Q4 2019 Earnings Call
Thank you Daniel Good afternoon, everyone welcome to Accuray's Conference call to review financial results.
Quarterly and full fiscal year 2019, which ended June 32019.
In addition, during our call this afternoon.
Review recent corporate development.
Joining us today are Josh Levine, Accuray's, President and Chief Executive Officer, and Shake Hamamatsu, Accuray's, Senior Vice President and Chief Financial Officer.
For once again like to remind you that our call today.
Each forward looking statement.
Risks and uncertainties, including statements regarding our fiscal 2020 guys.
Including factors that could affect such guided expectations regarding market conditions in China.
Expectation related to new product releases.
Business plans and strategies there are a number of factors that could cause actual results to differ materially from our expectations, including but not limited to risks associated with the adoption of the Cyberknife tomotherapy in Radixact systems commercial execution Operationalizing, the China joint venture and overall strategy in China.
Timing of China user license issuances, and the company's ability to take advantage of the issuance of social licenses future order growth future revenue growth and macroeconomic factors outside the company's control.
These and other risks are more fully described in the news release, we should 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 will result changes in assumptions or changes in other factors affecting forward looking information.
Except to the extent required by applicable securities laws.
Two housekeeping items first during the Q and a session. We request that participants limit themselves to questions and then re queue with any follow ups second all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example statements regarding our fourth quarter reflect too.
Refer to our fiscal fourth quarter ended June 32019, now I will turn the call over to Accuray's, President Chief Executive Officer, Josh Levine Josh. Please go ahead. Thank you Michael Good afternoon, everyone and thank you for joining us on today's call.
Since we last talked with you in April our team has continued to execute and build on our recent commercial momentum advance or opportunities in China reduce our overall operating costs and achieve full year operating profitability. This afternoon, we reported results for our fourth quarter and full fiscal year 2019, highlighting this progress.
We generated $97 million in system orders during the fourth quarter and 342 million in system orders for the full fiscal year year on year orders grew 12% over fiscal 2018.
For the fourth quarter orders increased 1% as compared to last year's period, but that was against a tough prior year comparison as we reported the largest U.S. multi system order in the company's history and last year's fiscal Q4.
Regionally, Japan had the highest order growth rate during the fourth quarter at approximately 20%, while the Asia Pacific region increased approximately 15% driven by the continued strength in China.
In EMEA orders grew in the mid single digits. During the fourth quarter. This growth was highlighted by the receipt of the first Multisystem multi clinic order that bundled both accuray and research lab system and software offerings placed by the Swiss Medical network.
Turning to our Americas region orders were down in the fourth quarter based on the previously mentioned comparison to the prior year fourth quarter. Nevertheless, fourth quarter orders in our Americas region achieved their highest level for any quarterly period during fiscal 2019, driven by contributions from the U.S. and Latin America.
For the full fiscal year 2019, the 12% total order growth was driven by our Asia Pacific region were pent up license demand and trying to resulted in orders nearly doubling on a year over year basis EMEA continues to be the largest contributing region in terms of absolute dollars. Although total orders for the year were off 2%.
Our Americas region was down 9% for the full year, given last year's multi system order impact, while our Japan region continues to make solid contributions representing approximately 20% of total company orders.
On an order composition basis, approximately 20% of our fourth quarter orders were competitive replacements, 30% were trade ins of older Accuray systems, and approximately 50% where new bunkers.
From a product mix perspective, both the Cyberknife and Tomotherapy platforms grew double digits year over year Radixact continues to perform especially well and has reached a very significant milestone by reporting the 100th system to revenue in the past 36 months.
Our backlog continues to grow increasing 4% year over year to $496 million.
I'd like to turn now to our recent progress in China.
During the fourth quarter, we booked orders from our trying to distributor totaling approximately $19 million. The orders were primarily for type products.
Recently, the Chinese Ministry of Health provided an update on the overall timing for the Taipei Radiotherapy license review and approval process tied to feedback from end user customers. We have a growing sense that accuray Taipei products covering both our cyberknife and Radixact systems represent a substantial number of the applications that have been received by the Ministry of health from tier one hospital facilities.
While there is no definitive guarantee that all of these applications will be approved for license customer feedback does suggest that we continue to be competitively positioned to capture type of devices.
Based on the current understanding of the process and the projected timelines. We are cautiously optimistic that accuray's first shipment of pipe based systems would occur sometime in the second half of fiscal 2020, and our inventory position will allow us to be highly responsive once licenses are issued.
Sure we will be reviewing in his prepared remarks, how this updated timing is reflected in our fiscal 2020 guidance. We're very excited about our potential to build type based system revenue during the second half of fiscal 2020 and beyond.
As for the type of each segment currently our tomo each system has been defined as a type b product.
