Good Day, and welcome to the Accuray First Quarter Fiscal 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. I would now like to turn the conference over to Joe Diaz from Lytham Partners. Please go ahead.

Thank you, Rocco, and good afternoon to everyone. Welcome to Accuray’s conference call to review financial results for the first quarter of fiscal year 2021, which ended on September 30, 2020. During our call this afternoon, management will review recent corporate developments. Joining us today’s call are Josh Levine, Accuray’s President and Chief Executive Officer; and Shig 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. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are set forth in the press release we issued just after the market closed this afternoon, as well as in our filings with the Securities and Exchange Commission. 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 as a result of new information or future results, 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 request that participants limit themselves to two questions and then requeue 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 first quarter refer to our fiscal first quarter ended September 30, 2020. With that, let me turn the call over to Accuray’s President and Chief Executive Officer, Josh Levine. Josh?

Thanks, Joe, and thank you to everyone for joining us today’s call. I’m joined today by Shig Hamamatsu, our Chief Financial Officer; and Suzanne Winter, our Chief Commercial Officer and Head of R&D. Accuray’s fiscal 2021 first quarter performance continues to reflect the positive momentum our business is making, despite the headwinds created by the COVID-19 environment. Our commercial team around the world continues to adapt and make the necessary adjustments to successfully compete at a high level, even in the face that a number of key markets continuing to be impacted by travel and customer access restrictions, as well as bunker construction and related installation delays. Validating our ability to execute in these challenging times, revenue for the quarter came in at $85.3 million, and we generated positive operating income of $5.5 million. This represents the fourth consecutive quarter that the Company has generated a positive operating profit, as we continue to demonstrate operating leverage that we expect to position us well in a post-COVID environment. Gross order volume for the quarter was $51 million, which was substantially down globally versus Q1 of the prior fiscal year, although at the regional level, our EMEA and Japan regions both showed solid order growth, during the quarter. The overall order result in Q1 was not unexpected. As we have communicated in our year-end FY20 earnings call in August, we highlighted the tough comparisons to the prior year, driven by the realization of the first phase of Type A orders in China in the first half and a large multisystem order from our Latin American business. Going forward, we are focused on ensuring the safety of our employees and meeting our customers’ needs to ensure that we maintain our overall customer responsiveness. I want to thank the entire Accuray team for their…

Thank you, Josh, and good afternoon, everyone. I’ll begin with some additional details on our financial performance for the first quarter, and then focus on some highlights for the period. Gross orders for the first quarter were $51 million as compared to $78 million in the prior year. The year-over-year decline in gross orders can be attributed to three factors. First, as we had anticipated, we saw a decline in China Type A orders, due to the challenging comparables to Q1 last year. I’d like to remind you that Type A orders received in the prior year reflected significant pent-up demand from our end users and legacy distributor TomoKnife, which was triggered by the announcement of Type A quota back in 2018, as most of the orders related to the first phase of 50 Type A licenses awarded to Accuray systems have been already received prior to the start of this fiscal year, we anticipated a decline in Type A order activity. Looking ahead to the second quarter, our prior year second quarter gross orders included $28 million of Type A of system orders, which were not -- which are not expected to recur in the second quarter of this fiscal year, for the reasons I just stated. In addition to China, the first quarter presented a tough year-over-year comparison from a gross orders perspective for the Americas region as the prior year included a $8 million multisystem order from South America. Lastly, we did see some expected headwinds due to the pandemic, particularly in the U.S. region, which has affected the timing of order placement. Despite the challenging year-over-year comparison for China and the Americas regions, we did see strong order growth in the EMEA and Japan regions where orders grew 4% and 14%, respectively. From a product mix…

Thank you, Shig. Even with the uncertainties created by the COVID situation, we are encouraged by our Q1 operating results. We’re demonstrating daily that we have the ability to successfully adapt to this new external environment, and we are excited about our future. I want to thank all of our employees across the globe for their energy and the contributions they’re making to support our customers and their patients, during these unprecedented times. And with that, we’re ready to open the call up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Josh Jennings with Cowen. Please go ahead.

