Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Accuray incorporated Q2 fiscal 2020 financial results Conference call. At this time, all participants are listen only mode. After the speaker presentation will be a question answer session. Taski question. During this session you'll need to press star one on your telephone please be advised that todays conference is being recorded.
If you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Joe di is with listen partners. Please go ahead Sir.
Thank you Josh and good afternoon, everyone. Welcome to Accuray's Conference call to review financial results for the second quarter fiscal year 2020, which ended on December 31 2019.
In addition, during our call. This afternoon management will review recent corporate development.
Joining us today, our Josh Levine, Accuray's, President and Chief Executive Officer, and Shake Hamamatsu, Accuray, Senior Vice President and Chief Financial Officer.
Before we begin I would like to remind you that our call. Today includes forward looking statements that involve risks and uncertainties, including statements regarding our fiscal 2020 guidance, including factors that could affect such guidance expectations regarding market conditions and the company's my.
Market opportunity in China expectations regarding the company's China joint venture.
Spectrum options regarding revenue growth and expansion in operating income and adjusted EBITDA, including for the next three years expectations regarding recognition of revenue from China typing systems expectations regarding the tariff exemption of our products in China expectation.
Regarding gross margins expectations related to new product shipments installations, and releases and future business plans and strategies.
There are a number of factors that could cause actual results could differ materially from our expectations, including but not limited to risks associated with the adoption of the Cyberknife and Tomotherapy and Radixact systems commercial execution Operationalizing, the China joint venture and over.
Overall strategy in China, the company's ability to realize the expected benefits of the joint venture.
Risks and uncertainties related to featured type a and b license announcements in China as well as the ongoing tender process in China future order growth future revenue growth profitability and macro economic factors outside of the company's control.
These and other risks are more fully described in the news release, we issued just after the market close this afternoon as well as in our filings with the Securities and Exchange Commission.
The forward looking statements on this call are based on information available to US as of today's date and we assume no obligation to update any forward looking statements to reflect actual performance or results.
Changes in assumptions or changes or changes and other factors affecting forward looking information except to the extent, Rick calk required by applicable securities laws.
Accordingly, you should not put undue reliance on any forward looking statements.
Two housekeeping items for today's call first you're into Q1 nice session. We request that participants list limit themselves to two questions and then re queue with any follow ups second all references we make two specific quarter in the prepared remarks, our to our fiscal year quarters for example statements.
Regarding our second quarter refer to our fiscal second quarter ended December 31 2019.
Now I'd like to turn the call over to Accuray's, President and Chief Executive Officer, Josh Levine, Josh Thanks, Joe and thanks to everyone. Joining us on today's call Accuray's Q2, and first half gross order performance has exceeded previously communicated expectations as we maintained a strong order momentum in China, despite having a difficult year over year.
Comparison.
In addition, net orders during the quarter increased by 30% over last year as we saw strong agent activities, which should will cover more deeply in his prepared remarks in terms of revenue. Our Q2 in the first half performance was inline with our expectations as we had shared in prior calls we expected revenue growth in fiscal 2000.
20, what's going to be weighted to the second half of the year due to the timing of trying to type a license revenue recognition and we believe that projected timing is still valid.
As a follow up to an important topic that remain somewhat open following our Q1 call. We have confirmed that the tariff exemption for medical linear accelerators is applicable to all of our systems. We believe that this exemption will support our commercial momentum and expand access to our innovative radiation therapy solutions for hospitals and patients in China in light.
Recent events with the Corona virus outbreak in China, we do not believed that the outbreak affects the longer term demand outlook for radiotherapy equipment in that market.
China remains the world's fastest growing market for radiation oncology systems, where we have a highly differentiated strategy to drive significant revenue growth in the coming years.
Gross orders for the quarter were $98.6 million down 2% from the prior year second quarter, but materially above the previously expected range of 87 million to $90 million. We had discussed in our Q1 call. During prior fiscal year. Two we received 16 orders from China as the Chinese government publish the law.
