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Accuray Incorporated (NASDAQ:ARAY)

Guidance Call

January 3, 2013 5:00 p.m. ET

Executives

Tom Rathjen - Vice President, Investor Relations

Joshua Levine - President and Chief Executive Officer

Derek Bertocci - Senior Vice President, Chief Financial Officer

Analysts

Jason Wittes - Brean Murray, Carret & Co.

Steve Beuchaw - Morgan Stanley

Anthony Petrone - Jefferies

Tycho Peterson - JPMorgan

Charles Croson - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Accuray Incorporated Corporate Conference Call update. My name is Dorcel and I will be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Tom Rathjen. Please proceed.

Tom Rathjen

Thank you, Dorcel. Hello and thank you for joining us for our conference call this afternoon as we update details of Accuray's strategy and provide insight into the preliminary results of the upcoming second quarter of fiscal 2013. Joining us today is Josh Levine, Accuray's President and Chief Executive Officer; and Derek Bertocci, Accuray's Senior Vice President and Chief Financial Officer.

Before we begin, I need to remind you that our call today includes forward-looking statements that involve risks and uncertainties. There are a number of factors that could cause actual risks to differ materially from our expectations, including risks related to our preliminary results for the second quarter, effects of introduction of new CyberKnife and TomoTherapy Systems, commercial execution, future order growth, future revenue growth, future profitability and updated guidance for fiscal 2013.

These and other risks are more fully described in the press release we issued earlier this afternoon as well as in our filings with the Securities and Exchange Commission. We assume no obligation to update any forward looking statements. And now, I'd like to turn the call over to our President and Chief Executive Officer, Josh Levine. Josh?

Joshua Levine

Good afternoon and thank you for joining our call today. This conference call is being held to provide greater detail and understanding about the announcements that were contained in a press release put out earlier today. As many of you know, from the time I joined the company in mid-October, I have been conducting a strategic and operational review of Accuray’s business. I recently concluded this review process and have identified many reasons to be optimistic about our business and confident about our future success.

However, this process has also highlighted several areas where improvement is needed to take Accuray to the next level. With the capabilities of the two new platforms that we launched at the ASTRO meeting in October of 2012, Accuray is now able to strategically position it’s product portfolio to compete in a broader range of the market and transition from niche product positioning to mainstream. As an organization we need to be a more commercially focused business culture. One that can consistently grow revenue and generate a sustainable level of profitability.

To accomplish this transformation, we need to change our primary orientation which historically has been focused on our technology and product development to improving our sales and marketing focus and meeting customer needs. To enable this strategy, we are taking actions to increase our selling focus and reallocating resources in downstream marketing activities. These actions will enable us to take advantage of repositioning the business based on the expanded features and capabilities of our new product platforms and communicate to the market how our products meet customer needs, both clinically as well as economically.

Additionally, we are optimizing and improving some of our internal business processes to enable and support our commercial strategy. Specifically, I have identified three primary areas of our business which require attention and change. These are, first, our new product introduction and their positioning. From a new product introduction standpoint, we need to transition our new products from development phase through launch to full commercial manufacturing. From a positioning perspective, we need to communicate clearly about the product’s expanded clinical capabilities, increased patient throughput and improved ROI value for customers.

Secondly, our sales focus and aggressively enabling downstream marketing. We need to improve our overall commercial focus and more aggressively enable downstream go-to-market capabilities to support product positioning and the value proposition associated with our new product platforms. And third, the cost structure of the business. Our overall goal of these actions is to position the business to drive sustainable revenue growth and profitability going forward.

First, we must lower the fundamental operating cost structure of the business. Second, we must prioritize or reallocate our spending to drive accelerated revenue growth going forward and align the organization structurally to support our commercial strategy. We must embrace and overcome these challenges in order to improve our operating performance and create customer and shareholder value going forward. Before I go into more detail in what we are doing to address these specifically, Derek Bertocci, our Chief Financial Officer, will discuss our second fiscal quarter results and the issues that impacted us in the quarter. I will now turn the call over to Derek.

Derek Bertocci

Thank you, Josh. Our preliminary revenues for our second fiscal quarter of 2013 are expected to be in the range of $72 million to $75 million on both the GAAP and a non-GAAP basis. This compares second quarter fiscal 2012 total GAAP revenue of $106.4 million and total non-GAAP revenue reported at $102.9 million. Based on these preliminary results, product revenue for second quarter fiscal 2013 declines 45% to 50% versus the prior year period, while service revenue posted an increase of 13% to 15% year-over-year, both in terms of non-GAAP results.

Net loss on a non-GAAP basis is expected to be in the range of $25 million to $30 million for the second quarter of fiscal 2013. Net orders for backlog are expected to be in the range of $15 million to $17 million and product backlog is expected to be in the range of $275 million to $280 million, down from $294 million at the end of the prior quarter. Clearly, we are disappointed with our second fiscal quarter results. As Josh mentioned earlier, some of the focus areas that have been identified as needing attention in order to transform Accuray into a sustainable, commercially successful organization, also impacted our near-term results.

