Ladies and gentlemen, thank you for standing by and welcome to the Q1 fiscal 2020 Accuray Incorporated earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star then 0. I would now like to introduce your host of this conference call, Mr. Doug Sherk. You may begin.
Thank you, Kevin. Good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the first quarter of fiscal year 2020, which ended September 30th, 2019. During our call this afternoon, management will review recent corporate developments. Joining us today are Josh Levine, Accuray's President and Chief Executive Officer, and Shig Hamamatsu, Accuray's Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind you that our call today includes forward-looking statements that involve risks and uncertainties, including statements regarding our fiscal 2020 guidance, including factors that could affect such guidance, expectations regarding market conditions in China, expectations related to new product shipments, and future business plans and strategies.
There are a number of factors that could cause actual results to differ materially from our expectations, including, but not limited to, risk associated with the adoption of the CyberKnife, TomoTherapy, and Radixact systems, commercial execution, operationalizing the China joint venture and overall strategy in China, timing of China user licenses issuances and tenders, the company's ability to take advantage of the issuance of such licenses, future order growth, future revenue growth, profitability, and macroeconomic factors outside of the company's control. These and other risks are more fully described in the news 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 to reflect actual performance or results.
Changes in assumptions or changes in other factors affected forward-looking information, except to the extent required by the applicable securities laws. Two 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 we make to specific quarters in the prepared remarks are to our fiscal year quarters. For example, statements regarding our first quarter refer to our fiscal first quarter ended September 30th, 2019. Now I'd like to turn the call over to Accuray's President and Chief Executive Officer, Josh Levine.
Thank you, Doug. Good afternoon, everyone, and thank you for joining us on today's call. Accuray's Q1 performance represented a reasonably solid start to our fiscal 2020. As we shared with you during our year-end earnings release in late August, we expected fiscal 2020 to be characterized by revenue growth primarily occurring in the second half of the year due to timing of China Type A license issuance and revenue recognition. We believe that projected timing is still valid. First quarter gross orders exceeded our internal plan. Revenue was in line with our plan for the quarter. Gross orders were $78.5 million, representing a 28% growth over prior year first quarter. Order growth was primarily driven by our CyberKnife system, while Radixact maintained strong momentum, representing over 60% of the total orders for the quarter.
Geographically, in fiscal Q1, our EMEA and AMS regions were meaningful contributors to gross orders, and we continued to see strong order growth from China, which contributed 11 new systems, 9 Type A and 2 Type B. On the revenue side, revenue for the quarter was $89.6 million, which was in line with our internal plan expectations. Turning to significant highlights, on October 9th, the National Health Commission announced the first round of Type A radiotherapy license awards for hospitals who had applications in the system for equipment. Of the 58 licenses that were awarded, 50 of them were for Accuray systems, with TomoTherapy/Radixact systems representing 60% of the awards and CyberKnife systems the remaining 40%.
We need to remember that the process identified by the Ministry of Health requires a tender process following the license awards for all participating end user hospitals prior to being able to take receipt of a Type A device. This tender process has been put in place to define the transactional terms and conditions related to each hospital's equipment order and will not initiate a competitive bidding situation that would result in changes in the specific device that the hospital has received the Type A license for. We expect that based on the timelines required for this tendering process, we would not begin to see revenue impact related to the China Type A awards until sometime in our fiscal fourth quarter, and we remain excited about the China market opportunity as a significant growth catalyst for our business. Turning now to our product development roadmap.
We introduced our Synchrony motion compensation and correction technology on the Radixact platform at the annual ASTRO Meeting last month in Chicago and received strong customer interest over the course of the show for this exciting technology. As we indicated last quarter, we have our primary clinical product evaluation site for Synchrony on Radixact currently underway at Froedtert Hospital in Milwaukee. Over the course of the next two quarters, we expect to ramp up additional commercial reference sites that will help drive full-scale commercialization going forward. Another highlight at the ASTRO Meeting was the presentation of an abstract from the PACE study that was subsequently published in the September 17th, 2019, online issue of The Lancet Oncology journal.
