Accuray Inc (ARAY) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Accuray Incorporated Q3 fiscal 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today, Doug Sherk. You have the floor.

Thank you, Andrew, and good afternoon, everyone. Thank you for joining us today on our conference call as we review Accuray's third quarter fiscal 2015 financial results. Participating on today's call are Josh Levine, Accuray's President and Chief Executive Officer, and Greg Lichtwardt, Accuray's 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 the fiscal fourth quarter and fiscal 2015. There are a number of factors that could cause actual results that 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 after the market closed 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.

During the question-and-answer session, we request that questioners limit themselves to two questions and then requeue if you have any additional follow-ups. We thank everyone in advance for their cooperation with this process.

And now I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.

Good afternoon, and thanks, everyone, for joining us today.

I'll start off the call today with an overview of the third quarter and a discussion of some of the highlights related to our key initiatives, and then Greg will provide a more detailed financial review. Then we'll open the call up for questions.

Our performance for the third quarter was somewhat of a mixed bag. While gross order volume was off benchmark relative to internal expectations, particularly in the US, our overall operating results were relatively solid, with good revenue volume, expanding margins, controlled expenses and an operating profit for the first time since our acquisition of TomoTherapy in 2011.

While US order performance was not what we had expected, it is worthwhile noting that the Americas Region total revenues were $52.6 million, an increase of 63% from the prior fiscal third quarter. Although we are disappointed by the sequential stepdown from second to third quarter in terms of gross order activity, we believe that these results reflect the impact of order timing rather than order loss.

The reported gross order value of $52 million does represent a 15% increase compared with the reported third quarter fiscal 2014, which is 21% on a constant currency basis. Additionally, our year-over-year system units gross order growth was a robust 28%. However, product mix largely resulting from the successful execution of our effort to position the TomoTherapy system for mainstream usage, trade-in allowances and foreign currency combined to reduce the gross order dollar value growth to 15%.

Looking forward, we expect to see gross order levels recover for the fourth quarter and continue to project overall gross order growth for the second half of our fiscal year that will exceed overall market growth rates. Our experience in terms of order flow and timing within a typical quarter is that order timing is more oriented around back half of the quarter and at times the last month of the quarter. In contrast, our Q4 is off to a strong start, as we currently have seven signed contracts reflecting the carryover in timing from five forecasted orders that missed from Q3 and two orders which closed at the ESTRO meeting that just concluded in Barcelona earlier this week.

With that said, we recognize that driving more predictability in quarter-to-quarter order flow is a priority. Over the past several weeks we've been conducting an internal analysis on gaining a deeper understanding about what caused the miss in Q3 and what we can do both strategically and operationally going forward to generate more quarter-to-quarter commercial consistency.

On a strategic level, there are five key areas that are critical to driving future order growth on a global basis and improving our quarter-to-quarter consistency. These five areas are: one, accelerating TomoTherapy mainstream product positioning; two, broadening CyberKnife clinical versatility through the introduction of our InCise Multileaf Collimator; third, improving the US sales funnel and commercial momentum through implementation of our GPO and strategic accounts contract portfolio; four, expanding our China commercial growth strategy; and five, focusing on customer satisfaction within our installed base.

First, on our efforts to position TomoTherapy as a mainstream product for the broader market, we are showing visible progress. While our TomoTherapy product mix in the third quarter negatively impacted gross order dollar value because of the dollar selling price differential relative to CyberKnife, the number of units is growing, indicating that more customers are choosing TomoTherapy as a workhorse mainstream product.

In fact, for the third quarter 40% of gross order dollars represented TomoTherapy systems going into single- or dual-vault settings in Japan, China and the US. This compares to 27% in the immediately preceding quarter. As we have described previously, we believe that successful positioning of TomoTherapy as a mainstream device is key to protecting our installed base and converting competitive bunkers, and we are continuing to make progress in this area.

