Good afternoon, and welcome to the Accuray Third Quarter Fiscal 2022 Financial Results Conference Call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Ken Mobeck, Vice President, Finance. Please go ahead.

Thank you, Gary, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the third quarter of fiscal year 2022, which ended March 31, 2022. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Josh Levine, Accuray's Chief Executive Officer; Suzanne Winter, Accuray's President; and Brandy Green, Accuray's Interim CFO and Controller . 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. 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 as a result of new information or future events except to the extent required by applicable securities law. Accordingly, you should not put undue reliance on any forward-looking statements. A few 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 third quarter refer to our fiscal third quarter ended March 31, 2022. Additionally, there will be a supplemental slide deck to accompany this call, which can be accessed by going directly to Accuray's Investor page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Josh Levine. Josh?

Thanks, Ken. And thanks to everyone joining us on today's call. I'm joined today by Suzanne Winter, our President; and Brandy Green, our Interim CFO. Accuray's fiscal 2022 third quarter performance continues to reflect the healthy demand environment we are seeing globally, which has been primarily driven by strong interest in the most recent innovation upgrades on our Radixact platform like ClearRT, our helical kVCT imaging system and Synchrony, our motion compensation and automated target tracking technology. These unique innovations and the resulting functionality improvements that they represent, have made Radixact a true workhorse product with leading edge, clinical case mix versatility. These functionality improvements have had strong year-over-year revenue growth impact for Accuray and fiscal 2022. For the quarter, like many of our capital equipment peers, our operational results reflect the continuation of operational headwinds and associated costs from macro market factors, including global supply chain and logistics issues. Brandy will provide be providing greater detail in her prepared remarks about the collective impact of these factors on the quarter's results. We believe Q4 will remain challenging in terms of the intensity of part shortages and logistics headwinds. And we will continue to see pressure on service margins. With that said, our teams are working cross functionally to preserve production capacity and identify and mitigate risks to stay ahead of supply gaps that could impact production. And now I'll turn the call over to Suzanne for some more details on commercial highlights during the quarter.

Thank you, Josh. We delivered solid top line performance for the quarter and our Q3 results represent our sixth consecutive quarter of delivering of above expectations in both orders and revenue. Looking at our first nine months of FY2022, we have delivered 14% growth in orders and 12% growth in revenue versus last year. We continue to see the strength of customer demand for both CyberKnife S7 and Radixact TomoTherapy platforms and the growing recognition by customers that Accuray technology provides a new standard of accuracy and precision compared with conventional C-Arm Linux systems. The market is adopting the use of ultra-hypofractionated stereotactic body radiation and stereotactic radiosurgery, or SBRT SRS treatments. We estimate that currently less than 20% of worldwide radiation therapy procedures are using ultra-hypofractionated treatments, but that number is expected to grow significantly over the next several years. These treatments are changing the way radiation therapy is delivered to patient, as it delivers a more powerful dose of radiotherapy and only one to five treatment sessions versus 35 to 40 treatment sessions with conventional radiation therapy. This represents a paradigm change offering significant patient benefits and additional treatment options for providers and reduces overall healthcare costs with a focus on value over volume. As discussed in previous earnings calls, the ability to deliver ultra-precise SBRT treatments vary substantially across commercially available radiation therapy platforms. Any error in the precision or accuracy of the treatment plan or delivery can have a significant impact on long-term patient outcomes and their quality of life, especially given the higher dose delivered over fewer treatments. The ability to see more, to distinguish tumor from healthy tissue enabled through superior ClearRT helical CT imaging, in addition to the ability to adjust the treatment beam to the tumor or patient motion continuously and in…

Thank you, Suzanne, and good afternoon, everyone. Accuray has delivered a good quarter while continuing to navigate notable supply chain and logistics challenges. We are pleased with our ability to stay nimble during this changing environment. Gross orders for the third quarter were $88.6 million, a 4% sequential increase and a 1% increase over the prior year period from innovation driven order momentum. As mentioned last quarter we anticipated smaller year-over-year gross orders expansion for the second half of the fiscal year. From a product mixed perspective, we saw stronger demand for our CyberKnife platform accounting for 57% of growth orders dollars for the quarter with a TomoTherapy platform accounting for the remaining 43%. During the third quarter we had approximately $2 million of net cancellations, which represents 2% of total new orders for the quarter as compared to $8 million in the same period a year ago. We ended our third quarter with backlog of $580.4 million representing a decrease of 5% from March 31, 2021. Now turning to the income statement. Total revenue for the third quarter was $96.2 million representing a 6% decrease over prior year. For the first three quarters of 2022 revenue was $319.9 million, up 12% over a prior year representing strong customer demand for product innovation. Product revenue for the quarter was $43.2 million, a decrease of 9% compared to the prior year. For the first three quarters of 2022 product revenue was up 30% as compared to the same period a year ago. Product demand remained strong. However, supply chain constraints on key components drove delays on finished good shipments for the quarter. From a product mixed perspective, CyberKnife accounted for approximately 22% of revenue unit volume in the quarter, while the TomoTherapy platform accounted for the remaining 78%. As a remind…

