Good afternoon ladies and gentlemen and welcome to the Accuray Incorporated Q3 Fiscal 2015 Earnings Conference Call. At this time all participant lines on the telephones are on a listen-only mode to reduce background noise. But later we will be conducting a question-and-answer session. Instructions will follow at that time. [Operators Instructions]. As a reminder this conference is being recorded. I would now like to introduce your host for today, Doug Sherk. You have the floor.

Thank you, Andrew, and good afternoon, everyone. Thank you for joining us today on our conference call, as we review Accuray’s third 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 the fiscal fourth quarter 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 after the market close 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. During the question-and-answer session we request the questioners to limit themselves to two questions and then re-queue if you have any additional follow-ups. We thank everyone in advance for their cooperation with this process. And now, I would like to turn the call over to Accuray’s President and Chief Executive Officer, Josh Levine.

Good afternoon and thanks everyone for joining us today. I will start off the call today with an overview of the third quarter, with the discussion of some of the highlights related to our key initiatives and then Greg will provide a more detailed financial review. And then we will open the call up for questions. Our performance for the third quarter was somewhat of a mixed bag, low gross order volume was off benchmark relative to internal expectations, particularly in the U.S. Our overall operating results were relatively solid with good revenue volume, expanding margins controlled expenses and an operating profit for the first time since our acquisition of TomoTherapy in 2011. While U.S. water performance was not as expected it is worthwhile noting that the Americas region total revenues were $52.6 million, an increase of 63% from the prior fiscal third quarter. Although we are disappointed by the sequential step down from second to third quarter in terms of gross order activity. We believe that these results reflect the impact of order timing rather than order loss. The reported gross order value of $52 million does represent a 15% increase compared with the reported third quarter fiscal 2014, which is 21% on a constant currency basis. Additionally, our year-over-year system units gross order growth was a robust 28%. However, product mix largely resulting from the successful execution of our efforts [ph] position at TomoTherapy System for mainstream usage trade-in allowances and foreign currency combined to reduce the gross order dollar value growth to 15%. Looking forward we expect to see gross order levels recover for the fourth quarter and continue to project overall gross order growth for the second half of our fiscal year that will exceed overall market growth rates. Our experience in terms of order flow…

Thank you Josh, and good afternoon everyone. Before I discuss our financial results I wanted to provide some further detail on our product orders for the quarter. We are once again providing a tabular format in our quarterly release reporting gross orders, net orders and ending backlog, Josh has provided the color around our gross orders but let me add a few remarks to the other three items that impacted ending backlog namely age-outs cancellations and foreign currency fluctuations. Regarding age-outs, which are orders that have not gone to revenue in 30 months since recorded, in our form 10-Q following the second quarter we put forth that age-outs in the second half of this fiscal year would decline to arrange of $16 million to $25 million as compared roughly $36 million during the first half of the year. As expected we experienced $11.6 million in age-outs in the third quarter compared to the much larger amounts of $17.8 and $18.1 million in the immediately preceding two quarters. Currently we expect age-outs in the fourth quarter to be in the range of $4 million to $9 million meaning the second half of 2015 will coming to the range of $16 million to $21 million for age-outs. We expect at least one order that previously aged out to go to revenue in the fourth quarter and when this happens it is reflected as a decrease in age-outs, so that backlog rolls forward directly. This was anticipated in our age-out forecast for this year. Regarding cancellations, which is when a customer proactively notifies us to cancel an order, we are reporting zero cancellations in the third quarter. We continue to believe that order cancellations going forward should be in line with our historical averages prior to 2015 which were approximately one cancellation per…

Thanks Greg. Accuray continues to be committed to innovation that enhances the value of our products to our customers and their patients. As reported today, during the quarter we signed an agreement with MIM Software, a respected vendor of software for the radiation oncology, radiology, and nuclear medicines fields. The purpose of the agreement and collaboration is to further develop adaptive radiation therapy software for both of our systems. Adaptive therapy is widely viewed as one of the next beachheads in radiation therapy treatment as it has the potential to increase the accuracy of delivered radiation dose, by adapting the treatment plan for each treatment session based on the image of the tumor immediately prior to treatment, therefore providing clinicians with the improved likelihood of more precise outcomes for patients. We’ve also reported in the ESTRO press release last week the receipt of FBA clearance to market delivery analysis software for the TomoTherapy system. This is an innovative new tool developed in response to customer feedback that leverages unique architecture of the Tomo system to provide unprecedented access to treatment delivery information. The data will allow clinicians to perform a pre-treatment test of the Multileaf Collimator. Onboard detector systems also enable continuous collection and analysis of data throughout the treatment process. Visualization tools and delivery analysis will enable users to see changes in delivery from fraction to fraction and correlate those changes to the patient anatomy. We believe that the software, combined with improvements with TomoTherapy’s reliability and performance will further boost clinician confidence and reinforce growing support for the TomoTherapy systems used as a mainstream treatment device. Lastly, we also announced during the quarter that we have signed a new sales partner to cover the Canadian market. Our focus on Canada has already begun to show results. We’ve seen significant sales growth over the past few years as a result of dedicated sales management coverage and a Canadian sales opportunity funnel that has more than doubled in the past 12 months. As announced Christie InnoMed will be the exclusive sales agent for Accuray products in this market. Covering the Canadian medical market for more than 60 years they have established strong relationships with clinicians and administrators in many of the cancer centers in hospitals across the country. By joining forces with Christie Accuray gains additional market coverage and increased visibility for our Cyberknife and TomoTherapy systems. We expect that our collaboration will significantly enhance our overall selling presence and commercial momentum in Canada ultimately driving increased patient access to our life saving technologies. And we now ready to open the call up to questions.