Next, with respect to broadening the clinical versatility of the CyberKnife platform with the InCise MLC, during the quarter we completed the US evaluation of the MLC for the CyberKnife M6 Series involving two US sites, and last week we announced the completion of the European site evaluation. Additionally, during the quarter we announced that the first US commercial InCise MLC had been received and the first patient was treated.

As Dr. Dwight Heron, Director of Radiation Services at the University of Pittsburgh Medical Center, observed about the first patient treatment, they were able to achieve equivalent precision in tumor targeting and sparing of healthy tissue, but it took less than half the time, just under 22 minutes, to complete what would typically be close to a one-hour treatment with the CyberKnife without the MLC.

To date, we have clinical experience feedback from three different customer sites encompassing intracranial, prostate and lung tumor case types. The reported MLC treatment times range from intracranial stereotactic radiosurgery cases at 22 minutes to prostate SBRT cases at 18 minutes to a lung SBRT case at 19 minutes.

These real-world examples are consistent with the MLC technical evaluation site experience and exceed both the customers' and our own expectations in its efficiency. The MLC treatment plan quality was reported as showing a reduction in integral dose due to the conformity per beam, and across the board customer locations reported rock solid device performance.

While we announced the commercial release and recorded MLC-equipped CyberKnife orders for M6 systems in the third quarter, the order ramp was a bit less than we expected. We believe that this was caused by the timing of the announcement of first patient treatment with the MLC, which came in the last month of the quarter.

During this fourth quarter we will be shipping MLCs to several additional sites from orders in our backlog and anticipate the expansion of regional reference sites, growing feedback of customer clinical experience and the launch of a multifaceted downstream marketing campaign which will drive broader market awareness of the functional improvements in patient treatment speed and expanded versatility.

As an example of how we are ramping up these activities, in partnership with reference sites, some of which are community-based facilities, we have had six prospective customer site visits either scheduled or attended in the past 30 days.

The third key area of commercial focus is improving the US opportunity pipeline and commercial momentum, which relies on both strategic and tactical elements. On the strategic side, we are driving this with our contracting and selling activity with hospital group purchasing organizations.

We have formal field-based marketing programs currently underway with the Novation and Premier groups. By example we are hosting a webinar this week for the Premier sales team focused on SBRT for prostate patients utilizing CyberKnife. We are tracking joint training and account partnering activities between our territory sales directors and the GPO field sales organizations.

While this remains an important strategy, it is an initiative that is taking longer to come to fruition than initially anticipated. Over the past two quarters we have seen some improvement in the quality of leads in the US sales funnel, though we predict the GPO-influenced opportunities will average somewhere in the 12-month time frame from the time we implemented and rolled out the agreement until the time they mature to a booked order.

Based on this timeline, the one-year mark with the Premier agreement, as an example, is September. So we would expect opportunities that are in the funnel as a result of our Premier relationship will probably not impact order momentum in a meaningful way until the first or second quarter of fiscal 2016.

On the tactical side, we are engaged in several sales and marketing activities which are focused on earlier market visibility, KOL development, sales track and process improvements, and engaging alternative channel distribution strategies, specifically in the US. On this last point, we are evaluating a number of additional actions related to increasing and optimizing our selling focus in the US business, including the selected use of distributors in areas where we currently have less effective coverage, and potentially moving to smaller territory footprints.

This will allow for more effective management in terms of span of control of both the selling process and overall territory management and drive better selling focus in our direct sales territories. We believe that these activities, coupled with the clinical and performance improvements in TomoTherapy and the expanded clinical applications driven by the launch of our InCise MLC for the CyberKnife platform, will give us greater access to competitive replacement opportunities.

Our fourth key area of commercial focus is expanding our China commercial growth strategy. Most of our progress to date with this initiative pertains to the announcements of Class A user licenses for Accuray products that were awarded to 22 hospitals by the Chinese National Health and Family Planning Commission since December of 2014.

