Accuray Incorporated (ARAY) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2019 Accuray Incorporated Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. Now, it’s my pleasure to turn the call to Doug Sherk. Please go ahead.

Thank you, Carmen, and good afternoon. Welcome to Accuray conference call to review financial results for the second quarter of fiscal 2019, which ended on December 31, 2018, as well as recent corporate developments. Joining us today are Josh Levine, Accuray's President and Chief Executive Officer; and Shig Hamamatsu, 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 risks and uncertainties, including statements regarding our future business plans and strategies. 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 the CyberKnife TomoTherapy and Radixact systems, commercial execution, future order growth, future revenue growth, and macroeconomic factors outside of the Company's control. These and other risk are more fully described in the news 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. Two housekeeping items: First, during the question-and-answer session we request that questioners limit themselves to two questions and then requeue with any follow-ups; Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2018. 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 on today's call. Accuray’s second quarter performance extends the positive results we reported for Q1. Gross orders of $100.2 million were up 29% year-over-year. Our gross order growth was driven by strong demand for our Radixact platform, a sequential rebound in quarterly CyberKnife orders, which represented almost 50% of gross order dollars and a bolus of orders from China. The CyberKnife growth can be attributed to customer demand for the system’s unique real time tracking and motion synchronization capabilities that spare healthy tissue through extremely precise treatments. Radixact continues to gain recognition from customers as a versatile and efficient workhorse system, while also providing best-in-class treatment precision. Since the launch of our Radixact treatment system roughly 24 months ago, we have now taken 120 orders for this system, more than half of which have come from single or dual vault customer locations. Our results in the second quarter are consistent with this historic trend with approximately 50% of the Radixact orders were single or dual vault sites. Overall, approximately 25% of orders in the second quarter represented competitive takeouts, 55% were for new vaults, and 20% were replacements in our installed base, which are all within our historical range. On a regional basis, our second quarter gross order growth was driven by our Americas and APAC regions. The Q2 Americas results provide an encouraging data point as we are seeing the benefit of additional sales resources and new territory coverage models associated with the U.S. sales organization restructuring that we fully implemented in the second half of our last fiscal year. APAC was the most significant contributor to our gross order growth in the second quarter, reflecting the impact of pent-up demand from customers who have been waiting for the formal announcement of final Type A and B radiotherapy quotas and licenses. The mix of the systems that represented the majority of the 16 systems in Q2 orders was strongly weighted to Type A radiotherapy systems. While the China related order demand in Q2 was strong, we believe there will be some quarter-to-quarter variability in order flow through the end of the fiscal year with revenue generation beginning in fiscal 2020 as the Type A and B licensing process becomes fully activated. Accuray’s CyberKnife and TomoTherapy radiotherapy systems have strong brand strength and a high awareness in Tier 1 academic and research-based hospitals in China and carry strong endorsement from many key opinion leaders in the radiation oncology community. This awareness and support for our premium products was instrumental in driving strong win rates during the period of time, when Type A licenses were last thing issued, and we believe we are well-positioned to see continued momentum in the Type A segment. As many of you know, approximately 87% of the roughly 1,400 devices covered by the quota announced by the Ministry of Health in October 2018 were for the Class B market. During the second quarter, we also continued to advance the negotiation process supporting the establishment of a joint venture with a Chinese manufacturing and commercial partner that would allow us to produce a locally manufactured, Chinese branded, Type B product and broaden Accuray’s market access within the Type B market segment. Accuray did not meaningfully participate in the Type B market under the previous quotas, and this represents the largest growth opportunity in the China market over the next