Good day, ladies and gentlemen, and welcome to the Q1 2015 Accuray Incorporated earnings conference call. My name is Britney, and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Alaleh Nouri, Senior Vice President and General Counsel. Please proceed.

Thank you, operator. This is Alaleh Nouri, Senior Vice President and General Counsel for Accuray. Thank you for joining us today on our conference call, as we review Accuray's first quarter fiscal 2015 financial results. Participating on today's call are Josh Levine, Accuray's President and Chief Executive Officer; and Greg Lichtwardt, Accuray's Executive Vice President of Operations 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 including statements regarding our business plans and strategies as well as our outlook for Q2 and fiscal 2015. There are a number of factors that could cause actual results to differ materially from our expectations, including risks associated with the effects of the adoption of the CyberKnife and TomoTherapy Systems, commercial execution, future order growth, future revenue growth, future profitability and guidance for fiscal 2015. These and other risks 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. 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. I would like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Thanks, Alaleh. Good afternoon, and thanks everyone for joining us today, as we review our results for the first quarter of fiscal 2015. I'll lead off the call today with an overview of the first quarter and a discussion of some of the highlights related to our key initiatives, and then Greg will provide a more detailed financial review. We'll then open the call up for questions. For the first quarter, we reported total revenue of approximately $82 million, representing a 7% increase over prior year. On a constant currency basis, this would have been 9% growth. This is in line with our guidance range and consistent with comments that we made during our last earnings call that we believe revenue calendarization should be similar to that of 2014. With that said, we do expect the negative impact of year-over-year foreign currency exchange rate movement to be more significant in the coming quarters of this fiscal year. We also reported first quarter gross orders of $58.8 million, which represents a decrease of about 7% from prior year. On a constant currency basis, this would have been a decrease of 4%. There are three primary factors that give us confidence that we will be seeing order improvement as we move through the year and specifically showing significant growth in new orders in the back half of fiscal 2015. First, the calendarization of our gross orders last year was unusually front-end loaded in the first half of the year, with order growth moderating in the second half of the year. This year, we expect our calendarization to be more in line with historical trends, which will show strength building throughout the year and will result in a more backend loaded order flow. The second factor is in our Asia-Pacific region, where orders…

Thank you, Josh, and good afternoon, everyone. Before I talk about our financial results, I want to highlight a couple of factors related to product orders. First of all, you will notice that coincident with the new fiscal year, we are introducing a different reporting format for gross orders, net orders and backlog. All of the same information is disclosed only in a tabular format in the condensed statement of operations. With respect to the backlog activity for the quarter, as is normally the case, age outs comprise a significant amount of the difference between gross and net orders. Our backlog policy, which does not permit any discretion as to the timing of adjustments to backlog causes us to age out orders that have been in backlog exactly 30 months without going to revenue. These age outs very substantially from quarter-to-quarter, it is also possible that an aged out order can go to revenue in a later period. Over the past two years, we have made numerous changes to the order taking process, including a different tone at the top; better oversight responsibility for and management of distributors; changes in timing, as to when we enter distributor orders to the backlog; and better internal management of the revenue process for distributor orders. We believe these changes will improve the quality of backlog overtime and reduce the level of age outs. As part of the change in reporting, we will be providing more in-depth disclosures on the factors impacting net orders in our 10-Q and 10-K, and spending less time on the conference call discussing them. As we have consistently said, gross orders are the best measure of our current commercial performance and that is what we are most focused on delivering. In that sense, we are hopeful that sell-side analyst…

Thanks, Greg. As we think about Q1, quite frankly our results were somewhat mixed. While we've made significant progress toward improving the operational capabilities and performance of the business, it's clear that we still have work ahead of us to ensure that the gains that we have made are truly sustainable. I assure you we are up to that task and fully committed to achieving not only our full year guidance targets, but our strategic planning horizon growth targets of mid-teens revenue growth. And now, we're ready to open the call up for questions.

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

Just want to try to put a bit of meat on the bones of the story around the order outlook for the rest of the year. I guess, first off, thank you for making the comment in the press release and on the call about the order outlook. So given the comments that you made, if I assume that the market is growing at say 5%, it sounds to me like you're suggesting that gross orders this year will grow by let's say at least 8%. That tells us that you'll get something like 10% growth over the next three-quarters. So I have two questions. Number one, am I reading this correctly, because that implies that you need to be seeing mid-stage order funnel growth that's probably at least 10%, so am I interpreting that correctly? And I think the corollary there would be what are you seeing in the order funnel by region that you think is most impactful in terms of year-on-year order growth.

