Good afternoon, ladies and gentlemen. Welcome to the Accuray fiscal third quarter financial results conference call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Michael Polyviou with EVC Group. Sir, you may begin.
Thank you, Carmen. Good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the third quarter of FY 2019, which ended March 31, 2019, as well as recent corporate developments. Joining us today on the call are Joshua Levine, Accuray's President and Chief Executive Officer, and Shigeyuki Hamamatsu, Accuray Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements that involve risks and uncertainties, including statements regarding our FY 2019 guidance, including factors that could affect such guidance, expectations regarding market conditions in China, expectations related to new product releases, 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, risks 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 license issuances, and the company's ability to take advantage of the issuance of such licenses. Future order growth, future revenue growth, and macroeconomic factors outside of the company's control. These and other risks are more fully described in the news release we issued just after the market closed this afternoon, as well as in our filings with the SEC.
The forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements to reflect actual performance or results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. Two housekeeping items. 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 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, 2019. Now, I'd like to turn the call over to Accuray's President and CEO, Joshua Levine. Josh, please go ahead.
Thanks, Michael. Good afternoon, everyone, and thank you for joining us on today's call. Accuray's third quarter performance was highlighted by 12% year-over-year gross order growth. The quarter was driven by strength in China and continued momentum for both of our delivery systems and software offerings. We also saw strength in competitive bunker takeouts, which for a fifth straight quarter represented over 20% of our gross orders. On a year-to-date basis, gross orders grew 18%. Also during the quarter, we substantially completed the $15 million cost savings initiative announced in the second quarter and should realize the full benefit in FY 2020. Our third quarter highlights also included the execution of our joint venture agreement in China, which we believe will uniquely position us to succeed in that market, which represents the single largest growth opportunity in radiotherapy.
We made progress during the third quarter in operationalizing the joint venture with our partner, China Isotope and Radiation Corp, and I'll be providing some more color and detail on this later in my prepared remarks. I'll provide a review of our regional gross orders performance in the quarter, highlight progress with the China joint venture and the China market opportunity as a whole, and then conclude with an update on our latest product innovations. I'll then turn the call over to Shig for a more detailed review of our financial performance. Gross orders of $83.6 million in the third quarter increased 12% year-over-year due to strong performance in our APAC region, specifically China, where we continue to see demand for our Type A products.
As you're aware, end user customers are still awaiting the issuance of licenses, which we believe will begin by late May or early June. During the third quarter, we took 10 orders from our China distributor, and the composition of the orders were primarily for Type A products. In our Americas region, gross orders were down slightly in Q3 compared to the prior year, but have grown 13% on a year-to-date basis. While the growth in the Americas during the first nine months is encouraging, it's still a bit early to characterize this trend as a sustained momentum. In our EMEA and Japan regions, gross orders declined on a year-over-year basis due to tough prior year comparisons. With that said, both EMEA and Japan continue to be strong contributors to our overall gross order number and each contributed over 20% of the total gross orders in the third quarter.
By order type, approximately 25% of overall orders in the third quarter were competitive takeouts, 60% were for new vaults, and 15% were replacements on our own installed base. All three of these metrics are consistent with our historical ranges. Turning now to China. When we look at the overall level of LINAC market penetration compared to mature markets around the world, it is clear that China is currently operating at a significant deficit in terms of clinical treatment capacity. To put this in comparative perspective, in the U.S., we have roughly 12.4 LINACs installed per million people. Western Europe has roughly six to seven LINACs per million, and China is estimated currently to be at 1.4 LINACs per million. When China's disease incidence forecasts are taken into account, the current level of radiotherapy treatment capacity represents both a significant concern as well as an opportunity.
While the near-term addressable market today is defined by the roughly 1,400 radiotherapy license quota outlined by China's Ministry of Health last October. To keep pace with future patient treatment needs, China will likely need a total of 5,000-plus LINACs over the next decade. Given Accuray's current installed base of 900 devices, you can see why we are so excited about China as an overall growth catalyst for our business. We continue to make operational progress on executing our joint venture strategy. Last week, the JV obtained the business license certification. Having this license certification means we can now begin to apply for the medical device radiation safety license, as well as hire employees to staff the JV from a basic infrastructure perspective, which in commercial terms, moves us closer to order generation.