The primary challenges we faced in the quarter were manufacturing and supply related issues which delayed contribution from new products launched at ASTRO. And secondly, commercial focus and sales force transitional issues. I will turn the call back over to Josh to review these challenges in the broader context of not just our second quarter results but our action plan to improve each of these areas going forward, as well as to provide details on the cost of action and restructuring that we announced.

Joshua Levine

Thanks, Derek. I am now going to provide more detail on my thoughts on repositioning the company for long-term success. The first area I would like to cover is the strategic positioning capability that come from our new products, as well as the timing of their availability. The launch of our new product platforms at ASTRO in October 2012, expands our strategic product positioning option.

The TomoTherapy H Series is a workhorse platform that offers unlimited radiation therapy treatment options without compromise to the whole body, including breast, prostate and complex head and neck cases. It is a true, single vault solution for institutional radiation oncology departments and free standing centers able to deliver treatments in conventional time slots. We expect the first commercial shipment of the Tomo H Series in our third fiscal quarter.

Given some of the questions that were raised about the strategic fit and risks associated with TomoTherapy at the time we announced the acquisition, I think it’s important to frame our current thinking on how the product line strengthens our overall product portfolio. Based on our ability to position the TomoTherapy H Series as a mainstream product and the attractive value proposition it represents for our customers, the product line will be a significant growth driver for Accuray and the cornerstone of our commercial momentum and strategic growth agenda over the next 18 to 24 months.

Since the acquisition, we have made substantial progress in improving the overall reliability of the equipment in the existing installed customers based and expanding gross margins associated with the service revenue stream of the Tomo product line. While we will continue to grow the market opportunity for our CyberKnife product line, we expect significantly greater unit sales volume coming from the TomoTherapy line than CyberKnife.

Regarding CyberKnife, the new M6 is ideally suited to treatment planning trends towards hypofractionation and is the product of choice for radio surgeries throughout the whole body. With the Multileaf Collimator or MLC option, it offers greater patient throughput and overall treatment speed and can treat a significantly expanded patient universe. One of the larger impacts for our second quarter results came from delays in the availability of CyberKnife M6 systems. These delays are in part related to an overly aggressive product development and launch plan that was intended to coincide with the ASTRO meeting last October. Additionally, we are currently experiencing some supply chain issues in the form of low manufacturing yields with the MLC and as a result we project delays in being able to ship the CyberKnife with the MLC option.

We project that supply chain issued will begin to improve in our fourth fiscal quarter and we will be able to ship CyberKnife with the MLC option in the first quarter of fiscal 2014. We are making additional engineering resources available to help improve manufacturability of the MLC. Please keep in mind that an established market opportunity clearly exists for CyberKnife with either fixed or Iris collimators and until yields on the MLC improve, we will be focusing our selling efforts on the CyberKnife version without the MLC, which will then be upgradable with the addition of the MLC option. We plan to provide updates on progress specific to these activities in subsequent quarterly calls.

I will now turn my comments to the critical needs for Accuray to establish a more commercially focused culture. I have analyzed our historic performance and attempted to identify what the obstacles have been to more consistent market share gains and revenue growth. Historically, we have never fully understood the value of sales force and sales management continuity and its impact on customer relationships, sales performance and revenue growth. Additionally, we have undervalued the importance of marketing competency and the role it plays in sales support and driving commercial momentum.

For too long Accuray has expected its field commercial organization to compete against significantly better resource competitors without impactful sales support tools and aggressive meaningful downstream marketing capabilities. To enable our growth strategy, we must change this orientation. My operational revenue has identified a slowing of order momentum in several regions and we have analyzed the causes associated with each. Some impact has been caused by the impending launch of our new CyberKnife M6 and the TomoTherapy H Series products. In both the EMEA and APAC regions, we have also seen the impact of commercial leadership roles that are either open or are only recently filled by new managers.

In addition, the U.S. sales team was reorganized in the late spring and early summer and the order pipeline has only recently begun to how renewed momentum. On the TomoTherapy side, we have seen slower order momentum which was driven by a lack of retention of many of the employees with significant TomoTherapy legacy knowledge, including sales, marketing, and field engineering support personal that are critical to maintaining customer relationships.

We have taken the following actions to address these issues. To address core historical support for the commercial team, we are structurally aligning the organization to support the needs of the new commercial organization which Kelly Londy, our Chief Commercial Officer, is establishing. All market facing functions and activities that either directly or indirectly support customers will now report directly to Kelly.

In the U.S. market we are improving our selling focus. There are very different sales processes and opportunities when selling to competitive accounts versus to our current installed base. We are putting added emphasis on leveraging the capabilities of our new products, particularly the TomoTherapy H Series, to sell new equipment into competitive accounts. To ensure that we can fully exploit the opportunities that the new TomoTherapy H series represents, in the U.S. market we are separating the selling responsibility for TomoTherapy and CyberKnife with each carrying its own dedicated sales team.