Hi, guys. This is Neal [ph] on for Josh. Thanks for taking our questions. First question just on ClearRT, just wondering how does this technology advance your efforts, providing clinicians an adaptive radiation therapy solution? Anything you can share there in terms of what steps are made to get to complete a adaptive offering, and how big of a step ClearRT is in that direction?

I’m going to late Suzanne Winter take this question.

The ClearRT, Helical kV introduction that we’ve done here at ASTRO, we think is a significant step forward, especially in the realm of imaging. And imaging is at the heart of adaptive therapy. We have the advantage at the core, our Tomo Radixact platform is basically a CT system with a slip ring design. That allows us to be able to do full 360 degree helical imaging. And so, what we’re bringing to the table here compared to what is available on the market from cone beam CT is much better visualization of low contrast images, very low noise, low scatter, compared to cone beam, cone beam CT, the best imaging is really at the center of the image. Once you move beyond the center, you start to lose your image quality. There is the largest field of view at 50 centimeters from an axial standpoint, and from a longitudinal standpoint, 1.35 meters, again significantly longer than what is available in the market. And so, our competitors have to stitch together their images. And so, there’s interpolation of data. So, ultimately, what we’re bringing to the market is not only uniform imaging, but fundamentally, the images and the image data is higher fidelity, which ultimately goes into dose calculations, which ultimately translates into accuracy. And ultimately, that’s what you want, especially when you are doing ultra-hypofractionated treatments, you want the highest precision possible. So, we do believe what we are bringing to the table is much better than cone beam CT, and we are on the path to providing imaging from a soft tissue contrast, closer to diagnostic CT. And we’re continuing the investment, again to even get as high as competing with MR type resolution.

Great. Thank you for that. And then, I just had one follow-up. Just wondering if you could share with us your views on the tailwinds and also the headwinds I guess associated with the Siemens and Varian combination and how that could impact Accuray’s success.

So, we’ve been public in these comments and these thoughts in the previous quarter. But, in the near-term, Neal, [ph] I think, the answer is that there’s likely to be some short to intermediate-term disruption as the two businesses on that end come together. I actually think that we might have benefited from some of that in the two regions that we’ve highlighted in the prepared remarks today, specifically APAC and -- I’m sorry, EMEA and Japan, which were strong performers for us order generation wise. I think Varian reported down comparisons in those regions. And I think that that might reflect some of the early disruption, if you will, or distraction factor, call it, in the coming together those two businesses. Longer term, I think the jury is still out. I mean, the bottom-line is that a combined company is going to have to create a value proposition that makes sense for customers without really asking customers to do dramatically different things from a workflow standpoint. And I’m not sure that that’s going to be easily obtained or achieved. So, again, we’re closely watching this and following it. But, I think it’s too early to say. We are excited about the things we’re doing from a technology standpoint. I think, if you fast forward a year from now, two years from now, I think that the products and the upgrades that we’re launching innovation-wise, right now, are going to be game changes for our product and portfolio positioning capabilities. And I think, the feedback we’re getting from customers concurrent with this week’s feedback from the ASTRO meeting, gives us significant confidence to what I just described.

And our next question today comes from Brooks O’Neil from Lake Street Capital Markets. Please go ahead. Brooks O’Neil: Good afternoon, everyone. Congratulations on the new Type A orders in China and the solid quarter overall, I thought it was very good in light of COVID. So, I have a couple of questions. The first one is, what is it exactly that triggers the revenue recognition on the Class A licenses in China? And maybe, why is it you’re confident you’ll get to be recognizing revenue in Q2? And then also on China, I was hoping you could say something about what you’re hearing and the Type B opportunity and the status thereof?