Long awaited quotas for type, a and b licenses in that quarter, which presented a tough year over year order growth comparison.
Graphically in fiscal Q2, our EMEA and APAC regions were meaningful contributors to gross orders and we saw strong order contribution from China, which contributed 11 new systems. Despite the tough year over year comparison I mentioned earlier.
Im pleased to report that we saw orders in the Americas grow 37% year over year, which represents two sequential quarters of double digit order growth as we continue to focus on rebuilding the revenue pipeline in that region.
Japan also delivered solid results with its gross orders growing 17% year over year.
From a product mix perspective, Cyberknife contributed approximately 36% of total gross orders in Q2, while the Tomotherapy platform led by Radixact accounted for approximately 64% of the gross orders during the quarter.
Revenues for the quarter were 98.8 million, which was in line with our internal expectations and shift will provide a more detailed review of the revenue numbers in his prepared remarks.
Turning now to a more detailed update related to China. We continue to closely monitor the status of the ongoing tender process, which is the process that must be completed by end user hospitals prior to their taking receipt of a type of device as discussed previously this tender process has been put in place to define the transactional terms and conditions related.
Each hospitals equipment order and is not a competitive bidding situation that would result in changes in the specific device that the hospital has received the type a license for we expect that based on the timelines required for this tendering process. We will begin to see the first revenue impact related to China type a license awards sometime.
In our fiscal fourth quarter.
We're also aware that the second batch of pipe a license applications are currently under review by the China National Health Commission, and believe that accuracy systems or well represented in the second round of applications. While the exact timing of the announcement of additional license awards is not known we are excited about the prospect of additional type a opportunities.
In the coming months.
Our China joint venture continues to make operational progress in a number of important areas construction of the JV manufacturing facility as well as the training center is on schedule and we expect that manufacturing activities for our type products will commence in the next 18 to 24 months, which will allow us to support the growth and overall opportunity.
Associated with the type B radiotherapy products.
Circling back to the US we announced during the quarter that Stanford University Medical Center has added a second cyberknife system to expand access to precise radio surgery treatments to more of their patients. The new cyberknife system will be dedicated to the treatment of diseases in the brain and base of the skol, while their existing system will continue to be.
Focused on patients with tumors elsewhere in the body.
As many of you know Stanford is the technological and clinical birthplace of Cyberknife and we are proud that they continue to see the clinical value in this unique product and our expanding their cyberark treatment capacity to deliver treatment to expanding volume of patients.
We also recently announced data from a prospective study which showed that at five years Hypofractionated SPR t. treatments administered with the Cyberknife system provided excellent disease control with very low rates of toxicity in men with recurrent prostate cancer after previous treatment with radiation therapy.
Most importantly, 69% of men required no hormone therapy, which is the most common treatment given for recurrent prostate cancer. The study was a multi center study conducted a genesis healthcare partners and Atlanta care, which is part of the Geisinger Health system. The study results were recently published online in the International Journal of rare.
Ideation oncology biology in physics, we.
We're excited that these data clearly reflect the benefit of our cyberknife system in treating recurring prostate cancer and believe the study data May act as a catalyst to expand the range of patients to treatment is offered.
Turning now to our product development roadmap, we've seen strong customer demand for our synchrony technology for Radixact, which we introduced at the annual Astro meeting in September as a reminder, synchrony is a unique accuray innovation available on both the Cyberknife and now Radixact systems synchrony compensates for tumor motion.
That may occur during treatment by precisely tracking targeted motion or changes in surrounding tissue and automatically compensates for that motion and adapts beam delivery in real time.
We've gained valuable experience from our primary clinical product evaluation sites and a completed installation of our next phase of ramp and monitor sites with additional global reference sites on track to install in our fiscal Q3. These installations will help ensure maximum of commercial impact upon full production release in the fourth fiscal quarter.
Before I turn the call over to Schick I'd like to speak to accuray's revenue growth expectations for the next three fiscal years, which we discussed at the JP Morgan Health Care Conference earlier this month.