We believe this increased focus will improve momentum and exploit what we believe is significant commercial opportunity associated with the TomoTherapy product line. This increase sales focus will also drive improved market penetration of the CyberKnife and will generally improve the sales funnel and overall accountability for our field sales team. To provide better selling support and more aggressive go to market capabilities, we are increasing our focus in the downstream marketing area in order to provide extended lead generation capability, drive sales pipeline activity and create and deliver selling tools to drive sales and order momentum.

We are also improving processes related to sales analytics to provide better visibility around market opportunities, sales funnel management, and taking steps to improve our order and revenue forecast and processes. And finally, in the U.S. market we will be adding selling resources focused on group purchasing organizations and strategic account sales opportunities to improve our ability to access larger institutional healthcare systems as well as free standing, community based cancer treatment networks.

Internationally, we are also making changes. In our APAC and EMEA regions, we are focusing resources on activities supporting contracting and public tenders and the processes that drive success with these opportunities. Regional marketing teams outside the U.S. are going to be focused on more of the downstream marketing tools and capabilities that I have previously outlined to ensure that we are more aggressive in our go to market messaging and framing our value proposition for customers.

While we are moving rapidly on initiating the aforementioned actions, it may be several quarters before we see an increase in order flow given the long cycle times of our capital equipment sales process. One of the other learnings that came out of my review is the time required for new managers and new sales and commercial leadership positions to ramp up and be fully effective. We have relatively new commercial leaders in place in both the U.S. and the EMEA regions and we are actively conducting a search for a sales leader in our Asia Pacific region as well.

I will now turn my comments to the broader restructuring that we announced today. As I have indicated in early remarks after first joining Accuray, I believe that our path for becoming a larger company is dependent on our ability to execute effectively in the key commercial activities that have not been a focus for the company historically. I believe that this change in focus and strategy will produce a stronger, more consistent sales results while paving the path for downstream profitability.

Driving to a level of sustainable profitability is a key requirement for us going forward. To move rapidly towards this goal, as you saw in our press release, we are undertaking an aggressive restructuring of the company to establish a new cost structure. This will enable return to sustain profitability but not compromise our ability either to grow the business or to continue to innovate to meet customer needs. This restructuring will impact approximately 13% of our global workforce and is most heavily concentrated in the U.S. market and our headquarters location in Sunnyvale.

The plan we are implementing will bring our R&D and G&A cost structure to a level appropriate for our business while reallocating incremental investment in those commercial activities and business processes that will support accelerated revenue growth going forward. This restructuring differs from prior actions focused on headcount reductions we have initiated in the past by both its overall scale and its focus on discretionary spending as well as headcount. We will be providing more details on operating expense target ratios in our second fiscal quarter earnings release but in general terms, we expect this restructuring of operations to generate annual savings of approximately $40 million.

Roughly half of this amount is related to headcount savings and the remaining half is related to program and discretionary spending cuts. We will be taking a non-recurring charge in our current quarter for expenses related to the restricting of between $3 million and $4 million. In light of many of the challenges and changes we have described today, we are providing updated financial guidance for fiscal 2013. We expect full year fiscal 2013 revenues to be in a range of $320 million to $330 million. Net loss for fiscal 2013 is projected to be in the range of $62 million to $67 million or a net loss of $0.85 to $0.92 per share. This guidance represents expected results on a non-GAAP basis.

While we won't be providing quarterly guidance on a go-forward basis, given the magnitude of the changes we have outlined today we want to provide a little more color around quarterly results we expect for the remainder of the year. We expect that our third fiscal quarter results will be similar to the revenue we report for the second fiscal quarter with more meaningful improvements in results in our fourth fiscal quarter.

Lastly, before making closing comments and then opening up the call for questions, I want to address the topic of our communication. I recognized in the past that the company has not provided as much insight into our business as would have been ideally desired. More transparency and improved visibility will be the hallmark of the new Accuray culture moving forward. To this end, we will be providing more qualitative information related to the ongoing impacts of our restructuring activities and better visibility into the ongoing operating trends in our business.

In closing, I have found many reasons to be excited and optimistic about our future. We have great products and great employees who are passionate about our technology as well as a loyal installed base of customers around the world. With that said, we have some heavy lifting to do in order to transform our company culture and drive the kind of consistent sustained performance that’s required to create customer and shareholder value going forward. We have diagnosed the business from a strategic and operational perspective and we clearly understand the areas that require fixing.

We are moving with a strong sense of urgency and well defined plans to address these areas of our business. Going forward, we will be aligning our resources and focusing on the activities to drive commercial execution and accelerate revenue growth. While we are transitioning from being a technology led organization to a commercially driven one, we will not be abandoning our commitment to developing meaningful product innovations that help meet the needs of our radiation oncology customers. While we have a lot of work ahead, we have a clearly defined path and we are taking aggressive steps to reposition the company and improve our business performance.

