Good afternoon, and welcome to the Accuray conference call to review financial results for the third quarter of fiscal year 2024 which ended March 31 of 2024. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Jesse Chew. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the third quarter of fiscal year 2024, which ended December 31, 2024. 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 outlined in the press release we issued just after the market close this afternoon as well as in our filings with the Securities and Exchange Commission. We base the forward-looking statements on this call on the information available to us as of today's date. 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 two questions and then re-queue with any follow-ups. Second, all references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended March 31, 2024. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations 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 all for joining the call. Let me start by saying that we are disappointed with our quarterly results and have faced near-term challenges here in the second half of our fiscal year that were greater than anticipated, impacting our near-term results and outlook. However, we are confident that we remain on track to achieve the goals that we laid out at our fall 2023 Investor Day, which includes 4% to 6% revenue CAGR and doubling our adjusted EBITDA by the end of fiscal year 2026. Fiscal 2024 remains an important year for our company as we are making a substantial entrance into some of the fastest-growing markets in radiation oncology, introducing advanced capabilities and investing in a sustainable infrastructure to grow our service business, all of which we believe will contribute to revenue and adjusted EBITDA growth over the next few years. The quarter did not play out as expected due to a few key factors. First, we had expected to ship three additional systems this quarter, which were pushed to Q4, impacting both our top line and adjusted EBITDA. Additionally, in the U.S., one of our largest and highest margin markets, we saw a substantial slowdown due to longer capital equipment budget cycles. We had expected the region to ramp in the second half of the fiscal year, but it has become much more evident that there is a broader weakness in capital equipment budgets in 2024. We believe these reduced budgets and lower capital deployment priority for radiotherapy equipment have both contributed to slow demand in the near term. Finally, while pleased to have received regulatory approval to market the Tomo C equipment in China, we still await approval for the precision treatment planning system used with the Tomo C. As previously discussed, the regulatory submission for the Tomo C system was a separate submission from the precision treatment planning system. This was by design to provide the quickest go-to-market strategy for the system, allowing us to take orders and build our order backlog. Furthermore, we strategically separated the regulatory submissions so we could gain a separate and accurate owned license approval for the precision treatment planning system, which gives us greater optionality within the China market in the future. As a reminder, we cannot report our full margins on the Tomo C shipments until we receive this approval, allowing our joint venture to ship systems to the end-user customers. This represents the final step to execute our full market launch, including installation at customer sites. Despite these headwinds, we expect to retrieve these revenues and associated adjusted EBITDA in the coming quarters, which will set us up for a return to growth above the overall addressable market in FY '25 and on track with a three-year plan we communicated at our Investor Day. Going deeper into our U.S. business, we believe this is mainly a timing issue and not a reflection of underlying demand. We expect the potential for strong replacement of the aged installed base will continue to drive demand. The age of many units has exceeded recommended guidelines and are nearing the end of parts availability for service and support. As we mentioned in the last earnings call, we saw longer customer installation timelines in the U.S. during Q2, and this has continued in Q3, where we saw installation cycles and backlog conversion continuing to take longer to materialize than originally anticipated. This impacted both product and, to a lesser extent, service revenue in the U.S. To understand this in greater depth, we surveyed our U.S. customers to validate the slowdown in installation and capital equipment purchasing activity. Further, a leading Wall Street analyst published a research report in March, which surveyed U.S. hospital administrators on capital equipment priorities, which also supports our observations. Some of these include spending for radiotherapy, which was rated lower on the priority list in calendar year 2023, with gradual improvement expected in 2024. Many customers that were allocated capital budgets were required to resubmit for additional capital due to higher costs. Finally, this market dynamic is expected to improve with gradual recovery entering our fiscal year 2025 through fiscal year 2026, when capital equipment budgets are expected to increase and radiotherapy is reprioritized. Despite these challenges, we believe that we will deliver the best fourth quarter in the company's history from a revenue perspective, and given that we are in a long-cycle capital equipment business where a shift in product volume from one quarter to the next can have a sizable impact on a result. We think it makes sense to look at our business both for the quarter and on a trailing 12-month basis to showcase the longer-term performance, which Ali and I will start to share moving forward. I am very encouraged by the 21% global order growth in Q3, which is 8% growth on a trailing 12-month basis, as well as the book-to-bill ratio of 1.8 for the quarter, both of which are strong leading indicators for the future growth of our business. Orders represent a strong signal that customers are adopting our product innovations and growing at a rate that is faster than the market, which we expect will ultimately translate into share gain and positive impact on revenue, margin, and adjusted EBITDA into the future. Another key performance metric is the growth of our global installed base. Our installed base grew 4% year-over-year, and service contract revenue grew 2% year-over-year and 4% on a trailing 12-month basis. Install base growth means that in addition to upgrading our existing install base, we are adding 4% net