Accuray Inc (ARAY) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Accuray Incorporated Q4 FY15 earnings conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Doug Sherk. Please begin sir.

Thank you. Good afternoon everyone. Thank you for joining us today on our conference call as we review Accuray's fourth quarter and full year FY15 financial results. Participating on today's call today are Josh Levine, President and Chief Executive Officer of Accuray and Greg Lichtwardt, Accuray's Executive Vice President of Operations and Chief Financial Officer. Before we begin I would like to remind you that our call today includes forward-looking statements that involve risks and uncertainties, including statements regarding our business plans and strategies, as well as our outlook for the FY16.

There are a number of factors that can cause actual results to differ materially from our expectations, including but not limited to risks associated with the adoption of the CyberKnife and TomoTherapy Systems, commercial execution, future order growth, future revenue and macroeconomic factors outside of the Company's control. These and other risks are more fully described in the press release we issued after market closed this afternoon as well as in our filings with the Securities and Exchange Commission. The forward-looking statements in 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 this afternoon we request that questioners limit to two questions and then re-queue if they have any 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. Thank you for joining us on today's call.

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

During the fourth quarter our team generated strong order activity for both the CyberKnife and TomoTherapy systems, demonstrating that we are delivering on the areas of strategic focus and commercial execution we identified as crucial to moving Accuray toward consistent order growth and eventually profitability. For the fourth quarter we reported gross orders of just under $85 million which represents a 14% increase compared with the year ago period and as a 20% increase on a constant currency basis. To put that performance in perspective this is the highest level of gross orders the Company has obtained for any quarter since the acquisition of TomoTherapy in June 2011.

We also set a new quarterly record in terms of gross orders for the CyberKnife system. CyberKnife System gross order dollars represented approximately 134% over the average of the prior three quarters. Additionally the second half of our FY15 represented substantial improvement in orders compared to the first half of the year.

Most importantly, 80% of M6 Series orders including an InCise Multileaf Collimator, or MLC. Based on fourth quarter gross orders it is evident that customers recognize the ability of the MLC-equipped CyberKnife M6 to deliver extremely precise radio surgery and stereotactic body radiation therapy to more patients in significantly less time than was previously possible with this CyberKnife system. We anticipate CyberKnife orders will show continued momentum as prospective accounts come to understand the vastly improved functionality and clinical capabilities that the system can provide. During the quarter, we announced that the InCise MLC would be available in additional markets outside of the US, where regulatory approval had been obtained.

As you may recall the MLC was commercially launched in February 2015 in the US We also continued taking orders for the InCise MLC as an upgrade to sites that currently have a CyberKnife M6 System. With more sites gaining clinical experience, we foresee an expansion of regional reference sites which will support a greater number of site visits, enabling us to facilitate product demonstrations and peer to peer information exchange with potential customers interested in the M6 with the MLC. In fact, our evaluation sites and initial MLC installation sites are already sharing data on their increased throughput and faster treatment times with the device. The first studies were presented in July at the AAPM meeting which I will discuss in more detail later in the call. We anticipate additional data being published and presented supporting the use of the MLC in the coming year.

Turning to the TomoTherapy system, we continue to see market validation for its use as a mainstream radiation therapy solution. During the fourth quarter, approximately 48% of TomoTherapy System gross orders were placed by sites with single or dual vaults. This followed approximately 38% of gross orders being placed by sites with single or dual vaults during fiscal third quarter. When customers evaluate a system of this type, for this type of setting they need an option they can count on, treatment after treatment. Customer and market requirements demand that the device not only be clinically versatile but also highly reliable and efficient in treating a wide range of radiation oncology patients.

The TomoTherapy System is proving that it can address these requirements through significant improvement in treatment speed and overall throughput. These improvements are enabling clinicians to treat a wide range of case mix, from complex cases such as head and neck cancers, to more routine treatments such as breast and prostate tumors. TomoTherapy's improved reputation for performance and reliability is driving sustained increases in customer satisfaction which have been validated by independent organization MD Buyline. System up time in the US can now be trusted to consistently exceed the US industry average of 98%. In fact, we have heard anecdotal feedback that centers with multiple types of LINAC's are reporting TomoTherapy System is often the most reliable of all the machines. As the TomoTherapy system continues to gain clinical recognition as a viable option, as an all purpose radiation therapy device, we believe we will significantly expand our penetration in single and dual vault account settings.