Thank you. [Operator Instructions]. And our first questioner in the queue today comes from the line of Steve Beuchaw from Morgan Stanley. Your line is open.

Hi, good afternoon. Thanks for taking the questions guys. Just a couple to dig a little deeper around your comments around the outlook for the fiscal. So on the AD how much of that is in the U.S., said another way is there any signal in the AD that you are seeing some incremental traction from activities in the U.S. and then I have one follow-up.

Steve, the truth is that we have -- we still have work to do in the U.S., I think that’s clear to us, it’s clear to probably the people that are looking at again some of this, a lack of consistency in terms of order generation quarter-over-quarter. But the strength of the funnel was improving and has been improving and I think that there will be a bigger contribution from the U.S. and the Americas region in Q4. Whether or not I’m ready to or we’re ready to say that we are going to declare a victory that the U.S. is operating at the full level of momentum and commercial consistency that we would expect into -- I think that it probably is still as frustrating as it sounds and it is to share that it’s probably still a little early to say that. But they are moving in a better direction. They are just not moving as fast in that direction as I would like.

And then can we revisit the comments you made, I guess two and three quarters ago around the medium term objectives growth. I mean at the time there was a view that you might grow at twice the rate of the market. One could argue or maybe the U.S. is coming along a little slower, you would also argue that okay well, maybe you are closer to a contribution from the GPOs, and we have higher visibility on China. So given all the moving parts, where is the thinking today relative to that objective, not this year but beyond this year growing at double the rate of the market?

I still think that’s a viable and a reasonably achievable goal. I mean if you look at where we project Q4 and overall the back half of the year, would put as -- again we called out market growth, essentially to be in the mid-single digit range but when we’ve done that the truth is that’s really been tied to, from a context standpoint, constant currency kind of number. Our expectation right now is that market growth on an as reported basis is probably more like 1% or 2%. And so when we think about Q4 and looking forward, I am thinking that we’re going to be showing reported gross order growth probably somewhere maybe at 10% range, which will be 16% to 17% on a constant currency basis. So we are still operating at a level that is vastly exceeding market growth rates, probably by 2X or greater.

Thanks Josh, I really appreciate the perspective. I’ll let others jump in here.

[Operator Instructions]. Additionally since we have several questioners in the queue at this time, in the interest of time, if you would please limit your questions to two and then re-queue. Our next question comes from the line of Jason Wittes from Brean Capital. Your line is open.

Hi, thanks for taking the question. Wanted to ask about the order rates and sort of what was timing and impact of the quarter, I think you noted that the release of the MLC was a little later than expected and probably didn’t generate the order flow you expected this quarter and also what relates to just the funnel itself, meaning I know the funnel’s getting stronger but it seems like predictability of that funnel when it actually might drive revenues, it might be longer than you originally anticipated.

So I mean it’s a -- it’s a combination of those things. I mean timing was clearly an impact and part of it. If you look at what we identified adjacent in our prepared remarks, we were out of the block strongly in Q4. We currently have seven signed contracts in house. Some of those clearly reflect carryover in terms of timing from orders -- about five of those would have been forecasted orders that missed from Q3 and two were from close at escrow. So timing was clearly some of it. Again U.S. it’s probably still, Q1 or Q2 like say fiscal 2016 before we are going to see meaningful traction from some of the work we’ve been -- the work we’ve been pursuing with the GPO, partners and those contracts. So I mean there are things in our funnel today in the Americas region in the U.S. that absolutely are opportunities that we did not know about, prior to signing Premier and prior to signing Novation. So there is visible signs of opportunity and improved market visibility there, they are just not as advanced opportunities relative to the sales process in terms of how deep in the funnel they are. We certainly, over the course of last 12 or 18 months we had the benefit some of the ability to offset some of the weakness or lack of predictability in the U.S., via Japan, China while that’s still the case I mean I think that we are just -- we need the U.S. to come online, is really what it comes down to. I think that the projections we have shared in just general terms around how do we think about Q4 we will show an improvement and a contribution from the U.S. piece and we think we are in a better path in terms of longer-term impact from the Americas Group and the U.S. team.

