Accuray Inc (ARAY) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q1 2015 Accuray Incorporated Earnings Conference Call. My name is Whitley and I will be your operator for today. (Operator Instructions). As a reminder this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Alaleh Nouri Senior Vice President and General Counsel. Please proceed.

Thank you, operator. This is Alaleh Nouri, Senior Vice President and General Counsel for Accuray. Thank you for joining us today on our conference call as we review Accuray's first quarter fiscal 2015 financial results. Participating on today's call are Josh Levine, Accuray's President and Chief Executive Officer, and Greg Lichtwardt, Executive Vice President of Operations and Chief Financial Officer. Before we begin, I need to remind you that our call today includes forward-looking statements that involve risks and uncertainties including statements regarding our business plans and strategies as well as our outlook for Q2 and fiscal 2015.

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 adoption of the CyberKnife and TomoTherapy systems, commercial execution, future order growth, future revenue growth, future profitability and guidance for fiscal 2015. 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. 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.

I would like to turn the call over to Accuray's President and Chief Executive Officer Josh Levine.

Thanks, Alaleh. Good afternoon and thanks everyone for joining us today as we review our results for the first quarter of fiscal 2015. I will lead off the call today with an overview of the first quarter and a discussion of some of the highlights related to our key initiatives, and then Greg will provide a more detailed financial review. We will then open the call-up for questions. For the first quarter we reported total revenue of approximately $82 million representing a 7% increase over prior year. On a constant currency basis this would have been 9% growth. This is in line with our guidance range and consistent with comments that we made during our last earnings call that we believe revenue calendarization should be similar to that of 2014.

With that said we do expect the negative impact of year-over-year foreign currency exchange rate movement to be more significant in the coming quarters of this fiscal year. We also reported first quarter gross orders of $58.8 million, which represents a decrease of about 7% from prior year. On a constant currency basis this would have been a decrease of 4%. There are three primary factors that give us confidence that we will be seeing order improvement as we move through the year and specifically showing significant growth in new orders in the back half of fiscal 2015. First, the calendarization of our gross orders last year was unusually front end loaded in the first half of the year with order growth moderating in the second half of the year.

This year we expect our calendarization to be more in line with historical trends which will show strength building throughout the year and will result in a more back-end loaded order flow. The second factor is in our Asia-Pacific region where orders have been on hold due to a delay in the release of licenses by the National Health and Family Planning Commission of China which is the former Ministry of Health. We believe there will be licenses issued in the second half of the year that will result in booked orders.

The last factor is our expectation of a positive impact on CyberKnife system orders with the likely commercial release of the Multileaf Collimator, or MLC. Although we are not giving gross orders guidance, we expect order growth to improve as the year progresses and on a full year-over-year comparison we expect to be at a significantly higher growth rate than the overall market. Also in the quarter, we reported an adjusted EBITDA loss of $8.5 million which was unfavorable compared to prior year. This result was driven by a planned increase in spending ahead of the acceleration of revenue.

For the full-year outlook we expect growth in adjusted EBITDA within our guidance range of $18 million to $27 million. Before moving on to the next phase of our call, I'd like to comment on the Multileaf Collimator, or MLC for the CyberKnife M6 series. As you saw in the press release, we have installed our second evaluation unit. As we mentioned on the last call we plan to provide a progress update on the evaluations that are underway on our Q2 earnings call at the end of January. I do, however, want to clarify some information you may have heard during a recent JPMorgan hosted physician call. During this call there was some discussion suggesting that Accuray is still testing the MLC and that there might be hardware or computer issues.

In fact, all of the development work on the MLC has been completed and the evaluation sites are taking the MLC through a series of tests to evaluate the technical performance of the device. These tests include assessments of delivered dose accuracy, component reliability, and stability of performance over time. Additionally, customer workflow for patient treatment, commissioning, physics calibration, and quality assurance are all being thoroughly exercised. We believe that the evaluation results will be extremely helpful in guiding decisions relating to enabling clinical use and our commercial rollout plans.