Another key area of commercial focus for us throughout FY15 was executing our China growth strategy. During the quarter we added seven orders to backlog for China. Many of these for the CyberKnife System. And we saw four additional Class A user licenses for Accuray products awarded by the Chinese National Health and Family Planning Commission or NHFPC. Of the 39 released Class A licenses issued for the current quarter period, which covered the period from 2013 to 2015, 34 licenses have gone to Accuray products. Of the 34 licenses, all but two are now in backlog, with the remaining two expected to enter backlog in this current fiscal quarter, first quarter of 2016. While the NHFPC has not announced plans related to the next phase of the Class A radio therapy procurement process, there remains significant growth opportunity for more advanced and technically capable radio therapy devices based on currently inadequate levels of serve market capacity and strongly increasing patient demand. We remain very confident about the opportunity in China.

Last night we talked with our General Manager of the business in China, who over the past two years has been a very astute observer of the potential for our systems in the China market. He remains very confident about our current momentum because of the government's continuing focus to bring modernized radiation therapy to help meet the needs of a market that continues to see a significant rise in new cancer cases. Healthcare delivery remains a key pillar in the Chinese government's social and economic philosophy going forward.

A couple of other points on China. First, our contracts with our distributor in China are in US dollars, so currency does not directly impact us in this market. Second, our distributor generates a healthy margin on their sales even post evaluation. To date we do not see any impact on the orders that are in backlog in terms of timing or revenue amount, and we believe our opportunities for continued momentum from Chinese order growth during FY16 remains intact.

Moving to another of our key initiatives, we believe our strategic account selling strategy, especially with domestic group purchasing organizations and healthcare systems is a critical element in driving better commercial momentum in the US market. During the fourth quarter, we began to see definitive progress in GPO associated orders and upgrades. We had three system orders that went to backlog in Q4 placed by hospitals affiliated with GPO partners. In addition, more than 30% of full FY15 system upgrades were placed in the fourth quarter by GPO affiliated accounts. Additionally, this momentum is not limited to just possible based purchasing organizations.

Tomorrow we are issuing a news release announcing that 21st Century Oncology has placed a multi-system order for one CyberKnife and four TomoTherapy Systems that is being recorded during our fiscal first quarter. While not the first order we have received from 21st Century it does show visible progress related to our strategic account selling focus. The four TomoTherapy Systems will replace conventional linear accelerators in single vault freestanding centers, reinforcing the TomoTherapy's value as a mainstream radiation therapy device.

As we highlighted on last quarter's call, we expect installed based replacement sales, or trade ins, to become a larger portion of our overall growth system orders mix going forward, with approximately 30% of our install base reaching ten years of age, which is a typical replacement cycle over the course of the next 36 months. As a primary strategy to ensure that we retain these sockets, we have been very focused the on overall customer satisfaction levels in these accounts. The two most important strategic levers in this regard are our people, representing the field and service and supply chain teams, and the performance and reliability of our products themselves. To that end, we have been extremely focused on earning customers' trust in our ability to deliver product performance and reliability excellence and superior service and support. The most recent report from the US market research firm MD Buyline provides tangible evidence that we are delivering on this promise.

According to the second quarter 2015 report, Accuray users' satisfaction ratings consistently exceeded the industry average for the past two years. I think it is noteworthy that what had once been the Company's biggest liability has now become a differential advantage in the minds of many customers.

Focusing on other strategic announcements we made in July, we were excited to communicate the signing of a long term collaboration agreement with RaySearch Laboratories, a technological leader in the area of radio therapy treatment planning software. This initial agreement enables Accuray to co-market the RayCare Oncology Information System, currently under development at RaySearch, in several designated major radiation therapy markets. We believe it represents the beginning of what we expect will be a deeper collaboration between the two companies.

Accuray will have the opportunity to offer RayCare in both install-based accounts, as well as new accounts, making available a fully integrated solution with a TomoTherapy and CyberKnife System product portfolios. RayCare is a next generation oncology information system being developed by RaySearch to support the complex logistical challenges in modern large scale radiation therapy centers. RayCare will provide an alternative to currently available OIS products, focusing on improved radiation oncology workflow efficiency and practices.

Lastly, in July we attended the medical physics meeting known as AAPM. There were a number of clinical abstracts presented on our CyberKnife and TomoTherapy Systems during poster and oral sessions, which highlighted benefits associated with each platform. Papers were presented by UPMC CancerCenter in Pittsburgh, Erasmus MC Cancer Institute in Rotterdam, and The Munich CyberKnife Center describing their early experiences with the InCise MLC or the CyberKnife M6 System. By sharing their early experiences these important reference sites are helping bolster the clinical credibility and expanded functionality of the device with other prospective accounts.

Now I would like to turn the call over to Greg to review some of the key financial highlights. Greg?

Thank you,, Josh. Good afternoon everyone.

Before I discuss our financial results let me provide some further detail on our product orders. Age outs, which are orders that have not gone to revenue in 30 months since being recorded, offset by orders going to revenue that were previously aged out, were $3.3 million in the fourth quarter. Cancellations, which occur when a customer cancels their order and receives a refund of the deposit, were $2.1 million for one order during the fourth quarter. With regard to the impact of foreign currency on backlog the US dollar was quite stable in the fourth quarter, which resulted in an insignificant $100,000 negative adjustment to backlog.