decade, which will capitalize on for the execution of this joint venture strategy. We are in the final stages of negotiation related to the China JV strategy, and we look forward to providing more details in the coming weeks. While Shig will discuss our financial performance and outlook in more detail, I do want to provide a few financial highlights for the quarter. Accuray's total revenue for the second quarter was $102.2 million. For the first half of the year, revenue grew 4%, which is consistent with our guidance range for the full fiscal year. We also generated positive EBITDA of $4.2 million during the second quarter, and we remain focused on driving our business to sustainable profitability going forward. As announced during our last call, we have implemented a cost reduction initiative in the second quarter with an annual cost savings target of $15 million. We believe that this action at current rates of revenue growth creates a level of operating leverage going forward that should allow us to achieve GAAP net income profitability on a full-year basis in fiscal 2020. As we identified in our Q1 earnings release, the reductions in workforce primarily occurred in functional areas that are not impacting our ability to achieve commercial objectives or advance our product innovation pipeline. We anticipate we will fully recognize the benefits of these cost savings by the end of our current fiscal year. Turning to an update on our product development pipeline, at ASTRO in late-October, we generated strong market interest in the introduction of our VOLO Optimizer software for CyberKnife system which can dramatically reduce treatment planning and delivery time. This new software, coupled with the Multileaf Collimator for CyberKnife can dramatically reduce treatment delivery time by as much as 50%, enabling treatments depending on disease site in just 15 to 30 minutes. The VOLO Optimizer also reduces planning times by up to 90%. We are making VOLO available to our existing customer base through various upgrade packages. We believe that VOLO reduces overall treatment times and mitigates workflow constraints, which slightly impacted customer decision making to purchase the CyberKnife in the past. We currently have VOLO installed at roughly a half a dozen customer locations at present, and the positive feedback has exceeded our expectations with regards to improved speed and overall efficiency gains. I am also pleased to report that during the quarter we received FDA approval on our 510(k) application motion synchronization on our Radixact treatment system. Accuray is the original innovator of motion synchronization, which has been a unique functional feature of the CyberKnife platform. As with CyberKnife, we will market this feature under the brand name Synchrony, and we expect to launch this important feature for Radixact by the end of our current fiscal year. With Synchrony on Radixact, Accuray will have the only two radiotherapy systems able to provide true motion tracking and beam synchronization and correction during treatment. This technical capability brings the beam to the tumor, not the tumor to the beam, enabling tighter dosing margins and healthy tissue sparing during the treatment. We also believe that precision and accuracy that Synchrony provides will expand hyperfractionated and retreatment opportunities for patients and physicians. A third innovation under development is kVCT imaging on Radixact as part of our continuous efforts to provide our clinicians with the best possible imaging capability. Our imaging roadmap leverages the unique benefits of the Radixact architecture as well as the cost and throughput benefits the technology. We believe innovations in diagnostic imaging will continue to expand what's possible with this technology to help support delivering improved treatments efficiently including the promise of online adaptive therapy. We intend to continue to make significant product development investments in this area. VOLO, Synchrony and kVCT imaging upgrades will combine to substantially strengthen Accuray's current product portfolio positioning which is already well-aligned to operate effectively, both clinically and operationally in a value based care reimbursement environment. Under this scenario, providers will be reimbursed based on quality, cost efficient care versus the current reimbursement model that rewards the number of treatments required to achieve an outcome. Our product’s ability to effectively support hyperfractionated treatment delivery improves the patient experience and reduces overall treatment regimen timeframes which benefits both patients and payers. With reimbursement trends moving in this direction, we are focused on capitalizing on this emerging dynamic. And now, I'd like to turn the call over to Shig for a deeper look at our financial performance.