We believe our opportunity in China, including the recent grants a 50 Taipei radiotherapy licenses for Accuray systems. This past October will enable enable us to achieve a compounded annual revenue growth in the range of 8% to 12% from fiscal 2021 through fiscal 2023.
With respect to the 50 type a license is already awarded to Accuray systems. These units have system revenue value of approximately $115 million and we expect that the first of these units will convert to revenue beginning in our fiscal fourth quarter and continue from that point over the following 24 months.
We expect this revenue growth will drive faster expansion in our operating income and adjusted EBITDA for the same periods as we start to benefit from operating leverage we have built into our business model over the past several years.
In summary, I believe accuray has never been better position for growth and our entire team here is singularly focused on executing on the substantial opportunities ahead of us with that let me turn the call over to ship for a more detailed review of the financial results for the quarter <expletive> .
Thank you, Josh and good afternoon, everyone.
I'll begin with some additional details on our order performance for the second quarter, and then focus on certain highlights what a period.
Gross orders for the second quarter were $98.6 million, which wasn't materially above the previously expected range of 87 million to $90 million and down 2% from the prior year.
On a year to date basis gross orders increased approximately 10% over the same period prior year.
Net Asia us for the quarter were $8.3 million, which was significantly better than our prior expectation of $18 million to $20 million as we converted six previously Asia orders to revenue during the quarter.
The Asians during the quarter were related to the orders across all regions.
While we expect the amount of Asians will vary from quarter to quarter. We're pleased to see the progress. We have made in this area. We continue to believe that a meaningful number or the autos on China the aged during the past two years will eventually convert to revenue.
The 50 type a licenses already awarded for Accuray systems included several systems that were previously aged out.
During the second quarter, we had no cancellations and recorded 0.0 point $3 million of other adjustments.
As a result on the net basis, we generated $90 million orders in the second quarter, which represented a 30% increase over the prior year.
We ended the second quarter with a backlog of $539 million, an increase of 12% from December 31st 2018.
Turning now to our income statement.
Total revenue for the second quarter was $98.8 million down from $102.3 million in the prior year.
For the first half of fiscal 2020 revenue was down 5% quantify your which was consistent with our internal expectations. We previously communicated.
Product revenue of $43.8 million during the quarter declined 9% compared to the prior year.
Service revenue in the second quarter was $55.1 million up what I'd have to set from the prior year.
From a product mix perspective, cyberknife accounted for approximately 45% of the quarter's revenue.
The Tomotherapy platform accounted for the remaining 55%.
Radixact revenue represented approximately 65%, although tomotherapy revenue during the quarter.
Turning now the gross margin our product gross margin was 44% up from 39.5% in the prior year, primarily due to a higher mix of Cyberknife revenue.
Service gross margin in the quarter was 33.9%.
A bit of 35.7% in the prior year.
As noted in our Q on call, we experienced higher than normal service parts consumption last quarter.
Which negatively impacted by service margin.
During the second quarter, we have conducted a full fiscal inventory of service parts field service and doing that work in connection with a pause quality control initiatives and as a result written off certain service parts in the network, which lowered our Q2, so as gross margin by 110 basis points.
Without the impact of this write off our Q2 service gross margin would have been 35%.
With the proactive quality control measures taken a second quarter, we have a reasonable basis to believe that service parts consumption rate will normalize in the second half of this fiscal year.
Overall gross margin in the second quarter was 38.4% compared to 37.5% in the prior year.
Moving down the income statement operating expenses for the quarter or $34.3 million, a decrease of $5 million or 13% from the prior year.
Although the second quarter operating expenses included in net benefit of approximately $1 million from infrequent items, such as release of non income tax reserves that year over year decline operating expenses was primarily driven by the cost reduction initiatives, we undertook a year ago.