I am confident in our ability to make this transition and look forward to updating you on our progress as we move forward. And now we are ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jason Wittes with Brean Capital. Please proceed.

Jason Wittes - Brean Murray, Carret & Co.

First off, I wanted to ask about the order rates, and they were significantly lower than I guess a lot of people were expecting, especially with the new product launches. And I want to kind of understand how much of the new products are actually reflected in those order rates? And also, tying back to a comment you said about how availability of new products affected that order rate? Especially since I think originally you had disclosed that you wouldn't have new products available until really the third quarter at this point. So, if you could give some clarification there?

Derek Bertocci

The new orders generally don’t include many orders that are for the new products. I don’t have the exact breakdown. As far as the timeframe, I think the way we are looking at it is that the customer, the cycle time to make a decision about a significant new product like these few products, it’s a little bit longer than if you would if it were a more than update to a good product. And that we think is pushing out the timeframe. In addition, we are looking at the customer having to go through budget cycles. So there is a variety of things that we think are delaying customers getting to the point of making a decision on these orders.

Jason Wittes - Brean Murray, Carret & Co.

So, I mean you had, from what I understand, at ASTRO a pretty strong reception. I think you have also indicated about a 33% increase in interest from leads which are simply interest, not orders, of course. But, I guess you're saying that given the time it takes for these orders to actually show up, pretty much if I look at the order rates you had this quarter there was really no impact from the new products. In fact, it maybe a negative impact?

Derek Bertocci

Basically it’s not much impact from the new products on orders in this quarter, you are correct.

Jason Wittes - Brean Murray, Carret & Co.

But then, Josh, to your comment, you also said that the order rates we saw this quarter are probably representative of what you'll see for the rest of the year, so what...

Joshua Levine

We said, Jason, I think we would about revenue. You are asking about orders?

Jason Wittes - Brean Murray, Carret & Co.

I'm asking about orders, yes.

Joshua Levine

Yes. I mean we are making many, many changes to and improvements to our overall selling, the support for our selling activity, the focuses at selling activity and the overall alignment on a cross-functional basis to support our commercial strategy. And I can go into and will go into as much detail as you would like about that. I think the thing that we need to recognize is, these impacts from a visibility standpoint, don’t show up in the next quarter. It will take a couple of quarters for order momentum to start to recover and accelerate.

But I still feel comfortable in saying that the general interest we saw and the customer feedback we received at ASTRO about the two new product platforms was real, is real. And I expect that they will have a significant impact on order momentum going forward.

Jason Wittes - Brean Murray, Carret & Co.

Okay. I don't want to capitalize this, I just want to clarify these points. If I'm understanding this correctly, the order rates I saw did not really reflect the new product, that's one thing. But the second thing I think, Josh, that you're pointing to is you've made some, it sounds like some significant changes to the sales force or there had been significant changes even before you got on board, and that is disrupting some of the order rate flow. Is that a fair way to think about it? And also, along those lines, it sounds like it's a few quarters for that to work itself out.

Joshua Levine

Yes, I would say that’s a very accurate assessment. This was a commercial organization that had gone through at least two significant restructurings in the prior 14 months to my arrival, before I got here. And given the cycle time of the sales process that we are dealing with and the learning ramp and the impact ramp in terms of effectiveness of sales managers and commercial leaders in this business, you know we are seeing the pipeline and the order activity on order momentum being impacted by those activities structurally, the structural changes we have made earlier in 2012.

We are taking advantage, Jason, of I think opportunities to put the sales organization in every region of the world on a much better and more aggressive path than we have had it quite frankly in the past. I mean I think it’s probably worth sharing just from a historical perspective, some of my views based on the review that I did and the research that I have done, we did not have -- culturally we did not have a really good understanding or experience at the senior most levels of the company. You know CEO, COO levels, real experience in commercial business operation.

When you look at the nature of our selling process, it’s a stage-gate selling process. And the management of that process in terms of internal tools, holding people accountable, advancing through that process and earning the right to advance through that process and measuring that activity were things that were not really taking place at all at Accuray, which would be uncharacteristic of a business this complex and with this long a sales cycle. And so there was a lack of sophistication, I would say, and process management and support for field sales team and commercial organization activities in general.

So the things that I alluded to in our prepared remarks are really looking very granularly at addressing those deficits going forward. And it will probably be a couple of quarters before we start to see real order momentum start to return.

Operator

Your next question comes from the line of Steve Beuchaw with Morgan Stanley. Please proceed.

Steve Beuchaw - Morgan Stanley

Josh, I wonder if you could take the analysis that you're giving there in terms of the expectations for the trajectory of orders and take it out further. Again, I really appreciate that you're willing to comment here. Would you say that by, like maybe the end of this year, by the end of 2013 or is it maybe a 2014 event where when we have the M6 on the market with the MLC, that we could get back to something like $60 million to $80 million order level? Or, is that something we could see this year?