Thank you, Josh, and good afternoon, everyone. As Josh highlighted, we had $100.2 million of gross orders in the second quarter, representing an increase of 29% over prior year. Both the APAC and Americas regions were the drivers of the strong gross order growth. On a year-to-date basis, gross orders increased 21% over prior year. As mentioned in our last call, we started to include upgrades purchased through our service contracts in our gross orders starting in fiscal year 2019. Such orders totaled $1.5 million for the second quarter and $2.6 million on a year-to-date. Excluding these upgrades on service contracts, gross orders increased 27% in the second quarter and 19% on a year-to-date basis over the prior year. On a product mix basis, the second quarter was highlighted by CyberKnife system orders more than doubling year-over-year. This growth was driven by the APAC and EMEA regions. As Josh mentioned, our APAC region was especially strong as a result of the pent-up demand from our customers and distributors in China who have waited for the release of new licenses and quotas. Additionally our Radixact system continued to perform well with orders going 8% from the prior year quarter. Radixact represented approximately 90% of TomoTherapy platform orders as we continue to see the shift to our newer generation systems. On a net basis, we generated $69.2 million orders in the second quarter. As we mentioned on our last call, we anticipated higher level of age-outs during the first half of the year, and the second quarter age-out adjustments for $32 million. We also recorded $1.2 million of cancellations and other adjustments. In addition, we recorded revenue of $2.2 million from age-ins. Net age-outs for the quarter included orders related to China Type A systems, representing about 20% of the total. As the end user hospitals start to receive licenses, we continue to believe we will start converting these age-out China orders to revenue, most likely starting in fiscal year 2020. We ended out second quarter with a backlog of $482.2 million, representing an increase of 2.5% over prior year. Turning now to our income statement. Total revenue for the second quarter was $102.3 million, representing a 2% increase over prior year. EMEA and Japan were the primary drivers of our revenue growth. For the first half of fiscal 2019, revenue grew 4% over prior year. Product revenue for the quarter was $48.1 million, an increase or 2% over prior year. The product revenue increase was driven by strong demand for our Radixact system with revenue approximately doubling from prior year. Since its introduction, we have recognized revenue from more than 70 Radixact systems. Service revenue for the quarter was $54.3 million, an increase of 2% over prior year. For the first half of the year, service revenue has grown 3%. The increase in service revenue was primarily driven by the growth of our installed base. Turning now to gross margin. Our overall gross margin for the second quarter was 38% compared to 39% in prior year. Product gross margin was 40% in the second quarter compared to 43% in the prior year. The decrease in product gross margin was primarily driven by product mix with a larger percentage of our overall sales attributable to the TomoTherapy platform as compared to the prior year. For the first half of fiscal 2019, product gross margin was 40%, down from 43% in the prior year due to lower mix of CyberKnife systems in our revenue. We are encouraged to see the strong current quarter of CyberKnife gross orders which should translate into improvement in product gross margin as these orders are converting to revenue. Service gross margin of second quarter was 36%, which was flat year-over-year. First half fiscal 2019 service gross margin was 37% compared to 38% in the prior year. We believe our continued investment in service efficiency and parts reliability will contribute to improved service gross margin as we look to the second half of this fiscal year. Moving down the income statement. Operating expenses for the quarter were $39.2 million, a decrease of 3% from the prior year. The second quarter operating expenses include a severance charge of approximately $0.7 million related to our cost reduction initiative that was discussed in our last call. Excluding this severance charge, the second quarter operating expenses decreased 4% from the prior year. On a year-to-date basis, operating expenses were $81.8 million or up 2% year-over-year. Excluding accounts receivable impairment charge in the first quarter and severance in the second quarter, year-to-date operating expenses decreased 3% from the prior year. Adjusted EBITDA for the second quarter was $4.1 million compared to $4.8 million in the prior year. Excluding the one-time charges mentioned earlier, adjusted EBITDA for the first half of fiscal 2019 was $8.1 million compared to $7.9 million in the prior year. We ended the second quarter with $65.4 million of cash and short-term restricted cash. The decrease in cash from the prior quarter was primarily driven by the timing of accounts receivable collections. Within the past three weeks, since the end of the second quarter, we have collected more than $17 million of cash from the receivables outstanding at the end of December. We expect to generate positive cash flow for the remainder of this fiscal year. Before I move on to discuss our fiscal 2019 guidance, I'd like to update the status of the cost reduction initiatives we discussed in the last call. As I mentioned earlier, we have recorded the severance charge in the second quarter as a result of the initiatives. With the execution of the initiatives substantially completed, we continue to expect the total annualized savings from this action to be approximately $15 million and to start realizing the full benefit of this action in the fourth quarter of this fiscal year. Of the expected savings, approximately 30% will benefit gross margin, while the remainder will reduce operating expenses across all functions. Turning now to our guidance for fiscal 2019. Today, we are reaffirming guidance provided back in August. August calling for our annual revenue in the range of $415 million to $425 million, which will represent growth of approximately 3% to 5% over fiscal 2018. The guidance includes 4% to 8% of product revenue growth. In addition, we continue to expect our adjusted EBITDA to be in the range of $23 million to $29 million, excluding the impact of the impairment charge and severance charge in the first half. This EBITDA range will represent year-over-year growth between 35% and 70%. We would like to provide a bit more color on some of our anticipated performance. For instance, we anticipate the recent China Ministry of Health quota announcement to have a more meaningful impact on our revenue starting in fiscal 2020. This timing on China order revenue conversion is anticipated to be primarily driven by the requirements for the end user hospitals to go through the regulatory to license application process prior to purchasing our systems. From a gross order perspective, in China, we realized pent-up demand in the second quarter and we are focused on winning customer orders during the remainder of fiscal 2019. However, we anticipate there will be quarterly fluctuations in orders from China during the remainder of this fiscal year. Globally, our trailing 12-month gross order growth was approximately 10%, illustrating the quarterly fluctuation potential of our Company. While we are maintaining our policy of not providing gross order guidance for the year, we believe our gross order funnel is still subject to the quarterly fluctuations and our second half of fiscal 2019 gross order growth rate is expected to be more in line with the overall market growth rate. Turning to our net age-out outlook. We anticipate third quarter net age-outs to be in the range of $18 million to $22 million of which approximately 40% is expected to be China Type A systems orders. As I mentioned earlier, we do anticipate these China orders to start age back in as fiscal 2020 unfolds. In terms of our gross margin outlook. We continue to expect overall gross margin to be similar to the fiscal 2018 level as we anticipate TomoTherapy Radixact platform revenue to be a higher percent of total revenue in this fiscal year. We now expect operating expenses for the full fiscal year to be down approximately 1% to 2% year-over-year, excluding the impact of one-time impairment and severance charges, discussed earlier. And with that, I'd like to hand the call back to Josh.