We are pleased to see the full benefit of this action and continue to believe operating leverage will allow us to deliver operating margin and adjusted EBITDA expansion in the coming quarters as we expect to revenue growth starting in a second half of this fiscal year.
Despite a slight year over year decline in our revenue operating leverage allowed us to deliver GAAP operating income of $3.6 million during the quarter compared to the operating loss of $900000 in the prior year.
We did not record any China joint venture lost pickup during the second quarter due to timing of accu as contractual obligations related to equity contributions.
We will begin to report the operating impact of China JV in the third quarter and expect it would be a loss for the second half of fiscal year.
I'd like to note that we reported net income of $10.7 million for a second quarter due to the recording of noncash $13 million gain related to the systems, we contributed to China joint venture in exchange for equity stake in the JV.
As discussed previously we expect to maintain a 49% equity interest in the JV through non cash contributions as allowed under the joint venture agreement.
This special noncash gain of $30 million represents the difference between the fair value.
Joint venture equity stake and the original cost of the systems we contributed.
The gain was recorded as other income income statement and excluded from the calculation of adjusted EBITDA due to its nature.
Excluding the gain I just described adjusted EBITDA was $7.1 million in the quarter, which represented a 72% increase compared to $4.1 million in the prior year.
We had a very strong cash collections quarter and ended the second quarter was $99 million, a cash and short term assisted cash an increase of $12 million from the prior quarter.
Turning now to our guidance for fiscal 2020 .
We are reiterating our prior guidance with revenue expected to range between $410 million in $420 million.
We continue to believe ability to return to revenue growth during the second half of the fiscal year.
As discussed previously our revenue forecast will fiscal 2020 includes a certain number of type a system orders from going into revenue.
Most likely starting in the fourth quarter of this fiscal year as a hospitals awarded the licenses way for the completion of the tender process.
We are reaffirming our expectations for gross order growth in the mid single digit range during fiscal 2020 with Americas in Japan lesions, leading the way.
As for adjusted EBITDA guidance for the full year, given Q2, adjusted EBITDA of $7.1 million and favorable operating expense trend, we see going into the second half.
We now expect adjusted EBITDA remains to be between $21 million to $26 million.
Over the prior guidance of $19 million to $24 million.
The new guidance range includes approximately $1 million of our share of expected loss of the China joint venture operations.
In terms of our gross margin outlook, we expect overall gross margin to be approximately 38%.
We focus operating expenses full fiscal 2020 to be down approximately 7% to 8% year over year, because we see the benefit of the cost reduction actions that we took in the prior year.
Turning to an ace forecast, we anticipate Q3 net Asia has to be in the $17 million to $23 million range.
With that let's open up the call for questions operator.
As a reminder to ask a question you need to press star one and your telephone to try and question press the pound key.
The symbolically compiled acuity roster.
Our first question.
Comes from Josh Jennings with Cowen You May proceed with your question.
Hi, good afternoon, thanks for taking the questions and congratulations on that.
Strong quarter here.
I was hoping to just follow up when the call question on the momentum you're seeing when the water side and I think you've done a nice job mapping out the tailwinds that are play in China, just wanted to check in on.
Were you guys are in the replacement cycle, how much of its tailwind you're experiencing from.
Getting winning replacement faults and in what regions are the replacement cycle the strongest.
So just the the primary focus geographically or areas contributing from a replacement cycle standpoint are caught the Americas region with.
The primary focus in the us and the EMEA region in.
Centrally the eurozone countries in Western Europe , and they are contributing to the order.
The order momentum in terms of.
You know.
Ongoing ongoing tailwind.
For the quarter.
We've had a good contribution from again HMS. This was the second quarter that orders.
Second sequential quarter that orders were showing double digit growth admittedly, it's growing off a relatively small base. So no. One is prepared to declare victory here, but directionally. We're pleased with what we're seeing there and I think that we've got.
The team from a structure standpoint, Suzanne winter, our new Chief commercial officer has done a.
I think a good job of.
