Accuray Inc (ARAY) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2016 Accuray Incorporated earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your first speaker for today's conference, Mr. Doug Sherk. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today as we review Accuray's fourth-quarter and FY16 financial results for the quarter that ended June 30, 2016, as well as provide our first look at FY17. Participating on today's call are Josh Levine, Accuray's President and Chief Executive Officer; and Kevin Waters, Accuray's Senior Vice President and Chief Financial Officer.

Before we begin I would like to remind you that our call today includes forward-looking statements that involve risk and uncertainties, including statements regarding our business plans and strategies as well as our outlook for FY17. There are a number of factors that could cause actual results to differ materially from our expectations including, but not limited to, risks associated with the adoption of CyberKnife, TomoTherapy, Onrad and Radixact systems, commercial execution, future order growth, future revenue growth and macroeconomic factors outside of the Company's control. 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 today, we request that questioners limit themselves to two questions and then re-queue with any follow-ups. We thank you everyone in advance for their cooperation with this process. Now, I would like to turn the call over to Accuray's President, Chief Executive Officer, Josh Levine.

Thank you, Doug. Good afternoon, everyone, and thank you for joining us on today's call.

Following the market close, we announced record fourth-quarter order results and full-fiscal-year operating results that reflect our team's achievement of our most important strategic initiates. Some highlights include growing our fiscal-year-end backlog by 8% to a record $406 million. Backlog is perhaps the best indicator of the dollars Accuray will ultimately report to product revenue and we have now eclipsed the $400 million mark for the first time in the Company's history. Fourth-quarter gross orders were a significant improvement on a sequential basis from our third-quarter results, an increase of 12% over the prior year. This was also the highest quarterly gross order performance in the history of the Company at $95.4 million.

From a cash generation and balance sheet perspective, we are continuing to demonstrate meaningful progress. Kevin will review this in more detail, but let me briefly highlight that adjusted EBITDA of $24.6 million represents another high-watermark for Accuray, a level significantly above the $11.8 million in FY15 and represents a substantial reversal of the losses the Company recorded prior to FY14. Additionally, we increased cash, cash equivalents, and short-term investments by $23.2 million for the full year, representing a significant milestone for us. Additionally, subsequent to the end of our fiscal fourth quarter, we retired $37 million of our convertible debt, further strengthening our capital structure and balance sheet. Importantly, this continued level of execution across our business puts Accuray firmly on track to achieve a level of sustainable profitability even as we operate in a near-term macro market environment that is growing in the low- to mid-single digits.

Looking at the factors driving our fourth-quarter commercial performance, orders in the quarter were favorably impacted by several factors, including a significant acceleration in the number of CyberKnife systems compared to the third quarter. Greater than 85% of the CyberKnife orders in the quarter were for our latest generation device, which included our Multileaf Collimator. TomoTherapy orders were also strong and benefited from the previously announced multisystem order with the NHS supply chain in the UK. This was the largest order in the Company's history from a single customer and an important strategic win for us.

It is important to note that we generated our record fourth-quarter gross orders despite not recording a large domestic multisystem order that we referenced earlier and had expected to close during our fiscal third quarter. The customer for that order has informed us that they now expect to place several individual orders in FY17 versus one large one and in fact, the first of these systems has already gone into backlog in Q1 of the new fiscal year.

In the fourth quarter, greater than 50% of TomoTherapy orders were in single- and dual-vault settings, demonstrating the market's increasing recognition of the workhorse capabilities and industry-leading reliability of this product. TomoTherapy Systems are increasingly being placed outside of multi-bunker academic settings, which represents continued expansion of the selling opportunity we have with TomoTherapy.

Another contributing factor to fourth-quarter gross order performance is the high level of customer satisfaction continuing to be reported by our expanding installed base. According to the Q2 2016 MD Buyline Market Intelligence Briefing, Accuray again received the highest composite user satisfaction ratings, receiving the highest scores in a majority of categories, including system performance, reliability, response time, and service repair quality.