Given some of the early challenges with product durability and resulting project delays, we feel strongly that it's critical that we have full confidence in the quality, durability and performance characteristics of the device that can only be achieved through the rigorous evaluation worked outlined here. Transitioning now to some of the more important activities and business indicators in the quarter, we had a successful showing at the ASTRO meeting in September. Our booth traffic was very strong and we saw significant interest in both the CyberKnife M6 and TomoTherapy HDA systems at the meeting, receiving positive customer feedback for both current as well as prospective uses of our products.

Additionally, there were a number of clinical abstracts presented on our product lines highlighting the clinical and quality of life benefits of both the CyberKnife and TomoTherapy platforms. For instance, specific posters showcasing the TomoTherapy system affirmed its benefits for whole breast and accelerated partial breast irradiation treatment, and for simultaneous integrated boosts during breast cancer treatment. On the CyberKnife side of the portfolio, abstracts presented on robotic SBRT validated the use of CyberKnife for low to intermediate risk prostate cancer and salvage therapy following the recurrence of prostate cancer.

Turning now to the sales side as we have highlighted on previous calls a key element in our US sales strategy is the development of a national accounts GPO contract portfolio to improve our market visibility and help ensure that we are engaging these opportunities earlier rather than later in the sales process. During the quarter we announced the signing of an exclusive three year contract for Accuray radiotherapy products and services with Premier, one of the nation's largest GPOs. Under the new contract which became effective on September 1, 2014, Accuray is the only contracted line of radiotherapy products and services available to Premier member hospitals and providers. Because we see this agreement representing significant potential to positively impact our US sales funnel I would like to take a moment to provide some additional insight into why we are so excited about it.

The Premier agreement provides Accuray with access to their alliance of more than 3,000 plus hospitals and oncology centers. While the agreement doesn't prevent member hospitals and providers from buying off-contract the exclusive nature of the agreement and the incentive supporting Premier's focus on driving purchasing compliance for on-contract products, provides Accuray a unique opportunity to work hand-in-hand with the Premier field-based marketing personnel to jointly target sales opportunities at specific facilities. The Premier Group's membership represents approximately 40% of US hospitals.

When you take into account Premier's overall market presence as well as market dynamics in the US where we see very limited new radiation bunker construction, the replacement market opportunity that exists within the Premier system has the potential to be very significant. During our last earnings call I mentioned we received the first of several orders on a multi-system purchase order from the Veterans Administration Health System and we expected more to follow. Today I'm pleased to announce that we have received two additional orders which means we have seen a total so far of three system orders, one CyberKnife and two TomoTherapy systems. These systems are configured with our latest technological advancements and demonstrate we are beginning to see the early signs of converting these strategic account contracts into real orders.

Shifting gears, I want to provide some additional background regarding our thought process on service margin expectations for 2015. During last quarter's call we stated that one of our key strategic initiatives was a continued focus on service excellence and customer satisfaction. This initiative is critical for us to gain new sockets because prospective customers put tremendous value in reference site customer experiences. For fiscal 2015 we are investing in programs focused on product and supplier quality, customer education, and service technician training.

In addition, we are establishing a team responsible for providing troubleshooting and technical support. Lastly, we are improving the network of replacement parts availability and optimizing the logistics system that will drive a higher level of responsiveness to improve line order fill rates for parts. These investments will help ensure that we have the installed base effectively covered globally, and that we can be responsive to customer service needs. Although these investments will suppress service gross margins this fiscal year we believe they are essential to ultimately drive to the 40% plus service gross margin target levels that we have shared with you previously.

We did miss our commitment for the first quarter due to service spending, which is entirely within our control, and we are already executing plans to close that gap and drive to that mid-30% service margin target we described earlier. Turning to our efforts and focus in the US business over the past two quarters our Americas region leadership team has been conducting a sales coverage and performance analysis to optimize and geographically align sales resources and territory coverage with our highest potential market opportunities. This process has led to a re-focusing of direct sales resources, and the addition of specialty sales agents in a number of very focused territories. We believe that this analysis will leverage our market coverage footprint, optimize our direct US sales efforts in the US, and improve our overall selling focus, ultimately resulting in new order growth going forward.

As we have discussed on previous calls, we need the US business to contribute in gross order volume levels equivalent to that of our other regions and we are focused on driving that outcome. While this is the goal, achieving that won't occur overnight. We believe there will be signs of improvement from the US market in two or three quarters. We expect the early signs of improvement to be visible in higher year-over-year growth rates and build from there over time.

