Accuray Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the Q1 fiscal 2020 AccuRay Incorporated earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star then 0. I would now like to introduce your host for this conference call, Mr. Doug Shirke. You may begin.

Thank you, Kevin, and good afternoon, everyone. Welcome to AccuRay's conference call to review financial results for the first quarter of fiscal year 2020, which ended September 30th, 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'd like to remind you that our call today includes forward-looking statements that involve risk 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 shipments, 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 risk associated with the adoption of the CyberKnife, Tomotherapy, and Radizak systems, commercial execution, operationalizing the China joint venture, and overall strategy in China, timing of China user licenses, issuances, and tenders, the company's ability to take advantage of the issuance of such licenses, Future Order Growth, Future Revenue Growth, Profitability, 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 affected forward-looking information, except to the extent required by the applicable securities laws. Two housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to two questions and then re-queue with any follow-ups. Second, all references we make to specific quarters in the prepared remarks are to our fiscal year quarters. For example, statements regarding our first quarter refer to our fiscal first quarter ended September 30th, 2019. Now I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Lamine.

Thank you, Doug. Good afternoon, everyone, and thank you for joining us on today's call. Accuray's Q1 performance represented a reasonably solid start to our fiscal 2020. As we shared with you during our year-end earnings release in late August, We expected fiscal 2020 to be characterized by revenue growth primarily occurring in the second half of the year due to timing of China Type A license issuance and revenue recognition, and we believe that projected timing is still valid. First quarter gross orders exceeded our internal plan, and revenue was in line with our plan for the quarter. Gross orders were $78.5 million, representing a 28% growth over prior year first quarter. Order growth was primarily driven by our CyberKnife system, while Rata's Act maintained strong momentum, representing over 60% of the total orders for the quarter. Geographically in fiscal Q1, our EMEA and AMS regions were meaningful contributors to gross orders, and we continued to see strong order growth from China, which contributed 11 new systems, 9 Type A and 2 Type B. On the revenue side, revenue for the quarter was $89.6 million, which was in line with our internal plan expectations. Turning to significant highlights, on October 9th, the China National Health Commission announced the first round of type A radiotherapy license awards for hospitals who had applications in the system for equipment. Of the 58 licenses that were awarded, 50 of them were for AccuRay systems with Tomotherapy slash Radizac systems representing 60% of the awards and CyberKnife systems the remaining 40%. We need to remember that the process identified by the Ministry of Health requires a tender process following the license awards for all participating end user hospitals prior to being able to take receipt of a type A device. This tender process has been put in place to define the transactional terms and conditions related to each hospital's equipment order and will not initiate a competitive bidding situation that would result in changes in the specific device that the hospital has received the Type A license for. We expect that based on the timelines required for this tendering process, we would not begin to see revenue impact related to the China Type A awards until sometime in our fiscal fourth quarter. and we remain excited about the China market opportunity as a significant growth catalyst for our business. Turning now to our product development roadmap, we introduced our synchrony motion compensation and correction technology on the Radizak platform at the annual Astro meeting last month in Chicago and received strong customer interest over the course of the show for this exciting technology. As we indicated last quarter, we have our primary clinical product evaluation site for Synchrony on RADISAC currently underway at Frater Hospital in Milwaukee. Over the course of the next two quarters, we expect to ramp up additional commercial reference sites that will help drive full-scale commercialization going forward. Another highlight at the ASTRO meeting was the presentation of an abstract from the PACE study that was subsequently published in the September 17, 2019 online issue of the Lancet Oncology Journal. The PACE study is an international multi-center phase three randomized controlled study that compares three different prostate cancer treatment regimens across multiple safety and effectiveness metrics. This is the first study that we are aware of that allows for head-to-head comparative device data among both competitive products in the radiotherapy space and provides comparative data between radiotherapy and an alternative treatment modality, in this case, robotically assisted prostatectomy. The first arm to reach target patient accrual and publish early toxicity results is referred to as the PACE-B arm of the study. The PACE-B trial is designed to determine whether ultrahyperfractionated SBRT offers therapeutic benefit over prostatectomy or conventionally fractionated or moderately hyperfractionated radiotherapy in the treatment of low- and intermediate-risk prostate cancer patients. In this arm of the PACE study, patients are randomized to one of two treatment regimens. Prostate SBRT treatment in five fractions utilizing Accuray CyberKnife and conventional Linax, or IMRT treatment involving conventional fractionation or moderate hyperfractionation in 20 or 39 fractions utilizing conventional NX. There are a total of 845 patients enrolled in the PACE-B arm of the study, 431 of which were treated with SBRT and 414 who were treated with IMRT. Of these subsets, 41% of the SBRT group was treated on CyberKnife and roughly 59% was treated on conventional Lenox. The results of the patient reported and clinician confirmed outcomes reported in the online September 17th issue of Lancet Oncology indicate two very important results. First, that there was no difference in acute toxicity between the SBRT and control arms, indicating that patients can benefit from shorter treatment schedules without the risk of greater toxicity in the short term. The second result was that SBRT treatments on CyberKnife resulted in significantly fewer grade II and higher acute urinary toxicity than treatments on conventional NX, 12.4% versus 30.6%, a 2.5-fold difference while maintaining equivalent levels of GI toxicity. CyberKnife's unique ability to deliver ultra-hyperfractionated treatment allows patients to receive higher dose and shorter treatment regimens without the risk of greater toxicity or incidence of side effects. Before I turn the call over to Shig, I'd like to welcome the newest member of our leadership team, Suzanne Winter, who has joined us as Senior Vice President and Chief Commercial Officer. Suzanne comes to us from Medtronic, where she most recently served as Group Vice President for the Medtronic Diabetes business, where she was responsible for annual revenues of $1.4 billion and over 2,000 employees. Suzanne previously served as general manager of GE Healthcare's detection and guidance solutions business and has a strong and progressive track record of driving business growth across industry segments as diverse as radiology, neurology, and general surgery. I'm excited about having Suzanne on board and I'm confident she will become a key contributor to our future business growth. And now I'd like to turn the call over to Shik.