The joint venture dealer sales organization is actively selling this device and we strongly believe our best opportunity to maximize our participation in the type of product segment in China is through our joint venture with China isotope and radiation Corporation.
Since forming the joint venture company in January meaningful progress has been made with the new company, reaching three important milestones.
Over the past 120 days the JV company has been granted the business license certification the medical device operating permit and most recently in July the radiation safety license, which is the final business license required from a regulatory perspective to sell and service radiotherapy systems in China.
The rapid and straight forward review and approval process related to these licenses reaffirms our view that our JV partner trying to trying to isotope and radiation Corp has been a significant and helpful resource in expediting. These approvals during a period of rising tensions in the us trying to relationship.
Second the JV has received its first two orders, which will in turn be reported as accurate backlog during the first quarter of fiscal 2020.
And lastly in July the new manufacturing and training facility located in 10 Gen had its groundbreaking ceremony, where our China branded type B system will ultimately be produced.
Our current plan based on facility readiness and regulatory approval timelines is to be in full production with a locally manufactured product and approximately two years.
To avoid short term disruptions of our revenue conversion cycle in China, while the JV ramps up we will continue to work with our current distributor Tonight to convert orders to revenue.
We believe this two phase strategy in parallel with our current distributor continuing their sales responsibility over the next year allows accuray to best maximize both near and longer term opportunities.
Overall, we have met or exceeded all of the milestones for the first phase of the China, JV integration and ramp up process and we're very excited about the future impact of our overall, China JV strategy as a major growth catalyst for the company.
Turning now to our product portfolio, we believe that the product development roadmap for both our Cyberknife and Radixact platforms are critical to our commercial momentum and accelerated growth going forward.
To that end, we have some exciting news related to roadmap development projects, we have our first customer evaluation site underway for accuray's proprietary synchrony motion compensation technology for our Radixact platform.
The site is Froder freighter hospital in suburban Walkie, which is the primary teaching affiliate of the medical College of Wisconsin.
They have successfully treated their first patient utilizing the synchrony technology on their radixact system and the case details were impressive.
The freighter clinical team delivered a three fraction fiduciary free SBR T. One case utilizing synchrony.
This technology enables continuous delivery or radiation treatment beam to the tumor while the tumors in motion by synchronizing the beam to the target on a continuous real time basis during the delivery of a treatment fraction.
We will be putting out of a joint press release with floater containing more detail on this next week, but we felt it was appropriate to share this exciting milestone on today's call.
Successful patient treatment gives us confidence that we are on track for full commercialization of this proprietary technical capability early in the second half of fiscal year 2020.
Accuray's, the only radiotherapy system provider to offer this unique solution and we expect sigrity for Radixact will be a catalyst for replacement of older Tomotherapy systems, as well as improving our strategic positioning and competitive selling situations.
Additionally, with the proposed changes in future reimbursement captured CMS is alternative payment model, we believe that more radiotherapy treatments will be performed with SBR t. applications and Hypofractionated treatment regiments. These higher dose fractions will benefit from the improved precision and tighter margins that are attainable through accuray, synchrony technology, which can help minimize toxicity and exposure to healthy tissue.
Switching to our Cyberknife platform, we view, our Valo optimizer software upgrade as a significant benefit considering the proposed reimbursement changes by CMS.
Volvo, which was introduced at Astro last fall reduces treatment times by up to 50%, allowing cyberknife treatments to be performed in 15% to 20 minutes, depending on the disease site.
Additionally, vala creates significant reduction in treatment planning times in some cases approaching an improvement of 90%.
As with Synchrony for Radixact, we believe the availability of the volatile upgrade on Cyberknife will be both the catalyst our installed base replacement cycle and allow us to attract new customers to the Cyberknife platform.
Technology upgrades like synchrony envelope offer material improvements in functionality in the form of precision speed and efficiency across the Radixact and cyberknife platforms. At the same time that reimbursement changes are likely to drive more SPR t. and hypofractionated treatments strengthening the value proposition of the accuray product portfolio.
In summary, we are excited about our progress in fiscal 2019, 12% order growth, 3% revenue growth and 39% EBITDA growth all of which were within our guidance estimates despite not having a material revenue contribution from China during the 2019 fiscal year.
Additionally, through operating expense management, we initiated 15 million in annualized cost savings and achieved an operating profit for the full year, which is the first time that has occurred since the tomotherapy acquisition and a topic that <expletive> will discuss in greater detail.
Our fiscal 2020 guidance reflects the latest information we have from China in terms of the potential timing for type a revenue recognition at the same time, we expect to generate mid single digit gross order growth globally. During fiscal 2020 with strong year over year increase is coming from the Americas, EMEA and Japan regions.
Overall with the pending commercialization of synchrony for Radixact, the Vogtle software upgrade opportunity on Cyberknife, the progress of our joint venture in China, and future reimbursement developments in the United States. We are enthusiastic about our direction and our growth potential and I would like to turn the call over to ship.