Thanks Brandy. Concurrent with our fiscal Q3 earnings press release we also put out a press release highlighting two important leadership transitions; one at the CEO level, and the other at the CFO level. In that press release we announced that I will be retiring as CEO and resigning as a Director of the Accuray Board effective at the end of this fiscal year ending June 30, 2022. Suzanne Winter, Accuray's President will lead the company as the new CEO effective July 1, 2022. This transition is the culmination of a well-planned and thoughtful succession plan that began at the start of the year with Suzanne's promotion to President. I have come to know Suzanne as a strong strategic partner and a high impact results-oriented business leader over the past 2.5 years, and I know the company will be in good hands under her leadership. At this time, I also want to thank Brandy Green for the significant contribution she made during the period of time that she was in the Interim CFO role essentially doing two jobs on a full-time basis. Her commitments to the company and the personal sacrifices she made during this period deserve the highest recognition and thanks. On a personal level, it's been a true privilege over the past 9.5 years to lead this organization. I've had the opportunity to work with great people at all levels within Accuray and collectively focus our efforts on ensuring that patients get the best radiation therapy treatments available. I am proud of the impact we've had on the lives of so many cancer patients around the world. And now I'd like to turn this back over to Suzanne to discuss the CFO transition.

Thanks Josh. Before I make my final comments, I also wanted to announce today our incoming CFO, Ali Pervaiz. Ali came to Accuray two years ago after having spent 15 years at GE and GE Healthcare in the finance organization, including as Chief Finance Officer for GEs Diagnostic Imaging and Life Support Solutions Businesses in the U.S. He brings strong operational experience and large capital equipment, healthcare, technology and has driven bold margin expansion and operational excellence initiatives during his tenure at GE. Finally, I am deeply honored to have the opportunity to succeed Josh and lead Accuray into the next chapter and build on our vision of building a better future for patients that have been diagnosed with cancer or certain neurological disorders. I'd like to thank the entire global and passionate Accuray team for their continued focus and commitment, providing the highest level of service to customers and the patients we serve. We are executing our growth strategy and continuing to build a foundation for long-term sustainable revenue growth, margin expansion with increased value creation for all of our stakeholders. With that we'll hand it over for Q&A.

[Operator Instructions] Our first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Good afternoon, everyone. I think the best way to say this is congratulations to you all. I think this opens the door for everyone having [indiscernible] in the future and I couldn't be more excited for the company and for each of you. So, my first...

Thanks Brooks.

Sure. Sure. My first question and my biggest question is Suzanne, I don't know if you've thought a lot about it. Maybe you have, but what would you say are the two or three biggest priorities you have as you assume the CEO job at Accuray?

Thanks for the question, Brooks, and thank you. Yes. My priorities over the next 60 days are to ensure that we have a very smooth transition between Josh and myself. Then my priority is really building on the foundation that we have started to build and continue to strengthen our fundamental. We absolutely have to execute on the important milestones that we have, not only on our innovation pipeline, but all of our growth initiatives so that we finally deliver on our financial performance in preparation for going into FY23. And as we get further on and at our earnings call, I will be laying out more of our growth plan and areas of focus for FY23 and beyond.

Great. That's very helpful. And then I guess the second question, obviously concerns about the environment in China, given the lockdowns and the recent COVID experience there. Do you perceive any fundamental change in the overall demand picture for Accuray equipment over the next few years? Or do you see the current situation as likely temporary or transitory and we'll get through this and move on with the program?