Understanding where where we're at and what's needed from a people and structure standpoint processes are in place. So I think that that we should continue to see some momentum from and contribution from us.
Japan was also a strong order growth in the quarter I think we at 17, roughly 17% gross order growth in Japan, and so if this is more than just the China story.
Yeah, I wish I could tell you that we have every region contributing at that level every quarter, but it feels like some of the places, especially in a amex, where we havent seen the ability to string together the kind of quarter after quarter momentum that we would have liked is starting to kind of come into a better visibility and I a lot of that has to do.
With replacement cycle and.
You know launch of or introduction of synchrony on radixact to the marketplace things that are should be.
Catalyst going forward for more more order activity.
Excellent and then just my follow up is.
Maybe a tough question to answer, but just anything you're hearing any bodes just in terms of CMS is progress on the into alternative payment models.
And any timing you can share with us in terms of your expectations for that to kick in or whether or not that will will be delayed out into calendar 2021.
I think the questions I'll get back in Q.
No problem.
The answer is we haven't heard anything incremental to what's already been communicated I think that.
If you looked at when the public comment period drew to a close.
In the fall of last year.
There there was that the time.
Least anticipated timing had moved around a little bit what started out at the beginning of calendar.
20 move to July and then perhaps even beyond that I don't have anything new I do think that.
And part of whats really important about that.
More than the timing is that Directionally CMS has been clear about what they expect and what they'd like to see happen from this and I think that that that that messaging in the direction in terms of what it what it.
What impact it will have on you know movement towards more SP Arty case mix movement to more perhaps hypofractionated and ultra hyper fractionated treatment delivery as opposed to more conventional treatment fractions. I think that word is that word is out there that message is out there and that I think bodes well as we've talked about in the.
Passed for us given our portfolio and our traditional focus in those areas.
Thank you. Our next question comes from Brooks O'neil with Lake Street Capital You May proceed with your question.
Good afternoon, guys in new also congratulations I think it's a terrific quarter terrific progress so keep football the good work.
Thanks Brooks.
So I'm curious if I was listening correctly and it's always possible it wasn't.
Thank you commented about.
The 12%.
Potential revenue growth from 20 123 is be.
Merely on converting the 50 Taipei licenses I Didnt think I heard you.
Allude to any potential contribution from additional tight bay licenses in the massive amount of potential take be licenses that are out there could you just.
Comment little bit more about your expectation.
Included in your 8% to 12% and what might be outside that is.
Further upside for the future.
Yes, so brooks the direct line of sight that we have to the 8% to 12% compounded annual growth range that weve communicated between fiscal 21 and fiscal 2003 is directly related to that first tranche of.
Type a licenses and.
Again, the the announcement from last fall 50 to 58 were for Accuray systems 29 for Tomotherapy devices 21, where for Cyberknife devices. So there was a very healthy mix or contribution of mix across both platforms.
You know, we're really not other than the fact that we're aware that the review process is currently in active form for the second wave or traunch. If you will have pipe a license applications, we don't have visibility too.
The timing of an announcement of those specific awards or anything beyond that although we do I think we alluded to in prepared remarks, we do have an understanding that.
But accuracy systems are well represented in that universe of applications. How many of those end user hospitals that have an accurate device.
Well actually get an award at this point is premature to comment on our forecast on so we won't we won't be doing that.
But.
That's that's kind of what the core the core assumption is based on and I'll give shake a chance to elaborate on that a little but yes. Thanks, Josh said, Hey Brooks.
The delay to think about it is that Josh and I talked about $150 million of revenue value.
Associated with the 50 type a licensee that we already lawn and what we said was you know we expect the revenue recognition of the $115 million to occur over the 24 months period period, it's starting in this fourth quarter. So.
If you think about the growth rates that we talked about in Fi 21, and 22. So next two years.
While we already having 115 million gives us a pretty good.
Feel for.
Our ability to achieve 8% to 12% we talked about I think when you get out to 30 or what we talked about was the progress we're making on the China joint venture manufacturing facility and Thats, mainly as you know for the type B market that we want to further penetrate in addition to a market penetration.