Yes. Hey, Brooks. This is Shig. I want to take first question on the process and timing of revrec, and maybe I can pass the Type B to Josh, maybe. So, the -- as we talked about in the past, the first step of the Type A revenue recognition that our end user had to get the license, which as you know, has happened a year ago with the 50 license wins. And in addition, Josh talked about the recent 24 additions to that. And the next step, after the end user receives a license, is they have to go through tender process, which we’ve been talking about for a good part of last one year. So, the reason that we are gaining confidence in terms of starting the first of the revenue recognition coming out of the first 50 in Q2 is because of the progress that we have seen out of China that the end user with the license can start to purchase. So, that’s why. So, we’ve seen that news out of China. And before I pass the question back to Josh on Type B, one clarification, that 23 -- I’m sorry, 24 new Type A licenses granted to Accuray systems in the recent new that Josh mentioned in his prepared remarks, those are not orders, we’re just letting you know that there was announcement from Chinese government that additional 24-licenses have been granted to Accuray systems. So, those are not orders in Q1 or as I said in my prepared remarks, we’re not expecting to receive orders for those in Q2 either. So, I just wanted to make that clarification. Brooks O’Neil: Thank you. I appreciate that.

I’ll give it to Josh, for Type B.

Brooks, the Type B, as you’ve heard us say in the past, the Type B product opportunity in China really truly represents, while there were different segments inside of Type B, overall, we believe it represents about 80% of the market opportunity in the country, which as you know, by any benchmark or comparison is a big, big number. And we think that the opportunity here for us, as we talked about in the past, is unique because of the go-to-market strategy that we’ve deployed, which is, having a manufacturing partner on the ground there in the form of China Isotope and Radiation Corp. that is able to operate at scale. They have the advantages of being a state owned entity and quite frankly, give us market visibility to things that we might likely not have had visibility to if we were standalone trying to go it alone. They have a significant position in the radioisotope business, like 70% market share in their core business and active selling relationships in somewhere between 8,000 and 9,000 hospitals throughout the country. So, their market access -- what they help deliver for us or create for us in terms of market access is not insignificant. And, last but not least, the fact that we’re going to be producing a product in Tianjin that is going to be essentially an epic Chinese brand. It’s a local branded product built locally, which is really aligning with what the government wants that happen around Made in China 2025. It basically -- this is a high technology product area that the government wants and is certainly supporting local domestic capability in market access for. And again, we think that the relationship we have with CIRC positions us well for this. We’re going through BIMT testing right now, which is in-country testing and validation for the product that we’re going to be producing in Tianjin. And we think we’re still on schedule for a product release produced in Tianjin sometime roughly in the 18-month timeline or window, from right now. Brooks O’Neil: Great. That’s good. I’m just going to sneak in one more. I am curious, if you could help us to understand if you believe you’re better positioned than competitors to benefit from the RO-APM, and maybe you could just elaborate on why or why not. Thank you very much and again keep up all the good work.

Thanks, Brooks. The RO-APM is a model that essentially puts a premium on value, and value being defined by speed and overall efficiency of treatment, as opposed to where the market has been in terms of prior reimbursement methodology, which paid people based on the number of treatment sessions or fractions that were being employed to treat a patient over an entire regimen. Going forward, the 16 most frequently performed, in terms of procedure volume disease sites with radiotherapy are being grouped into this model in a form that will encourage the use of shorter treatment regimens, both hypofractionated treatment regimens and ultra-hypofractionated treatment regiments, utilizing much more of a heavy mix towards a stereotactic body radiotherapy or SBRT than previously. And when you think about our product offering and portfolio, we are in the sweet spot across both, CyberKnife and the Radixact platform of the heart of what the RO-APM is encouraging. It’s encouraging higher dose over fewer treatment fractions with a minimum of side effects and things that would be detrimental from a patient overall efficacy standpoint, safety standpoint. Both our platforms are ultra-precise, ultra-accurate, and have the benefit of Synchrony, which in our view is kind of -- to some degree is a failsafe with regards to providing clinical confidence around being able to increase dose and do it safely. And so, we think we’re as well-positioned as anybody, if not more so, given the direction that the reimbursement environment’s moving in.

And the only thing I would add to that is, at the recent ASTRO, we had 44 different clinical presentations, posters, oral presentations on -- with the focus on the use of hypofractionation and ultra-hypofractionation, because we were the pioneer too. We have the longest follow-up data that’s been reported on safety and efficacy. So, we do think we’re well-positioned.

And the next question today comes from Marie Thibault with BTIG. Please go ahead.