The PACE study is an international, multi-center, phase III randomized controlled study that compares three different prostate cancer treatment regimens across multiple safety and effectiveness metrics. This is the first study that we are aware of that allows for head-to-head comparative device data among both competitive products in the radiotherapy space and provides comparative data between radiotherapy and an alternative treatment modality, in this case, robotically assisted prostatectomy. The first arm to reach target patient accrual and publish early toxicity results is referred to as the PACE-B arm of the study. The PACE-B trial is designed to determine whether ultra-hyperfractionated SBRT offers therapeutic benefit over prostatectomy or conventionally fractionated or moderately hyperfractionated radiotherapy in the treatment of low and intermediate-risk prostate cancer patients.
In this arm of the PACE study, patients are randomized to one of two treatment regimens, prostate SBRT treatment in five fractions utilizing Accuray CyberKnife and conventional linacs, or IMRT treatment involving conventional fractionation or moderate hyperfractionation in 20 or 39 fractions utilizing conventional linacs. There are a total of 845 patients enrolled in the PACE-B arm of the study, 431 of which were treated with SBRT and 414 who were treated with IMRT. Of these subsets, 41% of the SBRT group was treated on CyberKnife, and roughly 59% was treated on conventional linacs. The results of the patient-reported and clinician-confirmed outcomes reported in the online September 17th issue of "The Lancet Oncology" indicate two very important results.
First, that there was no difference in acute toxicity between the SBRT and control arms, indicating that patients can benefit from shorter treatment schedules without the risk of greater toxicity in the short term. The second result was that SBRT treatments on CyberKnife resulted in significantly fewer grade 2 and higher acute urinary toxicity than treatments on conventional linacs, 12.4% versus 30.6%, a two and a half-fold difference, while maintaining equivalent levels of GI toxicity. CyberKnife's unique ability to deliver ultra-hyperfractionated treatment allows patients to receive higher dose and shorter treatment regimens without the risk of greater toxicity or incidence of side effects. Before I turn the call over to Shig, I'd like to welcome the newest member of our leadership team, Suzanne Winter, who has joined us as Senior Vice President and Chief Commercial Officer.
Suzanne comes to us from Medtronic, where she most recently served as group vice president for the Medtronic diabetes business, where she was responsible for annual revenues of $1.4 billion and over 2,000 employees. Suzanne previously served as general manager of GE Healthcare's Detection and Guidance Solutions business and has a strong and progressive track record of driving business growth across industry segments as diverse as radiology, neurology, and general surgery. I'm excited about having Suzanne on board, and I'm confident she will become a key contributor to our future business growth. Now I'd like to turn the call over to Shig.
Thank you, Josh. Good afternoon, everyone. I will start with some detail on our gross order performance for the first quarter. Then focus on certain highlights for the period. As Josh noted, gross orders for the first quarter were $78.5 million, up 28% over the prior year period. On a regional basis, orders in the Americas approximately doubled compared to the prior year, with South America being the largest contributor. In Japan and APAC, each grew at healthy double-digit rates over the prior year period. Within APAC, orders in China were $24 million compared to $11 million during the first quarter of last year. Orders in EMEA were a meaningful contributor to our Q1 gross orders. Down compared to the prior year period, due mostly to the customer timing.
From a product mix perspective, CyberKnife contributed approximately 40% of the total gross orders in Q1, which was an increase from 15% of gross orders in the first quarter last year. The TomoTherapy platform, led by Radixact, accounted for approximately 60% of the gross orders during the quarter. Net AJAs for the quarter were $35.9 million, consistent with the forecast we provided during our fiscal 2019 fourth quarter call. As we expected, more than 40% of this total came from China. We continue to believe that a meaningful number of the orders from China that aged out during the past two years will eventually convert to revenue. The 50 Type A licenses recently awarded to hospitals for Accuray systems included several systems that were aged out of our backlog as of September 30, 2019. During the first quarter, we also recorded $3.6 million of cancellations and other adjustments.