On near term and so if you think about 30 or the way we think about it is in addition to the Taipei that we expect to win Additionally, but also the.
Additional volume from type B locally branded product that we expect to habit in China market.
In 18 to 24 months, given us a lift in revenue that San Antonio out.
Yes, that's great I thought that was the case it I'm glad you confirmed that that's fantastic. So I have lot of other questions, but I'm going to trend as Greg Your guidance here. So I just was hoping you guys might talk a little bit about that market response to think gritty I know there was a little bit in the prepared remarks.
In particular as it relates to.
How you feel that market is receiving.
Recruiting these capabilities and Cyberknife and Radixact.
Relates to the competitive offerings that might be out there at least talked about in the marketplace by others.
That would be a big thank you.
So.
As you are familiar Brooks, we we several years ago. We started in terms of new product introduction, we started.
Taking the approach that we wouldn't go to commercial full full production full commercial release of any.
Large new product introduction without making sure that we had I'll call. It up a beta process in place that allowed us to get cliff clear feedback from clinical.
Product evaluation sites, or what were calling ramp and monitor sites.
That.
We will provide early feedback about their experience with the technology in use with treating patients and also be able to to help us understand other aspects of.
Supporting the introduction or launch of those new new tight technologies.
But the things we learned around installation and upgrade activity related to getting the technology in place for customers. So it's a it's a process that has served us well.
It gives us a chance to get early feedback and also make.
Dial in other other corrective actions that we feel are important whether it's additional training for our field service engineers.
In making these installations go more smoothly.
Synchrony has been really well received and I think it simply put it is the.
Kind of the single biggest catalyst, we think going forward to continue to support trading to trade up activity on the installed.
Earlier generation Tomotherapy base installed base of business, which it's the largest concentration of which is in the us and western Europe right. Now so synchrony becomes a I think a pretty significant catalyst for continued momentum in terms of replacement sale opportunity on the Tomotherapy platform.
Great. Thank you very much.
Thank you. Our next question comes from read too well with B T. G. You May proceed with your question.
Great. Thanks for taking the questions and I'll add my congratulations here in a strong performance, it's really great to see.
My first question I wanted to dig in a little bit on the strength, you're seeing gross orders in the Americas region, and just if you could tell us a little bit more about what you're seeing and possible trends that are driving that.
The replacement cycle is it multisystem ordering is it getting excited about synchrony and so they're getting on board with Radixact any detail you can offer on that would help us understand the sustainability of that.
I would say Murray, it's probably most heavily concentrated around.
Launch of synchrony.
And also kind of the natural the natural trends from a replacement cycle standpoint.
I don't I don't believe at this point I think it's too early to to characterize any of it already large contribution of it related to the up the proposed alternative payment model from CMS, Although I think over time that could also be an impact, but it's really more what I would describe as organic.
Organic opportunity from a from our installed base standpoint, then and early reaction to the opportunity for motion management capabilities on the Radixact platform that synchrony represents.
Makes sense perfect.
And I have to thank you for proactively touching on the current virus outbreak since its clearly at the front of a lot of People's mind, you emphasize there that theres no change to longer term demand.
I Wonder if you could give us a little color on what you're hearing from customers and some of your folks from the ground in China about what the situation might mean, if anything at all for sort of the near term hospital insulation schedules.
I would just.
Plainly say that we don't have any incremental information to whats been publicly publicly disclosed.
I think that obviously people are appropriately.
Cautious in calibrated around.
Overall general impact.
Overall around this but.
We don't have any information that that that changes the again the longer term outlook. Here. This is the fastest growing radiotherapy market in the world. We think we've got a very good strategy for for a company of our size and current bandwidth to be able to participate.
As you know in it in a way that gives us a chance to over share that opportunity and.
We think we feel good about the.
