ViewRay, Inc.

Thank you for standing by and welcome to the Q1 2022 View Rate Earnings Conference 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. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Matt Harrison, Director of Investor Relations, so you may begin.

Thank you, Valerie. Good afternoon, everyone, and welcome to ViewRay's first quarter conference call. Joining me today are Scott Drake, our president and chief executive officer, and Zach Stassin, our chief financial officer. Earlier today, ViewRay issued a press release and presentation for today's call. The presentation can be viewed live on our webcast or downloaded from our website. Today's call is being broadcast and webcast live. A replay will be available on our website for 14 days. Before we begin, I would like to remind you that the discussion during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. I will now turn the call over to Scott.

Thanks, Matt. Good afternoon, everyone. Welcome to our Q1 call. Today I will highlight our quarterly performance and provide context on our exciting growth journey. In a nutshell, our strategy is working as intended. Our clinical and innovation pipelines are feeding and fueling our commercial progress. I will put a financial lens on our strategy to demonstrate how our industry-leading revenue growth will drive P&L leverage on our path to cash flow breakeven. Zach will go into depth on key metrics, and then we look forward to answering your questions. In Q1, we added seven more orders, and the backlog increased to $331 million, up 25% versus prior year, and revenue grew 22%. Cash use for the quarter was $35 million, and as a reminder, Q1 is our seasonally highest cash use quarter. We finished the quarter with $183 million of cash on hand, which we believe gets us to cash flow break-even. As previously stated, we expect the first half of 22 to look a lot like 2021 and then ramp into the back half of the year. Things are unfolding as anticipated. These results position us well for the balance of the year and set us up for an exciting 2023. Let's take a look at what we've accomplished and where we're going. Turning to slide four, over the last three years, we doubled the number of Meridian systems and more than quadrupled the number of patients treated. During that same period, we made considerable progress on our clinical, innovation, and commercial pipelines. We expect this rapid progress and trajectory to continue and deliver a similar doubling and quadrupling over the next two to three years. Slide five demonstrates why we're confident in our future growth. With current active systems, plus those in process of being installed, plus our backlog, we have clear and pretty quick line of sight to about 120 active Meridian programs. We expect this number will be augmented by the considerable activity in our commercial pipeline. On slide six, we've shared many times that our clinical and innovation pipelines feed and fuel our commercial pipeline. All three are accelerating and our business is gaining momentum. According to key opinion leaders, the clinical data that our customers have generated and that which is forthcoming is unlike anything ever seen in the industry. We are demonstrating survival and local control in the toughest to treat cancers such as pancreas. In more common cancers like prostate, customers are proving and delivering critical quality of life benefits. On the innovation front, A3I delivers the top capabilities and enhancements our customers desire. The clinical proof and product innovations are driving therapy adoption and purchasing decisions. More and more patients are learning about the benefits of Meridian Therapy, and we're actively driving awareness. On slide seven, patients will ultimately write the ViewRay story. Once they are aware that short courses of effective, and virtually side effect-free therapy is available, they will demand it. This movement is happening organically as patients and their loved ones do research. Concurrently, we are actively using our compelling clinical data to drive awareness. As an example, we leveraged Dr. Chung's outstanding pancreatic data that demonstrated 53% two-year survival on Meridian. We engaged with PanCan, a pancreatic cancer patient advocacy group, and spent time educating their patient services team. These efforts are already having an impact. Multiple patients from across the U.S. were informed that their pancreatic cancer was inoperable and their survival outlook was dim. Unsatisfied with their prognosis and lack of options, each patient sought guidance from PANCAN, I'm pleased to say that all of these patients have or will be traveling to various customers across the country to receive life-changing treatment that can only be provided by Meridian. Following our success with the Mirage and Scimitar trials, we've begun to engage with patient advocacy groups for prostate cancer and will utilize this playbook across new cancer types as we continue to clinically differentiate Meridian and change the paradigm of care. We're often asked about the impact of our clinical data on our commercial pipeline. UCLA answered this question on a webinar two weeks ago. They shared that demand for Meridian therapy is quote unquote skyrocketing. Patients traveling for Meridian creates competition which stimulates demand. On slide eight, the most catalytic force on our business is the impact of a successful Meridian program that competitively attracts patients. Our efforts are squarely focused on concentrating more and more programs in target markets. The foundational elements of our strategy include our clinical, innovation, and commercial pipelines, and driving patient awareness. These efforts are yielding more customers by incremental meridian systems, increasing competitive market dynamics, and accelerating therapy adoption. Turning to slide nine. Take Florida as an example. Four successful Meridian programs have led to two more. Patients are traveling to these sites across city, state, and country lines. We are seeing this competitive dynamic play out in an increasing number of markets. Florida, California, the Northeast Seaboard, France, Italy, and the UK are all budding examples of accelerating markets. We are systematically driving this cycle, and it is gaining momentum. The Meridian Value Chain, clinical value leading to strategic and economic value, combined with market competition and augmented by patient awareness are a powerful combination for driving significant future growth. To make this more granular, on slide 10, each order that we take is worth approximately $12 million in future revenue. half from the system sale, and the other half from recurring revenue. Think of the impact of a seven-order quarter. Seven orders represents about 40 million in system revenue and another 40 million in recurring revenue. As such, in Q1, we generated what we anticipated to be about $80 million in future revenue. We did likewise in each of the prior four quarters. In line with this approach, Over the past five quarters, we've generated about 400 million in future revenue. This kind of growth is powerful and striking in light of a business that provided guidance of 84 to 104 million in revenue this year. This growth drives excellent P&L leverage. Let's take a look at the full year 2022 on slide 11. This year, we're set up to grow about 40% on the top line. Our backlog and commercial pipeline put us in a very strong position for rapid top-line growth in 2023. Moving down to the gross margin line, we're set up to drive 750 to 1,000 basis points of improvement in 2022, and likewise, we're set up for significant expansion in 23. From an operating expense standpoint, you will see restraint. We expect a nominal OPEX increase in 22 with revenue growing at many times the rate of OpEx. We are preparing for a capital markets day later this year, where we'll provide more granularity on our revenue growth, gross margin expansion, operating leverage, and very importantly, illustrate that we have the balance sheet we need to get to cash flow breakeven. I will now turn the call over to Zach to walk through our results in more detail.

