Good day, and welcome to the Accuray Second Quarter Fiscal 2023 Financial Results. Please note, this event is being recorded. I would now like to turn the conference over to Jesse Chew, Senior Vice President, General Counsel and Corporate Secretary.

Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the second quarter of fiscal year 2023, which ended December 31, 2022. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are set forth in the press release we issued just 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 at today's date, and we assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to 2 questions and then requeue with any follow-ups. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2022. Additionally, there will be a supplemental slide deck to accompany this call, which can be accessed by going directly to Accuray's Investor page at investors.accuray.com. With that, let me turn the call over to Accuray's Chief Executive Officer, Suzanne Winter.

Thank you, Jesse. Good afternoon, and thank you for joining the call. I am very pleased with our excellent performance in the second quarter and our position going into the second half of the fiscal year. During the quarter, we delivered strong revenue and EBITDA performance, achieved a robust book of orders across all regions, and made significant progress on our strategic agenda focused on driving above-market revenue, margin expansion, profitability initiatives, and forming strategic partnerships that create value for all stakeholders. We are accomplishing this while managing persistent macroeconomic and foreign exchange challenges, which Ali will discuss later. I want to express my gratitude to the Accuray team for their remarkable performance. Although we have seen improvements in the supply chain environment over the past year, our teams continue to tackle challenges daily, driven by our commitment to ensure that our customers have access to the highest precision radiotherapy tools for advanced cancer care. Over the past year, we have taken steps to enhance the flexibility of our supply chain and customer-facing teams to meet new demand while maintaining smooth operations and customer satisfaction. These initiatives have positioned Accuray to better manage ongoing challenges, with our teams performing exceptionally well. I am particularly proud of a couple of key accomplishments this quarter. First, we achieved record system shipments in the second quarter, delivering 29 new systems, a historical milestone for the company. Second, we were recognized by the 2022 IMV ServiceTrak report for achieving the best service in radiation oncology based on an annual survey of U.S. radiation oncology professionals. These achievements highlight the talent, agility, and dedication of our global Accuray team. We continue to progress in our innovation-driven growth strategy, and our product pipeline is the strongest in the company’s history as we focus on solving clinical challenges and enhancing our portfolio's value. I am pleased with our Q2 orders performance, which included 34 new systems representing 13% sequential dollar growth. This reflects growing customer demand for Accuray solutions and the positive impact of our commercial initiatives. We believe these factors will enable Accuray's revenue growth to outpace our addressable market for FY '23 and beyond. In the Americas region, we delivered another outstanding quarter with 92% year-over-year growth driven by the adoption of our latest innovations, ClearRT and Synchrony, which are differentiating our offerings and driving win rates. In the U.S. during Q2, 100% of Radixact orders included options for ClearRT and Synchrony, up from 80% in Q1. In Japan, Accuray has gained the #2 market share position, and we continued strong competitive win rates in Q2, with nearly 50% of orders being replacements of competitors’ older systems. Our Japan team also won a public tender for 7 Radixact systems in a competitive process against the market leader. In the EIMEA region, we achieved strategic wins including a competitive replacement of Radixact in Belgium. Additionally, we won a second CyberKnife system at the prestigious Euro Radiosurgery Center in Munich, where Dr. Alexander Muacevic, the Director, stated his belief that CyberKnife is the leading technology for delivering radiosurgery. In China, our joint venture remains a significant long-term value driver for Accuray, and we hold over 75% market share in the premier Type A radiotherapy market. We also progressed with our NMPA regulatory submission of Tomo C, our domestic product for the Type B segment, which is the largest in China with an estimated annual potential of $600 million. We anticipate that Accuray's strong brand reputation in Type A will help Tomo C succeed in the Type B market. Furthermore, we believe our success with Tomo C in China will have global potential as we expand into new geographies with value segment products. In November, the Ministry of Health resumed the central bidding process for Type A licenses after COVID-19-related delays, awarding 18 Accuray systems expected to convert into revenue in the coming quarters. Even with COVID lockdown challenges in China, demand for radiotherapy systems and training remains strong, evident from our recent Users’ meeting where over 100 participants attended in person and 850 participated online. As we accelerate top-line growth, we are equally focused on profitability. We made solid progress on margin expansion plans and noted early indicators of a positive impact on service margins in Q2, where we see great potential. Our leadership team focuses on pricing discipline in our commercial strategies, reducing product and service costs, and optimizing operating expenses, which will significantly impact our mid-term results. Finally, establishing strategic partnerships is vital for our growth, enabling us to offer best-in-class solutions. In Q2, we advanced key partnerships, including one with C-RAD for a comprehensive breast package, and RaySearch for treatment planning and adaptive radiotherapy solutions that differentiate Accuray in the market. We are excited about our commercial partnership with GE Healthcare, aligning two technology leaders to provide personalized ultraprecision solutions throughout the care continuum. Our commercial teams are actively engaged, leveraging our strengths to develop a customer pipeline. We believe this partnership will drive substantial value for patients, providers, and shareholders. I will now turn it over to Ali to discuss our financial performance.

