Accuray's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

| About: Accuray Incorporated (ARAY)

Accuray Incorporated (NASDAQ:ARAY)

F1Q 2014 Results Earnings Call

November 7, 2013 4:30 PM ET


Lynn Pieper - Investor Relations Counsel, Westwicke Partners

Josh Levine - President and CEO

Greg Lichtwardt - Executive Vice President and CFO


Tycho Peterson - JP Morgan

Steve Beuchaw - Morgan Stanley

Anthony Petrone - Jefferies Group

Jason Wittes - Brean Capital

Brooks O’Neil - Dougherty & Company


Good day, ladies and gentlemen. And welcome to the First Quarter 2014 Accuray Incorporated Earnings Conference Call. My name is Glen, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Lynn Pieper. Please proceed.

Lynn Pieper

Thank you. This is Lynn Pieper, Accuray’s Investor Relations Counsel from Westwicke Partners. Thank you for joining us today on our conference call as we review Accuray’s first quarter and fiscal 2014. Joining us today is, Josh Levine, Accuray’s President and Chief Executive Officer; and Greg Lichtwardt, Accuray’s Executive Vice President and Chief Financial Officer.

Please note that today we will be referring to information, which can be found on a summary slide deck on the Investor Relations page of the Accuray website at

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 results to differ materially from our expectations, including risks associated with the effects of the introduction of the new CyberKnife and TomoTherapy Systems; commercial execution; future order growth, future revenue growth, future profitability; and guidance for fiscal 2014.

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.

With that, I would like to turn the call over to Accuray’s President and Chief Executive Officer, Josh Levine.

Josh Levine

Thank you, Lynn, and thanks to everyone for joining us today as we review our results for the first quarter of fiscal 2014. Before I begin, I’d like to introduce Greg Lichtwardt, who joined Accuray in early September as our Executive Vice President and Chief Financial Officer.

Greg most recently held the similar position at Conceptus, a medical products developer and manufacturer that under went significant change driving resurgence in revenue growth ultimately leading to the company being acquired earlier this year. Greg’s experience is unique and well suited for the Accuray team and we have seen the immediate impact of his expertise and strengths.

I will begin today’s call with an overview of the quarter with Greg providing a more detailed financial review. I’ll then wrap up with some commentary on our plan and outlook for fiscal year 2014 and then we will open the call up for questions.

I am pleased that we are continuing to make solid progress on our path to achieve sustainable growth in revenue and improvements in profitability. In the first quarter, we experienced continued strength in global new orders and we maintained solid financial discipline and operating expense control.

In respect to orders, both gross orders and net orders were up 17% and 16%, respectively, from the prior fiscal year first quarter. This is now the third quarter in a row which we are showing growth and momentum in new order volume driven by the early benefits of our improved commercial focus. This improvement is generally occurring across all four regions we serve.

Our guidance which we are reaffirming today indicates that total revenue growth in fiscal 2014 will be mid-to-high single digits year-over-year and this is in part predicated on the strength of our product backlog.

And lastly, we under spent our targeted operating expenses by $1.2 million in careful deployment of resources. I’m encouraged by the early progress we have made and our result to date.

As we think about our business going forward in terms of the geographic orientation of our installed base, our product portfolio and the customer channels that we have traditionally focused on, we believe we are uniquely positioned.

Our heavier presence outside the U.S. market, as well as our stronger presence in hospital-based accounts has ironically left us less exposed to macro factors such as uncertain in the U.S healthcare market driven by healthcare reform.

Additionally, proposed changes to reimbursement will have less impact for Accuray, given our limited presence in freestanding clinics, because we have a smaller market share, we have no shortage of selling opportunities and relatively modest gains in share have a disproportional effect on orders and revenue impact for us.

We continuously review our backlog and do not foresee making any adjustments other than ongoing age outs as they occur. In fact, many of the identified issues in our market are quite positive for the high-end SBRT and IMRT systems we sell.

Therefore we expect continue progress in commercial moment over the next several quarters driven by improved selling focus and sales formal management, economic and clinical validation of the first commercial installations of our new products and market acceptance driven by the substantial improvement in reliability of our TomoTherapy System product line.

In turning to our new products, we showcase both the Cybe1rKnife M6 and TomoTherapy H series systems at the ASCO meeting in September and received overwhelming positive customer feedback and generated a substantial number of new leads. Adoption of both platforms continues to grow with many cancer centers in the U.S. and Europe investing in the technology.

Our new platforms are now treating patients in U.S. centers including the University of Pittsburgh Medical Center, Tulsa Cancer Institute, Lancaster General Health, the Spokane CyberKnife & Radiation Oncology Center, and the University of Arkansas Medical Sciences Center. In Europe and Asia, the European CyberKnife Center in Munich, Heidelberg University Hospital in Germany, Erasmus Medical Center in Rotterdam, the Centre Oscar Lambret in France and the Yonsei University Healthcare System in Seoul have adopted one of our new technology platforms.