Additionally, I would like to provide some color around our gross order performance by region for the full FY15. While we do not typically provide this level of granularity, we think doing so will help put our full year performance in perspective. The Americas, Japan, and APAC territories all experienced tremendous order growth in FY15 compared to FY14. This was led by approximately 40% and 50% unit order growth in Japan and APAC, respectively. In APAC, China leads the way driven by the issuance of many licenses for Accuray products from the Chinese NHFPC, as we have been reporting throughout the year. Also Japan has continued to be a high performing region for us and is where we have the largest market share compared to any other region in the world. So we compete very effectively there.

The Americas Region had 23% unit order growth on the strength of our TomoTherapy mainstream product positioning and the availability of the InCise MLC for CyberKnife. This growth further validates that our approach to the Americas Region is gaining traction. The only region with below Benchmark performance for the year was the IMEA region, which although down approximately 14% in units in FY15 had grown more than 100% in the prior fiscal year, so we faced a very tough comparable here. We believe that with close to half of our distributor contracts being in US dollars, the strength of the dollar throughout the year caused the delay in distributors placing orders.

We look for the IMEA region to regain momentum in FY16 and generate positive year over year growth. Moving on to our income statement, total revenue for the fourth quarter at $101.8 million was relatively flat from the prior fiscal year fourth quarter but increased 5% on a constant currency basis. In fact, on a constant currency basis, quarterly revenue would have been an all time high for Accuray.

Product revenues at $51.7 million were relatively flat year over year but increased 5% on a constant currency basis. We were pleased with the performance across both our products with fourth quarter TomoTherapy revenue being the highest in over three years. For the full year, CyberKnife unit volumes experienced a near 50% growth, attributable to the commercial launch of InCise MLC and additional licenses which subsequently became orders in China. Service revenues at $50.1 million were also relatively flat for the quarter but increased 5% on a constant currency basis.

While we have continued to reduce our service contract vacancy rate, currency is largely offsetting our increases in the installed base. Total gross profit dollars of $40.5 million represents an increase of $2 million over the prior year fourth quarter, primarily attributable to improved service margins. Overall gross profit margin of 39.8% would have been 41.8% on a constant currency basis and that compares with 37.7% in the fourth quarter of the prior fiscal year. Product gross margins were 43.2%, or 46% on a constant currency basis, and compare with the prior year fiscal fourth quarter of 44.5%. Generally speaking, average realized prices were stable on a constant currency basis, so the improved gross profit margin results from supply chain cost downs and the transfer of the CyberKnife production from Sunnyvale to Madison executed during the year.

Fourth quarter service gross margins of 36.3%, or 37.4% on a constant currency basis, were very favorable compared to prior year fourth quarter service margins of 30.6%. This improvement is a direct reflection of our focus on managing service costs, the improved reliability of our systems leading to lower parts consumption and a lower vacancy rate of installed systems without service contracts.

Operating expenses were lower than the prior year fourth quarter by 3%. That $1.2 million decrease was primarily the result of reduced compensation and travel related expenses in selling and marketing partially offset by increased product development costs. On a full fiscal year basis, operating expenses increased by only 2% over FY14, demonstrating disciplined expense control.

Lastly, EBITDA was $6.7 million for the fourth quarter and $11.8 million for the full year. That full year result was $1 million below our most recently revised EBITDA guidance range of $13 million to $16 million, while our revenue performance, margin expansion, and control over operating expenses were in line with our forecast, we were impacted in the fourth quarter by a higher than anticipated employee bonus expense; due primarily to our strong fourth quarter gross order performance, as well as certain one time nonrecurring compensation related expenses.

From a balance sheet perspective we did not achieve cash usage objectives in both the fourth quarter or the full year. We fell short due to three factors. First, in the fourth quarter we experienced a large increase in accounts receivable of $16 million. Several revenue transactions, settled by way of letter of credit, that normally would have been collected before quarter end have now been collected in the current quarter due to the revenue transaction timing. This will contribute to increased cash flow in FY16 and is not indicative of a deterioration of our aging which actually saw a significant decrease in past due accounts during the fourth quarter.

The second impact was from the strength of the US dollar which caused us to generate approximately $11 million less in EBITDA for the full year, and then finally inventories for the full year increased $18 million. A good deal of that growth was planned in order to improve key performance indicators in our service inventories, while the unplanned growth which was in finished goods inventory will benefit cash flow in FY16 as it turns over.