Thanks, Scott. Today I will cover our first quarter business results and touch on our financial priorities. Full details can be found in today's press release, and we will be filing our 10-Q tomorrow morning. Revenue in the quarter grew 22% to roughly $19 million, driven primarily by three revenue units, versus $15.5 million, driven primarily by two revenue units, in the same period last year. Service revenue grew 32%. reflecting the continued growth and maturation of our installed base. During the quarter, we received seven orders totaling a gross order value of approximately $41 million. Our commercial pipeline continues to build as our clinical data sets and product innovations resonate with customers and gain broader market traction. Backlog ended at $331 million, a 25% increase over the same period last year. As Scott mentioned, Our current base of 50 systems, plus the 10 more in various stages of installation, and the size and strength of our current backlog gives us line of sight to an installed base of about 120 meridians. We anticipate this growth will further be enhanced by our robust commercial pipeline. The combination of these factors give us confidence in strong revenue growth for 22, 23, and beyond. Gross profit during the quarter was approximately 1%. as we continue to work to move gross margins solidly positive. Our Q1 gross margin performance gives us more confidence in delivering meaningful margin improvement over the course of the year as installations continue to ramp. Furthermore, we expect to make significant strides in gross margin on both the system and service front in the next few years. A combination of leverage from increased revenue growth, complemented by the fruits of our production cost reduction efforts, should drive meaningful margin improvement each year for the next several years. Our path to industry standard margins is well underway. Operating expenses were $28 million in the quarter, and we expect the growth in OpEx to moderate throughout the remainder of the year. Our current investments are focused on driving growth and enhancing margins. Our investments in innovation are squarely targeted at improving workflow and ease of use, as well as reducing the cost of manufacturing the system. On the commercial front, we have structured our team to drive therapy adoption and expand our pipeline. We firmly believe that each successful Meridian program leads to additional orders and programs. Turning to cash use, we used approximately $35 million during the quarter. As many of you are aware, Q1 tends to be a higher seasonal cash burn quarter consistent with our historical trends. Similar to prior years, we expect cash burn to moderate in subsequent quarters. Our cash burn this quarter was impacted by slightly higher than expected receivables. We had several projects impacted by lingering effects of the pandemic that ultimately delayed payment. We are now seeing these construction delays normalize and have since collected most of the payments. We continue to be encouraged by the improved access to customer sites for both sales and installation activity. Consistent with our commentary at the beginning of the year, we expect access to continue to improve as we progress through the year. While parts of Asia have gone back into lockdown, we do not have any exposure to areas currently being disrupted. As we have indicated in the past, the nature of our business exposes us to intra-quarter payment timing risk. However, we remain confident in achieving our previously stated full-year cash guidance. We finished the quarter in a strong liquidity position with approximately $183 million in cash on the balance sheet and believe this is sufficient to reach cash flow break-even. Turning to slide 14, we often discuss how our clinical and innovation efforts accrue to commercial success. I want to take a moment and highlight a few factors that give us confidence in our future growth and path to cash flow break-even. Firstly, accelerating top-line growth. We currently have the infrastructure in place to support our larger revenue business and expect to start leveraging our scale this year. As previously mentioned, the line of sight from our backlog and the strength of our commercial pipeline gives us confidence in achieving industry-leading revenue growth. Given a meaningful portion of cost of goods sold are fixed costs, accelerating revenue growth will play a major factor in enhancing our margins. We expect to see improvements starting this year and progressing into 2023 and beyond. Secondly, product-specific cost down measures. We continue to identify opportunities on both the product and process front that will ultimately lower the cost of manufacturing our systems while enhancing the user experience. We implemented a select few of these projects already and continue to pursue a list of additional opportunities. Finally, responsible capital allocation and working capital management. We remain extremely cautious with any incremental operating expense investments. We are focused on the items with the fastest and greatest return, along with driving growth and enhancing margins. On the working capital front, over the past two years, we leaned out our inventory significantly and are focused on efficiently fueling our future growth. The combination of these initiatives give us good visibility into the future. The nature of our efforts give us confidence in achieving our margin goals despite the current inflationary environment. This year promises to be an exciting year for V-Ray and 2023 even more so. The combination of our previous investments in innovation, clinical data, and commercial efforts are starting to pay off. We are focused on delivering for shareholders and feel that we are firmly on the path to doing so. With that, I will now open up the call to Q&A.