On the TomoTherapy H Series side of the business, the system is known as gold standard in IMRT but is now capable of a wider variety of treatments. At ASTRO, we were encouraged by customer feedback on the systems expanding clinical utility, versatility and increased efficiency of patient throughput.

In Heidelberg, where there are two TomoTherapy units, clinicians are treating 110 to 120 patient daily with a 6 to 15 minute time slot for patient, with imaging performed in 96% of the patients. As Dr. Debus comment that on H Series which has been in place since March and I quote “it offers the most precise and personalize treatment plans with significantly better dose distributions while at the same time reducing overall treatment time.”

Moving to the CyberKnife system, we continue to believe that CyberKnife is a best in class and a truly unique full-body SBRT solution. We continue to receive extremely favorable feedback about the performance at our first sites that have begun treating patients with new CyberKnife M6 in terms of patient throughput, reduce treatment times and ease-of-use.

In over six months of CyberKnife M6 usage, the European CyberKnife Center in Munich has treated over 420 patients. As reported by the Dr. Alex Muacevic at ASTRO, the average treatment time has decreased by over 20% versus the previous CyberKnife unit in Munich.

As you are all aware, a year ago, we introduced our new CyberKnife M6 Series Systems available in configurations allowing the option of a fixed collimator and iris collimator and a multileaf collimator or MLC. During the last quarter’s call, we identified that we had durability problems with the MLC manufacturer that would cause us to delay the delivery of that component.

Today we are announcing that we’re on track for limited release of the MLC for CyberKnife in June of 2014, approximately eight months from now. What we expect to release at that time is a device that has the original design specifications but with modifications to our supply chain and quality control processes to ensure improved yield and durability.

While we are confident in our path forward due to the complexity of the MLC, we want to caution there is still some risk in this project that could cause further delays and may require us to revert to a backup plan which is in parallel development. In the meantime and despite the delay in the launch of this upgrade, we are continuing to book orders and complete installations for the CyberKnife M6 system with both fixed and iris collimators.

We will upgrade customers when the MLC is ready for commercial release. It is our view that any detraction in the product offering caused by not having the MLC available now is not material overall and certainly manageable by us within the revenue guidance, we have provided.

Before turning the call over to Greg, I want to highlight two recent publications that provide substantial support for CyberKnife treatment of prostate cancer. They are the products of multicenter study initiated by researchers at UCLA and involving an international team of researchers from eight academic and community treatment centers.

The CyberKnife’s integrated automatic and autonomous dose delivery system is the best in class for full body applications with maximum radiation delivered where motion can occur. The prostate is surrounded by radiosensitive structure such as the bladder and rectum and because it can move unpredictably and sometimes substantially, precision of radiation delivery is critical.

The researchers had the confidence to deliver such high doses because they trusted the CyberKnife system’s ability to continually track and detect the position of the prostate and automatically correct the aim of the beam, if motion was detected. These publications strongly suggest that their confidence was justified.

Taken together with over a dozen other published studies of CyberKnife SBRT for prostate cancer and especially in light of ASTRO’s recent model policy indicating SBRT is an appropriate alternative for select patients with low-to-intermediate risk disease. We agree with the authors of these papers when they say the current evidence supports consideration of SBRT among the definitive therapeutic options for localized prostate cancer with low and intermediate risk.

We’re extremely proud of the users of CyberKnife system for developing a noninvasive short duration alternative surgery, conventional radiotherapy and invasive brachytherapy for men with organ-confined prostate cancer.

I will now turn the call over to Greg to provide you with a brief discussion of our move to a largely GAAP disclosure, and a more detailed review of our financial performance for the first quarter. Greg?

Greg Lichtwardt

Thank you, Josh and good afternoon everyone. In joining, Accuray, I’ve been able to take a fresh look at our financial reporting and in doing so, I’ve come to the conclusion that the time has come for us to revert to a more standard reporting format based largely on a generally accepted accounting principles presentation.

For the fiscal years, 2011 and 2012, we did have substantial acquisition accounting impacts related to TomoTherapy and to a lesser extent, Morphormics that have secured the result of our core business and necessitated a rather complex non-GAAP presentation.

However, following the CPAC deconsolidation, which occurred in the second quarter of our last fiscal year and now no longer reported by us above net income for that prior period, we believe that the acquisition accounting impacts no longer have the materiality or magnitude of fluctuations to the same degree that they have in the past and the GAAP is now a better presentation of the performance of our business,

In fact, if we look at amortization, depreciation and equity-based compensation of three primary non-cash expenses, amortization is the smallest of these three items as projected for this year. However, as most companies do, I want to introduce at this time a single non-GAAP metric, which is universally viewed as a cash-based earnings or adjusted EBITDA.

In addition to excluding depreciation and amortization, we are also excluding equity-based compensation, that’s the adjustment. As you’ve seen from the press release, there is a single table reconciling this non-GAAP measure to our GAAP presentation. And we are making all of these changes, because we think the presentation is simpler, more clear and we believe it will drive better decision-making by management internally and aligns us better with our investors as we move the business towards cash flow positive and GAAP profitability.