Joshua Levine

A $60 million to $80 million order level per quarter. Is that’s the question?

Steve Beuchaw - Morgan Stanley

Thinking about historic trends, I'm just thinking about where we've been and how quickly can we get back there?

Joshua Levine

I would say in general that’s probably the right kind of thinking or right level of thinking vis-à-vis a trajectory. That would be in sync or in line with where we had been historically. I think quite frankly we have some terrific opportunities with the Tomo 8 series. I think that this will be a significant growth driver for us. I think it has -- I think there is probably an undervaluing right now of how impactful this product line can be for us. And again, I think we are going to be taking advantage of the greater product positioning, the broader product positioning capabilities in the Tomo line.

We are going to continue to advance and try to expand the market opportunities on the CyberKnife side, but the real play here is around commercial excellence and commercial execution in terms of the selling process, in terms of the downstream marketing activities to make us a more formidable competitor. And how aggressively we are going to redirect the organization in those key areas. So I would say Steve that what you have highlight trajectory-wise is probably in the right kind of range of thinking.

Steve Beuchaw - Morgan Stanley

And then just to be clear, as we're coming out of ASTRO there was quite a bit of activity. It seems like there are a number of moving parts, right? Manufacturing, new product launches, the commercial force. Is it fair to say that there is no competitive issue here whatsoever? That what we're looking at in terms of the order figure and the expectation for the ramp order figures is exclusively a function of things that are specific to Accuray and nothing competitive?

Joshua Levine

Yes. I would say that that’s very accurate. We are dealing with, I would say internal -- either internally self-induced or self-influenced challenges, both on a selling and commercial level, on a product availability and product development level. We do not see any kind of broader market price pressure activity that we are responding to. So I don’t see anything on a macro level that we are having to step into and make decisions, quite frankly, that aren’t in our best interest from a price or a margin standpoint. And I think with improved selling focus and commercial alignment, and the kind of better sales support that you would expect from a really growth up marketing organization and one that has in fact the kind of go to market capabilities that you would need this business to compete, we will be fine going forward.

We need to get more aggressive and we need to get a harder edge, quite frankly, about how we are going to compete and how aggressive we are going to be about communicating the value proposition associated with our products and the tools we are going to give our sales force to compete in the selling process out in the marketplace with.

Operator

The next question comes from the line of Anthony Petrone with Jefferies. Please proceed.

Anthony Petrone - Jefferies

Josh, I just want to just begin also on the drop-off in bookings in the quarter and just in relation to the 33% increase in leads that you had mentioned following ASTRO. You mentioned two major themes here. One is on the sales side, one is on the manufacturing side. Is there any way to sort of sparse that out in terms of which one of those issues is more meaningful to the slowdown in transitioning those leads into bookings and eventually orders?

Joshua Levine

I would say, on a near-term basis that the more impactful of the two would probably be the sales, the commercial execution. Again, we are dealing with the real time impacts of pretty significant organizational changes that had occurred several quarters upstream from when we attended ASTRO, or at least a quarter and half or two upstream from when we attended ASTRO. And we had -- interestingly the ASTRO meeting was my first real external event with the company and I went through basically a three-day introduction process with what, really when I spoke to people it was remarkable how many relatively new sales people and territory managers and sales managers and sale leaders that I was introduced to and shaking hands with from around the world.

So this was really almost a hard restart, a cold restart in my mind in terms of commercial organization. And I will tell you that as I have gone back through both the historical performance and getting to understand what tools and what investments weren’t in place that in my mind should have been in a highly competitive, high performance culture type sales organization and commercial organization. I don’t think the quality of our people in the field is the issue here. I think the way we were supporting them, the way we thought about and positioned the selling process, the process or lack thereof, that we were using to hold people accountable and understand how we were advancing through what is a very sophisticated stage-gate selling process, I think all of those are things that I would point to that were obstacles to growth, quite frankly.

I think we have got people that can compete but they got to have the tools. And I don’t think that the quality of the organization overall is the issue here. I think we have got the same kind of quality players in our commercial organization at least in the field structure that our competitors do. So the heavy lifting in my mind is going to take place around what are we going to do to support those people better. What are we going to do to align the organization around cost functionally supporting the commercial strategy better and getting downstream marketing to become a much bigger impact in terms of lead generation, creating more pipeline volume opportunities, improving sales tools, and generally improving order momentum.

Anthony Petrone - Jefferies

That's helpful but I'll stay on that theme and just two follow-ups in these buckets, one on the sales end of it and one on the manufacturing end. It’s also sounded like in some of your prepared comments that there was some attrition on the Tomo side in terms of sales force? So, how much of this is really related to headcount, the lack of headcount in certain regions? And how does that all play out in terms of the $40 million restructuring? In other words, it sounds like it's all coming out of R&D and SG&A. Is that a completely aggregate number or will we see sort of some reinvestment into the sales number that doesn't completely become a net sort of reduction as we look to 2014? In other words, how much do you really need to add to the sales force?