Thanks, Shig. Before we open up the call for questions, I’d like to thank the entire Accuray team for their increased focus and commitment and improving execution, supporting the important work that's making a difference in patients’ lives. And with that, operator, we're now ready to open the line for questions.

Thank you. [Operator Instructions] And our first question comes from Josh Jennings with Cowen. Please go ahead.

Hi. Good afternoon. Thanks to actually Josh and Shig. Congratulations on the strong order quarter. I had two questions on China. First, just on the historic China Class A orders that are contributing to age-outs now. I was just hoping to get an idea of whether or not this represents some low-hanging fruit and how we should be thinking about the inflow or age-ins of some of these orders, as Shig was referencing earlier in his prepared remarks? Any way to quantify how many Class A orders were in backlog prior to the Class A licensing [ph] that happened over the past two years? And then, what percentage of those orders could potentially come back in and generate revenue?

Sure. Josh, thanks for the question. So, as far as sort of the cadence -- potential cadence around whether age-out orders or new orders, which come in to revenue, I think there's really no way for us to predict that. It's not really a first in, first out type of thing as we look at this China opportunity, as all those end user hospitals going to apply for the licenses. So, I don't think we can already predict which ones are age-in or which ones are going to go first. So, that's first point. As far as the level of the Type A orders, we have something in the neighborhood of probably somewhere around $60 million or $70 million worth Type A orders prior to the recent license announcement. So, that’s sort of the baseline that was started before the announcement occurred. Sorry if I -- did I miss another question there?

No. Thanks for that. Should we be assuming that you’re still having engagement with those customers that have made those orders and there should be some fruit borne from? I know that you did reference that there is some orders will begin to age-in over the next couple of quarters or maybe in fiscal ‘20?

Absolutely. We'll completely engage with these customers even though they age-out from a backlog policy standpoint. And again, as my prepared remarks said, likely and more likely 2020 is a timing you start to see some of those orders age back in.

Great. Thanks. And then just a follow-up question is on your China distributor. You guys had a clearly the strong quarter, 16 orders, some of that was pent-up demand. But, as you're pursuing the China JV, can you help us understand how you're kind of balancing the relationship here, and how you're incentivizing [ph] to continue to make the strong push to sell Tomo and CyberKnife systems in front of JV being finalized? Thanks a lot, gentlemen.

That's a great question. That topic actually has been a front and center, and one of the probably the bigger visible issues for us to deal with in this transition. So, we're not -- we obviously -- I think I said in my prepared remarks we hope -- we're getting close we hope we’ll have something to announce here and update the market on in literally the matter of weeks. But, it's been a primary focus of ours to ensure that we have -- in this transition plan we have basically structured a scenario where we are not disenfranchising our distributor Tomo. And we're making sure that the opportunity -- to ensure that we're not disrupting order activity and order flow going forward in this transition. So, that we've got a structure that we -- won't go into detail right now, but the opportunity is still a good one and we'll keep the TomoKnife folks actively engaged in the selling process for a period of time after the JV is announced. And also, it doesn't impede or constrain the JV partner from being able to begin their work in terms of selling and supporting installed base going forward. So, it really is, by intent, we look at this as we need to land at a win-win-win for TomoKnife, the JV partner and Accuray to ensure minimal disruption, maximum focus on continued order and selling activity, and order generation. And I think, we feel pretty good about where we're at right now. We'll be able to speak more intelligently and in detail about the underlying structures that are in place with the JV and why we're so excited about it, hopefully in a relatively short time period here.

Thank you. Our next question comes from Anthony Petrone with Jefferies. Please go ahead.

Thanks and also congrats on the order number in the quarter. Maybe one question on China, one question on CyberKnife. On China, maybe just you called out the 16 orders just from an actual order standpoint, just a recap of how many actual orders were already accounted for in backlog, and an update post the Q within backlog, how many orders are still in there? And then for CyberKnife, that number was better than expected as well. How much of that was driven by VOLO, and what percent of the CyberKnife installed base do you envision eventually will upgrade with VOLO? Thanks.