Now, let me shift to a review of our first quarter financial results. As mentioned by Josh, net orders of $60.1 million going into backlog increased 16%, compared to the year ago first quarter and represent the first quarter of positive year-over-year growth in one year.

Net orders in the first quarter also represent an increase, compared to the immediately preceding quarters, albeit smaller but very positive for us given the more historically downward trend in the first quarter and represents the underlying strength of our commercial execution.

Gross orders increased 17% year-over-year and while they were lower on a quarter-to-quarter basis, we had fewer edge outs in the current quarter and therefore, saw an increase in net orders quarter-to-quarter.

Total revenue for the first quarter at $76.6 million is composed of $29.5 million in product revenue and $47.1 million in service revenue. Service revenue represents a growth year-over-year of 12%, based on the increase in our installed base and conversion of customers to our Emerald and Diamond service contracts. Both product and service revenues were above our internal expectations, so we are pleased to get off to a good start for the year.

Based on our backlog and net order strength, we believe that we are very well-positioned to deliver on our revenue guidance for the year. You will also notice that net product orders are basically two times net product revenues, implying a significant potential growth in revenues as we convert these orders over the coming quarters.

Product gross profit margin improved again this quarter to 37.1%, compared to 36.4% in the immediately preceding fiscal fourth quarter due to better absorption and lower excess and obsolete inventory reserves taken last quarter and related to the MLC delay. Compared to prior fiscal year first quarter, as it indicates for the past two quarters, gross profit margin are running below the prior fiscal year margins by about 400 basis points due to the lower revenue and the impact of certain fixed cost of goods sold.

Service gross profit margin on the other hand improved to 33%, compared to 16.8% in the prior year first quarter and compared to 28.6% in the immediately preceding fiscal fourth quarter. This continues to be an area of focus for us and as you can see the Accuray service team has done an amazing job in the prior 12 months in doubling margins, primarily due to steps taken to increase up time for TomoTherapy customers.

Overall gross profit margin of 34.5% was about 600 basis points favorable to the prior year first quarter due primarily the improvements in service margin and 240 basis points favorable to the immediately preceding fourth quarter due to favorable absorption and lower access in obsolete inventory reserves.

Operating expenses of $38.8 million in the first quarter were also better than expected and represent continued expense control by our managers relative to our guidance of approximately $40 million per quarter. This result is 13% below prior year or savings of $5.5 million and 3% below the preceding fourth quarter.

Some of the favorable spend in -- is timing related in the R&D project area but at the same time a significant portion of the spent in the first quarter comes from items that will not recur such as our cost to participated ASTRO and executive severance.

As a result of the strength in revenues, improved gross profit margin and reduced operating expenses, adjusted EBITDA improved to a loss of $3.8 million, compared to a loss of $11.9 million in the year ago first quarter.

Even compared to the immediately preceding quarter, which had higher revenues, we improved the adjusted EBITDA loss by $2.1 million. The current quarter loss of $3.8 million is approximately three CyberKnife or TomoTherapy systems going to revenue away from breakeven. So this was within our near-term grasp and would represent an important milestone to riding our ship.

From a balance sheet perspective compared to the prior quarter net working capital increased $4.2 million excluding the change in cash. This was comprised of accounts receivable increasing $4.7 million, inventory increasing $6.4 million, partially offset by increases in accrued liabilities and deferred revenue.

Much of the increase for accounts receivable is in fact offset by the increase in deferred revenue, while the growth in inventory was expected by us in preparation for higher production associated with meeting our revenue plan for the year.

Given the $3.8 million negative adjusted EBITDA and the increase in working capital and our CapEx of $3.2 million, cash usage was $12.8 million for the quarter, representing a reduction from prior year first quarter by $9 million due primarily to the strength of cash based earnings. Compared to the preceding fourth quarter cash usage increased by about $5.7 million due to the increase in working capital.

And lastly, with regards to our financial guidance for fiscal year 2014, we are reaffirming our previous guidance given on the August 27, 2013 conference call of a revenue range of $325 million to $345 million, incrementally improving gross profit margins throughout the year and operating expenses of approximately $40 million per quarter.

Now I’d like to hand the call back to Josh to discuss our goals and objectives for the current fiscal year. Josh?

Josh Levine

Thank you, Greg. I am encouraged with the actions we have taken have produced positive results over the last three quarters. Our order pipeline and new order momentum are improving. We are also encouraged by the recent publications from the ECLA studies, as well as feedback that the extended feature set in functionality of our new products is driving improved clinical benefits for patients and economic value for our customers.

Lastly, we are seeing positive trends in overall financial results including increasing revenues and gross profit, and substantially reduced net operating loss and cash use.

