. Volo, which was introduced at Astro last fall, reduces treatment times by up to 50% allowing CyberKnife treatments to be performed in 15 to 20 minutes depending on the disease site. Additionally, Volo creates significant reduction in treatment planning times, in some cases approaching an improvement of 90%. As with Synchrony for Radizak, 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. Technology upgrades like Synchrony and Volo offer material improvements in functionality in the form of precision, speed, and efficiency across the RADIS Act and CyberKnife platforms at the same time that reimbursement changes are likely to drive more SBRT and hyperfractionated treatments, strengthening the value proposition of the AccuRay product portfolio. In summary, we are excited about our progress in fiscal 2019. 12% order growth, 3% revenue growth, and 39% EBITDA growth, all of which were within our guidance estimates, despite not having a material revenue contribution from China during the 2019 fiscal year. Additionally, through operating expense management, we initiated $15 million in annualized cost savings and achieved an operating profit for the full year, which is the first time that has occurred since the tomotherapy acquisition and a topic that Shig will discuss in greater detail. Our fiscal 2020 guidance reflects the latest information we have from China in terms of the potential timing for Type A revenue recognition. At the same time, we expect to generate mid-single-digit gross order growth globally during fiscal 2020, with strong year-over-year increases coming from the Americas, EMEA, and Japan regions. Overall, with the pending commercialization of Synchrony for Radizak, the Volos soft upgrade opportunity on CyberKnife, The progress of our joint venture in China and future reimbursement developments in the United States, we are enthusiastic about our direction and our growth potential. And I would like to turn the call over to Shiv.