So in general term, Steve, I would say that what we described in our prepared remarks, and essentially I even interpreted it, although the percentages maybe -- rather than give a discrete number, I think we were thinking of it more in terms of a range, but come full year on a year-over-year comparison, our order growth should be running, I would say, significantly above market growth rates. And if you look at how we performed last year, you'd say that we have the wherewithal to do that. I think your second part of the question with regards to funnel growth, and what gives us the confidence or what underpins that future order activity going forward. The answer is it actually is pretty diverse from a regional standpoint. I think we feel good about funnel health in both our EMEA region and the APAC region. Again, I would refer back to the comments we made in the prepared remarks, we've been making investments and growing our presence in China inside of the APAC region, as an example. We've had delays. I think that the market has seen delays overall in product licenses that were expected to have been issued by now by the Ministry of Health, that we believe are probably towards the end of this calendar year or certainly early next calendar year are likely to be released. And we think that we are positioned well to capture those orders that would go into the backlog, again in the back half of the year. Whether it's Q3 or Q4, I can't see be that precise, but I'd say, there's a confidence level that that will occur that gives us a significant belief that that's likely to be a big driver of this. Again, while it's still early to declare victory, we're starting to see the beginnings of some traction in they U.S. market. I think that one of the areas that we tried to highlight in our prepared remarks is the beginnings of impact from the national contracting in the GPO and strategic account activity. It's difficult to predict from timing perspective when those things translate into direct orders, but in terms of overall critical mass, we're building critical mass through those agreements, and I'm confident that those agreements will yield order activity going forward. The VA system is a good example of illustratively where that's already occurring.

And then one on CyberKnife. It sounds like given your comments around the likelihood of the MLC driving incremental order traction that you're more confident now about the likelihood that that product gets on the market. Is that the right way to read this? And can you give us any feedback from the first couple month or so in beta testing?

Yes. So the specific answer to the question is I'd say that's an accurate way to read that, number one. We've got the second evaluation site up and running. We now are coming up on, I guess seven or eight weeks of real experience and feedback from the first evaluation site. And I believe we are probably inside of the next week or 10 days from shipping the third device to the third evaluation site. So we are very quickly going to reach a place where we've got the three sites fully installed and up and running. I can tell you in a general sense we really have decided we're not going to get very specific about this. But in a general sense, in site number one, which has clearly the longest timeline in terms of experiential interaction with the device, the feedback is very, very positive. And we're seeing, I'd say consistent durability and performance with what we saw in our bench testing, which gives us at this point I'd say, a reasonable degree of confidence. I have said, as I talked about the back half of the year and order activity and those factors that might impact or be a catalyst for accelerated order growth going forward, I said the likely market release of the MLC, this shouldn't be interpreted as a guarantee, but based on what we're seeing today, I'd say we feel pretty good about where we are today.

Your next question comes from the line of Anthony Petrone with Jefferies.

Maybe to begin on orders and then one follow-up question on the U.S. market. On orders specifically maybe you can give a little bit of color around why so many are reaching the 30 month age-out phase? And is that financing related, is it delays in bunker construction or something else going on there?

So Anthony, the activity that is age-out and cancellation related obviously, is tied to very specific criteria as Greg had alluded to in prepared remarks. We've been consistent in those criteria and those filters around backlog criteria. The simple answer is today, what we're seeing is -- the genesis of what we're seeing today has its roots in, what was going on 30 months ago. And I know for sure that over the course of the last 24 months, we have been doing many, many things to improve the quality of what's going into the backlog vis-à-vis these orders. These are primarily distributor -- not primarily, they're really exclusively distributor orders. The orders that have the distributor in the middle, as a middle man, if you will, between us and the end user. And the things we've been doing to improve, what's going into the backlog is varied. I mean, essentially we have been in certain cases changing out distributors and making sure that the distributors that we are aligned with are going through a much more rigorous and disciplined, basically business review process with those folks to ensure that they are being held accountable relative to performance and our expectations for backlog criteria. I can also tell you that we've added people whose sole responsibility is to essentially manage the revenue conversion process with those distributor orders. And there are two of them now in place, and have been active for the last two or three quarters. And again, we think that that's having a big impact, positive impact on the quality of what's going into the backlog. And so I'd say, on many fronts we've got better line of sight. You have heard us talk about the past, in the past examples, where we are requiring proof of bunker construction in terms of timelines to ensure that we're very clear about where those activities are in their process. So I'm highly confident. The things we're doing are going to have an impact over time. The things we're seeing today are things that were taking place 30 months ago based on the activities, the orders that were going into the backlog 30 months ago. And so we are probably still a couple of quarters away from having the biggest stuff like this, some of the bigger challenges fully behind us.