Turning to our product portfolio, we continue to improve and expand on our portfolio strengths and we've had several recent announcements that I'd like to highlight. In late June, we received 510-K FDA approval for the Radixact platform, our internally developed Accuray precision treatment planning system and iDMS data management system. The Radixact platform and treatment planning and data management system have been designed to integrate seamlessly with one another, which we expect will provide expanded clinical capabilities, improvement in work flow processes and improved connectivity to existing and future OIS platforms. Multiple Radixact systems will be able to use a single centralized database for treatment planning and patient data management.

In Radixact, we have developed a highly adaptable image-guided IMRT platform that will ultimately be upgradeable for real-time motion management and automated beam correction. The integrated Accuray precision treatment planning system, along with the functional delivery system additions just described, will allow for real-time adaptive therapy, ensuring that patient treatments will be as accurate and precise as possible. The upgrade pathway for Radixact will expand the clinical utility of the system for customers and provide access to a larger universe of potential patients, allowing customers to optimize the financial return on their system investment.

As Radixact is a brand-new platform and incorporates a number of features representing newly developed sub-systems, we are installing and monitoring the Radixact system in multiple initial reference sites in the US and Europe. Those installations should take place during the first quarter and early second quarter of FY17 and I can share that the first of these systems has been installed. We will closely monitor the performance of these systems, focusing on reliability and functional performance. We will move to full commercial launch by the second half of this fiscal year. This measured rollout will ensure a high degree of customer satisfaction while providing our installation and service teams hands-on experience in making the installation and start-up experience for this new platform as customer friendly as possible.

Furthermore, I am also pleased to announce that our Onrad system received CFDA approval for the China market earlier this month. The Onrad treatment system in China is targeted at the value segment of the market and will provide a new option in helping clinicians meet the growing market demand in China with a devise that offers ease of use and precise care at a reasonable price point. The system will deliver treatments used in fixed-beam angles for optimal coverage with daily 3-D CT imaging capability. Given the targeted cap profile for this product and the fact that in most cases there will still be a provincial tender or contracting process required as part of the overall sales process and timing of our commercial ramp, we expect that all of the order activity for this product will occur in the second half of FY17, with initial orders likely sometime in fiscal Q3.

In addition to our improving product portfolio and the additional innovation under development in our product roadmap, we are also shifting resources to several key sustaining engineering projects that should benefit both our cost of goods sold as well as our service and product margins. So modest contribution from these efforts should impact later in FY17, with a larger contribution to our financial performance expected in FY18.

In thinking about some of the drivers of longer-term market growth, while recent global market growth has been in the low- to mid-digit range for LINAC products and services, we believe that there are several evolving catalysts that will drive overall market growth in the future. Many of these relate to expanding adoption of radiotherapy services in both emerging and developed markets. Current estimates suggest globally 20,000-plus new LINACs will be needed over the next 20 years to ensure adequate global radiation therapy capacity in the face of growing disease incidence projections. Additionally, there is a growing recognition that radiation therapy is actually an underutilized treatment option in many markets of the world and the development of market-specific public health policies addressing cancer care in low- to middle-income markets are likely to drive expansion of radiotherapy services.

Lastly, and perhaps the most important catalyst, is the growing body of evidence that suggests the delivery cost of multidisciplinary cancer care can be lowered through greater utilization of radiotherapy services as indicated in the Lancet Oncology Commission report published in September of last year. The relative cost-effectiveness of radiotherapy is critical to these macro trends. Clinical data continue to show a high rate of efficacy for radiotherapy in terms of local disease control with minimal side effects when compared to other treatment options.

We are excited about our future. We believe FY17 will be growth year for us, although for the reasons we highlighted we expect much of the growth will occur during the second half of the year. As we look out beyond FY17, we think there are a number of real growth catalysts for our business and we remain focused on ensuring that we are well positioned in terms of product portfolio, innovation roadmap, and the financial strength to drive market share and create value for our shareholders.

Now I will hand the call over to Kevin to discuss the quarter's financial results in greater detail as we also share our thoughts on FY17 guidance. Kevin?

Thank you, Josh, and good afternoon, everyone. I will begin my prepared remarks with additional detail on our product orders, P&L, and balance sheet before concluding with our financial outlook for FY17.