Of the 22 released licenses, four system orders went to backlog in the second quarter and four system orders went to backlog in the third quarter. Seven more licenses are expected to become orders either during the current fourth quarter or the first quarter of fiscal 2016. Seven of these licenses represent system orders that were already in backlog, including one system that had shipped to the distributor some time ago.

While we are encouraged by our current momentum in the Class A category, we believe that the opportunity to participate in the potentially larger Class B category represents a significant catalyst for potential growth. Our ability to unlock some of this potential will require an addition to our current product portfolio in the value product segment for the China market specifically and potentially in other select markets. Given the magnitude of future market growth in this product category over time, coupled with our strong commercial execution currently in China, we believe it's imperative that we expand the product segments we participate in.

As we've communicated in prior calls, we have been making investments in China, specifically in market development activities and infrastructure, and we have unique products with very strong brand strength in the premium and specialty product segments. We believe these factors, combined with a significant underserved patient need in China, given the current market capacity in radiation therapy, will be catalysts for growth over the long term.

The last key area of commercial focus is successfully managing the customer satisfaction levels in our installed base. As we've seen for several quarters in a row, our scores for system reliability and performance among newly installed systems exceed the scores of the overall market, as measured by the third-party market research firm MD Buyline.

As we continue to focus on ways to outperform the service expectations of our existing customers, we recognize the critical importance of installed base satisfaction and our overall socket retention strategy. Simply put, unless we can continue to keep our installed base of customers happy, we will not earn the right to potentially sell them another Accuray device in the future.

As we indicated in the beginning of this fiscal year, we expected these efforts would cause overall service margins to flatten for the year as we focus on field actions to improve system performance and our ability to provide service quickly and effectively to our installed customer base. These field actions have resulted in reductions in our usage of spare parts and in direct labor costs, and we believe that we should see expansion of service gross margin over time.

In summary, while our third quarter's order performance was less than expected, we are continuing to generate meaningful progress in the key areas of focus in our overall commercial execution strategy. As a result of our internal review and analysis, we believe that our fourth quarter year-over-year gross order growth will be in the range that encompasses current Wall Street consensus of $80 million.

As we communicated on last quarter's call, this level of growth will enable us to generate gross order growth that is significantly above the market growth rate in the second half of the fiscal year. For the full year, we believe that our gross order dollar growth will be in the mid-single digits on a constant currency basis in line with the current overall market. Underlying this, however, is a mid- to high-teens unit growth in orders, with particular strength coming from our TomoTherapy product.

Now I'd like to turn the call over to Greg for our financial commentary. Greg?

Thank you, Josh, and good afternoon, everyone.

Before I discuss our financial results I wanted to provide some further detail on our product orders for the quarter. We are once again providing a tabular format in our quarterly release, reporting gross orders, net orders and ending backlog. Josh has provided the color around our gross orders, but let me add a few remarks to the other three items that impact ending backlog, namely age-outs, cancellations and foreign currency fluctuations.

Regarding age-outs, which are orders that have not gone to revenue in 30 months since recorded, in our Form 10-Q following the second quarter we put forth that age-outs in the second half of this fiscal year would decline to a range of $16 million to $25 million as compared to roughly $36 million during the first half of the year. As expected, we experienced $11.6 million in age-outs in the third quarter, compared to the much larger amounts of $17.8 million and $18.1 million in the immediately preceding two quarters.

Currently, we expect age-outs in the fourth quarter to be in the range of $4 million to $9 million, meaning that the second half of 2015 will come into the range of $16 million to $21 million for age-outs. We expect at least one order that previously aged out to go to revenue in the fourth quarter, and when this happens it is reflected as a decrease in age-outs so that backlog rolls forward correctly. This was anticipated in our age-out forecast for this year.

Regarding cancellations, which is when a customer proactively notifies us to cancel an order, we are reporting zero cancellations in the third quarter. We continue to believe that order cancellations going forward should be in line with our historical averages prior to 2015, which were approximately one cancellation per quarter. But these are inherently difficult to predict, and at such low volumes can be lumpy from quarter to quarter, as we saw in the immediately preceding quarter, with three cancellations.