Joshua Levine

Yeah. Let me be clear about it. You got a bunch of pieces of that question, Anthony, let me just try to take them one at a time. On the transition post-acquisition from Tomo, they were a significant number of market facing employees. People with either primary or secondary responsibility in form or another who interacted with customers in the marketplace in the legacy Tomo world. Those are people that have relationships with customers and quite frankly were probably the people that were driving the pipeline and the order momentum on their end of the world prior to our acquisition of their company.

As part of the integration there was a consolidation of a significant number of those people, both on the field service side, on the marketing side, and in the sales organization as well. And I think that there is no question that there has been some, again, downstream impact on order momentum and sales flow in terms of the loss of continuity in terms of those people with the market facing relationships. So it takes some time to build that back. And quite frankly we think that the opportunities right now that we are looking at going down forward from here are so significant on the Tomo side that we need to separate the selling responsibility or the Tomo line and the CyberKnife line. And we are doing that.

We are not -- in this restructuring that we have talked about, there is not net loss of headcount of selling resources. If you look at the footprint, the current footprint at all, and we are taking the existing footprint and I think leveraging it in a way that will yield better results really as a primary element of better sales focus. People shouldn’t have confusion and there shouldn’t be ambiguity about what their mission is when they swing their legs out of the bed in the morning and they won't be going forward at Accuray. You have got to know, if you are selling to installed base customers, you are going to know if you are selling to new competitive accounts, you are going to know if your primary mission in life is to sell Tomo H Series or if it is to sell CyberKnife M6.

And we are going to be absolutely crystal clear in the incentives, in the way we are supporting those people in terms of individual dedicated selling requirements. And I think that is going to go a long way to fixing the momentum problem we have on the commercial side of the house. Just a word about the other part of your question, you had asked about the manufacturing side. You know from a marketing and a product introduction, a product launch introduction plan perspective, one of the things that you would imagine and was clearly the case here that was important upfront for us, was to get first sites. I call them beta sites, getting first sites installed with our new product platforms that were launched at Boston in the ASTRO meeting. And we were hoping to have had at least two or three of those sites installed early enough following the meeting, that we could start to use them as reference locations to support ROI value proposition positioning and validation sources for other prospective customers.

And one of the challenges in being delayed with MLC and the full CyberKnife M6 launch, is that it puts us a little bit behind the power curve in terms of the ramp that we would have expected in our ability to create those reference sites as rapidly as we would have hoped.

Anthony Petrone - Jefferies

That's helpful. The last one for me would just be, have you approached the market yet with the idea of an upgraded pathway to M6? Or is that something that we're just hearing new and we could expect that in the third and fourth quarter or are we actively doing that at this point?

Joshua Levine

Yeah, it’s really, I would say it’s a forward looking activity, Anthony. It’s not something that we have actively got in place right now. I think ultimately we need to make sure that we can launch a product with full feature availability. I mean it would be certainly our desire to be able to have full feature capability, I am referring to the MLC option. That really is where the economics and the value proposition gets dramatically different than what it had been with prior generation CyberKnife technology in terms of customer economics and ROI value.

But the reality is, we are going to sell what we have. There is a well established market opportunity in radio surgery for the previous generation devices in CyberKnife. And we will sell the version of the M6 essentially with a fixed collimator and an Iris collimator going forward until the MLC option is available.

Operator

And your next question comes from the line of Tycho Peterson with JPMorgan. Please proceed.

Tycho Peterson - JPMorgan

Thanks for taking the questions. A number of mine have been answered. But as we think about a lot of the things you've laid on the table here in terms of the longer selling cycles and sales force disruptions, can you just touch on the competitive dynamic? You clearly have an installed base that to a certain degree is coming up for replacement. You've got a new competitor out there with a new system. Can you just talk about how you maintain your relationships with your customers in this period of disruption and how you think about kind of the competitive dynamics over the next 12 months?

Joshua Levine

Yeah. I mean it’s a great question, Tycho. From a strategic portfolio standpoint there is several pieces to this. The first I think is the strategic portfolio discussion. You know we think, again, I don’t know what -- I got the sense when I looked at the background information and some of the feedback that the market gave the company at the time of the Tomo acquisition. I think it was a reasonable degree of concern about the risks the company was taking on. We clearly inherited an installed base of customers that was disenfranchised to some degree based on lack of product reliability issues.

We have made very significant process in improving the product reliability on the Tomo side in their installed base. I will tell you that in the spirit of full transparency, I don’t think that work is done. We have more work to do there. But we have made a pretty significant progress in getting downstream on this and I think we have positioned ourselves in a strong way to engage customers in the installed base and upgrade opportunities or trade out opportunities related to the Tomo H series, which is going to be a really, really -- I think a high impact product for us.

