Good day, ladies and gentlemen, and welcome to the Q4 2016 Accuray Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your first speaker for today's conference, Mr. Doug Sherk. Please go ahead sir.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today as we review Accuray's fourth quarter and fiscal year 2016 financial results for the quarter that ended June 30th, 2016 as well as provide our first look at fiscal 2017. 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'd like to remind you that our call today includes forward-looking statements that involve risk and uncertainties, including statements regarding our business plans and strategies as well as our outlook for fiscal 2017. There are a number of factors that could cause actual results to differ materially from our expectations including, but not limited to, risks associated with the adoption of CyberKnife, TomoTherapy, Onrad and Radixact Systems, commercial execution, future order growth, future revenue growth 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 closed this afternoon, as well as in our filings with the Securities and Exchange Commission. The forward-looking statements on this call are based on information available to us as of today's date and we assume no obligation to update any forward-looking statements. During the question-and-answer session today, we request that questioners limit themselves to two questions and then re-queue with any follow-up. We thank everyone in advance for their cooperation with this process. And now I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Thank you, Doug. Good afternoon, everyone and thank you for joining us today's call. Following the market close, we announced record fourth quarter order results and full fiscal year operating results that reflect our team's achievement of our most important strategic initiates. Some highlights include growing our fiscal year-end backlog by 8% to a record $406 million. Backlog is perhaps the best indicator of the dollars Accuray will ultimately record to product revenue and we have now eclipsed the $400 million mark for the first time in the company's history. Fourth quarter gross orders were a significant improvement on a sequential basis from our third quarter results, an increase of 12% over of the prior year. This was also the highest quarterly gross order performance in the history of the company at $95.4 million. From a cash generation and balance sheet perspective, we're continuing to demonstrate meaningful progress. Kevin will review this in more detail, but let me briefly highlight that adjusted EBITDA of $24.6 million represents another high watermark for Accuray, a level significantly above the $11.8 million in fiscal 2015 and represents a substantial reversal of the losses the company recorded prior to fiscal 2014. Additionally, we increased cash, cash equivalents, and short-term investments by $23.2 million for the full year, representing a significant milestone for us. Additionally, subsequent to the end of our fiscal fourth quarter, we retired $37 million of our convertible debt, further strengthening our capital structure and balance sheet. Importantly, this continued level of execution across our business puts Accuray firmly on track to achieve a level of sustainable profitability even as we operate in a near-term macro market environment that is growing in the low to mid-single-digits. Looking at the factors driving our fourth quarter commercial performance, orders in the quarter were favorably…

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 for fiscal 2017. For the fourth quarter, gross orders of $95.4 million increased 12% over prior year and on a sequential basis showed a significant acceleration from the third quarter, which was consistent with our guidance offered back in late April. As expected, the drivers of gross orders for the quarter were record for the MLC-equipped CyberKnife as well as continued solid TomoTherapy demand. Included in the TomoTherapy gross orders for the quarter was a seven-unit order for the National Health Service, which to remind everyone was the largest order in Accuray's history. We achieved our fourth quarter gross order despite, as Josh mentioned, not signing the multi-system order in the U.S., which was originally forecast in the third quarter. We remain focused on strategic multi-system orders as a key driver of our performance and are continuing to identify and pursue many opportunities. With respect to the pricing dynamics we mentioned last quarter, as TomoTherapy increases its success in being selected for single and dual vault sites and multi-system orders, we experience the similar levels of modest pricing pressures we saw in the third quarter. However, we continue to see a significant increase in our TomoTherapy System sales, with gross orders increasing 30% from the prior year fourth quarter. Our ending product backlog as of June 30th is now $405.9 million, an 8% increase over backlog at the end of prior year fourth quarter and also record for the company. Given we have completed the fiscal year; I would like to provide some color around our regional growth order performance for full fiscal year 2016. In 2016, EIMEA generated significant…

Thanks Kevin. Before we open up the call to your questions, I'd like to thank Accuray team for their focus, dedication, and execution during our fourth quarter, as well as for the beginning of our fiscal 2017 year. Together, we're building lasting value and increasing returns for our shareholders and we look forward to sharing those accomplishments as we report on our progress during the upcoming fiscal year. And now, we're ready for questions.