Okay. And then maybe just, since you alluded to this on the MLC launch and the seven contract that you have mentioned some of those spill over, were those all tied in with the MLC launch itself or those were just separate and just timing issues in general?

No, those were not all MLC-related. I mean at the end of the day, as I mentioned in the prepared remarks we didn’t have announcement of first patient treatment until the last month of the quarter, and we had one order that we can identify that for sure was in the quarter. But I don’t think that we can say that MLC at least for the third quarter was a material impact to order growth.

Okay, Josh, I’ll just sneak one follow-up on this and that’s last quarter you mentioned there is a certain amount of backlog related to the MLC. Can you give us an update in terms of what that number might be related to the MLC launch and I think again you had also indicated that, that’s not necessary a number you would see right in one quarter, it would take probably over the course of the year to get filled?

Yeah, that’s accurate. We have right now and Greg can give us the backlog number but the relative timeline to satisfying that backlog will absolutely be probably 9 to 12 months.

I will jump back in, thank you.

Thank you. Our next question in the queue comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Thanks. I just want to dig into maybe the market dynamics in the U.S. a little bit more, I mean you did your biggest competitor yesterday reported pretty strong quarter here in the U.S., obviously comps factoring to some of that but I am just wondering whether you are seeing your bigger competitors get more aggressive on price. And the other question that comes up more frequently is just on software and you obviously do very well with on treatment planning but as we think about patient management, tapping into marginal [ph] things I mean do you feel like you maybe at a disadvantage if you don’t have a broader software offering.

Yeah, it is a great Tycho, and let me just start with that one. I think that we have a view around the overall discussion around oncology information system connectively that here is a gap there for us and we actually working diligently at this point to try and close that gap I don’t think we have the ability to connect to what I call the market standards right now if you will in terms of [indiscernible] was it which were the part the OS systems of our competitors we obviously need their support technically and innovation capability and support to be able to connect them we get that. We don’t get it as easily quite frankly as you know customers would like which is something we identified to both of the other companies. But I am not naïve, we need our own platform and our own capability there and we are working diligently to be able to pass something to talk about more meaningfully hopefully in the next couple quarters. In terms of market dynamics in the U.S. you know I saw variance numbers, there is no question that they had a big quarter in terms of order impact in the current quarter. Look from our view we have seen funnel improvement in U.S. and but the U.S. comparatively for us is a market that we have probably if not the weakest some of the weakest of all of our share of market in any of the regions we compete in. So when you look at our market position currently and then you look at the facts around where the market in the U.S. is right now with regards overcapacity and that putting more pressure on, this being a replacement market we have got to be able to take competitive workers [ph] away from people in the U.S. market which primarily bear in, in order to grow in the U.S. and we are aware that, that is still -- that is not changed quite frankly at all in the last 18 or 24 months. And I think I outlined some of the steps that we're taking and focused on in the U.S. sales situation, the commercial team to try and drive better visibility, better territory, direct territory selling focus and better market impact and market penetration. I'm not panicked and no one here is panicked but frankly I'm frustrated that it's taking as long as it is, but I think we're doing all the right things to make -- to turn it to the degree that it needs to be turned.

How about, I mean the degree we've obviously seen hospital consolidation, the degree to which hospitals are standardizing on a single vendor. That was a dynamic variant called out last night that more hospitals want to work.

I noticed that and it's interesting because if you look on a year-to-date basis we, in terms of competitive wins we have about 13 competitors bunkers [ph] that we've won and five that we've given up. So on a just a wins and loss basis, when you look at kind of, are we a bulker taker or a bulker loser we're competing pretty effectively on that basis. So I don't -- I don't argue or I won't comment on where Variant is at with regards to their comments on consolidation.

Okay and then just lastly on the MLC as we think about the rollout, how much optimization, is there any kind of tinkering that needs to happen, was there any feedback from the early users that needs to kind of be factored in?

This device from everything we've seeing and everything customers, the sites are saying to us this device functions remarkably well, both from a functionality and an efficiency standpoint in terms of treatment speed. You're talking about intra-cranial, SRS cases that 21 22 minutes, you're talking about SBRT lung and prostate in the 17, 18, 19 minute range. So really magnitudes of difference in terms of treatment speed, workflow and throughput and all of the feedback around device reliability and durability has been very, very strong. So I think we like where we're at. We need to get this thing ramped up. I think the number of reference sites will grow again in Q4. And we've got a multi-fascinated marketing campaign that we're going to be starting to increase market awareness, drive site visits and we'll start to probably see some of the initial clinical information come maybe as soon as AAPM which I believe is in the July.

Okay great and we look forward to tracking that. Thanks for taking the questions.

Yeah.