Thank you, Suzanne, and good afternoon, everyone. I'd like to begin by thanking our global cross-functional team, who executed with intensity to deliver a strong second quarter of fiscal 2023 despite ongoing macroeconomic challenges, including supply chain shortages, global inflationary pressure and foreign exchange headwinds in our non-U.S. markets. Net revenue for the second quarter was $114.8 million, which was down 1% compared to the prior fiscal year, primarily due to supply chain constraints and $6.1 million of foreign exchange headwind. Net revenue on a constant currency basis was $120.9 million, which represents a 4% increase versus the same period in the prior fiscal year. Product revenue for the second quarter was $63.3 million, which was up 4% from the prior year and up 8% after adjusting for the impact of foreign exchange. As Suzanne mentioned, this product revenue represented 29 systems upgrades, which is a record number of system shipments in the company's history. It's important to note that this was achieved while continuing to navigate unprecedented supply chain issues, which really speaks to the hard work of our cross-functional teams. Service revenue for the quarter was $51.5 million, which was down 7% from the prior year, but flat once adjusted for the negative impact of foreign exchange, which was $4.1 million. Gross orders for the second quarter were $79 million, which is an increase of 13% sequentially and a decrease of 7% from the same period in the prior fiscal year and represented a healthy book-to-bill ratio of over 1.2. As mentioned in prior calls, we believe the book-to-bill ratio is the right metric to monitor to ensure healthy growth for our backlog and to focus our teams to book orders that will convert to revenue within 30 months. Gross orders on a constant currency basis were $82.6 million. Moving to backlog. We ended the second quarter with a backlog of approximately $550 million, which is 11.4% lower than prior year due to $41.4 million of orders that aged beyond 30 months within the quarter, mainly driven by customer installation timelines. We had no order cancellations within the quarter. As discussed in prior quarters, our global commercial teams continued to be focused on converting all orders regardless of age to revenue. In Q2, this resulted in $6.5 million of orders converting to revenue within the quarter that had previously aged out. Our overall gross margin for the quarter was 37.4% compared to 36.7% in the prior year, which is an increase of 70 basis points despite the foreign exchange headwinds. This showcases our focus on margin expansion through pricing and cost discipline is starting to take shape. Operating expenses in the second quarter were $40.3 million, which included nonrecurring charges of $1.9 million for restructuring charges and $0.5 million of ERP and ERP-related expenditures compared to $38.6 million in the second quarter of the prior fiscal year. Excluding nonrecurring charges, total operating expenses were down 2% compared to the same period in the prior year, illustrating good cost control as we continued to push our teams to focus on return on investment. Operating income for the quarter was $2.7 million compared to $4.0 million from the prior year. Adjusted EBITDA for the quarter was $8.5 million compared to $6.8 million in the prior year, which represents a 24% growth year-over-year despite the foreign exchange headwinds, which impacted our top line by $6.1 million. The reconciliation between GAAP net income and adjusted EBITDA is described in our earnings release issued today. Turning to the balance sheet. Total cash, cash equivalents and short-term restricted cash amounted to $68 million compared to $81 million at the end of the last quarter. Net accounts receivable were $89 million, up $12 million from last quarter as we had quite a few shipments in the last month of the quarter. Our net inventory balance was $156 million, up $3 million from the prior quarter, primarily due to 3 units in finished goods which we expect to ship out to customer sites in early Q3. Although we continue to battle supply chain constraints, we are taking firm actions to bring our inventory back to healthier levels in the coming quarters to optimize our cash and working capital. While we delivered strong results in Q2 and continue to navigate through supply chain constraints, the headwinds associated with foreign exchange have had a $12 million impact on our top line in the first half of fiscal 2023. Currently, we are reiterating our full year guidance with revenue in the range of $447 million to $455 million and EBITDA target range of $26 million to $30 million. We will continue to closely monitor the impact of foreign exchange and supply chain as we enter the second half of our fiscal year. Those are our key financial highlights. And with that, I'd like to hand the call back to Suzanne.