On the impact of foreign currency, the continued strengthening of the US dollar caused us to reduce ending backlog by $4 million in the third quarter, which is slightly less of an adjustment than each of our first two fiscal quarters. While the yen was relatively unchanged quarter to quarter, we did see an approximate 10% strengthening of the dollar against the euro.

Lastly, with regards to ending backlog, while the reported dollar value is down compared to March 31 of 2014 by $6 million, or 2%, on a constant currency basis we would be up $12 million, or 4%, and on a systems-in-backlog basis we are up 10%.

Okay, moving on to our reported financial results, we identified in the press release the total revenue for the third quarter was comprised of $46.4 million in product revenue and $51.2 million in service revenue. Product revenues at $46.4 million decreased year over year by approximately 1% but increased 3% on a constant currency basis.

Systems revenued in units grew 13%, driven by a strong TomoTherapy revenue, although these lower-priced systems negatively impacted average product revenue in addition to currency. On a year-to-date basis it's a little different. Systems revenued in units have grown 4%, while constant currency dollar growth is 8%, implying that an increase in average product revenue due to stronger CyberKnife units revenued at their relatively higher average price.

Service revenue for the quarter represents year-over-year growth of 2%, or 7% on a constant currency basis. While we have continued to reduce our service contract vacancy rate, which I discussed last quarter, currency is largely offsetting increases in our installed base.

Total gross profit of $38.7 million represents a decrease of $1 million over the prior-year third quarter caused by currency. Overall gross profit margin of 39.6% would have been 41.6% on a constant currency basis and representing an improvement over the prior-year third fiscal quarter gross profit margin.

Third quarter service gross margins were well above our expectations at 38.4%, or a healthy 39.5% on a constant currency basis. This compares favorably to prior-year third quarter service margins, represents a sequential improvement throughout this current fiscal year, and, perhaps most importantly, is the highest level in either as reported or constant currency service margins post acquisition of TomoTherapy. This improvement is a direct reflection of our management of service costs, improved reliability of our systems, leading to lower service part costs, and a lower vacancy rate of installed systems without service contracts.

Product gross margins were 41%, as reported, or 44% on a constant currency basis, compared to prior-year third quarter of 46.3%. In the current third quarter as compared to prior year, average selling prices were negatively impacted, primarily by currency, product mix, with a greater percentage of TomoTherapy systems, and trade-in, trade-up mix. Sequentially product margins were down 200 basis points, explained predominantly by the TomoTherapy product mix.

Operating expenses were lower than the prior-year third quarter by 7% and were lower than the prior quarter by $4.6 million. These decreases were in part caused by currency movement, but otherwise the decrease in spend year over year is driven by a $2.3 million decrease in sales and marketing due to lower employee compensation and consulting expenses.

Additionally, research and development expenses decreased $900,000, primarily related to employee compensation. General and administrative costs increased $600,000, primarily associated with legal fees in regards to the ongoing matter with our former CyberKnife distributor in China.

So, in summary, sales, gross profit and operating expense control generated positive operating income in the quarter of $1.2 million, which, as Josh mentioned, is the first quarter of positive operating income subsequent to the acquisition of TomoTherapy in June of 2011. Adjusted EBITDA was significantly positive at $9.9 million and represents an improvement of $2.1 million over the prior year. EBITDA was primarily driven by our focus on controlled expenses.

With regard to financial guidance, as reported in our press release we now expect revenues to be in the range of $375 million to $385 million. This would imply fourth quarter revenues of $97 million to $107 million and would produce full-year revenue growth rates of 2% to 4% as reported and 4% to 6% -- sorry, 6% to 8% on a constant currency.

The primary driver for the decrease in our revenue guidance is the continued strengthening of the dollar. If not for this factor, our reported revenues would have been solidly within the original guidance range.