With regard to our financial guidance for FY16, we anticipate revenue in the range of $395 million to $410 million representing a growth of 4% to 8% over FY15. While we aren't providing quarterly guidance on revenues, we can tell you that we would expect each quarter's revenue as a percentage of the total year in FY16 to be similar to the quarterly contributions in FY15. Our guidance does anticipate a further strengthening of the US dollar compared to other currencies in accordance with most major forecasting services unless the growth rates would actually be higher than 4% to 8% on a constant currency basis.

Our adjusted EBITDA guidance is in the range of $25-$35 million, representing a growth of 112% to 197% over 2015. In order to achieve our adjusted EBITDA range we expect gross margins to be flat at the low end and 200 basis points improved at the high end, although as in prior years gross margins during the year will fluctuate with revenue levels. Operating expense control will be apparent in FY16 as well. We anticipate operating expenses during the fiscal year to remain relatively flat compared to FY15. Additionally, not only do we anticipate positive cash flow for the year, but if we achieve the upper end of our EBITDA guidance, we would be reporting GAAP operating income. Both of these represent important milestones for Accuray and the team here is focused on achieving these goals.

Regarding our gross orders outlook for FY16, some of the analysts following our Company have previously published gross order estimates, and based on our current outlook a range around the current consensus of $294 million is within our thinking. I would like to emphasize that we expect gross orders during FY16 to be weighted towards the second half of the year.

With respect to future age outs and cancellations in FY16, we believe the quality of our backlog has improved and we expect to see a year over year improvement in age outs and cancellations as a percentage of average backlog. Two important comments though about that. First, our fourth quarter just reported is not our new run rate and was more of a timing anomaly. Second, as we have seen historically, age outs and cancellations exhibit significant variability on a quarter to quarter basis, and this will continue.

Now, turning to one other balance sheet item, our long term debt outstanding in the form of convertible notes due on August 1, 2016 and on February 1, 2018. As we have indicated on past calls the Company continues to explore several options for addressing these notes with our most immediate focus directed at the $100 million of convertible notes due in 2016. These options include among others, refinancing the existing notes with similar but longer term notes or redeeming the notes at maturity for cash and/or stock. If we have developments on this, we'll be sure to update you.

With that I would like to hand the call back to Josh. Josh?

Thanks, Greg. Looking back on FY15, I am encouraged by our fourth quarter performance and the fiscal year overall. While we wrestled with the macro level challenge of foreign currency exchange headwinds, we showed true progress in executing on our key strategic initiatives. As we think about FY16 and what will continue to drive our Company's transformation, I believe we now have a solid foundation on which to build.

Clinicians value our CyberKnife and TomoTherapy Systems for their clinical precision and they appreciate the excellent customer service we strive to deliver. We have made substantial progress in driving market acceptance of the TomoTherapy System as a mainstream radiation therapy device and TomoTherapy is now a viable product option in a growing number of single and dual vault accounts.

On the CyberKnife side, we have significantly increased sales of the CyberKnife M6 System as a result of the expanded utility and vastly improved functional capabilities that the InCise MLC provides. We initiated the global launch of the InCise MLC and began fulfilling backlog orders as well as generating new ones. Ongoing customer interest in our products can also be seen in the multi system orders we are receiving on both the direct sales basis and through distributors.

From an emerging market perspective, we continue to see China as our largest growth prospect, particularly with respect to our TomoTherapy System, and as such it remains a priority commercial focus based on the significant unmet need for radiotherapy devices. We have made targeted investments in building our GPO and strategic accounts selling capability and our efforts here are starting to show results. We believe the GPO strategic accounts contract portfolio represents a meaningful driver of future CyberKnife and TomoTherapy Systems sales growth in the US

Additionally, we remain committed to providing our customers with innovative technologies enabling better treatments for their cancer patients. Our partnerships with RaySearch Laboratories and MIM Software and our ongoing internal R&D initiatives will continue to help us advance our technology portfolio to ensure we can continue to meet our customers' needs.

In summary, we believe that Accuray has a significant opportunity ahead of us, tied to ensuring that more clinicians and their patients have access to the superior precision our innovative technologies provide. Successful execution of our FY16 plan should be a true inflexion point for the Company in terms of material stability, operating profit and cash flow that will result in both business growth and increased shareholder value going forward.

Now we are ready to open the call up for questions.

(Operator Instructions)

Our first question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is open.

Hi. Good afternoon. Thanks for taking the questions.

Hi Steve.

The first one is actually on the orders outlook. Thanks for giving the specifics on your perspective on how orders are likely to grow this year. You called out a range around the consensus 294. It would be helpful if you could just give us a sense of, number one, what you think the most important swing factors are that drive the range and then, number two, what it is that drives the relative strength in the second half of the fiscal year as you called out in your prepared remarks.