That last comment is helpful. So just to clarify that in the current backlog today there's still some amount of orders that are similar to the ones that were phased out, that sort of still have to sort of work themselves through?

Yes. And the other thing I would say is we absolutely do not feel that the current age-out activity and the levels are indicative of our commercial momentum or commercial success. Again, there is a 30-month lag time here that has to be taken into account. And I think we can easily separate, we should be separating, how we're thinking about the business and how it's performing today and what's going into the backlog from what it looks like 30 months ago.

Let me just switch gears on the positive in here. Then on Premier, can you maybe give us an idea this is clearly one of the larger GPOs. The expectation on that alliance it is exclusive, so that it's significant. How long do you think the lag effect will be before you begin to see benefits in backlog bookings and eventually P&L from Premier?

So we are really excited about Premier. I am really excited about Premier. I have a relationship with Premier from other business experiences that goes a long way. They have the ability, quite frankly, and given the nature of the contract in terms of exclusivity, we have the ability to really move some market share we feel through this agreement. And we think this could be a significant catalyst to improving the strength and the quality of our funnel in the U.S. market. Timing-wise, it's a little bit more difficult to predict. I would say, we're probably, just to be conservative, three quarters downstream from full contract implementation. And when I say, contract implementation, since we have signed the agreement, we have been scheduling rollout meetings with the Premier field marketing organization. Most of those meetings are scheduled to begin taking place in this next month. That probably will take several months of timeline to fully complete. And then once those rollout meetings have taken place, there's going to be kind of side-by-side regional and territory level planning taking place between out field organization and the Premier marketing organization in the field to do the kind of account-by-account targeting that you would expect to start to, quite frankly fish where the biggest fish are and where the best opportunities are. So in terms of, from that point forward, I would guess probably three quarters, but there could be things that happen before that, there could be things that take longer than that. I think the good news here is we have a really unique opportunity. I think the other thing worth mentioning is the size and scale of Premier's field marketing organization is substantial and it allows us quite frankly to kind of leverage in ways that we couldn't, given the size and scale of our own sales organization. It gives us a chance to leverage and get much better market visibility and presence and we're doing it with their folks. So again, I think it's a really exciting opportunity for us, and I think the impact of it is going to be significant.

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

Josh, just following up on the backlog question a minute ago. Can you comment on cancellations? I mean, presumably most of the adjustment is age-outs, but can you talk to the degree to which there are any cancellations?

Yes, Tycho, I think for the quarter of that activity there was one cancellation. So the vast majority of it was age-out. There were six systems that aged out.

And then can you talk a little bit on OpEx. I mean obviously you're still spending here. You're counting on a big recovery in order growth but to the degree that that doesn't ultimately come through right by chance, can you talk about your ability to maybe manage costs a little bit better?

Let's be very clear about it. We got ahead of ourselves in Q1, okay. I'm not going to try to paint this as something that it's not. We got ahead of our sales in Q1 and it isn't going to happen again. So our ability quite frankly, while we're comfortable, and I think from a deployment or an allocation standpoint in terms of where we're investing, I have no problem with the things that we're doing there because we're aligned with what we think are the biggest strategic initiatives and the things that can impact the size and scale of the business most effectively, but we've got to titrate the spending with what the topline is doing.

Tycho, this is Greg. When you develop your model in order to hit the adjusted EBITDA range that we have given you, you will see a year-over-year increase in operating expenses at 3% to 5%, which is essentially half of the growth rate in revenues and that's what we're managing the business to.

And then you called out the China dynamic, and the fact that licenses have been held up. Is there any way you can help kind of quantify what you think the impact of that has been and will be over the next quarter or two, until you see things free-up there?