Our revised adjusted EBITDA guidance of $13 million to $16 million is also primarily impacted by currency, such that on a constant currency basis we would have been at the upper end of the range originally provided of $18 million to $27 million. The adjusted EBITDA range would imply reported gross margins in the fourth quarter will be essentially the same as in the third quarter. In operating expense growth it would be flat to up 2% compared to the fourth quarter of 2014.

And now I'd like to hand the call back to Josh.

Thanks, Greg.

Accuray continues to be committed to innovation that enhances the value of our products to our customers and their patients. As reported today, during the quarter we signed an agreement with MIM Software, a respected vendor of software for the radiation oncology, radiology and nuclear medicine fields.

The purpose of the agreement and collaboration is to further develop adaptive radiation therapy software for both of our systems. Adaptive therapy is widely viewed as one of the next beachheads in radiation therapy treatment, as it has the potential to increase the accuracy of delivered radiation dose by adapting the treatment plan for each treatment session based on the image of the tumor immediately prior to treatment, therefore providing clinicians with the improved likelihood of more precise outcomes for patients.

We have also reported in the ESTRO press release last week the receipt of FDA clearance to market delivery analysis software for the TomoTherapy system. This is an innovative new tool developed in response to customer feedback that leverages the unique architecture of the Tomo system to provide unprecedented access to treatment delivery information.

The data will allow clinicians to perform a pretreatment test of the multileaf collimator. Onboard detector systems also enable continuous collection and analysis of data throughout the treatment process.

Visualization tools and delivery analysis will enable users to see changes in delivery from fraction to fraction and correlate those changes to the patient anatomy. We believe that this software, combined with improvements in TomoTherapy's reliability and performance, will further bolster clinician confidence and reinforce growing support for the TomoTherapy system's use as a mainstream treatment device.

Lastly, we also announced during the quarter that we have signed a new sales partner to cover the Canadian market. Our focus on Canada has already begun to show results. We have seen significant sales growth over the past few years as a result of dedicated sales management coverage and a Canadian sales opportunity funnel that has more than doubled in the past 12 months.

As announced, Christie InnoMed will be the exclusive sales agent for Accuray products in this market. Covering the Canadian medical market for more than 60 years, they've established strong relationships with clinicians and administrators in many of the cancer centers and hospitals across the country.

By joining forces with Christie, Accuray gains additional market coverage and increased visibility for our CyberKnife and TomoTherapy systems. We expect that our collaboration will significantly enhance our overall selling presence and commercial momentum in Canada, ultimately driving increased patient access to our lifesaving technologies.

And we're now ready to open the call up for questions.

(Operator Instructions)

Steve Beuchaw, Morgan Stanley.

Just a couple to dig a little deeper around your comments around the outlook for the fiscal fourth quarter. So on the 80, how much of that is in the US? Said another way, is there any signal in the 80 that you are seeing some incremental traction from activities in the US? And then I have one follow-up.

Well, Steve, the truth is that we have -- we still have work to do in the US. I think that's clear to us, it's clear to probably the people that are looking at, again, some of the lack of consistency in terms of order generation quarter to quarter. But the strength of the funnel is improving and has been improving. And I think that there will be a bigger contribution from the US and the Americas Region in Q4.

Whether or not I'm ready to or we're ready to say that we're going to declare victory, that the US is operating at the full level of momentum and commercial consistency that we would expect them to, I think that it probably is still, as frustrating as it sounds and it is to share that, it's probably still a little early to say that. But they are moving in a better direction. They're just not moving as fast in that direction as I'd like.

And then can we revisit the comments you made I guess two and three quarters ago around medium-term objectives for growth? I mean, at the time there was a view that you might grow at twice the rate of the market.

One could argue, well, maybe the US is coming along a little slower. You could also argue that, okay, well, maybe we're a little closer to a contribution from the GPOs and we have higher visibility on China. So given all the moving parts, where is the thinking today relative to that objective, not this year but beyond this year, of growing at double the rate of the market?