As a result, on a net basis, we generated $39 million of orders in the first quarter. We ended the first quarter with a backlog of $495 million, representing an increase of 7% from September 30, 2018. Turning now to our income statement. Total revenue for the first quarter was $89.6 million, down from $95.8 million in the prior year. During our fiscal 2019 fourth quarter earnings call in August, we offered an outlook for revenue during the first half of fiscal 2020 to be below fiscal 2019 levels, and the 7% decline for the first quarter was in line with this expectation. Our product revenue of $37.6 million during the quarter declined 9% compared to the prior year.
Service revenue in the first quarter was $52 million, down 4% from the prior year due to lower revenue from upgrades purchased through service contracts, which as we discussed in prior calls, can fluctuate from quarter to quarter. From a product mix perspective, CyberKnife accounted for approximately 40% of the quarter's revenue, while the TomoTherapy platform accounted for the remaining 60%. Radixact revenue represented approximately 75% of the TomoTherapy revenue during the quarter. Turning now to gross margin. Our product gross margin was 42.6%, up from 40.9% in the prior year period due to a higher mix of CyberKnife revenue. Service gross margin in the quarter was 32.5% compared to 38.5% in the prior year. There were two primary drivers of lower-than-planned service margin for the quarter. First, parts consumption was higher than normal, which we believe was an isolated incident related to specific high-dollar parts.
Second, we experienced delays in the renewal of certain service contracts that we expect to execute in the near future. Overall, we expect to see service margin return to near historical levels for the remainder of this fiscal year as we work through these items. Overall gross margin for the first quarter was 36.8% compared to 39.5% in the prior year. Moving down the income statement, operating expenses for the quarter were $37.2 million, a decrease of $5.4 million, or 13% from the prior year. The prior year operating expenses of $42.6 million included $3.7 million from a one-time accounts receivable impairment charge during the first quarter. Excluding the impact of this charge, operating expenses decreased by $1.7 million, or 4% during the quarter.
We did not record any China joint venture loss pickup during the first quarter due to the timing of Accuray's contractual obligations related to our equity contributions. We expect to report our share of the JV loss starting in the third fiscal quarter. Adjusted EBITDA was negative $1 million in the quarter, compared to $4 million in the prior year period. The EBITDA decline was mainly the result of the year-over-year decline in revenue and commensurate decline of gross margin dollars during the quarter due to the lower service gross margin. We ended the first quarter with $87 million of cash and short-term restricted cash. Turning now to our guidance for fiscal 2020. We are reiterating our guidance provided back in August, with revenue expected to range between $410 million and $420 million.
We continue to believe in our ability to return to revenue growth during the second half of this fiscal year. While we continue to expect our total first half revenue will be approximately 5%-6% below fiscal 2019 levels. Our revenue forecast for the full fiscal year reiterated today does not include any incremental contribution from the 50 Type A licenses awarded in October because the hospitals awarded the licenses still need to complete the tender process before a shipment date can be arranged. Based on the timelines required for this tendering process, we do not expect to see revenue impact related to China Type A awards until sometime in our fiscal fourth quarter. We are reaffirming our expectations for gross order growth in the mid-single-digit range during fiscal 2020, with the Americas, EMEA, and Japan regions leading the way.
During last year's second quarter, we received 16 orders from China as the government published the long-awaited quotas for Type A and B licenses in that quarter. While we expect solid gross orders from China during the second quarter, we do not believe we will match the 16 orders from the prior year period. Overall, our total second quarter gross orders are expected to be approximately $10 million-$13 million below last year's level of $100 million. We continue to expect adjusted EBITDA for the full year to range between $19 million-$24 million, which includes approximately $2 million of our share of expected loss of the China joint venture operations. In terms of our gross margin outlook, we expect overall gross margin to be approximately flat to our fiscal 2019 levels of 39%.
We expect operating expenses for fiscal 2020 to be down approximately 4% year-over-year as we see the benefit of the cost reduction actions that we took in the prior year. Turning to our Q2 net orders forecast. We anticipate Q2 net orders to be in the $18 million-$20 million range, which is approximately 50% less than the first quarter. With that, I'd like to hand the call back to Josh.