For the fourth quarter, gross orders of $95.4 million increased 12% over prior year and on a sequential basis showed a significant acceleration from the third quarter, which was consistent with our guidance offered back in late April. As expected, the drivers of gross orders for the quarter were record orders for the MLC-equipped CyberKnife as well as continued solid TomoTherapy demand.

Included in the TomoTherapy gross orders for the quarter was a seven-unit order for the National Health Service, which to remind everyone was the largest order in Accuray's history. We achieved our fourth-quarter record gross order despite, as Josh mentioned, not signing the multisystem order in the US, which was originally forecast in the third quarter. We remain focused on strategic multisystem orders as a key driver of our performance and are continuing to identify and pursue many opportunities.

With respect to the pricing dynamics we mentioned last quarter, as TomoTherapy increases its success in being selected for single- and dual-vault sites and multisystem orders, we experienced the similar levels of modest pricing pressures we saw in the third quarter. However, we continue to see a significant increase in our TomoTherapy system sales, with gross orders increasing 30% from the prior-year fourth quarter. Our ending product backlog as of June 30 is now $405.9 million, an 8% increase over backlog at the end of prior-year fourth quarter and also a record for the Company.

Given we have completed the fiscal year, I would like to provide some color around our regional gross order performance for full FY16. In 2016, EIMEA generated significant growth for us and was our strongest performing region of the year. The combination of the full availability of the MLC-equipped CyberKnife, coupled with TomoTherapy's continued strength in both new opportunities and competitive take outs, led order unit volumes in this region to increase approximately 30% over FY15.

The Americas region, which also includes both Latin America and Canada, increased approximately 15% in unit volumes but was relatively flat year over year in total dollars. The flat dollar performance on increased volumes was primarily due both to product mix and more replacement sales to the CyberKnife existing customer base as the result of MLC availability. The Asia-Pacific and Japan regions were both down slightly in both gross order dollars and units in FY16 compared to 2015. However, this was within our expectation as both regions recorded exceptional order performance in 2015. Both of these regions should return to modest growth in FY17.

Moving on to net orders for the fourth quarter, net orders were $79.2 million and reflected expected age outs of $11.9 million and three cancellations. As we have stated on previous calls, cancellations typically average one to two per quarter and given that we had no cancellations in our third quarter, we remained within our expectations in terms of average cancellations for the full fiscal year. Net orders were also favorably impacted by positive foreign currency adjustments of $3.5 million, primarily as a result of the strength of the Japanese yen.

Moving on to our income statement, total revenues for the fourth quarter were $95 million, a decrease of 7% from the last fiscal year fourth quarter. Revenue for the quarter was within our expectations and for the full year we were within our guidance set in August of 2015, representing 5% full-year revenue growth and 6% on a constant currency basis. Product revenues were $43.8 million in the fourth quarter, with strong performance in EIMEA revenues, particularly sales of CyberKnife systems. On a full-year basis, product revenues increased 8%, with over 15% growth in CyberKnife revenues, again due primarily to installations of our M6 CyberKnife systems in the US and Europe as well as continued strength in China.

Product revenue in Japan for the full year 2016 was relatively flat compared to 2015. Japan, as mentioned last quarter, was below our expectations due to weak economic development manifesting itself in the form of construction delays causing longer conversion times of orders to revenue. Service revenues for the fourth quarter of $51.2 million were up 2%, in line with the trend in previous quarters and our expectations.

Turning to gross margins, product gross margins in the quarter increased 360 basis points over the prior-year period to 46.8%, primarily driven by higher-margin deals in EIMEA. Product and channel mix continue be the most significant factor in regards to quarter-to-quarter fluctuations in product margins. Service gross margins decreased 340 basis points from the prior-year quarter to 32.9%, primarily due to one-time employee severance-related expenses and other one-time part costs. These two factors represented an approximate $2 million increase compared to the fourth quarter of 2015.

Additionally, we recorded a $500,000 charge for certain excess service inventory levels in the fourth quarter. On a full-year basis, service margins were a healthy 36.1%, 60 basis points higher than prior year. Operating expenses were $40.3 million, a decrease of $1.7 million compared to the prior-year period. The decrease was primarily due to lower general and administrative expense, offset by approximately $2 million in one-time severance-related expenses. For the fourth quarter, our operating loss was $3 million and our GAAP net loss was $7.2 million, or $0.09 per share. Adjusted EBITDA was $5 million.

