Earnings Call Transcript - ARAY Q2 2021

Operator, Operator

Good afternoon and welcome to the Accuray Second Quarter Fiscal 2021 Financial Results Conference Call. 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 Ken Mobeck, Vice President of Finance at Accuray. Please, go ahead.

Ken Mobeck, Vice President of Finance

Thank you, Gary, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the second quarter of fiscal year 2021, which ended December 31, 2020. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Josh Levine, Accuray's President and Chief Executive Officer; Shig Hamamatsu, Accuray's Senior Vice President and Chief Financial Officer; and Suzanne Winter, Accuray's Chief Commercial Officer and Senior Vice President of R&D. 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 as of 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. Two housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to two 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, 2020. With that, let me turn the call over to Accuray's President and Chief Executive Officer, Josh Levine. Josh?

Josh Levine, President and CEO

Thanks, Ken, and thanks to everyone joining us on today's call. Accuray's fiscal 2021 second quarter performance continues to reflect the positive momentum our business is making, despite the headwinds created by the COVID-19 environment. Highlights from our second quarter performance include: the beginning of system revenue conversion related to the China Type A licenses awarded to Accuray Systems, receiving 510(k) approval for ClearRT, our Helical kVCT imaging on Radixact and the continued adoption of our latest innovations like Synchrony, real-time motion tracking and delivery adaptation on Radixact and our latest generation CyberKnife S7 system. Revenue for the quarter came in at $97.5 million, which included approximately $21 million of China-related system revenue. The bulk of the China-related system revenue recognized in the second quarter represents the beginning of revenue conversion related to Type A licenses awarded to Accuray Systems in the past 18 months, which have an aggregate estimated value of approximately $150 million. While the number of Type A system shipments will vary from quarter to quarter, we currently expect revenue related to the remainder of the Type A licenses will be recognized over the course of the next 18 to 24 months. Regarding the Type B product segment, our China JV continues to make operational progress in advancing the manufacturing validation and qualification process and we believe we are on track to have our China-manufactured Type B product ready for market introduction in approximately 18 months. Gross order volume for the quarter was $75.4 million, which, while down globally versus Q2 of the prior fiscal year due to COVID headwinds, was in line with our internal expectations. As we had shared in our first quarter earnings call in October, this was expected, as we highlighted the tough comparisons to the prior year, driven by Type A orders in China during Q2 of the prior fiscal year, coupled with COVID-related headwinds in the Americas and EMEA regions during the current fiscal year. Despite those challenges, we saw positive order growth in Japan where gross orders grew 10% year-over-year primarily driven by strong Radixact demand, as well as new technologies such as Synchrony on Radixact. On a global basis approximately 50% of new Radixact orders during the quarter included Synchrony, which is a significant increase from the prior year and we believe this increase demonstrates that our customers see true clinical value in Synchrony's proprietary real-time motion tracking and delivery adaptation capability. With respect to CyberKnife, we saw a 17% unit volume increase year-over-year driven by S7 orders in the Americas and EMEA regions. From a financial perspective, we continue to see positive momentum in both operating and financial leverage from the cost management and cash preservation decisions we initiated during the initial stages of the COVID pandemic. With the improved operating leverage that we are seeing we will be increasing our investments in R&D which will bring the spending run rate back to pre-COVID levels of investment. On the product innovation front during the quarter we announced that we had received 510(k) clearance for ClearRT our Helical kVCT imaging platform for the Radixact system. This regulatory approval paves the way for two important milestones in our phased product launch. First, we can now obtain customer clinical evaluation site feedback and generate case studies demonstrating the impact of ClearRT on treatment-related decision-making. Secondly, we look forward to gaining additional global regulatory clearances like CE Mark and Shonin in Japan in preparation for a broader commercial launch which we anticipate will take place towards the end of this fiscal year. ClearRT combines the Radixact Systems' unique TomoTherapy Helical platform with kVCT imaging capability providing near diagnostic quality image resolution, the longest transverse field of view and best-in-class image acquisition speed that allows clinicians to acquire uniform high-quality images during the treatment. We expect that ClearRT combined with our Synchrony motion tracking and real-time delivery adaptation on the Radixact platform will help to further advance the overall functionality and clinical capabilities of Radixact and its strategic positioning as a workhorse system. We believe that the significant technology additions we are adding to our current product portfolio are well aligned with CMS's radiation oncology alternative payment model which is now scheduled to go into effect beginning in January of 2022. Accuray has been a pioneer in high-precision technologies that enable hypo and ultra hyperfractionation and we believe that the innovations we are bringing to the market will be a catalyst for long-term growth and ensure that our delivery platforms maintain their position as a gold standard choice in hyperfractionated SRS and SBRT treatments. And with that, I'll turn the call over to Shig to review our Q2 financial results in greater detail. Shig?