Thank you, Shig. Operator, we're now ready to open the line for questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We also ask that you limit yourself to two questions per caller. Our first question comes from Josh Jennings with Cowen.
Ryan here for Josh. Thanks for taking my question. With respect to being named in 50 out of the 58 Class A licenses, can you share how that compares to the level of participation you originally assumed?
Our reference point for original assumptions really has to go back to where we were during the period of time, roughly two and a half or three years ago, when the government was still actually issuing licenses for Type A radiotherapy products. If you go back to that stage, we were operating at a place where we had a win rate of roughly low to mid-80s kind of wins across both platforms. This is very consistent with where we were in that prior period of time. We're very pleased with what ultimately now has become visible with regards to license awards starting to flow.
I think the other thing in addition to overall win rate, the fact that it's balanced across both platforms, we think is another good indication of how important our products are to the more academically-oriented medical centers and the larger public hospitals there in the local market.
Great, thank you. With respect to the guidance, can you clarify what percentage of the total opportunity associated with these 50 Class A licenses that you expect to impact revenue in the fiscal fourth quarter?
Yeah. This is Shig. I obviously can't be very specific about it, but I'll characterize that as a modest amount of the Type A revenue in the fourth quarter in that guidance number based on awareness back in August when we provided original guidance, how many license applications for our system have been turned in. We obviously have a great news of the 50 licenses won which is really higher than what we had expected. We have not really built in any incremental units from that good news that we received into the guidance at this point because of the tender timing which is still uncertain that you heard about. What we want to do right now is we want to see the pace of that tender process play out before we make any revenue forecast revision.
Okay, great. Then just last one on the tender process itself. Just can you speak to Accuray's capacity to deal with multiple processes at once? Thank you for taking all my questions.
When you're referring to multiple processes, I'm not sure. The tender process, the interaction there is basically between the end user hospital and TomoKnife, our distributor who you know as we've stated in prior discussions, we've basically involved in a transition kind of a format as they're winding down and the JV is winding up. The primary interactions for the tender process will be TomoKnife directly with those end user hospitals. I think we stated on prior year-end call in August, we have inventory staged. We have a high degree of readiness relative to once the tender process is complete in a given hospital situation, once they're ready to take receipt, we have the ability to ship and be active at that hit the ground running so to speak, right from the beginning.
Excellent. Thanks for that.
Our next question comes from Anthony Petrone with Jefferies.
Thanks, congratulations on the traction in China. Maybe to start there with a few questions just on exactly how this process plays out. In terms of a license award, should we actually be looking at the license award as essentially a precursor to a booking? Is that a good way to look at it? You mentioned last quarter, Josh, just in terms of Class B licenses, that's going to take a bit longer, and part of that had to do with just the infrastructure that was in the process of essentially being put together to handle the tender process. If you could provide an update there, that would be helpful.
Yeah. Anthony, I think the answer on the Type B discussion is essentially our Type B activity has been probably about 10% of the overall order activity that we've been generating in China. Again, as you've heard us talk about in the past, the primary focus for TomoKnife as they wind down the distribution relationship with us has really been on Type A. The primary focus for the Type B products will be the distribution network that the JV has established and the product longer term, the product that's going to be built in Tianjin at the facility that's now under construction with China Isotope & Radiation Corp. Again, in the reported numbers for the quarter, there were nine orders on Type A, there were two on Type B.
I think ultimately, we will start to see Type B start to ramp up more significantly as we get deeper into this. There are still. If you go back to the number of orders or quotas that were established for Type A and Type B, you'll recognize that this is really just scratching the surface. The orders or the awards that had been identified in this first round of award or licenses in the first round of awards, basically were a third of the total Type A licenses that were identified in the quota. On the Type B side, there was a total of almost 1,300 licenses identified for Type B products. We're really at early stages here, but we're pleased with where we're at in general.
Yeah, Josh, I'm going to give clarification. Anthony, the 50 licenses awarded for end users, a vast majority of that is represented by the orders we had already booked into a backlog, I would say as of June 30 last year. Excuse me, the past fiscal year, so three, four months ago. You might recall that the 50 licenses issued were related to the applications turned in at the end of July, this past July. Vast majority of that 50 relates to the orders we already had in our books three, four months ago.