Thank you, Josh and good afternoon, everyone.
As Josh highlighted.
For the full year gross orders were $342.3 million, an increase of 12% over the prior year.
We had $97.2 million or gross orders in the fourth quarter.
Representing a 1% increase over the prior year.
Last year's Q4 included the largest us multi system order in the company's history, and therefore presented a tough year over year comparison.
Starting in fiscal year 2019 gross orders include upgrades purchase through service contracts.
These upgrade orders totaled $1.9 million for the fourth quarter and $5.5 million on a full year basis.
Excluding these upgrades gross orders grew 10% on a full year basis.
From a product mix perspective, the Tomotherapy platform led by Radixact accounted for approximately 60% of gross orders for both Q4 and the full year.
Cyberknife represented approximately 40% of the total gross orders in both Q4 and the full year.
Cyberknife orders grew double digits on a full year basis.
Net age outs for the quarter or $24.1 million up from $17.1 million in the prior year.
Net age outs consisted of $28.2 million of age outs offset by $4.1 million of age ins.
Approximately a third of the Asia for the quarter relates to the orders with a long time distributor in Turkey, where strengthening of the US dollar against the local currency over the past few years has caused a delay in revenue conversion.
We also recorded $8.7 million of cancellations and other adjustments as a result on a net basis, we generated $64.4 million of orders in the fourth quarter.
As discussed in prior calls the volume of auto cancellations can fluctuate from quarter to quarter.
On a full year basis order cancellations totaled $25 million or approximately 5% of our total backlog, which is consistent consistent with prior year.
We ended the fourth quarter for the backlog of $495.6 million.
An increase of 4% over prior year.
Turning now to our income statement.
Total revenue for the fourth quarter was $117.4 million, representing a 3% increase year over year.
On a full year basis revenue was 480 point to $18.8 million and also grew 3%.
On a regional basis, EMEA, Japan, and APAC deliver the healthy year over year revenue growth in fiscal 2019, with EMEA, and Japan, growing 11% and 13% respectively.
Growth in these regions was offset by decline in the Americas by 9%.
Product revenue for the quarter was 60 point $60 million, an increase of 11% over prior year.
Driven by driven by strength in both Cyberknife and Radixact systems.
On a full year basis product revenue was $196.7 million and grew 7% driven by strong demand for the rise X system with full year revenue up more than 40%.
Since its introduction almost three years ago through June 32019, we have recognized revenue for 100 Radixact systems.
Service revenue for the quarter was $56.8 million or down 4% from the prior year.
As a reminder, the prior year service revenue included a higher than normal level of upgrade upgrades purchase through service contracts.
Which was driven by new software releases do they to a precision treatment planning and I'd and AST connectivity.
As we mentioned in prior calls timing of upgrades can vary from quarter to quarter.
On a full year basis service revenue grew 1% driven by service contract revenue growth, which is consistent with our installed base growth of 3%.
Offset by lower upgrade revenue on service contracts for the reasons I stated earlier.
Turning now to gross margin our overall gross margin for the fourth quarter was 39% compared to 42% in the prior year.
On the full year basis overall gross margin was 39%.
Down from 40% in the prior year due to a decline in our product gross margin.
Product gross margin in the fourth quarter and for the year were 41%.
Full year product gross margin of 41%.
It's down from the prior year, 44%, primarily due to a lower mix of Cyberknife systems.
From a revenue mix perspective, cyberknife accounted for approximately 35% of fiscal 2019 revenue, which is down from 50% in the prior year. We are however, encouraged by that double digit Cyberknife order growth in fiscal 2019.
Which we believe will drive cyberknife revenue growth in the future.
Service gross margin in the fourth quarter was 37.4% of flat year over year.
On a full year basis service gross margin increased to 37.2% compared to 36.6% in the prior year.
Moving down the income statement operating expenses for the fourth quarter were $42.7 million, a decrease of $2.2 million or 5% from the prior year.
The decrease was driven by the cost reduction actions taken earlier in the year and full and the fourth quarter represented the first reporting period during which we realized the full benefit from these actions.
On a full year basis, operating expenses were $162.1 million or down 2% year over year.
Excluding onetime charges related to the accounts receivable impairment in the first quarter severance and lease termination credit full year operating expenses decreased $7 million or 4% from the prior year.
Adjusted EBITDA for the fourth quarter was $8.9 million compared to $7.8 million in the prior year.
Full year, adjusted EBITDA was $23.7 million, an increase of 39%.
Compared to $17.1 million in the prior year.
I'd like to note that in the past fiscal year, we achieved GAAP operating profit for the first fiscal year since the acquisition of Tomotherapy in 2011.
Operating profit of $600000 was achieved.
The direct result of the cost initiatives, we undertook during the year.