The people, we've selected as a JV partner and the momentum that we have that we see in that visibility to from an operational standpoint with regards to the plant coming online on the projected timelines. We've communicated so I mean, we still are very bullish about the longer term outlook I mean, I can't I can't comment or don't have anything to add.
Add too.
Specifics around the Corona virus.
Outbreak and impact that that that could have or might have in in any other timeframe.
Okay perfect. Thank you so much.
Thank you and as a reminder to ask a question units Press Star one on your telephone. Our next question comes from Anthony Petrone from Jefferies. You May proceed with your question.
Thanks, and congrats on a good quarter here, maybe I'll start with a couple on China, and then shifts to the us any for shake just on the gain.
From JV that was reversed out of adjusted EBITDA.
That due to shipments from some of the class a licenses you you've disclosed hero, where those from orders outside of the tender licenses.
So just a little clarity on that gain in adjusted EBITDA.
Yes, Anthony Thanks sort of question my short answer would be.
The two systems, we contributed to the joint venture.
Which caused again to be quota it has nothing to do with the the revenue shipment that we're going to have once the tender process complete so I want to make that clear it was simply.
Transaction, where.
At the onset of the joint venture agreement instead of putting cash into the joint venture in exchange for foreign episodic equity interest our agreement with the our partner was for us to put the systems.
Into joint venture, but for the JV to use.
Yes, I was putting cash into the joint venture for operational purposes. So.
That's really the underlying transaction. So therefore, given its nature.
It's not really alignment with our ongoing operation so to speak into onetime event. So that's why we took it out of the adjusted EBITDA calculation.
Maybe just a follow up on the JV will or on the topic, just maybe an update on where the infrastructure.
Build sits out.
I think you've shared in the past that they're actively training on on systems out of the joint venture at the moment and.
The distribution network is is also being established so just a little bit on the infrastructure of the JV.
And then last one on the U.S. installed base.
Maybe just can you quantify.
The average age of the installed base in the us.
And what you think the upgrade opportunity is from the oral bundle once that gets going thanks again.
Hi, anything we take take just sequencing wise, we take the last question first.
I'd say that the sweet spot of what we're seeing in terms of trading trade up opportunities are really probably intend to 12.
10 to 12 year range in terms of life.
Service life and.
That really is not.
Not not all that different or substantially different from what we've seen over time I mean, these devices come into into the replacement window. So to speak probably beginning as early as maybe eight years.
But we've got we've got systems that we're in the in use and inactive service life beyond 12.
As well, but I'd say the.
In the most recent activity, it's probably in that 10 to 12 year range.
I don't I don't think that any of as I mentioned before I don't think any of the current replacement opportunity that we're seeing is is being impacted as of yet by the proposed alternative payment model discussion I don't think that it's impossible that over time once that gets launched officially in.
It rolls out that it might not have a it very well could have an impact going forward as a catalyst for for more trade and trade up activity, but right now I'd say, it's it's it's it's too early I don't hear anything specifically, tying what we're seeing on trade and trade up too to Aro ATM, So that I think.
That covers that part of the question on the China joint venture and infrastructure discussion.
I mean on the physical plant just to give you kind of.
Sense about.
Speed with which things are happening.
I was in China last July late late July .
And groundbreaking was taking place on the facility the manufacturing facility and the customer training facility I was there again.
Right before JP Morgan so.
A week or 10 days into the.
The month of January and.
Essentially the customer the offices and the administrative headquarters for the JV location the cost the internal.
Customer training classrooms, all of that facility is now built out and complete its actually being occupied by the.
The folks that our.
Straight of Lee and from functional leadership roles involved in the joint venture and the manufacturing facility, including the training Bulkers those would be the bunkers, where equipment will reside that will be used in training actual training activities with customers. Those bulkers were being completed Walter.
Was there the the projected timeline for manufacturing facility close out if you will in terms of the construction is sometime towards the end of April beginning of May and it just it's really extraordinary how fast things move there from a project standpoint, we've gotten great support from our JV.
The partner.