As a result, our game plan for fiscal year 2014 continues to be focused on five key areas, including growing U.S. market share, maximizing growth outside the U.S. market, optimizing the product portfolio to enable growth, maximizing the value of our installed base and improving business processes to enable growth.

Given the modest size of our U.S. installed base growing U.S. market share is going to be a key focus for us for many years. At the center of this we would be driving adoption of our new products by demonstrating the unique capabilities and advantages of these platforms, while simultaneously continuing to focus on customers and commercial execution.

We now have an upgraded sales talent and an expanded footprint and we are driving performance management discipline. With improved go-to-market strategy and tools we are strongly focused on new order activity and conversions to revenue. We are also continuing to enhance our service and understanding of customer needs so we can enable our customers to optimize their use of -- our technologies long-term.

We are continuing to drive a much more significant marketing presence by positioning Accuray as one company with two great technologies, the CyberKnife M6 Series which precisely maximizes dose, minimizes side effect and maximizes patient comfort and the TomoTherapy H series which is versatile efficient and effective and is the gold standard in IMRT is now able to treat a wider array of radiation therapy patients.

In our online survey, of over 300 cancer patients and caregivers completed in July of this year, CyberKnife was recognized as the number one radiation treatment brand. We will capitalize on this along with our customers by ensuring that well-tested patient phasing marketing is available to support our customers in increasing awareness of our precise innovation -- innovative radiation therapies.

Second, as we have talked about considerably on these calls over the past several quarters, we see significant opportunities for orders and revenue from select markets outside the U.S. This includes developed and emerging markets in both Europe and Asia, as well as territories that are direct and distributor based.

In some cases, our plans for this year involve laying a foundation for more significant growth in future years, but with nearly 70% of our order volume coming from OUS this is an undeniably important area for our commercial team.

Third, we are investing in our product portfolio to drive further innovation. We will incorporate the voice of our customers into development efforts driving continued customer and patient satisfaction and product order and revenue growth.

Also, we are viewing this strategy broadly by also investing in area that maximize our served market by further aligning our product portfolio with the specific needs of markets that are important to our long-term growth strategies such as China.

Fourth, our plan continues to focus on maximizing the value and opportunity of our installed base. Here we are driving multiple metrics for service and upgrade revenue growth, trade in, trade out and end of service opportunities, as well as service gross profit margins. Tactics in this area will drive both revenue and profitability as we have already demonstrated in the past three quarters.

Our installed base remains one of our most valuable assets as an enduring annuity and we intend to continue to focus on this opportunity, while providing our customers continued clinical solutions for optimizing their investment in our equipment.

Finally, our plan for 2014 not only continues to focus on financial discipline and operating expense control, but also dedicates significant resources to improving very specific business processes that will enable growth and drive operational excellence.

Some of this focus involves systems implementations and some involves reengineering our business practices in a Six Sigma quality process. This effort is long term focus but will have many milestones this year which we are holding ourselves accountable to.

As we look ahead, our strategic vision is to lead in clinical excellence through innovation and to grow our installed base to make our technologies available to all patients and the physicians who treat them.

We strive to maximize our customers experience by providing high value solutions and superior service and we are laying the groundwork to ensure that we are successful longer term.

Thanks for participating in today’s call and we are now ready to take your questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Tycho Peterson with JP Morgan. Please proceed.

Tycho Peterson - JP Morgan

First, just for Josh, with -- in light of the reimbursement, proposals and presumably where they could end up, can you just talk about how do you think about the SBRT and SRS market trajectory from here and how much pent-up demand do you think there maybe ahead of the final reimbursement, rates coming out in the next couple of weeks?

Josh Levine

Yeah. It’s a good question, Tycho. I think in a general sense, if you look at what longer term, longer term where reimbursement as a methodology lands, it ends up probably in some kind of a episodic case rate type of scenario where treating patients as rapidly as possible and as rapidly with the best clinical outcome you can, really starts to -- to look strongly like it overlaps with the things that we are really strong at, the trends towards hypofractionation, the trends towards the precision of our products minimizing complications and dosing in areas that you shouldn’t be dosing.

So, I think in a macro sense, it’s a -- directionally its -- quite frankly it’s moving in our view in an encouraging way because it plays to our strength. If you look at the short -- in the near-term with regards to the reimbursements proposals that have been made, we clearly are going to see patients moving back in the hospital setting.

SBRT and SRS are strongly considered in the proposed reimbursements changes and again, I think directionally it’s going to create a -- I would believe a stronger focus on hypofractionation few treatments and higher dosing in general when you look at what the reimbursements momentum will push people to think. So I think it’s got positive impact on, again on the things that we are already strongly positioned to provide to the market.

Tycho Peterson - JP Morgan

And for you guys there are still good opportunities, potentially cracking the single vault or dual vault overtime? Can you maybe talk about how you are thinking about that and do you need to use pricing as a little bit more of a lever for some of those single vaults sites?