We think it's temporary. And we are very close communication with our team on the ground, and despite the, I think stringent policy going on in Shanghai and potentially moving on to Beijing, I think the feeling on the ground is that it is temporary. Business is still being transacted and we're certainly seeing that we saw this quarter with our orders and revenue performance. There may be some slowing in China expected in Q4, but in general we're on track for significant growth out of this sub-region for the year. We have customers also that have Type A licenses in hand that have already gone through the bidding process and the team feels confident. These are going to go to revenue once – once some of the restrictions lift. That being said, I mean there are some headwinds that we are feeling as a result of the shutdowns. One of them is our – some of our orders that are aging out that are in our backlog, but again are underscored by licenses from the central government but aging out of the backlog. We do have an impact on the NMPA regulatory submission for our Type B product. So that's slightly delayed just because we – we're waiting to get an inspector onsite to complete the report so that we can submit to NMPA. But again, we see this as being temporary overall and I think that's a good thing.

Hey, Brooks, I agree. I concur with everything Suzanne has said. If there's one thing, we've learned over the last several years, we don't control the cadence and the timing of things in China, right?

Right.

I mean it's just – it is what it is. I will tell you that I don't think there's been any change in the overall demand for our products. And I think that while these things are – they're frustrating from a delay and a timing standpoint, I would encourage our investors to realize that through three quarters of this year, we've got 6$ million in incremental revenue in China that we didn't have quite frankly before we implemented a strategy, put the JV in place and started down the path strategically to be a bigger company in China. And obviously not rely on that alone, but it is even with the delays and even with the frustrations, it is contributing in a meaningful way to the company's growth trajectory. So, the timing is the timing. We can't control what we can't control, but I don't think that we're in any, any different level of opportunity overall than we've been – than we've been from the outset, and I think the future there for us is very, very bright.

That's great. Thank you very much, again congratulations to you all.

Thanks, Brooks.

Thanks Brooks.

The next question is from Marie Thibault with BTIG. Please go ahead.

Hi, good afternoon. Josh, congrats on your retirement and thanks for the, the years of discussion and help to us over the years. And Suzanne, congrats on the new role; we're looking forward to working with you.

Thank you, Marie.

Yes. I wanted to start here maybe on the demand environment, you mentioned a healthy demand environment globally and then broke it out sort of by geography sounds like America and APAC have been very strong, but a little bit of uncertainty in EMEA. I wonder if you could dig into each of those a little bit more. I know you just gave us a lot of detail in China but some of those other geographies as well.

Yes. I mean, I think again we're seeing the strength in the Americas, partly due to the investment that we've made in our commercial infrastructure in the U.S. We are seeing very strong pipelines for demand and customer demand for some of the new products that we've introduced. So, we are encouraged by that. Again, China has been very, very strong for us and we continue to see strength there. Japan has been strong for us in year-to-date. They're up 10% from an order standpoint. I think the EMEA, the European area has been a little tempered in their growth. I think it's not because they're a lack of activity, but I think the sales cycles have been increasing and partially due, I think, you know, to some of the unstable environment as a result of Russia, Ukraine, and just some conservatism in making capital equipment purchases.

Okay. That's helpful. And then maybe my follow up here on supply chain headwinds. You certainly talked to us about this last quarter, and it sounds like indeed the constraints are impacting some ability to a meet demand. Do you have a way to size the sort of impact from that constraint here in the fiscal third, what you imagine it might be in the fiscal fourth and whether your visibility allows you to look beyond kind of midyear and how long some of these headwinds might last, understand that's very difficult but appreciate any insights there? Thank you.

Yes. I'll start and then I'll hand it over to Brandy. But I think that we obviously saw some – some challenges in Q3. We expect they'll be similar in Q4, and we think we're going to see them through the end of the calendar year. At which time we think that the supply chain will start to catch up. And just in terms of mitigating inflation, there are obviously things that we are doing to mitigate inflation, but we actually think that we'll start to see relief in the second half of our fiscal year, as we will start phasing in new material from new lower cost suppliers. And we also think we'll get some sourcing productivity in the second half after the year. So that's at least the timeframe of what we're expecting. And then, I'll have Brandy give a little bit more color.

Yes. I think Suzanne, you said it very well. We've seen between 1% and 2% inflation. If you look at a year-over-year 5% inflation on some of our parts cost, but as far as supply challenges, I think Suzanne is absolutely right that we do expect this to release and we're leaving the – in the back half of FY23.

Thank you.

The next question is from Josh Jennings with Cowen. Please go ahead.