We believe we now have the right operating cost structure in place and remain focused on continuing to improve our profitability metrics as we execute on strategic initiatives that will drive revenue growth.
We ended the fourth quarter with $87 million of cash and short term restricted cash.
Turning now to our guidance for fiscal 2020.
During Josh his comments he mentioned the revised Linaclotide based system revenues in China.
As a result of the push out of the system revenues to the second half of our fiscal year.
We are currently anticipating fiscal 2022 revenue to be in the range of $410 million to $120 million.
This topline guidance includes the impact of current tariffs in China for the full fiscal year, which reduced revenue growth guidance by approximately 1.5%.
Outside of China, we are anticipating revenues in both EMEA and Japan to be flat or slightly below the fiscal 2019 levels, which if I might lead you to revenue conversion delays.
Related to Walt modification and although all project planning slowdowns.
Our two largest distribution channel lesions.
As we have highlighted in prior periods the complexities of our vaults readiness construction projects further challenged when a distributor organization. He is playing an intermediary enroll in between our site planning coordination efforts and the end user customer.
While additional resource resources, we have put in place to assist with the budget planning activities have been effective.
We are still subject to some inherent lumpiness in these activities and the overall timelines.
In addition, as I mentioned earlier revenues from these two regions grew at a healthy double digit rate in fiscal 2019, and therefore present, a tough year over year comparison going into fiscal 2020.
We see these issues in Japan, EMEA successfully resolving as we exit fiscal 2020 and expect these regions will resume revenue growth in fiscal 2021.
As for the Americas, we anticipate modest revenue growth in fiscal 2020.
As we continue to focus on rebuilding order pipeline.
Despite the near term challenges in these regions.
We are continuing to work on a backlog conversion through other distributors and building momentum in the Americas.
We are also excited about synchrony motion tracking correctional launch for Razak.
With the commercial installations expected to start in the back half of fiscal year.
Given the timing on type and revenue and project delays imposed by certain customers in other reasons I. Just described we expect our revenue in the first half of fiscal 2020 to be slightly below fiscal 2019 levels before resuming year over year growth in the second half of the year.
I just mentioned earlier, we do believe we will generate gross order growth in the mid single digit range during fiscal 2020, with Americas, EMEA and Japan, leading the way.
Given our revenue outlook, we expect adjusted EBITDA for the full year to range between 19 and $24 million.
The fiscal 2020 EBITDA guidance includes approximately $2 million of our share of expected loss of the China joint venture operations.
As mentioned in prior calls we are accounting for 49% joint venture interest using the equity method of accounting and accordingly, we expect to report our share of income or loss from the joint venture on a quarterly basis.
We did not record any joint venture loss pickup in fiscal 2019.
From a piano reporting perspective in fiscal 2020, we will start reporting our share of income or loss when the joint venture on a single line item called equity in income of joint venture.
Which will appear right above the net income line on the income statement.
In terms of your gross margin outlook, we expect overall gross margin to be approximately flat to our fiscal 2019 levels of 39%.
We continue to work and cost down initiatives to lower cost of goods and expand margins.
Tariffs in China negatively impact the fiscal 2020 gross margin outlook by approximately 150 basis points.
Excluding the term impact gross margin expectations will be over 40% in fiscal 2020, which represent healthy year over year improvement.
With regards to operating expenses, we expect fiscal 2020 to be down approximately 3% year over year.
As we see the full benefit of the cost reduction actions, we took in the prior year.
Turning to our Q1 Asia forecast, we anticipate Q on the Asia to be in the mid $30 million range with all the 40% coming from China.
As mentioned earlier as we gain more clarity on the timing of type of license issues in China. We will continue to work with our distributor and end customers on converting these days that China orders to revenue.
And with that I'd like to hand, the call back to Josh Thank schick before moving into Q and eight I'd like to spend a few moments on some of the details related to recent developments with us reimbursement.
In July CMS unveiled the radiation oncology alternative payment model that will be tested over a five year period and is currently anticipated to be implemented sometime in the first half of calendar 2020.
As proposed 40% have already shown oncology providers will be required to participate in the model, which will apply to both hospitals and freestanding cancer treatment centers.
We believe that the proposed national payment rates and subsequent adjustments will likely result, likely result in increased utilization of hyper fractionation and SBR t. treatments.
As an original pioneer in the areas of Piper fractionation and SBR tea, we believe accuray is well positioned to benefit from the likely changes in clinical practice that will result from implementation of the ATM.
At our upcoming analyst event to be held on September 16th at Astro, We will be providing an expanded overview of accuray's latest technology upgrades and how we see these advancements potentially benefiting from reimbursement trends.
Before we open the call up for questions I would like to thank the entire accuray team for their commitment increased focus improved execution in supporting the important work, that's making a difference in patients lives and now operator, we're ready to open the line for questions.
