Good day, ladies and gentlemen. And welcome to the Q4 2014 Accuray Incorporated Earnings Conference Call. My name is Jason, and I will be your operator for today. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session. (Operator Instructions) I'd now like to turn the conference over to Mr. Jamar Ismail. Please proceed.

Thank you, Jason. This is Jamar Ismail, Accuray's Investor Relations Counsel from Westwicke Partners. Thank you for joining us today on our conference call as we review Accuray's fourth quarter and fiscal 2014 results. Joining us today are Josh Levine, Accuray's President and Chief Executive Officer; and Greg Lichtwardt, Accuray's Executive Vice President and Chief Financial Officer. Before we begin, I need to remind you that our call today includes forward-looking statements that involve risks and uncertainties. There are a number of factors that can cause actual results to differ materially from our expectations including risks associated with the effects of the adoption of the new CyberKnife and TomoTherapy Systems; commercial execution; future order growth, future revenue growth, future profitability; and guidance for fiscal 2015. And there are other risks that are more fully described in the press release, we issued earlier this afternoon as well as in our filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements. Now, I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Thank you, Jamar, and thanks everyone for joining us today as we review our results for the fourth quarter of fiscal 2014. I think you will hear over the next 15 to 20 minutes that we made significant progress against the objectives and initiatives we have been discussing throughout fiscal year 2014. I will begin today's call with an overview of the quarter and highlight some of our achievements. Then Greg provide a more detailed financial review including a discussion of our fiscal year 2015 guidance and I will close with some thoughts on our most important strategic imperatives in this new fiscal year. And then, we will open the call up for questions. Fourth quarter financial results were strong, highlighted by impressive growth in orders, revenue and profitability. With respect to fourth quarter orders, we are reporting today gross orders of $74.5 million and net orders of $63 million. This represents a year-over-year growth in gross systems ordered of 10% and net dollars growth of 8.4%. Importantly, we came in at the upper half of our full year guidance range provided at the end of the second quarter at $221 million for the full year compared to the guidance range of $215 million to $225 million. As has been the case most of the year, our international regions and in particular our EMEA region delivered very strong new order results for the quarter. We are also reporting, total revenue of $102 million in the fourth quarter representing a 20% year-over-year growth. We continue to see improving trends with our backlog conversion to revenue that resulted in our first $100 million plus total revenue quarter in two years. This is an important milestone in the overall turnaround of our business. Further, we reported adjusted EBITDA profit of $2.5 million in…

Thank you, Josh, and good afternoon everyone. Total revenue for the fourth quarter at $102 million is comprised of $51.8 million in product revenue and $50.2 million in service revenue. We are pleased to follow-up our previous quarter's performance with year-over-year revenue growth of 20% in the fourth quarter driven primarily by strength in our product revenues which increased 34%. Service revenue represents year-over-year growth of 8% driven by the increase in our installed base and conversion in customers to higher value service contracts. You may have noted that we are providing additional geographic detail on revenue performance in our press release. This information has been available in our quarterly SEC filings and we will now be providing this in our press release from now on. In regards to our fourth quarter revenue, the Americas region comprised 49% of total, the EMEA region 22% of total and the remainder attributable to the Asia Pacific and Japan regions. For the full year, we reported revenues of $369.4 million which is a 17% increase over fiscal 2013. On a full year basis, the Americas region comprised 42% and our EMEA comprised 31% of total revenue. Total gross profit of $38.4 million for the quarter increased 41% over the prior year fourth quarter indicating a further expansion of margin due to higher product revenues and lower excess and obsolete inventory charges. Product gross margins were a strong 44.4%; however, they were down slightly compared to the prior quarter of 46.3%. The decrease is primarily due to product mix and certain one-time cost part of which includes the transition of the CyberKnife systems production excluding lathe guide assembly for our manufacturing facility in Sunnyvale, California to our facility in Madison, Wisconsin. We have made significant progress in this project and expect our Madison facility…