If you'd like to ask a question, please press star then 1. If your question has been answered and you'd like to remove yourself in the queue, press the pound key. Our first question comes from Jason Bednar with Piper Sandler. Your line is open.

Hey, guys. Good afternoon. Congrats on another nice quarter of new orders here. I'd like to start in the hospital CapEx environment if I could. It feels pretty dynamic right now. Rates are moving higher. We all see that. Some other capital equipment players have pointed to maybe a bit of softening the funnel of demand for big-ticket capital equipment. But, you know, your order book continues to build, so it would seem like things are status quo for V-Ray. But I'd love to hear just the tenor of recent conversations out there and whether you're seeing hospitals being at all more cautious with spending on capital equipment.

Hey, Jason, thanks for the question, and also thanks for the compliment. I would say the overall environment is improving. When you look at it with the context of a little bit of time, over the course of the last two to three years, we've battled a multi-year pandemic. We've battled lockdown, supply chain issues. Inflation is a little bit more recent. And overall, all things in, I would say the environment for us is improving. Our ability to access customers, to do installations, to meet live with current and prospective customers. Our customers' ability to mitigate any kind of disruption to elective procedures, all of that has gotten better. And I do recognize, to your point, there's been a little bit of a mixed bag of commentary from other companies out there, some saying the environment is strong, some saying it's a little bit weaker. As it relates to us specifically, we tend to fit into strategic capital budgets for our customers. And even our for-profit customers tend to spend strategic capital. If they want to improve their competitive market position, either to accelerate share gains or to stem share losses, we're in a very good position to help them with that. And what you tend to see is that replacement kind of capital gets pushed before any kind of strategic capital. And like I said, we generally fit into that strategic bucket. So from a macro perspective, I would say things are better than they have been over the past six, 12, 24 months. And specifically as it relates to capital, we feel comfortable with where things are.