So, I think even with the sales force disruption, some of the goodwill that we have bought ourselves in terms of customer relationships on the Tomo side, is positive and is helping keep us in the game on new discussions around other opportunities, upgrade or trade-on opportunities going forward. The same that I described the reference site situation on the CyberKnife side, the same situation exists for Tomo H. We have a handful of, what I will call reference or KOL type of accounts that are the most prestigious teaching hospitals in their portion of the world. And we expect to have first commercial shipment of the Tomo H product line occurring by the end of the current quarter, by the end of our fiscal third quarter.

So we are actually on the timelines that we expected on the Tomo H side when we stood up at ASTRO. And I think that there is going to be an opportunity here for us to drive momentum with that product line and the fact that we are going to have it available and ready for shipment certainly by the end of this quarter. I think we will start to see that momentum ramp in Q4 and as we roll into the beginning of our next fiscal year.

Tycho Peterson - JPMorgan

And then on the sales side, you obviously talked about some of the restructuring that’s occurred. Can you talk to your ability to hang on to the reps you want to keep, the more tenured reps? How do you keep them engaged and on-board as you go through this process?

Joshua Levine

You know I am not going to sugarcoat this. We have a situation where our sales force has really not gotten the help and the support they have needed in the way they had needed it over a long period of time. And I stood up in mid to late October in front of that sales organization globally and told them what our Chief Commercial Officer, Kelly Londy, had been telling them, which is better days are coming. And better days are coming because, quite frankly, the company now has a CEO who grew up carrying a bag. And I understand what it takes to build a high performance sales culture and what sales people and commercial business leaders need to succeed going forward.

So I am not naïve, Tycho. I mean if people want to move on, we live in a world where free agency prevails. But we are going to put a lot more fun into this for our sales force going forward. We are going to expect a lot of them. We are going to demand that they perform at the right levels of our sales momentum. But we are going to make this a much better environment for sales people and commercial organization personal to work in because they are going to become the point of the lance of our company in terms of strategy going forward.

Tycho Peterson - JPMorgan

And then are you able to, just with the bifurcation of the sales force, are you able to give us a sense of what percentage of the headcount now goes to Tomo versus CyberKnife?

Joshua Levine

I would say in a general sense that at the highest position levels in the sales management ranks, those positions will still have dual responsibility. But where the rubber meets the road, if you want to describe it that way, is at the territory manger level. You know the foot soldier in the territory. And on that basis we probably have 65% of the sales organization focused on Tomo. They will be dedicated to the Tomo line with the remainder dedicated to CyberKnife. We have clinical sales specialists that will support both selling platforms, both product platforms from a sales process standpoint in each region as well.

Tycho Peterson - JPMorgan

Last one for me on the cost savings, does any of that directly apply to R&D? Are you looking for R&D leverage or how do we think about that?

Joshua Levine

Yeah, I will tell you that a significant bite of it comes from R&D. We, again, in my prepared remarks I think we talked to the fact that this differs from the prior workforce alignments or restructurings that we have done in the past in two forms. One is its scale. The other one is that it isn’t just headcount related. We probably have 50% of the impact of that $40 million coming out of manpower and the other 50% coming out of program cuts and discretionary spending. A pretty significant chunk of it out of R&D, either in some -- I call it really more deferring timelines or pushing timelines out for product development.

The things that we need to do to continue to work through the MLC options on CyberKnife are not being impacted as we have full resource and commitment and investment being supported -- putting in place to support those activities. The same thing is true for all of the (inaudible) house regulatory compliance requirements we have on the Tomo side and CyberKnife side. So none of the table stakes activities in the R&D area are being put at risk based on cuts in R&D. But I will tell you that the take down in R&D is significant but I will also say that when you look going forward, we will still probably have -- on a target ratio basis for that function of the company, we will probably still have an at or above spend level on a peer universe comparison. When I say peer universe, I am not necessarily talking about market segment vis-à-vis Varian or Elekta, but companies who would be more calibrated to our size and scale from an economic and market cap standpoint.

We are not giving up the robust development programs and technology advancements that we are working on, we are just pushing them out a little bit and focusing on those things that are, again, they keep the lights on, they keep the trains running. They are compliance related, they are MLC fix related. So I don’t think we are compromising our ability to continue to grow the business based on any of those cuts.

Operator

And your next question comes from the line of Charles Croson with Sidoti & Company. Please proceed.

Charles Croson - Sidoti & Company

Thanks for taking the questions here. I think most of mine have been answered. So I guess this one just in relation to the longer sales cycle via the new products here. Can you kind of go over how much longer you're going to see that? And then with the supply issues as well -- I know this is kind of a two-part question -- are you seeing now or some soon to be orders that bounced possibly in the quarter or anything like that? I guess, what are your -- what are the sales teams essentially telling customers during this restructuring?