In terms of the second part of that question, I think for a growth oriented business, it's not unusual to see each quarter build upon the previous quarter and that therefore puts the majority of the growth in the back half. We saw that occur in 2015. Since I have been with the Company, 2014 was the other way around, but a bit of an anomaly. I think it is just indicative of a growth business and it falls out that way.

I do think currency is something for us to keep an eye on relative to gross order value. But really we just need to execute on the commercial initiatives that we have in front of us to maintain the TomoTherapy mainstream positioning, get customers to the MLC InCise for CyberKnife reference sites and certainly focus on our own install base replacement sales. That's a big opportunity for us as Josh mentioned in his remarks.

Steve let me amplify on that just for a second. I would say with what Greg just said I would add that essentially what Greg communicated in his prepared remarks assumes order growth in excess of market growth rates with obviously the second half of the year growth in order substantially above market rates.

So it looks somewhat similar to what we had seen at 2015 and so I think that the thought process there is really comparing it to where we see ourselves and what we are capable of relative to the market at large. We think we are being prudent in this regard in terms of managing the expectations related to the quarter to quarter order timing based on our current visibility.

Thanks. Really helpful.

Then one specifically on CyberKnife. We have been hearing lately that there has been more of a focus, particularly in the US, from the private payer community emphasizing the use of stereotactic treatments. You guys sound really happy about the progress on the CyberKnife and numbers are certainly bearing that out.

Clearly the MLC is an important driver. I wonder if you can comment on the rate of transition in the market in the US and maybe globally towards stereotactic, if you think we might be getting closer to an inflexion and if there is an identifiable driver there. Thanks so much.

I mean basically on the stereotactic radio surgery and SBRT front, if you look at the growth and procedure volume you are looking at growth rates for SRS in the 14%-15% range and on the SBRT side probably high 20s, 28% or 29% in procedure growth volume on a per annual basis. There is no question that we are talking about based on the photon side of the business probably along with IMRT some of the faster growing, the fastest growing procedures, in terms of overall case mix.

In the US market you could say that reimbursement that certainly the reimbursement thought process is starting to understand that the benefits of hyper fractionation are things that offer benefits that are important relative to not just the overall patient treatment and patient experience, but the amount of time it's going to take to drive a case to completion. These are things that are positive elements in terms of variables in driving probably greater adoption over time towards SBRT and SRS.

Thanks. I will get back in queue.

Thank you. Our next question comes from the line of Jason Wittes with Brean Capital. Your line is open.

Hi. Thank you. I think you said earlier that GPOs were about 30% of orders for this quarter. For the year, what was the number?

I think we said basically it represented -- the GPO affiliated accounts represented about 30% of the full year upgrades. Those were not necessarily full orders Jason.

Okay.

I just wanted to be sure you had that right. We had three orders in the quarter that were related to GPO-affiliated facilities. Basically that was the point of clarification for Q4 in terms of order impact.

Okay. And related to that, what percentage of orders this quarter and maybe for the year -- maybe you gave this -- relate to single and dual vault centers?

So for the quarter Tomo represented 48%. 48% of the Tomo orders were in single and dual vault facilities, that was up about 38% in fiscal Q3, in fiscal third quarter. So we are continuing to show incremental penetration in single and dual vault setting accounts.

Okay. Then a follow up to that and I will jump back in queue. That is in terms of the --

Go ahead, Jason. We lost you.

Yes, sir. Our next question comes from the line of --

Hello. I apologize.

I just wanted to ask in terms of your negotiations for TomoTherapy Systems, are they primarily versus Varian's [truvium] or are you seeing elective systems in there, as well? What is a typical negotiation that you are seeing?

It varies from account to account. I would say the answer is both.

Interestingly, if you look at one of the points we referenced in our prepared remarks with regard to the multi system order that we took at 21st Century Oncology, the four Tomo units in that order basically replaced standard linear accelerators that happened to be Siemens units, all of which were single vault free-standing centers, which again when you think about just historically how little penetration we have had with Tomo in single vault or even dual vault setting locations, you know there are really visible signs here that Tomo has come full circle in terms of its ability to be considered as a viable option in single and dual vault settings. So in the 21st Century case, it was Siemens systems, but I would say across the board we see varying devices, elective devices that are being switched out.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Thanks.

Josh, just actually have a question initially on the RaySearch deal you announced. Does this level playing field for you on the software side? Maybe just talk a little bit about how it's going to work. It said in the press release you've got rights within certain markets, obviously they haven't even launched the RayCare platform yet so maybe just talk a little bit about how you approached this and then how you are ending up with the deal that you have in terms of (technical problem -- speaker too far from the mic).

So let me start by saying, Tycho, we are really excited about the RaySearch relationship. This is an opportunity for us to fill in from a portfolio standpoint in a really important area related to strategy, and related to our ability really to position ourselves from a connectivity standpoint, which really ties to market access in, you know, account situations.