Our clear expectation is that the US business and the Americas region overall will outpace our other three regions in terms of year-over-year order growth for this fiscal year. As an example for the first quarter gross order growth in the Americas was 140% year-on-year. While it's too early to declare a victory based on quarter one alone we do believe we are seeing early signs of improvement.

On a global basis we also experienced commercial success during the first quarter with five competitive bunker wins and no competitive losses. 95% of these new installations are for new vaults, meaning we're growing the overall installed base. At the same time we're securing trade-in and trade-ups which show that our customers value our products and want to own our latest technology.

Over the last two quarters we have seen very strong trade-in, trade-up orders going into backlog, which supports our belief that as our installed base ages, customers want to replace their Accuray products with our new systems for additional clinical capabilities and improved throughput to support growth in their practices. Now I would like to turn the call over to Greg for some financial commentary. Greg?

Thank you, Josh and good afternoon everyone. Before I talk about our financial results I wanted to highlight a couple of factors related to product orders. First of all, you will notice that coincident with the new fiscal year we are introducing a different reporting format for gross orders, net orders, and backlog. All of the same information is disclosed only in a tabular format in a condensed statement of operations.

With respect to the backlog activity for the quarter, as is normally the case, age-outs comprise a significant amount of the difference between gross and net orders. Our backlog policy which does not permit any discretion as to the timing of adjustments to backlog, causes us to age out orders that have been in backlog exactly 30 months without going to revenue. These age-outs vary substantially from quarter to quarter. It is also possible that an aged-out order can go to revenue in a later period.

Over the past two years we have made numerous changes to the order taking process including a different tone at the top, better oversight responsibility for and management of distributors, changes in timing as to when we enter distributor orders to the backlog, and better internal management of the revenue process for distributor orders. We believe these changes will improve the quality of backlog over time and reduce the level of age-outs.

As part of the change in reporting we will be providing more in-depth disclosures on the factors impacting net orders in our 10-Q and 10-K and spending less time on the conference call discussing them. As we have consistently said, gross orders are the best measure of our current commercial performance and that is what we are most focused on delivering. In that sense we are hopeful that sell-side analysts will begin to publish gross orders in their models instead of net orders.

Moving on to our reported financial results, total revenue for the first quarter at $82.4 million is comprised of $33 million in product revenue and $49.4 million in service revenue. The overall revenue -- revenue growth of 7% in the first quarter was driven primarily by the 12% increase in product revenues. Service revenue represents a year-over-year growth of 5% driven by the increase in our installed base and the conversion of customers to higher value service contracts.

The lower year-over-year growth in service revenue this quarter is largely caused by the effects of foreign exchange and a higher vacancy rates on systems without a service contract. Total gross profit of $27.8 million represents an increase of 5% over the prior year first quarter indicating an expansion of margins due to higher product revenues. Product gross margins were 37.4% which are slightly higher than prior year first quarter.

However, they are down compared to the fourth quarter of 2014, primarily due to the presence of fixed costs such as the TomoTherapy intangibles amortization in cost of goods sold. So product gross margins are sensitive to product revenue volume. We expect product margins to improve significantly throughout the year as our product revenues increase. First quarter service gross margin is lower than prior year by 170 basis points at 31.3% and below our expectations.

As indicated in the press release higher service spending had a negative impact on service margins and we are focused on getting this back under control for the rest of the year and expect to see improvement in service gross margin to the mid-30% level as previously communicated. Operating expenses of $43.1 million in the first quarter represents an increase of approximately $4.3 million or 11%, compared with spend in the preceding fiscal year first quarter. The increase in spend was driven by $3.5 million in increased sales and marketing expenses, and $1.2 million in increased R&D.

These increases were focused around expenditures for ASTRO, head care related cost to drive increased revenues in commercial execution, as well as product development and regulatory spending. While the year-over-year increase in operating expenses appears significant I want to remind everyone that our fourth quarter spend was also $43.1 million and represents a more current run-rate and in line with our adjusted EBITDA guidance.

