Good day, ladies and gentlemen, and welcome to the Accuray Incorporated Fiscal Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I would like to introduce your host for today’s conference, Doug Sherk. Sir, you may begin.

Thank you, Tim and good afternoon, everyone. Welcome to Accuray's conference call to review the financial results for the quarter ending December 31, 2016, which is the company’s second quarter of its fiscal 2017 year as well as recent corporate developments. Joining us todays 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 during our call today -- the call 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 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 today, we request that questioners limit themselves to two questions and then re-queue with any follow-up questions. We thank everyone in advance for their cooperation with this process. And with that out of the way I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Thanks Doug. Good afternoon everyone and thank you for joining on today's call. Following the market close today we reported second quarter financial results, highlighted by strong growth for both gross orders and backlog. Gross orders for the quarter increased 17% year-over-year to $78.5 million, while our backlog grew 16% year-over-year to a record $426.2 million. We believe our progress is evidence that the catalysts driving order growth discussed with you over the last several quarters are beginning to take hold. These catalysts include a meaningful replacement cycle for Accuray products and greater recognition by both existing and new customers that our company's product portfolio offers increased versatility and functionality for customers. Over the next few minutes I'd like to provide more color on the most important of these catalysts, before turning the call over to Kevin for a more detailed review of our financial performance and full year outlook. First, as many of you know, we are entering the early phase of a multi-year replacement cycle of approximately 200 TomoTherapy and CyberKnife systems that will reach their tenure in service dates within the next 36 months. While we anticipate replacements will generally average 10% to 20% of orders on an annual basis, the results in the second quarter were north of that range with the largest number of replacements occurring in the US market. At the end of our first fiscal quarter we communicated we had secured commitments for several replacement orders in Q1 that were indeed finalized in the second quarter. We are optimistic about the replacement sales momentum continuing. When we look at the full file of our installed base we have a mix that leans heavily towards large multi-bunker [ph] academic institutions where many have our earlier generation Tomo and CyberKnife systems, who will therefore benefit…

Thank you, Josh and good afternoon everyone. We ended the second quarter with backlog of $426.2 million, up 16% over the prior year. Backlog included gross orders of $78.5 million and net orders of $54.1 million, reflecting age outs of $19.9 million and one cancellation for $3.6 million. Age outs in the quarter were anticipated and consistent with the guidance we provided in October. In addition, currency negatively impacted net orders by approximately $1 million in the second quarter. Josh already highlighted the factors contributing to our strong gross order performance, including replacement sales above historical averages, improved mix, of both new and replacement CyberKnife orders and a multi-system Radixact order. All of these items led to significant gross order growth in the quarter and we are approximately $10 million above our guidance for the first half of fiscal 2017. First half of fiscal 2017 gross order performance translated into 16% year-over-year growth in our backlog. As we look out 12 months to 24 months when these systems are installed our backlog could translate in to product revenue growth rate greater than our rate of product growth in fiscal 2017. Turning now to our income statement, total revenues for the second quarter were $87.5 million compared with record levels of revenue of $108.9 million in the year ago period. On a sequential basis, revenues were up slightly over the first quarter and we continue to anticipate a linear progression of revenue as we move through the balance of the year. I’ll provide more detail on the metric shortly. Product revenues for the quarter were $35.4 million. We performed above our expectations for the quarter in the U.S. and Japan. This was offset by below plan performance in Europe which is primarily attributable to the marginally extended conversion to revenue times…

Thanks, Kevin. Before we open the call up to your questions, I'd like to thank the entire Accuray team for their focus and contribution to our performance in second quarter. Our company's commitment to the important work we are doing in improving the lives of cancer patients by providing leading edge treatment solutions remains central to our mission. Now operator we're ready to open the call up for questions.

Thank you. [Operator Instructions] And our first question comes from Josh Jennings from Cowen & Company. Your line is open.

Hi good evening, thanks gentlemen. I was hoping to ask you a few questions on the sales funnel. Clearly the replacement cycle has set up nicely. And any high level thoughts on how you're feeling about the de novo customer funnel at mid-year versus the beginning of the year. Then on Radixact, and one of the promise of the platform that it will more fully open up to single and dual vault segments of the market and can you talk about the early Radixact funnel and the mix of single and dual vault centers within it. And then lastly you secured another multi-system order in fiscal 2Q. Does the funnel include more potential multi-system orders as well?