new customers into the Accuray base, which we expect will further drive growth and service contract revenue over a 10 to 12-year period following the one-year warranty period. Reflecting on our regional performance, I am very pleased with the strength of the EIMEA region, which is our largest region and a strategic focus for the company, with growth driven from fast-growing emerging markets, which is a key part of our strategy to drive patient access. EIMEA grew 5% in revenue and 29% in orders on a trailing 12-month basis. We expect the EIMEA region to end the fiscal year with double-digit revenue and order growth year-over-year and gain market share in key sub-regions. APAC is fast becoming our second-largest region, with 7% revenue growth and 14% order growth on a trailing 12-month basis. Once we obtain the final step in regulatory approval for the Precision Treatment Planning System for the Tomo C, which we expect to obtain by our fourth fiscal year-end, we will unlock deferred revenue and margin and unleash our China team to deliver pent-up installation demand and drive market traction. The Japan region, where we are number two in market share, saw 60% of our Q3 total orders come from replacing competitive systems. The region was down 11% on revenue and 8% on orders on a trailing 12-month basis, primarily due to the impact of unfavorable effects. Japan continues to be a highly profitable region for Accuray, but we are taking additional commercial actions here, including increased pricing and enhanced offerings to help offset the negative impact of FX, which is expected to be realized over time. Finally, as I mentioned earlier, the U.S. performed at a slower pace than we expected in Q3. The Americas region Q3 revenue was down 38% year-over-year and down 15% on a trailing 12-month basis. We expect the region to gradually recover, but be down in Q4 and for the full fiscal year. Orders were up 7% for the quarter, but down 19% on a trailing 12-month basis. Our strategy in the U.S. during this time, where it is extremely challenging for our customers, is not to retreat, as we expect from other industry players, but instead to get even closer to our U.S. customers by offering enhanced solutions, including flexible financing, increased user engagement activities to improve satisfaction, flexing our commercial partnerships, and increasing our field support. Cancer care continues to be a top profit driver for hospitals, and while capital allocation is tight and shifting forward, we remain committed to being the valued radiotherapy partner now and in the future. Our focus will be on building our backlog of orders so that when capital equipment conditions improve, we will be well positioned to take share within this important region. Other key highlights for the company include the inauguration of our new training center, the Accuray Innovation and Partnership Hub, located in Genolier, Switzerland. This new facility is the most recent addition to the Accuray network of training centers, with other locations in the U.S. and Japan, as well as China through our joint venture. These sites are located strategically around the world to make it easier for medical care teams to obtain state-of-the-art clinical education. We expect our investment in these global training centers to generate new training revenue that will contribute to growth and service in the coming quarters. In addition, furthering our strategic pillar of advancing patient access into under-penetrated high-growth countries, the full introduction of the Tomo C in the China Type B market is an important milestone for the company. We recently showcased both the Tomo C and the CyberKnife Systems at the China Medical Equipment Fair Meeting, the largest Medical Equipment Expo held in Shanghai, China, with over 300,000 participants. We also continue early market launch efforts for Helix, our non-China access product, first in India, where we are awaiting regulatory approval for the full market launch, which is expected by the calendar year-end 2024. As part of our margin expansion strategy, we also announced today that we are entering into a collaboration agreement with IUCT-Oncopole in Toulouse, France, and Airbus, a leader in the aerospace industry, to develop an artificial intelligence-driven solution for predicting radiotherapy system performance. We will collaborate to develop a failure prediction methodology, which will allow us to monitor component-level performance to predict and proactively address system issues. We expect that this will translate into a better patient experience and reduced operating costs, and further strengthen service margins by reducing parts consumption. Finally, at the end of this week, we will head to ESTRO, the European Society of Radiation Ecology's Annual Meeting. This year's ESTRO Meeting is particularly meaningful as we recognize and celebrate 30 years of collaborating with healthcare professionals and industry partners to develop groundbreaking technologies that expand the application of radiation therapy and access to patients who may benefit from care. Highlights from ESTRO will include CyberComm, a new physics service solution offering intended to substantially reduce the CyberKnife S7 system's commissioning time and enable customers to begin treating patients significantly faster. Cenos, a work in progress designed to provide customers with the ability to perform online adaptation of their treatment plan to account for changes that may occur between treatment sessions. In addition to demonstrating product innovation, we also believe that driving clinical innovation is an important pillar in our strategy to advance care. At this year's ESTRO, we will drive thought leadership with a symposium, led by an elite panel of key opinion leaders on the use of stereotactic radiosurgery and SBRT treatments where Accuray precision technology is well positioned to deliver. In summary, while we are disappointed with the Q3 results, we understand the current challenges. I remain confident in our long-term strategy and the value of our differentiated solutions. In the near term, we expect to fuel the success of our strongest growing regions, where we will continue to grow and increase share as we look for signals of improvement in U.S. conditions. We have meaningful growth drivers in both product and services, and we believe the strength of our innovation pipeline, investment in new service solutions, expected near-term regulatory clearances, and the continued focus on margin expansion and improving our balance sheet will position us well for substantial growth and increasing profitability.