[Operator Instructions] And our first question or comment comes from the line of Anthony Petrone with Jefferies. Your line is now open.

Thanks and good afternoon. Josh, maybe I'll kick-off a little bit with guidance for 2017 and in particular, gross orders for -- of 5%. I guess there's a few moving parts this year vis-à-vis prior years and that we have Radixact coming in, Onrad in China, and then there's the base underlying business. So, in looking at those three buckets, I'm just looking for a little bit more detail on those three moving parts. I mean what specifically is in there for the full year for Onrad as well as Radixact? And then also what is contemplated for the underlying business? And then I have a couple follow-ups after. Thanks.

Sure. So, let me just take them in the order that you presented them. Let me start with Radixact. So, as we talked about in the prepared remarks, Radixact is a new platform. It's got a number of newly designed subsystem and we're going to be basically rolling out essentially a define reference site program that will encompass both geographically U.S. and Europe where we're going to basically monitor performance of those systems to ensure that we understand how they are going to perform, to make sure our service and installation teams have the right level of training and hands-on experience in terms of minimizing customer disruption. So, we expect just based on timing there to move to full commercial launch sometime during Q3 of this fiscal year. So, Radixact is -- there really won't be a full commercial launch of Radixact until we get to Q3. So, it is second half in focus. I can tell you that we have the first site installed and so far, all the parameters we're monitoring our meeting or exceeding all of our internal performance expectations. So, that's the Radixact discussion. Onrad is also a later in fiscal developing situation. We're excited about the approval. We've been talking about it for some time now. But it's basically the first step in a multi-step commercialization process for that product. Given the target account profile that we're contemplating for the product, likely that much of the selling activity will still be depending upon province level or provincially driven public tender processes, driving much of the selling process. So, as a result, we're assuming that essentially the part behind Onrad activity in 2017 begins to impact order flow in the second half of the year. We don't expect a lot of book and bill activity with Onrad. So, it really is more second half order impact not revenue impact. We estimate that the first of these orders probably should start to become visible in fiscal Q3. The underlying business trends -- I mean we had a very, very good quarter in Q4 with CyberKnife. It sequentially showed nice growth over Q3. That product is certainly can amount to what we're thinking about and strategy around replacement sales activity. So, were actually at the upper end of the range in what we've been communicating around replacement sales activity in that 10% to 20% range. And CyberKnife sales in Q4 had a lot to do with that. But we're -- while there are opportunities here in terms of new product introductions, because we're looking at later in the year full commercialization of these products, the order outlook and the guidance really reflects the timing of the rollout.

That's all very helpful and maybe just my two quick follow ups would be. As you look to 2017, you've conveyed earlier on prior calls and at the Analyst Day, just the opportunity for the replacement of the company's own install base. And so for 2017, I mean how significant will that replacement opportunity be? So, how many systems do you think are actually going to turn over? And then last one for Kevin would just been margins. I was just surprised to see product margins higher this quarter and then service margins drop off. Just as we look forward, should that sort of normalize and reverse a little bit through 2017? Thanks for taking my questions.

Yes, thanks. I'll take both of them actually. So, our guidance for next year on replacements is fairly consistent with the percentages we just witnessed in 2016, which ranging anywhere from 10% to 20% on a quarterly basis. I'd also advise you to not look at that metric quarterly. As you know with small volumes, it could fluctuate significantly. So, I think it's safe to say modeling those out at 10% to 20% of fiscal 2017 orders is a nice range. In regards to margins, as I mentioned in my prepared remarks, the single biggest factor in regards to product margin fluctuation is really mix and what we saw in the fourth quarter was higher margin deals, particularly in our European regions going to revenue and that channel mix really is the most significant factor in regards to quarter-to-quarter fluctuations. So, that's the answer on the product margin side. Turning to service, our service margins this quarter were slightly lower than we've experienced for the full fiscal year. I highlighted about $2 million in one-time expenses, primarily related to some employees severance related cost. And also we had some significant one-time expense of product cost; that contributed about $2 million. If you add that back to the fourth quarter, you'll see that you get back pretty quickly to the 36% run rate. So, that's the explanation on Q4. Looking forward to 2015, to finish out your question, I'd tell you about -- we're going to have fairly modest expansion in 2016, probably a 100 basis points at the high end of revenue, as we're making some significant one-time expenses in our margin line to benefit years out pass 2017. And what I communicated at our Analyst Day that you referenced is I still think the future goal of 45% overall margins for this business is kind of in that mid two to three year plan we talked about in May.