We expect the JV to have the radiation safety license to sell and take orders sometime during this summer. During the early stages of ramping the JV, we will continue to work with our current distributor, TomoKnife, to take and convert orders to revenue to ensure there will be no disruption to our near-term opportunities. Once licenses begin to issue, this initial transition phase will allow us to maximize orders and revenue while we operationalize the JV to support our longer-term strategy for the China market. In the first phase of this transition, we anticipate the JV will begin selling Type A and our current Type B Accuray radiotherapy devices, much like a distributor. In the second phase of the strategy, the JV will manufacture and sell a locally branded, made-in-China Type B radiotherapy device. This locally produced product would replace our current Type B TomoH offering.
We believe this two-phase strategy, in parallel with our current distributor, TomoKnife, continuing their sales responsibility over the next year, will allow Accuray to best maximize both near and longer-term opportunities. To enable longer-term market penetration, our manufacturing partner, China Isotope, has active selling relationships in almost 10,000 China hospitals across more than 30 provinces. China Isotope's customer relationships are also diverse by hospital type, including many institutions beyond the Tier 1 academic and research-based hospitals, which have been Accuray's strength historically. As a result, we believe that the customer base that China Isotope currently serves will provide Accuray with improved strategic market access that should help diversify and expand our overall market opportunity. In the near term, Accuray's order and revenue activity in China will continue to be partially governed by two processes, the license application and issuance process, and the tender process.
Based on the latest information, the China Ministry of Health is nearing completion of its implementation of license application infrastructure, and it is expected that the initial batch of Type A licenses should start to flow soon, most likely in late May or early June. We anticipate it will take approximately six to eight additional weeks for the tenders to be awarded and the first units to go to revenue. We therefore continue to expect our order activity in China will benefit fiscal 2019 with the bulk of the revenue benefit occurring in fiscal 2020. As we communicated on our last call, we do anticipate some quarter-to-quarter variability in order flow as this licensing and tender process becomes fully activated, which Shig will cover in more detail shortly.
Turning to our product development roadmap, our current upgrade strategy is focused on further increasing the speed and utility of our devices and continuing to extend Accuray's historical strength in the overall precision of our treatments. The VOLO Optimizer software upgrade for CyberKnife, which was introduced at ASTRO last fall, is now on approximately 30% of compatible CyberKnife systems in our installed base. The VOLO Optimizer reduces treatment times by up to 50%, allowing CyberKnife treatments to be performed in 15 to 30 minutes, depending on the disease site. The reduction in treatment planning times is even greater at approximately 90%. We believe the availability of the VOLO upgrade on CyberKnife will be both a catalyst to our installed base replacement cycle and allow us to attract new customers to the CyberKnife platform.
Currently, approximately 100 systems in our CyberKnife installed base are the latest Generation M6 platform that is MLC-compatible and capable of realizing the full benefits of enhanced treatment times of the VOLO Optimizer. This means a reasonable number of the roughly 250 CyberKnife systems in our installed base are high-value trade-in, trade-up targets for our latest generation CyberKnife platform. For Radixact, Accuray is bringing the motion synchronization capability currently found on CyberKnife to our extremely versatile Radixact IGRT system. We expect to have our first shipment of this important feature, which we call Synchrony for Radixact, by the end of our current fiscal year. Broader commercial launch will be towards the end of the calendar year. Synchrony corrects for target motion during treatment delivery in real time without the need for gated treatments or uncomfortable patient positioning devices designed to restrict patient movement.
The result is efficient treatment deliveries that enable tighter dosing margins, improved sparing of healthy tissues, and greater patient comfort. As the original innovator of motion tracking and synchronization with our CyberKnife system, Accuray fully intends to extend our leadership in this important area by transitioning this capability to our Radixact platform. In addition to Synchrony, we are in active development on enhanced imaging upgrades for both our Radixact and CyberKnife systems that will improve soft tissue resolution and contrast. We anticipate an enthusiastic customer reception for both our Synchrony motion tracking and synchronization upgrade for Radixact and the VOLO Optimizer for CyberKnife at the upcoming ESTRO conference in Milan later this week.
Now I'd like to turn the call over to Shig for a deeper dive into our financial performance in the third quarter and our outlook.