So Josh I'll take in, I guess in that sequence that the question were given. Let me talk a little bit about replacement cycle in general. As we've characterized in the past the primary geographic focus is our US market and Western Europe across both platforms. If you think about just the performance, let's say in Q2 and the contribution, the bigger contribution in terms of product mix from a CyberKnife standpoint, right now across the entire installed base that's kind of coming into replacement cycle on CyberKnife, less than 20% of that installed base actually has the latest generation device. So when you think about the opportunities for M6, MLC equipped people that are looking to build full body radio surgery programs, we think we have a lot more ground to cover in terms of opportunities inside the installed base and that's represented by replacement cycle. We talked a little bit about product advantages on both platforms. I mean we have the basis here for confidence really comes from a better performing product on both platforms, better functionality, better speed, better throughput, better reliability. And those things really translate into expanded clinical versatility in the minds of customers but also a growing addressable market opportunity for us. So I'm pretty bullish on the continuation of momentum in the replacement sales piece in both the US market and Western Europe.

Yeah I could take your single and dual vault question, we continue to experience the majority of our orders for Radixact and TomoTherapy in single and dual vault, which has been really running now for probably last four or five quarters, Josh. So that trend continued in the second quarter.

Josh, I think the last question you had was around Radixact, and kind of funnel and what our view is right now from an early assessment? We are in still in this current quarter, ramp and monitor [ph], which is really kind of a reference site installation optimization exercise that essentially makes sure that we’re creating the very best reference sites we can and understanding elements of installation that are specific to the new platform. That program is not completed until the end of this quarter, so the fiscal third quarter but quite frankly as you can see it’s not standing in the way of us taking orders for Radixact. So we’ve got sites in both the U.S. and Europe that are reference sites that we’ve already taken to revenue and that are all treating patients today. And again we expect that they’ll be completed with ramp and monitor as a phase by the end of the third quarter but generally the feedback from those customers that now have patient treatment experiences with the new system has been really positive, very strong feedback, positive feedback about speed, product performance and so much this is exceeding their expectations quite frankly. So we’ve again a stronger sense that we’ve got with Radixact, a true workhorse product and a product that quite frankly is going to really meet the needs of a lot of customers.

Thanks for that. Sorry for the multi-pronged question. Just one follow-up, just on the replacement cycle, I don't -- sorry if you guys commented on this in your prepared remarks but can you give us an idea whether you’re maintaining that replacement conversion rate? And then lastly with Radixact and with the next generation CyberKnife with the InCise MLC, are you seeing any customers move up their replacement timeline to have the latest and greatest Accuray technology platform earlier than say 10 years? Thanks for taking the questions guys.

So I'll start. I will let Josh come -- follow-up on the timing. We did see in the second quarter, Josh above, I’d say historical performance on the replacement cycle. We have said that you should expect in fiscal 2017 for us to be in the 10% to 20% range as a percent of total orders. We were north of that in the second quarter. But I don’t get too excited about looking at it on a quarterly basis. I think for fiscal 2017 we’re still comfortable with placements being somewhere in the 10% to 20% range of total orders.

Josh, on the accelerated timing, if you will, part of the question, again if you look at the profile of the typical location that we have our installed base equipment and you’re talking about large multi-bunker academic institutions, generally a more complex case mix of patients that end up being treated in those institutions, and in many cases people that lead those departments and those -- the radiation oncology practice, if you will, at those medical centers, are pretty well-known key opinion leaders, people that are still actively involved in research with those patient populations and our devices. So there’s generally a desire to have, what I would characterize as the latest and greatest, if you will in terms of our equipment. I think maybe in certain cases you see people that would -- and have the capability from a budget and a flexibility standpoint to be able to go, to upgrade, perhaps sooner than a ten year replacement cycle but our expectations are that it isn't necessarily that that’s going to happen on a routine basis or a highly predictable basis. We’ve got a lot to keep us busy quite frankly, just at the level of replacement sale opportunity in front of us. Again it’s 200 plus systems across CyberKnife and TomoTherapy, on both platforms and again I think we have a fairly robust view of the momentum if you will of replacement sales continuing.

Thanks for those answers. Appreciate it.

Thanks Josh.

And our next question comes from Anthony Petrone from Jefferies. Your line is open.

Thanks and good afternoon. Maybe I’ll start with a higher level question just on the market landscape and then move into a couple on guidance. But maybe just Josh and Kevin if you provide an update on the competitive landscape, just as it relates to elect and vary and maybe the similarities and differences around the landscape heading into calendar year 2017?