I want to start here on China, wanted to see if, quantitatively, you could size up the revenue opportunity. My notes have you having said this -- the first tranche of Type A orders would be about $115 million in terms of revenue recognition. So, I wanted to double check that that was still true. And then secondly, I know, it’s early, given the recent announcement of the second tranche, but wondered if you could size up what that would mean and eventual revenue amount, how many millions that those systems are worth?

Yes. So, Marie, thanks for the question. I’ll take the first part. So, your recollection on 115 is correct. And that number represented the system revenue for the first 50 Type A licenses we won back in, I guess, about a year ago now. And so, that is still correct. In terms of the estimated system revenue value, again, to Josh -- as Josh described in his script, we’re expecting first wave out of that one 115 to start in the second quarter we’re in right now. And we believe that that 115 gets recognized over the following 18 to 24 months. So, hopefully, that gives you the sense of the pace and cadence of that amount. And I’m going to pass the second part of the question to Josh here.

Marie, just some additional color on this. We recognize that it’s a hard and at times, confusing kind of backdrop to piece together what is first tranche, second tranche, where does the first tranche end and the second tranche pick up. I think that the important takeaways here are pretty simple and straightforward. And they are first and foremost that we’re continuing to win -- our devices are continuing to win at a very, very high level of the Type A licenses that the MOH and National Health Commission are distributing to end user hospitals. That’s point one. Point two is that the visibility that Shig talked about before with regards to the tendering process being complete. We have been waiting, as Shig just pointed out, it’s almost the better part of a year, no one is more frustrated by the delay here than we are, maybe other than you guys. But, quite frankly, that tendering process and the bidding process related to the tender is complete, in at least in that first wave, the first 50 licenses that we talked about. And what that means is customers are basically now in a point where they can execute paperwork, execute contracts, and schedule installation of equipment. And so, that’s the kind of the trigger here in activation, if you will, that gives us the confidence around revenue conversion, starting to become visible in the current quarter. We really are trying to focus more now on -- given what I just described, on just execution of the revenue conversion. Basically the Type A license unlocks our revenue conversion process, given the fact that the tendering and bidding process is now complete. And we’re pretty excited about the fact that we’re continuing to see a win rate that’s consistent in the second tranche -- that’s consistent in the second tranche, with the level that we’ve been generating in the first and the initial tranche. And so, we will be able to provide perhaps the more detail, with regards to impact order activity at down the road, but at this point given the fact this is news, that’s really not even 48 hours old at this point with regards to the second round, win rate, we’re kind of digesting it and trying to understand the impact on the ordering.

Understood. Okay. We will wait for that update, great. I want to skip over here to the neurosurgery opportunity. Glad to see that announcement yesterday, and then the discussion at ASTRO earlier this week. I wondered if you could size up for us what that market means actually, in terms of opportunity, kind of addressable market and possibly timelines on when we might start to see some of the start to hit the business. Thank you so much.

Hi Marie, it’s Suzanne. Yes. So, I think, we think of the neuro-radiosurgery marketing two different -- opportunity, actually in two different parts. First, is an immediate replacement opportunity, again, there’s an aged install base of Gamma Knife, as well as still some Novalis systems that are out there. I would say, in total, that’s probably about 500 units globally. And even at a conservative way of looking at it, assuming 10% of these would move to our more of a shared system, between radiation oncology and dedicated neurosurgery, I think that translates to about 150 million to 200 million, at least in the short-term. I think, the longer term opportunity, and you heard a little bit about this at investor day, is the opportunity to take radiation therapy into treatment of movement disorders. And you heard Dr. Chris Loiselle from Swedish Medical Center, talk a little bit about the use in essential tremor. And again, that opportunity right now, if it’s refractory to pharma therapy, they go for deep brain stimulation. And, there’s still a number of issues associated with that. So, I think, -- and the prevalence is 5% of the adult population, and it gets more severe as you age. So, we think there’s a real opportunity here in therapy penetration. And we haven’t put the market potential on that at this point. But, we will continue to work with clinicians to see what the potential is in terms of translation into system purchases, moving forward.

Very helpful, Suzanne. Thank you so much.