And our next question or comment comes from the line of Tycho Peterson with JPMorgan. Your line is now open.

Hey, guys. This is Steve in here for Tycho. Thanks for taking my question. Maybe start-off, can you just give us little more color on what you're seeing in Japan, any assumptions you've embedded in your 2017 guidance? I know you mentioned you expect that market to return to growth, I guess is what's driving that expectation?

Yes, so, let me be clear on Japan. We met our expectations and we're pleased with their performance of the order side. So, the macroeconomic demand in Japan for new radiotherapy systems exists and we had as expected year on the order side. What I cited and it's approximately a $10 million shortfall this year is in regards to revenue and the fact that orders are just taking longer to go from order taking to installation, primarily due to construction delays. What gives us confidence that this is going to occur in 2017 is that those are highly visible deals to us. We work closely with our distributor. We have end user visibility as to when construction is going to start. In many instances, it's already started. And that is also a reason, by the way, that visibility by revenue is back end waited in 2017. Japan is a big contributing factored to that phenomenon in 2017.

Got it. And then sorry if I missed this. But regarding the commercial order and then you've done some reorganizations of the key accounts and other realignments, I mean do you feel comfortable where you are from a resourcing standpoint, or should we expect some incremental adds, particularly as you guys have this new product cycle?

I think in Kevin's portion of the prepared remarks, Steve, he talked about the fact that we continue to believe -- we will continue to spend or invest from an expense ratio standpoint on the sales and marketing line at somewhere in that 14% to 15% of sales range. We actually feel good about that level of investment. I mean the two big areas from a resourcing perspective that are continuing to get the focus in the energy continue to be sales marketing, the commercial aspects of our business model, and the R&D piece in terms of continued innovation. So, the answer -- the simple answer to the question is we're comfortable with the level of resourcing. It's interesting I think to point out that when you look at one of the things that I am really -- probably more excited about than any other in 2016 was the level of visibility that multi-system orders is getting in our selling cycle. We have more -- we recorded more multi-system sales in the last fiscal year than any time in our history. It speaks to a lot of the work that we've done in regards to strategic accounts selling and positioning ourselves with larger groups and integrated delivery networks and health systems. And I expect that to continue. The funnel for multi-system sales opportunities is continuing to grow. And I feel good about the forward-looking opportunities that we have to funnel. As we pointed out, I think in the last quarter, the challenge was multi-system orders is given the dollar value of some of those deals and given our size and scale what happens is a big deal like that, if it moves, if it shifts some quarter one to quarter two, can really swing our results. So, the good news is we've got more of these opportunities. The things we're doing from a commercial and strategic account selling standpoint are really having, in my mind, a positive effect on the ramp if you will of our multi-system order activity. But it will probably mean in certain quarters that we have little bit more quarter-to-quarter variability when you look at potential -- the potential timing, the selling complexity in those situations is greater, the timelines are greater, as a consequence, and the quarter-to-quarter variability could in fact be greater. But, all in, it's a net positive force because we're generating more of these opportunities than we ever have in the past.

Got it. Appreciate the color. That's all from me guys.

And our next question or comment comes from the line of Brandon Henry with RBC Capital Markets. Your line is now open.

Yes, thanks for taking my question. So, I just wanted to touch on revenue guidance. When you look at the backlog, it was up 8% year-over-year and fiscal year 2016, the guidance I assume is only 3% to 5% growth in revenue to fiscal year 2017. So, can you spend a little minute talking about how you're thinking about revenue growth from each of the regions, Americans, Europe, Asia-Pacific for fiscal year 2017 versus fiscal year 2016? I'm just trying to understand kind of where the shortfall is coming from relative to consensus? Has the delays gotten worse in Japan, has pricing gotten worse? Just help me understand that.

