Good afternoon, and welcome to the Accuray conference call to review financial results for the third quarter of fiscal year 2024 which ended March 31 of 2024. 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 note, this event is being recorded. I would now like to turn the conference over to Jesse Chew. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the third quarter of fiscal year 2024, which ended December 31, 2024. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's 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 outlined in the press release we issued just after the market close this afternoon as well as in our filings with the Securities and Exchange Commission. We based the forward-looking statements on this call on the information available to us as of today's date. 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 laws. 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 re-queue with any follow-ups. Second, all references 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, 2024. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Suzanne Winter. Suzanne?

Thank you, Jesse. Good afternoon, and thank you all for joining the call. Let me start by saying that we are disappointed, with our quarterly results and have faced near-term challenges here in the second half of our fiscal year that, were greater than anticipated and have impacted our near-term results, and outlook. However, we are confident that we remain on track, to achieve the goals that we laid out at our fall 2023 Investor Day, which includes 4% to 6% revenue CAGR and doubling our adjusted EBITDA, by the end of fiscal year '26. Fiscal 2024, remains an important year for our company as we are making a substantial entrance into some of the fastest growing markets in radiation oncology, introducing advanced capabilities and investing in a sustainable infrastructure, to grow our service business, all of which we believe will contribute to revenue and adjusted EBITDA growth, over the next few years. The quarter did not play out as expected, due to a few key factors. First, we had expected to ship three additional systems this quarter, which pushed to Q4, which would have had a meaningful impact on both our top line, and adjusted EBITDA. Additionally, in the U.S., which is one of our largest and highest margin markets, we saw a substantial slowdown, due to longer capital equipment budget cycles. We had expected the region to ramp in the second half of the fiscal year, but it is becoming much more evident that there is a broader weakness in capital equipment budgets in 2024. We believe these reduced budgets and lower capital deployment priority for radiotherapy equipment, have both contributed to slow demand in the near term. Finally, while pleased to have received regulatory approval to market the Tomo C equipment into China, we still await approval…

Thank you, Suzanne, and good afternoon, everyone. While the third quarter posted macro challenges, most notably with the slowdown of the U.S. market and foreign exchange headwinds with the yen. We remain confident in the long-term strategy we laid out during our Investor Day last fall. We are proud of our global cost functional teams to continue to execute on our strategy, despite these headwinds and are grateful for their commitment and dedication to our mission. Turning to the financials. Product growth orders for the third quarter were approximately $89 million, which is a 21% increase versus the prior year and 23% was adjusted for the impact of foreign exchange and represents a book-to-bill ratio of 1.8 million. This strong orders performance was driven by our EIMEA region, which had a 76% growth in our non-China APAC region, which had growth of 123% versus prior year. On a trailing 12-month basis, gross orders grew by 8%, which represents a book-to-bill ratio of 1.5, illustrating our customers' confidence in our innovations and NPIs, which continues to enhance our product backlog. Moving to the backlog. We ended the third quarter with a product order backlog of approximately $503 million. This reported backlog is up 2% sequentially and down 1% versus the prior year. We had no order cancellations in the quarter. Net revenue for the third quarter was $101 million, which was down 14%, versus the prior year and down 13% on a constant currency basis, primarily due to eight fewer revenue shipments within the quarter. Product revenue for the third quarter was $50 million, down 21% from the prior year, driven by eight fewer unit shipments as previously mentioned. While Q3, product revenue did not play out as we expected, due to three system shipments being pushed out related to customer…

Thank you, Ali. In summary, while some business has shifted into FY '25, due to the U.S. market dynamics, we continue to make major advances in long-term growth and profitability drivers. We remain focused on executing our plan, to advance care and access with our innovative solutions that, make a difference every day in the lives of people diagnosed with cancer. Finally, I'd like to thank everyone in our global teams that work tirelessly to provide the highest level of service, and support to our customers. I am grateful for their commitment and dedication to our mission. I will now turn it back, over to the operator Q&A.

Thank you. [Operator Instructions] And the first question will come from Marie Thibault with BTIG.

Hi, good afternoon, Suzanne and Ali. This is Sam on for Marie. Thanks for taking the questions here. Maybe I can start on the commentary on the Americas region. I'm just wondering any more color you have on maybe some of the bottlenecks, specifically that you're seeing that's causing these delayed installations here?

Yes. Thanks, Sam, for the question. Yes. I mean the major headwind for the quarter and really going into Q4 has been an expected slowdown larger than we thought in the U.S. market. And primarily, it's due to reduced capital equipment spending tighter budgets. We've seen the customers holding onto their systems longer as they wait for capital equipment funds to be available to them. Overall, I think it's validated very much by the research that was done as well as what we're hearing from our customers. So, we've talked to them. They have said that their overall budgets are down and that there's a complete report allocation and reprioritization of their cap equipment funds. And so as a result, we started to see it slow a little bit at the end of Q2, but really in Q3, it was significant. And as we got more to the drivers. We see it shifting over into FY '25 and certainly affecting Q4. And that's really what drove our revised guidance.