For FY16, on a full-year basis we achieved revenue of $398.8 million, representing 5% year-over-year growth or 6% on a constant currency basis, 150 point basis increase in our overall margin to 40% and adjusted EBITDA of $24.6 million as compared to $11.8 million in the prior year. Gross orders and net orders increased 6% and 19%, respectively. On the balance sheet, we ended the fiscal year with $167 million of cash and investments, adding $23.2 million of cash to our balance sheet. This includes $33.5 million of cash generated from operations in FY16. Further, given that we just achieved our first positive cash flow year in the history of Accuray and that our outlook is for continued annual positive cash flows, we would anticipate using additional excess cash to potentially further reduce our net debt position.

We announced on August 2 that 2016 convertible notes are now fully retired and by doing so through a combination of non-convertible debt financing and cash on our balance sheet. The cash retirement avoided the issuance of approximately 10.6 million new common shares that would have represented dilution of approximately 13%. Regarding other balance sheet metrics, accounts receivable decreased by $32.5 million from prior quarter and $20.9 million from June 30, 2015, contributing to the strong cash flow from operations.

With respect to inventory, we ended the year with $116 million in inventory, a $1 million decrease from the end of the third quarter. However, inventory is up approximately $10 million from June 2015 as the increase in inventory reflects our investment to support higher manufacturing levels and to increase service inventory to maximize customer satisfaction. We believe that while inventory will fluctuate on a quarterly basis, our goal will be to end next fiscal year with the same or less inventory than we have now as we look to improve management of our working capital balances.

Turning now to our annual guidance for FY17, we anticipate revenue to be in the range of $410 million to $420 million, which would represent growth of approximately 3% to 5% over FY16. While we are not providing quarterly guidance on revenues, we do expect a different calendarization of revenues in 2017 as compared to 2016. We anticipate approximately 45% of revenue will occur in the first half and 55% of revenue will occur in the second half of FY17. Additionally, we expect a more linear progression in revenues throughout the year, with Q1 being the low mark for the year and Q4 being the largest revenue quarter.

In regards to mix between service and product revenues, we expect overall revenues to be approximately evenly split between product and service. This will lead to product revenue growth in the 6% to 9% range over FY16. The timing of revenues in 2017 is primarily due to both macro and Company-specific factors, such as the anticipated timing of Radixact placements, timing of customer installations and construction schedules, with Japan as mentioned, being heavily weighted towards the back half of the year due to the longer conversion cycles and finally the large gross orders recorded in the fourth fiscal quarter being converted to revenue primarily the back half of 2017.

Adjusted EBITDA is expected to be in the range of $32 million to $38 million, which would represent year-over-year growth of between 30% and 55% and continued annual cash generation that will support additional balance sheet flexibility as we look towards addressing the February 2018 notes. In order to achieve our adjusted EBITDA range, we expect gross margins to be flat at the low end to a 100 basis point improvement at the high end of our revenue outlook, with fluctuations on a quarterly basis due to revenue levels.

Josh mentioned we are implementing several improvement processes to cost of goods sold. These initiatives will commence in FY17 with payback beginning in 2018. However, the one-time investments in 2017 are a contributing factor to margin expansion being fairly modest. We will start to see these cost reductions initiatives flow through the P&L in FY18.

Again, operating expense control will be emphasized with operating expense levels flat with FY16, or approximately $164 million. We continue to invest in areas that provide the largest return to our customers and shareholders, which we believe is to focus our spending on R&D and sales and marketing efforts. R&D will continue to be approximately 12% to 14% of sales and sales and marketing will maintain their 14% to 15% levels.

Turning to backlog and gross orders, we anticipate growth of approximately 5% for FY17. As with revenue, orders are weighted toward the back half of the year, with 60% of gross orders expected to occur in the second half of FY17. The timing of gross orders in 2017 is primarily due to the timing of full Radixact launch and the recent Onrad approval in China. Both of these opportunities, while instrumental to our growth, are expected to have primarily a second-half impact. As with revenue, we expect a linear progression throughout the year with orders, with Q1 being the low mark and Q4 being the high mark.