Thank you, Suzanne, and good afternoon, everyone. While the third quarter posted macro challenges, most notably with the slowdown of the U.S. market and foreign exchange headwinds with the yen, we remain confident in the long-term strategy we laid out during our Investor Day last fall. We are proud of our global cost functional teams to continue to execute on our strategy, despite these headwinds and are grateful for their commitment and dedication to our mission. Turning to the financials, product growth orders for the third quarter were approximately $89 million, which is a 21% increase versus the prior year, and 23% when adjusted for the impact of foreign exchange and represents a book-to-bill ratio of 1.8 million. This strong orders performance was driven by our EIMEA region, which had a 76% growth in our non-China APAC region, which had growth of 123% versus the prior year. On a trailing 12-month basis, gross orders grew by 8%, representing a book-to-bill ratio of 1.5, illustrating our customers' confidence in our innovations and NPIs, which continue to enhance our product backlog. Moving to the backlog, we ended the third quarter with a product order backlog of approximately $503 million. This reported backlog is up 2% sequentially and down 1% versus the prior year. We had no order cancellations in the quarter. Net revenue for the third quarter was $101 million, which was down 14%, versus the prior year and down 13% on a constant currency basis, primarily due to eight fewer revenue shipments within the quarter. Product revenue for the third quarter was $50 million, down 21% from the prior year, driven by eight fewer unit shipments as previously mentioned. While Q3 product revenue did not play out as we expected, due to three system shipments being pushed out related to customer process delays, it is important to highlight that our China business had a 17% product revenue growth on a trailing 12-month basis, and the EIMEA region had a 7% product revenue growth on a trailing 12-month basis, showcasing the strong growth of these regions, which are vital to the long-term strategy for our company. Service revenue for the quarter was $52 million, down 7% from the prior year and down 6% on a constant currency basis, primarily driven by $3 million of lower revenue related to installation and training, primarily tied to lower new U.S. installations and lower spare parts volume. Although non-contract service revenue was lower in Q3, we expected to pick back up in Q4 with an increase in global customer installations. Notably, the service contract revenue portion was up 2% versus the prior year and up 4% on a trailing 12-month basis, showcasing growth in the annuity part of the service business as our installed base continues to expand globally at 4% in Q3 versus the same period in the prior year. Our overall gross margin for the quarter was 28.7%, compared to 32.8% in the prior year. The key factors were related to increased China margin deferral of $3.2 million or 3.2 points and an unfavorable impact of foreign exchange on revenue of approximately $1.3 million or 1.3 points. As a reminder, due to joint venture accounting rules, we defer 49% of the margin related to shipments to our JV partner, and that margin is deferred until our partner sells through to their end customer. This margin impact is purely timing related and is not an indication of the future profitability of our business. China deferral and foreign exchange together had an approximately 4.5 point downward impact on our Q3 margins. Margin expansion continues to be a focal point and part of our cultural transformation, and we are confident this will be reflected more positively in our P&L in the coming quarters. We're seeing the impact of our pricing efforts in our service business, with better contract pricing of approximately $2 million in Q3 versus the prior year. Additionally, with our focus on reducing our cost of goods sold, we're seeing lower impacts of inflation as we work with our suppliers and internal teams to drive product COGS down further. Operating expenses in the third quarter were $33.6 million, compared to $36.4 million in the prior year, down 8% as we realize the full benefit of our restructuring actions and as we drive cost discipline within the company with a strong focus on return on investment. The operating loss for the quarter was $4.6 million, compared to an operating income of $2.3 million in the third quarter of the prior year. Adjusted EBITDA for the quarter was $1.1 million, compared to $8.3 million from the prior year, primarily driven by $17 million of lower revenue, compared to the prior year. We described the reconciliation between GAAP net income and adjusted EBITDA in our earnings release issued today. Turning to the balance sheet. Total cash, cash equivalents and short-term restricted cash amounted to $61 million, compared to $73 million at the end of last quarter, with the decrease driven by lower product shipments and the timing of those shipments. Net accounts receivable was approximately $73 million, which is $4 million lower than the prior quarter. We continue to have a strong focus on collections, which resulted in a DSO of 66 days. Our net inventory balance was $160 million, up $4 million from the prior quarter due to the delay in system shipments. In summary, our third quarter results were negatively impacted by a slowdown in the U.S. market, timing of three revenue shipments, and further deterioration of the Japanese yen. Although the timing of the three revenue shipments is a temporary phenomenon that we expect to recover from in Q4, as Suzanne mentioned, we believe the U.S. market slowdown will persist for at least the near term. Additionally, the Japanese yen continues to be a headwind greater than we expected, especially as we have a considerable number of system shipments to that region in Q4 and a significant installed base contributing to contract service revenue. Taking all these factors into consideration, we are adjusting our fiscal year 2024 financial guidance. We now expect revenue in the range of $432 million to $437 million and $19 million to $22 million of adjusted EBITDA. Those are key financial highlights. And with that, I'd like to hand the call back to Suzanne.