Our goal continues to be to increase operating expenses only half the growth -- at a rate of only half the growth in revenues. And while this metric fell short in the first quarter, we remain committed to achieving this for the whole fiscal year. As a result of the increase in spending year-over-year, adjusted EBITDA decreased to a loss of $8.5 million compared to a loss of $3.8 million in the year-ago first quarter. In order to have EBITDA profitability in the first quarter we will need to have higher level of revenue.

Those higher levels are expected to occur in subsequent quarters and drive our overall results here to a positive outcome which represents significant growth year-over-year. Turning to the balance sheet, net working capital decreased with an inventory growth being largely offset by a reduction in accounts receivable. The growth in inventory was caused primarily by higher levels of finished systems, given the lower first quarter revenues, and a level loaded factory production schedule. Cash usage for the quarter was $19.2 million which is driven negative in large part by a Company-wide bonus payout for performance in fiscal 2014.

We are targeting to be significantly cash flow positive in the second half of 2015. With regards to our financial guidance, what I would like to direct your attention to again is the color we gave on last quarter's call. It is our expectation that the revenue range of $390 million to $410 million will be calendarized in a fashion similar to last year. That is not the way consensus appeared coming into this call. Now I would like to hand the call back to Josh.

Thanks, Greg. As we think about Q1 quite frankly our results were somewhat mixed. While we have made significant progress towards improving the operational capabilities and performance of the business, it's clear that we still have work ahead of us to ensure that the gains that we have made are truly sustainable. I assure you are we are up to that task, and fully committed to achieving not only our full year guidance targets, but our strategic planning horizon growth targets of mid-teens revenue growth. And now we are ready to open the call-up for questions.

(Operator Instructions) Your first question comes from the line of Steve Beuchaw with Morgan Stanley. Please proceed.

Hi. Good afternoon guys and thanks for taking the questions.

Hey Steve.

Hi Josh. Just want to try to put a bit of meat on the bones of the story around the order outlook for the rest of the year. I guess first off thank you for making the comment in the press release and on the call about the order outlook. So if -- given the comments that you made, if I assume that the market is growing at say 5%, it sounds to me like you're suggesting that gross orders this year will grow by let's say at least 8%.

That tells us that you will get something like 10% growth over the next three quarters. So I have two questions. Number one, am I reading this correctly? Because that implies that you need to be seeing mid-stage order funnel growth that's probably at least 10% so am I interpreting that correctly? And I think the corollary there would be what are you seeing in the order funnel by region that you think is most impactful in terms of year-on-year order growth?

So in general terms, Steve, I would say that what we described in our prepared remarks and essentially I even interpreted it although the percentages may be -- rather than give a discrete number, I think we were thinking of it more in terms of a range, but come full year on a year-over-year comparison our order growth should be running, I would say, significantly above market -- market growth rates. If you look at how we performed last year, you would say that we have the wherewithal to do that.

I think your second part of the question with regards to funnel growth and what gives us the confidence or what underpins that future order -- order activity going forward, the answer is, it actually is pretty diverse from a regional standpoint. I think we feel good about funnel health in both our EMEA region and the APAC region. Again, I would refer back to the comments we made in the prepared remarks.

We have had a -- we have been making investments and growing our presence in China, inside of the APAC region as an example. We've had delays. I think the market has seen delays overall in product licenses that were expected to have been issued by now by the Ministry of Health, that we believe are probably towards the end of this calendar year or certainly early next calendar year, likely to be released and we think that we are positioned well to capture those orders.

Those are orders that would go into the backlog in -- again, in the back half the year whether it's Q3 or Q4 I can't be that precise, but I would say there's a confidence level that that will occur that gives us, you know, significant belief that that's likely to be a big driver of this. Again, while it's still early to declare victory, we're starting to see the beginnings of some traction in the US market. I think that one of the areas that we tried to highlight in our prepared remarks is the beginnings of impact from the national contracting, in the GPO and strategic account activity.

It's difficult to predict from a timing perspective when those things translate into direct orders, but in terms of overall critical mass, we're building critical mass through those agreements and I'm confident that those agreements will yield order -- real order activity going forward. The VA system is a good example of illustratively where that's already occurring.