Shig Hamamatsu, Senior Vice President and CFO

Thank you Josh and good afternoon everyone. I'll begin with some additional details on our financial performance for the second quarter and then focus on certain highlights for the period. Gross orders for the second quarter were $75.4 million as compared to $98.6 million in the prior year. As we generated double-digit gross order growth in the last two fiscal years due to pent-up demand for China Type A system triggered by the initial announcement of Type A quota back in October of 2018, we had anticipated that we would be focusing more on converting existing Type A orders to revenue this fiscal year as the volume of new China orders normalize which is what we saw occur in the second quarter. In addition, we continue to see some headwinds due to the pandemic particularly in the U.S. region which has affected the timing of order placement in the near term. Looking ahead to the third quarter, we expect to see a similar challenging year-over-year comparison for gross orders. The prior year third quarter included $25 million of Type A orders which is expected to be meaningfully lower in the third quarter of this fiscal year for the same reasons I just stated. We also anticipate our gross order volume in the second half of this fiscal year to be weighted more towards the fourth quarter, although we do anticipate a sequential increase in order volume from the second quarter to third quarter. From a product mix perspective the TomoTherapy platform accounted for approximately 55% of order unit volume for the quarter and CyberKnife accounted for the remaining 45%. As Josh highlighted earlier, we saw strong innovation-driven order momentum during the second quarter, where we saw a significant year-over-year order growth for both Synchrony on Radixact as well as CyberKnife S7. Net age-outs for the quarter were $35 million and included $13 million of age-in activities during the quarter. As expected, we saw a higher-than-normal level of age-outs during the quarter as timing of revenue conversion was impacted by the pandemic in all regions with the exception of China. However, $13 million of age-ins during the quarter represented the highest quality age-in activity we've ever reported. Although the depth and extent to which COVID-19 will impact individual markets could vary based on a number of factors, we expect to see a higher-than-normal level of age-outs for the second half of this fiscal year due to this pandemic driven timing disruption. During the second quarter we had no cancellations and FX and other adjustments totaled approximately $2 million. As a result, on a net basis, we generated $42 million of orders in the second quarter. We ended the second quarter with a backlog of $596 million, which is an increase of approximately 11% from December 31, 2019. Turning now to our income statement. Total revenue for the second quarter was $97.5 million and included a significant year-over-year increase in China system revenue, which was offset by year-over-year revenue decline in other regions, primarily due to the impact of the pandemic. Product revenue for the quarter was $41.8 million and included $21 million of system revenue to China, of which $18 million were Type A products. From a product mix perspective, CyberKnife accounted for approximately 30% of the quarter's revenue unit volume while the TomoTherapy platform accounted for the remaining 70%. Service revenue for the quarter was $55.7 million, an increase of 1% from the prior year. Turning now to gross margin. Our overall gross margin for the quarter was 41.9% compared to 38.4% in the prior year. Product gross margin for the quarter was 44.7% compared to 44% in the prior year. The second quarter product gross margin represented a meaningful sequential improvement from the first quarter product gross margin of 41% as we saw a higher mix of CyberKnife