Thank you, Ali. In summary, I'd like to again thank our teams for their unwavering support of our customers so they can provide the highest level of care to patients. While we expect to continue to navigate the uncertainty of the macroeconomic conditions we've seen over the last year, we remain encouraged by continued customer demand for Accuray technologies and our robust product pipeline as well as market trends that favor Accuray technology and where we are positioned to win and take share. As an organization, we are strengthening our fundamentals, advancing multiple growth catalysts, and creating new strategic partnerships. I will now turn it back over to the operator for Q&A.

Our first question comes from Marie Thibault with BTIG.

Congrats on a very nice quarter. I wanted to start here and try to understand a little bit more about what drove that record product revenue, the record shipments that you mentioned in the quarter. Was this a bit of a backlog that had been building up in some geographies? What really drove kind of the strength in that metric this quarter?

Yes, I would say our revenue was really driven by 2 regions: the EIMEA region as well as the Japan region. But we did start to see some recovery in China as well. And so again, really working through our supply chain to be able to manufacture as much product as possible and be able to fulfill that demand. Our customer demand continues to be very, very strong. And again, working through our supply chain to make sure that we can fulfill demand is at the top of our priority list.

Okay. That's great. And while we're talking about supply chain challenges, I know you're navigating quite well right now. But what are the specific components or issues you're dealing with there? And I guess, as a partial follow-up on China, are you expecting any impact in the fiscal third quarter from sort of the reopening, the Lunar New Year, any of the COVID dynamics around that quarter?

Yes, overall, from a supply chain perspective, we have seen some improvements over the past year. We've reduced the number of supply chain vendor issues from more than two dozen to less than half a dozen. While these remaining challenges are significant, we are closely collaborating with our suppliers, managing operations closely, assisting in material sourcing, and enhancing flexibility in our supply chain. We are also redesigning processes as necessary. Despite these efforts, it remains a challenge that we face daily. Regarding China, we are observing some recovery since the easing of COVID restrictions. Our orders have been strong in the first half, which is a positive sign that things are starting to improve in China. We anticipate continued recovery in the second half of the year.

Our next question comes from Josh Jennings with Cowen.

I wanted to just start off and ask about the Americas order growth, the big performance for that region. And wanted to just get a reminder or better understand the strategic initiatives that are in place to kind of drive growth of orders in the Americas region. I know you have the technology portfolio that's in play, but any other strategic initiatives that were successful and that could continue through the remainder of fiscal '23 and beyond?

The Americas region is obviously the largest health care market globally. We have doubled down in terms of our investment in commercial organization and initiatives. One of the big growth catalysts is the very large replacement market. This is largely a replacement market. In the U.S., it's a mature market. We have an older aged installed base. I would say our sales teams are firmly focused on ensuring customer satisfaction within that installed base, but also encouraging, upgrading those systems through trade-in, trade-up to our latest performance capabilities so that they can start to provide advanced care like ultra-hypofractionation, and in CyberKnife, radiosurgical capabilities. So we do expect to continue to see the return on those investments and that focus.

