Welcome to the Accuray Q3 2016 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference Mr. Doug Sherk. Sir, please go ahead.

Thank you, Liz and Good afternoon everyone. Thank you for joining us today as we review Accuray's third quarter fiscal 2016 financial results for the quarter ending March 31, 2016. Participating on today's call are Josh Levine, Accuray's President and Chief Executive Officer; and Kevin Waters, Accuray's Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements that involve risks and uncertainties including statements regarding our business plans and strategies as well as our outlook for the fiscal fourth quarter and full fiscal year 2016. There are a number of factors that can cause actual results to differ materially from our expectations, including but not limited to risks associated with the adoption of the CyberKnife and TomoTherapy Systems, commercial execution, anticipated regulatory approvals and launches of new products, future order growth, future revenue and macroeconomic factors outside of the Company's control. 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 questioners limit themselves to two questions and then requeue if you’ve any 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

Thank you, Doug and good afternoon everyone. Thank you for joining today's call. In terms of our third quarter financial operating performance, we generated revenue of a $105.3 million which represents 8% year-over-year growth and is in-line with our objective of driving revenue growth that exceeds overall market growth rates. On a year-to-date basis in constant currency our third quarter revenue performance reflects growth of 12% compared to fiscal year 2015. We generated adjusted EBITDA of $13.9 million which represents a high-water mark for Accuray and demonstrates our continuing commitment to driving the business to a level of sustained profitability. Cash decreased by $6 million in the quarter, however this included the $5.5 million payment to settle litigation with our former Chinese distributor. Even with this non-recurring payment we’re well on our way to generating the first positive cash flow year in the history of the Company. We finished the quarter with a $150 million of cash on the balance sheet as of March 31. Kevin will provide greater detail on cash flow and the balance sheet during his section of the call. Gross orders were $56.4 million which were off bench mark in terms of our internal expectations but still represent growth 9% year-over-year. Importantly, we continue to grow our backlog which drives future revenue growth and finished the quarter at 7% higher than prior year. Net orders were $58 million, an increase of 60% over the prior year. Our net orders were positively impacted by two orders that previously had aged out but came back to revenue and the positive impact of foreign currency exchange adjustment. While we do not usually expected net orders to exceed gross orders, our net order performance in the third quarter demonstrates that given the company's definite age out policy and order that…

Thank you, Josh and good afternoon everyone. I will begin my prepared remarks with additional detail on our product orders, P&L and balance sheet before concluding with our financial outlook. Let's first address our gross orders which were $56.4 million. As Josh mentioned the primary variance between gross orders for the quarter and expectations for the quarter was a timing of a single multi-system order in the U.S. from the third quarter to what we expect will be in the fourth quarter. At the same time net orders of $57.6 million were above expectations. We had age out of $10.8 million during the third quarter which were offset by $5.6 million of orders that had previously aged out and were recorded as revenue in the third quarter. Net orders were also favorably impacted by positive foreign currency adjustments of $6.4 million and zero order cancellations ending product backlog as of March 31 was $370 million which again is a 7% increase over backlog at the end of the prior fiscal year third quarter. TomoTherapy orders in the third quarter provided strong year-over-year growth off set by relatively flat CyberKnife orders compared to the third quarter of the prior year. while CyberKnife made up a lower percentage of the overall product mix the InCise multi-leaf collimator was included in all of our CyberKnife orders. We anticipate the CyberKnife order volumes will regain momentum in the fourth quarter driven by the closing of a large number of replacement deals in the funnel and significant CyberKnife growth in the EIMEA compared to the fourth quarter of 2015. Staying with our discussions on orders, the timing of the multi-system order resulted in the Americas' region performing below expectations in the quarter. however on a year-to-date basis all four of our regions remain on track…

Thanks, Kevin. We're encouraged by the progress in operating performance that our business continues to exhibit which is led to year-over-year growth in orders, revenue and EBITDA. We’re focused on the growth catalyst we have in front of us and we are excited about our future and now we're ready to open the call up for questions.

[Operator Instructions]. Our first question comes from the line of Tycho Peterson with JPMorgan.

Maybe Josh, just first on the gross order commentary. Can you quantify kind of the single large multisystem order that got pushed out and can you give any more color on the pricing dynamics that you talked about for a single and dual vault settings?