units during the quarter. Service gross margin for the quarter was 39.8% compared to 33.9% in the prior year. As a reminder, prior year Q2 service margin included the impact of a higher-than-normal level of service parts consumption. Our operations and service teams have done a great job of normalizing parts consumption in the past four quarters, which contributed to a material year-over-year improvement in service gross margin. Additionally, Q2 service margin benefit from higher upgrade revenue as well as continued benefit from reductions in travel and other operating costs due to the pandemic. Moving down the income statement. Operating expenses for the quarter were $32.6 million, a decrease of $1.6 million or 5% from the prior year. The year-over-year decline in our operating expenses was primarily driven by the actions we implemented in response to the pandemic, which included physician eliminations as well as curtailment of costs associated with the impact of COVID-19, particularly travel, marketing events and related expenses. As we look forward to the second half of this fiscal year, we anticipate our quarterly operating expense run rate will start to normalize in the range of $35 million to $37 million, as we restore certain expenses and continue to invest in our R&D pipeline. In addition, the higher operating expense run rate in the second half of this fiscal year is consistent with the seasonality we have seen in the past fiscal cycles. Operating income for the quarter improved $4.6 million to $8.2 million compared to $3.6 million in the prior year. This represented the fifth consecutive quarter of GAAP operating income generation and we have generated $27 million of operating income for the trailing 12 months period measured from December 31st, 2019. While our operating income benefited partially from cost management actions taken in response to the pandemic, we expect our improved operating leverage will position us well in the post-COVID environment. The operating impact of the China JV for the quarter was an income of $1.1 million. This item is being reported on our income statement as a single line item called gain or loss on equity investment right below our operating income line. As our China joint venture continues to ramp its operational and commercial activities, we expect our share of JV's quarterly income or loss will continue to fluctuate in the near term and we expect our share of JV's operating impact will be a small loss in the second half of this fiscal year. Adjusted EBITDA for the quarter was $13.5 million compared to $7.1 million in the prior year. On a trailing 12-month basis, we have generated $44 million of adjusted EBITDA. The adjustments between GAAP net income and adjusted EBITDA are outlined and quantified in our earnings release issued today. Our cash and short-term restricted cash position improved $7 million from the start of this fiscal year to $116 million as of December 31st, 2020 despite paying down $10 million of term loan as the team continues to focus on managing our working capital. We also generated $15 million of free cash flow in the first half of this fiscal year. As we look ahead to the second half on revenue front, we remain cautious on revenue conversion timing given the current state of the pandemic, although we believe the visibility we are gaining on China Type A revenue conversion will soften the potential impact of the pandemic-driven timing disruption. As we manage our near-term headwinds and revenue conversion, we are continuing to focus on operational efficiency, continued investments in innovation, margin expansion, and working capital management. We are also focused on inventory and supply chain management as we execute on China Type A revenue conversion while maintaining appropriate levels of inventory. With that, we're ready to open up the call for your questions. Operator?