Thank you, Josh, and good afternoon, everyone. As Josh highlighted, we had $83.6 million of gross orders in the third quarter, representing an increase of 12% over prior year. On a year-to-date basis, gross orders have increased 18% over fiscal 2018. Starting in fiscal year 2019, we included upgrades purchased through our service contracts in our gross orders, these types of orders totaled $900,000 for the third quarter and $3.6 million on a year-to-date basis. Excluding these upgrades on service contracts, gross orders increased 10% in the third quarter and 16% on a year-to-date basis. From a product mix perspective, CyberKnife contributed approximately 45% of total gross orders compared with 35% a year ago, primarily driven by the strong demand in China. The increased contribution from CyberKnife should positively impact product gross margin as these orders convert to revenue in the future.
Our Radixact and TomoTherapy platform continued to perform well and accounted for approximately 55% of the Q3 total gross orders. Net age outs for the quarter was $15.2 million, down from $25.9 million in the prior year. Net age outs consisted of $20.8 million of age outs, offset by $5.6 million of age ins. We also recorded $7.3 million of cancellations and $1.3 million of currency-related adjustments. As a result, on a net basis, we generated $59.8 million of orders in the third quarter. As discussed in prior calls, the volume of order cancellations can fluctuate from quarter to quarter. On a year-to-date basis, order cancellations totaled $16 million or approximately 3% of our total backlog, which is consistent with our historical trend. China Type A systems represented about 30% of the total age outs for the quarter.
We continue to believe we will start converting these age out China orders to revenue, most likely starting in fiscal year 2020 as Type A licenses start to be issued. We ended the third quarter with backlog of $493.9 million, representing an increase of 5% over prior year. Turning now to our income statement. Total revenue for the third quarter was $103.2 million, representing a 3% increase over prior year. EMEA, APAC, and Japan drove the revenue growth in the quarter. On a year-to-date basis, total revenue grew 4% over prior year. Product revenue for the quarter was $46.5 million, an increase of 7% over prior year. The product revenue increase was driven by strong demand for the Radixact system, which approximately doubled in unit volume from the prior year. Since its introduction two and a half years ago, we have recognized revenue for approximately 90 Radixact systems.
Service revenue for the quarter was $56.8 million, which was relatively flat year-over-year. I would like to remind you that the prior year service revenue included a higher than normal level of upgrades purchased through service contracts, which was driven by new software releases related to our precision treatment planning and iDMS connectivity. As we mentioned in prior calls, timing of upgrades can vary from quarter to quarter. Sequentially, service revenue was up 5% from the previous quarter, driven by continued install base growth, training, and spare parts revenue. On a year-to-date basis, service revenue grew 2%. Turning now to gross margin. Our overall gross margin for the third quarter was 39.2% compared to 36.3% in the prior year. Year-to-date, our overall gross margin was 38.7% or approximately flat year-over-year.
Product gross margin was 41.5% in the third quarter, compared to 41.4% in the prior year. On a year-to-date basis, product gross margin was 40.6%, down from 42.5% in the prior year due to the lower mix of CyberKnife system revenue. Service gross margin in the third quarter was 37.3% compared to 32.4% in the prior year. The lower gross margin in the prior year included the impact of higher than normal service parts consumption in that quarter, which was an isolated incident. On a year-to-date basis, service gross margin was 37.2% compared to 36.3% in the prior year as we continue to expand our overall service gross margins. We believe our continued investment in service efficiency and parts reliability will continue to improve our service gross margin over time.
Moving down the income statement, operating expenses for the quarter were $37.6 million, a decrease of 6% from the prior year. Contributing to the decrease was an $800,000 non-cash one-time credit related to a lease termination for one of our office buildings. Excluding this one-time credit, our third quarter operating expenses were $38.4 million, a decrease of 4% from the prior year. On a year-to-date basis, operating expenses were $119 million or down 1% year-over-year. Excluding one-time charges related to the accounts receivable impairment, severance, and lease termination credit, year-to-date operating expenses decreased $5 million or 4% from the prior year. Adjusted EBITDA for the third quarter was $6.7 million compared to $1.4 million in the prior year. The third quarter Adjusted EBITDA excludes the impact of one-time non-cash credit related to the lease termination I mentioned earlier.