Joshua Levine

So Charles, let me take the later part of your question first. You know we are in active communication right now with customers on the timing of availability around the MLC option on the CyberKnife. And again we are being transparent with people. I think we need to be, quite frankly. We have I think at times historically we have disappointed them with where words and music didn’t match around product availability or product functionality. And I am determined that we are not going to continue to kind of restep into those same situations and repeat those patterns.

The MLC is, again, on a more active flow in terms of its availability. It’s probably a couple of quarters away, but it doesn’t necessarily change the opportunity. It says that we would basically put an M6 in place and then look to upgrade it with an MLC option down line. So I don’t think that we are going to see orders bounce. That certainly is not going to be something we are going to lay down on and not fight tooth and nail to hold on to. And I am sure that that’s going to be the case in every region of the world where we have customers that were looking at a CyberKnife with an MLC option.

Just as a point of reference on that, the MLC design is our design. It’s being produced by an outside vendor. The MLC uses a control mechanism that’s of the vendors design. But a lot of what's happened here around M6, the CyberKnife launch, has really been probably more related to just an overly aggressive product development and launch timeline that was really geared around concurrent timelines with the ASTRO meeting in October last year. And we had our developments in R&D organizations killing themselves to try and get these products out and launch. And quite frankly, I am not sure that we gave them really the best chances of success because I don’t think what we had in place was probably realistic to begin with.

And rather than exacerbate this problem we need to kind of take this moment in time and say we are going to get this right and make sure that the MLC that we put in front of customers is a product that functions the way it needs to and meets our standards or functionality and performance. And it’s not atypical though from the manufacturing, learning curves that we would have considered normal or our experience if you look at let's say, moving from the Iris collimators in prior times. I mean we, because of the accelerated timelines I just described, we have kind of put ourselves in -- we have exacerbated the whole to some degree. But we have a significant amount of incremental engineering resources applied at this and I am confident that we will get through this near-term challenges that we have and get this resolved.

Charles Croson - Sidoti & Company

Okay. That's helpful. Thank you for that. And then, just on the sales cycle that you're going to see with the Tomo H, is there any really big change there in terms of how much longer customers would take to update or to make a decision there? I know you had said that you expect orders to somewhat pick up in Q4 and then more so we'll probably get some in the beginning of F '14. But, just given that longer sales cycle, I'm just curious what kind of ramp-up we actually could expect there given that extended sales cycle?

Joshua Levine

I think what you see is kind of what I have described. I think interestingly enough the TomoTherapy product based on its -- the H Series based on its feature set, the value proposition attached to this product, I think again because it is more mainstream it is more single vault solution in its orientation, it actually gives us a better chance to get into discussions and access market opportunities that might be longer developing if you were thinking about a radio surgery device like the CyberKnife. So I actually think that, again the Tomo H Series, Charles, is actually going to help this. Just because of the way we can position it, it’s really going to help this ramp and the improved momentum going forward. And I don’t think -- again, I don’t want to talk about this in comparative terms as an easy sales cycle or a significantly shorter sales cycle, but I think it’s a different sales cycle than what we would see for CyberKnife. And actually one that aligns with what I have already described for expectations around our fiscal fourth quarter and the first quarter fiscal ’14.

The TomoTherapy product, there is really a replacement market there for radiotherapy versus a new [valve] requirement for a radio surgery device like the CyberKnife.

Operator

And your next question comes from the line of Jason Wittes with Brean Capital. Please proceed.

Jason Wittes - Brean Murray, Carret & Co.

Okay. Just two follow-ups then. This is my follow-up anyway. First off, just want to clarify, you've lost no frontend salespeople, Josh? I wasn't sure of your explanation?

Joshua Levine

Yeah. No, we have, in terms of the overall footprint through restructuring, the sheer numbers, the absolute headcount in the sales organization has remained intact. What we have done is again we have shifted and realigned selling focus certainly in the U.S. market with splitting the selling responsibility for the Tomo line and the CyberKnife line, but in terms of absolute manpower there is no change.

Jason Wittes - Brean Murray, Carret & Co.

Okay. But, wasn't those changes were put in place before you joined, weren't they? Or these were additional changes you've made yourself?

Joshua Levine

I am sorry, one more time?

Jason Wittes - Brean Murray, Carret & Co.

Yes. Sorry. The changes you just described, splitting out Tomo and CyberKnife sales, that was, I thought, announced prior to your joining? Or have you made additional changes to that since joining?

Joshua Levine

No, that’s a forward looking discussion right now. I mean that was not part of the restructuring that was done back in the last one which was done back in late spring or early summer last year.

Jason Wittes - Brean Murray, Carret & Co.

And then just one last clarification and that is on Tomo H Series. There's no delay issue or no supply issues there from what you're describing, from what you originally planned?

Joshua Levine

No.

Operator

And there are no further questions at this time.

Joshua Levine

Operator, thank you. I want to again express my thanks and appreciation for people joining the call. We look forward to updating you on the progress of these actions going forward. Thanks again.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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