Okay. And then one on CyberKnife. It sounds like given your comments around the likelihood of the MLC driving incremental order traction that you're more confident now about the likelihood that that product gets on the market. Is that the right way to read this and can you give us any feedback from the first couple months or so in Beta testing? Thank you so much.

Yes. So the specific answer to the question is I would say that's an accurate way to read that, number one. We have -- we've got the second evaluation site up and running. We now are coming up on I guess 7 or 8 weeks of real experience and feedback from the first evaluation site and I believe we are probably inside of the next week or ten days from shipping the third device to the third evaluation site. So we are very quickly going to reach a place where we've got the three sites fully installed and up and running.

I can tell you from the -- in a general sense we really have decided we're not going to get very specific about this, but in a general sense in site number one, which has clearly the longest timeline in terms of experiential interaction with the device, the feedback is very, very positive. And we're -- you know, we're seeing, I would say consistent durability and performance with what we saw in our bench testing which gives us, at this point I would say, a reasonable degree of confidence.

I said a -- you know, as I talked about the back half of the year and order -- order activity and those factors that might impact or be a catalyst for accelerated order growth going forward I said the likely market release of the MLC, you know, this shouldn't be interpreted as a guarantee, but based on what we're seeing today I would say we feel pretty good about where we are today.

Thanks again.

Yes.

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

Hi. Thanks a lot. Maybe to begin on orders and then one follow-up question on the US market. On orders specifically maybe you can give a little bit of color around why so many are reaching the 30 month age-out phase and is that financing related, is it delays in bunker construction or something else going on there?

So Anthony the activity that is age-out and cancellation related obviously is tied to very specific criteria as Greg had alluded to in prepared remarks. We've been consistent in that those -- those criteria and those filters around backlog criteria. You know, the simple answer is today what we're seeing is -- the genesis of what we're seeing today has its roots in what was going on 30 months ago and the -- you know, I'm -- I know for sure that over the course of the last 24 months we have been doing many, many things to improve the quality of what's going into the backlog vis-a-vis these orders.

These are -- are primarily distributor -- not primarily. They're really exclusively distributor orders. They're orders that have the distributor in the middle, as a middle man, if you will, between us and the end user. And the things we've been doing to improve what's going into the backlog is varied. I mean we have -- essentially we have been in certain cases changing out distributors and making sure that the distributors that we are aligned with are going through a much more rigorous and disciplined basically business review process with those folks to ensure that they're being held accountable relative to performance and our expectations for backlog criteria.

I can also tell you that we've added people whose sole responsibility is to essentially manage the revenue conversion process with those distributor orders. And there are two of them now in place, and have been active for the last two or three quarters and, again, we think that that's having a big impact, positive impact on the quality of what's going into the backlog. And so I would say on many fronts we've got better line of sight. You've heard us talk about the past -- in the past examples where we're requiring proof of bunker construction in terms of timelines to ensure that we're -- you know, we're very clear about where those activities are in their process.

So I'm highly confident the things we're doing are going to have an impact over time. The things we're seeing today are things that were taking place 30 months ago, you know, based on the -- the activities -- you know, the orders that were going into the backlog 30 months ago. And so we're probably still a couple of quarters away from having the biggest stuff like this, some of the bigger challenges fully behind us.

That last comment is helpful. So just to clarify in the current backlog today there's still some amount of orders from -- that are similar to the ones that were phased out, that sort of still has sort of work themselves through?

Yes.

Okay.

The other thing I would say is we -- we absolutely do not feel that the current age-out activity and levels are indicative of our commercial momentum or commercial success. I mean, again, there's a 30 month lag time here that has to be taken into account and I think we can easily separate -- we should be separating how we're thinking about the business and how it's performing today, and what's going into the backlog from what it looked like 30 months ago.

That's helpful. Let me just switch gears on the positive in here. On Premier, can you maybe give us an idea this is clearly one of the larger GPOs. The expectation on that alliance, it is exclusive, so that is significant. How long do you think the lag effect will be before you begin to see benefits in backlog bookings and eventually P&L from Premier? Thanks

So we are really excited about Premier. I'm really excited about Premier. I have a relationship with Premier from other business experiences that goes back a long way. They have the ability quite frankly, and given the nature of the contract in terms of its exclusivity, we have the ability to really move some market share, we feel, through this agreement and we think this could be a significant catalyst to improving the strength and the quality of our funnel in the US market. Timing-wise -- timing-wise it's a little bit more difficult to predict. I would say we're probably, just to be conservative three-quarters downstream from full contract implementation.