I wanted to ask about the Type A wins in China and the revenue conversion cycle associated with that. It seems like there's a significant revenue opportunity in the latter half of this year and early fiscal '24. Could you provide more details on the November bidding process? Additionally, within the Type A award channel, what should we expect next? Are there more rounds coming up, and is there further opportunity for Accuray?

Yes, we were very encouraged to see the bidding. The central bidding process resumed after a delay during COVID, which is a positive sign of recovery in China. This bidding process is essential for securing funding for the systems and starting the installation. For us, it is very strategic as it presents an opportunity to place 18 additional systems in the China market, contributing to a critical mass of premier systems at top institutions. This, we believe, will enhance Accuray's branding in that region. We anticipate that there will be more central bidding processes throughout the year, although we currently lack visibility on the timing. Additionally, a new five-year plan will be announced, which should provide better insights into the market sizes for Type A and Type B.

If I could just sneak one more in while we're on China, it seems like everything you shared today about the progress with the regulatory submission and some of the completion of production and testing at the manufacturing facility indicates that things are on track. Should we still be considering a fiscal '24 timeline for approval and launch? Perhaps you could provide an update on any timelines related to the Tomo C through the joint venture in China?

Yes, I don’t have any new information beyond what we've previously discussed. A typical regulatory cycle takes about 12 months, and while we can’t predict it precisely, if we assume that it follows the usual timeline, we still anticipate a potential impact in the second half of fiscal year 2024 from the approval of the Tomo C product.

Our next question comes from Neil Chatterji with B. Riley.

Congrats on a strong quarter. Maybe just first off, you talked about the Munich Center adding the second CyberKnife. Just curious if you could just remind us how often you see that dynamic of centers adding multiple iterate systems.

Yes, that's a great question. I think we're seeing it more and more. We're also seeing centers that are starting to get the combination of a CyberKnife and a Radixact. And I think that, that is a commercial strategy that our teams are showing how our sites can really build up their patient referrals, how they can build their business by having this combination of a radiosurgery system and the CyberKnife, but also a workhorse system like the Radixact. So I think we're going to continue to see it more and more. But we're absolutely thrilled with the center in Munich, primarily because they're very well known for radiosurgery. The first system was really bought for intracranial type of applications, and he is buying the second system now for more extra cranial, more full body SBRT type of applications. And so again, we think it's a strong endorsement and a site that we can use for strategic reference.

Great, great. Maybe just one follow up here. Regarding kind of the customer installation delays or the age outs, just curious if there's any updated insight on the construction environment, whether that's related to any worker shortages or supply issues? Just any update there?

Yes, that’s an excellent question. The aging out is primarily due to systems in our backlog from Russia that have become outdated, which are still orders we hope will go to installation. However, due to the current circumstances, they have aged out. Additionally, COVID has generally affected the timeframes of some of our backlog. We are focused on new orders and assessing them based on whether we believe they will be installed within 30 months to avoid this situation. Overall, we aren’t noticing an increase in installation times, and it varies by region. There is substantial research on capital equipment spending, highlighting a couple of key catalysts. Radiation oncology generates revenue for hospitals, making it a priority for capital spending. It also represents a strategic service line, particularly in oncology, which is a crucial area of care. Furthermore, there is a significant opportunity in the replacement market, and the age of existing equipment is a major factor in prioritizing capital equipment funding. We believe this will influence the allocation of installation funds that are required.

Our next question comes from Brooks O'Neil with Lake Street Capital Markets.

Congratulations on what I think is a terrific quarter under the circumstances. I am pleased to hear you talk about competitive wins, Suzanne. I wonder if you could elaborate a little on what you think the dynamics are that are leading to these wins. I'm not expecting you to mention specific competitors, but it would be great if you could highlight what you believe is contributing to your successes compared to established players.