In addition, age outs for the first quarter of 2017 are expected to approximate, on a dollar basis, the level of age outs in the fourth quarter of 2016, which were approximately $12 million. On a full-year basis, we expect to see a year-over-year improvement in age outs and cancellations as a percentage of average backlog. However, as experienced in 2016, age outs can exhibit significant variability on a quarterly basis and this will continue.

Before I turn the call back to Josh, I would like to mention a few of our upcoming investor relations events. On September 1 we will be attending the Pareto Healthcare seminar in Stockholm. On September 8 we will be at the Goldman Sachs European Medtech and Healthcare Services conference in London. On September 14 we will be at the Morgan Stanley healthcare conference in New York and in late September we will be attending the ASTRO conference in Boston. We are scheduling one-on-one meetings with investors during ASTRO and invite you to contact Doug if you would like to set up a meeting.

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

Thanks, Kevin. Before we open up the call to your questions, I would like to thank the entire Accuray team for their focus, dedication, and execution during our fourth quarter as well as to the beginning of our FY17 year. Together we are building lasting value and increasing returns for our shareholders. We look forward to sharing those accomplishments as we report on our progress during the upcoming fiscal year.

Now we're ready for questions.

(Operator Instructions)

Anthony Petrone, Jefferies.

Thanks and good afternoon. Josh, maybe I'll kick off a little bit with guidance for 2017 and in particular, gross orders of 5%. I guess there's a few moving parts this year vis-a-vis prior years in that we have Radixact coming in, Onrad in China and then there's the base underlying business.

In looking at those three buckets I'm looking for a little bit more detail on those three moving parts. What specifically is in there for the full year for Onrad as well as Radixact and then also what is contemplated for the underlying business? I have a couple of follow-ups after.

Let me just take them in the order that you presented them.

Let me start with Radixact. As we talked about in the prepared remarks, Radixact is a new platform. It's got a number of newly designed subsystems.

We're going to be basically rolling out essentially a defined reference site program that will encompass both geographically US and Europe where we're going to basically monitor the performance of those systems to ensure that we understand how they are going to perform, to make sure our service and installation teams have the right level of training and hands-on experience in terms of minimizing customer disruption. We expect just based on timing there to move to full commercial launch sometime during Q3 of this fiscal year.

Radixact is -- there really won't be a full commercial launch of Radixact until we get to Q3, so it is second half in focus. I can tell you that we have the first site installed and so far all of the parameters we're monitoring are meeting or exceeding all our internal performance expectations. That is the Radixact discussion.

Onrad is also a later in FY17 developing situation. We are excited about the approval. We've been talking about it for some time now.

It's basically the first step in a multi-step commercialization process for that product. Given that target account profile that we're contemplating for that product, it's likely that much of the selling activity will still be dependent upon province-level or provincially driven public tender processes driving much of the selling process. As a result, we're assuming that essentially the bulk of the Onrad activity in 2017 begins to impact order flow in the second half of the year.

We do not expect a lot of book-and-bill activity with Onrad. It really is more of second-half order impact, not revenue impact. We estimate that the first of these orders probably should start to become visible in fiscal Q3.

The underlying business trends, we had a very, very good quarter in Q4 with CyberKnife.

It sequentially showed nice growth over Q3. That product is certainly -- can amount to what we're thinking about and strategy around replacement sales activity. We were actually at the upper end of the range in what we've been communicating around replacement sales activity in that 10% to 20% range.

CyberKnife sales in Q4 had a lot to do with that. But while there are opportunities here in terms of new product introductions, because we're looking at later in the year full commercialization of these products, the order outlook and the guidance really reflects the timing of the rollout.

That's all very helpful and maybe my two quick follow ups would be as you look to 2017, you have conveyed earlier on prior calls and at the Analyst Day just the opportunity for the replacement of the Company's own install base. For 2017, how significant will that replacement opportunity be? How many systems do you think are actually going to turn over?

The last one for Kevin would just be on margins. I was just surprised to see product margins higher this quarter and then service margins drop off. As we look forward, should that normalize and reverse a little bit through 2017?