So if you go back about 12 months ago, what was the formerly by title, the Ministry of Health -- the China Ministry of Health, it's now actually being called the National Health and Family Planning Commission. But about 12 months ago, they indicated that as it related to the product segment, the market segment, the radiotherapy devices that the MOH was going to issue in round numbers about 60 licenses for these types of devices at the federal level. And these were for Class A radiation therapy products. To date, they have issued five. So they have been substantially behind their own timelines, around what they had originally communicated and let the market to believe. I want to say, the market, not just the vendor market, ourselves and competitors, but their own provider community, the clinical community there. And I can tell you that there is a lot of frustration about that, within that clinical community. But they've been really behind the power curve in terms of timing. We have been very close to this situation. And again, I'd go back to what I said before, I think our understanding and belief today is that towards the latter part of this calendar year or early in the next calendar year, the logjam, if you will, on those licenses is going to start to ease up a little bit. And we think we're well-positioned to capture certainly a part of that. How big a part of it, I guess remains to be seen. I don't want to project X or Y or give you a discrete number, but I think that we feel very good about how we're positioned once the licenses start to flow.

And the last one. We're heading into kind of funnel reimbursement decision here. Presumably funneling goes through as proposed. What are you hearing from customers as to how that plays out in terms of demand trends, once the final codes are set? And does that ultimately force more of the migration to radio surgery? And as a follow-up, is there anything that you're communicating to customers about how radio surgery or SBRT is being branded? I mean, I think it seems like you and one of your big competitors have a very different definition of SBRT.

Yes. So on the first half of the question; it really is a function how customers are interpreting it, or how customers are feeling about it, is really a function of what kind of customers you're talking about. Because if you're talking about operators or clinicians and providers that are operating out of freestanding centers, I think that there is obviously a reserved outlook, if you will, from that segment of the market about what this impact, if the proposed approach that CMS is suggesting comes to pass, I think that we will see more emphasis on hospital outpatient departments as a primary point of care, than the freestanding market. So I think that trend that we saw this time last year is likely to continue or at least the sense in the marketplace is, is that it's directionally, that's likely to continue. From SBRT standpoint or from a product and case mix standpoint, if you look at where the mix is and where the mix will likely to go, I think there is the general sense we have and others have is that there will be a shift of dollars from a fee standpoint between the simple cases, the very routine cases, towards the more complex cases. So applications for things like stereotactic full-body radiotherapy, stereotactic radio surgery, image-guided IMRT, these areas will like to be the recipients of a greater emphasis of the reimbursement dollars, than what had been would be more of a routine case mix or application approach. So we think from a positioning standpoint, we think we're actually in a pretty good place. I mean, again, it's impossible to predict ultimately what CMS will do, but if you look at directionally in terms of point-of-delivery, point-of-care and the case mix discussion, we think we're in a pretty good place.

Your next question comes from the line of Jason Wittes with Brean Capital.

I appreciate your commentary earlier on sort of how we should think about order rates this year, but I just wanted to, maybe if I could put a finer point on it, I think first off you said significantly above the market rate is where you expect your order rates to grow. I'm just curious if I look at sort of the o US, EMEA, APAC, is that part of that equation or is that primarily driven by the resurgence in the U.S. orders?

Well, I'd say, Jason, it's a blended growth rate of all of our regions. So it would encompass EMEA, Japan, APAC and the Americas region.

So I guess, if I were to look at your business as your o US business is still growing off of base, the way you see it right now, you're still sort of, even though it's ahead of the U.S., it's still in a recovery mode in your opinion?

Restate please?

Sure. I just am trying to understand the components here. I think a lot of us are waiting to see what happens in the U.S. I think most people agree that you've underperformed there and there's a real good chance for some upside. Outside the U.S., you guys have done a very good job of sort of recovering that business. I guess I would like to know if that's still a high growth area for Accuray or have you saturated those markets and you're sort of in a steady state there?

Not at all. I think that we feel very good about where we're at as far as position and funnel strength that funnel outlook in EMEA and in Japan. Obviously, we've talked about China and APAC in just the conversation that we just had. But I think those are the markets we still feel strong. I mean just as a point of reference, the five competitive bunkers that I referenced earlier in terms of competitive takeaways, those were all o US activity and competitive takeaway. I mean that should give you some, I think an indication, a pretty clear indication that we're still rolling in those primary markets.

And then in U.S., you pointed in the past to sort of a second half more noticeable recovery. However, this quarter you did say that I think U.S. growth rate was up 120%. I assume that's off a pretty small base. I guess the question really is what kind of visibility do you have six months out in terms of what order rates might look like? Is that just too far out for visibility at this point or is that still within your new systems a realistic thing to have visibility on?