[Operator Instructions] Our next question comes from Anthony Petrone with Jeffries. Please go ahead.

Thank you, and good afternoon. I hope everyone’s doing well and staying healthy. Maybe Josh and Shig, a couple of questions. One would be -- and we’re just hopping around calls here, so I apologize if you sort of touched on these. But, one would be just with the COVID resurgence, and sort of when you think of hospital preparedness, and how they may be thinking about the next few months, is that changing the conversation around capital equipment adoption, and specifically, radiation therapy? Have you noticed any of those trends in any of the key geographies? And then, maybe just to get your views, again, on push-out of the radiation bundle in the U.S. Obviously, there’s a debate as to whether that’s a headwind or a tailwind. It’s now pushed into the middle of next year. So, your latest thoughts there on the push-out of the radiation bundle, and whether or not that’s a tailwind for capital adoption?

Yes. Thanks, Anthony. COVID-19, there’s no question that the intensity of the COVID situation is it continues to be pretty variable by region. That’s not necessarily changing. It is -- quite frankly, it is ramping up in terms of intensity. You heard both Shig and I talk in prepared remarks about COVID headwinds in certainly the U.S. market. And I think that that’s very visible at this point. I think also, Western Europe, maybe not every one of the eurozone countries are markets, but certainly, France, Germany, Italy, and Spain remain, I would say, at risk as well. Interestingly, with all of that said, we saw good order generation in EMEA in the quarter, which again, maybe we’re splitting here share on timing. Certainly France and Germany have announced in the last day or so that they’re going to more restrictive kind of environmental precautions. But, we’re not seeing orders cancel out of the backlog related to COVID. I don’t think there’s any question though, that in, again, the selected markets that I just talked about, U.S. being one, markets in Western Europe, the other, we would anticipate that there would be some slowdown and some impact from an order ramp standpoint. We’re not hearing directly from any hospitals that they’re going back to where they were back in late spring or early summer with absolute lockdowns, and other procedures essentially being turned off. So, I would say that there’s no visibility to those severe kind of decisions being made, again, at this point, which I think is a good thing. But again, this is -- it’s a day-by-day situation. I wish I could give you a high degree of confidence or predictability around where we’ll land, 6 months, 12 months from now. But, I think, we’re going to be…

Thank you so much.

And our next question today comes from [indiscernible]. Please go ahead.

On the EBITDA, lots of puts and takes in the first quarter, things that were sort of absent. Can you give us -- but can you give us any sense for -- I know, you don’t want to guide, but any sense at all around how atypical that $9 million is? Any sense maybe for if we have a similar level of revenue in 2Q, what the EBITDA puts and takes might be?

Yes. Ryan, I appreciate the question. And, I’m not going to be specific about that. But, let me try and keep us from color to help you think about this. So, first quarter historically has been lowest quarterly OpEx quarters. So, part of it is that. And also, as I said in my remarks that this year the ASTRO expense shifted from this past quarter, Q1 to Q2. So, you’re right, there’s some puts and takes. But, I think, if I think back about -- I know you’re asking about EBITDA but from OpEx perspective, coming out of Q4 last year, I said $33 million quarterly run rate on OpEx is something that I’m comfortable with, looking forward. So, I would still say the same thing. Even though Q1 was more like a $30 million, I think on an average basis, $33 million of OpEx is a good place to be from my perspective. On top of that, I think, we’re hovering around 40% gross margin for last few quarters. I see that being somewhat of a consistent area that we can probably produce. So, hopefully, gross margin, OpEx run rate give you enough sort of hint to kind of sort of help you model a little bit, without my giving you guidance in any way here, and you just need to lay in the revenue, so to speak.

Thank you, ladies and -- sorry. Thank you. I was just going to close out the question-and-answer session and turn the conference back over to Mr. Levine for any final remarks.

Thank you, operator. Thanks everyone for joining us this afternoon. We look forward to speaking with you again in January, when we present at JP Morgan’s Annual Healthcare Conference, and later on in January, when we report our fiscal 2021 second quarter results. Thanks very much.

Thank you, ladies and gentlemen. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.