Thanks for taking my questions.

I'll take both of them, actually. Our guidance for next year on replacements is fairly consistent with the percentages we just witnessed in 2016 which ranging anywhere from 10% to 20% on a quarterly basis.

I would also advise you to not look at that metric quarterly. As you know with small volumes it can fluctuate pretty significantly. I think it's safe to say modeling those out at 10% to 20% of FY17 orders is a nice range.

In regard to margins, as I mentioned in my prepared remarks, the single biggest factor in regards to product margin fluctuation is really mix and what we saw in the fourth quarter was higher-margin deals, particularly in our European region going to revenue. That channel mix really is the most significant factor in regards to quarter-to-quarter fluctuations. That is the answer on the product margin side.

Turning to service, our service margins this quarter were slightly lower than we have experienced for the full fiscal year. I highlighted about $2 million in one-time expenses primarily related to some employee severance-related cost. Also we had some the significant one-time expensive part costs. That contributed about $2 million.

If you add that back to the fourth quarter, you will see that you get back pretty quickly to the 36% run rate. That is the explanation on Q4. Looking forward to 2015, to finish out your question, I had cited that we are going have fairly modest expansion in 2016, probably 100 basis points at the high end of revenue as we're making some significant one-time expenses in our margin line to benefit years out past 2017.

What I communicated at our Analyst Day that you referenced is I still think the future goal of 45% overall margins for this business is in that mid-two- to three-year plan we talked about in May.

Tycho Peterson, JPMorgan.

Hello this is Steve Reiman on for Tycho. Maybe to start off, can you give us a little more color on what you're seeing in Japan and the assumptions you've embedded in the 2017 guidance? I know you mentioned you expect that market return to growth.

What is driving that expectation?

Let me be clear on Japan. We've met our expectations and we are pleased with our performance on the order side. The macroeconomic demand in Japan for new radiotherapy systems exists and we had an as-expected year on the order side.

What I cited and it is an approximately a $10 million shortfall this year, is in regards to revenue. And the fact that orders are just taking longer to go from order taking to installation, primarily due to construction delays. What gives us confidence that this is going to occur in 2017 is that those are highly visible deals to us.

We work closely with our distributor. We have end-user visibility as to when construction is going to start. In many instances, it has already started.

That is also a reason, by the way, that visibility while -- why revenue is back-end weighted in 2017. Japan is a big contributing factor to that phenomenon in 2017.

Got it. Sorry if I missed this, but regarding the commercial org and then you've done some reorganization to the key accounts and other realignments, do you feel comfortable where you are from a resourcing standpoint or should we expect some incremental adds particularly as you go through this new product cycle?

I think in Kevin's portion of the prepared remarks, Steve, he talked about the fact that we continue to believe -- we will continue to spend or invest from an expense ratio standpoint on the sales and marketing line at somewhere in that 14% to 15% of sales range. We actually feel good about that level of investment. The two big areas, from a resourcing perspective, that are continuing to get the focus and the energy continue to be sales marketing, the commercial aspects of our business model and the R&D piece in terms of continued innovation.

The answer, the simple answer to the question is we're comfortable with the level of resourcing. It is interesting, I think, to point out that when you look at one of the things that I am really probably more excited about than any other in 2016 was the level of visibility that multisystem orders is getting in our selling cycle. We have more -- we recorded more multisystem sales in the last fiscal year than any time in our history.

It speaks to a lot of the work that we've done with regards to strategic account selling and positioning ourselves with larger groups and integrated delivery networks and health systems. I expect that to continue. The funnel for multisystem sales opportunities is continuing to grow.

I feel good about the forward-looking opportunities that we have in the funnel. As we pointed out, I think in the last quarter the challenge with multisystem orders is given the dollar value of some of those deals and given our size and scale, what happens is a big deal like that, if it moves, if it shifts from quarter one to quarter two, can really swing our results. The good news is we have got more of these opportunities.

The things we're doing from a commercial and strategic account selling standpoint are really having, in my mind, a positive effect on the ramp, if you will, of our multisystem order activity but it will probably mean in certain quarters that we have a little bit more quarter-to-quarter variability when you look at potential -- the potential timing. The selling complexity in those situations is greater. The timelines are greater as a consequence and the quarter-to-quarter variability could, in fact, be greater. But all in, it's a net positive for us because we're generating more of these opportunities than we ever have in the past.