Ladies and gentlemen, if you have a question at this time. Please press the Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish we resell from the queue. Please press the pound key again, that's star then one to ask the question.
And as a reminder, we ask that you. Please limit yourselves to two questions and you may rejoin the queue. If you have any follow ups.
Our first question comes from Anthony Petrone with Jefferies. Your line is now open.
Thanks, Josh think schick, maybe I'm going to begin with with guidance fiscal 2020 and just.
Kind of moving through the moving parts here should you mentioned 150 basis point.
Impact from tariffs to 25% tariff so.
As I'm doing the math correctly, if we back that out.
The implied underlying guidance is something around down.
60 basis points to up 1.8% you coming off fiscal 19, where you did 3.4%.
And so I'm just wondering the spread between where we're exiting 19 and the underlying outlook, excluding terrorists for 2020 and how much of that is purely the delay in class a licenses.
And is anything baked in there for the us as perhaps maybe hospitals hesitate a little bit as the PM is sort of finalize and implement and then I'll have a follow up thanks.
Yes, and thanks for the question.
You are right about the math you know if you did a 1.5% tariff impact on them. That's roughly 400 million. That's about 6 million. So that is the dollar impact of the tariff.
And so if you sort of remove that the I can say that top end our ranges for for 20 plus 626 over.
Let me add that for 18 19 in.
And if I 19 so.
The.
As as as Justin I said in prepared remarks, a lot of that it's kind of a muted growth. Unfortunately in the.
If I 20 is impacted by the China type area revenue, we now expect to be to second half of the fiscal year.
And all of that is due to the license timing, which outside our control.
Good news is we're getting a lot more clarity on the license stations timing as a day goes by so thats. Good news it just a timing slipped.
And I think you heard ice speak about the other regions.
Japan and EMEA in particular, we're expecting flat to slightly down slowdown these regions due to.
What we think is sort of a one year hiccup in terms of managing the end user installation timing.
But they are they said they grew double digits in fiscal 19, so clearly the management of the revenue conversion pipeline has been very effective last couple of years.
But again these two regions.
We think we by the time, we finish up by 20 going into it by 21.
There will be in a growth mode.
Going into 21, and as we resolve these temporary issues on installation schedule and we've got some modest growth in revenue expected full.
Amex revenue.
Just want to add something Anthony just to tag on shoes.
The piece you get a part of your question, which you ended with was really around how much if anything weve baked into some of the assumptions on guidance related to.
Slowdown perhaps in.
Purchasing decisions based on CMS is direction.
The answer on that last piece is virtually nothing.
I don't think anybody right now can predict what the.
The the implementation timing, we've got obviously, an understanding about implementation timing from CMS, probably sometime in the first half of the next fiscal cycle, but.
The next calendar year, but the reality is.
It's a complex it's a complex proposed model there are lot of moving pieces to it.
I happen to believe very very strongly that when you look at what will result in terms of clinical practice direction and impact.
We are probably going to benefit more than any of our competitors from what is happening with the reimbursement.
It's moving people in a direction that we have more more continuous experience with related to IPO fractionation.
And SBR t. treatments than than arguably.
The bulk of the people we compete against so I think over time. There is no question that that will benefit from it and I think that our portfolio is well positioned to capitalize on what CMS, we'd like to see happen, there, which is patients treated more rapidly with higher doses.
But I think it's too early to call, whether or not theres going to be.
A definitive impact or slowdown or freeze if you will on purchasing decisions and therefore, we didnt, we didnt really have anything baked into the guidance related to that component.
Great and then I'll just had a follow up go back to China. I mean, do you think as you know sort of trade war.
Continues back and forth I mean is there any risk to that target now of the second half for class a license contribution I'll get back in queue. Thanks, Doug. So again I think you heard me say in.
Last quarter's call.
It would be terrific to wake up in the morning and not have.
A tweet or another another headline related to.
Trade war or tariffs and the back and forth that's been taking place with that said.
We still have a high degree of confidence that these these licenses are going to issue one of the reasons that we put the prepared remarks in place than we did in todays discussion.
Related to China isotope and radiation Corp is that if you think about what's going on between trying to US relations and then you look at what what we've experienced with the practical flow of regulatory decisions or licensing and permitting that the JV structure has been.
Receiving approvals on over the last 120 days, we've had three three wins in terms of the permitting and licenses that that business structure needed to start operation and I'm fairly convinced that the reason it was so rapidly and was so effective was because we're dealing quite frankly with the Chinese government directly it's not Washington, It's not president Trump, it's us dealing with our partner and they are a very very large state owned entity and they have.
Kind of an inside the tent view, I think and capability of helping advance some of these some of these things and I think that that what we've seen is kind of indicative of that so.
Again, if nothing else it just reaffirms in our mind that we've got the right.
The right partner and we're seeing.
Them help and interject themselves in ways that I think over time will continue to be helpful.