Josh Levine

So, I think, I probably and I’m sure this, in other discussions, I think that my view or our view of the world to go back a year ago, we thought and believed at that point that the TomoTherapy H series was a true single vault solution and I believe quite frankly it still is.

But I think that from a practical reality standpoint, we needed to prove ourselves with that device in probably multi-vault settings and that’s really has been our focus and our strategy over the last year. We have made good progress against reference sites in setting up Tomo HDA situations and sites in all of the major regions of the world at this point.

And I think that the product has tremendous difference today from what the market remembers of it early on in earlier generations with regards to product reliability. So you are talking about a completely different level of clinical capability, treatment speed, throughput and efficiency and quite frankly, reliability.

I think when you look at those things, we do have single vault -- soul vault capability from functionality and feature set standpoint and it’s just a matter of time, quite frankly, before the market starts to recognize. We -- I recognize, we think we have to prove ourselves in multi-vault settings first and that’s really the focus at this point.

Tycho Peterson - JP Morgan

Last one, you talked about cost discipline at ASTRO you also talked I think about the direct-to-consumer campaign with American Airlines? Just maybe talk about how we reconcile those two and to the extent you are willing to spend dollars on brand building campaigns?

Josh Levine

Yeah. So let me clarify it. It’s really a great opportunity for us to clarify the American Airlines campaign. So we – first -- the first thing I would say is, we have underinvested and under-spend in strategic marketing resources of company over a long period of time. And so we have a renewed energy and renewed focus on being smart about what we are doing and how we are going about it. But the market effort both upstream and downstream is getting a lot of attention at this time.

We -- just to set the record straight on the current campaign, this is a relatively -- really quite frankly modest investment, talking about under six figures in total dollar exposure. Our intent is not to drive -- not to become in its truest form a DTC type of patient delivery mechanism in this effort.

This is really us testing messaging and positioning for our products in our therapies in a way that would allow us to bring those proven messages and position opportunities and materials to customers, our customers, so they can run their own campaign. So this is really an opportunity for them to use the modest investments we have made with the programs like the one we have described at ASTRO to basically drive patient acquisition in their own business model.

So we want to be smart, we want to be selective in what we are doing and I think that positioning and hiding level awareness about the brands right now is important. But we are not looking at this as kind of a classic true DTC campaign.


Okay. Our next question comes from the line Steve Beuchaw with Morgan Stanley. Please proceed.

Steve Beuchaw - Morgan Stanley

Hi. Good afternoon and thanks for taking the question. I wonder first if, Josh, you could put a little context around the order number. Was there any contribution from ASTRO orders you took at the show in the quarter and maybe with that as a backdrop, as you think about the new combined organization, Accuray plus Tomo with these new systems, is it still appropriate to think about the September quarter as the seasonally weakest quarter of the year?

Josh Levine

So let me start Steve with the first part of the question. I would say in general ASTRO was a minimal contributor to order activity during the quarter. On the second part of the question, while if you look back from a historical prospective there has been some seasonal or quarter-to-quarter patterns that would be identifiable.

Our view is that if we are doing the things commercially that we need to be doing from an execution stand point, we should be able quite frankly to have a sales funnel and pipeline that allow us to minimize overtime or flatten overtime, minimize the effects of some of the historical seasonality or quarter-to-quarter variations that we have seen.

And quite frankly, I hope its obvious to people at this point that that is getting a 110% quite frankly of our attention in terms of again crisp, commercial execution, management of the funnel, management of early identification of deal flow and deal opportunities and if we do those things well, quite frankly, I think that we should minimize and drive to a more casual transition or even transition between the quarters as it relates to order activity.

Steve Beuchaw - Morgan Stanley

Okay. And then be our transition over to the MLC, the disclosure of the Plan B was unaccepted and I do not know that it should change the way that we think about the outlook for the M6? But as we think about the MLC, it wasn’t so much that it was an MLC that got people excited it was about the potential for the MLC to accelerate the throughput of that system? So can you comment at all on what Plan B is even if not in a way the specific about what exactly the product is in terms of what it would do for the throughput of the CyberKnife, so we know how to calibrate our thinking in the event Plan B becomes Plan A?

Josh Levine

Okay. So let me put this in prospective, we disclosed the existence if you will of our Plan B and Plan B essentially is a parallel path that we believe is prudent at this point, given the risks that are still inherent in the primary project, that we have a -- again a backup ready to go to with if in fact we need to. I would tell you at this point it is very clearly premature to believe that we would need a Plan B. So let me just emphasize that to begin with.

Let me also emphasize that we have customers that now have up to six, seven, eight months of practical experience over 400 plus patient treatment engagements with M6 and the improvement in throughput and treatment time with the existing just to fixed an iris collimators version of the production, we are seeing 20% to 25% reductions in treatment time as it is.

So functionality of the base system without the MLC is already a reasonably significant step ahead and improvement in what had been the case with the previous generation device.