Adjusted EBITDA on a year-to-date basis was $14.8 million compared to $9.3 million in the prior year. We ended our third quarter with $65 million of cash and short-term restricted cash, which remained flat from prior quarter as we continue to invest in our working capital to prepare for converting China orders to revenue in fiscal 2020. Before I move on to discuss our fiscal 2019 guidance, I would like to update the status of the cost reduction initiatives we discussed in our previous calls. With the execution of the initiatives substantially completed, we continue to expect the total savings from this action to be approximately $15 million on an annualized basis and start realizing the full benefit of this action in the fourth quarter of this fiscal year. Of the expected savings, approximately 30% will benefit gross margin, while the remainder will reduce operating expenses across all functions.
A large benefit of the cost reduction initiatives was realized in our third quarter, resulting in $6.7 million of Adjusted EBITDA, or $23 million on a trailing 12-month basis. This number compares to $17 million of EBITDA we generated in fiscal year 2018. We believe we now have the right operating cost structure in place to expand our EBITDA generation capability as we grow orders and revenue. Turning now to our guidance for fiscal 2019. Today, we are updating guidance calling for annual revenue in the range of $415 million-$425 million, which would represent growth of approximately 3%-5% over fiscal year 2018. The revenue range provided is reflective of the timing of China license issuances, which, as Josh explained earlier, will not likely benefit us in the fourth quarter.
More specifically, if our end customers have not completed their tender process in the next 30-45 days, we don't believe we will be recognizing any China order revenue in the fourth quarter, which will likely result in achieving the lower end of the revenue guidance I just provided. Regardless of the amount of China revenue we realize in the fourth quarter, we continue to believe that China revenue conversion will accelerate during the first half of fiscal 2020. We expect adjusted EBITDA range to be $23 million-$29 million. As EBITDA most closely follows revenue, if there is a delay in China licenses and revenue conversion, we would finish the year in the lower end of this EBITDA range. In terms of gross orders, during fiscal 2019, we have refrained from providing specific guidance on this metric.
In light of our exceptional 18% year-over-year growth for the first nine months of fiscal year, driven primarily by pent-up demand from China and the reporting of the largest U.S. multi-system order in the company's history during the fourth quarter of fiscal 2018, we felt we should share with you our expectations for full-year gross orders. Currently, the fourth quarter gross orders are expected to be flat to slightly less than last year's figure of $96.4 million, which, as I previously mentioned, included the largest U.S. order in the company's history. Therefore, our gross order growth rate for fiscal 2019 would be in the low teens. Turning to our net AGES forecast, we anticipate fourth quarter net AGES to be in the mid-$20 million range, although, as we experienced in the third quarter, we are and will actively work on converting those orders to revenue.
In terms of our gross margin outlook, we continue to expect overall gross margin to be flat to slightly down to our fiscal 2018 levels. This is a result of the TomoTherapy Radixact platform contributing to a higher percentage of the total revenue. We now expect operating expenses for the full fiscal year to be down approximately 2% year-over-year. Excluding the impact of one-time items of impairment, severance, and the lease termination credit, operating expenses are forecasted to be down 5% year-over-year. With that, I'd like to hand the call back to Josh.
Thanks, Shig. Before we open the call for your questions, I'd like to thank the entire Accuray team for their increased focus, commitment, and improving execution supporting the important work that's making a difference for our customers and patients. Additionally, we'd like our shareholders and analysts to note that on Monday, September 16th, from 3:30 P.M.-5:30 P.M. Central Time, Accuray will host an analyst and investor information session at the ASTRO Conference in Chicago. I wanted to make note of this event today because it's the first time in many years our company has hosted an investor event at ASTRO, and we wanted to give investors and analysts as much advance notice on this date as possible. Operator, we're now ready to open the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, press star and one of your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound or hash key. Again, to get in the queue, just press star and one. Our first question is from Joshua Jennings with Cowen. Your line is open.
Hi. Good afternoon, Josh and Shig. Thanks for taking the questions and congratulations on the strong order growth and the progress in the China JV. I was hoping to start with just the China market. I know that there's a lot of, I guess, administrative things that need to happen with the China Ministry of Health to still complete the license application infrastructure, as you mentioned in your prepared remarks. It sounds like the last two quarters, most of the China orders have been Type A.
I was just hoping to understand better the dynamic about why you haven't seen more Type B orders coming out of China and when you think that that could be opening up and when that could turn into a tailwind because of the 1,400, I guess, Class A and B licenses and the quota there, I think the vast majority or 90% or so are Type B.