Right now again based on what you heard us say in prepared remarks.
The early indications are that we have.
A reasonably substantial number of tier one hospitals with applications in the system for type a license review and approval that are related to either.
Radixact product or Cyberknife product and I think that we feel.
Well well positioned based on that again, we're not going to win probably not going to win all of those were not going to get approval on all of those but I think that we feel good about what we see at this point directionally in terms of momentum or the the representation of our products in the in the <unk>.
When the total pool of applications that are related to Taipei.
Okay. Thanks, Thanks again.
Thank you.
And our next question comes from Josh Jennings with Cowen. Your line is now open.
Hi, good evening, thanks for taking the questions.
I wanted to follow up on the on China, just with the class C license time in what's a wildcard is out of your control and unpredictable.
But just to I think we're all clear.
When you.
When you do get the licenses terms of.
Recognizing revenue in the back half.
You guys will recognize revenue upon the license granting and you get you will ship to tomo knife and you'll be able to recognize revenue. There I'm just trying to think about the risk of of if licenses are granted later in the first half of this fiscal year versus or the benefit of them being recognized earlier.
To to relative to your guidance here.
Yes, Josh this is Jay I'll take that question.
In General you are correct, when we ship to Tom and I think thats the timing on revenue recognition for us and just to add a little more clarity there the wassa licenses granted to and use a hospital. There's additional steps to go through the tender process. So I just want to make it clear that beyond the license grant.
This additional step up the tender process for public hospitals in China.
Talk to go through the bidding and after bidding is complete.
The that's why in our shipment occurs Tom and I haven't taken revenue.
Just just to be clear on on what you've just said I want to make sure were.
Precise on this the the tendering process is essentially a process that will define and lock down the contractual terms between the distributor and the end user facility Thats receiving the license. It does not open it's not an open bidding situation.
Relative to.
Something that would would result in a different product being.
Awarded.
A license in that customer that end user customer situation just for purposes of clarification, but you are.
What triggers identified is right on in terms of you know.
We'll recognize revenue when we ship the tomo knife and inventory availability for us is not going to be a problem in us being able to respond rapidly to once once hospitals are ready to.
Installer and once told when I was ready to take product.
Great and just a follow up question again on China, It's a hot topic.
Just in terms of your gross order guidance mid mid single digit range.
I mean, how should we be thinking about class C licenses being granted and the impact to potential that pent up demand and maybe even stronger order flow out of China.
And also can you just remind us how once the JV is fully in place and sales responsibilities shipped over from culminated to the JV those type a class eight orders will still flow through.
Accuray's.
Order number and I just want to make sure that there's not going to be any any over overhang there in terms of.
Taipei orders falling off of off of your your backlog were in to your gross order number.
Thanks for taking the questions.
Sure So just.
Sure sure going I will tag team. This just to answer your last the last part of your question directly.
One of the reasons, we put the structure in place and negotiated the agreement details the way we did between ourselves.
Our JV partner CRC and terminal is we wanted to make sure that exactly what you were asking about was was not going to happen that we weren't going to have any disruption from a revenue conversion cycle standpoint in the transition between total arrive and trying to isotope and so.
Tom on ice has a protected window. If you will for a defined number of accounts that they are going to be able to take revenue on and we'll do so quite frankly for the next for a defined period of time and.
The.
At the end of that period.
Well revenue will will will be flowing through the JV structure.
The.
The the selling activity for type C products I mean, we have tomo age today, that's available for sale.
And we've got a window of time, obviously before a local product is going to be going to be available and manufactured for us, but we have a a network of distributors or dealers. If you will that are covering the vast majority of the provinces at this point there in place they've.
They are there people that our CEO , there who was our former GM for the APAC Accuray APAC region that he worked with in prior lives at Siemens and other companies. So he's got a strong commercial experience with them, they're on board, they're already trained and.
They are they are actively out.
Trying to sell tomer wage under the type b discussion or at least positioning that product. So we think that we have the right mechanisms and protections in place to ensure.
No disruption or no overhang to use your terminology in that transition yet and just to.
Kind of had some of the the point you're raising.
In transitioning.
Type activities from.
Tom and I have to to a JV on order front.
There will be no loss to backlog in that process and of course, we have.
You heard that the number 100 plus million a background in Taipei, we have wed Tonight.
Tom and I has opportunity convert to to convert those backlog to revenue over the next couple of years and they'll focus on that and there's no orders loss of backlog lost in that transition I want to make that clear and.
As we said.
Right now the JV and Tomo NIFA also sourcing additional orders on top of what we already have on Taipei and.
One of the press release, we had about a month ago in a JV progress.
One of the two orders. They received was the JV received was Taipei, so they already already generating both type and type B orders. So.
Hope that answers your question.
And I think the other one was.
Our mid.