From here, if you would put in MLC on the device would you better treatment time, or would you get a better throughput, the answer is probably. But at this point, it’s hard to say they have been theoretical studies and analysis done on what an MLC could do or might yield with CyberKnife. But at this point, I do not think it’s prudent to say definitively it’s X, Y or Z that would see an incremental improvement.

We are getting incremental improvement quite frankly right now with the M6 with fixed and iris collimators. And I think you heard me say over the last several quarters while it’s disappointing that we don’t have -- that we have been delayed with MLC. I want to be clear about this.

This is not going to put our product line and our commercial momentum in park. So we are selling what we have in the bag today. I don’t think that -- I think the risk of cancellations out of the backlog, I think are absolutely minimal if at all. We haven’t see quite frankly any as of today and I think that more of the way to think about the MLC delay and the impact it has is, it’s more -- it’s less of our cancellations and more about probably extension of installation timelines.

Steve Beuchaw - Morgan Stanley

Got it. Very helpful. And then a quick one for Greg, I wonder Greg is your (inaudible) and have been there now for a bit, if you had any quick thoughts on the company’s capital structure, specifically the use of unconvertible debt, how that compares to your past experience and preferences on cap structuring, how you might manage any changes there? Thanks guys.

Greg Lichtwardt

Great. Steve, thank you for that question. Certainly capital structure is one of things that I am very focused on right now. Probably two others that are may be a little bit more important would be that their financial P&L performance of the business. And I am frankly in total alignment with Josh and the rest of the team here on the goals that we have set out for ourselves.

So first obtaining cash flow positive that involves being very focused on the adjusted EBTIDA metric as well as our balance sheet and then moving into the obtaining GAAP income profitability, first operating income and then net income. And I think may be that’s a bit longer term objective partnering of the commercial team to get our revenues up and maintain our gross profits while also holding operating expenses.

So those are -- maybe the most important for me immediately. But I would say minimizing dilution from the converts is front center for both Josh and I. We’re evaluating alternatives now. We hope to have a plan in the relatively near future. I think there is a lot of options at our disposal for minimizing the effects if those converts were to be exchanged into stock. And I think that we can do a lot to improve our situation there.

So my to-do list is a bit longer than just that but I think those are the areas where I think I can make the biggest contribution.


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

Anthony Petrone - Jefferies Group

Thanks. Good afternoon. Couple of for Greg, welcome as well and congratulations on the new role. May be if we just focus on OpEx for a moment there and also margins, Greg, the goal has been $40 million in OpEx on a quarterly basis. It was a little bit lower this quarter. I was just wondering if -- should we be expecting other areas of cost savings in lieu of higher investments and selling on a go-forward basis and if that $40 million is still truly goal on a quarterly basis?

Greg Lichtwardt

Thank you. Yes $40 million is still the goal, that’s a GAAP number. And the management here is very focused on that. We’re certainly aware as I said in my prepared remarks that some of the savings we saw in Q1 was timing related on our R&D projects. But there were also some expenses in the $38.8 million that will not recur in the future. So we are quite comfortable that we are going to be able to manage to or below the 40 million on a quarterly basis.

Anthony Petrone - Jefferies Group

And then a follow-up on service margins, Greg as you know Accuray inherited a service business that was well inherited upon acquisition of TomoTherapy, may be just a review of specifically where TomoTherapy service margin is today and where you think it can over the time?

Greg Lichtwardt

Yes, it’s frankly still in the low or now in the low 20s that has been much, much lower than that. And as you probably know, our CyberKnife margins are quite a bit higher than that. They had been in some periods roughly twice as high as that. So we have still long ways to go but we are headed in the right directions. We have made very significant progress in just the last year.

So I think the goal of bringing total service margins into the 40% range is still on our radar, that’s again a GAAP number and that’s primarily going to be brought about by continuing increase on the TomoTherapy side.

Anthony Petrone - Jefferies Group

Great. And then Josh, may be couple for you, focused on the CyberKnife, can you may be clarify how many orders are coming for CyberKnife that been booking specifically, that are may be potentially anticipation of favorable SRS codes or is it more just the features of M6 and may be the possibility of the MLC?

Josh Levine

Anthony, I think that the answer in the near, kind of the current time frame is probably really more general, people having an interest in full body radiosurgery. Again I don’t think there is likely -- the momentum in the area in the SBRT or SRS area, just given what’s happening from reimbursement environment standpoint. Certainly it shouldn’t hurt that in any way but I do not know that I would attribute it to today, things that we are seeing in kind of real term -- real timelines or near term timelines on the reimbursement.

Anthony Petrone - Jefferies Group

So, great. Thanks. I appreciate and just last one Josh. You mentioned last quarter, GPOs and IDNs were channel that was becoming more of focus for Accuray. May be just an update on what’s going on there, are the orders coming through that channel more than 15% at this point or should I believe you disclosed in prior quarters? Thanks.