Thanks Greg. And looking back at fiscal 2014, we have come a long way in the past 12 months. In the last fiscal year, we drove significant improvements in Accuray's commercial momentum and overall financial performance including increasing revenues and gross profit and substantially reduced net operating loss and cash use. We have stabilized this business and have clearly identified pathway to profitability. The positive changes in financial performance coupled with our improving commercial execution skills will ensure that more patients and clinicians will have access to the superior precision associated with our innovative technologies. Turning to the key strategic imperatives for fiscal year 2015, we are focusing on four key areas, growing U.S. market share, maximizing growth outside of the United States, continued focus on service excellence and customer satisfaction and optimizing the product portfolio to enable growth. As you heard me comment before, improving our commercial momentum and growing U.S. market share is going to be a key focus for us going forward. In fiscal year 2015, we will continue to focus on activities that will generate new leads as well as those that will drive conversion of U.S. customers currently in the sales funnel. The core of our strategic marketing efforts will be a continued emphasis on communicating the unique benefits of our products and highlighting the role in the treatment of a broader range of tumor types. From a service perspective, we are continuing to focus on customer education and support from purchase throughout the ownership life cycle. In addition, we are involving our customers in the development of new platforms and programs to ensure that we introduce technologies that address their needs and maximize the potential of our products. Finally, we are enhancing our customer marketing tools and providing physicians with well-tested information and materials…

(Operator Instructions) The first question comes from the line of Steve Beuchaw with Morgan Stanley. Please proceed.

Hi, good afternoon everyone.

Hi, Steve.

Hi, Steve.

Josh, I wondered if we could take it just a little bit further with the conversation around execution in the U.S. For the last 6 or 12 months or so, you've been talking about operational steps, the GPO initiative being one of them to make the business work commercially in the U.S. You've had a pretty good track record in terms of competitive situation wins there. Can you give us a little bit of a finer point, maybe any granularity around what kind of evidence you think we could see in fiscal 2015 in terms of converting all that effort to new orders in the U.S. market?

So it's a multistep process Steve. I think we were pretty explicit in the last call and in prior messaging around what we view as – what the challenges were to U.S. sales and commercial momentum. So I am not going to walk back through that, but I will tell you that as we pointed out in our prepared remarks the impact – the beginning of visibility around impact on the GPO strategy, I think are significant, we believe that it's still an important part and a meaningful part of U.S. sales momentum downstream. But again, there is no substitute for the time involved in the funnel activities that move those opportunities in the U.S. market deeper into the funnel and closer to close. And as I characterize I guess in the last quarter call, we have an improving quality of funnel opportunities in the U.S. to just not as advanced as we would like and we expect in terms of time to close and generating more momentum from an overall sales process standpoint. And I think that as I characterized last quarter, we're still probably a quarter or two away from that kind of traction in the order activity – its – nothing has changed with regards to our focus. I think that again, I am encouraged by what I am seeing with regards to the activity level – the successes we've had in signing agreements on the GPO side. I think the order the multisystem order from VA System is certainly a visible indicator to me that that traction is going to come and but in the U.S. market specifically we're still probably a couple of quarters away from starting to see that traction kick in.

Perfect. And then just a couple of quick follow-ups. One on China, can you give us any sense for when you might have – might be able to talk about a more specific distribution strategy there? And then just one on the MLC, you mentioned that you expect to give an update on the next quarter call. That to me sounds like you are pretty confident that you have a design lock and will go to commercialization with this version of the MLC. Am I reading that correctly? And then I'll drop. Thanks so much.

Yes. Well I'll take your second question first. I think what we said in our prepared remarks is that we would be back to you by the end of our second quarter earnings call. So I would be thinking more in timeline terms of probably around end of the calendar year or I guess our call through Q2 probably will come by the end of January so that would be kind of the expectation vis-à-vis timeline on having some feedback on our MLC situation. Quite frankly we are excited about the MLC I think what we've said in our prepared remarks today echoes actually how we feel. We have good data coming off the internal bench testing. We have – we would not have gone to this evaluation quite frankly had we not felt that we had a device that could put in front of these customers in an evaluation sense so and feel good that we get to a good outcome with it. So its – I think all of that should speak to our confidence about momentum in the MLC discussion overall. And again, I can timeline in terms of feedback on our end around next steps and how what we take out of the evaluations feedback wise informs us on the next steps in commercial launch activities there. So the timeframe – let me go back to your first question, which is the timeframe for the China distribution strategy. We have been very active in China with regards to investments in commercial infrastructure, investments in marketing support and things are related to market development activities things like med affairs, the things that are pre-cursor types of investments to building a bigger business in a more robust commercial execution capability there. We probably have a quarter or so of time ahead of us before we'll have a better sense or start to see some of what we've been investing in start to bear fruit. But, I don't think we're more than a couple of quarters away with regards to seeing the tangible impacts of China start to kick in, in terms of the work we've been doing really over the course of the last probably three to four quarters.