All right. Thanks, Scott. That's really helpful. Maybe one of the commercial side here is we think forward to how this year will play out and then also thinking ahead beyond this year. I'm going to go maybe a layer deeper here, but can you talk at all about your line of sight projects that are in process, not just over the next quarter or two, but the visibility you have for install timelines over the next 12 to 18 months? I guess as you map out your backlog install schedules and look at where hospitals are with whether it's construction process or site prep, whatever it might be. Can you talk qualitatively on how those timelines might be firming and then your level of confidence in seeing that record backlog that you have advance towards installation?

Yeah, Jason, I'll touch on it here and by all means follow up if I don't completely answer your question. But I would say let's begin with the commercial funnel. That is building very, very nicely. We have never had the number, the quality, the diversity of customers within our commercial funnel that we have now. And that just continues to build. And I think our clarity on that front also continues to increase. As it relates to installations, we have very clear line of sight here in 22. And 23 is firming up very nicely. We are getting to the point where conversations with our customers, you know, we're having a little bit of, you know, back and forth with these customers that want to get systems in the ground faster. So there's a little bit of competition for our capacity to install systems, which is very nice to see. It's putting us in a strong position to really line things up, like I said, for the very end of 22 and on into 23. So we feel very good about where we are on the installation front as well.

All right, perfect. And then, Scott, maybe just as a follow-up on that point, if there is that competitiveness for, you know, slots on installs, I mean, is that a bottleneck at all? I think not. I think you've addressed this in the past, but just, you know, given the way you framed that, can you confirm that your installability or the teams that you have to install are is not a bottleneck to execute, whether it be against or above the guidance you have out there?

No, you're exactly right, Jason. We're in very, very good shape in 22 as it relates to our capacity and ability to do installations. And in 23, we'll be in the same position. We may have to expand capacity for later in the year in 23. But we've got, you know, with the forward visibility that we have, We have plenty of time to build that capacity, but it is helpful as we're horse trading one slot for another to really kind of help our position in terms of customers buying to get systems in the ground as quickly as possible. And that's a very beneficial dynamic for us as a company.

Yeah, good spot to be in. All right, I'll hop back in queue. Thanks, guys. Thanks, Jason.

Our next question comes from Frank Pinal with Jefferies. Your line is open.

Hey, guys. Congrats on a really strong quarter there. Just picking up on the 120 installs, I guess, a few years out, I was sort of doing the same math before the call, interestingly, and it sort of points to an upside versus consensus on revenues in some of the outer years there. I mean, just on quick math, 25, 50% even, which is a few years out, so understandable it could be a delta. But I'm just wondering how you're sort of thinking about some of the assumptions there as it relates to what you're building in internally and, you know, any sort of risks that you see around that in terms of executing to that. And then I have a follow-up there.

Yeah, absolutely. Thank you, Frank. Appreciate the question. You know, we do think we're in a very strong position to have industry-leading and even, you know, kind of elite-level MedTech growth for the foreseeable future. We have a very strong growth profile here in 22. We're in a very strong position in 23 as well. And growth just drives the P&L in this business so attractively. for gross margin expansion, for operating leverage, and ultimately gets us to cash flow break even in the out years. And we feel as though we're in a really good position there. I'm not going to make any real forward new comments as it relates to guidance. I'll hold off on any kind of 23, 24, and beyond commentary to our capital markets day that we anticipate in Q4 of this year. But I would tell you that we are optimistic on the guidance that we've provided in 22, both on the revenue and cash utilization side of things. And like we said in our prepared remarks, the doubling and quadrupling of patients over the next two to three years, we have a really good line of sight to that, and we think we're in a very, very good position to drive shareholder value creation and treat patients with the therapy that they deserve and desire.