Josh Levine

Yes. I don’t -- I can’t recall whether we actually gave specifics on it or not in -- as a base line, Anthony, but the answer is we’ve got a lot of activity taken place in that area, lot of -- quite frankly a lot of proactive selling activity on our part. We have added resources and people in that area. Kelly Londy, our Chief Commercial Officer, has been very aggressive about putting the dollars to work there.

We think in really meaningful ways as it relates to getting that effort launched and up in running. And I’m encouraged about what I’m seeing, I think, stay tuned, we’ll have other things probably overtime to report there but the answer is we’re now showing up quite frankly. We were not showing up prior to having the infrastructure in place that we needed to be able to get to those critically important customer and groups.

So if you believe that half the battle is just getting your face in front of that channel, we’re absolutely in front of that channel now and we’re bringing what we think are meaningful messages to that audience around how we can help them from an economic and clinical standpoint.


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

Jason Wittes - Brean Capital

Hi, thanks. Josh, just a quick first clarification, I think you mentioned that if anything, the MLC timing is delaying some of the -- or is prolonged in the backlog, is that what you meant to say, to think about it because I thought my understanding where there is just plenty of customers willing to take the MLC now. So I get the -- get the CyberKnife going and have the MLC put in later, but I guess you’re implying that there are some customers out there that would rather just wait till the MLC is available?

Josh Levine

No, I’m not sure, where you got that. I know that I didn’t say…

Jason Wittes - Brean Capital

I guess, I misheard that.

Josh Levine

Yes, we -- again, there are no indication that I have today that people are sitting on the side lines on this as a consequence of MLC delay. If you look at the people that had orders in the backlog, there have been no cancellations. If you look at the people that all of the M6 installation, Jason, we’ve done to-date have been were orders in the backlog that originally went into the backlog with either an MLC -- they were FIM versions.

They were MLC equipped by order initially and those customers decided to move forward with an installation and commissioning of the fixed and iris collimator on the understanding that they would take the MLC as an upgrade, when it came along. So there is no -- I don’t think at this point there is any indication that we have a slow down in this -- as it’s related to MLC delay.

Jason Wittes - Brean Capital

Okay. That’s what I thought but I guess, I heard differently on the responsible question. The other thing is, are you able to give us an indication of how -- what the breakdown between CyberKnife and TomoTherapy was on the 13-unit shifts and the 14 installed.

Josh Levine

No, not discretely, I mean, I would say again these things kind of run quarter-to-quarter. You’ve got lots of selling activity taking place, lots of funnel management and pipeline management, things taken place. Last quarter happen to be a strong CyberKnife quarter. This quarter happen to be -- I think a bigger -- proportionately a bigger Tomo quarter, but I -- that’s about the -- all the color I would give to it.

Jason Wittes - Brean Capital

Okay. And then one thing, when you talk to your customers, you’ve got a strong following in TomoTherapy, you’ve got a strong followings in CyberKnife. But the overlap has been limited in the past, is that changing -- have you been having different conversations about potentially packaging the two and have you even seen some orders flow through which combined the two at this point?

Josh Levine

Yes. That is a really, really good question because the answer, the very definitive answer is yes. We are -- and I think it’s attributable to two things -- number one, we’re doing a much better job, Jason, from a positioning and messaging standpoint, the benefits of these two devices, these two platforms independently but how they can be complementary, when you put them either side-by-side quarter, inside of the same customer location, that’s one observation. So the marketing, the clarity of the messaging and the value proposition has improved dramatically over time, number one.

Number two, as we have basically put the reliability issues related to Tomo in our rearview mirror and really put them to rest in the minds of the marketplace. Tomo does become a more of the mainstream products opportunity and more of an interest for customers to kind of explore. And we have a -- I’d say, a very healthy number of deals working their way through the pipeline that our combination orders. So the answer is yes we’re seeing it as a kind of a trend that didn’t exist before quite frankly. And I think it’s attributable to the things I just highlighted.

Jason Wittes - Brean Capital

Okay, great. And then I don’t know if you can help us regionally in terms of the orders and revenues in this quarter, like where they came from U.S. versus O-U.S. and where do you saw much from China?

Josh Levine

So the answer is I’d say, all four regions of the world were represented. Some to a greater decrease than others. In areas where we have a big -- our biggest, they will install base presence. I’d say we got probably bigger contributions from those regions. Some of this also is being supported and influenced by where the first reference site locations were earlier this year in, with regards to new product.

So as an example, Western Europe got equipment in terms of reference sites up and running and established in those situations earlier from a chronological standpoint. And as a result, you have those sites in place and perspective customers being able to access and understand how those devices are working and whether or not they would meet their clinical needs.

So you had bigger -- probably bigger impact I’d say in general in our EMEA region as a result of that, but we’ve got, I’d say we’re pleased at this point with the general momentum we see in all of our regions, recognizing that we’ve got the smallest market presence in terms of share of market in the U.S. market opportunity which is obviously a big opportunity and so there’s lots of work still to do in terms of opportunity for us in the U.S. market.


Our next question comes from the line of Brooks O’Neil with Dougherty & Company. Please proceed.