Great. Thanks so much Josh.

And your next question comes from the line of Jason Wittes with Brean Capital. Please proceed.

Hi. Thanks guys. Can you hear me?

Yes.

Sure, we can Jason.

Okay, great. So couple of questions, one I appreciate the geographic breakdown for revenues; could you give us a similar breakdown for order rates this quarter and for the year?

We are not providing that information publicly Jason. Apologies that is not part of our SEC filings either.

Okay, fair enough. I just want to get a sense – I know that, Josh, you've spoken about being a couple of quarters away from the U.S., the VA's is obviously good example of traction. Can you just kind of give us a sense of how you're doing right now in the U.S. in terms – it sounds to me like it's still a very small percentage of the business and once you get up and running, roughly how much of the market you think Accuray will be competitive in?

I mean I think if you're talking about orders or revenue, I mean if you look at the information we released in the prepared remarks and our press release on a revenue basis the full year contribution from the U.S. was I think somewhere in the 41%, 42% range. We're not – again, we're not breaking down order activity by region I mean I think from any view at this point you probably admit and be willing to get aligned in the thought process with us that we've got certainly some, I'd say imbalance in terms of order strength and commercial execution momentum when you compare some of the regions of the world that we're really firing on all cylinders with from what we're seeing in the U.S. The U.S. situation is not related to products – the view of our products not being competitive; the view of our technology is not being able to compete effectively. It's quite frankly just – we are earlier in the sales opportunity funnel in terms of the U.S. market and we characterize the details behind that at a pretty extensive degree over the course of the last call. But, the feedback we're continuing to get from reference sites in the U.S. are very positive around TomoTherapy HDA. The feedback we’re getting around CyberKnife M6 from reference sites in the U.S. continues to be very positive. And I have a high degree of confidence that over the next couple of quarters we're going to start to see the kind of more granular traction that you'd expect with a growing degree of consistency in terms of sales momentum from the U.S. sales team.

Okay, fair enough. And then just a second quarter I realize TomoTherapy is still going to be the major driver even though it sounds like orders were roughly 50:50 CyberKnife, Tomo. But, we have noticed we have done a little bit of work on prostate and it seems like the insurance companies are now following some guideline changes pretty much open to CyberKnife for prostate, which is kind of a change that's happened over the last two to three years. Do you – are you seeing any impact on the marketplace yet, do you think this potentially is going to start driving more interest in CyberKnife?

I do. Answer is I absolutely do in terms of its visible impact in terms of momentum right now. I mean I would say in general what's happening is, there is a lot – there is a lot more interest or a lot more interest in conversation and in customers wanting to engage in dialog around the idea of CyberKnife as a prostate option. Given what's happened over the course of the last year, I think you characterized some of it. We have since the – about this time last year, or maybe early last summer we got the ASTRO position paper on early stage prostate and SBRT, I think we have eluded to the fact that we now have Medicare coverage, or a coverage in terms of CyberKnife for prostate cases through most of – actually all of the Medicare regions there is a growing number of commercial insurers that have stepped into the fray with positive and affirmative coverage decisions around CyberKnife and prostate. So it's a – I would say all of those factors are moving to drive a kind of – more of ground swell, we are just having an impact on customer perspective – customer interest. The opportunity for us is taking that interest and converting into bookings, which is – we are very, very focused on.

Jason, this is Greg. Let me just correct one thing that you said. In my prepared remarks, I said that orders increased 29% for the full year and that the growth rate was consistent between the two products not that the –

Oh, I understand.

Half –

My misread. I apologize. One last housekeeping question and I will jump out. And that is the legal charge this quarter, how much was it?