Thank you, Ali. In summary, while some business has shifted into FY '25 due to the U.S. market dynamics, we continue to make major advances in long-term growth and profitability drivers. We remain focused on executing our plan to advance care and access with our innovative solutions that make a difference every day in the lives of people diagnosed with cancer. Finally, I'd like to thank everyone in our global teams that work tirelessly to provide the highest level of service and support to our customers. I am grateful for their commitment and dedication to our mission. I will now turn it back over to the operator for Q&A.

Thank you. And the first question will come from Marie Thibault with BTIG.

Hi, good afternoon, Suzanne and Ali. This is Sam on for Marie. Thanks for taking the questions here. Maybe I can start on the commentary on the Americas region. I'm just wondering any more color you have on maybe some of the bottlenecks, specifically that you're seeing that's causing these delayed installations here?

Yes. Thanks, Sam, for the question. The major headwind for the quarter and really going into Q4 has been an expected slowdown larger than we thought in the U.S. market. And primarily, it's due to reduced capital equipment spending and tighter budgets. We've seen the customers holding onto their systems longer as they wait for capital equipment funds to be available to them. Overall, I think it's validated very much by the research that was done as well as what we're hearing from our customers. They've told us that their overall budgets are down and that there's a complete report allocation and reprioritization of their capital equipment funds. As a result, we started to see a slowdown at the end of Q2, but really in Q3, it was significant. As we got more to the drivers, we see it shifting over into FY '25 and certainly affecting Q4. And that's really what drove our revised guidance.

Got it. Yes, that's helpful, Suzanne. I heard both of you reiterate the long-term target that you set out last fall. I certainly understand some of the near-term dynamics here. But international still seems to be holding up pretty strong, with new catalysts coming with China and Helix. So I guess just help me frame the long-term opportunity that's still here for Accuray. And maybe some of the puts and takes between some of these near-term headwinds with some of the longer-term tailwinds that are coming?

You're exactly right. Aside from the U.S. business shifting forward, we've got major catalysts that we're on the cusp of getting the regulatory approval on the precision treatment planning for the Tomo C. Again, that will unlock deferred margin and revenue, and it's the final step to allowing our China team to really take that to market and start shipping to customers. We have just very strong business growth in EIMEA. We look forward to the introduction of the Helix, which we think will do very well in India. The Japan backlog is very strong, and the focus on revenue conversion going into FY '25 will also be a catalyst. We're seeing our service contract revenue grow, and that's tied to our growing installed base. We see that as a catalyst. Our innovation pipeline is something we feel really strongly about, advancing care. We're going into ESTRO this next week and have some service solution offerings that we believe will drive strong order performance.

Thanks so much.

Your next question will come from Young Li with Jefferies. Please go ahead.

All right, great. Thanks for taking our questions. I guess to start, maybe about China, Tomo C with the treatment planning approval - is that still expected in May? What's the latest on timing there?

Yes. Our best expectation at this point is that it will be done before the end of our fiscal year. I can tell you that we have folks with our China JV in China right now to get a feel on timing. We are relatively confident that we are at the final step here. It's taken a little longer than we expected and a bit more of a gap between the Tomo C clearance and the treatment planning. Again, our strategy was to get to market as quickly as possible on the system so that we could go out there and start to get orders for the system. The shipments and margin are tied to the treatment planning clearance, but we believe we are at the very end.

Okay, great. That's very helpful. I guess maybe just a follow-up there. Follow-on approval and you have strong interest and strong orders there. Can you kind of help us frame how that can potentially impact growth, revenue, and margin for fiscal '25?

Sure. I'll let Ali chime in here.