That's very helpful. Thanks, Scott. And one more here, a simpler question, really around the catalyst. Meridian A3i, it's going to be, seems like a big part of the story over the next few years. I'm wondering how you're sort of thinking about that launch from a timing standpoint. Have you, at this point, I'm not sure if you've committed to it yet, for a 1H or, say, a second half launch? Just on timing there. Thanks. Thanks.

Yeah, team celebrated that today, Frank. Your question is very timely. We are beginning the first installation of A3I here at the end of this week. We're going to put the A3I new capabilities into four customers in a beta launch. And we'll keep you apprised in terms of how that's going. And once we're comfortable that we're delivering exactly what it is that our customers seek, those give or take seven new capabilities, enhancements, and improvements to the system, once we're very comfortable that we have completely nailed it, we will then roll it out more rapidly. We project in the back half of 22 on into 23. But we're really excited about it, and we've celebrated all across the globe here today with the Cinco de Mayo A3I celebration. So thanks for the question. That's great.

Congratulations. Thanks, guys. Appreciate it. Thank you. Thank you.

Our next question comes from Justin Walsh with B-Rally Securities. Your line is open. Thank you.

Hi, thanks for taking the question. I know there are meridians installed around the world, but I was wondering if we could talk a little bit about growth prospects in different markets and how you're working to optimize the potential there. Maybe you can clarify your outreach efforts in the key U.S. market versus other markets and if there are particular challenges you face in different geographies.

Yeah, happy to, Justin. I would say starting at the highest level, Our target markets include the U.S., Europe, and Japan today primarily. We will be focusing on China, we hope, in the not too distant future. That is a very important market for us, and I anticipate you're going to see more activity out of us in Australia and Canada as well. And I think we're doing really well in US, Europe. Frankly, we've got work to do in Japan. We had a really nice order here recently from a leading academic center in Japan. And I anticipate that here in 22 and 23, we're going to move the needle in that very important market. the pandemic hurt us there and our lack of ability to get in the country the way that we would have liked over the past two plus years. So hopefully that gives you a little bit of context. We're obviously having a decent amount of success in the Middle East, and I think you'll see us expand to other areas around the globe. But we think it's critically important for us to win in the United States, in Europe, and Japan. that's critically important and then we can grow out from there.

Great. Congrats on the quarter. Thanks for taking the question.

Thank you, Justin.

Our next question comes from Marie Tebow with BCIG. Your line is open.

Hey, good afternoon. This is Sam Iberon from Marie. Thanks for taking the questions. I wanted to ask about the data from Scimitar Mirage. Is that driving conversations maybe with the more non-academic type institutions? I mean, you mentioned the diversifying customer funnel, so I was just wondering if those data readouts are driving some of that.

Yeah, absolutely, Sam. We were kind of really happy to hear what UCLA said about the impact of the data on their webinar just a couple of weeks ago. It was striking to hear them say that demand for meridian therapy is quote unquote, skyrocketing. And the conversation with our customers has very much changed because of the clinical data that we have, both in the toughest to treat cancers such as pancreas, but also in more common cancers like prostate. And the conversation centers today on what we're able to deliver for patients. If you contrast that to a couple of years ago, the conversation was more like what you would find historically in this space. It was conversations about technology as opposed to clinical outcomes. And we declared, as you're aware, three and a half years ago that we would lead and differentiate with clinical data, and that is very much taking hold. and we're augmenting that now with driving patient awareness, because as we've talked with you on many occasions, patients will write the ViewRay story. Once a patient is aware that short courses of highly effective and virtually side effect-free therapy is available, they will obviously demand that therapy. And what's unfolding now, competition within markets, patient awareness efforts, 20-plus thousand patients treated, every one of them a little pebble in the pond, if you will, for ViewRay. All of these are taking effect and driving things forward. And one area that I would share with you that I think is pretty interesting, when you think about the conversations that we're having with customers, I'll give you a really striking example. We had a freestanding center place an order for Meridian some time ago. And after that decision was made by the CEO to buy Meridian, they hired a radiation oncologist who came in and said, hey, you know what? I don't need that expensive equipment. I can do everything that I need to do on a conventional LINAC. Fast forward to today, they decided to go forward with the installation of Meridian. They treated their first patients just two or three weeks ago, Zach, and the physician after treating the first patient turned to our team and apologized because of how wrong he was and how different our technology is. And then the second patient that he treated had a tumor on their aorta, something that he said he wouldn't do on any other system. So you've got all of the arrows pointing in the right direction, and we feel really good about how things are set up as we move forward.