I still think that's a viable and a reasonably achievable goal. I mean, if you look at where we project Q4 and overall in the back half of the year would put us -- again, we call that market growth essentially to be in the mid-single digit range, but when we've done that the truth is that that's really been tied to, from a context standpoint, a constant currency kind of number.

Our expectation right now is that market growth on an as-reported basis is probably more like 1% or 2%. And so when we think about Q4 and looking forward, I'm thinking that we're going to be showing reported gross order growth probably somewhere maybe in 10% range, which would be 16% to 17% on a constant currency basis. So we're still operating at a level that is vastly exceeding market growth rates probably by 2X or greater.

Thanks, Josh. I really appreciate the perspective. I'll let others jump in here.

(Operator Instructions)

Jason Wittes, Brean Capital LLC.

I wanted to ask about the order rates and sort of (inaudible) out sort of what was timing that impacted the quarter. I think you noted that the release of the MLC was a little later than expected and probably didn't generate the order flow you expected this quarter. And also what relates to just the funnel itself, meaning I know the funnel's getting stronger, but it seems like predictability to that funnel, when it actually might drive revenues, it might be longer than you originally anticipated.

So, I mean, it's a combination of those things. I mean, timing was clearly an impact in part of it. If you look at what we identified, Jason, in our prepared remarks, we're out of the block strongly in Q4. We currently have seven signed contracts in-house. Some of those clearly reflect carryover in terms of timing from orders -- about five of those would have been forecasted orders that missed from Q3, and two of them closed at ESTRO. So timing was clearly some of it.

Again, US, it's probably still Q1 or Q2, I'd say, of fiscal 2016 before we're going to see meaningful traction from some of the work we've been -- the work we've been pursuing with the GPO partners and those contracts. So, I mean, there are things in our funnel today in the Americas region in the US that absolutely are opportunities that we did not know about prior to signing Premier and prior to signing Novation.

So there is visible signs of opportunity and improved market visibility there. They're just not as advanced opportunities relative to the sales process in terms of how deep in the funnel they are.

We certainly over the course of the last 12 or 18 months, we've had the benefit of some of the -- the ability to offset some of the weakness or lack of predictability in the US with EMEA, Japan, China. And while that's still the case, I mean, I think that we're just -- we need the US to come online is really what it comes down to.

I think that the projections we've shared in just general terms around how do we think about Q4, we'll show an improvement in the contribution from the US piece. And we think we're on a better path in terms of longer term impact from the Americas group and the US team.

Okay. And then maybe just, since you limited us to two, just in the MLC launch and the seven contracts that you mentioned, some of them spillover, were those all tied in with the MLC launch itself, or those are just separate and just timing issues in general?

No, those were not all MLC related. I mean, at the end of the day we, as I mentioned in the prepared remarks, we didn't have announcement of first patient treatment until the last month of the quarter. And we had one order that we can identify that for sure was in the quarter. But I don't think that we can say that MLC, at least for third quarter, was a material impact to order growth.

Okay. I just need one follow-up on this, and that's last quarter you mentioned there was a certain amount of backlog related to the MLC. Can you give us an update in terms of what that number may be related to the MLC launch? And I think, again, you've also indicated that that's not necessarily a number you would see right in one quarter. It would take probably over the course of a year to get filled.

Yes, that's accurate. I mean, we have right now -- Greg can give us the backlog number, but the relative timeline to satisfying that backlog will absolutely be probably 9 to 12 months.

I'll jump back in. Thank you.

Tycho Peterson, JP Morgan Securities.

I just want to dig into maybe the market dynamics in the US a little bit more. I mean, you did have your biggest competitor yesterday report a pretty strong quarter here in the US. Obviously comps factor into some of that. But I'm just wondering whether you are seeing your bigger competitors get more aggressive on price.

And the other question that comes up more frequently is just on software. And you obviously do very well with treatment planning, but as we think about patient management and tapping into EMRs and things, I mean, do you feel like you may be at a disadvantage if you don't have a broader software offering?