Yes. No, we're excited, I think, about our competitive wins. I think, obviously, a lot of it is driven by our new product innovations. We talked a little bit on the - in the basic - this part of the call on how many systems are ordering ClearRT, for example, and Synchrony and VOLO Ultra as well. That is driving a lot of the differentiation of our products compared to competition. And I think that, that's gaining traction. We're seeing the increase in growing demand for our products. Same thing for the CyberKnife. It continues to be a very unique product that just based on the technology is able to do things that other platforms are not able to do. That being said, I think there's disruption in the competitive landscape that is allowing us to get the second look that maybe we wouldn't have gotten 5 years ago. And we are in a very strong position. And I think that with the growing use of SBRT and ultra-hypofractionation, the need for precision has never been more important. And we bring unique product innovation to the table that others cannot. So all of those things, I think, are just helping us, along with commercial focus and a little bit more of a commercial swagger, I think, in knowing that we can win against previous market leaders.

Yes. That's fantastic. So my second question. I know you talked a little bit about it in the prepared remarks, but increasing your service revenue and driving margin improvement are key strategic objectives. Can you just give us any additional color on where you feel you are, how fast we might be able to see progress in some of the key priorities?

Yes, it's absolutely a key priority. We also think we have tremendous opportunity in the service business as well as margin expansion. I'll let Ali talk a little bit more about what we're doing in those areas.

Yes, absolutely. On the service side, we believe there is a significant opportunity to continue to boost revenue in our annuity business through enhanced offerings that are better tailored to our customers' needs. Furthermore, the larger opportunity in service goes beyond just revenue growth; it involves improving margins. Our focus is on optimizing the business and addressing two major cost drivers: parts consumption and utilization. We need to analyze our parts consumption more closely, identify which parts we use frequently, and work on optimizing those. Additionally, we aim to reduce utilization costs.

Our next question comes from Jason Wittes with Loop Capital.

First off, 2 things in terms of what's driving this quarter, and it looks like it should drive through the rest of the year. One, I think you guys have mentioned replacement cycle or replacements at least. I mean where are we in terms of a replacement cycle? And I don't know if you can even give us any kind of color in terms of how many of the systems sold regionally were replacements? And then secondly, you do have quite a bit of new innovations you're offering at this point. Can you give us any kind of indication in terms of what the take rate is for those and what that might be doing to ASPs?

Yes, I'll start and then let Ali address the ASP question. In our mature markets, such as the U.S., Western Europe, and Japan, we are primarily dealing with a replacement market. The focus for our teams is on upgrading our older installed base to the latest performance standards. During COVID, the average lifespan of systems increased from 10 years to approximately 12 to 12.5 years. This trend creates a growing demand and acts as a catalyst for us to encourage customers to transition to the latest version. Our new product introductions and clinical trends are also supporting this effort, leading to increased value and higher pricing. Now, I'll let Ali share more insights on that.

Yes, to emphasize Suzanne's point, most of the trade-in and trade-up activities are occurring in our mature markets. Regarding your pricing question, this is a key part of our margin expansion strategy. Pricing is fundamental to this initiative, and we have made significant adjustments commercially. Firstly, we have aligned our commercial team's incentives to help us achieve profitability targets for new incoming orders. Additionally, we have equipped them with tools to optimize configurations for customers, ensuring we meet their needs while also maximizing our margins. These two factors together are driving our focus not only on increasing order volume but also on securing profitable orders. We are starting to see positive signs of this reflected in our overall average selling price quarter-over-quarter, which is encouraging. This all contributes to our backlog filled with healthy orders, and we are concentrating on turning those orders into revenue.

That's helpful. As a quick follow-up, aside from China, I wouldn't say we're in a post-COVID environment, but we have been speaking with hospitals, and many of them are indicating that they have held back over the past three years and are now starting to reinvest, particularly in some capital equipment products. Is this in line with your observations regarding the situation, especially in mature markets?

Yes, I believe it's largely influenced by the specific institution. A significant factor is the age of their equipment, as this seems to motivate some institutions to upgrade. Based on research conducted in this area, which surveyed top executives in capital equipment, about one-third have already observed some easing in capital equipment. The majority, however, feel that by the second half of 2023 and into 2024, we should return to pre-COVID levels.

This concludes our question-and-answer session. I would like to turn the conference over to Suzanne Winter for any closing remarks.

Thank you very much. And this concludes our earnings call. We are looking forward to speaking with you all again in April for our fiscal year 2023 third quarter earnings release. Thanks for joining us.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.