Yes, Tycho. The multi-system orders, as you guys have heard for really probably a role in four or five quarters. Now we've been very, very focused on strategic account selling activity. That selling activity is focused on IDN, GPOs [ph] etcetera and the primary reason that we have been focused on that is we believe that that's the best way to bring larger volume, dollar volume, multi-systems orders into play in terms of our opportunities and we're absolutely increasing the size and the funnel activity in the context of those types of accounts. So growing a number of funnel opportunities related to those didn't exist a year ago let's say at this time. So the opportunity set there is improving. The challenges that -- given the relatively modest number of total orders that we generate in any given quarter -- if one of those bigger volume situations or multi-system situation slips from quarter to quarter, it still creates a reasonably large degree of quarter to quarter variability or fluctuation for us. I wish that weren't the case but that's you know -- it's kind of really where we are at this point. I think the opportunity hasn't changed quite frankly at all for us, I think if anything it's actually increased just given the way the funnel is shaping up in terms of some of the multi-system deals but what happened in Q3 certainly was -- you know again from a timing expectation we expected that was going to happen in Q3 and now it's going to happen in Q4. So again I am not going to get more specific than that. We did say it was a U.S. based order and I think we'll leave it at that. Relative to the pricing, I think again just from a commercial…

And if I look at the fourth quarter guidance you're down about 9 million sequentially at the midpoint of the range. You highlighted Japan, the construction delays is I guess the biggest win factor there. Is that the only reason for the tempered outlook and is there any light at the end of the tunnel there?

So just to be clear the reference that Kevin made to Japan I think was on the revenue side. We are seeing obviously -- I think the impact of economic headwinds there. There's a relatively significant backlog of larger construction projects in general in their industrial environment. There's labor shortages and we're seeing delays in bunker build-out and construction that are really directly related to that.

And just to follow up on Josh, Tycho, I mean the revenue guidance in Q4 being as you mentioned sequentially down is a direct reflection of Japan revenue. We’re probably looking anywhere from $7 million to $10 million on a full year basis in regards to construction projects in Japan that have started initial construction but will not finish insulation to revenue until up fiscal 2017.

Our next question comes from the line of Steve Beuchaw with Morgan Stanley.

My first question has to do with the Radixact launch. When I think back to the Tomo and CyberKnife launches in 2012 we had a little bit of an air pocket. You know between the time of the product's launch when they were shipping, and that created some challenges in the order funnel. How are you managing that this time around? What did you learn from that experience?

Well we learned that we need to be careful about being ready to release something before really it's ready for prime time and we're not going to make that mistake again quite frankly. You were kind of describing it as an air pocket. It was a painful process for us and we learned a lot from it. The good news here is that our existing TomoTherapy system, Steve, the H Series product has a ton of momentum and it's a very, very viable product. We're proving that in terms of the penetration we're making in really new account profile type customer situations in single dual vault type settings and so I think we've got a reasonably unique opportunity here in the same way that if you think about the way that the MLC has been a catalyst for system upgrade on the CyberKnife side, we actually think that Radixact could in fact may in fact have the same kind of impact on TomoTherapy replacement sale [ph] opportunities going forward.

I'm sorry I think you mentioned the shipment timing for Radixact in Europe, when would you expect to be able to take orders and ship in the U.S.?

So again we're not going to get specific about timing there with regards to product that's under 510(k) review. We look forward to working with the agency, you know their processing in the review of our application. I think that it's conceivable that our regulatory group if you think about the typical, the statutory response time lines involved in a 510(k) submission, we would think it's potentially possible that we'll hear back from the agency with regards to any questions they might have, with regards to the filing by the end of our fiscal year.

Our next question comes from the line of Brandon Henry with RBC Capital Markets.

First question, it looks like you made some good progress on both gross margins for both products and services this quarter. Can you help us understand the drivers of each this quarter and how sustainable you think this level of gross margin is and to kind of fiscal 4Q and into fiscal year '17?

Brad we’re not going to comment at your initial question on our fiscal 2017 guidance at this time, we'll address that on our next call. You know our increased product margins for the quarter are primarily just due to the channel mix to be honest. We had a larger number of sales in direct markets at higher prices than we have had in previous quarters. I stick to my comment at the beginning of the year that we expect very modest margin improvements on a full year basis probably in the 100 to 200 basis point range. Our current fiscal year gross margin guidance out there right now would give overall margins of 40% and that’s overall margins. On the service side, 40% is not the new run-rate of the business that we achieved in the third quarter. We had some lower employee compensation related expenses and we also had lower power consumption that we historically have experienced. So I don't want the takeaway to be 40% is the run rate on service margins. Again if you expect on a full year basis, very just modest improvements in the 100 to 200 basis point range.

And then separately can you provide us an update on what you're seeing in the Chinese radiation and oncology market? You know I think you previously said kind of what you were seeing on the ground differs from the weaker macroeconomic narrative in China. I think GE has talked about they're starting to see an uptick in Chinese tender activity here. Are you kind of seeing the same thing here?

Brandon, our view and the optics there have not changed at all. You know generally with regards to the China contributions, orders -- you know our revised order outlook in Q4. None of that order outlook revision depends on issuance of Class A radiotherapy so. We are in a good place regardless of what happens with regards to the timing of an announcement on the Class A licenses and on the second part your question. Just to be clear in the third quarter we moved five orders from the backlog to revenue that were orders in the backlog that were Chinese orders. So we're not at this point still not seeing any order cancellation or any construction project slowdown relative to customers who have orders in the backlog or are in the process of bunker construction in China.