Yes, it's a great question, Tycho. Let me just start with that one. I think that we have a view around the overall discussion around oncology information system connectivity that there's a gap there for us, and we actually are working diligently at this point to try and close that gap.

I don't think -- we have the ability to connect to what I call the market standards, right now, if you will, in terms of ARIA and Mosaic, which are the products, the OIS systems of our competitors. We obviously need their support technically and integration capability and support to be able to connect, and we get that. We don't get it as easily, quite frankly, as customers would like, which is something that we've identified to both of the other companies.

But I'm not naive. We need our own platform and our own capability there, and we're working diligently to be able to have something to talk about more meaningfully hopefully in the next couple of quarters.

In terms of market dynamics in the US, I saw Varian's numbers. I mean, there's no question that they had a big quarter in terms of order impact in the current quarter. From our view, we've seen funnel improvement in the US, and, but the US comparatively for us is a market that we have probably if not the weakest some of the weakest of all of our share of market in any of the regions we compete in.

So when you look at our market position currently and then you look at the facts around where the market in the US is right now with regards to overcapacity, and that's putting more pressure on this being a replacement market, we've got to be able to take competitive bunkers away from people in the US market, which is primarily Varian, in order to grow in the US. And we're aware of that.

That's still -- that's not changed, quite frankly, at all in the last 18 or 24 months. And I think I outlined some of the steps that we're taking and focused on in the US sales situation and commercial team to try and drive better visibility, better territory, direct territory selling focus and better market impact and market penetration.

I'm not -- I'm not panicked, and no one here is panicked. Quite frankly, I'm frustrated that it's taking as long as it is. But I think we're doing all the right things to make -- to turn it to the degree that it needs to be turned.

How about, I mean, the degree -- we've obviously seen hospital consolidation -- the degree to which hospitals are standardizing on a single vendor? That was a dynamic Varian called out last night where hospitals want to work (inaudible).

I noticed that. And it's interesting, because if you look on a year-to-date basis we in terms of competitive wins, we have about 13 competitive bunkers that we've won and five that we've given up. So on just a wins-and-loss basis, when you look at kind of are we a bunker taker or a bunker loser, we're competing pretty effectively on that basis. So I don't -- I don't argue or I won't comment on where Varian is at with regards to their comments on consolidation.

Okay. And then just lastly on the MLC, as we think about the rollout, how much optimization -- is there any kind of tinkering that needs to happen with it, any feedback from the early users that needs to kind of be factored in?

This device, from everything we've seen and everything customers, those sites are saying to us, this device functions remarkably well, both from a functionality and an efficiency standpoint in terms of treatment speed. You're talking about intracranial SRS cases at 21, 22 minutes. You're talking about SBRT lung and prostate in the 17-, 18-, 19-minute range, so really magnitudes of difference in terms of treatment speed, workflow and throughput.

And all of the feedback around device reliability and durability has been very, very strong. So I think we like where we're at. We need to get this thing ramped up.

I think the number of reference sites will grow again in Q4. And we've got a multifaceted marketing campaign that we're going to be starting to increase market awareness, drive site visits. And we'll start to probably see some of the initial clinical information come out maybe as soon as AAPM, which I believe is in July.

Okay, great. We look forward to tracking that. Thanks for taking the questions.

Anthony Petrone, Jefferies LLC.

To focus in on Tomo a little bit, can you give us a sense, Josh -- I know, Greg, last quarter you mentioned legacy Tomo installed base, there was about 100 to 150 systems out there that were potential candidates to be upgraded to TomoHDA. Can you just give an update on that process? And were there any actually lost sockets on those upgrade opportunities with Tomo specifically? And then a follow-up.

So, I mean, we are absolutely making progress on socket retention strategy. As Greg alluded to in his remarks, Anthony, trade-in, trade-up activity is absolutely an area of focus for us. It's growing. It gives us a chance to make sure that we retain those sockets and take the latest and greatest equipment we have on the Tomo side of the house and put it into our own bunkers.