Okay, that's helpful. Then one quick follow-up, if I may, is just Americas orders nearly doubled. Obviously, there was concern on the CMS radiation oncology bundle. It doesn't look like, at least from the reported results so far, that there was any hiccup or impact to orders. Any update on what Accuray is hearing around the RO bundle and the lack of impact in the quarter or what the expectations are in terms of implication for orders going forward? Thanks.
Yeah, Anthony, it's a great question. Our view then and our view still today, very consistently with what you heard from us already, is that we actually think that we are, from a portfolio standpoint, very well positioned to deal with the alternative payment model situation. In general, from a directional standpoint, we believe that what will happen over time is you will see people that have been more predisposed to look at IMRT with greater number of fractions historically. They will be encouraged to move to SBRT-related treatments, probably using either moderately or ultra hyperfractionated treatment plans. We think that favors our product portfolio, both platforms, really strongly. We've seen no negative overhang, if you will, or no negative feedback at all from customers relative to the APM announcement.
We're still bullish on longer term on our positioning from a portfolio standpoint related to that.
Thanks again. I'll get back in queue.
Our next question comes from Brooks O'Neil with Lake Street Capital Markets.
Good afternoon, guys. I want to just zone in on China a little bit more. I have really two questions. We've been talking about your disproportionate market share of Class A licenses so far for a number of years. If you could just remind us why your competitive position is so strong in China right now? Obviously, the next phase is going to be this tendering process, and I'm curious if you could shed any light on whether the joint venture, you expect that to be a positive force in getting through the tendering process successfully, or how do you view that right now?
Brooks, the Type A discussion really goes back to the company's roots or the early days of both product platforms both on the CyberKnife side and on the Tomo side. Both platforms had been very distinctly focused on larger academic medical centers. There was a significant amount of work in the early days done in building relationships with key opinion leaders across both of the technologies. If you remember some earlier conversations we've had, essentially, we had, in addition to academic medical centers with strong KOL endorsement, we had a very strong position in the PLA military hospital channel. The reason for that was that if you go back 10, 12 years ago, those hospitals were, from a budgetary standpoint, essentially, they had open checkbooks.
They had the best equipment you could find and the best technologies you could find across all the categories, and they were rarely, if ever, constrained from a budgetary standpoint. You found a disproportionate number of the most important military hospitals and academic hospitals with both CyberKnife and TomoTherapy devices really well represented in both of those customer profile types.
We did some market research early on after I got to Accuray. One of the interesting things that we found was that for a company of our size, given the market share we had, the brand awareness statistics and data from the market research that we did said that the awareness both on the clinical side of the world, but also in a more general sense, population-wise, awareness of our products and the brands were disproportionate to our size relative to market share, which I thought was very interesting. I think that has continued to play itself out. When you think about where high-ranking government officials in China, where they go or where their families go for treatment, they end up in PLA military channel hospitals, or they end up in the large academic centers.
There's a high level of awareness across the MOH and the healthcare side of the government from a public health policy standpoint, high level awareness about our products to this very day, that we think is an important kind of a foundational aspect or foundational advantage for us given our positioning. That, I think, is kind of the answer to the first part of your question.
Yeah.
The second part is really around the tendering processes you asked about. The JV infrastructure will be assisting in some of the tender process, but I'm not believing that they're going to take the primary lead in it. I think that our existing distributor, TomoKnife, because they have the relationships with the hospitals that have received the Type A licenses, they actually assisted those customers in application process, getting themselves in the queue for Type A licenses. They have the strongest relationship and working background with those accounts, and I think that as a consequence, they're better positioned to support the efficient negotiation, if you will, or process management related to the tendering.
I know while it sounds like there's a lot, if you look at 50 different accounts, it sounds like a lot, but the bottom line is, I don't think we've got a big concern that there are going to be challenges to that tendering process in terms of infrastructure support and focus. The TomoTherapy guys, as you might imagine, are 110% focused on ensuring that those licenses get, or the tenders get completed so that they can put themselves in a first available position, if you will, to be able to receive a device.