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Josh Jennings with Cowen. Please go ahead.

Unidentified Analyst, Analyst

Hi guys. This is actually Neal on for Josh. Thanks for taking our questions. The first question I had was just, I guess, around ClearRT. Now that it's approved could you maybe just lay out kind of at a high level what the path forward is towards having, I guess, a broader adaptive therapy solution? And what steps would be to get there?

Suzanne Winter, Chief Commercial Officer

Sure. Josh, it's Suzanne. Just a little bit about our phased product introduction. We shipped to our clinical site for our Phase 1 part of the introduction. We're getting feedback from our clinical sites then we'll go to a broader introduction in Q4. And we hope to follow up with CE Mark and Shonin so that we can address broader markets. ClearRT is really going to be the fundamental difference and backbone of any adaptive therapy that will be developed in our innovation pipeline. One of the things we've certainly been watching is to take a look at existing adaptive therapies that are out there now and still very good ideas and a good first path at adaptive therapy changes is still burdensome from a workflow standpoint and also is very resource intensive. So, from that standpoint, I think we are happy to be a fast follower here and take a look at what we can improve on the next phase to ensure that it is more clearly adopted by clinicians.

Unidentified Analyst, Analyst

Great. Thanks for that. Just a second question. Just in terms of the joint venture, the sales force team and leadership that's currently under CIRC, how is that, I guess, positioned versus the prior distributor sales force in terms of offering the current Type B offerings for ONRAD and TomoH? Our thought is that that would be a stronger effort versus prior but just wanted to check that.

Josh Levine, President and CEO

We agree, Neal. So again we are appreciative that the legacy distributor TomoKnife had done a terrific job looking back over the years of positioning our brands. What CIRC as a joint venture partner really brings us is strategic market access in a pretty powerful way. As you've heard us talk about, they are a market-leading company in medical-ready isotope production and sales and they've got active customer relationships in probably 7,000 or 8,000 hospitals across the country. So they are both a manufacturing partner for us in terms of the on-the-ground product being produced on the Type B in Tianjin. But they also are, we think, a very powerful partner in the context of commercial activity, strategic market access and visibility, if you will, across more than just the major population centers because the big upside here for us when we think about the Type B product is the opportunity that exists in small to medium-sized facilities out in the provinces. And that's where CIRC has an existing strength in terms of market position, customer relationships that will be very valuable in the context of helping us ramp up the Type B product.

Unidentified Analyst, Analyst

Okay. Thanks. That’s it for me.

Operator, Operator

The next question is from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Brooks O'Neil, Analyst

Good afternoon, everyone, and congratulations on what I think is a terrific quarter in light of the challenging conditions.

Josh Levine, President and CEO

Thanks Brooks.

Brooks O'Neil, Analyst

So I was hoping to just get a little color. Obviously, we see the COVID impact underlying some of the numbers. So if you could just maybe you, Suzanne, Josh could walk us around the key markets outside of China in terms of what you're seeing right now? And then specifically I'm curious about the U.S. market and how you see the impact of the pushout of the APM until the start of the next year impacting the business in the next 12 months?

Josh Levine, President and CEO

Yeah, Brooks, it's Josh. I'll address that. Starting with the Americas region, particularly the U.S., our situation has evolved compared to last summer when hospitals experienced significant lockdowns. Currently, we are not seeing widespread lockdowns in the U.S. market as we did last year. While the intensity of COVID cases and ICU capacity does fluctuate across different regions, it makes it challenging to generalize recovery timelines. However, I can confirm that cancer patients are receiving treatment. Cancer is still a critical issue, and active patient treatment is ongoing nationwide. Therefore, it's likely that we will experience a continued slowdown in order activity, particularly in the first half of 2021. This trend is similar in other developed markets like Western Europe and the Eurozone. We also mentioned in our prepared remarks that Japan is demonstrating a strong trajectory in order activity, despite facing COVID challenges, with notable decisions about resource allocation being made. Regarding the APM model, while we understand the delay until January 2022, we don't believe it will impact our long-term growth. We anticipate that our business will continue to evolve due to changes in reimbursement, moving towards hypofractionation and ultra hyperfractionated treatment delivery. Our portfolio is strengthening with each quarter, and we believe we are well-positioned moving forward as the APM implementation will positively affect us.

Brooks O'Neil, Analyst

That's great. That's great color. If I could just ask a second probably two-part question, I apologize. But can you give us a little more color on the China revenue? How many systems kind of what you expect over the next few quarters on the Type A side? And I know you mentioned the commentary about joint venture production 12 to 18 months out. Do you expect any milestones on the Type B side in the next say 12 months?

Josh Levine, President and CEO

In the recently reported quarter, we received four orders from the China joint venture, consisting of two Type A and two Type B. We recorded revenue for nine systems, with seven being Type A and two Type B. Among the seven systems, we included CyberKnife, TomoTherapy, Radixact products, and two TomoH devices on the Type B side. As previously mentioned, we have products available to meet market demand for Type B, including ONRAD and TomoH, which are currently active in the qualification process for approved Type B products. We anticipate continued activity in this area, which should be beneficial until our Tianjin-produced product is ready for release with CIRC in about 18 months.

Brooks O'Neil, Analyst

Great. Any color on Type B? And what you expect from Type B in terms of orders ramping up or whatever?