Hi, thanks for taking the questions and have to pitch in my congratulations, Josh to your retirement and look good luck to the next chapter. And Suzanne and Ali congratulations on your new positions, it's great news. And we're looking forward to tracking the progress of Accuray under your leadership. Wanted to ask two follows on China and the first one just being on agents. And I think you talked a little bit about some agent dynamics. I apologize I just didn't catch them fully. You could review those and then just help us understand how we should be thinking about agents particularly in the China market over the next 12 to 24 months? May be a little bit murky with everything that's going with COVID in the near-term, but it'd be great to get an update there? And then also, I think just to review, I just wanted to get clarification on how Type B systems manufactured by the Chinese China, JV, how orders and revenues flow through, through the A&L reporting the P&L but also the new order reporting. Just want to be clear in terms of because we're getting closer to the finish line here. I know it's pushed out a little bit, but that would be –that would be great? And I've one follow-up after.

Okay. So, Josh, let me take your second question first, which is more on the timing on the Type B product and just from what we can sort of see at this point. It takes between 10 to 12 months to get an MPA approval. Once we submit again, we need – we need the COVID lockdown to lift before we can get that final registration. So, at this point we are thinking that orders and revenue will start to show probably Q4 of fiscal year 2023, a year from now. Now that being said, we are still proceeding and on track to do a market introduction in the fall of this year, so late August calendar year 2022 at the major shows in China. So that at least the system will be introduced to the marketplace, people can start budgeting and putting it in their sales process, but we can't take an order or ship for revenue until we get NMP approval. So, we're expecting the contribution Q4 of next year.

It's great. If you don’t mind trying to interrupt, but just to refresh us on just some of the ASP metrics, we should be baking into our models, because one of the things we're trying to do is just give Accuray credit in our forecast for this China JV officially, and just wanted to make sure we were doing it appropriately and having the right numbers in our models. But particularly, ASP assumptions and just making sure that Accuray would capture that full ASP in the new order update, as well as on the revenue line when those orders are converted installed and converted to revenue.

Hey, Josh, you know what, we really haven't been for a variety of reasons mostly competitive reasons, we haven't been very forthcoming with target price point, target ASP information. I think we would feel comfortable in getting a little further downstream closer to better clarity around the understanding of NMP approval timelines. Once we have approval, we will be ready to start producing product very, very quickly. And so, there is no lag there. But I think for competitive reasons it would be our opportunity or our best approach to kind of keep that close to the vest so that competitors are not having a chance to do something with regards to a preemptive kind of discussion in any way. And so, as soon as we're there, you'll have the best information to be able to build out your models, I promise.

Understood. No, thank you for that. Thanks, Josh.

And then Josh, for the first part of your question, which was timing on the agents, I think, that's a bit murky at this point. But again, the good news is we know of our customers that have their licenses in hand, we know who has gone through the bidding process. And so, once things open up, I think, we'll get an idea of quarterly phasing and be able to help more with your models.

Great. And just in terms of thinking about agents, I mean, those agents will convert right to revenue. Correct?

Correct.

And then we'll not pack the backlog, right. Thank you.

That's correct. That's right.

And then lastly, just as we, I can't believe we're going to be in May next week, but [indiscernible] then right around the corner in just a few months, but just wanted to level set our team's expectations and we're getting more and more excited about online adaptive and all the work that you are doing with RaySearch and internally. But just any level set in terms of expectations on the update for progress on adaptive at ASTRO this year? Thanks for taking all the questions.

Yes, thanks for that question. Actually, we're within weeks of going to ASTRO in Copenhagen, so that's the European meeting and then ASTRO in the fall. And at ASTRO we're excited because we are going to be showing in partnership with RaySearch a sneak preview of our online adaptive using the ClearRT as input. So, we're already booked out for that meeting as well. So, we're excited about the response. So, we'll be talking about our online adaptive. At the same time, we also have a very full agenda of clinical abstracts that are going to be shown. We have over 79 abstracts that are using Accuray technology that are going to be presented at this European meeting. So excited about that. And then in preparation for ASTRO where we'll be doing another product introduction at that point of our partnership with CRAD in our breast package, which we think is going to put us in a very, very strong position to have the most comprehensive breast package in the marketplace, as well as again, discussing more about our online adaptive. So, two important shows coming up. Thanks for the question.

Thanks. Thanks, Suzanne and Joshua. We’ll miss you at ASTRO this year.

Thanks Josh.