Yeah, you're absolutely right, Josh, on that. The mix is much heavier overall to the Type B side. The simple answer is that we have been kind of building out the additional dealer network or sales agent network on the Type B side. As we talked about in prepared remarks, the JV will first of all, the transition between TomoKnife and the JV, our distributor, TomoKnife, kind of the historical distributor, has a 12-month tail to continue to sell. We want that activity to continue for reasons related to continued momentum. The Type B products are really probably going to be more of a joint venture focus. The work that's taking place right now on that front is to line up sales agents across the bulk of the provinces to assist in that effort.
I don't think, quite frankly, it's going to be too much longer before we start to see some Type B activity start to flow. As you pointed out, the first two quarters of, or the last two quarters of activity have really been Type A centric and more focused on that side. That's because TomoKnife has continued to be essentially the kind of sales force of record, historical record, if you will. The JV is going to be starting to ramp and start to contribute to the Type B side of this, I would predict in the next quarter or two. It should flow pretty good from there.
Understood
really more just infrastructure and startup related ramp than anything else.
Understood. Thanks for that. This is my second question and final question is just on the Americas business. I think you guys anniversary the U.S. sales restructuring effort this quarter, and then that bore a lot of fruit over the last four quarters. Can you just talk about, I guess, how we should think about the Americas franchise and the comps over the next couple of quarters and whether that region can return to growth in the coming quarters? Thanks for taking the questions.
Sure. The simple answer is yes. I have an expectation that the Americas and the U.S. geography predominantly are going to contribute to a greater extent than they have. The numbers right now, the percentage growth in order volume looks pretty frothy, but that's against, obviously, I'd say fairly modest baselines from prior year. They've been moving in the right direction though for the last two or three quarters. I'd say there's some consistency there in what we're seeing. I think the funnel in general is improving. There are, as we've talked about in the last quarter or two, there are some multi-system orders in the U.S. funnel, in the Americas funnel that I think, again, are making progress. I think that we'll finish this year at a reasonably strong percentage growth from the U.S. over prior.
I think we're just being realistic and transparent about the prior year numbers. Those really aren't necessarily the kind of benchmark that I would like to hold the U.S. team accountable to. Based on the funnel that I see developing and I think the quality of the people that we've added and the leadership that's in place, Josh, I feel good about where the U.S. should end up over the course of certainly the next, I'd say four to six quarters. More to come there. We need to execute, but I feel good about where we're headed.
Thanks again.
Thank you. Our next question is from Anthony Petrone with Jefferies. Your line is open.
Thanks and good afternoon. Congratulations also on a strong quarter and obviously the development in China. I have questions on China, and then I'll just shift over to Radixact and some of the clearances and new solutions on that system. On China, maybe you understood Josh just on how the rest of the fiscal year is going to play out. Maybe just to piggyback on Josh's question, as we look into really through 2021, what is the company's expectation on the number of licenses that ultimately will convert to orders and revenue out of that estimated 1,400 total between Class A and Class B through the soft deadline of 2021? Then I'll have a follow-up on the JV.
Anthony, at any level of analysis, obviously it's a lot of devices. The aggregate number of licenses in the quota is a big number. With that said, the market has gone at least 2 years with essentially being in park, at least the public facilities market. Obviously, the private facilities have had a little bit more leeway, but the vast majority of the market in terms of existing served market institutions have really not been able to acquire the equipment that they need based on lack of clarity, at least in our situation, lack of clarity around Type A versus Type B. It's impossible to predict in absolute terms what the Ministry of Health will issue, but as an internal metric, we're making assumptions around 75%-80% of that 1,400 license universe across both A and B.
That's an internal set of assumptions we're making relative to a number of aspects of our business planning processes. You might imagine we've got to ramp production from a revenue support standpoint to meet that kind of accelerated or expanded forecast going forward in the next 24 months. A number of other internal systems and requirements to support the business. We've had to make certain assumptions about what it looks like, and the internal take or benchmark, if you will, is probably somewhere in that 75%-80% range. It could be higher than that. Again, there's a lot of work to do to get. Once the licenses start to flow, there's still a lot of work required to get equipment in the ground from an installation and a training standpoint.