So I’ll start Anthony. I think again if you look at where, certainly where our replacement sales opportunity resides, again you've got heavy concentration in the U.S. and Western Europe. In the U.S. market the primary people we're competing against is Variant. Probably seven out of the ten bunkers that our sales people drive past have a Variant device of one form or another running in those vaults. So I'd say it's a very -- from a competitive scenario, it's a very Variant-centric kind of landscape. I think we're doing a really good job of maintaining and retaining our existing bunkers. And we are showing that with improved functionality and product capability and reliability we've got -- in a competitive sense, we've got the ability to convince single and dual vault locations that Tomo and now Radixact are really viable options for them, where overtime if you look back over the last four-five years that quite frankly historically wasn't the case. So I think we're feeling pretty good about the competitive dynamics. Again we're not wining at 100%, we're not going to win at 100%. But I think we're being a more viable competitor quite frankly today, than we've been at any point of time in my experience at Accuray.

That's helpful and maybe just to clarify from a bunker size standpoint is Tomo and Radixact similar to sort of existing dimensions for the majority of those installed Variant bunkers?

Yeah, they would certainly be more characteristic of a relatively easy substitution, relatively minimal bunker modification would be required. So that certainly helps the discussion.

Okay. And then just on guidance, you've mentioned distributor orders. I'm just trying to get a sense of the difference in timing of revenue recognition sort of when you have a distributor order versus a direct sales order. And maybe just the last question would be what do age outs and cancellations look like with respect to distributor orders versus direct orders? Thanks.

Yeah, so I'll answer your age out question first. Our age outs historically have been primarily distributor orders as compared to direct orders. With that said the comments I made about expecting age outs in '17 to improve as a percentage of backlog over fiscal 2016's level of 13% takes into account the increase in the revenue conversion cycle that both Josh and I highlighted. So we've already factored in any impact that would have in our age out guidance. Your first question with regards to differences in conversion timing, I mean the fact is it does vary by region. And you're going to see some differences. I think in this quarter we are impacted primarily, as I mentioned on the revenue side by our distributors in the European region primarily the non-Western European regions where we use distributors. However on a positive note, we highlighted I think in our third quarter call last year, Japan which is a region where we are 100% distributor and we've actually seen that conversion process improve over the last six to nine months, so much so that Japan now in the first half of 2017 is representing approximately 15% of total company revenues as compared to 5% in the first half of 2016. So it's vary region specific, macro factor specific, but the weakness and the delays we saw in the first half of 2017 were primarily Europe.

Very helpful. Thanks.

And our next question comes from Tycho Peterson from JPMorgan. Your line is open.

Hey guys, thanks. It's actually Patrick in for Tycho. Maybe just to expand on Anthony's question on revenue conversion. Definitely understand it's more difficult to handicap given distributors, all that direct control. But now that you've kind of identified that as a problem and increased focus on it, is there anything you can do to accelerate conversion from the distributors or how you're thinking about improving that a little bit.

Yeah, so Patrick, it's a great question. We just as a little bit of background on the resources that we usually have involved, when we're involved in a direct sale and then where we have primary responsibility for installation. We've got installation teams and essentially revenue conversion teams in our regions that are working with end user facilities on site planning elements and site planning details, working on installation details and bunker modification components -- elements of the process, and coordination quite frankly in some cases with contractors locally to support those activities that I just described. Those resources are our resources that are dedicated and they’re focused by region and when we're direct sales mechanism and we’ve got responsibility for installation, those resources are highly engaged, actively engaged in a really end-to-end process with the site and institution, the end user institution. We are trying to work more closely with distributors to find out its – it’s really a little bit of the help us, help you discussion. We’re working with them to find out what we can bring with regards to some of the resources I just described that would help augment or help support, perhaps in ways that they’re not capable of on their own, those – the execution if you will of those activities that I just described. So we’ve got a large number of independent distributors that we work with in different parts of the world, but this is not necessarily an exercise for us where we’ve got to support every one of them. These -- the orders are probably, more heavily concentrated in, again, as Kevin described before, central Europe, certainly, as of – most recently Japan -- well that’s an improving situation as Kevin highlighted. So we have -- I think we have the resources from the Accuray side that need to be engaged in these conversations with distributors pushing and expanding their involvement perhaps if you will in efforts to move this process forward in a more expedited fashion.

Okay. That’s helpful. And then may be one for Kevin, just on gross margins, now they’re obviously a bit soft in the first half. Now looking out -- you guys gave at the Analyst Day the longer term target of 45%. Maybe just talk to your confidence level in that number and the key leverage to get you there from obviously a lower base coming off first half of the year?