Got it. Yes, that's helpful, Suzanne. And I heard both of you reiterate the long-term target that you set out last fall. And certainly understand some of the near-term dynamics here. But international still seems to be holding up pretty strong, new catalyst coming with China and Helix. So I guess just help me frame the long-term opportunity that's still here for Accuray? And maybe some of the puts and takes between some of these near-term headwinds, with some of the longer-term tailwinds that are coming?

You're exactly right. I mean, again, aside from the U.S. business shifting forward, we've got some major catalysts that we're on the cusp of getting the regulatory approval on the precision treatment planning for the Tomo C. Again, that's going to unlock deferred margin and revenue, and it's the final step here to allowing our China team, to really take that to market and start shipping to customers. We have just very strong business growth in EIMEA. We look forward to the introduction of the Helix, which we think will do very well in India. The Japan backlog is very strong and the focus on revenue conversion, I think going into FY '25 will also be a catalyst. We're seeing our service contract revenue grow, and that's tied to our growing installed base. We see that as a catalyst. And then our innovation pipeline, we feel really strongly about what we are doing to advance care. We're going into ESTRO this next week. Again, we've got some service solution offerings as well as Cenos that will add to what we've introduced already with VitalHold, ClearRT, all of which believe is driving the strong order performance that we are seeing across the board.

Thanks so much.

Your next question will come from Young Li with Jefferies. Please go ahead.

All right, great. Thanks for taking our questions. I guess to start, maybe to on China, Tomo C with the treatment planning approval - is that still expected in May? What's the latest on timing there?

Yes. Our best expectation at this point, it will be done before the end of our fiscal year. And I can tell you that we have folks with our China JV in China right now to get a feel on timing. We are relatively confident that we are at the final step here. It's taken a little bit longer than we expected and a little bit more of a gap between the Tomo C clearance and the treatment planning. But again, I think our strategy was to get to market as quickly as possible on the system, so that we could go out there, and start to get orders for the system. But again, the shipments and the margin are tied to the treatment planning clearance, but we're at the very end we believe.

Okay. Great. That's very helpful. I guess maybe just a follow-up there. Follow-on approval and you have strong interest and strong orders there. Can you maybe kind of help us frame how that can potentially impact growth, revenue and margin for fiscal '25?

Sure. I'll let Ali chime in here.

Yes. No, thanks for the question, Young. I mean I think right now, we're still very much in the midst of doing our planning for fiscal year '25. So, we'll certainly share that outlook with you in our earnings call for Q4. But I think it's important to reiterate what Suzanne had mentioned, is that we continue to be laser-focused on the growth horizon that we had shared, with you during our Investor Day last fall. We sort of shared that our expectation is fully continuing to grow revenue, somewhere between 4% to 6% and that we are going to continue to be really focused on margin expansion, which we think is going to really end up doubling our adjusted EBITDA, as a percentage of revenue by the end of fiscal year '26, right? So that plan has not changed. We have had a little bit of a speed bump as it pertains to the U.S. market in the back half of fiscal year '24. But like Suzanne mentioned, we fully expect this to be timing related. But as indicated, there are other regions that are very much coming online and contributing to some really good backlog growth, which is converting into revenue.

Thank you very much.

The next question will come from Brooks O'Neil with Lake Street. Please go ahead.

Good afternoon, everybody. So as I listened to the comments both in the prepared remarks and the Q&A, it sounds like you're attributing the shortfall to environmental issues. The first I think about, I guess, I'm curious, as you do a deep dive into your own performance as a company, Suzanne and Ali, how would you grade yourself on execution this quarter? And are there any areas where you would specifically call out? Okay, we dropped the ball here. We missed the turn whatever. Help me to understand how you think you're doing in this admittedly weak environment?

Thanks for the question, Brooks. Clearly, we're focusing on the areas where we can improve from an execution standpoint in all the areas that, are within our control mean we missed three system shipments. And some of that was due to some delays in customer processing. But again, we are looking back at everything within the quarter, to see what could we have done better, what can we execute better in the future? How do we plan for these kind of headwinds - and at the same time, there's a lot that we're very proud of. We've made some significant progress against key priorities in the long-term plan. And I think that have been shown by delivering our strong orders growth, are continuing to build our healthy backlog, growing our installed base, certainly seeing some good positive growth in the service contract revenue. Again, all parts of our long-term strategy. We're starting to see improved margins in service. And again, some of these take time to be able to come through the P&L. I think if there are areas we know we need to continue to laser focus, is bringing down product COGS, and we have a path to do that. And we'll continue to look for areas where we can improve overall margins even in this difficult environment. Because even though we see good news, there are still external headwinds that overshadow the goodness, which hopefully we're able to show you where, are the parts of the business that long-term are improved. And so that we're building a better balanced business. I think I look at the U.S. and again, part of our strategy to go to high-growth emerging markets where IT access has been limited, is partly, because we see low growth in the developed markets. It's largely a replacement market. So while we didn't expect the U.S. to slow down so much, I think that it reinforces the strategy that we have, which is how do we balance going into high-growth markets where we can grow our installed base, which ultimately will grow our service revenue.