Brooks O’Neil - Dougherty & Company

Good afternoon. It seems to me that the performance of the stock took a dip around the time vary and started talking a lot about weakness in the U.S. radiology market. And Josh, you spoke to this a little bit in your prepared remarks about the mix you have between freestanding centers and hospital in U.S. and outside U.S. But can you give us just a few more specifics about sort of maybe the percentage of your install base that’s what freestanding centers versus hospitals and that type of thing?

Josh Levine

Yeah, I meant in general, Brooks, I’d say, we have a very, very limited presence in freestanding centers and I’m not saying -- it’s ironic I think today that that position it’s kind of good news, bad news, right. The good news is that today ironically given some of the headwinds in the U.S. markets I think it actually helps us. But when I say limited I mean very limited and I mean, we did not have an active national accounts, strategic accounts strategy focused on proprietary freestanding network type customers. So, again it gets back to just presence and showing up. If you are not there, if you don’t have your face in front of that channel, you are not going to get much attraction there and that was kind of where we blend it.

Again the current environment -- just given the reimbursement directions and trends that are likely to rollout, that actually helps us in terms of installed base, better than 50% of our installed base is outside the U.S. And again, we had -- I think we clearly understand that if we want to be, if we want to really optimize a strategic growth agenda going forward, we’ve got to fix our position in the U.S. market or at least improve it.

And so we make no mistake about it. We’re focused on that, but today when you think about kind of macro level market impacts and characteristic of the current environment, not having a big exposure in the U.S. market actually is probably something that helps us right now. But doesn’t mean that we’re not going to be focused on improving our position in the U.S. market because nothing could be further from the truth, but we’ve got -- when you are swinging a three horse race and your point of share or position of share in the U.S. market is in around number, say 10% or 12%, everywhere I look they are selling opportunity for us. There’s a bunker that we can go compete for.

Brooks O’Neil - Dougherty & Company

That’s great. That’s very helpful. Second question, I’m just curious trying to be sure I understand if there is any consideration or factor related to the availability or like there are for the multi-leaf collimator in the guidance, maybe as differently if you’re able to deliver it on the schedule you’re thinking about now, would that have any impact on your guidance? Do you think at this point?

Josh Levine

No. I mean, again, I think if go back to the prepared remarks, any perceived deficit if you want to describe it that way, Brooks, that the market might perceive in our product offering by being delayed at this point, or having to go to a power or path or Plan B if you will. I mean, we believe that any in all of that is manageable within the guidance that we’ve already communicated.

Brooks O’Neil - Dougherty & Company

Good. And then last thing, when I was at ASTRO, one of the things that just pops out at you is the interest in proton therapy, and I even heard you guys talk about it at all. I’m just curious if it plays a role at all and you’re thinking about your product lineup overtime?

Josh Levine

Proton is -- proton is a topic and a subject that gets a lot of interesting conversations going in a lot of different circles. There is no question that from a sheer technology standpoint, it’s something that people want to and will probably consider going forward. The problem is the economics of delivering proton today, are to some degree unworkable in most markets. And until the cost curve or the price point of proton comes down and I think the one way to see that happen over time is a considerable runway at the lengthy timeline.

I think it’s going to -- the cost of proton will limit its adoption curve. The other part of this discussion ends up being, cost and benefit. Until someone can put in very clear unambiguous clinical terms that proton is an improvement over what’s currently being utilized, people will asked whether or not it’s worth the trade, the trade off. And if you look at where some of the activity, some of the more recent activity has been in proton it’s been in prostate. I mean, it’s been used in areas where you quite frankly -- the experts will say there is no incremental clinical benefit in the use of proton for prostate cancer.

So you’ve got two things working against it in the near term. You’ve got the cost situation and you’ve got maybe either, inappropriate selection, patient selection for where proton would be best served, or that coupled with just lack of clinical support and lack of clinical data, indicating an improved outcome for patients. Those are not good things, those are things that will really I think impact adoption over time, at least in the near to intermediate term.

Brooks O’Neil - Dougherty & Company

So, it’s fair to say you are pretty focused on just continuing to drive adoption of your existing technologies and have spent a lot of time thinking about proton in terms of your product line-up at this time?

Josh Levine

So we are thinking about a lot of things of strategic importance to the business, but the bottom line is we’ve got to fix our house in the near-term and fixing our house, Brooks, involves the current -- our current core technology base and making sure that we are maximizing the value that we create with two -- what we think are really, really terrific products that we just launched and I think that the market is starting to wake up to so.


I’ll now turn the call back over to Mr. Josh Levine for closing comments.

Josh Levine

Thank you for joining us on today’s call. We are aggressively focused on the activities that will unlock the value on our new products, and allow us to become a profitable growth-oriented business. Look forward to speaking with you on our Q2 call. Thanks very much.


Ladies and gentlemen, that concludes today’s presentation. Thank you for your participation. You may now disconnect. Have a wonderful day.

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