When I say contract implementation, you know, since we have signed the agreement we have been scheduling rolling out meetings with the Premier field marketing organization. Most of those meetings are scheduled to begin taking place in this next month. That probably will take several months of timeline to fully -- to fully complete and then once those rollout meetings have taken place there's going to be kind of side-by-side regional and territory level planning taking place between our field organization and the Premier marketing organization in the field to do the kind of account-by-account targeting that you would expect to start to quite frankly fish where the biggest fish are and where the best opportunities are.

So in terms of -- from that point forward I would guess probably three-quarters, but there could be things that happen before that, there could be things that take longer than that. I think the good news here is we have a really unique opportunity. I think the other thing worth mentioning is the size and scale of Premier's field marketing organization is substantial and it allows us quite frankly to kind of leverage in ways that we couldn't, given the size and scale of our own sales organization. It gives us a chance to leverage and get much better market visibility and presence, and we're doing it with their folks. So it's a -- again, it's a really -- I think it's a really exciting opportunity for us and I think the impact of it is going to be significant.

Thanks again.

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

Okay. Thanks. Josh, just following up on the backlog question a minute ago. Can you comment on cancellations? I mean presumably most of the adjustment is age-outs, but can you talk to a degree to which there are any cancellations?

Yes. Tycho, I think for the quarter of that activity there was one cancellation. So the vast majority of it was age-out.

Okay. And then (multiple speakers) go ahead.

There were six systems that aged out.

Okay. And then can you talk a little bit on OpEx. I mean obviously you're still spending here. You're counting on a big recovery in order growth but is there -- to the degree that that doesn't ultimately come through [quite] by chance, can you talk about your ability to maybe manage costs a little bit better?

Yes. I mean just -- let's be very clear about it. We got ahead of ourselves in Q1, okay? There's no -- I'm not going to try to paint this as something that it's not. We got ahead of ourselves in Q1 and it isn't going to happen again. So our ability -- quite frankly while we're comfortable and I think from a -- a deployment or an allocation standpoint in terms of where we're investing I have no problem with the things that we're doing there because we're aligned with what we think are the biggest strategic initiatives and the things that can impact the size and scale of the business most effectively, but we've got to titrate the spending with what the top line is doing.

Tycho, this is Greg. When you develop your model, in order to hit the adjusted EBITDA range that we have given you, you will see a year-over-year increase in operating expenses of 3% to 5%, which is essentially half of the growth rate in revenues and that's what we're managing the business to.

Okay. And then you called out the -- you know, the China dynamic and the fact that licenses have been held up. Is will any way you can help kind of quantify what you think the impact of that has been and will be over the next quarter or two until you see things free up there?

Yes. So if -- if you go back about 12 months ago what was the formerly by title the Ministry of Health, the China Ministry of Health, it's now actually being called the National Health and Family Planning Commission. But about 12 months ago they indicated that as it related to the product segment, the market segment of radiotherapy devices that the MoH was going to issue in round numbers about 60 licenses for these types of devices, at the federal level. And these were for Class A radiation therapy products. To-date they have issued five. So they have been substantially behind their own timelines around what they had originally communicated and led the market to believe and when I say the market not just the vendor market, ourselves and competitors, but their own -- you know, their own provider community, the clinical community there. And I can tell you that there's a lot of frustration about that within that clinical community. But so it's -- they've been really behind the power curve in terms of timing.

We have been very close to this situation and, again, I go back to what I said before. I think our understanding and belief today is that towards the latter part of this calendar year or early in the next calendar year the log jam if you will on that -- those licenses is going to start to ease up a little bit and we think we're well-positioned to capture -- to capture, you know, certainly a part of that. How big a part of it I guess remains to be seen. I don't want to project X or Y or give you a discrete number but I think that we feel very good about how we're positioned once the licenses start to flow.