Yes, Anthony. So, just to be clear, the orders that we generated and we talked about in Q2 in China, those are new orders, those are orders that TomoKnife has brought forward. Just to be clear, of the 16, 15 units were Class A radiotherapy orders for those type of products and one was a Type B product order. But, those are new orders. And so, we're excited about -- obviously the lag time between -- that it took for clarity to be reached on order licenses, quotas et cetera really had customers -- end user customers wanting to make sure that they could get into the manufacturing queue and there was a significant push on the distributor to take orders, so that people were not left out in the cold sort of speak, in the early stages of this. We feel good about that. On the CyberKnife, end of the quarter, we had a good for with CyberKnife. It was sequentially -- it was a rebounding in order activity. I think we mentioned in the prepared remarks, we've got about a dozen locations installed with VOLO Optimizer. Feedback has been -- it's clearly exceeded at least from what we were expecting. It's actually exceeded expectations from a feedback perspective on customer inputs on and reactions to treatment -- improvement in treatment plant preparation time and treatment delivery. And I think it's going to continue to be a catalyst for more engagement in customer dialogue with regards to the CyberKnife. It's got the potential to kind of reset the market expectations about what they're used to on treatment speed and overall throughput. To be clear, to handle the second or the last part of your question, this is -- the upgrade is really specific in terms of backward integration to our M6 platform, which is in round numbers, roughly about 100 devices installed in the market right now. And I can't imagine a scenario where over time, the vast, vast majority, I don't know that I would say all of them, but the vast majority of those installed base devices, roughly 100 of M6s would want -- would not want to upgrade to VOLO. It's got such incremental improvement in efficiency, treatment speed, throughput. I can't imagine a scenario that those customers would want to upgrade. So it should be close to all of them.

Yes. And just a follow-up there would be, so as we look forward, those upgrades should get recorded now into gross orders, just want to clarify that. And then, the second one is just the Synchrony algorithm with Radixact, how much of an upgrade opportunity is that? Thanks. I'll get back in queue.

I'm going to take the second one first. I mean, the Synchrony motion -- our motion management solution is unique. It has been unique in the market for quite some time. I think that having the ability to bring that motion management capability to a platform like Radixact is a very, very significant upgrade path. You're talking about a product that already in the base system has dramatically improved functionality and performance characteristics, comparative speed and throughput capabilities to the products that it competes against with products like TrueBeam and Versa. And having synchrony on Radixact should be a very, very large jolt quite frankly to both customers that were considering purchasing Radixact as well as those that have a Radixact or have an order in the queue in the backlog waiting for installation because of the again the capabilities and the jump in performance relative to motion management and precision relative to treatment margins and tissue sparing. So, we're excited about that. The Radixact upgrade pathway, the two big anchor upgrade innovations, the first was Radixact, the second is the kVCT imaging platform upgrade as well. So, we're going to have a product that is really truly best in class capability both on the routine cases and the upper end of the spectrum with regards to more complex cases going forward with these capabilities installed.

Thank you. Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead. Brooks O’Neil: Good afternoon. I guess, I'll follow on there, Josh. And at the risk of asking a question that can't be answered in the short amount of time, I would say there is a lot of noise in the marketplace right now about motion management and system capability. I'm hoping you could give us the shorthand version of what you see Radixact with Synchrony delivering in the marketplace relative to what you hear about competitive systems claiming to be able to do?

So, Brooks, I think the simple answer is that Synchrony -- again, our version of motion management on Radixact is one of two pieces that unlock real time adaptive therapy capability where you're basically in current timeframe and fractionally you're able to basically adjust or modify treatment plan for anatomical changes in the patients or in target tumor location that's changed over time. And I mean that's really been quite frankly the Holy Grail of radiotherapy, at least by intent and by design over many, many years. I mean, this technology or this capability and the whole adaptive therapy discussion has its genesis back probably 15 years ago when Rock Mackie who had started TomoTherapy first kind of opined about the benefit, the possibility of with a product architecture like ours, got a ring gantry that looks like a CT scanner, getting through this kind of real time capability, online capability in terms of being able to adapt treatment plans based on patients changes. And while it’s taken a long time, we are clearly moving the rock down the field on both of those elements. The 510(k) approval on Radixact on the motion management capability for Radixact is a major hurdle behind us. And we're working fast and furious on the imaging upgrade capability for that platform as well, which would be the last piece to unlock adaptive therapy capability. So, I think that it's a big deal for us. I think the market is going to respond well to it and be excited about it. And anyone that doesn't believe or that thinks that Radixact today is just kind of like the old TomoTherapy system that they remember from hierarch days or earlier generation devices, they really haven't seen and haven't heard what is capable today off Radixact, even just a base system. So, we feel pretty bullish about where we're at with this product and what it means down the road in terms of growth catalysts for the business. Brooks O’Neil: Just as a follow-up. Can you just help us with the timing on the imaging capability? And secondly, we've talked over a long period of time about throughput. Can you just compare your throughput on this machine to what maybe is available from other systems in the marketplace today?