Thank you. Our next questioner comes from the line Anthony Petrone [ph] from Jefferies. Your line is open.

Hi thanks and good afternoon, maybe focusing on a Tomo a little bit, can you give us a sense Josh, and Greg last quarter you mentioned legacy Tomo installed base it was about 100, 250 systems out there that were potential candidates to be upgraded to TomoHDA. Can you just give an update on that process. And were there any actually lost sockets on those period opportunities with Tomo specifically. And then I have a follow up.

So I mean we are absolutely making progress on socket retention strategy. As Greg alluded to in his remarks Anthony, trading trade up activity is absolutely an area of focus for us. It's growing gives a chance to make that we've retain those sockets and take the latest and greatest equipment we have on the Tomo side of house and put it into our own bunkers. And so it's moving, I think in a very positive way that area of focus. We, on a Q3 basis, I don't have the numbers in front of me on lost win lost sockets. I guess as I quoted before year-to-date at 13 win 5 loss calculation but I don't have -- I can't put my hands right now on the numbers for competitive losses. It was not a big quarter for skivving up our own sockets quite frankly. That hasn't been that hasn't been the case in any of the quarters this year.

That’s helpful maybe just the second one here on margins. I guess it's too snug and the one I want to hear, just MLC revenues when they begin to flow in, are those revenues margin accretive to the company? And then maybe just an update on the Tomo Service margins where that stands and is there still some improvement that is yet to be seen in the service margins as it relates to Tomo specifically?

Yes, Anthony generally speaking, upgrades in general and in the MLC specifically are going to be kind of higher than average product gross margins so that can be accretive to us. With regards to Tomo service margins we are probably about 85% of the way through the big field action upgrade that we started right after the TomoTherapy acquisition. So and of course those systems once upgraded perform very, very well and become some of our best performing systems in the field. But there is still an opportunity to close out that field action, to upgrade additional units in the field and that will drive further improvements in service gross margin for TomoTherapy specifically. So the answer is yes, there will be further improvements. We will probably talk about that a little bit more on our next call as we get into the 2016 timeframe.

Anthony this is Joshua again, just while the Greg was answering your last question I did find the win/loss information. So Q3 we took five competitive bunkers we gave up two.

Okay, that’s helpful. Thank you.

Thank you. [Operators Instructions]. Our next questionnaire in the queue is from the line of Suraj Kalia from Northland Securities. Your line is open. Suraj Kalia please check your mute button. We are not getting any audio from Mr. Suraj’s line would you like to take the next question.

Sure.

Okay. Our next question comes from the line of Brooks O’Neil from Dougherty & Company. Your line is open. Brooks O’Neil: Good evening. I was hoping you could just talk a little bit about what’s involved in bringing on the value positioned machine for China and what opportunity you see for that in the US as well? Thanks a lot.

Brooks the value product strategy in China it's been in kind of developing situation -- as you have seen we have been pretty successful in the Class A radiotherapy category we have got really, really strong commercial execution taking place in China with the strong commercial leadership in place there and when you look at the growth our strength in the market there has traditionally been in the PLA channel, which was the military hospital channel it was the kind of from a technology price point standpoint it was the part of the market that was really an open check book to some degree, you will find the very best equipment in those facilities. The growth going forward over the next decade in China in our business is going to take place in the private sector and in the provinces. And the product requirements there are probably going to dictate that functionality has to be at a certain level of capability but price point and the overall value proposition is going to have to look different than where our traditional strength has been in premium and specialty categories. So we have been at heart of work at this kind of quantifying the market, the product design requirements, we have work taking place right now on that, I am not going to get really specific or granular about product description in form or another but I will tell you that we think that for us, this is very, very nice opportunity and it's one that we are interested and excited about. And given the momentum we have there and the market -- the brand strength in terms of market recognition for our products and our company we like the prospects of being able to bring another product to market especially in that price point, with that type of market opportunity attached to it. Brooks O’Neil: And could you just say roughly how long do you think it will take you to really have a lower price point possibly, modestly lower functionality system for the China market?

You know I am reluctant to do that just given as we have seen them they have been from a timing standpoint, we were delayed for quite a while with Class A license releases the regulatory environment there from an oversight standpoint is a little bit difficult to predict. I think we’ve got some… what we think might be speed to market, interesting speed to market opportunities around product configuration and it might give us better speed to market, solutions to this but again I would rather not hang a data up there or range of timeframes and say, that set ourselves up for not being able to deliver on that at this point. Brooks O’Neil: I can understand that totally. Thanks a lot.

Thank you. That’s all the questions that we have the in the queue at this time. So I would like to turn the call back over to the speakers for the closing remarks.

I would just like to thank everyone for joining us on this afternoon’s call and we look forward to speaking with you on the fourth quarter and year-end earnings call. Thanks very much.

Ladies and gentlemen thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.