We are not disclosing that. We are under confidentiality agreement in the terms of our settlement.

Fair enough. I will jump back in. Thanks a lot guys.

And your next question comes from the line of Tycho Peterson with JPMorgan.

Thanks. Just thinking a little bit more I guess about the U.S. market. I know the single-vault market is a little bit further out in terms of the opportunity for you guys, but can you maybe just talk about when you think that starts to become more meaningful?

In terms of single-vault or specifically –

In terms of penetrating the single-vault market, yes.

Well, I mean, again, it's an N of one, but we talked about the placement of 500 Tomo system in a standalone freestanding single-vault location brand new cancer center in Scottsdale, Arizona. They certainly had the will, the financial capability to choose whatever product they wanted. And they also provide in addition to radio therapy services they provide medical oncology services in that location as well. But, I mean, I take that as again, it's a positive sign, I mean people are – if you look at the MD Buyline, customer feedback people are seeing TomoTherapy as – from a reliability standpoint, from a technical performance standpoint a much more viable option today than they did, 18 months ago or further back than that. We had some real challenges to go back to those timeframes with regards to getting people to give us even a window of opportunity to discuss this platform as a potential product for a single-vault setting. Today, it looks very different. But, again, it's the discussion around translating the interest into hard booked orders into the backlog. And so we got earlier stage opportunities that we are tracking in the U.S. funnel related to Tomo that some of which quite frankly are in single-vault settings. But nothing that – nothing that you can point out today that's going to be a – this quarter, next quarter kind of an impact.

And then I guess, you know, other end of the spectrum, the multisystem orders obviously, nice job with the VA, maybe can you talk about your line of sight to other multisystem orders, I mean you talked about Collimator Leaf, how much of that backlog for example includes multisystem orders right now?

Yes. So when you have what we have been dealing with and what we have been talking about over the last quarter or two, which is essentially a focus on growing the contracts portfolio which gives you essentially the hunting license to stark down that path of opportunity identification and really getting into the hunt in terms of competitive bidding situations. The step one is getting the contracts, step two is essentially doing the market activation and the contract – the contract activation and contract implementation work that it takes to start these other pieces moving. And that's the work that we have been really working on and focused on in the last couple of quarters. And I would say that in terms of thinking about it in the context of percentage of the backlog that's represented by that. I would really be thinking about it more in terms of what are the things that – will be able to report in the next couple of quarters that are similar to today's release things that we can point that become visible tangible wins that say that this strategy we deployed is working. And so I'm excited about where we are at with this, we are growing, the opportunity and the need, I have no doubt that these are activities and pre-cursor work and pre-cursor activities that will drive sales momentum downstream. Again, in the U.S. market we are probably still a couple of quarters away.

Okay. And then just on the SG&A, the incremental step-up, I know you don't want to call out the magnitude of legal settlement, but you also called out incremental service infrastructure spending. So can you just give us a sense as to whether the bulk of the SG&A step-up was tied to infrastructure on the service side or the legal settlement?

So service expenses are captured above the gross profit margin. So they are not part of SG&A. So the characterization of the other expenses that contribute to $43 million total OpEx number are mostly timing related to marketing spend and sales compensation. These were expenses that we had expected to incur earlier in the year that happened to wind up in the fourth quarter pushing the total number up in addition to the legal settlement.

Okay. So you pulled forward some sales and marketing spend then?

They just based on the activities and the way that the sales compensation plan was written those expenses were properly booked in the fourth quarter.

Okay. Thank you very much.

Thank you.

(Operator Instructions) And at this time, we are showing no further questions. I would like to turn the conference over to Josh for final comments.

So I want to take a moment to thank the 1000 plus Accuray employees around the world for helping drive the company's success in fiscal 2014 and enabling the company's ongoing turnaround. For everyone listening in today, thank you for joining us on this afternoon's call, as a reminder, this year ASTRO is September 14 through the 16 here in San Francisco and we hope to see some of you there. We look forward to talking with you again on the fiscal 2015 first quarter call. Thanks very much.

Ladies and gentlemen, that concludes the conference. Thank you for your participation. You may now disconnect. And have a great day.