The next question is from Frank Pinal with Jefferies. Please go ahead.

Hi everyone. First Josh congrats on retiring. You'll be missed. Best of luck on the next endeavor. And Suzanne congrats. Look forward to working together. I guess two for me just picking up on the China opportunities, how would you size the financial impact of the pushout on the Type B for the fiscal year? And is there an opportunity to sort of catch up there in the future, just given what the demand landscape looks like? And I have a follow-up on the macro question after that.

Yes, I think, that's a great question. I think there is opportunity to catch up. And I say that because we're going to do a market launch and we're still on track to do the market launch. So hopefully we'll be driving some pent-up demand influencing customers’ purchase decisions so that when we get the approval, we'll be able to fulfill and book the orders. The market opportunity for Type B as you know, is very attractive. And over the next five years, we think there'll be over 1500 systems that are going to go into the Type B market. And the growth rate within that segment alone, we think is 12% to 15%. So, we're really excited about the potential for this product within the marketplace. And again, we can't get through the regulatory process fast enough.

Great. Thank you for that. And then we're hearing a bunch of companies at this point. Most recently this morning Integra comments on FX headwinds that they are higher than expected and even a few weeks ago. And we are seeing changes in expectations around guidance. And I'm curious what you are seeing at this point, how it's impacting the company? And how you expect that to play into guidance for the balance of the year? Thanks.

Yes. Well [indiscernible]. Yes, so, on the FX front, I mean, overall, we're not seeing a lot of FX headwinds. We are definitely seeing some in our revenue, but not to material impact. We have a hedging program in place, so that hedges our balance sheet pretty effectively. So, at this point we feel fairly covered. No, that's not to say that currency is changing out there and we're monitoring it and looking at ways to mitigate. But we're not changing our guidance. We are not maintaining our guidance both from a top line and an EBITDA perspective.

Great. Thank you. Appreciate it

[Operator Instructions] The next question is from Jason Wittes with Loop Capital, please go ahead.

Hi, thanks for the questions. And yes, Josh congratulations on your retirement job, well done. I think you're leaving the company at a really interesting point. And Suzanne look forward to continuing working for you and [indiscernible] as well. So, with that said, did want to ask a couple questions. First, if I could just review what you mentioned about China, specifically, what was the contribution from China this quarter and roughly how much is left in the backlog related to China orders?

Sure. I'll start with the contribution. We did $26 million in revenue.

That's right. And $20 million in orders. And just from a backlog perspective…

We have about $70 million remaining in our Type A for China in our backlog.

Great, very helpful. And then you noted – you commented that Class B is probably at the current timeline, I think, Q4 of fiscal 2023 is the outlook in terms of when you anticipate approval. Is that a change from your thinking prior last quarter? And it sounds like that's been impacted by the COVID lockdowns.

It's definitely been impacted by the COVID lockdown. We've got one more step to go through before we can submit for an MPA approval. And that is really to get our notified body on site to finalize the report. And really since before the Olympics, before the shutdown really for the Olympics we had been waiting for that final report. So yes, it is pushed out about a quarter in terms of when we expect to be able to submit for an MPA approval. However, as we said, we remain on track in terms of when we're going to introduce this to the marketplace. So that has not changed.

Okay. That that's helpful, I understand. And then you mentioned, it's still a little clouding in terms of some of the cost inputs you've made some changes. But based on your guidance on EBITDA at least, it sounds like the outlook – you have made some adjustments otherwise the outlook is kind of in line with what you weren't thinking last quarter. Is that the right way to think about it?

Yes, that's right. That is exactly right. And then that is why we're maintaining our guidance at $15 million to $20 million.

All right. Great, wonderful. I'll jump back in queue. Thank you very much.

Thank you.

This concludes our question-and-answer session. I would like to in the conference back over to Suzanne Winter for any closing remarks,

Thank you. Well, in closing, as I look to become CEO in the next 60 days, I am excited by the momentum we see from global customer demand and expect to finish our fiscal year growing materially faster than the market despite the headwinds caused by supply chain. Together with the Accuray management team, and all of our colleagues and partners, I look forward to building on the strong foundation we have put in place that will drive further benefits as macroeconomic conditions improve. I believe that we are extremely well positioned to grow our topline, expand margins, and to create value for the shareholders, as well as the patients and customers we serve. And I'm looking forward to speaking with you again in August for our fiscal fourth quarter and full year earnings release. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.