Josh Levine, President and CEO

Well, I mean, again we're taking Type B orders today with our current product offering. So the products that I mentioned before, TomoH and ONRAD are active. They're in the approved products list for Type B. The JV and our dealer network there are actively taking and can take orders for those products and they are doing so. And as you saw in the quarter and it's been fairly consistent over the last year or so or 18 months we're showing, again it's admittedly modest unit volume level but we're not a non-presence if you will in Type B today. We're – and we'll continue I would imagine Brooks at that pace or cadence if you will until we have our own product the China-produced product available in about 18 months.

Brooks O'Neil, Analyst

Okay. That’s great. Thank you for taking my questions.

Josh Levine, President and CEO

Sure.

Operator, Operator

The next question is from Marie Thibault with BTIG. Please go ahead.

Marie Thibault, Analyst

Hi. Congrats on the strong quarter. I may start with a follow-on to Brook's question about the China revenue. Wanted to get a little more insight into how you envision, I guess, kind of, the cadence of some of this rolling out? I know you said that there's a total value of $150 million in those orders. So how we should think about kind of the lumpiness or not lumpiness of that revenue recognition, as well as kind of the second tranche of awards that you also have in hand?

Shig Hamamatsu, Senior Vice President and CFO

Hey, Marie, thanks for the question. I'll take that. And, yes, so again, we're not going to be able to give specifics on quarterly cadence. But, as we said earlier, we think it's going to be a rollout of the remaining revenue out of the $150 million we talked about over the course of the next 18 to 24 months. Now, as Josh just mentioned, we shipped $18 million of Type A, which was part of the $21 million we talked about. And so, what I could probably say is, is it going to be a big fluctuation from quarter to quarter in the next few quarters? We're not seeing that necessarily. But, again, we do expect the number of units shipped from quarter to quarter to vary. So I will just leave it at that, Marie.

Marie Thibault, Analyst

Okay. Clear enough. I appreciate that. And then, perhaps we could talk a little bit about the replacement tailwinds. You've certainly been vocal about the older age of your installed base. So I'd love to hear what you're hearing from some of your legacy customers who are thinking about replacements and possible timing on when we may see some of that start to turn in a bigger way?

Suzanne Winter, Chief Commercial Officer

Yes. Marie, we started to see some of the tailwinds, even this quarter, at 26% of our total orders were trade-in and trade-up. And, I think, we're excited about the response that we're getting with the introduction in ClearRT. And so, I think, that with Synchrony is providing a really good rationale for our customers to make the investment to upgrade. So we only expect as we move forward that that percentage may increase as well.

Marie Thibault, Analyst

Fantastic. Thank you.

Operator, Operator

The next quarter is from Anthony Petrone with Jefferies. Please go ahead.

Anthony Petrone, Analyst

Hi. Thanks. I have a couple of questions about China and then a couple regarding COVID. I want to focus on the spending side, particularly regarding the joint venture. You mentioned at the JPMorgan Conference that you plan to increase the headcount from 100 to 200 by fiscal 2023. Can you share the timeline for adding to the infrastructure throughout 2023? Should we expect a significant increase in the near term, or will it be more evenly distributed over the year? I also have two follow-up questions.

Shig Hamamatsu, Senior Vice President and CFO

Yes. Anthony, I'll take that question. Thanks for the question. And I think what we see is more of an even gradual build of that additional headcount at the JV level. And just to remind you, as they get at it to JV operations, they don't run through our expenses. It's not going to show up as Accuray's P&L expense in COGS or OpEx, rather the impact of that for us would be picked up through the 49% equity interest pickup towards the bottom of income statement. So I just want to make that clear. And, I guess, you have the next question.

Anthony Petrone, Analyst

Sure. And, again, one would be on the headcount adds. I mean, I fully understand that there's ownership in the JV, but funding of the new headcount maybe just a refresh on how actually the funding will go and how the funding of growth of the JV will blend those three?

Shig Hamamatsu, Senior Vice President and CFO

Yes. At this point, the best way to think about how to fund that at the JV level is that they are self-funded. And so, the initial capitalization was completed when we formed the JV effectively. As you recall, our partner provided the cash capital. We provided the in-kind capital. So they are fully capitalized and they're going to fund additional headcount through their own operations.