So, I mean, the simple answer on throughput is basically Radixact is as fast as anything in its class. And when I say it's class, the product capabilities or comparators if you would describe them competitively would be to TrueBeam, would be Versa, those would be again higher order premium products, significant case, mix versatility and case mix capability technically. We're seeing locations generate north of 50 patients in a treatment -- a 12-hour treatment window off of these platforms today. And the capability is every bit as good as the folks we’re competing against, actually on the upper end of case complexity probably even better, because of the product’s unique architecture. So, we think that it's -- again, we have the unique ability at this point to go back to people that remember TomoTherapy and its earlier iterations, its earlier generations and be able to share with them now real life customer testimonials, people that are using the device today in ways that would have been inconceivable, if you compared it to earlier generation devices. Brooks O’Neil: And if I could just sneak one last one. Could you just give us a broad sort of top-line about what you think the margin profile of a joint venture in China will look like and how it will compare to your existing sort of financial performance?

Brooks, I'm going to pass on that one. I appreciate the question. I am reasonably confident that we'll be able to speak very specifically to that question here relatively soon. But, I'm going to ask you to just be patient with us a little while longer on anything related to China JV.

Our next question comes from Brandon Henry with RBC Capital Markets. Please go ahead.

You discussed the Americas region being one of the main growth drivers for gross orders this quarter in addition to China. Can you just provide some more details on the Americas performance this quarter and what’s giving you the confidence the strength can continue in fiscal second half?

So, just to be -- in the spirit of full transparency, Brandon, we have -- the U.S. situation is admittedly driving off of a relatively low base, right? So, on a percentage uplift basis, it was significant, but this is still, I would say very much of a work in progress. It is a good indicator though that what we've done with regards to account targeting and our territory coverage model coupled with additional feet on the street, it looks like it's having some traction. And again, given our position over a long window of time in the U.S. that that actually is a good story, good new story for us. We are continuing to see funnel improvement in the U.S. market. We've talked a little bit in the last couple of quarters about the number of multisystem orders that are in the funnel, and that continues to be I think good -- another good indicator around the fact that we're in the game now and in conversations that we probably were not able to get into, if you go back a year or two ago. So, again, I think that those are good indicators. I also think that we're -- as I mentioned in prepared remarks where we're starting to see traction as well as continued strength in single and dual vault settings in the U.S. market, which for us is a big, big opportunity because we take ourselves out of just academic research based medical centers which might be 400 to 500 in the U.S. and say now that we can play, legitimately play in almost 2,000 vaults incrementally in the U.S. market, based on product capability, product efficiency and speed and reliability. So, pretty good uplift in terms of what we're playing for and what opportunity exists going forward. But again, we should be honest about -- it's a low base comparatively. So, I'm not ready to declare victory on this. But, I think we feel good about at least directionally where this thing is moving.

All right. And then, with China, what is the average time you're expecting for converting the new China orders to revenue? And how should we be thinking about the ASPs and profitability of the new China gross orders?

Well, the New China ASPs and gross margins and gross profitability I think will end up being a blended situation in terms of economics between the transition from TomoKnife, our current distributor to the joint venture structure going forward with the new partner. And again, I'm going to -- as you probably heard me in a previous question, I think we're going to defer questions on forward-looking impacts with regards to profitability and/or ASPs. We like -- just to be clear, we like the economics going forward, and I think the market will as well. But I'm reluctant to get into details on that at this point. I know you had another…

The timing.

So, time in the backlog really is going to be a function of how rapidly will -- once the mechanisms are well activated, how rapidly will end user customers be able to secure an importation license. And we think that that should be a reasonably short timeframe. We're -- obviously where we're seeing already seeing orders start to come from customers who want to make sure that they have an opportunity to get in the queue early, and I think that that's a testimony of TomoKnife’s aggressiveness in terms of positioning. But, it's hard to predict right now what absolute timing was like in terms of the backlog time on China, just given how early we are in the process with regards to licensing activation. I think it should be certainly no worse than what it had been in historic terms comparatively, once those licenses really start to flow.

All right. And just last one for me. I didn't hear anything about Onrad performance in the quarter, so, maybe you can talk about that and your expectations for Onrad as a contributor to gross orders in the back half the year. Thanks.

So, Onrad, as we’ve talked about, Onrad and TomoH are Type B products. We have really not had a lot of activity with either one of those up until the time we’ve had a better clarity around quotas and license announcement. I think with clear understanding now that those products are very definitively Type B, I think we have a chance to move more aggressively and have customers actually feel like they can make decisions, affirmative decisions on that product. The big opportunity for us in the immediate term are Type A products. But, I think that our positioning, both with Onrad and TomoH as well as the ability for the JV partner, when we get there to be able to sell those products before we're producing a local branded product on the Type B and given their size and market access capabilities, we feel good about what contribution will come from their involvement with those products. So, I'd say, they should start to impact order activity in the second half of the year.