Got it. Appreciate the color.

Brandon Henry, RBC Capital Markets.

Thanks for taking my question. I wanted to touch on revenue guidance. When you look at the backlog it was up 8% year over year in FY16, but guidance assumes only 3% to 5% growth in revenue to FY17.

Can you spend a little -- a minute talking about how you're thinking about revenue growth from each of the regions -- Americans, Europe, Asia-Pacific -- for FY17 versus FY15? I'm just trying to understand where the shortfall is coming from relative to consensus.

Have the delays gotten worse in Japan, has pricing gotten worse? Just help me understand that.

The first thing I'd point out is while our revenue guidance -- you cited the high end of 5%. I had split out in my prepared remarks that our product revenue growth in FY16 is actually going to be 6% to 9%. Our backlog grew 6% in FY16 over FY15.

It's a logical step that our product revenue growth would be 6% to 9% over FY16. However, due the lower low-single-digit service revenue growth, that yield in overall revenue growth of only 5%. I do not think there is any of the larger concerns that you mentioned implicit in our guidance, given product revenue growth at the high end is 9%

In regards to regional breakout, we are expecting a larger contribution from both Europe and our Americas region in 2017 and I would say more modest growth in APAC and Japan.

Okay, and then just a question on China. You mentioned that you received Onrad regulatory approval. Can you talk about the distribution there?

Do you currently have the right distribution in place to sell the product or will you be looking at adding additional distributors for Onrad in the coming quarters? And then just one follow up.

Brandon, the answer is we have the existing distribution that we feel is needed in place today. As I mentioned earlier, the selling cycle with Onrad, again given the fact that it is by account kind of target or profile of the accounts that we are targeting, we will find ourselves in more of a provincially driven contracting or tender process, which is a different set of selling circumstances or environmental circumstances than you would recognize we've had in the Class-A radiotherapy space.

That is the primary driver of why that is a longer developing timeline into 2017 on that end. But on the distribution partner side, we feel good about where we're at and that we're aligned with the right partners with regards to being able to pursue this value set with the market.

Okay. As a follow-up, I think one of your competitors, Varian, has shown very good success with VitalBeam. I think around half of their VitalBeam systems have been sold in the Americas region. How are you thinking about potentially expanding Onrad to other markets outside of China and Japan? Thanks.

At this point, I would say that we do not have plans to expand Onrad outside of China and Japan. We have some other things that we are looking at and working on from a development standpoint.

We think that we have -- if you look at the success that we have had with regards to moving well beyond multi-bunker academic settings for the Tomo line and the visible success we've had in single- and dual-vault settings. We think we've got the product lineup, especially when we think about the longer term with Radixact that we can compete in that US market situation that you inquired about.

(Operator Instructions)

Jason Wittes, Brean Capital.

Thanks for taking the questions. You mentioned in North America that unit volume was up 15% but revenue was down -- was basically flat. Could you give us a little more color there? What you see going on in pricing and in terms of mix, what created the downdraft in mix?

The biggest single factor there is in the Americas region. We are primarily dealing with the replacement market. Those replacement sales are sold at a lower average selling price than a new system.

I would say that is the primary reason, Jason, why on 15% unit volume increase you have relatively flat year-over-year dollars.

Okay, that's helpful. Last couple quarters you've given us an update in terms of where you -- what percentage of the installed base you think you can convert. I think last measure was somewhere in the 70% range. Is that still kind of where you see things falling in terms of your ability to win bids on these replacements?

I would say that, that is still certainly in the range of how we're thinking about it and the level of success that we have seen historically. We are, on a net basis, we are still winning more bunkers than we are giving up. Essentially the replacement sales strategy that we've talked about now for quite some time is working.

We're retaining not just on the competitive take outs, the success on that end, but we're retaining our bunkers at a very high rate. So I'd say 70%, 75% is still in the range of what we would expect.

Okay, and then one quick follow up. For the Radixact, how long do you think this -- it sounds like you are saying six months, but I just want to maybe put a finer point on it. You are installing the reference centers now.