Josh Levine, President and CEO

Anthony, we do not anticipate any additional or unexpected capital calls at this time. As Shig mentioned, we firmly believe that this operation is self-funded. To break it down further, the majority of the commercial operational infrastructure is already established, including full representation in strategic marketing and sales. The additional headcount we expect will primarily focus on operational aspects, particularly in manufacturing, and possibly some regulatory roles to facilitate product registration approvals and manufacturing qualification and validation processes. Overall, the emphasis will be on operations, manufacturing, and regulatory functions.

Anthony Petrone, Analyst

Okay. And a follow-up here would be also just I guess on the multiyear outlook from a segment basis, you sure have material out there suggesting this can sort of approach the 4000 linac opportunity in China. And by 2026 when you back out the existing tender both the 2018 and I guess the prior 2015 tender you're looking at almost 2000 additional units. And so, when you sort of think about that multiyear opportunity where does the confidence come in, in that outlook? And what is the expectation for a follow-on tender from the 2018 one in terms of timing?

Josh Levine, President and CEO

I believe the Central Government is currently developing the 14th 5-year plan. While I can't predict the announcement date, we know there are approximately 90 to 95 additional Type A devices from the original quota that will likely be included in the next plan if they aren't captured already. We also believe that applications for a third batch of Type A licenses have been submitted through the Central Government's Ministry of Health’s electronic application process and could be announced around April or May. The significant opportunity lies with Type B devices, where we expect a similar volume impact as seen in the original quota announcement, which increased to around 1400 Type B devices. We are confident that at least this many will again be represented in the next 5-year plan. The potential market opportunity in China is substantial, and we believe our unique strategy positions us well in capturing this opportunity.

Anthony Petrone, Analyst

Now with that all good to hear. Thanks.

Operator, Operator

The next question is from Jason Wittes with Northland. Please go ahead.

Jason Wittes, Analyst

Hi. Thanks for taking the questions. I have more inquiries regarding China. You mentioned some details about last quarter's revenue comparison for China. Could you share the comparison for the upcoming quarter and the year for China's revenues?

Josh Levine, President and CEO

Yes. I think we referenced orders against the prior year in ...

Jason Wittes, Analyst

I'm sorry, orders if you could. Yes.

Shig Hamamatsu, Senior Vice President and CFO

Yes. So what I mentioned was that in the third quarter of last year, we had approximately $25 million in Type A orders. This will be a challenging comparison for us in the upcoming quarter.

Jason Wittes, Analyst

Could you also add revenues? I mean, you did provide revenues for this quarter. So I'd be curious to know what the revenue contribution was for next quarter and for the year, just so we can kind of track the progress of China, which I think is at least the way I'm pretty critical to the outlook for I guess most of us here?

Shig Hamamatsu, Senior Vice President and CFO

Yes. So again, I don't think we specifically talk about China revenue contribution in the context of last year Q3, Jason.

Jason Wittes, Analyst

Okay.

Shig Hamamatsu, Senior Vice President and CFO

But the way to think about it is we had a small unit of B units in last year Q2. So we're talking about the low, probably mid single-digit China revenue last year Q3.

Jason Wittes, Analyst

Okay. If I look at last year, the contribution was likely in the mid single-digits. Is that the right way to think about it?

Shig Hamamatsu, Senior Vice President and CFO

That's the way to think about it, because again, we didn't have a Type A revenue as we were waiting for the tender to complete. So we had a small contribution from B units second half of last year. So that's the way to think about it.

Jason Wittes, Analyst

Okay. It looks like you're suggesting that operating expenses will increase in the second half of the year, likely more in the fourth quarter compared to the third. Can we assume that this will return to pre-COVID levels, or will there still be a significant impact from COVID reflected in those numbers?