Thank you. And our next question comes from Sean Lavin with BTIG. Please go ahead.

Yes. This is Marie Thibault on for Sean Lavin’s line. Thanks for taking the questions and I'll add my congrats on the strong order report. I do want to just go back to some of the comments you made on VOLO Optimizer for CyberKnife and then Synchrony on the Radixact. I guess I'm trying to get a sense of just how big a deal this is. I understand that it has got procedure time and it does seem like it will make a big difference for clinicians. But, I'm wondering what you're hearing from prior customers who were CyberKnife VSI customers who may be passed on the M6, is this getting them re-interested in CyberKnife? And then, equivalently on the Radixact side, do you think this could be a contributor, kind of an uplift and growth orders or is it more of an upgrade opportunity in terms of software there?

Marie, I think on the CyberKnife side -- actually on both the CyberKnife side and on the Tomo side, I think that the VOLO Optimizer and Synchrony are both big enough issues that they give us an opportunity to be a little bit more bullish on replacement sale opportunity. Because if you don't have an M6, you're not going to be able to upgrade to VOLO; if you don't have a Radixact you're not going to be able to get Synchrony. And so, it becomes a driver for customers that have earlier generation devices across both platforms to really consider for the first time now a forklift upgrade, if you will, to the latest generation, to base latest generation base systems across both products.

That's great to hear, great Josh. And then my other question is, I didn't hear too much on sort of the idea of a Medicare mandatory bundled payments. What conversations if any have you had with the agency at this point on that?

So, we, like our competitors, have been actively involved in supporting ASTRO on inputs around making sure that the cost basis is that they're using and for calculation purposes are correct and well thought out. CMS obviously is -- it's a government agency, it's hard to under the very best of circumstances predict what CMS or when CMS will move on this. I'd say, given our current situation in Washington, I characterize the dysfunction as maybe a little bit greater dysfunction than we normally see. But, I don't think there's any question that we're moving based on what CMS has said already that we're moving towards value-based care model. If you think about the typical timeframe calendar wise when they make these announcements, typically June or July would be the window of time when you hear a final rule schedule being announced or rolled out. And so, for what would end up being the 2020 final rule, it could happen -- something could happen this June or July. I would be reluctant to guarantee it or make a bet on it. But I know that the desire is there on CMS’s part to move in this direction aggressively. My understanding in talking to the folks on our end that are involved with the interactions with CMS from a reimbursement and a patient access standpoint that even though the government shutdown is still in effect, there are folks at CMS still actively working. And so, I think that that's a good indicator that perhaps that you could take that out or interpret that as a more positive outlook that we might hear something in the June or July timeframe. But, we don't have anything specifically that I could say I can hang my hat on that timing wise.

Okay, great. I appreciate the update. Thanks so much.

Sure.

Thank you. Our next question comes from Tycho Peterson with JP Morgan. Please go ahead.

Thanks. Just a couple of clean-up questions here. I guess as we think about the upgrade path first with Synchrony and then with kVCT imaging, how do you see that playing out in terms of your Tomo customers? Do you think they’ll potentially wait and do both at once or do you see them kind of going off line, add Synchrony and then subsequently adding kV once that released?

No. So, Tycho, it's good to hear from you. Thanks for participating today. The answer is, we've got orders in the backlog that are there with technology protection -- upgrade protection. So, no one is waiting for the final punchline if you will of imaging upgrade capability. The folks that are moving on this are moving now and have upgrade capability built into those contracts. So, again, as I mentioned before, we see this on the Tomo side as a real driver potentially of forklift upgrades in the discussions we're having with people that are sitting on older generation equipment and looking at this as an opportunity for completion of a replacement sale opportunity in one of our own bunkers.

Okay. And then, Josh, can you touch on clinical data? I know at our conference you highlighted the 5 to 10-year prostate outcome data. Is there anything to kind of look forward to in a coming year and maybe can you just talk on how that's going to be received in the clinical community?

I mean, we've worked hard at the -- to our clin affairs and med affairs group on trying to get to a place where we have device-specific information on the benefits of our products, which was quite frankly not very common, when I landed here six years ago, if you looked at across the space. We've got we think is the best data, the deepest pool of data on low and intermediate risk prostate patients utilizing hyperfractionated treatment schemes and SBRT with CyberKnife. And the data is remarkably strong, 98% or 99% local control, virtually no side effects or side effect characteristics or profile that could be characterized as rare, and two of the three studies five-year plus follow-up data; in one of the studies 10-year follow-up data. So, in the fastest growing disease site in our world, which is a prostate, specific to CyberKnife, we think we've got a strong position to work from there. I think that thing like VOLO Optimizer, which flats the time to develop a treatment plan and also really terrifically speed up treat and delivery time are things that along with the data will help, expand the opportunity for CyberKnife or at least create an opportunity where people that were concerned about workflow constraints with the earlier generation experiences that they -- they're willing to give us a chance or take a look, which is going to be helpful for us.