We have spent a lot of time and effort in exploring an array of options to fill out this part of the portfolio and we believe we have with RaySearch a partner on both the oncology information systems side, and I am going to suggest that it will become more than that potentially over time, so that we may have more to talk about there with regards to expansion of the relationship and collaboration in other capabilities over the course of the next quarter or two. I think that up until now the primary focus for us was internally developed treatment planning capability.

We still are on the path to launch an improved integrated treatment planning capability and treatment plan system for our products, probably in the next 15 to 18 months. But I think that RaySearch represents a very strong opportunity for us to position ourselves from an end to end capability with regards to connectivity and really advanced optimization capabilities in terms of treatment planning in general.

Okay. And, nothing in revenues, obviously, until they launch in 2017? Is that the right way to think about it?

I'd say that's probably right. They're still probably 15 to 18 months off on RayCare as it stands now. That's probably the timing.

Then in your comments you talked about the upgrade opportunity both with some of the CyberKnife customers going back with the MLC and then, obviously, your install base, if they are ten years older. Just talk a little bit about how you are thinking about pushing upgrades to the install base over the next year and is it a matter of adding additional reps, are there things that we need to think about on the cost side, as well.

So the upgrade opportunity is probably one of the bigger growth drivers we believe we have available to us going forward. It really is represented across all of our regions, but when you look at opportunities probably within the next 36 months there is a significant degree of opportunity in the US market. We have, interestingly enough, at the end of Q4 we actually did some reallocation of people and positions and actually added some really focused on a account management model that we have been using in other regions of the world and basically put in place that same account management-focused model in the US business.

And so we think that actually lends itself to the opportunity. We created smaller territories, better selling focus, so the coverage model has been optimized, we think, in a meaningful way, especially in light of the replacement sale opportunities around installed base. That's an important reference I think relative to the opportunity we have. We also added in Q4 a VP of Sales for the US market. Essentially our general manager had been playing that role up until then. I would say we have added a level of talent and a layer of management from a sales management oversight that I think is going to be critically important going forward.

If you think about install base opportunities for us, one of the reasons we have been so focused on product reliability and customer satisfaction is that if we really hadn't -- if we didn't give ourselves the chance to fix reliability concerns and perceptions around the reliability and issues around service, we really weren't going to earn the right to have a chance to sell those customers those existing customers another device in the future. So you know all of these pieces that I have just described tie together, the improved reliability, and focus on service and overall customer satisfaction, the selling model in the US market, and all of these things translate into, from our view, a really strong focus and high degree of confidence that we will retain the vast majority of those vaults in the install base.

Okay. Thank you.

Thank you. Our next question comes from the line of Brooks O'Neil from Doherty and Co. Your line is open.

Good afternoon. I just want to start with a brief comment. I used to cover 21st Century and talking with Danny Dosoretz a couple years ago he told me, why would anyone buy anything but Varian, so congratulations on your progress there. I think it's terrific.

Thanks, Brooks.

Secondly. I am hoping you might just comment, at least on some level, about electives woes and what impact that might be having in the marketplace, both domestically and internationally, and specifically are you seeing any pricing pressures related to what's happening with them right now?

So as I mentioned before in answering one of the other questions, you know, we are seeing competitive wins on our end against really both Varian and Elekta and to obviously a lesser degree, just given the size of the install base that some of the more recent Siemens wins we've had. I think that Elekta's situation has been well-characterized and talked about, I am not sure that I am going to be able to lend a whole lot to it.

Relative to pricing though, there are a number of factors that impact pricing as we have talked about in the past and they can vary pretty substantially from quarter to quarter, mix between system configurations, new versus refurbished, new placements versus trade ins, distributor versus direct, all can create meaningful variability quarter to quarter. So I am guessing though the intent of your question, Brooks, is whether generally we are seeing competitive pricing pressures and the simple answer is there is nothing new right now.

It has been a competitive price environment and it remains such, but we have been pretty successful in positioning what we think are unique product capabilities along with a total cost of ownership kind of approach from a pricing and positioning standpoint, that customers generally have been responding well to. I think in that regard we have been able to avoid some of the larger equipment-centric types of discounts.

That's great. Very helpful.

Second question, I am curious if you will share any color at all about the direction of future product development? I am thinking in two specific areas, one is robotics and two is image guidance. I am curious. Maybe a year or so ago you told me that you weren't real focused on proton therapy, and I am just curious if that's changed any at this point.

Let me take the last one first because it's a relatively easy answer. The answer is no. The view hasn't changed a lot.

We think we have a really meaningful ability to drive really good patient outcomes and do that very effectively with our systems. So proton is probably not something you are going to see us involved with on an active basis in any way.