I think that our aspects or our estimates, if you will, of what's actionable or what will be actionable in the next 2 years is probably somewhere in that 75% range.
That's helpful. Just on the JV structure and as it relates specifically to Type B, out of the gate here, you have Onrad and TomoH. You had mentioned on the last call that the second phase of the JV will really be centered around the locally manufactured product that will be focused in Type B regions. Just how is that going to work out between the 2 transitions? In other words, do you think the market within Type B freezes a bit as it waits for the local product? Or do you expect that you'll see some early traction with TomoH and Onrad?
I think we'll see some early traction with TomoH and Onrad. The degree of pent-up demand is pretty significant. Obviously, the bigger upside here, the bigger volume requirements are coming from smaller and medium-sized facilities, which are facilities that are hospitals that are outside of the major population centers in the provinces. That's where China Isotope and Radiation Corporation's market presence is. They have a sales presence in something like 30 different provinces that represent the bulk of the geography. There are active resources of theirs in place, active customer relationships, and we hope to leverage a lot of that, or at least more than our fair share, call it, in the ramp with just the products that we'll have in the near term.
Going forward, the manufacturing facility that's going to produce our Type B product, the China-made Type B product, they're building that facility out as we speak. This is not something that they're sitting on or we're sitting on waiting for licenses to issue. There's a ramp here that's required, and we need it to start, quite frankly, as soon as we could following the execution of the JV agreement, and we've done that. They're moving as expeditiously as they can, and we're in full support of that.
We want to have a product registration package that we can get in front of CFDA as soon as possible for review. All of that should help to, as soon as they're ready to start producing and as soon as we've got a regulatory approval process obtained, we should be in business on the Type B side with the locally manufactured product.
I appreciate that. I'll get back in queue. Thanks.
Thank you. Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Your line is open.
Good afternoon. I hope to sneak in a couple of quickies here. First, Josh, you mentioned competitive wins. I didn't hear you say a lot about replacement cycle progress in the U.S. Could you just give us a quick update on that?
Yeah. Replacement cycle in the U.S., again, it's not just a U.S. discussion, it's a U.S. and Western Europe opportunity. Again, it's been relatively stable at roughly 15%-20% of the total gross order volume. It's consistent with where it's been, Brooks. Again, I think that our view is that with the things that we're launching or have launched in the last quarter and the going forward quarter, on the upgrade side with VOLO and soon to be Synchrony on Radixact, we think these are catalysts for replacement sale opportunity for trade-in and trade-up of older generation devices in both geographies, both U.S. and Western Europe.
Perfect. That's great. Secondly, you mentioned soft tissue visualization with Synchrony. Can you just give us a feel or your perspective on how that will match up with the offerings of competitors we're hearing so much about?
I would characterize what we're doing on imaging, from a relative capability standpoint. I would encourage you to think of it in terms of diagnostic quality CT capability, which we think is going to provide with really terrific contrast. We think that's going to be quite frankly very competitive with any of the cone beam capability that's out there right now from competitors. Again, it will not have the contrast that MRI capability will, but Radixact will run circles around from a workflow standpoint and a throughput and efficiency standpoint. It'll be able to do things from a workflow perspective and a throughput perspective that you can't do with an MRI-linac. Again, I don't think a head-to-head comparison there can be made.
Nor would I say that, again, you've heard us say this in the past, we're not seeing devices of ours decommissioned to make room for MRI-linacs, either the MRIdian device or the Unity device. I don't believe that in the primary customer base that our history has, where we've been the strongest historically in terms of academic or research-based medical centers. We're not in a zero-sum game from a bunker competition standpoint with the MRI-linac devices. I think when we get our imaging solutions to market, they will be very competitive, if not even more capable than kV cone beam. That's kind of been the industry standard, if you will, prior to, at least for the more workhorse product offerings, if you will.
Sure. If I could sneak in one last one. Could you just comment on your balance sheet and any strategy you're currently contemplating with regard to, I think, remaining converts?
Brooks, thanks for the question. I think we've got about three more years to go. I think, for the time being, we're focusing on generating cash and trying to pay down the non-convert debt in the near term. I think we need to talk about the convert sometime soon, but that'll probably also depend on the stock price as well, in a couple of years to see what the stock price is and how to approach the either, what to do with convert in terms of refinancing that piece of it. I'll just leave it as that for now.