And so it's moving, I think, in a very positive way in that area of focus. We -- on a Q3 basis, I don't have the numbers in front of me on lost -- win/loss sockets. I guess I quoted before year to date a 13 win, 5 loss calculation. But I don't have -- I can't put my hands right now on the numbers for competitive losses.

It was not a big quarter for us giving up our own sockets, quite frankly. It hasn't been -- that hasn't been the case in any of the quarters this year.

That's helpful. Maybe just the second one here on margins, and I guess this is really two snuck into one here. Just the MLC revenues, when they begin to flow in, are those revenues margin-accretive to the Company? And then maybe just an update on the Tomo service margins, where that stands, and is there still some improvement that is yet to be seen in the service margins as it relates to Tomo specifically?

So, yes, Anthony, generally speaking, upgrades in general and the MLC specifically are going to be kind of higher than average product gross margins. So that can be accretive to us.

With regards to Tomo service margins, we are probably about 85% of the way through the big field action upgrade that we started right after the TomoTherapy acquisition. So, and of course those systems, once upgraded, perform very, very well and become some of our best performing systems in the field.

But there is still an opportunity to close out that field action, to upgrade additional units in the field, and that will drive further improvements in service gross margin for TomoTherapy specifically. So the answer is yes, there will be further improvements. We'll probably talk about that a little bit more on our next call as we get into the 2016 time frame.

Anthony, this is Josh again. Just while Greg was answering your last question, I did find the win/loss information. So Q3 we took five competitive bunkers, we gave up two.

Okay, that's helpful. Thank you.

(Operator Instructions)

Suraj Kalia, Northland Securities, Inc.

We're not getting any audio from Suraj's line. Would you like to take the next question?

Sure.

Brooks O'Neil, Dougherty & Company.

I was hoping you could just talk a little bit about what's involved in bringing on a value position machine for China and what opportunity you see for that in the US, as well. Thanks a lot.

Brooks, the value product strategy in China is -- it's been kind of a developing situation. As you've seen, we've been pretty successful in the Class A radiotherapy category. We've got really, really strong commercial execution taking place in China, with strong commercial leadership in place there.

And when you look at the growth -- our strength in the market there has traditionally been in the PLA channel, which was the military hospital channel. It was kind of from a technology price point standpoint, it was the part of the market that was really an open checkbook, to some degree. You find the very best equipment in those facilities.

The growth going forward over the next decade in China in our business is going to take place in the private sector and in the provinces. And the product requirements there are probably going to dictate that functionality has to be at a certain level of capability, but price point and the overall value proposition is going to have to look different than where our traditional strength has been in premium and specialty categories.

So we've been hard at work at this kind of quantifying the market, the product design requirements. We have work taking place right now on that.

I'm not going to get really specific or granular about product description in one form or another. But I will tell you that we think that this is a -- for us, this is a very, very nice opportunity, and it's one that we're interested and excited about.

And given the momentum we have there and the market -- the brand strength in terms of market recognition for our products and our company, we like the prospects of being able to bring another product to market, especially in that price point with that type of a market opportunity attached to it.

And could you just say roughly how long you think it'll take you to really have a lower price point, possibly modestly lower functionality system for the China market?

I'm reluctant to do that, just given -- as we've seen, there've been, from a timing standpoint, we were delayed for quite a while with Class A license releases. The regulatory environment there from an oversight standpoint is a little bit difficult to predict.

I think we've got some what we think might be speed-to-market, interesting speed-to-market opportunities around product configuration that might give us better speed-to-market solutions to this. But, again, I would rather not -- I'd rather not hang a date out there or a range of time frames and say that -- set ourselves up for not being able to deliver on that at this point.

I can understand that totally. Thanks a lot.

That's all the questions that we have in the queue at this time, so I'd like to turn the call back over to the speakers for closing remarks.

We'd just like to thank everyone for joining us on this afternoon's call, and we look forward to speaking with you on the fourth quarter and year-end earnings call. Thanks very much.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may all disconnect your telephone lines. Everyone have a great day.