As it relates to the overall direction from a product pipeline standpoint, we have been I think pretty transparent around the fact that there are opportunities that we see in China related to a value product offering on the TomoTherapy side, and on the CyberKnife side obviously the big news right now and it's clearly having impact, is the introduction of the MLC. We are going to stay focused on that because there is probably a fair amount of hay to make, if you will, in the CyberKnife area with results of the product improvements and functionality, overall efficiency with what the MLC provides.

Beyond the MLC, I would say on the CyberKnife side we've got projects actively focused on things like optimizing workflow, things in the disease specific applications area, as well as improved imaging and things to further reduce treatment times. I'd say those are all things you know future enhancements or improvements to the CyberKnife platform.

That's perfect. Thank you very much.

Thank you. Our next question comes from the line of Raj Denhoy from Jefferies. Your line is open.

Hi. Good afternoon.

Hi Raj.

I wonder if I can ask you a little about China? You noted the 34 systems now in your backlog for China, and I guess I am curious whether you think there is any risk or prospects for those orders perhaps taking longer to realize in China than we typically see in other markets?

We talked I think during the prepared remarks earlier around the fact that we don't really see changes in impact or project that there will be changes to order timing or revenue amounts. The interactions we have, the contractual obligations and interactions we have formally with the distributor there are in US currency, it's US dollar-denominated.

They are in a really good margin on the products even after the devaluation of the RMB. So the answer as we see it is no. We don't see that there is going to be any downside there in terms of timing or revenue impact.

Right, but I get the currency piece of it, but just in terms of general uncertainty in the Chinese market and not having a lot of experience with how quickly those orders move in backlog to actually being realized in revenue, just wondering if there is any risk that you won't see quite the conversion from backlog to revenue as quickly as you might see it in the US or European or other markets, not withstanding currency, just generally, in terms of the inflexion of the market.

You know I'd go back to what I said earlier which is the healthcare in general continues to be a key area of focus for the Chinese government relative to their social and economic development plans and philosophies going forward. Right now, healthcare is projected to be, while increasing roughly about a 5% element or mix of their overall total GDP, and you know there are no signs at least philosophically that there is a shift in that view, the importance of Healthcare in their view.

And so you know between that and the currency discussions that we have just had relative to our distributor in the contractual relationships we have there, I think the answer is no. We don't believe that there is a risk of a change in timing with regards to revenue and moving from backlog to having those systems ATP.

That's fair. I just was curious.

On the MLC, as you now have several more of those in the wild and you're starting to get more real world experience with those, just curious when you think about how centers are using those and as we all know the CyberKnife has always been relegated to more esoteric types of cancers, and with MLC and the treatment times coming down, have you started to see a move into more routine types of cancers, to the prostates, the breast cancers, or is it really still treating those more unique esoteric cancers, but just doing them more quickly?

The simple answer is that it varies from location to location. I mean, there are locations where we have -- they've built very strong case mix practices on full body radio surgery, prostate being an area of good example of that. The answer is it really varies from location to location.

If your question is really asking do we see CyberKnife being used as an IMRT device or in those kind of applications, the answer is while the MLC gives it that capability, I don't think that that's where the product's strong suit is. I think you are still going to see more SRS, more SBRT usage, but not necessarily just inter-cranial.

Again we see good growth in treatment applications in prostate, we see good growth in lung. So the MLC's impact both from an efficiency and throughput standpoint is one element. Expanding the universe of patients that can be treated, the cases that can be treated is the other impact. That also directly ties to the economics of an ROI model for the customer.

That makes sense. Thank you. Thank you very much.

Thank you. Our next question comes from the line of Suraj Kalia of Northland Securities. Your line is open.

Good afternoon gentlemen. Congratulations on the quarter.

Thank you.

So Josh let me just piggyback on Raj's question related to China. At least from what I heard in your prepared remarks, 32 out of the 34 licenses have been recognized as backlogged. Did you give indication of what percent of them are Tomo verses CyberKnife? At the same time, the way -- at least my understanding is, you get a license, that license is allocated to Accuray. You have a fixed price in dollars.

Your distributor then marks it up whatever 30%, whatever they do, and then sell it to the final end-user and Josh you have said at least twice or thrice indicated they have enough buffer in there. Is that buffer enough that one keeps devaluing? We shouldn't see at least for the next couple years any impact to the product line item coming out from China or the service contracts?

Right now, we see the distributor having a set of economics that gives them the ability to earn the margin they need to in order to keep this as a viable business for themselves and we don't expect that to change. As the devaluation of the currency has occurred today it looks like they can absorb this.

If in the future the yuan devalues to a greater degree we would be open if need be to looking at pricing and/or distributor margins and make adjustments if necessary. But in the overall scheme of our revenues this is still a relatively, in terms of backlog percentage of the backlog, it's still a relatively small percentage of the overall backlog. So you know the concerns about currency valuation and its impact on the distributor business model, I think, are over blown.