Okay. Thank you so much.
Thank you. Our next question is from Sean Lavin with BTIG. Your line is open.
Hi, it's Marie Thibault on for Sean Lavin tonight. Thanks for taking the question.
Hi, Marie.
Hi. I appreciate all the level of detail you've given us on the China JV and the tender process. I wanted to ask just one follow-up on that. When you said it usually takes about 30-45 days for the tender process to start up, is that sort of an average? Do we see a bulk of tenders be issued around then, or could we see some kind of jump out in front and come in quicker? I'm just trying to get my hands around the likelihood of seeing anything in this current fiscal year.
Yeah. I guess it is possible, Marie, that there could be stuff, things that come sooner. I think as far as our view, and I think we've been growing in our view on this, or strengthening our view on this from an internal perspective that it's just been so difficult to, with any degree of precision, imagine or predict forward-looking how these processes get fully activated. If that process isn't completed by really legitimately by the end of this month or the first week or two of the month of May, the window of time, or if the licenses aren't issued in that timeframe, the tender processes. We think probably less likely to occur on a timeframe that would give us the chance to take revenue in this fourth quarter, in the current quarter.
Maybe we've been conservative in that. Just given what we've seen historically, what we believe is happening, we think that's probably the right approach, the conservative approach. I think it's interesting that the application process, we had heard a lot about the application process. The Ministry of Health, what's been happening behind the scenes is they've been developing an online application process to assist the thousands of institutions that have an active application that they want to submit and have in the active queue for the tender process that's forthcoming. The build-out of that online infrastructure, the validation of it, our understanding from our people on the ground there is that's what's taken the added time here.
Again, we just think it probably makes the most sense to be more reserved in our outlook with regards to the timing of that and how that translates into the timing of revenue recognition for us.
Okay. Appreciate.
I think what it says to me is that the first quarter of fiscal 2020 and the first half of fiscal 2020 are going to be big ramps in terms of revenue.
Okay. Appreciate that insight, Josh. Thank you for that. I guess my second question, I'd like to turn back kind of the domestic market. I know that a few quarters back, there was a lot of focus on the potential for multi-system orders. Were there any multi-system orders in the quarter, or what sort of that funnel look like to you at this point?
There was nothing of note in the quarter that we're reporting today. I will tell you that there are, in the funnel, going forward, a number of multi-system orders that we've been progressing or advancing over the course of the last few quarters, and I think some of them could hit this quarter. Some of them are likely, if they're not this quarter, then they're in probably the first half of fiscal 2020. Again, I think that the U.S. team has made pretty good progress in teeing those up and advancing them. Again, nothing to report or to forecast definitively in the current quarter that we're reporting.
Okay, perfect. Thanks so much.
Thank you. Our last question is from Tycho Peterson with JPMorgan. Your line is open.
Hey, thanks. Josh, maybe I'll start with reimbursement. CMS obviously leaked kind of the bundling. They didn't put the rates out, we know it's coming. Just curious what you're hearing in the field from customers. Obviously, didn't seem like it impacted the order book, as we think about bundling going forward, how do you think the response will be from the customer base?
Yeah. It's good to hear from you, Tycho. If CMS sticks to historical timing, we would expect to hear something in probably the month of July. If you go back the last five or six years, they've been as early as July 4th weekend. A couple of years they've been later. July would probably be a good expectation if they stay to historical precedent. The general, I'd say, set of assumptions from everybody close to this is that the final rule will capture some kind of alternative payment model.
Something around value-based care, something that would be really encouraging more, at least in specific radiotherapy terms, things that would move customers and hospitals essentially more to a hyperfractionated or SBRT kind of a treatment model, and away from what I'll call the fraction preservationist kind of approach, which has been the IMRT model or the 3D conformal model of kind of longstanding history. For the patient, you're talking about faster, shorter treatment regimens, for sure, and for payers, you're talking about a more accelerated timeline, and one that is probably more cost efficient in construct than what's been in place over a long period of time. We think we're positioned, and you've heard us say this in the past, we think we're positioned pretty strongly with our portfolio. We think on both platforms, we really have solutions technically and treatment-wise that fit that model going forward.
Again, nothing definitive as of now. If a final rule comes out on typical timelines from CMS, it'll probably be sometime this summer.