Okay. And the last one. We're heading into kind of funnel reimbursement decision here. Presumably bundling goes through as proposed. What are you hearing from customers as to how that plays out in terms of demand trends once the final codes are set? And does that ultimately force more of the migration through to radio surgery? And as a follow-up is there anything that you're communicating to customers about how radio surgery or SBRT is being branded? I mean I think it seems like you and one of your big competitors have a very different definition of SBRT.

Yes. So on the first half of the question, it really is a function how customers are interpreting it or how customers are feeling about it, is really a function of what kind of customers you're talking about because if you're talking about operators or clinicians and providers that are operating out of free standing centers, I think that there's obviously a reserved outlook if you will from that segment of the market about what this impact if the proposed approach that CMS is suggesting comes to pass, I think that that we will see more -- you know, more emphasis on hospital outpatient departments as a primary point of care than the freestanding market.

So it's -- I think that -- that trend that we saw this time last year is, you know, is likely to continue or at least the sense in the marketplace is that it's directionally that's likely to continue. You know from an SBRT standpoint, or from a product and case mix standpoint if you look at where the mix is and where the mix will likely go, I think there's -- there's -- the general sense we have and others have is that there will be a shift of dollars from a fee standpoint between the simple cases, the very routine cases towards the more complex cases.

So applications for things like stereotactic full body radiotherapy, stereotactic radio surgery, image guided IMRT, these areas will likely be the recipients of a greater emphasis of the reimbursement dollars than what had been -- what would be more of a routine case mix or application approach. So we think we're -- from a positioning standpoint we think we're actually in a pretty good place. I mean it's -- again, it's impossible to predict ultimately what CMS will do but if you look at directionally in terms of point of delivery, point of care, and the case mix discussion, we think we're in a pretty good place.

Okay. I will leave it at that. Thank you.

Yes.

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

Hi. Thanks for taking the question. I appreciate your commentary earlier on sort of how we should think about order rates this year, but I just wanted to maybe if I could put a slightly finer point on it. I think first off you said significantly above the market rate is where you expect your order rates to grow. I'm just curious if I look at sort of the OUS, EMEA ,APAC is that -- is that part of that equation or is that primarily driven by the resurgence in the US orders?

I would say, Jason, it represents -- it's a blended growth rate of all of our regions, so it would encompass EMEA, Japan, APAC and the Americas region.

So I guess if I were to look at your business as your OUS business is still growing off of base, the way you see it right now, you're still sort of -- even though it's ahead of the US it's still in a recovery mode in your opinion?

Restate, please. I mean, if --

Sure. I just am trying to understand the components here. I think a lot of us are waiting to see what happens in the US. I think there's -- I think most people agree that you've underperformed there and there's a real good chance for some upside. Outside the US you guys have done a very good job of recovering that business. I guess I would like to know if that's a still a high growth area for Accuray or have you saturated those markets and (multiple speakers) a steady state there?

Not at all.

Okay.

Not at all. I think that we feel very good about where we're at as far as position and funnel -- funnel strength and funnel outlook in EMEA and in Japan. Obviously we talked about China and APAC in the most -- you know, just the conversations that we just had, but I think in those other markets we still feel very strongly. I mean just as a point of reference, the five competitive bunkers that I referenced earlier in terms of competitive take-aways those were all OUS -- OUS activity and competitor takeaway. So I mean that should give you some -- I think an indication -- a pretty clear indication that we're still rolling in those primary markets.

Okay. Okay. Very fair. And then in the US, you know you've pointed in the past sort of a second half more noticeable recovery. However, this quarter you did say that I think US growth rate was up 120%. I assume that's off a pretty small base. I mean I assume -- I guess the question really is what kind of visibility do you have six months out in terms of what order rates might look like? Is that just too far out for visibility at this point or is that still within your new systems a realistic thing to have visibility on?

I think in general that the quality -- the quality and the strength of the funnel in the US is continuing to advance, is continuing to improve. It comparatively though -- it comparatively does not look like what we would see let's say in EMEA or Japan. Although I think that the catalyst -- there are a couple of catalysts potentially in the US that are -- that are game-changing quite frankly. I mean I think some of the things we've highlighted with regards to the national contracts, strategic account GPO work, these are things that could impact -- I'm going to predict quite frankly will impact in a fairly substantial way because you're talking about driving off of a relatively small base.