They have great relationships with the 10 Gen provincial government and who are the folks that oversee permitting and licensing for building construction permits et cetera. So we've had we've had a lot of support from try to isotope and radiation corp. as our partner and we've been fortunate that things have moved.
Along nicely with regards to the construction of the facility.
All of the distributors that the sales agents that are.
Attached to and represent that try to JV and will be the primary.
Selling mechanism for.
Taipei going forward as well as type B all of those distribute organizations have been train and.
They are they're out there out selling today I mean, we have I'd say in great part we are.
Materially complete except for you know maybe another couple of months in terms of the facility build out.
But in terms of the the infrastructure involving sales.
Marketing sales support service field service Engineering network. It's that work is that work is complete in terms of transitioning employees hiring employees et cetera, I think they've gone from well from a debts that start last July that organization now has roughly I think it's 95 or 90.
Most people in total across the will all functions.
Related to that organization in a span of you know maybe six six and a half month seven months.
Pretty phenomenal.
That's great. Thanks for the update and I'll get back in thanks.
Thank you and as a reminder to ask a question you need to press Star one on your telephone. Our next question comes from Tyco Peterson with JP Morgan You May proceed with your question.
Hi. Thank you. This is millennium for Tyco. So I was wondering fight off net.
Were significantly lower than you had anticipated could you talk about the dynamics at play here and regionally, whether you're starting to see agents from China or if there is something else underpinning the better results here.
Yes, thanks, Thanks for question and letting.
As I said earlier, we had a six total age in.
Orders in a quarter and.
As we began each quarter every time, we obviously look at the not only Watson on backlog, but also the orders that had been previously phased out and try hard to convert.
So those two revenue so.
As I said earlier to that.
As far as a number of Asian can vary from quarter to quarter. Although I do think that you know if you look two to three quarters out as we start to.
Number or type of revenue in China.
That's going to include some of the previously age that item. So I do expect a few quarters, we start the CMO steady flow agents, but.
That's really the dynamic here and as far as the six Asian orders it was across all regions.
So that was good see as well as you know.
The majority of sales outside of the United States, We had a pretty big distribution.
China presence so.
EMEA in particular, those that are regions, where we had a fairly high amount of age outs.
Beyond China. So it's very good to see a very positive activity here and hopefully we get more steady.
About the age in so.
As the China.
Revenue side, the convert into future.
That's helpful. Thank you I was also wondering how should we think about the pacing in terms of your revenue guidance for the second half of this fiscal year to better understand the balance between Threeq and Fourq you.
Yes, I think the best way to look at it is you know we've been consistently saying that the.
Type a revenue conversion for China, we believe it's going to start in Q4. So you know if anything between the two quarters in second half I would it weighted more towards Q4.
Okay.
Just wanted to tack with view bad.
Parents are you still embedding around 150 basis points.
To the topline and then also.
For your gross margin outlook.
Yes, no extra question while any.
Yes, so it's great to see us that we had to confirm the status exemption status with tariff this quarter and.
Recall that I did specifically called out one and half a cent or about $6 million coming into this year and we'll we obviously left the revenue range.
It was before in terms of guidance and.
The way, we think about it is that the.
Again.
Realization of this tariff exemption benefit ties into the timing of type a.
Revenues shipment that we've been talking about so.
For us.
Because of the dependency on the timing of shipments did a makes sense to really changed guidance at this point.
And.
The thing I would stress about that is it is a good news that the amount that we thought that we're going to loose attire now we don't and he just a matter of timing so whether that 6 million I wasn't he talked about commit come into this year on next year. It's a carry timing issue. So thats, how we think about it.
Okay. That's helpful. Thank you.
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Right.
And I'm not showing any further questions at this time I would now like to turn the call back over to Josh Levine President Seal Accuray incorporated for any further remarks.
I'd like to thank everyone for joining our call. This afternoon. We look forward speaking with you again in April when we report our fiscal third quarter results. Thanks, very much for your participation.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.