Yes, all that makes sense. I get it. I appreciate your commentary and your color there. Could you say - obviously, you've had tremendous success in Japan with competitive wins. And I recognize the environment is challenging in the U.S. right now, but are there any indications that you might have opportunities to win some competitive bunkers in the U.S. despite the slowdown that's been occurring?

Definitely. So if we look at what are we going to do in the U.S. and what do we learn from Japan and how we've done well there. They have gotten very close to their customers and building relationships and being there with solutions. And so, just - it's the same in the U.S., where, again, it's largely a replacement market. We're obviously very focused on replacing our own systems and upgrading them, but it is an opportunity to also look at vulnerable competitive sites. And so, we're going to get closer to our customers. We're going to bring in solutions that will help them through this difficult period of time. We're going to focus on the IB and make sure that everyone is satisfied with their equipment. And again, leverage our commercial partnerships that we have, so that when conditions improve, we're there, and we'll be able to capitalize on it.

Makes sense. I'm sorry, I didn't mean to interrupt....

No, I was just going to say, and I think we - that's something that our Japan team has done just an incredible job. And as a result, they're there when the customers are ready.

Sure. I assume in the U.S., you might benefit some from your commercial partnership with GE Healthcare?

I think all GE as well as all of our commercial partners, we're obviously all in a challenging space, especially as it relates to radiotherapy priority, but we absolutely will leverage all of our commercial relationships, including GE.

Cool. Thank you very much for taking my questions.

The next question will come from Jason Wittes with ROTH MKM. Please go ahead.

All right. Thanks for taking the questions. Just a couple on the outlook. Specifically, first off, the three systems that didn't occur this quarter, is that really more of a 2025 event that you expect them to be filled? Or is that something that's going to hit the fourth quarter?

It will be in Q4 revenue.

It will be in Q4 revenue. Okay. And then in terms of the size treatment approval, it's now, I guess, late June or sometime in June, how does that impact the outlook in terms of what were you anticipating earlier for China? And does this move that out into 2025?

So Jason, I guess what I would say is, number one, we're continuing to ship systems to our China JV partner because they need to continue to manufacture a certain number of these systems just to get ready. So as soon as the approval is there, they can start to cater to their customers. So I would say, we're continuing to ship systems from a revenue standpoint and they contribute to revenue. Where it has an impact is this whole deferral of 50% of the margin related to JV accounting rules. And so just to clarify, we sell to our JV partner, we defer 50% of our margin until our JV partner sells through to their end customer. That's just part of JV accounting rules. And so said another way, we have 50% of the margin associated with those shipments that, is deferred and sitting in our balance sheet, right? So once we're actually able to get this precision NMPA approval, and once their JV partner starts to ship systems to their end customers. And at that point, will we be able to recognize half of that margin - right now, all of that margin is deferred related to the Tomo C shipments that we've made.

Okay. So revenue, there's really - that's not impacted is really a margin in terms of whenever depending on when the approval happens?

That's right.

Okay. And then - so if I think about the change in the outlook, that's mostly U.S. driven? Can we assume that? Or is there other regions that are were calculated into your thinking when you're looking at the fourth quarter?

Predominantly the U.S.

Predominantly the U.S. Okay. And I guess we've asked enough, but I mean, is it - the order rates were actually healthy. Also, I think you mentioned that a lot of that was EMEA and Japan, I think. In terms of what the customers are telling you in terms of the orders or discussions you're having? Is it really just they said it's been thrown into the 2025 budgets? Or it's just another just for the laser. I know you talked about this earlier, but how are they characterizing?

Yes, I would say it differs by customer. Everyone's process slightly different. I think the expectation is that there will be some improvement, in the back half of our fiscal year '25. And we've heard some customers saying, listen, it's going to take us until calendar year 2026, to get back to pre-COVID levels of budget. So, I think it's going to be gradual, and we're going to be monitoring it. We don't have a crystal ball, but certainly, we're going to be watching it very closely and again, double down here, so that we're ready when things start to improve.

Got it. Thanks a lot. I'll jump back in queue.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Suzanne Winter for any closing remarks. Please go ahead.

I want to thank everyone for joining the call. This concludes our earnings call, and we look forward to speaking with you again in the summer for our fiscal 2024 fourth quarter earnings release.

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