Accuray Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the Accuray Incorporated Q2 Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Joe Diaz with Litham Partners. Please go ahead, sir.

Thank you, Josh, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the second quarter of fiscal year 2020, which ended on December 31, 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 Shig Hamamatsu. Accuras 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 and the company's market opportunity in China, expectations regarding the company's China joint venture, Expectations regarding revenue growth and expansion in operating income and adjusted EBITDA, including for the next three years. Expectations regarding recognition of revenue from China type A systems. Expectations regarding the tariff exemption of our products in China. Expectations regarding gross margins. Expectations related to new product shipments, installations and 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 Radizak systems, commercial execution, operationalizing the China joint venture and overall strategy in China, The company's ability to realize the expected benefits of the joint venture, risks and uncertainties related to future Type A and B license announcements in China, as well as the ongoing tender process in China, 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, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities law. Accordingly, you should not put undue reliance on any forward-looking statements. Two housekeeping items for today's call. First, during the Q&A session, we requested participants list limit themselves to two 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 second quarter refer to our fiscal second quarter ended December 31, 2019. Now I'd like to turn the call over to Accurate's President and Chief Executive Officer, Josh Levine. Josh?

Thanks, Joe, and thanks to everyone joining us on today's call. AccuRace Q2 and first half gross order performance has exceeded previously communicated expectations as we maintained a strong order momentum in China despite having a difficult year-over-year comparison. In addition, net orders during the quarter increased by 30% over last year as we saw strong agent activities, which Shig will cover more deeply in his prepared remarks. In terms of revenue, our Q2 and the first half performance was in line with our expectations. As we had shared in prior calls, we expected revenue growth in fiscal 2020 was going to be weighted to the second half of the year due to the timing of China Type A license revenue recognition, and we believe that projected timing is still valid. As a follow-up to an important topic that remains somewhat open following our Q1 call, we have confirmed that the tariff exemption for medical linear accelerators is applicable to all of our systems. We believe that this exemption will support our commercial momentum and expand access to our innovative radiation therapy solutions for hospitals and patients in China. In light of recent events with the coronavirus outbreak in China, we do not believe that the outbreak affects the longer-term demand outlook for radiotherapy equipment in that market. China remains the world's fastest growing market for radiation oncology systems, where we have a highly differentiated strategy to drive significant revenue growth in the coming years. Gross orders for the quarter were $98.6 million, down 2% from the prior year's second quarter, but material above the previously expected range of $87 million to $90 million we had discussed in our Q1 call. During prior fiscal year two, we received 16 orders from China as the Chinese government published the long-awaited quotas for type A and B licenses in that quarter, which presented a tough year-over-year order growth comparison. Geographically, in fiscal Q2, our EMEA and APAC regions were meaningful contributors to gross orders, and we saw a strong order contribution from China, which contributed 11 new systems despite the tough year-over-year comparison I mentioned earlier. I am pleased to report that we saw orders in the Americas grow 37% year over year, which represents two sequential quarters of double-digit order growth as we continue to focus on rebuilding the revenue pipeline in that region. Japan also delivered solid results, with its gross orders growing 17% year over year. From a product mix perspective, CyberKnife contributed approximately 36% of total gross orders in Q2, while the tomotherapy platform led by Rattus Act accounted for approximately 64% of the gross orders during the quarter. Revenues for the quarter were $98.8 million, which was in line with our internal expectations, and Shig will provide a more detailed review of the revenue numbers in his prepared remarks. Turning now to a more detailed update related to China, we continue to closely monitor the status of the ongoing tender process, which is the process that must be completed by end-user hospitals prior to their taking receipt of a Type A device. As discussed previously, this tender process has been put in place to define the transactional terms and conditions related to each hospital's equipment order and is not 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 will begin to see the first revenue impact related to China Type A license awards sometime in our fiscal fourth quarter. We are also aware that the second batch of Type A license applications are currently under review by the China National Health Commission and believe that AccuRay systems are well represented in this second round of applications. While the exact timing of the announcement of additional license awards is not known, we are excited about the prospect of additional Type A opportunities in the coming months. Our China joint venture continues to make operational progress in a number of important areas. Construction of the JV manufacturing facility as well as the training center is on schedule and we expect that manufacturing activities for our Type B products will commence in the next 18 to 24 months, which will allow us to support the growth and overall opportunity associated with the Type B radiotherapy products. Circling back to the U.S., we announced during the quarter that Stanford University Medical Center has added a second CyberKnife system to expand access to precise radiosurgery treatments to more of their patients. The new CyberKnife system will be dedicated to the treatment of diseases in the brain and base of the skull while their existing system will continue to be focused on patients with tumors elsewhere in the body. As many of you know, Stanford is the technological and clinical birthplace of CyberKnife and we are proud that they continue to see the clinical value in this unique product and are expanding their CyberKnife treatment capacity to deliver treatment to an expanding volume of patients. We also recently announced data from a prospective study which showed that at five years, hyper fractionated SBRT treatments administered with the CyberKnife system provided excellent disease control with very low rates of toxicity in men with recurrent prostate cancer after previous treatment with radiation therapy. Most importantly, 69% of men required no hormone therapy, which is the most common treatment given for recurrent prostate cancer. The study was a multi-center study conducted at Genesis Healthcare Partners and Atlanticare, which is part of the Geisinger Health System. The study results were recently published online in the International Journal of Radiation Oncology, Biology, and Physics. We are excited that these data clearly reflect the benefit of our CyberKnack system in treating recurring prostate cancer and believe the study data may act as a catalyst to expand the range of patients to whom treatment is offered. Turning now to our product development roadmap, we have seen strong customer demand for our Synchrony technology for Radisact, which we introduced at the annual ASTRO meeting in September. As a reminder, Synchrony is a unique, accurate innovation available on both the CyberKnife and now Radisact systems. Synchrony compensates for tumor motion that may occur during treatment by precisely tracking target motion or changes in surrounding tissue and automatically compensates for that motion and Adapt's beam delivery in real time. We've gained valuable experience from our primary clinical product evaluation sites and have completed installation of our next phase of ramp and monitor sites with additional global reference sites on track to install in our fiscal Q3. These installations will help ensure maximum commercial impact upon full production release in the fourth fiscal quarter. Before I turn the call over to Shig, I'd like to speak to AccuRay's revenue growth expectations for the next three fiscal years, which we discussed at the JPMorgan Healthcare Conference earlier this month. We believe our opportunity in China, including the recent grants of 50 Taipei radiotherapy licenses for AccuRay systems this past October, will enable us to achieve a compounded annual revenue growth in the range of 8 to 12 percent from fiscal 2021 through fiscal 2023. With respect to the 50 Type A licenses already awarded to Accuray Systems, these units have system revenue value of approximately $115 million, and we expect that the first of these units will convert to revenue beginning in our fiscal fourth quarter and continue from that point over the following 24 months. We expect this revenue growth will drive faster expansion in our operating income and adjusted EBITDA for the same periods as we start to benefit from operating leverage we have built into our business model over the past several years. In summary, I believe Accuray has never been better positioned for growth and our entire team here is singularly focused on executing on the substantial opportunities ahead of us. With that, let me turn the call over to Shig for a more detailed review of the financial results for the quarter. Shig?