Okay. On the software side, I think you guys announced during the quarter you'd had your first treatments partnering up with RayStation, with RaySearch. I'm just curious if you could talk about how that relationship has evolved and should we see kind of more joint sales with RayStation going forward beyond the Anderson deal?
Yeah, I think we will. Our view is that when you look at where their installation's taking place, the growth in their installed base, they continue to be the fastest growing standalone treatment system provider in the market. They have become, at the academic level or research-based medical center level, they've become, in many locations, the system of choice across a wide variety of equipment. They plan for multiple devices, multiple types of products, and they've made it easier for customers to say, "Anything that falls outside of our ability to plan on RayStation really is kind of an outlier situation for us that we'd rather not deal with." We think strategically, it still makes a lot of sense for us to be working with them.
They help expand and leverage our reach, and they help position us in a way that we can avoid being the outlier, quite frankly, i.e., the one product line on the systems side that has to have its own workstation for treatment planning purposes outside of RayStation, which they have, that's planning for everything else they own. It just makes a lot of sense strategically. We've got I think the right mindset and incentives in place between the organizations at the field level to encourage joint selling activity and joint account targeting, I still think what we're doing there from the outset strategically, it still makes sense, and I would predict that it'll have a bigger impact going forward.
Okay. Last one, I appreciate all the color on China. As we think about China Isotope kind of ramping up on their locally made device, should we assume this is accretive to margins, or how should we think about the margin impact?
Yeah. Thanks for the question, Tycho. We do think it should help our margin. We certainly have negotiated a pretty good transfer price with our joint venture from our perspective, we'd expect that to be gross margin accretive. I also think that on that topic, we'll get better efficiency over time from them. I think that the supply chain opportunities over time will be a bigger impact than they certainly are at the outset. We will be the supply chain source for them with parts and key componentry out of Madison, out of our manufacturing facility in Madison, at least to begin with. There's already thoughts and conversations taking place between the two organizations, Tycho, around forward-looking thoughts and how we leverage that up in ways that can help both organizations. I think that should be another positive impact to margin over time or reduction in COGS.
Okay. Thank you.
Thank you. Our next question is from Phillip Cooper with Citi. Your line is open.
Hi, guys. Thanks for the question. I was hoping on the heels of the CT imaging kind of coming to market, could you provide an update on your thoughts on adaptive therapy, maybe timing or your outlook for producing a product on that front?
Again, we're probably in the 18-month timeline on imaging commercialization, Phil, that's clearly the primary gating item on this. From an adaptive therapy standpoint, I think that our ability to And the work we've done to improve treatment planning speed with VOLO, improve optimization around plan comparisons, all of these things should assist pretty substantially in making truly adaptive therapy a reality and a more efficient process than it is today. I think the views that the only way adaptive therapy takes place is off an MRI-linac, I think those views are, I would describe them as constrained.
Sure. Okay. All right. That was helpful context and expanding the question a bit. I appreciate it. A bit more technical second one, if I could. A little bit of the age in, age out dynamic. Can you talk about how China's sort of impacting that and any impact that it's having on cancellations at this point? Maybe a question for Shig there.
Phil. The age out, as I said in my prepared remarks for the quarter, was a total of $21 million, and 30% of that was China, just to kind of give you a sense. China continued to have some age out, as I said also in the remarks that we'll continue to work on those. Those are still good orders, as you know. It's just more than 30 months old per our policy, it gets aged out. Again, we're going to continue to work on those to convert them into revenue starting in FY 2020.
Okay.
None of the cancellation was from China, by the way.
None of the cancellations from China. As we age back in, are we going to see sort of like a book-to-bill conversion where we age back in and then convert to revenue in the same quarter on the China front or is there going to be-
Yeah
some lead time?
Exactly. Mechanically speaking, you got it right. When something backlogs in, just like we did this quarter, we had a couple of deals there, it goes back to backlog, it comes out immediately because it's almost like a book and bill in that quarter, mathematically speaking.
Okay. All right. That's super helpful. Thanks.
Yep.
Thank you. I'm not showing any further questions in the queue. I would like to turn the call to Joshua Levine for any final remarks.
Thanks, operator. Thank you everyone for your participation this afternoon. We look forward to talking to you on our Q4 and full year update. Thanks very much.
With that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program. You may all disconnect. Have a wonderful day.