Single digit auto growth guidance in how to think about China. The we are expecting additional China orders to follow.
In fiscal 2020, and obviously the assumptions is embedded in that mid single digit guidance.
However, I do expect top comp year over year on China, because as you pointed out we had a bolus of orders in Q2 Q3, So we're going to see some tough comp on the order side.
In China in particular by 20.
Great and just a follow up just so we're clear on.
Just on the gross order flow through the year. When you have that transition from T mobile knife to the JV for selling type a and type b well the type and tape orders be recognized through the JV or will will you guys recognize those orders as gross orders for accuray and could there be any disruption to order growth in or is that been accounted for in that middle mid single digit gross order guidance you provided.
Yes, so logistically.
The way works Josh is that obviously the end users will place on order with.
Joint venture.
Because obviously the joint venture is a local distributor about product and the joint venture will turn around and place the order with accuray at which point it becomes backlog.
So hopefully that makes it clear for you that the logistics of the older we see.
And then for type a and type b shoot correct.
Great.
Thank you.
Yes.
Thank you.
And our next question comes from Brooks Oneil with Lake Street Capital markets. Your line is now open.
Good afternoon, I have a couple of questions.
On August 2nd you've made final day in 8-K.
Indicating that you add.
Emanated the employment of your Chief commercial officer can you just give us any color that you are able to offer as it relates to.
What was going on there what is going on there.
Yes, Brooks this is Josh I can confirm that.
The former Chief commercial officer has left the organization on an interim basis. The regional Oems are reporting to me directly which arm.
And they are very comfortable with its given me direct line of sight to the business and the trends in each region and not in my mind ensures that we will minimize any business disruption.
As a result of.
Our chief commercial officer his departure, it's very much a business as usual environment. We've got an active search underway for a new commercial leader and as we have additional updates or news to report on this topic, we will do so.
That's great I appreciate that.
Second question I had was you.
Good.
Quite a bit in your prepared remarks about your excitement about the motion management capabilities, you're introducing to the marketplace.
Can you just.
Though in layman's terms, it give us a little bit of a sense for how you feel those position you competitively in the environment you see out there in the marketplace right now as it relates specifically to motion management capabilities, you bring as well as what you're seeing from your competition.
So.
The world that the world that we will be living in all of us will be living and Brooks going forward, we will see a shift in case mix from higher Marty cases, and our Threed conformal cases too.
Much more.
Much higher dosing.
Fractions and fewer fractions. So think in terms of those those historical mix moving more to SPR T. cases, and SPR T. P cases, driven by Hypofractionated.
Treatment regimens as opposed to.
More conventional fractionation.
Approach.
And so the that movement is going to and CMS is taking this into account when they start when you look at their their proposed JPM because they're they're talking about patient about quality measures, they're talking about patient safety measures. So there is likely going to be and certainly we will be so im guessing some transition here from a clinical practice standpoint, the people that and the providers that are not as familiar with or Havent. Historically have been doing as much SBR Ti work or Hypofractionated work are are actually going to need to come through some kind of a learning curve and the learning curve is really about confidence clinical confidence in being able to increase the dose and delivered over fewer fractions from where they've been and ensuring.
And what drives that confidence clinically is knowing that you are going to have the beam focused on.
The target as you as you want it as precisely as it can possibly be and.
Our view is that we have we pioneered the use of fiber fractionation. If you go back 15 years ago 18 years ago.
We were the only voice in the marketplace talking about this and SP RT and it was because.
Cyberknife was a unique technology that allowed you to do this safely increase the dose and ensure that motion management through synchrony was able to accommodate for either positioning changes by the patient motion of respiratory motion from a patient.
Breathing.
Or any other changes that needed to be taken into account that would require synchronization compensating for the motion and synchronizing the beam.
And we do that in real time, we do that on an automated basis in real time, that's a very very different mechanism than our competitors using gating patient restraints.
You can go down the list, but none of them none of them provide the peace of mind and the confidence clinically too.
To be operating at dosing levels.
Those those higher fraction dosing levels that SPR TB cases are going to require and that's why I think we're feeling the way we are about what benefit what the value proposition looks like in our.
In our product portfolio. When you think about this this this kind of new backdrop for future backdrop related to what CMS wants to have happened with the ATM.
It sounds like a very positive environment for you and I am excited thank you very much.
Thanks Brooks.
Thank you and our next question comes from Tyco Peterson with JP Morgan. Your line is now open.
Okay. Thanks, Josh I want to go back to some of the comments you made before on the bundle and you highlighted its a complex model a lot of moving pieces.
I'm just curious if you could talk qualitatively about what you are hearing from customers because the idea that we might not capex freezes, there's a little bit odd I mean, I would think customers may pause until there is better kind of visibility here.
Yes, so I mean, I haven't I haven't had any any.
Overt inputs that are.
That.
Give me give me pause or trepidation or concern about long delays.