Yes, no, the first thing I'd point out is while our revenue guidance you sighted the high end of 5%, I had put on prepared remarks that our product revenue growth in fiscal 2016 is actually going to be 6% to 9%. And our backlog grew 6% in fiscal 2016 over 2015. So, it’s a logical step that our product revenue growth would be 6% to 9% over fiscal 2016. However, due to the lower -- kind of low single-digit service revenue growth, that yield in overall revenue growth of only 5%. So, I don't think there's any of the larger concerns that you mentioned implicit in our guidance given product revenue growth at the high end is 9%. In regards to regional breakout, we are expecting a larger contribution from both Europe and our Americas region in 2017 and I'd say more modest growth in APAC and Japan.

Okay. And then just a question on China, you mentioned that you received Onrad regulatory approval. Can you just talk about the distribution there, do you currently have the right distribution in place to sell the product or you'd be looking at adding additional distributors for Onrad in the coming quarters? And just one follow-up.

So, Brandon, yes, the answer is we have the existing distribution that we feel is needed in place today. As I mentioned earlier, the selling cycle with Onrad, again, given the fact that it is by account kind of target or profile on the accounts that we're targeting. We will find ourselves in more of a provincially driven contacting or tender process, which is a different set of selling circumstances or environmental circumstances than you would recognize with had in the Class A radiotherapy space. So, that's the primary driver of why that's a longer developing timeline in 2017 on that end. But on the distribution partner side, we feel good about where we're at and what -- that we're aligned with the right partners with regards to being able to pursue this value set within the market.

Okay. And then just as a follow-up, I think one of your competitors Varian has shown very good success with vital beam. I think around half of their vital beam system have been full in Americas region, so how are you thinking about potentially expanding Onrad to other markets outside of China and Japan? Thanks.

So, at this point, I would say that we don't have plans to expand Onrad outside of China and Japan. We have some other things that we're looking at and working on from a development standpoint, but we think that we have -- if you look at the success that we've had with regards to moving well beyond multi-bunker academic settings for the Tomo line and the visible success we've had in single and dual vault settings, we think we've got the product line, especially when we think about the longer term with Radixact that we can compete in that U.S. market situation that you inquired about.

[Operator Instructions] And our next question or comment comes from the line of Jason Wittes with Brean Capital. Your line is now open.

Hi, thanks for taking the questions. You mentioned in North America that unit volume was up 15%, but revenue was down -- was basically flat. Could you give us little more color there? What do you see going on in pricing and in terms of mix, what created the downdraft in mix?

Yes, so the biggest single factor there is in the Americas region. We're primarily dealing with the replacement market. And those replacement sales are sold at a lower average selling price than and a new system. And I'd say that's the primary reason, Jason, why on 15% unit volume increase relative flat year-over-year dollars.

Okay, that's helpful. And then last couple quarters you've given us an update in terms of kind of where you -- what percentage of the install base you think you can convert. I think last measure was somewhere in the 70% range, is that still kind of where you see things falling in terms of your ability to win bids on these replacements?

Yes, I mean I would say that that's still -- and certainly in the range of how we're thinking about it and the level of success that we've seen historically. I mean we are -- on a net basis, we are still winning more bunkers that we're giving up. And essentially the replacement sales strategy we've talked about now for quite some time is working. And we're retaining the -- not just on the competitive take outs the success on that end, but we're retaining our bunkers at a very high rate. So, I'd say 70% -- 75% is still the range of what we would expect.

Okay. And then just one quick follow-up for the Radixact. How long do you think this -- it sounds like you're saying six months, but I just want to -- maybe put a final point on it. You're putting -- you're installing the reference centers now. Is it generally a six-month must delay in terms of -- until you start to see orders come through from that? Or -- am I think about it right, mechanically, in terms of how the marketplace is going to react to the new product cycle?