That's great. That sounds like there's a high probability you can get those things across the goal line, which is fantastic.
Yeah. I would agree with that assessment.
Thank you very much.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. Our next question comes from Tycho Peterson with J.P. Morgan.
Hi. Thanks. This is Eleni on for Tycho. Going back to your questions on China, can you maybe just talk about why your expectations on the timeline for the tendering process have changed with revenue recognition now pushed out to your fiscal fourth quarter? What is the initial pacing and cadence we should expect given the pent-up demand, and how rapidly could you respond once the tendering process concludes?
Eleni, let me just kind of start by saying, I don't think our expectations or our view of the timing related to revenue impact in this discussion, I don't think they changed really at all. I think if you go back to our prepared remarks and some of what you heard from us in Q&A over the last couple of quarters, the one thing we've been pretty consistent about is that every time we've tried to make grand predictions about timing related to China, we've been wrong. We've been disappointed. If anything, we've taken a stance that says I think it's been consistent over the last several quarters. We're going to take the long view on this. We're going to be conservative about it. If things happen in a more rapid fashion, that's terrific. There's upside there.
If you go back to, again, remarks from the prior earnings call, we said that we expected between the timing of the license awards announcement and the tendering process, we were expecting that there was going to be revenue impact late in our fiscal year. It was difficult to predict or near impossible to predict with any precision how much revenue impact, and that's still kind of where we're at at this point. The good news is we have today, prior to the end of the calendar year, we've got license awards that say that we've been a disproportionate winner, if you will, in the selection in Type A equipment. That's the good news. The challenge is that we still have some activities process-wise that have to be worked through the tendering piece specifically.
Again, we don't have any information or any belief at this point that we won't get through that process reasonably quickly. For us to say that we've got a defined view about down to the day or down to the week of when that process will be complete, I'm just not prepared to put our credibility on the line at this point again, I think it's just best for us to say that we don't see any obstacles to getting the tendering process complete. We believe that we will start to have some revenue impact sometime during our fiscal fourth quarter. If tendering goes faster than we would imagine, I would say the degree of revenue impact that could take place would be higher.
Just as a reminder, our current China backlog in round numbers is 59 units, so in round numbers, about 60 devices or about $130 million in backlog. About $115 million is Type A, about $16 million is Type B. There's a lot to work with in that backlog once tendering is complete and those accounts, those end user hospitals who are earliest in the queue are ready to take receipt of a device. As I mentioned in the last call, we've got inventory built, we've got inventory staged, and our ability to respond to the final completion of tendering and people ready to schedule installation and take delivery of equipment, our ability to support that is imminent. We're ready, quite frankly, now. I think that's how I'd characterize it.
Okay, thanks. Can you talk about the give and take on guidance? I believe you previously included some assumption for tariffs on 150 basis points top line headwind, and then also 150 basis points gross margin headwind. Just wondering how you're assuming, given the tariff exemption.
Yep. We had a discussion and some review internally on this topic, Eleni, and we put a press release out, I think, in early to mid-September. You'll probably remember that we said that we expect to benefit from the tariff exemption. That has not changed. We do expect it to benefit from the tariff exemption. We're waiting for final clarification from the Chinese government on our exemption status. I think we've got a very high degree of confidence on the TomoTherapy and Radixact products. I think, again, because the CyberKnife is a little bit different animal than a conventional LINAC, we wanted to make sure that we had full confirmation from the government that the CyberKnife will achieve the same level of exemption status that we're expecting on the TomoTherapy and Radixact products. Until we have that clarification in hand, we think it's premature to change the guidance situation.
Your estimate, though, of about 150 basis points is in the zip code range of what that benefit should be once we have clarification.
Okay, great. Thank you.
I'm not showing any further questions at this time. I'd like to turn the call back over to Joshua Levine.
Okay. Just want to thank everybody for participating today. Look forward to speaking with you again in January when we attend the J.P. Morgan Annual Healthcare Conference and report our fiscal 2022nd quarter results later in that month. Thanks very much for your participation.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.