Really encouraging to hear. Thanks for taking the question. Thank you, Sam.

Our next question comes from Mike Ott with Oppenheimer. Your line is open.

Good afternoon, Scott and Zach. I'm on for Suraj. Congrats and thanks for taking our questions. Thank you, Mike. So I'd like to start maybe on some macro factors. Curious if you're having any impact from any of this laundry list, supply chain issues, cost inflation, or FX impact from some of the weaker foreign currencies.

Yeah, I would say, Mike, the overall environment, I know I referenced this on a question earlier. I think the overall environment for us, all things considered, is actually improving. There are certainly challenges out there like supply chain, but you've seen us operate, I think, very well since the beginning of the pandemic and supply chain issues emerged. When you talk about things like inflation, any of those kinds of things that are happening, and we are battling that, you know, renegotiating with vendors, changing vendors where appropriate. The growth of our company absolutely overwhelms any of those effects. So this top tier growth that we're driving is hand in glove with gross margin expansion that again this year will be another 750 basis points, maybe 1,000 basis points, and that will continue on as we go forward and continue to grow. So I would say the overall environment for us is better than it was say six months ago or 12 months ago. There are challenges, but I would say improving.

That's great to hear, Scott. And then in early April, CMS proposed delaying the ROAPM start from January of 2023 to some future date, TBA, and we've talked in the past about ROAPM, but is there any impact in that, do you think, for you or your customers?

Yeah, we're not baking anything in on that front, Mike. You know, to your point, they've delayed it a couple of times, and You know, for us, the way we think about it is if it were to go into effect, it would simply be a tailwind for us. We think with the current reimbursement environment, Meridian is incredibly well positioned. Our customers make good money when they utilize our system with five or fewer fractions for patients. They're able to be very efficient. On the bottom line and on the top line, They're able to attract net new patients. I know you've heard that story time and again. But our customers, every single one of them, tell us that they're treating patients that they wouldn't or couldn't treat on any other system. Patients are traveling long distances for meridian therapy, and there's an increase in local referrals as well. So I think the current reimbursement scheme serves us well. A3I speeds us up even further and provides a greater return for our customers. So, we're well positioned currently, and if the ROAPM were to go into effect, I think it's just a tailwind for us. But the one thing, Mike, I would share with you that is very clear, this steady march that's been happening over time to go to shorter and shorter courses of treatment is not going backward. we are a driver of five fractions or fewer, and we're able to do it with what our customers call aggressive margin reduction. We do it without any implanted fiducials, and you see the mitigation of healthy tissue toxicity that we deliver. So I think we are incredibly well positioned in the reimbursement environment and where things are going clinically.

That's great to hear. And then I guess my last question What's the next clinical data set that you would advise investors to be on the lookout for?

You know, I think the next one that we're really excited about coming out this summer is the smart pancreas data. So we'll be sharing that when it comes out. We don't want to spoil anything from a podium presentation standpoint, so we'll be judicious in terms of how we share that. But we're very excited to see what comes next. with that data set here this summer. Great. Thanks, Scott. We'll see you soon. Thanks, Mike.

Thank you. This concludes the question and answer session. I'd like to turn the call back over to Scott Drake for any closing remarks.

Thanks, operator, and thanks, everybody, for joining us. Happy Cinco de Mayo, and we look forward to doing it again in 90 days. Have a good afternoon.

This concludes the program. You may now disconnect. Everyone have a great day.