I would say that -- I would think about this in the context of the reference site work taking place kind of in parallel with planning for more of a full commercial launch at ASTRO in Boston at the end of September. So, we actually are thinking that we will start to see uptake on this in sometime in Q3.

Okay, got it. Thanks. I'll jump back in the queue.

And our next question or comment comes from the line of Suraj Kalia with Northland Securities. Your line is now open.

Good afternoon gentlemen. Thank you for taking my questions. So, Josh, I know you all don't give out unit sales per se. Revenues this quarter were slightly softer than our expectations, can you give us some color in terms of unit pricing on a constant currency basis. I guess what I'm trying to understand is we know Varian and Elekta have been duking it out and price. And one of the things you all have mentioned in the past is you guys are concentrated on the University academic centers. Those are relatively priced, insensitive, if I can put it in that way. Any color whether there are some pricing dynamics at eastern and global basis are coming over to you guys also?

Suraj, I'd say that the pricing dynamics that we see in the current timeframe are really more related to the single and dual vault settings that are not our historic strength. They are not the typical account profile we've had our historic greatest presence in. And as a consequence we -- as we indicated in some of our previous conversations, we are making a conscious decision to compete in those bunkers in the face of the other companies. And for us on a net basis, even at modestly lower prices that the economics so us are a benefit, because we pick up a bunker and we pick up the economics related to the life of the service contract and possibility on that. So, those are really the only price dynamics that I'd say are putting any downward pressure. And just to put the context for the absolute impact there, we estimate that it's probably something in the neighborhood of about $5 million on an annual basis. So, it's -- we think again the trade-off here on a net-net basis is the right selling strategy for us, giving the fact that we need to grow our install base and we need to treat more patients. And the only way we can do that is to own more bunkers.

So, I'm going to add onto that Suraj. This is Kevin. And we got to be careful not to confuse pricing dynamics between orders and revenue. And in regard to the revenue, specifically, it wasn't so much pricing that caused us to be kind of -- you said a slight miss, but within our expectation. That was primarily Japan. And I mentioned I think to Anthony on our first Q&A that we had an approximately $10 million shortfall in revenues with Japan that had nothing to do with pricing, but due to timing. So, the pricing pressure that we talked about in single and dual vault in $5 million is primarily on the order. While on the revenue forint, it's not so much pricing dynamics, but just -- frankly end customer timing of installations.

No, I get that. I appreciate the clarity. I mean all I was saying is the quarter, it was surprising. The topline usually has ever been an area of concern. It's always the dance on gross orders. But I get your point. Josh, on -- how do you all see some of the site-specific payment changes for FY 2017, primarily on HOPs [ph] the MPFS, the physician schedule side. Are you all relatively insulated or how do you all think through that, especially as you factor in your North American guidance? Thank you for taking my questions.

Yes, I mean as we've said the past, Suraj, we do not have a lot of exposure in free-standing centers. So, our -- the bulk of ours business has been and continues to be hospital outpatient departments. So, that's point number one. Point number two is we don't see when we think about macro-drivers quite frankly at this point in the U.S. market or North America. We don't see reimbursement quite frankly in fiscal 2017 as a negative impact. I mean CMS reimbursement does not look like a negative situation for us. There were no major changes in payment rates from IMRT for 3D delivery codes. And stereotactic radiosurgery and SPRT codes were also not materially impact. So, when you take those things into account, we don't see that being a big downside. I think the other point I would make is more of the conversations we're having with customers who are considering new technology are situations where they are looking at devices that have a higher level of clinical capabilities, which is really in sync with the broader clinical trends of full body stereotactic body radiotherapy, stereotactic radiosurgery and a general trends towards hypofractionated treatments, where we thing quite frankly our portfolio is kind of in the sweet spot of directionally where the clinical trends are headed. So, I don't see this as a big concern or a looming negative in anyway.

And at this time, I'm showing no further questions or comments. So, with that said, I'd like to turn the conference back to management for closing remarks.

Thank you, operator. And I'd like to thank everyone for their participation this afternoon. We're looking for to talking with many of you during our upcoming Investor Conference attendance and at ASTRO in late September in Boston. Thanks very much

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a wonderful day.