So what -- what organic if you will -- what organic funnel improvement is taking place will likely be augmented or amplified by some of the impact of these other national contracts and GPO relationships that we have worked on.

Okay. And then just two follow-ups. One just on the whole Premier setup. I mean it does sound like that's going to take several quarters to work its way through. There's training, et cetera, involved. So if I think about the US resurgence or whatever you want to refer to it as, that's separate from Premier at least would be my impression. Is that the right way to think about it?

I think it's unlikely. I mean it would be -- it would be I think overly aggressive at this point to believe that we would have on a broad scale basis opportunities that came out of the Premier relationship impacting in the second half of the year although, again, I -- we may find things -- we may find things that shake loose earlier. But I would say just to be appropriately conservative about it I would say it would be probably overly aggressive to think that that would impact as soon as Q3 or Q4.

Okay. And just last quick clarification again. Obviously, you sound increasing optimistic with the MLC, though I know you will put out comments next quarter, but it sounds like there are some centers that are kind of waiting for this to be fully available before putting down an order. Is that the right way to think about it?

Yes.

Okay. Great. Thank you very much.

Your next question line of Toby Wann with Obsidian Research Group. Please proceed.

Hey. Thanks for taking the question. Just quickly on the US sales strategy reorg. Kind of how is what you guys are doing now different than I think the reorg you did a year or so ago?

So, Toby, the simple answer is if you go back to some of the language that we had in our prepared remarks we've been looking very closely at how we can optimize our selling resources and ensure that we get an expansion, if you will, or a leveraging effect of the footprint that we currently have. Again, I indicated in the remarks I think in the script that over the last couple of quarters the leadership team, the sales leadership team in the US market has gone through a pretty deep analysis of both opportunities, geographically and current territory alignment or geographic alignment and assignments related to the direct sales organization. And we have actually gone to a situation in the last quarter where based on that analysis we've added what I will call specialty sales agents in a number of selected territories.

It's the first time we have really done that in the US market. It's -- we think it's a really great way for us to leverage the footprint, the sales footprint, get renewed focus, selling focus back on the direct sales side of the ledger, and actually have some very capable business partners on the sales agent side in areas of the map, or areas of the country where we probably couldn't cost justify putting a direct rep. And that blend of the two we think is -- it gives us a chance quite frankly, to again, expand or optimize and get some leveraging effect out of our sales resource footprint, and give us a chance, if you want to describe it in boxing terms, punch above our body weight. Our weight class. And so just as an example we actually had -- we have a -- an agreement that -- that -- a contractual agreement with one of these specialty sales agents come to fruition in the last quarter and they actually put us into an opportunity -- a sales opportunity that gave us a chance to close an order in the quarter.

Now, I'm not going to suggest that that's an everyday occurrence. That was a really unique situation. But we think that that's representative of the fact that there are some really capable organizations out there that can help us and help leverage us in the ways I just described. There are people that are in other large, very complex areas of capital equipment on the imaging side. They have represented other very big companies, they have -- you know, for us it's a perfect model because they are a commission -- it's a commission sales organization, it's a variable expense.

We don't take an impact to OpEx or anything on -- on an expense basis unless they go out and sell something. So it's really an interesting scenario for us. We haven't implemented it before, but we're moving forward with this and we think -- again, we have seen -- we have seen a real near-term surprise with the first one. There are going to be --there are going to be a handful of these organizations in parts of the map that makes sense and give us a chance to leverage our sales footprint.

Okay, that's helpful. Thanks for the additional color on that. And then just one quick one I think for Greg. Just kind of remind us again of the seasonality of revenue so that we all kind of stay within the appropriate parameters from a seasonality standpoint.

Well, I said to use the calendarization of last year as a guide post. So just take each quarter as a percentage of the total year, and that is pretty much how we would anticipate this year to turn out.

Okay. That's helpful. Thank you.

(Operator Instructions). There are no further questions in queue. I will now turn the call back over to management for closing.

So I want to thank everyone for joining us on this afternoon's call, and we look forward to speaking with you on our second quarter earnings call. Thanks very much.

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