Shig Hamamatsu, Senior Vice President and CFO

Yes. Thanks for the question, Jason. You're right about the comparison between Q3 and Q4. I anticipate that Q4 will be stronger than Q3, following the seasonal patterns we've observed in previous fiscal cycles. In the second half, I mentioned an expected run rate of $35 million to $37 million per quarter, which reflects a return to what we saw before COVID. A useful comparison for understanding this is to look back at our annual run rate in fiscal year 2019, which was the last full pre-COVID year when we had $162 million in operating expenses for the year. If we reach that second half run rate of $35 million to $37 million, it would translate to an annual run rate of approximately $144 million. This suggests that even as we normalize from the effects of COVID, we are likely still operating about 10% below our pre-COVID operating expense levels.

Jason Wittes, Analyst

Okay, that's helpful. I'll switch topics to ClearRT. Josh, congratulations on the approval. It seems to be a significant step forward, but it appears that the launch will be controlled at first. Is that the correct way to view it? And when will it be fully rolled out in the field?

Suzanne Winter, Chief Commercial Officer

Yes. So it is a phased launch. And again, we're in Phase 1 of the launch, which is sending to our clinical sites. So the installation is going very well and we're at the point of just getting clinical evidence as well as finalizing final product parameters. And then we'll go to a full launch which will be in the Q4 timeframe.

Jason Wittes, Analyst

Q4, okay. And older Radixact machines upgradable to ClearRT as well and can you give us an indication of kind of what the price bump is for ClearRT?

Suzanne Winter, Chief Commercial Officer

Yes. So the ClearRT will be available to the Radixact install base as an upgrade and it's also available to any TomoTherapy customer. There'll be an upgrade trade-in trade-up price as you get to the latest version with ClearRT.

Jason Wittes, Analyst

So if I have a current system with ClearRT, it's just an upgrade right? It's not a replacement.

Suzanne Winter, Chief Commercial Officer

Yes. You are right. It's an upgrade.

Jason Wittes, Analyst

And do you have an indication of kind of what the ASP is for an upgrade?

Shig Hamamatsu, Senior Vice President and CFO

Jason, not yet on ClearRT. So we'll probably in the next few months ramping up on commercial activity. So I think we should be able to talk about that a little bit more then.

Jason Wittes, Analyst

Okay. And then also just related to that, I assume that upgrades are going to be available until that Q4 when the full rollout comes through.

Suzanne Winter, Chief Commercial Officer

That's correct.

Jason Wittes, Analyst

Is that the right way to think about it?

Suzanne Winter, Chief Commercial Officer

Yes.

Jason Wittes, Analyst

Okay. Last question. Just if I think about – obviously, we're very focused on China here. Japan, obviously, came in very nicely as well. In terms of more established U.S. and European markets, it sounds like the tone is that COVID is still largely impacting both the performance there, but also just kind of the visibility for the moment. Is that the right way to think about it?

Josh Levine, President and CEO

Yes, that seems to be a fair representation. However, it's important to note that we are not seeing orders being canceled from the backlog. If you consider the market dynamics from last summer and even the early fall, I don't observe that same level of activity today in the developed markets, particularly in the U.S. and Western Europe. Currently, there are no visible signs of widespread hospital lockdowns. What we're experiencing instead is that timelines for projects that are already in the works are being extended. The timing for revenue conversion on these backlog orders is varying significantly from one institution or region to another. Nevertheless, we are closely engaging with all our customers and are prepared to begin installations and initiate any projects as soon as they indicate readiness. Overall, as you've outlined, this accurately reflects our perspective on the situation and its implications.

Jason Wittes, Analyst

Okay. Thank you. It’s very helpful. I will jump back in queue. Thanks a lot, guys.

Operator, Operator

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

Josh Levine, President and CEO

Thank you, operator. In closing, we are pleased with the progress we see occurring with the business despite the challenging environment, and we're strongly focused on taking advantage of the anticipated growth catalysts and opportunities we have in front of us. During fiscal third quarter, we have a number of investor conferences that we look forward to participating in including the BTIG Healthcare Conference in February and the Cowen Healthcare Conference in March. Lastly, we intend to report our fiscal 2021 third quarter results at the end of April. Thanks to everyone listening in to today's call.

Operator, Operator

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