[Operator Instructions]. Our next question comes from the line of Anthony Petrone with Jefferies.

Josh maybe and Kevin as well, maybe just a couple on gross orders and just sort of the outlook. I guess Kevin you gave a couple of items that are factored into the fourth quarter guidance. I guess I'm just wondering how much of that guidance range is actually reliant on other large orders such as the one that slipped in the third quarter and is there a risk that we’re going to continuously see larger orders in that kind of getting timing on those orders will become more difficult.

So what the factors that I referenced in my prepared remarks stated that you know we're only dependent in the fourth quarter on closing the one large multi-system order that we had originally forecasted in the third quarter. However to follow that up I think you know we have given a range as opposed to our point estimate which does reflect the fact that sometimes timing is outside of our control. But with that said we think the other factors primarily orders we have received already today continuing TomoTherapy orders because of the roadmap we're now showing these customers. And then lastly again, CyberKnife order funnel activity in the fourth quarter is going to be significantly improved as compared to the third. Give us right now you know comfort in our guidance range and the large sequential increase that you see. I think it's also worth mentioning if you look at the order pattern in fiscal '16 it's not terribly different than the fourth quarter that we had in fiscal 2015 where fourth quarter represented significant sequential growth.

Maybe just a follow up on that would be a age outs, and the whole notion that previously aged out orders could you know make their way back into gross orders in backlog over time. So did that occur in the quarter and do you expect that to occur in the fourth quarter?

Yes so it did occur in the quarter. So we had -- just to calibrate the numbers, 10.8 million of orders that aged out in the quarter, but with that 10.8 million, 5.6 million aged back in. So our net aged out number was more in the $4 million and on a year-to-date basis Anthony, we actually now have $11 million which represents four orders that have previously aged out and have gone to our revenue. If you look at that as a percent of all age out basis, it's basically saying that 20% of all our age outs year to date have eventually made their way through the funnel to revenue. Again just reinforcing our belief that once an order is aged out it's not necessarily a lost opportunity. So I would expect this to continue in the future.

This is Josh, let me just amplify in this. Just to be clear I don’t think that neither Kevin or I or anyone involved in the our commercial business operations you know Kelly Londy our Chief Commercial Officer, I don't think any of us would we be proposing or suggesting that you know we routinely expect net orders to exceed gross orders in terms of the dollar volume, right. I mean -- again I think characterized our gross order performance for the quarter as off benchmark. We had higher internal expectations. We know exactly what caused the [indiscernible] and the timing related to it and so I don't think we -- I just want to make sure that people aren't expecting from a step up standpoint that net orders going forward are going to exceed gross order volume you know kind of on a routine basis. I mean where we have a kind of phenomenon that Kevin -- that occurred this quarter that Kevin just characterized with those orders coming back in. You may see this occasionally but I don't think we should expect it on a rolling basis.

And then one last one would just be an update on the win rate, on existing bunkers. So the ability to retain the installed as those orders come up for renewal. Thanks again.

Yes. So in general I'd say that we probably are somewhere in the range of 70% of the deal opportunities were wins, we retained them. And I think we basically have said that essentially on a rolling basis going forward we expect something in the range of about 10% to 20% of total order volume being attached or connected to essentially those replacement opportunities.

And just to amplify Josh's comments, Anthony where we’re retaining 70% to 75% of our current bunkers. The remaining 20% to 25% are not normally competitive losses, what we're seeing there are the macro factors where bunkers are either consolidating or shutting down with entirely or are merging with other centers. So the other 25% are not going to the competition. And you know another number to highlight is 25% of all orders in this quarter were competitive replacements as well.

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

Quickly shifting back to China for a second, can you kind of give us an update if you will on your product kind of geared towards the Class B market and where we stand with that? Thanks.

That regulatory submission activity Toby, continues to be under review by the CFDA and again we have visibility already as part of their regulatory -- that their sequential regulatory kind of milestone process. U.S. FDA, 510(k) approval has to precede or would normally precede any final rendering that they'd make decision wise one way or the other, that 510(k) approval from U.S. FDA has already taken place. So that's a hurdle or a milestone that we think is a good sign. At this point it's tough to predict absolute timing but you know we generally we would imagine probably somewhere in the maybe six month kind of timeframe from where we are right now that would be a I think a reasonable expectation.

I'm showing no further questions in queue at this time. I'd like to turn the call back to management for closing remarks.

I'd like to take this opportunity to thank all of our Accuray employees worldwide for their contributions and the work we did in the third quarter fiscal 2016. To those of you listening in, thank you for joining us on this afternoon's call. We look forward speaking with many of you at our Analyst Day in May and again our fourth quarter call. Thank you very much.

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