Tyco I think the reality is that.
Again, what CMS is hoping to do is to try and get this implemented as rapidly as they can you know as you know that we're in a public comment period right now as you might imagine in typical fashion.
All the constituents that have a stake in the outcome here.
Being led by Astro are.
Or assembling information and putting there.
Putting their their information together to be able to present to to CMS I think when you think about.
What they've communicated so far what CMS has communicated so far.
You know there are the big topics at least from what Astro was saying and what what what.
What I'm gathering is that.
The the national payment rate. The view generally is that in the sense is is that its low.
There are also.
A whole series of withholds and adjustments that will will will be a part of the payment model that are going to need to be worked through and so.
I think that theres going to be some negotiation and some movement on those before the music stops playing and.
And something it's definitively rolled out.
But I know that CMS wants to get moving on this rapidly and.
So I think that that in general should should try and create an environment, where it moves. This along I mean, I think that there will be.
There will be some people that will probably take a wait and see.
Approach to to.
If they are in the midst right now of purchasing decisions.
Definitively, but I think Directionally I think directionally people that are understanding what CMS wants to have happened here with regards to the movement just SP arty.
Case mix and hyper fractionated treatment delivery I think I think that if you. If you use that directional context for you know what what the world is going to look like and how are you going to have to be able operate in it clinically I think it takes it takes a lot of the confusion out of or the potential confusion out of where.
Where this should land and it it again it supports a more rapid people being able to make cuesta decisions about.
What they need to do from an equipment standpoint.
Okay. That's helpful and then on Veilleux and kind of the replacement cycle here I think you've talked in the past about a third of the compatible Cyberknife customer base is already adopted can you just talk a little bit about how you think about the adoption curve and the replacement cycle around valo going forward.
Yes.
We have.
Again in round numbers about 350.
Cyberknife in.
In the installed base and roughly roughly as you pointed out about a third of those are.
In.
In in the latest generation device, and six and that and Thats. The part of the installed base thats device compatible or backward backwards.
Integratable from a.
And install based compatibility standpoint.
Which essentially leaves us another.
65, or 70% of the installed base that are that are pre pre and six devices and that is a primary target.
For our Volvo.
Valo software upgrade introduction and that's that's a I'd say the heaviest concentration geographically.
Is the U.S. and EMEA with a concentration in EMEA really in Western Europe , and that's that's the selling focus right now related to follow.
And then on the guidance question on margins you are guiding to flat gross margins you had a good double digit cyberknife orders, which is higher margin for you guys can you maybe just talk about give and take on gross margins and then.
Any profitability comments as we think about 2020 for you guys.
Yes, I forgot income that is yes.
Yes so.
Gross margin.
Tightly hurt.
I'd say that we're guiding to flat, 39% year over year and that includes the one one and half cent impact on tariff. So if you have if you remove that type of impact we would have been.
Something like 44.5%.
Showing improvement year over year.
We certainly think that.
So we can improve on coming into this year the mix of Cyberknife as you pointed out as high a margin.
We also see the benefit of the cost actions, we took last year some of that went to a Cogs line.
But but terribly impacted early kind of pressing it down Unfortunately for fiscal 20.
And then the profitability metric.
Again, we are very happy about six 600000 small feat amount, but it is operating profit that we turned.
First time since the Tomotherapy acquisition.
In 2011, and the cost cutting auction is paying off and even though.
You know that will guide into it ought to be flat revenue here.
We can we can expand on the operating income.
Lying going into fiscal <unk>.
2020 here.
Okay, and if I could just ask one last one on Japan, you had great order number but you are talking about some some kind of delays. There can you just clarify what what's exactly going on in the Japanese market.
Yes, it's basically I mean, as you've heard us kind of that didnt different moments in time talk about in the past.
We've got we've added resources Schick indicated in the site planning area in support of distributors, but quite frankly in Japan specifically.
You know there is a especially around.
Technically complex.
Construction related type projects.
There are competing resources now in play with regards to.
The Olympic the Olympic construction infrastructure build up and.
I think that that's probably the single biggest.
Contributor to.
End user and user.
Delays or slowdown if you will on revenue revenue conversion cycle I don't see this as a continuing trend we actually saw have seen.
Since the.
Probably the end of 2016, we've seen in the last several years much improved revenue conversion cycle activity based on some of the steps we took and implement that back then and I think that these are more transitional or transitory.
In Japan and EMEA.
In the context of shifts remarks.
I don't see this being a long term situation tyco, but it's definitely going to slow things down with regards to revenue.
Revenue generation capability in those two regions for fiscal 20.
Okay. Thank you.
Thank you ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Josh Levine for any closing remarks.
I want to thank everyone for joining the call. This afternoon, and we look forward to speaking with you again in October when we report our fiscal 2021st quarter. Thanks, very much for participating.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.