Yes. We're still very much in the midst of planning for fiscal year '25. We'll certainly share that outlook with you in our earnings call for Q4. But I think it's important to reiterate what Suzanne had mentioned. We continue to grow revenue somewhere between 4% to 6%, and we are going to remain focused on margin expansion, which we believe will double our adjusted EBITDA as a percentage of revenue by the end of fiscal year '26. That plan has not changed. We have had a little bit of a speed bump regarding the U.S. market in the back half of fiscal year '24, but as mentioned, there are regions that are coming online and contributing to good backlog growth, which is converting into revenue.

Thank you very much.

The next question will come from Brooks O'Neil with Lake Street. Please go ahead.

Good afternoon, everybody. As I listened to the comments both in the prepared remarks and the Q&A, it sounds like you're attributing the shortfall to environmental issues. The first I think about, I guess, I'm curious, as you do a deep dive into your own performance as a company, Suzanne and Ali, how would you grade yourself on execution this quarter? Are there any areas where you would specifically call out? We dropped the ball here. How do you think you're doing in this admittedly weak environment?

Thanks for the question, Brooks. Clearly, we're focusing on the areas where we can improve our execution in all areas that are within our control. We missed three system shipments, and some of that was due to delays in customer processing. We are looking back at everything within the quarter to identify what we could have done better, how we can execute better in the future, and how we can plan for these kinds of headwinds. At the same time, there's a lot that we're very proud of. We've made significant progress against key priorities in our long-term plan. We delivered strong order growth, built a healthy backlog, and increased our installed base, while seeing positive growth in service contract revenue. All parts of our long-term strategy are coming together. We're starting to see improved margins in service. There are areas we need to focus on, such as bringing down product COGS, and we have a path to do that. We will continue to look for ways to improve overall margins even in this difficult environment.

Could you say - obviously, you've had tremendous success in Japan with competitive wins. Are there any indications that you might have opportunities to win some competitive contracts in the U.S. despite the slowdown that's occurring?

Definitely. Looking at what we're going to do in the U.S. and what we can learn from Japan, where we've done very well, we've gotten very close to our customers and building relationships with them. It's the same in the U.S., where it's largely a replacement market. We're focused on upgrading our own systems and taking advantage of vulnerable competitive sites. We're also going to get closer to our customers by bringing in solutions that will assist them through this challenging time, ensuring satisfaction with their equipment, while leveraging our commercial partnerships. When conditions improve, we will be poised to capitalize on this.

I assume in the U.S., you might benefit some from your commercial partnership with GE Healthcare?

Yes, absolutely. We will leverage all of our commercial relationships, including GE, as we navigate this challenging environment.

The next question will come from Jason Wittes with ROTH MKM. Please go ahead.

Thanks for taking the questions. Just a couple on the outlook. Specifically, first off, the three systems that didn't occur this quarter, is that really more of a 2025 event that you expect them to be filled? Or is that something that's going to hit the fourth quarter?

It will be in Q4 revenue.

In terms of the treatment planning approval, is that still expected to occur in May? How does that impact the outlook in terms of what were you anticipating earlier for China? Does this move that out into 2025?

Number one, we're continuing to ship systems to our China JV partner because they need to continue to manufacture a certain number of these systems just to be ready. As soon as the approval is there, they can start to cater to their customers. I would say we're continuing to ship systems which contribute to revenue. The impact relates to this whole deferral of 50% of the margin related to JV accounting rules. We sell to our JV partner, defer 50% of our margin until they're able to sell through to their end customer. Right now, we have 50% of the margin associated with those shipments deferred and sitting in our balance sheet. Once we get the precision NMPA approval and once our JV partner starts to ship systems to their customers, we can recognize that margin. Right now, all of that margin is deferred related to the Tomo C shipments we made.

So revenue, there's really no impact; that's mostly a margin issue depending on when the approval happens?

That's right.

If I think about the change in the outlook, is that mostly U.S.-driven? Can we assume that?

Predominantly the U.S.

The order rates were actually healthy; I think you mentioned a lot of that was EMEA and Japan. What are customers telling you in terms of orders or discussions? Is it really they're saying it's being pushed into the 2025 budgets?

Yes, it differs by customer. Everyone's process is slightly different. The expectation is that there will be some improvement in the back half of our fiscal year '25. Some customers mentioned it will take until calendar year 2026 to get back to pre-COVID levels of budget. I think it's going to be gradual, and we will monitor it closely.

Got it. Thanks a lot. I'll jump back in queue.

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

Thank you for joining the call. This concludes our earnings call, and we look forward to speaking with you again in the summer for our fiscal 2024 fourth quarter earnings release.

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