I think in general the quality and the strength of the funnel in the U.S. is continuing to advance, it's continuing to improve. It comparatively does not look like what we would see, let's say, in EMEA or Japan. Although, I think that there are a couple of catalysts potentially in the U.S. that are game changing, quite frankly. I mean, I think some of the things that we've highlighted with regards to the national contracts, strategic account GPO work, these are things that could impact -- I'm going to predict, quite frankly, will impact in a fairly substantial way, because you're talking about driving off of a relatively small base. So what organic, if you will, what organic funnel improvement is taking place will likely be augmented or amplified by some of the impact that these other national contracts and GPO relationships that we've worked on.

And then just two follow-ups, one, just on the whole Premier setup. I mean it does sound like that's going to take several quarters to work its way through. There is training, et cetera, involved. So if I think about the U.S. resurgence or whatever you want to refer to it as, that's separate from Premier, at least it would be my impression. Is that the right way to think about it?

I mean it would be I think overly aggressive at this point to believe that we would have on broad scale basis opportunities that came out of the Premier relationship impacting in the second half of the year. Although, again, we may find things that shake loose earlier, but I would say just to be appropriately conservative about it, I'd say it would be probably overly aggressive to think that that would impact as soon as Q3 or Q4.

And just last quick clarification again. Obviously, you sound increasingly optimistic of the MLC though. I know you'll put out comments next quarter, but it sounds like there are some centers that are kind of waiting for this to be fully available before putting down an order. Is that the right way to think about it?

Yes.

Your next question comes from the line of Toby Wann with Obsidian Research Group.

Just quickly on the U.S. sales strategy reorg. Kind of what you guys are doing now different than I think the reorg you kind of had a year or so ago?

Toby that the simple answer is if you go back to some of the language that we had in our prepared remarks, I mean we've been looking very closely at how we can optimize our selling resources and ensure that we get an expansion, if you will, or a leveraging effect of the footprint that we currently have. Again, I indicated in the remarks, I think in the script that over the last couple of quarters, the sales leadership team in the U.S. market has gone through a pretty deep analysis of both opportunities geographically and current territory alignment or geographic alignment and assignments related to the direct sales organization. And we have actually gone to a situation in the last quarter where based on that analysis, we have added, what I'll call, specialty sales agents in a number of selected territories. It's the first time we've really done that in the U.S. market. We think it's a really great way for us to leverage the footprint, the sales footprint, get renewed selling focus back on the direct sales side of a ledger, and actually have some very capable business partners on the sales agents side in areas within the map or areas of the country where we probably couldn't cost justified, putting a direct rep. And that blend of the two we think it gives us a chance quite frankly to again expand or optimize and get some leveraging effect out of our sales resource footprint and give us a chance that if you want to describe it in boxing terms, punch above our body weight, our weight class. And so just as an example, we actually have a contractual agreement with one of these specialty sales agents, come to fruition in the last quarter, and they actually put us into a sales opportunity that gave us a chance to close an order in the quarter. Now, I'm not going to suggest that that's an everyday occurrence. That was a really unique situation. But we think that that's representative of the fact that there are some really capable organizations out there that can help us and help leverage us in the ways I just described. There are people that are in other large, very complex areas of capital equipment on the imaging side, they have represented other very big companies. For us it's a perfect model, because they are commissioned. It's a commission sales organization. It's a variable expense. We don't take an impact to OpEx or anything on an expense basis, unless they go out and sell something. So it's really an interesting scenario for us. We haven't implemented it before, but we're moving forward with this. Again, we've seen a real near-term surprise with the first one. There going to be a handful of these organizations in parts of the map that makes sense, and give us a chance to leverage our sales footprint.

And then just one quick one, I think for Greg. Just kind of remind us again of the seasonality of revenue, so that we all kind of stay within the appropriate parameters from a seasonality standpoint.

Well, I said to use the calendarization of last year as a guide post. So just take each quarter as a percentage of the total year, and that is pretty much how we would anticipate this year to turn out.

(Operator Instructions) There are no further questions in queue. I'll now turn the call back over to management for closing.

So I want to thank everyone for joining us on this afternoon's call. And we look forward to speaking with you on our second quarter earnings call. Thanks very much.