Okay. Fair enough. And Greg in terms of you gave FY16 gross order guidance of at least a range around the consensus of 294 orders. You gave a pretty good year over year growth rate, unit growth rate in Americas Japan APAC, how should we think about FY16? I know you specifically haven't given unit number growth in these different geographies, but where does the emphasis in your gross order guidance?

I think the emphasis for us, Suraj, is going to be attributable to the Americas.

First, you know there is potential for significant new incremental orders from our installed base replacement. Josh gave you the percentage over the three year period of units that are likely to reach end of life and we are very focused with our customer initiatives to making sure that those remain Accuray vaults.

Second, we see the momentum for the MLC for CyberKnife and the mainstream positioning for TomoTherapy continuing to gain traction and then third the GPO strategic accounts initiative that will result in many incremental orders next year or this fiscal year, we believe.

Americas in our plan is the primary region for growth, but not to say that the other regions aren't going to exhibit above market rates of growth, as well. But I think that's a good answer to your question.

Fair enough. Finally Greg, I think I missed the percent of gross orders in the quarter that was Tomo versus CK? Thank you for taking my questions.

Unfortunately, for competitive reasons we really don't give a lot of detail by product. We give some regional detail. But, Surag, we generally don't provide product line information. I apologize.

Thank you for taking my questions. Congratulations again.

Thank you. Our next question comes from the line of Toby Wann from Obsidian Research Group. Your line is open.

Hey. Good afternoon. Can you provide us a little bit of an update on trade in trade out, velocity of that program, how it's progressing, what you are seeing, et cetera?

I think I mentioned earlier that, just given the magnitude of the opportunity there, relative to the number of systems that we have in the installed base reaching ten year replacement cycle window, you know we have gone through essentially a redesign and improvement in the coverage model from a selling standpoint in terms of territory coverage in the US. That account management model gives a territory sales director the very best visibility in a smaller area, a more concentrated area, to understand, to be on top of the timing of products coming in to replacement cycle in our installed base. And for the most part I would say, or in great part you know these are TomoTherapy-related devices at least in great part.

And so we have the ability to take a device from a trade in standpoint, take the older unit, we would bring that unit back to our facility in Madison and actually refurbish it and make it available for program that we called reNEW, which is a program that would take that device and make it available for sale, let's say in an emerging market or third world country, somewhere in South America perhaps. So we're using that equipment as inventory to fuel and support another marketing and selling program. But at the start of the three-year peak for the install base, the age of the install base equipment is somewhere in that 10 to 12 year range and it just gives us -- this program gives us the opportunity to be able to get the old device out and get our latest technology into that account. So I mean that really is the thought process in a nutshell.

Okay. And then Greg just on the -- you mentioned there was a one time increase in employee comp. Any color surrounding that at all if available?

Sure Toby. So that was a non-material severance expense associated with reallocating head count resources to achieve our operating plan goals for 2016.

Okay. Thanks for taking the questions.

Thank you.

(Operator Instructions)

Our next question comes from the line of Keith Hinton from Sidoti & Company. Your line is open.

Hi everyone.

I have two questions regarding R&D lines. First was if you could sort of just go into some detail on the role that Accuray's R&D team has in the commercialization of the RaySearch product, whether that's just sort of helping them implement the system into Accuray products, or if there is more of a development aspect to it. The second one was just on a higher level with InCise MLC now released, do you see the R&D line flattening out at all in FY16, or do you expect that expense to continue to go up?

Keith, the answer to the first part of your question is our software development team will really be involved not in front end development in the classic sense. They will really be involved more in terms of activities and support to allow for integration of our equipment with the RayCare product. So it is essentially allowing the device and creating the right interface with the RayCare system. So I would say that incrementally, there is not a lot of work or expense there.

The bulk of the development from a functionality standpoint is absolutely on the RaySearch lab side of this, not on our side. On the second part of your question the introduction of MLC, while you know certainly having the bulk of that work behind us is important, from a philosophical standpoint, we still have other fish to fry, so to speak, in terms of innovation.

And as a result Keith, this is Greg, we will see a modest increase in R&D expenses in 2016 in the range of 5%-7%. It is actually going to be the only line item of operating expenses that will show growth, because I said that overall OPEX will be flat year over year. So we are making investments in the product road map items and we'll see R&D go up as a result 5%-7%.

Okay. Terrific. Thanks for the color. That's it for me.

Thank you. At this time I am showing no further questions in queue. I would like to turn the call back over to management for closing remarks.

Thank you, operator. I would like to take this opportunity to thank the 1000 plus Accuray team members around the world for their contributions in our FY15. For those of you listening in thank you for joining us on this afternoon's call. We look forward to speaking with you on our first quarter call. Thank you very much.