Okay. And then, just one or two other quick ones. I appreciate all the color on China, that’s certainly helpful. I think in the past you said, it would probably be a quarter or two before you start to see an impact from the Type A and B quotas. So, can you just say for all of us if there is any kind of pull forward dynamic here and you might hit an air pocket in a couple quarters on the China front?

No. I mean, again, as Shig pointed out and I think as I pointed out in prepared remarks, I think we're going to, on the order flow, until the licensing process for Type A, which goes through Federal Ministry of Health, and we're -- on the Type B products it runs through provincial Ministry of Health oversight, until those processes are in place and fully activated, I think, it could be lumpy from an order standpoint. But, I don't think that we're going to hit an air pocket in a big sense. In this we've got, especially in Type A, we've got a very strong position to work from. I think the history would suggest that we're still well positioned in that space. And we think that momentum in Type A will continue. And I think that Type B is an upside opportunity for us. We haven't really been all that active in Type B, because of uncertainty about where our product offering with Onrad and TomoH where it would land in terms of A or B designation. But with clarity around that now and the longer term strategy that we're going to employ to have a local brand what we produce locally branded products, which we think is the big lever for growth going forward, we think we're really well positioned in both A and B.

And then, just lastly, on the 15 million G&A reduction. Can you just give us some broad sense of where that's coming from? Obviously it’s G&A not sales, so nothing customer facing, but just give us some sense of where that's coming out of?

Yes. Tycho, so, just to be clear, it's not clearly G&A. But as Josh stated in his remarks, it is one of a supporting function and also some level of R&D area as well. So, I would just say across other function, but within those functions, more of a supporting roles. And then, as I said, 15 annualized, the 70% of that hit OpEx. So, if you think about starting Q4, that's when we start to utilize the full benefit of annualized $15 million. So, the way to think about it is, that means about $2.5 million on the savings we start to see through the OpEx line in Q4. So, if you think about Q4 last year was about $45 million OpEx exit rate. So, you can probably model out from the 45 million coming down 2.5 million from that rate exited this year.

And our last question is from Amit Hazan with Citi. Please go ahead.

Hey, guys. This is Phil. [Ph] I think you’re pretty well exhausted at this point. Maybe just one more on China if I could. You all have very good competitive takeout on your vault rate. And I'm wondering if you can talk to the level of win rate that the Type As had this first quarter out of the blocks and how that compares to the very strong win rate that you have last quarter around?

Phil, I don't -- off the top of my head I don't have a comparison with this first quarter versus where we would have been in the previous period when licenses were flowing. It goes back now close to three years. I do know this that these are new bunkers, these our greenfield -- for the most part greenfield opportunities. And those are places historically where as opposed to competitive takeouts, we've been very, very strong in our win rate relative to order generation. And again, I think it's a good indicator that as we’ve said we think that we have a strong position, we have strong KOL endorsement in those hospitals that are the Type A product interested customers, and whether they're academic or research-based medical centers, the other one would be the PLA military channel hospitals. But, we've got strong endorsements clinically. Some of the most important KOLs in the country know our products and are endorsers of our products by brand name and awareness. And that's I think a good place to operate from as it relates to as this thing kind of ramps up what we could expect going forward. I mean, if you look at where we were we've been pretty clear that we don't think we would -- it doesn't make sense to be overly aggressive about this in terms of forecasting win rates that would be at the level that we were winning in the previous time period. But, even with a reasonably significant discount to that win rate, you can imagine that we’d still be in a very, very good position relative to kind of being able to bunch above our weight class so to speak in competing for these Type A licenses.

Okay. I think that's really helpful color. So, I was still confident that you can compete above your weight class, but obviously that I think it was maybe 34 out of 37 I think quite reasonable thus far or as you guys see going forward in forecasting?

Yes. Again, I'm reluctant to say that -- it was 34 out of 39 actually in the previous period. But, either way, it's a north of 8% win rate. I think that our goal here is to not overstate the opportunity. We feel really good about where we're at and we feel really good about this first quarter impact. And we'll see more from here going forward.

Thank you. And this concludes our Q&A. I would like to turn the call back to Josh Levine for any final remarks.

Thank you, operator. And I like to thank everyone for their participation this afternoon. We look forward to speaking with you when we report our Q2 results at the end of April. Thank you all and have a good evening.

Ladies and gentlemen with that we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful evening.