Yeah. So as I mentioned your question really is two parts. On the second quarter as I said, the most significant factor continues to be really mix and we were hurt in the first half of the year by product mix having a high ratio of Tomo revenues and also just an overall lower sales volume. We still think given our forecast for the back half for the year, we can get back to essentially flat product margins in 2017 as compared to 2016. Longer term, we still continue to work towards the goal we put forward on Analyst Day of 45% overall margins. This would represent service margins in the low 40% range, product margins in the high 40s. Revenue improvements are an obvious factor in regard to margin improvements, but another thing, we are also working on as a company, which we haven’t talked about in a few quarters, we do remain focused on cost down initiatives on our systems and we are currently investing in several large standing engineering products, which will not benefit fiscal 2017, but it is going to contribute as we head into 2018 and 2019. So I don’t view our overall margin results in the first six months as any risk or indication that we can’t get to where we want to get to in fiscal 2019.

Understood. And maybe just one, last one, you guys mentioned Japan, an increase in product revenue, I don’t think you’ve shown any improvement to Radixact yet. So maybe what are you anticipating that, what’s the visibility there on that, and then how significant is the opportunity for Radixact? Thank you.

Yes. So we’ve submitted all the necessary paper work for showing [ph] an approval in Japan and we expect that very shortly, we expect in our fiscal third quarter.

[Operator Instructions] And our next question comes from Brandon Henry from RBC Capital Markets. Your line is open.

Yeah. Thanks for taking my question. Motion management, it's an important differentiator for CyberKnife, that’s not yet available on the Radixact platform. So can you provide us with an update on the timeline for the motion management for Radixact? And then discuss, how important you think this technology will be in driving TomoTherapy replacements? And I have a follow-up question.

Brandon, it’s a great question. The – what you describe in terms of capability on CyberKnife, which is the motion management capability the software component to that which is the automated theme adjustment capability through synchrony, these are similar technology upgrades that we believe are going to be really pretty central to longer term adoption and utility of Radixact going forward. This is a highly upgradable platform that will allow for motion tracking overtime, motion correction in terms of beam [ph] correction overtime. So, if you think about how CyberKnife has evolved Radixact would look again different platform obviously but would look similar in terms of how it tracts along those upgradability pathways if you will, and this is a major, at least my feedback, this is a major part of the thought process for those customers that are looking at considering Radixact in the replacement sales discussion. Again if you think it about it in terms of our existing installed base we’re taking a customer with earlier generation product and even in an upgraded form that earlier generation product will never get to the level of capability from a functionality perspective that Radixact will, given the functionality improvements that I just described. And we haven't been specifically quite frankly about timing, but I would say that we feel pretty good about the rate at which or the pace at which we are moving through our technology roadmap and advancing the development of these incremental product capabilities.

Okay. And then just a couple of questions. First, have you seen any differences in the historical win rate for replacements for TomoTherapy versus CyberKnife and then also the replacement rates for the U.S. versus international market?

No, we haven’t. I think the answer would be it's too early to draw any definitive conclusions. We’re very early in this replacement cycle. I will say the first half of 2017 yielded positive results on both product platforms. We saw in the U.S. predominantly all replacement sales and also predominantly CyberKnife related, while in the OUS we saw a nice mix of replacement sales and the competitive wins across both platforms. So I don’t think -- I think it’s too early in the cycle Brandon to draw any conclusion. We’re performing kind of at or above our expectations on replacements sales across both product platforms at the movement.

Okay. And then final question from me, you mentioned that operating expenses will now be down 3% to 4% for this fiscal year versus I think previous guidance, of kind of flat, can you talk about where the cost reduction is coming from and also if fiscal second half revenue performance does fall short of expectations, are there additional opportunities for cost cutting that would still allow you to meet your fiscal year 2017 adjusted EBITDA guidance? Thanks.

Yeah, I believe so. So we finished for the first six months of 2017 roughly down $10 million in OpEx or 12% below prior year. 4.4, roughly 4.5 of that is attributable to legal expenses, I'll call them nonrecurring and what you seeing in the first half is lower revenue levels leaving to decreased compensation expenses and decreased commission expenses. And our guidance right now of operating expenses down 3% assumes we're within our revenue range of $410 to $420 million and if we would be below that range I think it’s fair to suggest that our operating expenses could potentially be down less than 3% primarily due to the two factors on compensation that I just mentioned, which, by the way, in my prepared remarks I had said that's what gives us, I’d say particularly higher level of confidence in our ability to achieve our EBITDA range.

Okay. Thank you.

No problem.

And at this time, I’m showing no further questions. I would like to turn the call back to management for any closing remarks.

Thank you, operator. And thank you everyone for your participation on this afternoon’s call. We look forward to talking with you again on our fiscal third quarter earnings call and thanks and have a good evening.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.