Is it generally a six-month delay in terms of until you start to see orders come through from that? Am I thinking about it right, mechanically, in terms of how the marketplace is going to react to the new product cycle?

I would say that I would think about this in the context of the reference site work taking place in parallel with planning for more of a full commercial launch at ASTRO in Boston at the end of September. We actually are thinking that we will start to see uptake on this in sometime in Q3.

Okay. Got it. Thanks. I will jump back in queue.

Suraj Kalia, Northland Securities.

Good afternoon, gentlemen. Thank you for taking my questions. Josh, I know you don't give out unit sales per se.

Revenues this quarter were slightly softer than our expectations. Can you give us some color in terms of unit pricing on a constant currency basis? I guess what I'm trying to understand is we know Varian and Elekta have been duking it out on price.

One of the things you'll have mentioned in the past is that you guys are concentrated on the university academic centers. Those are relatively priced insensitive, if I can put it in that way. Any color whether there is some pricing dynamics at least on a global basis are coming over to you guys also?

I would say that the pricing dynamics that we see in the current timeframe are more related to the single- and dual-vault settings that are not our historic strength. They are not the typical account profile we've had our historic greatest presence in.

As a consequence, as we indicated in some of our previous conversations, we are making a conscious decision to compete in those bunkers in the face of the other companies and for us on a net basis even at modestly low prices that the net economics for us are a benefit, because we pick up a bunker and we pick up the economics related to the life of the service contract and the profitability on that. Those are really the only pricing dynamics that I'd say are putting any downward pressure.

Just to put the context for the absolute impact there we estimate that it's probably something in the neighborhood of about $5 million on an annual basis. We think, again, the trade-off here on a net/net basis is the right selling strategy for us given the fact that we need to grow our installed base and we need to treat more patients. The only way we can do that is to own more bunkers.

I'm going to add onto that. This is Kevin. We got to be careful not to confuse pricing dynamics between orders and revenue.

In regard to the revenue specifically, it wasn't so much pricing that caused us to be -- you said a slight miss, but within our expectations. That was primarily Japan. I had mentioned I think to Anthony on our first Q&A that we had an approximate $10 million shortfall in revenues in Japan that had nothing to do with pricing but due to timing.

The pricing pressure that we talk about in single and dual vaults in $5 million is primarily on the order front; while on the revenue front it is not so much pricing dynamics but more just, frankly, end-customer timing of installations.

I get that. I appreciate the clarity. All I was saying is the quarter, it was surprising. The top line usually has never been an area of concern. It's always the dance on gross orders, but I get your point.

Josh, on -- how do you all see some of these site-specific payment changes for FY17, primarily on [hops] and the MPFS side, the physicians schedule side. Are you relatively insulated, or how do you all think through that especially as you factor in your North America guidance? Thank you for taking my questions.

As we've said the past, we do not have a lot of exposure in free-standing centers. Our -- the bulk of our business has been and continues to be hospital outpatient departments. That is point number one.

Point number two, is we do not see -- when we think about macro drivers, quite frankly, at this point in the US market or North America, we do not see reimbursement, quite frankly, in FY17 as a negative impact. CMS reimbursement does not look like a negative situation for us. There were no major changes in payment rates from IMRT or 3-D delivery codes.

Stereotactic radiosurgery and SBRT codes were also not materially impacted. When you take those things into account we do not see that being a big downside.

I think the other point I would make is more of the conversations we're having with customers who are considering new technology are situations where they are looking at devices that have a higher level of clinical capability which is really in sync with the broader clinical trends of full-body stereotactic body radiotherapy, stereotactic radiosurgery and the general trends towards hypo-fractionated treatments, where we think, quite frankly, our portfolio is in the sweet spot of directionally where the clinical trends are headed. I do not see this as a big concern or a looming negative in any way.

At this time I'm showing no further questions or comments. With that said, I'd like to turn the conference back over to Management for closing remarks.

Thank you, operator. I would like to thank everyone for their participation this afternoon. We're looking forward to talking with many of you during our upcoming investor conference [tenets] and at ASTRO in late September in Boston. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a wonderful day.